August 20th, 2010

Executive Compensation/Employment Agreement Checklist

Compensation Analysis

The following questions are aimed at obtaining the maximum total compensation package and revealing any weaknesses in the proposed structure.

  • How does the compensation package - salary, bonus, benefits, and options  - compare to similarly situated Executives in the particular industry and within the Company?
  • Are there built-in salary increases, or increases based upon a formula or meeting targets?
  • Is there a clear bonus formula in writing?
  • Is there a signing bonus available to make up for a "lost" bonus at the former employer?
  • How much of the bonus criteria is within your control?
  • Are there any benefits which the Company may provide if you specifically ask?

Options/Equity/Phantom Equity

With the increasing use of options and other equity plans, understanding the short and long-term ramifications of these plans is important.

  • Are such plans available and at what levels?
  • What financial information is available with respect to the Company?
  • What type of financial analysis can you do with respect to the Company?
  • What are the vesting and payment parameters?
  • What happens if a sale, merger, or IPO occurs?
  • What are the current and future tax ramifications of such plans?
  • What happens if your employment is terminated?

Severance/Term

  • The benefit of a good compensation package must be protected in the event of a termination by the Company. Remember that even if you trust the current management team, a new owner or management team may be making the decisions in the future.
  • Are you being offered a "pay-or-play" employment agreement with a fixed term?
  • If there is no fixed term, are you entitled to a fixed severance package in the event of a termination by the Company without cause?
  • How is "cause" defined?
  • Do severance payments stop if you become employed?
  • Are severance payments reduced if you become employed?

Duties/Authority

A clear statement of responsibilities and authority can provide Executives with legal protection if the Company does not follow through with its promises.

  • Are you being given a specific title, duties, and reporting structure that are set forth in writing?
  • Can you terminate the agreement and trigger your severance package if the Company changes your title, duties, or reporting structure without your consent?

Restrictions

As technology becomes more significant to businesses, more and more businesses are requiring Executives to sign agreements that contain restrictive covenants. While they can appear harmless, restrictions often carry far-reaching consequences.

  • Are you being asked to sign an agreement restricting your activities after termination of employment, including restrictions from soliciting or servicing clients, soliciting or hiring employees, or engaging in a competing business?
  • Will such an agreement be presented on your first day of work after you have already resigned another position?
  • How enforceable are the Company's restrictive covenants?
  • Can you negotiate any of the covenants to provide the Company with reasonable protection without hindering your career?

Author: Gavin McElroy