The value of an offer extends beyond salary and bonus
A senior offer can include far more than salary and bonus. It may affect guaranteed pay, equity awards, deferred compensation and other payments made later, severance, post-employment restrictions, and protection if a claim is brought over work performed for the company. The firm represents executives and investment professionals throughout the United States; restrictions on future work can require attention to the law that applies to the executive and the arrangement.
This overview is particularly relevant to senior executives and investment professionals considering or negotiating material compensation, equity, deferred-compensation, severance, or other contractual arrangements.
What we help you understand
- What you will be paid and when the company can change or withhold it
- What you receive if your employment ends, including bonus, ownership, and severance rights
- Whether restrictions could limit your next role or affect compensation already earned
- Whether the agreement's payment and ownership terms may have unintended tax consequences
Key terms that can change the value of an offer
The agreement should identify not only base salary and target bonus, but also the applicable performance measures, discretion standards, timing of payment, treatment of partial-year service, sign-on compensation, guarantees, make-whole payments, and whether compensation is subject to clawback, recoupment, or forfeiture. Guarantees and make-whole payments require particular care: payment conditions, discretion standards, continued-employment requirements, termination provisions, and offset or repayment terms should not give the employer an easy path to avoid paying the agreed amount. A negotiated term is materially less valuable if its payment conditions or discretion provisions make it uncertain in practice.
Tax-sensitive structuring
Executive compensation should be structured with the relevant tax rules in mind from the outset. Depending on the arrangement, those rules can include Section 83, Section 409A, and rules affecting the treatment of equity, profits interests, deferrals, reimbursements, and separation payments. The goal is not to add technical language for its own sake; it is to preserve the intended economics and identify tax-sensitive provisions before they create adverse consequences.
Termination protection
The agreement should address what happens if the executive is terminated without Cause, resigns for Good Reason, is disabled, dies, or is affected by a change in control. Important questions include severance amount, benefit continuation, bonus treatment, treatment of equity and deferrals, release requirements, payment timing, post-employment restrictions, and the definition of Cause and Good Reason.
Good Reason is a negotiated definition of material adverse changes that permit the executive to resign and receive the protections agreed for a qualifying termination. It commonly addresses a material reduction in title, authority, responsibilities, or compensation, or a material change in work location, but the agreement should state the applicable events, notice period, employer cure right, and treatment of severance, equity, and deferred compensation. The timing provisions require particular attention because an executive who resigns without Good Reason can risk forfeiting those protections.
These protections can matter even where an executive has a strong relationship with the current CEO or direct reports. Leadership, reporting relationships, and business priorities can change during the term of an agreement, and the executive’s contractual protections should not depend solely on the individuals in place when it is signed.
Severance is commonly conditioned on the executive signing a release of claims. That condition should be negotiated carefully so the release does not require the executive to waive protections or benefits that should continue, such as vested compensation, indemnification and advancement rights, insurance coverage, rights under governing documents, rights to enforce the agreement, or claims that cannot lawfully be released.
Change in control protection and tax analysis
A sale or other change in control can be difficult even where the executive remains employed. A new employer may impose different policies and practices, and the executive’s position, title, reporting line, authority, responsibilities, compensation, or work location may be reduced or materially changed. The agreement should identify the events that support a Good Reason resignation and address compensation, equity, and deferred-compensation treatment if the executive’s negotiated role no longer exists in substance.
The type of buyer matters. A financial buyer is often more likely to maintain the existing management team and the company’s practices and procedures, although that is not assured. A strategic buyer generally must integrate the acquired company into its existing business and is more likely to make significant changes to employment terms, compensation practices, reporting lines, roles, and headcount. The agreement should anticipate those risks rather than assume that continued employment after closing preserves the negotiated role.
Payments in a change in control also require tax analysis. Even if the executive remains employed, accelerated vesting or other transaction-triggered equity or phantom-equity benefits may be relevant. Depending on the facts, those benefits, severance, transaction bonuses, and other compensation can be considered together under Section 280G of the Internal Revenue Code. If the rules produce an excess parachute payment, Section 4999 may impose a 20% excise tax on the executive, in addition to regular income tax. The arrangement should therefore be reviewed for appropriate protections, including the treatment of any potential tax exposure.
Specificity before a dispute arises
Executive agreements should address foreseeable events with enough specificity to reduce the risk of a later dispute. Once a dispute has arisen, particularly in a termination situation, the company will often have substantially greater leverage than the executive. Clear provisions addressing compensation, equity, deferred payments, termination, and restrictive covenants can preserve the negotiated economics when they matter most.
