Executive Employment Agreement
An executive employment contact can encompass a variety of issues including many non-monetary concerns for both the employer and employee. The attorneys at Tuggle Duggins are experienced in representing both groups.
The terms of a typical executive employment contract, cover not only the types of compensation and benefits payable but may also include confidentiality and non-compete provisions. How these agreements are structured can have significant tax and securities consequences for an employer.
The types of compensation and benefits included in the employment agreement, as well as the specificity of these provisions, will depend on the applicable facts and circumstances of each case, but will include such items as:
- The employer's business needs
- The employer's industry
- Whether the employer is a public company
- The executive's position
- The need to attract and retain the executive
Before negotiating employment agreements, employers should carefully evaluate how particular compensation and benefit terms may be perceived by others. Employers should also assess the implications of this when reviewing and negotiating their employment agreements. Employees should consider what they want to receive out of the process and be aware of the alternatives available in structuring compensation packages.
A number of issues exist that should be considered when drafting and negotiating compensation and benefits provisions of executive employment agreements. The compensation and benefits components that are frequently included are:
- Base salary
- Annual bonus provisions
- Signing bonuses
- Equity awards
- Perquisites and participation in employee benefit plans
Each of these are briefly described below.
An employment agreement usually specifies an executive's annual base salary, which can be:
- Fixed for the entire term of the employment agreement
- Subject to discretionary or automatic increases during the term of the employment agreement
Automatic increases can be made based on a specified amount or cost-of-living increases. However, because of the more stringent regulatory environment, automatic increases have become less common.
ANNUAL BONUS PROVISIONS
Whether an annual bonus provision is included in the employment agreement and the specificity of any annual bonus terms, generally depend on the negotiations between the parties. When structuring annual bonus provisions, the employer should consider how much discretion it wants to retain in granting bonuses over the term of the employment agreement. The employer must balance its need for flexibility with the executive’s need for certainty in his compensation arrangements.
A purely discretionary annual bonus provision gives the employer the most flexibility. This type of provision allows the employer to determine each year whether to pay an annual bonus and the amount of any annual bonus.
Employment agreements frequently provide that payment of the executive’s annual bonus is based on the achievement of performance goals. This type of provision gives the executive greater certainty in his compensation arrangements. The performance goals can be subjective, objective or a combination of both, and can be based on company-wide or individual performance metrics. A performance-based bonus provision may also include a:
- Target bonus (the amount the executive is entitled to receive if target performance goals are achieved).
- Maximum bonus (the amount the executive is entitled to receive if performance surpasses target performance goals and more difficult goals are achieved).
- Threshold bonus (the amount the executive is entitled to receive if performance does not reach target performance goals but less difficult goals are achieved).
Deductibility of Bonus Payments
In many cases this is not an issue unless the amount paid is deemed to be unreasonable. However, if the employer is a public company additional tax and disclosure provisions may apply
Short-term Deferral Exception
Performance-based bonus provisions should specify when the bonus will be paid. In drafting the payment date provision, the parties should be mindful of the deferral regulation set forth under IRC Section 409A.
Termination of Employment
The employment agreement should specify how the executive's eligibility for a performance-based bonus is affected by termination of employment. The parties must decide whether the executive is required to be employed on the last day of the performance period or on the payment date to be eligible to receive the bonus. In addition, they should decide whether the executive is eligible to receive a bonus for the year in which the executive terminates employment. Often time this depends on the reasons for termination. Also when negotiating the circumstances under which the executive forfeits the bonus in connection with his termination of employment, the employer should confirm that the forfeiture is permitted under the applicable state's wage payment laws.
PERKS AND BENEFIT PLANS
The employment agreement may also address any perquisites the executive is entitled to receive and the employee benefit plans in which the executive will participate. Perquisites may include:
- Personal use of a company vehicle
- Country club dues
- Financial planning or tax advice services
- Life insurance coverage
To preserve flexibility for the employer, the employment agreement can describe these benefits generally. This can be done by stating that the executive will be eligible to participate in employee benefit plans and receive perquisites that are provided to similarly situated employees of the employer. However, if there are certain items that are important to the executive, they may need to be set out in the employment agreement. The parties may also need to address the tax consequences of any perquisites or benefits, including:
- Whether the perquisite or benefit is taxable
- How the employer intends to satisfy any tax withholding obligations
In addition, the parties should decide how the perquisites and benefits will be treated upon the executive's termination of employment.