Hiring the right senior manager can be of immense benefit to a company if they bring the right combination of skills, experience and contacts to the business. It is not uncommon for the recruitment process to include informal occasions where terms, conditions and incentives can be discussed. Failing to grasp these casual agreements and spell them out in detail in the employment contract can lead to problems down the road if there is a misalignment of understanding.
Executive compensation packages and contract terms can be complex. So, investing time and resources in negotiations and in establishing agreed terms is worth it. Failure to do so can be costly, detrimental to the business or the individual’s future opportunities and, at worst, lead to litigation.
Directors and Companies Act 2006
The Companies Act 2006 sets out the duties of directors and the law on directors’ involvement in companies, and our company team can advise you on all aspects of company law requirements.
This article highlights a number of key elements of any senior executive’s contract and compensation and employment law considerations.
Redeem a previous role
By negotiating a package to leave another organization, executives can effectively ask their new employer to “buy them out” of their current role. This “golden hello” is actually compensation for any lost compensation or benefits that would have been received had they not jumped ship.
Employers can try to use this buyout to lock the executive into the contract for a period of time to recoup this cost.
Executives will want to make sure the buyout is protected in the contract, if the employer terminates their employment.
When negotiating notice periods, the executive may not want a period so long that it effectively prevents them from finding a new role. However, long notice periods can become a form of financial protection if the company terminates their employment. Indeed, in practice, senior managers may not have to determine their notice period because their employer may wish to protect customer contacts, trade secrets or other business interests.
To have the best of both worlds, individuals may seek to negotiate a longer notice period for the company and a shorter notice period in the event of resignation. A notice period for directors of more than two years must be approved by the shareholders.
Insurance and indemnities
Companies are limited by the Companies Act 2006 insofar as they can indemnify their directors against liability arising from the actions of the director. For example, the company cannot indemnify them against their negligence or breach of duty. Instead, board directors should determine whether appropriate directors’ and officers’ insurance is in place and ensure this is reflected in the contract. It may make sense for insurance coverage to continue after employment ends.
Bonuses can be a very large part of overall compensation and also provide fertile ground for disputes over calculations.
Bonus terms should be crystal clear to ensure they reflect the agreement made and to minimize the risk of disputes arising at checkout or checkout. The conditions of the bonus or even the bonus itself can be described as discretionary.
The eligibility requirements for a bonus and how the amount will be calculated should be specified, such as whether sharing a pool of cash is based on a percentage of pre-tax profits or whether it is based on personal performance or business profits.
Other incentive plans, such as stock option plans and long-term incentive plans, should also be carefully drafted, especially for any “head start” or “head start” provisions. bad start”, which determine the rights of the leader to leave.
These are usually handled separately from the employment contract, and executives should seek tax advice on these schemes.
The compensation package may include other entitlements such as permanent health insurance, life insurance, private medical insurance, car and associated running costs.
Any conditions attached to the receipt of such benefits, whether related to a time period or to performance, should be spelled out in detail.
There is a general implied duty to act in good faith to the employer, which generally terminates upon termination of employment, but contracts frequently restrict an executive’s outside business interests and activities in more specific terms.
Exit restrictions are often more controversial. These clauses are intended to prevent the manager from doing certain things after leaving the company that could be detrimental to the company. These include working for competitors, poaching business or personnel, accepting work from a client of the former employer, or competing against each other. To be enforceable, such restrictions shall only be to the extent necessary to protect the Company’s legitimate business interests and shall not constitute an unlawful restriction of trade.
Along the same lines, companies frequently seek assurance that the executive is free to work for the company and will not violate any court orders or contractual restrictions with a previous employer. This is to protect the company in case it is drawn into litigation and accused of inducing the executive to breach its previous contract.
Pitfalls to avoid
Problems usually arise when it’s not clear exactly what was agreed between the executive and the company. This may be because the details weren’t worked out at the start of the relationship or weren’t properly written down, or a combination of both. For instance:
- What benefits or bonuses, if any, is the executive entitled to receive when receiving payment in lieu of notice?
- Can the company withhold payment in lieu of notice if it discovers that it could have terminated the manager for gross misconduct?
- Is it clear under what circumstances an executive would be a bad or a good starter in determining the price paid to an outgoing executive for his shareholding?
- Do covenants specific to the individual’s activities not go further than necessary to protect specific legitimate business interests?
- Do references to a long-term incentive or bonus scheme inadvertently create a contractual right or limit board discretion?
How can we help you
We advise both companies and executives on negotiation packages and ensure that agreed terms are entered correctly to minimize the risk of future litigation. For more information, please contact Andrew Masters, Employment Manager, on 01227 763939.
Note: This article is provided for informational purposes only and does not constitute legal or professional advice.