Executive Compensation Agreement Generator
Executive compensation agreements are critical legal documents that define the relationship between a company and its high-level leadership. These agreements must carefully balance competitive compensation with appropriate protections for the company. My Executive Compensation Agreement Generator helps you create a comprehensive agreement that addresses all key aspects of the employment relationship.
Key Features
Structure base salary, bonus eligibility, and payment terms with clarity:
- Base salary with annual review options
- Bonus structures (annual, quarterly, or performance-based)
- Signing and retention bonuses
- Customizable performance metrics
Define equity grants with precision and clarity:
- Stock options, RSUs, or other equity types
- Customizable vesting schedules
- Cliff vesting provisions
- Accelerated vesting triggers
Set clear employment terms and exit conditions:
- Fixed or indefinite term options
- Termination scenarios (with/without cause)
- Notice periods and conditions
- Severance packages and conditions
- Change-of-control provisions
Protect company interests with appropriate restrictions:
- Confidentiality provisions
- Non-compete clauses with customizable terms
- Non-solicitation provisions
- State-specific enforceability considerations
Key Legal Considerations
Executive compensation agreements involve complex legal, tax, and regulatory considerations. The generator addresses these issues but always consider consulting with legal counsel to ensure your agreement complies with applicable laws.
Section 409A Compliance
Deferred compensation provisions must comply with Section 409A of the Internal Revenue Code. Non-compliance can result in substantial tax penalties for executives, including immediate taxation, a 20% additional tax, and interest charges.
Golden Parachute Restrictions
Severance packages triggered by change-in-control events may trigger “golden parachute” tax consequences under Sections 280G and 4999. These provisions can limit deductibility for companies and impose excise taxes on executives.
Public Company Disclosure Requirements
Publicly traded companies must disclose executive compensation details in SEC filings. Consider these disclosure requirements when structuring compensation packages, particularly regarding perquisites and benefits.
State-Specific Restrictions on Non-Competes
Non-compete provisions face significant enforceability challenges in certain states like California, where they are generally void except in limited circumstances such as business sales. The generator provides state-specific guidance on these issues.
Best Practices by Compensation Element
Cash Compensation Best Practices
When structuring cash compensation, consider these practical approaches:
- Clearly define performance metrics: Link bonus payouts to specific, measurable performance criteria to avoid disputes about achievement.
- Include discretionary components: Maintain some board/committee discretion to adjust bonuses based on extraordinary circumstances.
- Establish payment timing: Specify exact timeframes for bonus determinations and payments, especially for compliance with tax laws.
- Address pro-ration: Detail how bonuses will be calculated upon mid-year termination or start dates.
- Consider clawback provisions: Include provisions allowing recovery of incentive compensation in cases of financial restatements or misconduct.
Equity Compensation Best Practices
When designing equity compensation, consider these approaches:
- Reference formal plan documents: Specifically reference the equity plan that governs the award to ensure consistency.
- Include detailed vesting terms: Clearly specify vesting schedules, including any cliff periods and acceleration triggers.
- Address post-termination treatment: Define what happens to equity upon various termination scenarios (voluntary, for cause, without cause).
- Consider shareholder approval requirements: Ensure compliance with any shareholder approval requirements for equity grants.
- Include tax withholding provisions: Address how tax withholding will be handled upon vesting or exercise.
Severance Best Practices
When crafting severance provisions, consider these approaches:
- Define “cause” narrowly: Use specific, objective criteria for “cause” termination to provide clarity.
- Define “good reason” carefully: For executive-initiated terminations, clearly define what constitutes “good reason.”
- Require release agreements: Condition severance payments on the execution of a release of claims.
- Address benefit continuation: Specify whether and how health/welfare benefits continue during severance periods.
- Consider Section 409A compliance: Structure severance to comply with “separation pay” exceptions or other Section 409A requirements.
Restrictive Covenant Best Practices
When drafting restrictive covenants, consider these approaches:
- Tailor to the executive’s role: Customize the scope of restrictions based on the executive’s specific knowledge and relationships.
