Employment Agreements: A Rundown of the Top 10 Pointers
Executive contracts often include a range of options, clauses, benefits, restrictions and obligations. We represent employees at all levels in the negotiation process, and this post will share our thoughts on some of those provisions.
The range is broad: non-qualified stock, incentive stock, incentive bonuses, pay for performance, deferred compensation, retirement plans, benefit plans, business expenses, choice of laws, arbitration clauses, non-competes, non-solicitations, confidentiality clauses, termination provisions, residency requirements, and post-employment cooperation agreements…to name a few of the more common provisions.
Below, we outline some of the main parts of employment agreements and answer some of the most common questions that we get asked. Of course, feel free to contact us with any other questions you may have.
- The general trend in executive pay is moving towards a proportionally lower base salary and higher pay-for-performance rewards. Expect to see more incentive based clauses.
- A second general trend in employment agreements is an effort to lock employees into long term arrangements or lock them out of the industry.
- Severance packages are back, but frequently misunderstood. These provisions should be negotiated at the outset with particular care to definitions of cause and good reason, as well as cure periods, conditions to payouts and post-employment obligations.
- Change in control provisions protect employees in the event a company is sold or new management takes over. These clauses often provide for acceleration in compensation and equity vesting, and should be considered whether or not the prospect of such an event is immediate.
- Incentive Stock Options (ISOs) are agreements providing an employee the right to buy stock, ie. exercising the option. This also comes with a tax benefit, but there are several important limitations including the amount of stock that can be granted this way.
- Non-Qualified Stock Options (NSOs) are similar to ISOs, but they do not qualify for the same preferential tax treatment and the have fewer restrictions.
- Restricted stock is an actual share of stock owned by an individual, but subject to certain company mandated restrictions and repurchase rights. These restrictions usually lapse over time, with the employee’s rights in the stock vesting at each milestone.
- Phantom stock is not actual equity, per se, but it gives the executive the benefits of stock without owning it. For example, if the actual stock value increases, so will the phantom stock.
- Stock Appreciation Rights (SARs) are not actual stock, either, but these contracts typically result in a bonus or other payment equivalent to the increase in the price of an actual share.
- Employment at will is often the rule, but there are many rights depending on the contracts, if any, but there are also rights under laws protecting against discrimination, retaliation and whistleblowing, all of which merit a view.
If you’re negotiating an employment relationship, or termination, contact us today.
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