What an Executive Employment Agreement Does
An executive employment agreement is a binding contract between a company and a senior-level hire that sets the terms of the employment relationship before work begins. An executive’s compensation package typically includes base salary, equity awards, and deferred bonuses that are negotiated and fixed in the agreement upfront, along with the conditions under which severance is owed and what the executive can do after employment ends.
Conn Maciel Carey’s Labor & Employment attorneys draft and negotiate executive employment agreements exclusively on behalf of employers, and they push back on vague or incomplete terms before the agreement is signed.
Key Provisions Every Executive Agreement Needs
Duties, Title, and Reporting Lines
The agreement needs to define the executive’s duties and title with enough specificity that both parties understand what the role entails. If the company later reassigns responsibilities or adds a management layer above them, an executive can argue they were pushed out, or constructively terminated, and pursue the severance and other payments the agreement ties to a termination without cause.
Compensation and Incentive Structure
An executive’s compensation package goes beyond base salary, and the agreement needs to spell out every component in specific terms. The agreement needs to specify what happens to unvested equity if employment ends before vesting is complete, and what happens to bonus payments if the executive is terminated before the payment date. If any of these terms are left ambiguous, an executive has grounds to argue they are entitled to compensation the employer never agreed to pay.
Term and Termination Rights
Executive employment agreements are either fixed-term or at-will, and the structure the company chooses determines its financial obligations if the relationship ends early. Fixed-term agreements require the company to pay the executive through the end of the contract if the company terminates the executive without cause. For example, a company that ends a two-year agreement after six months may owe the executive up to eighteen more months of base salary. At-will agreements let the company terminate the executive at any time and for any lawful reason without owing pay through a set term.
Defining “For Cause”
Executive employment agreements that include severance provisions need to define “for cause” with precision, because the definition determines whether the executive receives severance when employment ends. The agreement needs to specify exactly which conduct qualifies as cause, like material breach of the agreement or willful failure to perform job duties, rather than using broad language that leaves room for interpretation. When an executive employment agreement does not provide a precise definition of “for cause,” a terminated executive can argue they were fired without cause and demand severance pay.
Severance Provisions
When a termination does not meet the “for cause” standard in the agreement, the company owes the executive severance. Severance is a cash payment made at separation and is typically calculated as a multiple of the executive’s annual base salary. For example, a company paying an executive $400,000 per year that agrees to a severance of two times the executive’s base salary will pay out $800,000 at termination.
Change-in-Control Provisions
A change-in-control provision in an executive employment agreement determines whether the executive is entitled to severance pay if the company is sold or merged. The agreement needs to specify whether a change in ownership alone triggers the executive’s severance rights, known as a single-trigger provision, or whether the executive also needs to be terminated or resign before severance applies, known as a double-trigger provision. Single-trigger provisions create immediate severance obligations at the moment a transaction closes, and a buying company that discovers a single-trigger provision after a deal is signed can face severance payouts it never accounted for in the purchase price.
Change-in-control severance payments can also trigger tax consequences under IRC Section 280G that affect both the company and the executive, which is one reason employers should have an employment attorney review change-in-control provisions before the agreement is signed.
Termination and Severance Provisions Need to Align
Termination and severance provisions negotiated separately can say different things about the same termination scenario, and an executive can use any inconsistency between the two to argue the company owes severance. For example, if the termination provision allows the company to terminate the executive immediately for cause but the severance provision requires 30 days notice before any termination, the executive can argue the company owed them notice and that the termination entitles them to severance.
“Good reason” provisions create a separate issue. “Good reason” refers to specific changes the company makes to the employment relationship that give the executive the contractual right to treat the change as a constructive termination and resign with severance. Good reason provisions typically cover changes like:
- A reduction in base salary or bonus opportunity
- A material change in the executive’s title or reporting structure
- A relocation of the executive’s primary work location
An executive whose good reason provision is drafted broadly has the ability to trigger severance on their own terms, which is why employers need to define good reason with the same precision as the “for cause” definition.
Restrictive Covenants After Employment Ends
Non-Compete Provisions
A non-compete provision prohibits an executive from going to work for a competitor or starting a competing business for a defined period after employment ends. The enforceability of a non-compete provision is governed by state law. Some states limit non-compete agreements significantly while others ban them outright, and a non-compete that does not comply with the law of the state in which it was entered into will not be enforced by a court.
