Big Red Car here. Nice quiet early morning, let’s me compose my thoughts. We had a thunderstorm last night and the yard is strewn with twigs and leaves. Lots of lightning. Big Red Car loves lightning. It seems to energize my personality and make me excited. There is nothing in the world like an excited Big Red Car. Haha, Big Red Car, you crack yourself up, don’t you?
So The Boss is working with a couple of his CEOs and they are looking for some guidance as to how they should define their relationship with their company — an employment agreement.
In once instance, the CEO is selling his company and is being retained by the new owners. The new owners want to ensure that the CEO does not wander off and start another company, so they are both wanting to get something done. And, why the Hell not, Big Red Car?
So today we are going to talk about the elements of an employment agreement. Hey, yeah, you — dear reader: this is NOT legal advice. We are not engaging in the “unauthorized practice of law” here. Just some friendly advice from a Big Red Car whose Boss has negotiated quite a few of these Employment Agreements over the last 33 years.
This is just earthy advice as to how to organize your thinking to ensure that you do not overlook anything. Remember, we are talking to CEOs here.
Today we are going to focus on the “headings” — the big topics that should be covered in the employment contract or agreement. Here they are:
The parties to the contract
The definition of the position
Compensation, benefits, expenses
The term of the contract including renewal provisions
The termination provisions of the contract including change of control provisions and severance
Those are the big ones. Doesn’t look too intimidating, does it? Well, the Devil is in the details, my friends. And the Devil is working overtime.
Spirit of the agreement
The Employment Agreement should define the relationship between the C level employee and the company. In the case of a Chief Executive Officer, it should define the relationship between the CEO and the Board as well as the relationship with the company.
It is an important document. Well done on the front end will avoid much wailing and gnashing of teeth on the back end. It will also define the most important relationship in the company and it will allow a Board to create, maintain and discipline their relationship.
A deal cut when everyone is happy will ultimately be implemented when everyone is irked, vexed and angry. Know this on the front end and make it protect your interests. Your friends on the Board will be cutting up your undergarments for sale as rags when some of these provisions become very, very important.
Every company of any size has had to work through this challenge and the sooner a company comes to grips with this important defining relationship the better they can create, organize and operate all the important employment relationships that will ultimately fuel and drive the company.
A good CEO Employment Agreement signals the tone of the company for all other high level employees. You will not be treated better than the CEO but it will set the pattern.
The Employment Agreement is negotiable and while there are a great number of exemplars out there, everything is negotiable.
The first rule of negotiations? Remember to negotiate. Hey, you knew that already, right? Haha, Big Red Car is just funning you. You knew that!
In business you do not get what you deserve, you get what you negotiate.
In business you do not get what you deserve, you get what you negotiate. Know that and remember to negotiate.
Take your time. You are getting ready to settle down for 3-5 years. Don’t rush things.
And, hey, use a bit of charm. Charm always gets a better outcome than baloney.
The Boss always suggests that you try to get the big issues finalized quickly — compensation being one of the biggest. Then use the document itself as the tool or instrument to manage the negotiations. Make changes, track the changes and close the differences slowly and methodically.
It will likely take 5-7 “touches” to get the Employment Agreement finalized. Each step will bring you closer to a final agreement but no single step will close the gap until the end. Be deliberate, Grasshopper. [Does it piss you off when the Big Red Car calls you "Grasshopper", Grasshopper? The Big Red Car apologizes if it does. Sorry.]
You will not get everything that you want but you will get a lot of it, if you are fair and consistent and precise in your negotiations.
The Boss always advises the CEO to take the first stab at the Employment Agreement. Whoever strikes first usually sets the pattern the negotiations are going to take.
The Boss always used to submit an initial draft outlining exactly what he wanted before the discussion as to the original Employment Agreement or any subsequent modification or renewal was advanced by the Board. Be the first mover.
The Boss would send it with a cover memo discussing any specific issues. This memo was an attempt to strike a “coup de main” — look it up, Grasshopper.
The CEO should retain an attorney to advise her unless she has been at it for a number of years and there is an exemplar being used with which she is very comfortable. Rookie CEOs should always retain a damn good lawyer to advise her.
The Board will likely form a compensation committee and deputize that committee to handle the negotiations. Likely the Chairman of the Compensation Committee will be the point of contact with the CEO. Work that relationship understanding that it will greatly impact the outcome of the negotiations. Again, charm will serve you well.
Try to conduct your negotiations outside the office or on the Chairman’s turf. If he is relaxed, the outcomes will be better. Pro tip.
The final Employment Agreement will likely be voted on by the Compensation Committee and then the whole Board. Don’t be afraid to do a bit of politicking and to count noses before a vote. Rally your friends. This is just simple Board politics. Get your hands dirty if you must.
This is a multi-step process and has the potential to have a few snags along the way. Again, be deliberate and don’t over react when a snag appears. Just work through it.
As a quick introduction to the kinds of details that can be confronted, dealt with and defined by a good Employment Agreement, here are ten quick hitters, just to give you a flavor of things.
1. What is the “indemnification” of the CEO by the company? If the CEO is sued personally by an aggrieved party, how is the CEO’s defense provided?
2. How is the CEO’s performance appraised? By whom? With what frequency? What if it is not done?
3. What happens in the event of a change of control? Does the Employment Agreement terminate? What happens to the CEO in the event of a termination by virtue of “change of control”?
4. What happens if the CEO is disabled and cannot work? Can he ultimately return to work when he gets better?
5. Are the CEO’s options protected against dilution? If so, how?
6. What does the company pay for as it relates to business machines, premium web based services, premium social media memberships, expense reimbursement?
7. Can the CEO work remotely? From his ski house? At the beach?
8. Is the CEO automatically nominated to the Board?
9. Can the CEO’s executive assistant oversee the paying of the CEO’s bills?
10. Can the CEO serve on other boards, charity boards?
As you can see, there is a lot more detail than just compensation at work here.
In the weeks ahead, the Big Red Car and The Boss will go through each of these sections and provide some real world guidance and musings. Musings are good.
But, hey, what the Hell do I know anyway? I’m just a Big Red Car.