Typical Terms of a CEO Employment Agreement

John P. Beavers
Partner, Bricker & Eckler LLP
October 2000

The following is a brief summary of the typical terms of a CEO employment agreement based upon an analysis by the Executive Compensation Advisory Services:

• Initial Term—78% range from three years to indefinite, with an average of 3.7 years.

• Contract Renewal—More than half (53%) provide for automatic renewals or extensions that continue the contract provisions beyond the initial term. The remainder either do not address renewal or stipulate that it will occur only upon written notice.

• Restrictive Clauses—75% include a noncompete covenant and 75% a confidentiality or nondisclosure clause; only 45% have a nonsolicitation provision.

• Compensation—all the CEO agreements specified the executive’s salary or minimum pay rate, and most (85%) provide for an annual bonus (most frequently as a percentage-of-base-salary target amount); only 41% guarantee a bonus for at least the first year of the contract.

• Signing Bonuses and Stock Awards—65% of the CEO companies granted an extraordinary stock option in connection with the contract, at a median grant size of 246,030 shares; in addition, 69% of these companies also awarded cash, restricted stock, or both, along with the options. The average cash award was $1,288,750 among the CEOs that received them.

• Benefits—a provision for expense reimbursement is included in 73% of the CEO agreements; a company car in 58% of the agreements and SERP benefits are incorporated 55% of the time.

• Termination—98% of the CEO contracts specify severance in the event of the executive’s termination without cause; "constructive" termination (i.e., resignation for good reason) provisions are included 75% of the time, and death and/or disability clauses are also common (83%); CEOs typically have severance pay periods of up to three years, or 3-times compensation.

• Change of Control—65% of CEO contracts incorporate provisions related specifically to a COC; half of these are "single-trigger" provisions; more than half also would pay an excise tax gross-up.

• Disputes and Legal Fees—60% stipulate how a dispute will be handled (primarily by binding arbitration); 63% spell out which party will pay legal fees in a dispute.

Here is a checklist of terms for an employment contract being fashioned for a typical CEO today:

• Set initial term of at least three years, with automatic renewal or extension provisions.

• Include noncompete, confidentiality, and nonsolicitation clauses.

• Stipulate the salary or minimum pay level.

• Specify a target bonus level (usually expressed as a percentage of salary).

• Include a special signing award (cash, restricted shares, and/or stock options) in connection with the contract.

• Specify that the CEO will have an expense account or be reimbursed for expenses.

• Detail the company’s obligations in the event of the CEO’s death, disability, termination without cause, or resignation for defined good reasons.

• Set maximum severance pay at three years of compensation and benefits, with benefits terminated if they are received from a subsequent employer (but the CEO is not obligated to seek new employment).

• Include change of control provisions in the contract or in a separate agreement. To be aligned with current practices, they should allow the CEO to resign at will during a specified period after a takeover and include an excise tax gross-up, if applicable.

• Specify dispute resolution terms, usually to provide for binding arbitration; the company will pay the executive’s associated legal costs, either unconditionally or in the event s/he prevails in the dispute.