Executive Contract: Everything You Need to Know
An executive contract can spell out any number of things for those people who serve in an executive capacity within a company; typically as a senior-level employee, such as a Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Marketing Officer, and the like.3 min read
An executive contract can spell out any number of things for those people who serve in an executive capacity within a company; typically as a senior-level employee, such as a Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, Chief Marketing Officer, and the like. The challenge is that an executive may want the contract, but the company does not.
Many companies do not like to have executive contracts in place, in fact, sometimes, they even refuse to have them. The reason as to why so many companies (specifically, the board of directors) do not want to create executive agreements essentially comes down to control: the company wants to be in control of their relationships, and by putting something in writing and essentially creating a legal document that can be enforced, they are giving up a certain amount of control. The fewer promises or assurances that are provided, in writing, the better, as far as the board of directors is often concerned.
Another reason as to why many companies do not like to instill executive contracts is due to not wanting to deal with the negotiation process. Many companies may be highly adept at, and familiar with negotiating commercial or business contracts, but negotiating an executive contract is far more personal.
From the standpoint of the executives, however, executive contracts are important to ensure that their expectations are being met, as well as those of the company, while also defining certain entitlements, such as bonuses and stock options. Some of the expectations that an executive may want spelled out in an executive contract, may include:
- Power or authority they have regarding the company and other employees
- Resources needed to do their job (for example, the ability to hire an administrative or executive assistant)
- Performance-based incentives, such as bonuses
Many executives will also want their executive contract structured in such a way that the company is expected to shoulder some of the burden of responsibility, should the employment not work out long-term.
The Basics of an Executive Agreement
While there are any number of things that an executive agreement may include, the primary points are:
- How the executive is to be compensated. Basically, what their salary is to be, what the payroll schedule is, whether or not there is any type of commission involved, etc.
- Policy regarding the reimbursement of out-of-pocket expenses. For example, if the executive goes on a out-of-town business trip, does the company only pay for coach airfare, are there restrictions as to how much a hotel room may cost, etc. Additionally, it should include information regarding the repayment process.
- Specific job responsibilities of the executive
- Any information regarding non-disclosure agreements or non-compete clauses.
- Information regarding fringe benefits, such as health insurance and paid vacation time.
- Details regarding any probationary period within the employment.
Additionally, even though your executive is probably being paid over minimum wage, it is customary to include information regarding your state’s minimum wage and overtime laws in the contract.
Benefits to the Company
While often avoided by employers, there are a number of benefits to the company to utilize an executive contract, including:
- Demonstrating to the potential executive that you are committed to their success and meeting their needs. This is far more important than many companies realize, as employees want to trust the companies for which they work. By having an executive contract in place, as the company, you are providing assurances to the executive that you are wanting to act in their best interest.
- It ensures that the company and the executive are on the same page, regarding expectations around job performance and the company’s return on investment.
- It can ensure that all of the members of the board of directors are on the same page regarding their expectations of the executive-level positions within the company, as it will all be spelled out in a written document.
Severance Pay and Packages
Another key point in the executive contract is the issue of severance pay, and by creating an executive contract this can be addressed, and both the company and the executive can be in agreement as to the terms. Some of the terms may include:
- The amount of the severance package
- Whether or not the severance is based upon length of employment, and if so, the formula used to determine the amount of payment
- How the severance is paid out
- Any reasons under which the severance package may not be paid, such as illegal activity on the part of the executive
If you need help with an executive contract, you can post your legal need on UpCounsel’s marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law, and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.