Flexing Your Muscle

How to craft an employment contract that gives you the best deal.

Marie Leone
- CFO Magazine

November 1, 2008

What soft economy? With your talent and track record, plenty of
employers would jump at the chance to sign you up. That's the frame of
mind you should put yourself in when you're negotiating a new
employment contract. Having that leverage will help you pinpoint — and
build on — the provisions that matter most.

Executive employment contracts are typically 10 to 20 pages long,
and are saturated with subtleties that any careful candidate needs to
know about.

Not that every financial executive will have a slew of decisions to
consider. For some, the contract may consist of only one provision —
but it is an important one: a Change in Control Agreement. This spells
out the details of what will happen if a new owner appears and brands
you as redundant. "CFOs are among the most expendable senior executives
in an acquisition," notes Bud Robertson, CFO of $500 million Progress
Software, which serves businesses. "If your employer gets acquired, you
are probably gone." The Change in Control document is your severance
package, so make sure it accommodates the position you'll be in. After
all, as Robertson points out, getting hired anew will take some time.
"You aren't just going to interview with three people at the company
and get the job of CFO," he adds. When a potential employer hands over
the agreement, make sure to ask: "How long after my exit will I
continue to be paid?" "Will I get my base salary and my bonus?" "Are
benefits included?" "Will my options vest faster?" You want all of that
— and for a year (see "Expendable You" at the end of this article).

In fact, as you evaluate any contract, consider first what happens
when you leave; it's important to know, and be comfortable with, the
terms. Yes, it's about as romantic as a prenuptial agreement, but it
must be done. Termination clauses tend to be tough to negotiate and
have the potential to be real pact-smashers.

How so? Consider a recent situation that pitted a highly
sought-after CEO against the hard-nosed chairman of a real-estate
development firm. The two made an agreement — sealed only with a
handshake — that the CEO would resign from his current post and join
the developer. The coveted executive was potentially a key driver of
the company's future fortunes, and he negotiated a compensation package
to reflect that.

The chairman, who prided himself on being a savvy negotiator,
instructed his lawyers to include a harsh termination clause as they
drafted the employment contract. By the chairman's lights, the clause
would serve as a bargaining chip he could use to whittle down his
original lucrative offer. Among other things, the chairman had promised
the future CEO a huge supplemental retirement benefit.

As a result, the contract's just causes for termination included an
aggressively subjective yardstick: "Failed to meet board of directors'
standards." Not surprisingly, the candidate suddenly stopped returning
the chairman's calls and the deal died. The CEO considered the overly
aggressive clause a show of "bad faith" by the chairman, says J. Mark
Poerio, an employment practice partner at Paul, Hastings, Janofsky
& Walker. "It is fine to want to protect corporate interests, but
not to the point of sending signals of mistrust."

While termination clauses can be especially delicate, it's important
to study other provisions as well. If you're dealing with a public
company, there's a new Securities and Exchange Commission rule that
requires it to disclose, in detail, the proposed compensation package.
That means investors and other stakeholders will have to be placated —
so don't expect to make your getaway with a parachute of gold,
especially these days.

How Long, How Much
The agreement usually starts off with a
definition of the period it covers — generally in the range of one to
five years — followed by a clause about automatic extensions that
includes the caveat, "unless the board decides otherwise before the
renewal date." This is also an area that new hires often overlook, says
Maria Hallas, an employment attorney with Greenberg Traurig. What at
first appears to be a yearlong contract could include a provision
allowing the executive to be axed with just 15 days' notice and a
month's pay. Be aware, says Hallas, that what you're being offered is
"really a monthlong contract that is renegotiated year-to-year."

Salary may also appear to be fairly straightforward. Nonetheless,
candidates should benchmark salary and compensation packages against
peer-company data to develop a sense of where their deal fits.
Underpaid? Remind them, sternly, how lucky they are to have you.
Overpaid? Remind yourself — under your breath, of course — how lucky
you are to have snagged this new gig.

Compensation language starts with the base salary and should end
with a clause about how annual increases will be calculated. Candidates
should argue for as much detail as possible, says Poerio. For example,
negotiate a written commitment from the board that it will develop a
compensation formula by a specific date for doling out cash bonuses,
stock-option grants, and restricted stock. In addition, the provision
should include details about performance goals and targets that trigger
the formula.

Another tip: make sure any stock-option provision goes beyond noting
the grant date and number of shares that a candidate has the option to
purchase. Incoming executives should ask for details about options
vesting and expiration as well as the possibility of cashless exercise
(a method for converting options to stock without covering the strike
price). It's common for a CFO-level hire to receive restricted stock as
a signing bonus. As Harry Graham, managing director at Smart Business
Advisory and Consulting, a compensation and benefits firm, points out,
while stock options and restricted stock are popular forms of executive
compensation, some aspects of both have changed in recent years.

Continued at:

http://www.cfo.com/article.cfm/12465319/c_12493013