Compensation for low- and mid-level employees is typically fixed within certain salary ranges, with only a little bit of with only a little bit of wiggle room for negotiation. Executive compensation is much different. Compensation for high-level employees, especially those in the C-suite, is significantly more complex. It usually involves much more extensive negotiation between the parties, and the compensation at issue may involve additional perks and benefits beyond mere wages. That’s why high-level executives and companies seeking to hire them should consult a Norfolk executive compensation lawyer before drafting, negotiating, or signing an executive compensation agreement.

Components of Executive Compensation Packages

Executive compensation is more than just wages or a salary — it is often a multifaceted package of benefits and incentives that may include performance-based bonuses, stock or stock options, equity awards, and long-term incentive plans. Executive compensation packages also frequently contain a number of other “goodies,” such as club memberships, company cars, use of company airplanes, etc. The most common terms in executive compensation agreements include:

• Base compensation
• Stock options
• Benefits (e.g., healthcare, vacation, leave of absence, etc.)
• Bonuses (e.g., annual, performance, and retention bonuses)
• Performance expectations
• Severance provisions

Each of these provisions is negotiable on its own and in combination with other provisions. For example, an executive might negotiate a higher salary in exchange for fewer stock options. Executive compensation negotiations are notoriously complex, which is why you should never attempt to negotiate on your own. Instead, hire a Norfolk executive compensation lawyer who has experience negotiating favorable terms on behalf of both executives and their employers.

Key Provisions to Consider in Executive Compensation Agreements

Executive compensation agreements are often long, dense employment contracts written in legalese that can easily confuse and overwhelm the uninitiated. And while every executive compensation agreement is different, there are a few commonalities among them. Here’s what to watch out for when looking over or crafting a compensation offer:

• Equity compensation specifics: Many executives are paid through equity in the company. Make sure you understand the type of equity (e.g., stock options, restricted stocks, profits interests, etc.), its vesting schedule, whether there is an acceleration clause and how it operates, and what happens to the equity in mergers, acquisitions, and IPOs.
• Performance-based compensation terms: If your agreement contains performance-based compensation, make sure you understand what the performance metrics are and how you will be scored on them.
• Termination and severance provisions: Executives are not at-will employees, so their contracts typically outline the grounds on which they can be terminated. Make sure those grounds are clearly defined and that the contract spells out how severance provisions will operate.
• Post-employment restrictions: Executives, unlike lower-level employees, are frequently covered by post-employment restrictions such as non-compete, non-disparagement, non-solicitation, and confidentiality agreements. Make sure you understand the scope of those provisions.
• Change in control provisions: Executives may be entitled to exercise certain rights if there is a change in control of the company, such as a merger or acquisition, sale of the company’s assets, or transfer of ownership. Those rights may include the right to terminate the agreement, demand a payment, or give consent before the change occurs.
• Clawback provisions: These provisions allow the company to recover payments, bonuses, or stock after misconduct allegations or financial restatements. Make sure you understand what can trigger a clawback.

Also, keep in mind that each of these provisions (and others) can have significant tax implications, even if those implications are not spelled out in the contract. For example, non-qualified deferred compensation plans (e.g., severance, bonuses, and stock options) can implicate Section 409A. Noncompliance with Section 409A can result in immediate taxation, interest, and IRS penalties.

Factors That Influence Executive Compensation

Many factors and considerations go into executive compensation. The executive’s role and responsibility are significant, with compensation generally increasing the higher up in the organization the executive is. The type of compensation (e.g., straight salary vs. equity) is also industry-dependent, with white collar industries tending more toward the salary plus equity model. And, of course, the size and stage of the company also play a major role. The larger, older, and more well-known a company is, the more it is likely to pay.

Negotiating Executive Compensation Agreements

The hiring process for executives is not a “take it or leave it” affair. Negotiation is at the heart of the process, and the good news is that everything can be negotiated. Once the company has determined that the executive is the right fit and the executive wants the position, negotiation is intended to ensure that both parties reach a mutually beneficial agreement. Moreover, the negotiation process does not necessarily end once the executive signs his or her compensation agreement. Contracts can be renegotiated as needed — for example, if the executive’s position naturally evolves over time or there are significant changes to the operation of the company. In fact, many companies would rather renegotiate an executive’s compensation package when circumstances change than part ways, as doing so could trigger severance packages, exit bonuses, or golden parachutes, depending on the contract.

What Happens When Disputes Arise?

Even the best-drafted executive compensation agreements cannot possibly take into account every eventuality, so disputes over such agreements can and do arise. Many executive compensation agreements stipulate that disputes between the parties must be resolved through mediation or arbitration, both of which are alternatives to litigation. In arbitration and mediation, each party submits their disagreements to a neutral third-party arbitrator or mediator who is skilled in negotiating solutions to complex problems. If the parties fail to reach an agreement through arbitration or mediation (or the dispute falls outside the scope of arbitration/mediation clauses, like most claims related to sexual harassment), the dispute may make its way into a courtroom. For more information about the enforceability of arbitration and mediation clauses, as well as litigation between executives and their employers, please contact an executive compensation lawyer at our firm.

Work With a Norfolk Executive Compensation Lawyer to Draft or Negotiate the Ideal Agreement

If you’re an executive negotiating a compensation package or a company seeking to make an offer, please contact a Norfolk executive compensation lawyer at Pierce / Jewett by calling 757-624-9323 or contacting us online.