Employment Contract: Get It In Writing! (Employment).

• Author: Harris, Steve
• Position: Brief Article

But yourself in this scenario: You're the competent chief financial officer of a successful publicly traded firm who enjoys very good working relationships with both your CEO and the board of directors. The CEO has said to you, "Hang in there for the next year," meaning that when he retires, you'll get his job, a substantial pay raise and a large grant of stock options. Meanwhile, your telephone is ringing with offers from recruiters presenting you with comparable positions now. And, there are rumors that the venture capital firm that still controls your board may be seeking to monetize their investment. What do you do?

The obvious answer is that you should obtain an employment contract that protects you from a number of potential "what if" outcomes: What if the CEO doesn't retire? The board doesn't confirm your promotion? A change of control occurs and your job is eliminated? It's very common for senior executives to negotiate "special deals" with their employers, but promises not documented may be forgotten -- either innocently or, in some cases, deliberately. Involuntary executive terminations occur for many unforeseen reasons that have nothing to do with job performance. Wholesale executive terminations can occur as a result of a change of control of the company or just a change at the CEO level. There's a strong case to be made for getting an employment contract in writing.

Employment Contract vs. Severance Policy

It's important to distinguish between an employment contract and a severance or change-in-control policy.

An employment contract is a personal legal agreement between you and your employer. It typically contains severance or change-in-control provisions, and other important terms. So, in the example above, if the CEO promotion did not occur, an employment contract could provide comfort; you'd be compensated for your lost opportunity. An employment contract may also provide more beneficial severance entitlements than you could claim under the company's regular severance policy or other benefit or compensation programs.

A severance or change-in-control policy is a broader arrangement, generally adopted by the board of directors, which outlines what compensation and other benefits a particular employee group (such as executives) will receive in the event of termination of employment without cause. Some portion of an employer's severance policies may also be found in other documents. For example, treatment of involuntarily terminated employees can vary substantially under the annual bonus program, a deferred compensation program, stock option or other long-term incentive program or supplemental retirement program. Ideally, these events should be treated consistently; however, that's not always what occurs in the real world.

Prevalence of Contracts

Some employers have a strong preference either for or against entering into executive employment contracts. Those who advocate contracts cite, among other things, the necessity of keeping track of the "inevitable" special arrangements with executives, particularly in recruitment...