What to Look for in Your Executive Employment Contract

What to Look for in Your Executive Employment Contract

What to Look for in Your Executive Employment ContractAlthough there are other variables in your employment contract (flex time, remote work, etc.), compensation is in the spotlight. It’s helpful to be aware of some of the jargon you might see.

  • Base Salary. Focus on being upwardly open-ended … at least “X” and “to be reviewed annually,” if increases aren’t included.
  • First-Year Guarantee. Make sure you’re making – at least the first year – 25% to 30% more than if you stay where you are. Maybe your new salary will cover the incentive to move. If not, you can probably get the first-year’s bonus “guaranteed” by pointing out that, after years of experience, you know precisely what your bonus will be where you are. You’re far less certain of the new situation. In the second year, you’re happy to be treated just like everyone else.
  • “Signing,” “One-Time,” or “Special” Bonus. To balance not immediately coming under intermediate – and long-range compensation programs and to make your relocation more painless than under standard policy (while not putting your base and bonus out of line with other executives at your level), you may be given a “signing bonus,” which occurs only one time. It can be a good solution to take care of varied issues, and these days, large amounts of money may be included.
  • Short-Term Bonus Plan. This is the traditional annual bonus, and it is the most globally used incentive compensation. You may have to meet goals to get paid, and the amount may align with performance. Typically, whatever you get paid is in cash and subject to income tax.
  • Long-Term Bonus Plan. This is paid years after it is earned as if it were deferred compensation and typically depends on your individual performance, rather than that of the company. Payment may even be at the time you exit the company, whether by leaving, retirement, or death.
  • Stock Option Plans. These vary from employer to employer, and the same company may have more than one plan.
  • Incentive Stock Options. These are sometimes called ISOs, and are often attractive to employees, because the profit they generate may be treated as a capital gain, rather than ordinary income. There are also Non-Statutory Stock Options that have no legal requirements on issuance other than compliance with state and security laws. Always check with your financial advisor on both these stock options.
  • Other Stock Potentials. You may see Stock Grants and Restricted Stock Grants. The former means you don’t have to buy stock; the company gives it to you – usually as a reward for performance or tenure. Restricted Stock Grants are where the company gives you stock, but you have to stay a certain period or meet performance goals. Tax implications are always changing; check with your financial advisor on both these. Others to look for are Company Stock with Non-Lapse Restrictions, Phantom Stock Options, Stock Appreciation Rights, and Phantom Stock Plans.
  • Performance Shares. This type of program encourages meeting long-term performance goals by the overall company. Measurements can be in units (dollar amount) or tied to the value of share of stock. Companies can design them to their liking. But to earn 100% of the amount targeted to be paid at the end of the program, the compounded growth performance during the period has to be X%. Performance at 90% of goal might earn a lesser amount. Lower performance might earn correspondingly even less at the end – or even nothing, depending on the plan’s terms.
  • Performance Cash Plan. Similar to Performance Shares, but these often have shorter duration until the proceeds are paid.
  • Others to Look For: Other negotiables may include Deferred Compensation, Interest-Free or Low-Interest Loans, Golden Handcuffs, or a Golden Parachute. They encompass a range of taking care of you, to making it hard for you to leave.

I’m of course not offering legal or tax advice regarding compensation jargon. For this, engage a competent professional to advise you on your particular situation.

You’ll typically have to deal with the compensation programs that serve you along with many other executives. But make it a point to find out what programs the company has and try to get yourself included in the highest-level ones you qualify for. Protect your own interests! Document and save everything in writing that makes a promise to you.

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