Clients frequently tell us (usually at the point of exit) that they wished they had taken legal advice before agreeing to the terms of a new employment contract. For many senior people joining a business, they will never be in a stronger negotiating position than when they first accept an offer of employment to take on a new senior appointment, particularly at board level. We recommend that senior executives consider the following areas when negotiating a new employment contract.
Consider both the notice period that you are required to give to terminate the employment contract, as well as the notice period of the employer. The notice period is for many executives the main contractual protection on termination of employment, but a long notice period can cut both ways. If you want relative freedom to change roles, then a shorter notice period may be preferable. Sometimes it is possible to negotiate a shorter notice period on resignation and a longer period if the company wishes to terminate. If your predecessor’s terms of employment are publicly available, check them as this might provide a good precedent from which you can negotiate.
Probationary periods are very rarely appropriate for senior executives and should almost always be resisted – unless of course you want the flexibility to leave on short notice during a trial period.
Contracts frequently give employers flexibility to make reasonable changes to the job title or duties or to appoint someone else to carry out your role jointly with you. If you are appointed to a very senior role in a business, particularly as CEO, it is unlikely you will be willing to take on an alternative position in the business, at least without your express agreement. You should therefore resist such wording. You should also consider whether you have a contractual right to sit on the board. Often service agreements place an obligation on a senior executive to act as a director, but do not contain a corresponding right to do so. In many cases, a CEO will not be able to carry out their job properly unless they have a seat on the board.
Insurance and indemnities
Board directors should always consider whether adequate director’s and officer’s liability insurance and, where relevant, indemnification is in place. The service agreement should also state that you have a right for this to continue after termination of employment.
Executives often negotiate compensation for earnings, bonus awards or deferred compensation lost with their old employer on resigning from their employment. This is frequently the most heavily negotiated part of the package and it is important that you have contractual protection in relation to such sums in the event that the new role does not work out through no fault of your own.
Check whether the bonus scheme is contractual or discretionary and review the leaver provisions. Given a big proportion of your earnings is likely to be made up in bonus, consider how much protection is provided in the contract. For those in financial services, bonuses are heavily regulated, but there is sometimes scope to negotiate a guaranteed bonus for the first year of employment.
Equity and long-term incentives
Look carefully at the leaver provisions relating to your equity participation and how your equity will be treated on departure. Consider whether to negotiate enhanced protection in your service agreement as to how your equity will be treated on departure, particularly where the employer retains wide discretion. Consider whether you need tax advice, particularly if the equity scheme in place is an overseas arrangement. Bespoke arrangements may need to be put in place to address UK tax considerations.
Change of control
If a change of control is a possibility consider carefully what happens to your employment and incentive awards in this scenario and whether you wish to negotiate extra contractual protection on a change of control.
Corporate governance considerations
If you are joining a listed company, consider carefully the terms of the remuneration policy and the relevant corporate governance code, as these may dictate the extent to which you can successfully negotiate enhanced terms. Similarly in financial services, be aware of the restrictions that remuneration codes may place on variable remuneration.
Look carefully at the duration and scope of the post-termination restrictions, typically preventing you from joining a competitor, dealing with clients and recruiting employees for a period after termination of employment. Do not assume that these are unenforceable as this is unlikely to be the case for senior executives. If post-termination restrictions are likely to be problematic, consider whether they can be more narrowly drawn in a way that still gives the employer the protection it needs without overly restricting you on departure from the business.
Our market-leading senior executive team frequently assists clients negotiating new service agreements. Our clients include public company directors, founders, directors of private companies (often in private equity backed businesses), bankers, other professionals in financial services and other C-suite executives across industries. There is no one-size fits all approach to our advice. We offer personalised, tailored advice to our clients based on decades of experience acting for the most senior individuals within corporates across many different sectors. For more information contact Eleanor Rowswell and view our senior executive brochure here.
If you require further information about anything covered in this briefing, please contact Eleanor Rowswell or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, January 2022