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Why A U.S. Executive Needs A Contract

In our blog of July 27, 2017 entitled, “When An Executive Is Fired,” we argued that when an executive is terminated without Cause in the United States, as opposed to certain European countries, if the terminated executive does not have his or her own contract with its specific protections, then he or she has very modest entitlements under the law.

Accordingly, each senior executive should have an individual employment contract, which contains specific contractual entitlements which would otherwise be lacking.

The most prominent of such “negotiated” entitlements are:

(1)       Severance. What a terminated executive needs most in order to bridge the transition to a new position is a meaningful continuation of his or her salary. As more and more executives’ contracts are “at will” rather than for a set term of years, the executive’s written employment agreement (or binding offer letter) must contain a specification of precisely what severance the executive will receive from the employer if the executive is terminated “without Cause.” Six months of base compensation is a minimum; depending on the executive’s level of seniority, and the care with which the executive’s agreement has been negotiated, severance pay amounting to a full year (or more) of the executive’s base compensation is not uncommon.

(2)       Continuing Health Benefits. Because without a contract it is the executive, not the employer, who has the legal obligation to pay the premiums to continue his or her health insurance benefits under COBRA, an executive’s contract should make the employer liable for continuing to pay these health insurance premiums, at least during the severance period.

(3)       Bonuses. Without a specific contractual entitlement, many executives, as a purely legal matter, will forfeit their bonuses if they are terminated without Cause before the date on which the bonus is to be paid, even if they have worked most or all of an entire year. The executive’s contract should address this as well, and provide for the payment of the bonus, or a meaningful portion of it, depending on the date of termination. This becomes especially important in those industries, such as the financial services industry, where executive compensation frequently involves a modest base salary and a far larger annual bonus.

(4)       Accelerated Vesting of Equity Interests and Other Incentives. Similarly, without a contractual provision which provides that in the event of a termination “without Cause,” all future incentive benefits, including the right to stock or stock options, shall become vested (and thereafter payable to the executive on some agreed-on future date), the executive must assume that all unvested incentives and equity interests will be forfeited upon the end of his or her employment.

There are other considerations (including tax topics which this blog cannot cover), but the foregoing should be sufficient to convince the reader that without a good written employment agreement, negotiated by a knowledgeable executive employment attorney, none of these items are automatic legal entitlements upon an executive’s termination. For an executive in the United States to be certain of these enhanced entitlements, he or she must negotiate an individual written agreement before accepting employment.

About the Author

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George Birnbaum

Since 1980, sophisticated business people have relied on George to apply the meticulous preparation, attention to detail, and devotion to his clients he learned from fabled trial lawyer Louis Nizer. A graduate of Harvard College and Harvard Law School, George has over 35 years of distinguished deal-making, litigation, mediation and arbitration experience which he has used to negotiate high-stakes agreements for senior executives and select business clients throughout the United States.