Routine covenants can create unexpected risk
Company-drafted agreements can contain provisions that appear routine but create significant leverage if a dispute arises. A broad promise to comply with all company policies, avoid any personal use of company property, or comply with all applicable laws may seem unobjectionable. But company handbooks often contain numerous requirements, and ordinary deviations, such as a late arrival, a personal email on a company computer, or a personal call on a company phone, can later be cited as a technical breach.
The risk becomes more serious if Cause directly includes a violation of company policies or applicable law, or permits termination for a breach of a “material provision” of the agreement. A company may contend that a broad policies-compliance or legal-compliance covenant is itself a material provision, even when the underlying deviation was minor. Similarly, an overbroad confidentiality covenant can create an issue from an inadvertent, minor disclosure of nonpublic business information, such as mentioning a business trip to a spouse.
An asserted Cause termination can also carry serious reputational consequences. A prospective employer may assume it reflects serious misconduct, such as fraud, embezzlement, or other dishonesty, rather than a technical or minor violation of a policy or law. That perception can make it significantly more difficult for an executive to obtain another comparable position, even if the Cause assertion was not well founded.
The agreement should distinguish material from immaterial breaches, limit policy- and legal-compliance Cause triggers to material conduct, provide a reasonable opportunity to cure a breach that can be remedied, and avoid turning ordinary conduct into a basis for forfeiture or loss of severance and equity rights.
Restrictive covenants, clawbacks and forfeiture
Noncompetition, nonsolicitation, confidentiality, clawback, recoupment, and forfeiture provisions can affect both future employment and the value of compensation already earned. These restrictions should be reviewed together with the executive's compensation and equity rights, rather than in isolation.
An executive may be subject to restrictive covenants in multiple documents, including an employment agreement, equity award, deferred-compensation arrangement, plan document, or other governing agreement. Those provisions may cover different conduct and apply for different periods. The documents should be reviewed together rather than one at a time.
Indemnification and advancement
Executives may face claims arising from service to an employer, portfolio company, fund, or board. Appropriate indemnification, advancement, and insurance protections can be important even where an executive ultimately prevails.
Cross-border executive arrangements
The firm also advises on selected cross-border executive arrangements where the employer uses U.S.-style employment, compensation, equity, or carried-interest documents. Ed coordinates with local counsel where local employment, regulatory, or other local-law issues require jurisdiction-specific advice.
Foreign employers often use compensation plans and employment practices designed for their local workforce. A U.S. taxpayer, including a U.S. citizen or lawful permanent resident, who relocates abroad may face both U.S. and foreign tax regimes, with potentially very different timing and taxation of salary, bonus, equity, deferred compensation, and other arrangements. An arrangement designed for local law and tax practice may not satisfy U.S. tax rules and may expose the U.S. executive to significant adverse, and in some cases punitive, U.S. tax consequences. The relocation package should address more than moving expenses. It should be coordinated with accountants who understand both tax systems and should consider a tax-equalization or make-whole arrangement designed to place the executive in a comparable after-tax position to remaining in the United States, subject to the agreed plan terms. The employer's local arrangement should therefore be reviewed for the U.S. executive, and the executive's individual agreement, award, election, or implementation may need tailored modifications.
Frequently asked questions
When should I hire counsel to review an executive employment agreement?
Ideally, before beginning substantive negotiations, not merely before signing. You should first understand the offer and ask the company any factual or clarifying questions you have. But before making substantive requests or counterproposals, consult counsel.
Early involvement helps identify issues and requests you may not have considered and permits a coordinated approach to the negotiation. Bringing counsel in after negotiations have begun can require reopening points already discussed, which may make the process more difficult or create unnecessary friction with the prospective employer.
Can the company pay my legal fees for reviewing the agreement?
For a new employment arrangement, many employers will contribute to an executive's legal fees for reviewing and negotiating the documents. Even where an employer says that it does not pay legal fees, an executive may be able to seek a signing bonus or an increase in the proposed signing bonus to help cover those costs.
Companies rarely agree to pay an executive's legal fees for negotiating a separation agreement.
Can an employment agreement affect tax treatment?
Yes. The structure and timing of payments, the form of equity, the treatment of reimbursements, and the treatment of separation payments can all matter. The agreement should be reviewed with the tax consequences of the compensation arrangement in mind.
What is the difference between Cause and Good Reason?
Cause is a defined set of circumstances that permits the company to terminate the executive with reduced or no severance and other termination protections. Good Reason is a defined set of material adverse circumstances that may permit the executive to resign and receive the protections specified for a qualifying termination. The actual consequences depend on the agreement and related documents.
