Sealing an executive hiring deal is a challenging time for employers and potential employees. It is important for both sides to confirm their understanding in a written agreement. However, neither side wants to see the goodwill built up during the hiring process destroyed by lengthy and difficult contract negotiations.
“Putting employment terms in an enforceable written contract is important because it forces both sides to ‘get real,’” says Peter Donati, a partner with Levenfeld Pearlstein, LLC, and leader of the firm’s Employment Service Group. “The employer needs to consider what it is truly willing to promise an employee, and an employee needs to consider what he or she absolutely must have in order to join or continue with an employer.”
Smart Business asked Donati about when and how to craft employment agreements that accomplish your objectives.
When are employment agreements used?
Some of the most common situations in which employment agreements are used include:
- Executive hiring situations: Senior
managers often look for certain guarantees
before they will leave a current employer.
- Change of ownership control: Prior to
the sale of a business or other transfer of
ownership control, the acquired company
may put written employment contracts in
place to prevent defections and give executives an incentive to make the sale happen. At the time of the sale, acquiring companies may require written agreements to
‘lock in’ the senior management team and
confirm its commitment to stay.
- Senior management incentives: Employers may use contracts to reward senior
management or in exchange for obtaining
other terms, such as non-compete commitments.
What should senior managers consider prior to negotiations?
Employees typically have maximum leverage during the hiring process. Once they start working, the power typically shifts to the employer. In order to strike the best deal, you should answer the ‘What ifs?’ you hope will never happen, such as:
- What if they change my position or
- What if the person who hired me leaves
in six months?
- What if they change my responsibilities?
- What if I am terminated?
Both parties need to understand what their rights and obligations will be in situations like these so that they are not caught by surprise.
How should potential hires prepare for compensation discussions?
You should get as much information as possible, starting with your own current salary and benefits. Then you should try to learn what the employer pays other members of the management team and, if possible, paid the last occupant in the position. With senior positions in public companies, the information is usually available in SEC filings. If the company is privately owned, try to gather information from comparable companies. Talk to your friends in similar positions and look at other public company filings. You can also pay for a compensation survey from a benefits consultant or, in some situations, your attorney may be a useful source of information.
Finally, decide how you want to conduct negotiations. This process is the first chance for a new employer to see how you operate. You need to walk the fine line between being tough and aggressive and being perceived as unreasonable and greedy. Besides providing legal advice, a lawyer also can serve as helpful intermediary so that the employer and the employee are able to engage in frank discussions without putting their working relationship at risk.
What should individuals know in regard to term, termination and noncompete clauses?
The term is not as important at the termination provisions, which outline under what circumstances you can be terminated and what you will be owed if you are terminated ‘without cause’ or resign for ‘good reason.’ From an employee’s perspective, the terminations provisions are the key terms and need to be as strong as possible.
Noncompete provisions also require careful examination. Over the years I have generally found that it is possible to draft ‘winwin’ terms where an employer secures the post-termination protection that it needs and a court will enforce while the employee still has an opportunity to use his or her training and experience to earn a living.
Why is it crucial to understand the legal ramifications of employment agreements?
Even if you have a strong understanding of your marketplace value in terms of salary, bonus and overall compensation, collaborating with a lawyer ensures you have a fair, appropriate and enforceable committment from an employer to provide all of the discussed terms.
PETER DONATI is a partner with Levenfeld Pearlstein, LLC and leader of the firm’s Employment Service Group. Reach him at (312) 476-7590 or email@example.com.