- Consider state-specific limitations: Be aware of varying enforceability standards across jurisdictions.
- Provide adequate consideration: Ensure there is sufficient consideration for post-employment restrictions.
- Include severability provisions: Allow courts to modify overly broad provisions rather than invalidating them entirely.
- Address remedies: Include specific remedies for breach, such as injunctive relief and attorney’s fees.
Frequently Asked Questions
Executive compensation agreements differ from standard employment contracts in several key ways. They typically include more sophisticated compensation structures, including equity components, performance-based incentives, and deferred compensation arrangements. These agreements often contain more robust severance provisions, change-in-control protections, and more comprehensive restrictive covenants.
Additionally, executive agreements are subject to greater regulatory scrutiny, particularly for public companies under SEC disclosure requirements and tax regulations like Sections 409A, 280G, and 4999 of the Internal Revenue Code. The negotiation process is usually more extensive, with executives often having their own legal counsel review and negotiate terms.
The approach to equity compensation varies significantly between startups and established companies:
For startups: Equity often forms a larger percentage of total compensation, with executives typically receiving stock options or restricted stock representing a meaningful percentage of the company (often 1-5% for C-suite positions in early-stage startups). Vesting schedules usually include a one-year cliff followed by monthly or quarterly vesting over 3-4 years. Acceleration provisions upon acquisition (single-trigger) or termination following acquisition (double-trigger) are common.
For established companies: Equity typically represents a smaller percentage of the company but potentially higher absolute value. Publicly traded companies often use a mix of time-based and performance-based RSUs or performance shares rather than stock options. Metrics frequently tie to company performance against industry peers or specific financial targets. Vesting periods may be shorter (2-3 years) with more complex performance conditions. Established companies must also consider accounting implications, shareholder approval requirements, and proxy advisory firm guidelines.
A well-drafted “good reason” termination provision serves as a counterbalance to the company’s ability to terminate “for cause” and should include several key elements:
First, the definition should include material adverse changes to the executive’s position, such as significant reduction in duties, authority, or reporting relationships; material reduction in base salary or target bonus opportunity; relocation requirements beyond a specified distance (typically 35-50 miles); and any other material breach of the agreement by the company.
Second, procedural requirements should be included, such as written notice from the executive specifying the condition constituting good reason; a cure period allowing the company to remedy the condition (typically 30 days); and a resignation timeframe requiring the executive to actually resign within a specified period after the cure period expires (usually 30-60 days).
Finally, consider including a “safe harbor” provision stating that certain changes don’t constitute good reason, such as changes affecting all senior executives equally or reasonable changes to duties that don’t fundamentally alter the executive’s role. This balanced approach provides appropriate protection for executives while preventing opportunistic departures.
Section 409A compliance requires careful structuring of deferred compensation arrangements. Start by identifying potential deferred compensation elements in your agreement, including severance, bonuses paid after the year earned, equity with deferral features, and supplemental retirement benefits.
For severance provisions, structure payments to fit within the “separation pay exception” when possible by limiting payments to 2x the executive’s annual compensation and completing payments by the end of the second calendar year following separation. Alternatively, ensure payments qualify as “short-term deferrals” by making them within 2½ months after the year the compensation is no longer subject to a substantial risk of forfeiture.
For payment timing, specify one of the six permissible payment events under 409A: separation from service, fixed date or schedule, change in control, disability, death, or unforeseeable emergency. Avoid ambiguous payment triggers like “as soon as practicable.”
Include a general 409A compliance clause stating that the agreement will be interpreted to comply with 409A and that payments may be delayed if necessary for compliance. Despite this clause, proactively review the substantive provisions to ensure compliance rather than relying on the savings clause alone.
For executives who are “specified employees” of public companies, include six-month delay provisions for payments triggered by separation from service. This area is complex, so consultation with legal counsel experienced in executive compensation is highly recommended.
Need Expert Assistance?
While the Executive Compensation Agreement Generator creates a solid foundation for your agreement, executive compensation involves complex legal, tax, and strategic considerations. Schedule a consultation to discuss your specific needs and ensure your agreement is optimally structured.