One of the biggest challenges in negotiating employment agreements with senior executives is the competing desire to certify the terms of the agreement.
Companies generally do not like written employment agreements – some refuse even to consider them. They want to control the future employment relationship, and a negotiated written agreement may result in less control. From a firm’s perspective, the fewer promises and obligations made in writing, the better.
Executives view these agreements as necessary to confirm their expectations, spell out their entitlements and shift risk to the company. They have expectations about the power, authority and resources they need to do their jobs, and the short and long-term financial incentives they will receive. They want their entitlement to common stock and stock options spelled out, without preconditions or hidden restrictions.
They also want the company to share the risk that the employment may not work out for reasons outside the executive’s control. They ask for guarantees of compensation, overrides of management discretion in short and long-term incentive compensation plans, and more favourable event triggers or compensation packages in the event of a change in control or changes in key definitions, among other items.
Companies often consider the minor changes they accept around the edges of a proposed draft employment agreement as negotiations, but such modifications only acknowledge the uneven bargaining strength of the parties; they are not negotiations in any real sense. From the companies’ perspective this is fine, but executives who know better want more. For them, negotiations are not real unless they are substantive and engage both sides in evaluating their true interests, the alternatives to a negotiated
agreement, and the possibilities for concession and compromise.
The company’s challenge
Big differences exist between negotiating executive employment agreements and negotiating commercial agreements, with which companies are more familiar. Negotiating executive employment agreements is a more personal, less objective process characterised by subtle and nuanced moves and turns. Companies often believe they have superior bargaining leverage in negotiating an employment agreement with an executive: after all, they are the ones offering the position, the opportunity and the privilege of working for the company. Firms that think this way are vulnerable on several levels, however.
Firstly, while a competitive negotiating style may serve the company well in negotiating a commercial agreement, it will be counter-productive in negotiating an executive’s employment agreement. By the time a company is negotiating with an executive, it has already made a substantial investment in time and energy (and often in outside recruiter fees) in interviewing and comparing candidates. What the company may fail to realise, however, is that the developing trust and confidence between the two parties is fragile, and can be easily jeopardized by unrealistic negotiating positions that may later need to be withdrawn to obtain an agreement.
Secondly, executives want to believe the firm is looking out for them. During negotiations, a company that desires a trusting relationship needs to find ways to reinforce this belief. Certainly, when a company is wooing an executive to leave another position, it must show concern for the executive as a person as well as a profit centre.
Thirdly, executives want companies to take their proposals seriously. If the company’s ultimate goal is a faithful, dedicated executive who will put the company’s interests first, it needs to be sensitive to the executive’s needs and react thoughtfully to his/her proposals. Any negotiation that leaves the executive resentful or doubting the company’s sincerity and credibility is a failure; the future relationship will not last.
Fourthly, companies that ask their general counsel alone to negotiate an employment agreement with a high-level executive create unnecessary tension and potential conflicts of interest. A general counsel wants to be known as a trusted adviser: honest, straightforward and credible. This may conflict with the firm’s desire to take strong positions and show flexibility only if absolutely necessary. A general counsel who will report to the executive is at a particular disadvantage. To maintain the executive’s trust, he or she may be unwilling to actually engage the executive in real negotiations, especially if not supported by unambiguous standards, criteria and past practice.
The corporate challenge
A company that understands these vulnerabilities will temper and adjust its strategies and tactics to eliminate or neutralize them. By the time negotiations conclude, the firm should have the executive believing it has considered his or her interests and done its best to satisfy them. This does not mean compromising or acquiescing to the executive’s demands, but it does mean negotiating in good faith to reach agreement on what the executive actually needs.
Executives experienced in negotiating usually understand a company’s need to exercise restraint in using its full leverage. They understand the personal and intangible factors in negotiations and how to use them. This gives them leverage in negotiations but also restrains them from using it. They do not wish to demonstrate a lack of confidence in the company or be perceived as arrogant, self-centered, over-anxious about their own interests or difficult to work with.
Executives who understand negotiations also realise that they are a process, not an event, and appreciate that changes in a company’s proposed draft employment agreement will be reached only after a full understanding of both parties’ needs. They recognise that the firm is looking as much at how the executive acts and what he or she says in negotiations as it is at the outcome.
For example, a critical aspect of any employment agreement is the company’s ability to terminate it; this defines the balance of power in the employment relationship. The executive wants a pro-employee ’cause’ termination definition, and a favourable separation package in the event of a termination without cause or a resignation for ‘good reason’, because this will make the company think twice about terminating the contract due to personality conflicts, not being a good fit for the company’s culture or other subjective reasons.
If crafted properly, the separation package will also protect the executive’s right to receive earned but unvested compensation, including deferred compensation from prior year bonuses, current year bonuses and even guaranteed bonuses that otherwise require continued employment until a vesting date. To negotiate these provisions, executives have to artfully articulate proposals that present both their interests and their leverage.
At the same time, the executive must not make the company anxious that he/she is overreaching or too concerned about being protected against a justifiable termination. A successful negotiation is one where both the firm and the executive think as well or better about the other after the negotiation ends as they did before it began.
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