Executives push for better exit deals post COVID
Senior executives changing roles during coronavirus are having to robustly negotiate service contract terms to protect themselves against any sudden deterioration in trading conditions that are outside their control, says Boodle Hatfield, the leading private wealth law firm.
Executives choosing to join a business during this period of economic volatility face a far greater risk than normal of seeing their contract terminated early. This is a particular issue for businesses that are in sectors more at risk from the lockdown, who want to attract executives with strong track records.
To compensate for that increased risk Simon Gorham, Employment Partner at Boodle Hatfield Boodle says that executives are increasingly negotiating the following terms:
- Longer notice periods – new appointees are negotiating notice periods of 12 months or longer to give them greater financial security. In exchange for a longer initial notice period, new joiners seem open to accepting notice periods that taper down to shorter periods after the first year.
- Payment in lieu of notice – increasingly, payment in lieu of notice clauses are providing for employers to pay in instalments as opposed to a lump sum. New joiners are increasingly resisting this and asking for this to be paid in a single lump sum. This is particularly relevant where an executive is being asked to join a more financially stressed business. Some payment in lieu of notice clauses have onerous terms, such as forcing the departed executive to show they have taken reasonable steps to find a new job. Other companies offer payments that get dramatically cut as soon as the executive gets a new job.
- Less onerous non-compete clauses – executives being asked to join companies are requesting far less onerous non-compete clauses which prevent them from joining a competitor for a period of time. This is because the current economic environment may see the executive forced out for reasons far beyond their control.
- A more equitable buyout of shares or bonus on exit – to guard against being forced out before shares or a bonus has vested, new executives are looking to negotiate for a higher payment of that unvested bonus on their early departure, with a preference for a payment in a single lump sum. Businesses that want to maintain cash are trying to have the money paid out in instalments over longer periods – an increased risk to the executive if the business is financially weak.
Boodle Hatfield says that remuneration policies vary substantially between private and public companies. UK listed companies must operate within the framework of their remuneration policy (which must comply with the UK Corporate Governance Code), whereas private companies have more flexibility to determine packages.
Simon Gorham, Employment Partner at Boodle Hatfield says: “Senior executives leaving a financially sound business at this time are taking a big risk. They aren’t necessarily looking to be compensated for that risk through bigger salaries but rather on the terms of their exit, particularly if they have to leave early because of restructuring or more economic shocks.”
“If talented executives don’t move from stable jobs at strong companies to jobs at weaker or smaller companies then UK PLCs suffer.”
“Executives are now paying much closer attention to the fine print of their contracts and are pushing hard to have any money owed to them, even if it’s a lower amount, paid out in one go. Businesses keen to preserve as much cash as possible to tide them over the crisis are resisting this.”
“Increasingly companies and employees are coming up with creative solutions – for example, formulations that allow a departing executive to receive a percentage of their exit package as a lump sum with the remainder paid in instalments or by a certain back stop date with mechanisms that reduce the risk of default or non-payment.”