As with many companies, distributors need to fill or expand executive positions, including those for executives seeking out new employment opportunities. Whether seen from the employer’s or employee’s viewpoint, C-suite opportunities almost always involve greater professional challenges, further company advancement, and increased compensation. Unlike many other positions within a distributorship, they also carry the onus of incentive or performance-based compensation.
While the relationship between a company and a newly minted C-suite executive may begin with enthusiasm and optimism, there is no guarantee that this spirit will endure in perpetuity – for either party. Circumstances change, relationships sour, and a host of other factors could bring a C-suite tenure to an abrupt or unwanted close. Unfortunately, too many owners and high-level executives, seeking to create, fill, or become employed in such positions – as brilliant and business-savvy as they may otherwise be – fail to prepare for these very real possibilities.
Either side may create or begin a new position without an employment contract that defines the C-suite executive’s employment terms and outlines each party’s rights, responsibilities, and remedies. Conversely, distributors might prefer a lengthy and detailed contract skewed heavily in their favor or containing compensation formulas that may appear more lucrative than they actually are. Instead of working through these details, in consultation with or with the advice of competent counsel, either party may simply turn to the last page of the agreement and sign it – not realizing the effect it will have on the relationship going forward. Either way, both parties are leaving themselves vulnerable financially and otherwise.
Whether you are a distributor or an employee seeking a high-level position, it is critical that both parties understand basic as well as complex executive compensation “dos and don’ts” about the beginning, middle, and potential conclusion of any C-suite relationship. These positions are not typical employment relationships. Thought and expertise should be brought to bear on C-suite agreements, including provisions regarding compensation, for the benefit of both parties. Four specific points merit attention:
Cool Your Jets – And Consult Counsel
An individual experienced in the industry just received an offer for a new position that you, the distributor, very much wanted to fill. As enthused as that person may be to accept the offer, it is not wise for that person to sign on any dotted line without taking the time to carefully review any offer letter, employment agreement, or executive compensation package with an experienced executive compensation attorney. Likewise, distributors must ensure that they are making the right decisions as to compensation including incentive compensation, termination rights, and many other customary terms in such contracts, as each party will have expectations of the performance levels needed in any C-suite opportunity. Neither party should sell themselves short when the stakes are much higher than in an average employee engagement.
C-suite agreements contain clause after clause and paragraph after paragraph that may appear to be nothing more than boilerplate and legalese but are, in fact, determinative of each parties’ rights during the executive’s tenure and thereafter. These terms are wide-ranging and cover everything from termination rights and grounds to compensation to restrictive covenants like non-solicitation provisions. They may also discuss severance, enhanced performance compensation, use and disclosure of confidential information, and many other issues – all of which must be spelled out as clearly and unequivocally as possible beforehand. Given the increasing limitations on the enforcement of non-competition or non-solicitation provisions, both parties should not be hamstrung but flexible enough to address each party’s concerns. If neither party understands what is in an existing or proposed contract now, either could be in for some very unpleasant surprises in the future.
Several years ago, I wrote an article on the Do’s and Don’ts of hiring experienced employees for distributors(https://www.inddist.com/operations/article/13763536/litigation-abounds-when-competitors-hire-one-anothers-employees). The cautions contained in that Industrial Distribution article hold true today.
Don’t Hesitate To Negotiate
It is likely that any distributor and new executive will have common interests in their mutual success, but they certainly have divergent interests regarding the terms of an executive employment agreement. Businesses do not want to set an expensive precedent for future hires or offer an executive compensation package that raises concerns among shareholders or regulators. Conversely, executives do not want to shortchange themselves or limit the upsides that are properly gained for hard work and, presumably, success. These C-suite positions are often judged not only on objective performance statistics, but many subjective factors which are hard to detail in a contract. Nevertheless, they should not be idly discarded. Again, both parties should consult with competent executive contract counsel.
As initial versions of an executive employment agreement often come from the distributor and its attorneys, it is no surprise that such a contract will be much more favorable to the company than to the employee. However, as noted, both parties have a vested interest in creating a win-win relationship. As such, each party should not hesitate to push for changes that protect their rights and interests now and, in the future, so long as they do so with the guidance of competent legal counsel.
Crunch ALL The Numbers
Executive compensation packages for CEOs, CFOs, COOs, and other high-level or C-suite executives involve much more than just a salary and health benefits. Just compensation can involve complex, varied, and multi-layered terms and performance standards. Each party should give careful thought to long-term equity-based compensation, deferred compensation, performance bonuses, cash-based incentive pay, and equity interest rights, among other forms of income and benefits.
Many elements of a compensation package are contingent on future events and benchmarks, some of which can make promised compensation illusory. And different forms of compensation can have complicated legal and tax implications which both parties need to consider when evaluating the wisdom and advisability of proposed C-suite contracts. Consulting with experienced counsel before either party agrees to a C-suite package can ensure that each party understands all aspects of the new position from a contractual standpoint, including compensation and the other terms of C-suite arrangements.
Don’t Be a Quitter or a Prognosticator
If, for whatever reason, an employee intends to leave a current position, they should not just up and quit. The how, why, and when of a resignation or departure can significantly impact their next venture – even if they are a perfect fit for a C-suite position at a new distributorship. Likewise, for distributors, finding the right fit for an executive role is essential – especially for long term growth. Just consider how many talented major league baseball players end up in this situation, awaiting the right position from both their perspective and that of the potential acquiring team.
Neither party should consider terminating the relationship without first consulting an attorney, as each may forfeit much if not all leverage and/or opportunity when it comes to negotiating a favorable arrangement. While employment terminations can be unpleasant and leave distributors feeling that they are in the driver’s seat, it may well be that there is a “perfect fit” opportunity for both parties. It will be important, however, to ensure that existing agreements between employees who resign or are terminated do not interfere with any opportunities. Yet more reasons to speak with competent counsel before acting.
If you are a distributor seeking to create or fill a C-suite position, or an executive about to start – or end – such an employment relationship, and want to discuss your situation, please contact me at 312-840-7004 or fmendelsohn@burkelaw.com.