Both definitions require careful negotiation. Cause should be limited to genuinely serious conduct and include appropriate materiality protections and an opportunity to cure conduct that can be remedied. Good Reason should identify the relevant adverse changes and provide workable notice, cure, and resignation procedures. A poorly drafted definition can change the executive’s entitlement to severance, equity, deferred compensation, and post-employment protections at the point when those rights matter most.
Can routine policy or confidentiality provisions create a termination risk?
They can. Cause may directly include a violation of company policies or applicable law, even where the agreement contains no separate covenant to comply with those requirements. Broad covenants to comply with every company policy, avoid any personal use of company property, comply with all laws, or keep all nonpublic information confidential can similarly be invoked after an ordinary or inadvertent deviation. Even where Cause requires a breach of a “material provision” of the agreement, a company may contend that a broad policies-compliance or legal-compliance covenant is itself material and use a technical breach as Cause or as leverage in a dispute. The agreement should distinguish material from immaterial breaches, limit direct policy- and legal-compliance Cause triggers to material conduct, and provide a reasonable opportunity to cure a breach that can be remedied.
Why do Good Reason notice and resignation deadlines matter?
Good Reason provisions commonly require the executive to notify the company of an adverse event within a short period, often 30 days, give the company an opportunity to cure, and resign shortly after the cure period ends if the issue is not cured. Those deadlines can leave the executive insufficient time to consult counsel before an asserted Good Reason claim is waived.
The definition should also address a series of related reductions. An employer may reduce title, authority, responsibilities, compensation, or other aspects of the role incrementally, with no single change appearing material in isolation. If each change is separated by more than the notice period, the company may later argue that no timely Good Reason notice was given.
An executive ordinarily should not resign for Good Reason unless the claim is clear. Otherwise, the company may characterize the departure as a voluntary resignation without Good Reason and assert that severance, equity, deferred compensation, or other rights were forfeited. Clear Good Reason provisions reduce that risk before a dispute arises.
What does a Good Reason resignation mean for severance and other termination benefits?
If a defined Good Reason event occurs and the executive satisfies the agreement's notice, cure, and resignation requirements, the executive may resign and be treated under the agreement as though the company had terminated the executive without Cause. The resulting rights depend on the agreement, but they can include cash severance, bonus treatment, benefit continuation, and specified equity or deferred-compensation treatment.
Some agreements also provide that restrictive covenants lapse, are modified, or are not extended after a qualifying Good Reason resignation. Those protections should be stated expressly. The executive should not assume that a Good Reason resignation produces the same economic and post-employment consequences as a without-Cause termination unless the agreement says so.
Why does specificity in an executive employment agreement matter?
Clear provisions can reduce the risk of a dispute about compensation, equity, deferred payments, termination rights, or restrictive covenants. Once a dispute arises, particularly in a termination situation, the company will often have substantially greater leverage than the executive.
Good Reason is a practical example. Executives rarely resign for Good Reason unless the right is clear, because the company may characterize an uncertain resignation as a voluntary departure without Good Reason and assert that severance, equity, deferred compensation, and other benefits were forfeited. The events that constitute Good Reason, and the precise wording of those events, therefore matter as much as the notice, cure, and resignation mechanics. Experienced executive compensation counsel helps preserve the executive’s business deal by negotiating those protections before a dispute changes the balance of leverage.
Why should an executive employment agreement address indemnification?
An executive can incur significant costs responding to claims or proceedings arising from services performed for the company, even if the executive ultimately prevails. The agreement should address the scope of protection, advancement of defense costs, and the relationship to the company’s governing documents and insurance.
Why can a change in control create tax and employment issues?
A transaction can leave an executive dealing with a new employer while the executive’s title, authority, responsibilities, compensation, or other terms change materially. It can also affect severance, equity, deferred compensation, and transaction-related payments. Termination is not required: accelerated vesting or other transaction-triggered equity or phantom-equity benefits may be relevant even if employment continues. Depending on the facts, the Section 280G rules can apply to certain payments contingent on a change in control; an excess parachute payment may trigger a 20% excise tax under Section 4999 in addition to regular income tax.
Why may a U.S. taxpayer employed abroad need a different arrangement from local employees?
A foreign employer's standard compensation plan may be designed for local law and local tax practice, while a U.S. citizen or lawful permanent resident relocating abroad may face both U.S. and foreign tax regimes. The executive's individual agreement, award, election, or implementation may therefore need tailored modifications, without changing the employer's overall plan for other employees.
What is tax equalization?
Tax equalization is a relocation arrangement under which the employer provides agreed payments intended to place the executive in a comparable after-tax position to the position the executive would have occupied had the executive remained in the United States. The appropriate approach depends on the executive's facts, the applicable countries, the employer's policy, and advice from accountants familiar with both tax systems.