Frequently Asked Questions About Executive Compensation

What Is An Executive Compensation Package? 

Executive compensation is a legal team of art that generally refers to the financial rewards and benefits that top executives receive.  These executives are generally the highest-ranking officers of the company or part of what is referred to as the “C-Suite.” The “C” in the word “C-Suite” stands for the title of “Chief.”  Common C-Suite positions include the CEO (Chief Executive Officer), CFO (Chief Finanical Officer), and COO (Chief Technology Offier), among others.

Generally, the more established a company is, the larger the C-Suite becomes. Start-up companies in the Research Triangle area operate on a limited operating budget initially.  The C-Suite at start-up companies tends to be comprised of the founders, often designated as the CEO or CFO, when the company starts. 

Executive compensation packages often include a combination of elements and offer a variety of benefits and sophisticated legal terms.   Before an executive offer letter, employment agreement or similar post-employment agreement is signed, the terms of the contract should be reviewed by an experienced employment attorney. 

1. What are some of the benefits offered in employment agreements? 

The components of a compensation package can vary greatly depending on the company’s size, industry, and financial performance. 

Typical elements include:

• Base Salary: A fixed amount, usually paid out bi-weekly or monthly.
• Bonuses: Performance-based incentives that can be structured in a myriad of ways.
• Equity Awards: This could be in the form of stock options, restricted stock units (RSUs), or other equity vehicles.
• Retirement and Pension Plans: These could include 401(k) matches, profit-sharing, or defined benefit plans.
• Health and Other Insurance Benefits: These are often major considerations, especially for senior executives.
• Perquisites (or “Perks”): These might range from company cars to educational assistance.

2. How do I determine the value of equity awards?

The value of equity awards – like stock options or RSUs – is tied to the company’s performance and stock price. When assessing equity compensation, consider:

• Vesting Schedules: This determines when you can exercise or sell your shares.
• Strike Price: For stock options, this is the price at which you can buy the stock.
• Market Value: The potential value of your equity awards based on current and projected stock prices.
• Dilution Impact: How future equity issuances (like fundraising rounds) might dilute your stake.

3. What are “golden handcuffs”?

“Golden handcuffs” refer to provisions that incentivize executives to remain with the company for a set period. These might include deferred compensation plans or vesting schedules that grant value over time. While these can be lucrative, they can also limit your mobility. 

4. How do I negotiate a severance package?

Severance packages provide protection in the event of termination. Aspects to consider when negotiating a severance package can include:  

• Severance Pay: A lump sum or continuation of salary for a specified period post-termination.
• Benefits Continuation: Including health insurance and other benefits in some cases. 
• Equity Acceleration: Allows the vesting of equity to accelerate. 
• Definition of Cause:   Typically, severance is not paid when an executive is terminated for “Cause” as that term is defined in the contract.  This can be a heavily negotiated term in executive employment agreements. 

It’s essential to understand the conditions under which the severance package applies. For instance, there may be different provisions for terminations due to mergers versus performance issues.b

5. What is a non-compete clause and should I be concerned?

A non-compete clause prevents you from working with a competitor or starting a competing business for a specified period and within a specific geographic region after leaving the company. If too restrictive, it can severely limit future employment options. 

Although there have been recent legal happenings that bring into question the legality and enforceability of non-competes, it’s important to review your contract with an attorney.

6. Can I renegotiate my compensation package once I’ve accepted a position?

While it’s best to finalize terms before accepting a position, there may be circumstances where renegotiation is possible or necessary. This could be triggered by changes in the company’s performance, shifts in the market, or personal milestones achieved. However, approaching this requires tact and an understanding of market standards and company precedent.  

Review Your Employment Agreements before signing!

Negotiating an executive compensation package and reviewing the terms of an employment agreement, severance agreement or non-compete is a complicated process. Investing in an experienced attorney when contract negotiationsstart can mean an increase in benefits and compensation in some cases.  

With years of legal experience, a background in corporate employment law and executive coaching experience, attorney Holly Hammer is well versed to assist in these matters and her goal is to ensure every client receives boutique legal services at Hammer Law PLLC.  Contact Holly today if you are in the need of legal assistance.