Laura O'Donnell in Corporate Board Member: Executive Contracts: Ties that Bind


Corporate Board Member recently interviewed Laura O’Donnell, partner, Haynes and Boone LLP, to talk about the current corporate landscape for executive retention and what boards should know when evaluating executive contracts.

Executive contracts have become the norm for just about all hires at the executive level. How does a company determine how far down the line to go with these agreements?
The general practice is to limit employment agreements to executives. Companies will, however, consider agreements for employees who are farther down the line when 1) offering a period of guaranteed employment is necessary to recruit a valuable nonexecutive employee or 2) when a business sale is conditioned on the buyer entering into the agreements. In addition, companies often require sales and management employees who have access to confidential information to sign noncompetition agreements, but these agreements are typically not tied to a guaranteed period of employment.

Is there such thing as a “typical” agreement?
Every employment agreement is unique but in addition to compensation information, some of the “typical” clauses include severance provisions, reasons why a company would have “cause” to terminate the employee without paying severance, reasons why the employee would have “good reason” to resign and still receive severance, noncompetition covenants, and nonsolicitation covenants.

When is it important to include a noncompete clause?
If the employee has access to sensitive, confidential information or if the employee’s identity is connected with the business’s goodwill, which often happens in the context of a sale of the business, a noncompete is appropriate. Remember that noncompetes are only permissible if they are designed to protect a legitimate business interest, such as confidential information/trade secrets, business goodwill, or stock options.

Excerpted from Corporate Board Member, August 21, 2012. To view full article, click here.

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