Executive Employment Agreement Toolkit

Resources to assist an employer in negotiating and drafting an executive employment agreement. 

Practical Law Employee Benefits & Executive Compensation

Many employers require their executives to enter into employment agreements at the start of the employment relationship. The employment agreement generally:

  • Specifies the terms of the executive’s employment.

  • Outlines the payments and benefits to which the executive will be entitled on his termination of employment.

  • Restricts the executive's competitive activities following his termination of employment.

Other employers do not feel it is necessary to enter into employment agreements with their executives. In this case, the employer or the executive may generally terminate the employment relationship at any time without consequence.

Whether executive employment agreements are necessary or beneficial depends on the nature of the employer’s business and the executive's role. The benefits of entering into a written employment agreement include:

  • Setting out and recording the terms of an executive's employment.

  • Minimizing the possibility of confusion or misunderstanding between the parties regarding their mutual obligations, both during employment and on termination.

  • Serving as a valuable recruitment tool by committing to pay certain compensation during the term and on termination.

  • For the executive, protecting him against arbitrary acts by the employer.

  • For the employer, placing restrictions on the executive’s activities following termination of employment.

  • For the employer, limiting the costs associated with terminating the executive.

Executive employment agreements are heavily negotiated documents and the relevant tax and other legal rules are complex. For example, Section 409A ( www.practicallaw.com/1-506-3280) of the Internal Revenue Code applies to "nonqualified deferred compensation" which is defined broadly to potentially include several elements of an executive's compensation, such as bonuses and severance payments (26 U.S.C. § 409A). Under Section 409A, a severance provision that is not carefully drafted can result in:

  • Income inclusion at vesting (even if no payments have been made).

  • A 20% penalty tax on the deferred amounts.

  • Interest charges on the late payment of the income tax due on the compensation.

In addition, certain employment agreements of the senior executives of public companies must be publicly disclosed and therefore are subject to scrutiny by shareholders and the media.

For all of these reasons, it is important that:

  • Careful consideration is given to which provisions should be included in the employment agreement.

  • Each provision is clearly drafted and understood by both parties.

  • Expert advice is sought on the tax and other legal issues related to the payments, benefits and restrictions in the agreement.

  • Applicable state law is taken into account.

The Executive Employment Agreement Toolkit contains continuously maintained resources designed to help employers and executives negotiate and draft employment agreements that:

  • Meet each party’s business objectives.

  • Comply with applicable laws.

For current trends in executive employment agreements, see What's Market, Executive Employment Agreements: Detailed Analysis, which contains summaries of recently filed executive employment agreements and allows you to analyze and compare agreement terms or features and access the underlying public document. To access a broader sampling of executive employment agreements that are summarized at a higher level, see What's Market: Executive Employment Agreements.

 

Practice Notes

 

Standard Documents

 

Standard Clauses

 

Checklists

 

Articles

 
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