Page 248 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

234 The Complete Guide to Executive Compensation

company. In addition to the paid time off to attend, the company usually pays the travel and
meeting expenses. This benefit is of moderate importance to executives.

Employment Contract
For most employees, the employment contract is a social not a legal commitment. For
decades, the social contract between companies and their employees implied that as long
as workers did their job well, the company would keep them employed. No longer. The pre-
vailing “contract” is that in lieu of a job guarantee, the employer provides opportunities to
acquire new job skills. As long as an employee’s skills are needed and performance require-
ments met, the individual will have a job. When either is no longer true, the individual is
discharged to find work else-where but with newly acquired skills. In other words, the long-
standing “employment-at-will” principle is truer now than ever before. In the absence of
an employment or union contract, a company may terminate employment whenever it
wishes as long as termination is not discriminatory as defined by law. (With the number of
discrimination cases going to court, some companies are looking at insurance contracts to
cover associated legal costs.)
Executives taking on new responsibilities and/or new employees should seek a written
employment contract. Such a contract will typically specify the period of time for which it is
in effect, what constitutes acceptable performance, and what the executive will receive in the
way of pay (e.g., salary, short- and long-term incentive amounts, and specific benefit and
perquisite coverage). In addition, it may include an automatic annual renewal unless notified
by the other party within a specified time period before the end of the contract. A contract
period of three to five years is common, along with the automatic renewal clause (probably
terminating in case of disability, retirement, or death). A process for resolving disputes is also
a common feature. The contract will typically include a clause barring the executive from dis-
closing confidential information, often for an indefinite period. Additionally, a clause may be
inserted that prevents the executive from engaging in any activity considered competitive to
the employer. This noncompete clause usually extends beyond the contract term and is linked
to eligibility for severance payments. Violation of this requirement not only results in the loss
of future payments but may require the return of previous amounts (including exercised stock
options for a prescribed period of time) if a clawback clause has been included. While compa-
nies prefer a broadly defined, long-term noncompete clause, they are difficult to enforce.
The courts are inclined to be restrictive in both definition and term. Companies may be more
aggressive in enforcing contracts when the executive has defected to a competitor. A clause
may also be included to permit renegotiation upon mutual agreement of the company and
the executive. In addition to stipulating pay during the period of employment, the contract
will also often include a signing bonus and specify the terms and conditions of severance pay.
The signing bonus is intended to cover what the executive is leaving behind. This includes at
least the current value of forfeited pay and benefits. It may also include the present value of
anticipated future appreciation of both outstanding awards as well as those not yet received
by the executive. The form of payment may be cash, stock options, and/or restricted stock.
Additionally, a package of other perquisites such as those described in this chapter may be put
together. (Perhaps executives should employ an agent to negotiate their contracts, as do
prominent sports figures. Few would argue that the use of agents has not been successful for
the men and women who are being paid whopping amounts of money to continue to play
games learned as children.)