VideoWhat 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.
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