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Executive Employment Agreement Toolkit
Practical Law Toolkit 1-506-7037 (Approx. 16 pages)
Executive Employment Agreement Toolkit
by Practical Law Employee Benefits & Executive Compensation
| Maintained • USA (National/Federal) |
Resources to assist an employer in negotiating and drafting an executive employment agreement.
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 the executive's termination of employment.
- Restricts the executive's competitive activities following 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 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's employment.
Executive employment agreements are heavily negotiated documents and the relevant tax and other legal rules are complex. For example, Section 409A 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, which frequently accentuate agreements that provide for executive compensation that they consider "excessive."
For all of these reasons, it is important that employers:
- Carefully consider which provisions should be included in the employment agreement.
- Clearly draft all provisions to ensure that each party understands their meaning.
- Seek expert advice on the tax and other legal issues related to the payments, benefits and restrictions in the agreement.
- Understand whether the compensation being provided under the employment agreement is in line with the market.
- Take into account applicable state law.
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 the Executive Employment Agreements and Executive Employment Agreements (Detailed Analysis) databases in What's Market.