An executive compensation agreement is a binding contract between a company and one of its most important and powerful employees. If drafted poorly by the employer, the executive could be left with so much power that they can dominate the business, or with so little that they are unable to act and use their skills to the company's benefit. Executives, on the other hand, can agree to terms and conditions that end up making their working lives miserable.
WORKING FOR A COMPANY'S COMPLICATED INTERESTS
Any company looking to sign an executive has numerous interests that they want to pursue. Some of them can conflict, though, and finding a resolution that is in the best interests of the company can be very tricky.
For example, many companies want to:
- Hire an executive with lots of experience and talent
- Save money
- Align the financial success of the company with the financial interests of the executive
- Avoid situations where the executive's interests are contrary to the long-term survival and success of the company
- Promote growth while discouraging reckless risk taking
- Shield the executive from legal action that reasonably stems from the day-to-day activities of the company, while still holding them accountable for misconduct or criminal activities
The line between some of these interests is very fine, indeed. Reaching an executive agreement that incentivizes company growth while protecting it from liability requires skilled negotiation, lots of experience from prior cases, a thorough understanding of the industry and the risks inherent to it, and intense preparation.
The lawyers at the Katz Law Group bring all of that and more to the table.
ADVOCATING FOR AN EXECUTIVE'S FUTURE
For executives who are exploring a job possibility or who are in the negotiation process, the compensation agreement is the final hurdle separating them from what can be an extremely lucrative position managing a company. The difference between success and failure at this juncture will not just alter the compensation you earn over the next few years: It can determine your entire future.
There are some parts of the executive compensation agreement that tend to draw the eye, like:
- Base salary or compensation
- Stock options
- Bonuses, including annual, performance, and retention bonuses
- Performance standards
However, other terms and conditions of executive employment can be just as important, such as:
- Severance or separation agreements, including information regarding deferred compensation or exit packages
- Retirement benefits
- Non-disclosure agreements
- Non-solicitation provisions
- Arbitration agreements or requirements
- Indemnity agreements
- Non-compete provisions, including garden leave clauses
Many of these benefits and forms of compensation have complex tax implications that can drastically undercut the value of the payment. Meanwhile, the performance standards and the company's other expectations can mean the difference between a lucrative offer and one that the executive ends up regretting.
Executives should always consult an experienced attorney before signing an executive compensation agreement.
Drafting Agreements that Further the Interests of All Parties
Because executives act on behalf of the company and will make huge decisions that can affect the future of the business, it is essential for the executive compensation agreement to satisfy both of the parties involved. If it does not, it can create bad blood between the executive and the company he or she represents. This can manifest itself in a wide variety of ways, any one of which can damage the company irreparably.
This potential for conflict makes the executive agreement very different from other employment contracts. While companies have a financial interest in using contracts that secure as much work for as little compensation as possible with their other employees, executives have to be satisfied with the agreement that they have signed. If they are not happy, their attention will be turned towards finding other companies to work for, rather than growing the one they currently control.
As a result, the process of soliciting candidates and hiring an executive is completely different than it is for other positions. Companies need to take an approach that is far more transparent and generous. The last thing that a company needs is an executive who feels as if they were duped or that the practical realities of the job are different than what they had expected.
DISPUTES ARISING FROM EXECUTIVE COMPENSATION AGREEMENTS
Even perfectly-crafted executive agreements can lead to a serious dispute in the future if the company's well-being is threatened or if its goals begin to change.
When employment contract disputes like these arise, most of them end up being resolved through mediation or arbitration, rather than through the costly and time-consuming process of litigation. While these negotiations focus on the mutual agreement of the parties at the time of the dispute, the executive agreement is still going to play a huge role in the outcome. Both the company and the executive will look to their rights and their interests under the contract throughout the negotiation process.
Should these resolution methods fail to produce an agreement, the case will go to court and can go all the way to trial, where a judge and jury will determine who is entitled to what under the terms of the contract.
Negotiating Modifications to the Agreement Can Help Everyone
Ideally, though, problems with executive compensation agreements are ironed out without the need of a third party's oversight. While these discussions are extremely sensitive and do not always reach a mutually-agreeable resolution, going through the negotiation process can avoid an expensive and distracting escalation to the dispute. It will also reveal sticking points before the dispute goes before a mediator or arbitrator.
In fact, negotiating modifications to the executive compensation package are often a crucial part of a company's evolution. If the business atmosphere has changed since the compensation agreement was first struck with the current executive, it may no longer reflect the short- and long-term interests of the corporation. The executive may have a financial motivation to do things that are not in the company's interests any more, undermining the vitality of the business rather than promoting it.
Companies that have pivoted like this over time tend to react by simply firing the executive and hiring another one with a skillset that is more on-point, using a new executive compensation agreement that more closely reflects the company's new values and direction. However, this may not be in the company's best interests, and not solely because it is a hassle: Letting an executive go will also trigger the severance agreement and any exit payments or golden parachutes that are included in it. Opening up a dialogue with the executive and modifying the compensation package in ways that are mutually-agreeable can be a far less costly alternative.
THE KATZ LAW GROUP: MASSACHUSETTS LAWYERS FOR EXECUTIVE COMPENSATION AGREEMENTS
For both the executive and the company looking to hire one, the executive compensation agreement is one of the most important stages in the entire process. If not done carefully, the executive can feel unwanted and undervalued, and could notice that they benefit more if the company fails. If the interests of the company and the executive are not aligned and in sync, it can create serious problems for both sides in the future.
The business and contract litigation lawyers at the Katz Law Group can legally represent you at this important point in the hiring process. Contact them online or call them at (508) 480-8202 for help in the cities of Worcester, Framingham, or Marlborough, Middlesex or Norfolk County, the MetroWest region, or the rest of Massachusetts.