Non-Solicitation of Employees and Clients
Non-solicitation provisions prohibit a departing executive from recruiting the company’s employees or soliciting its clients after employment ends. Non-solicitation provisions are upheld more broadly than non-competes because they do not restrict where an executive can work, only who they can contact. Employers need to address employee solicitation and client solicitation separately because different standards apply to each, and a provision that conflates the two is easier for an executive to challenge.
Confidentiality and Trade Secret Protections
A confidentiality provision in an executive employment agreement restricts the executive from disclosing or using the company’s proprietary information after employment ends. Federal law provides baseline protections for trade secrets under the Defend Trade Secrets Act, but a confidentiality provision allows the company to define what qualifies as confidential, rather than relying on the statutory definition of a trade secret. Employers should also note that under 18 U.S.C. §1833(b), any agreement governing the use of confidential information has to include a whistleblower immunity notice, and an employer that omits it cannot recover exemplary damages or attorney’s fees in a federal trade secret claim.
Executive Employment Agreement Template: Key Sections Employers Should Include
The outline below identifies the key provisions an executive employment agreement needs to address and what each one governs. Employers should have an employment attorney review any executive employment agreement before signing, because the specific language in each provision determines the company’s rights and financial obligations at every stage of the employment relationship.
- Parties and Effective Date: Identifies the company and the executive by full legal name and establishes the date on which the agreement takes effect.
- Position, Duties, and Reporting Structure: Defines the executive’s title and responsibilities, and identifies who the executive reports to.
- Term of Employment: Establishes whether the agreement is fixed-term or at-will and specifies the start date.
- Base Salary and Incentive Compensation: Sets the executive’s base salary and incentive compensation structure, and specifies the terms under which each component is earned and paid.
- Benefits: Identifies the benefits the executive is entitled to and any executive-level perquisites the company is providing.
- Termination: Defines the conditions under which the company or the executive can end the relationship, covering for-cause and without-cause termination, resignation, and death or disability.
- Severance: Specifies the severance amount and which termination scenarios trigger a severance obligation.
- Change-in-Control: Establishes whether a sale or merger triggers the executive’s severance rights and whether a single-trigger or double-trigger provision applies.
- Restrictive Covenants: Sets out the post-employment provisions that govern the executive’s conduct after employment ends, including non-compete, non-solicitation, and confidentiality terms.
- Dispute Resolution: Specifies how disputes between the company and the executive will be resolved, including whether arbitration is required.
- Governing Law: Identifies the state whose law governs the agreement.
EXECUTIVE EMPLOYMENT AGREEMENT SAMPLE TEMPLATE
Mistakes Employers Make in Executive Employment Agreements
Signing the Executive’s Proposed Agreement Without Employer-Side Review
Senior-level executives frequently come to the table with their own proposed agreement drafted by their own attorney. An employer that signs that agreement without having employer-side counsel review it is agreeing to terms that were written to protect the executive, not the company, and provisions like the “for cause” definition and good reason clauses will reflect that.
Using the Same Agreement for Every Executive
A Chief Financial Officer and a Chief Revenue Officer have different compensation structures and different competitive risk if they leave to join a competitor. An agreement drafted for one role and repurposed for another can leave provisions that don’t apply and omit ones that do.
Failing to Update the Agreement When the Executive’s Role Changes
An executive who takes on significantly expanded responsibilities or receives a material increase in compensation might be bound by contractual terms that no longer reflect the employment relationship. An outdated agreement can leave the company without contractual protections it would have negotiated had the agreement been updated.
Get Legal Help with Executive Employment Agreements
Conn Maciel Carey LLP’s Labor & Employment Practice attorneys draft and negotiate executive employment agreements on behalf of employers. They represent companies at every stage of the process, from the initial term sheet through final execution, and push back on provisions that transfer financial or legal risk to the company. To speak with an attorney about an upcoming executive hire or an existing agreement, contact the firm directly by calling (202) 715-6244 or by using our contact form.
This article is for informational purposes only and does not constitute legal advice. Laws and regulations change, errors may occur, and this content may not address every aspect of the relevant legal requirements. Reading this article does not create an attorney-client relationship. For guidance on your specific situation, consult your attorney.