In the U.S., most employment is “at will”. This means that either the employer or the employee can terminate the employment at any time, for any legitimate, non-discriminatory reason, with or without cause. The typical senior executive, in contrast, has an employment agreement that runs for a number of years and allows termination only for cause. The reason: Attracting and retaining key executives is critical for any company’s success.
By the time I am called in, the parties usually are at or near agreement on salary and the amount of equity compensation (stock options or grants). In addition, the employer’s benefits program usually is well-defined. I have found that most of the negotiation effort goes into the following provisions:
- Cause – Which events give the employer the right to terminate the executive’s employment?
- Good Reason – Which events give the executive the right to terminate the agreement and receive severance payments?
- Severance – Which compensation, if any, will the executive receive if the agreement terminates under various circumstances?
The employer wants to define Cause as broadly as possible (making it easy to remove an unsatisfactory employee), while the executive wants to define Cause narrowly (permitting removal only in cases of incompetence or seriously dishonest behavior). The agreement often ends up focusing on the following as constituting Cause:
- Violation of the executive’s responsibilities that continues after notice and a cure period.
- Conviction of, or a plea of nolo contendere to, a felony or other specified crimes.
- An act of personal dishonesty or misappropriation in connection with the executive’s responsibilities.
- Willful misconduct that injures the employer.
The parties take the opposite positions in defining Good Reason: The executive wants a broad definition (making it easier to leave a bad company), while the employer wants a narrow definition (minimizing the likelihood that the executive will leave with severance). Factors cited as constituting Good Reason frequently include:
- A significant reduction of the executive’s duties, position, title or responsibilities.
- A reduction of the executive’s salary or benefits (other than in the context of a general reduction of benefits).
- A substantial reduction of the executive’s other perquisites.
Severance provisions can be extremely complicated, taking into account which party terminated the relationship, why it was terminated, whether termination was justified, and how long the executive served before termination. If severance is available, the issues that must be addressed include:
- Continuation of salary (at full or a reduced level).
- Continuation of benefits (especially insurance).
- Continued or accelerated vesting of stock options or grants.
- The time period during which each of the foregoing occurs.
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact an attorney directly.