The impact of Covid-19 on senior executives’ contracts
It may not be the most pressing concern for many employees as the coronavirus pandemic continues to wreak havoc among organisations, but senior executives’ relationship with their new employers is changing as they look to safeguard their positions against a background of instability. Employment Partner, Simon Gorham investigates.
While many companies are grappling with the impact of the coronavirus pandemic on their businesses, the crisis is also affecting how senior executives approach negotiations over their service agreements with new employers. Senior executives are not necessarily looking to see additional uncertainty or risk reflected in higher basic annual salaries but rather they are seeking to better insulate themselves against economic shocks and unpredictability.
In April 2020, the first full month to experience the effects of the coronavirus, there were a total of 232 board changes at London Stock Exchange-listed companies. This was a substantial increase on the monthly average of 206 over the preceding two years.
Senior executives seek protections
Senior executives joining private companies during the pandemic are increasingly seeking to ensure that their service agreement provides them with additional protection in uncertain times. But this approach needs to be considered against the backdrop of multiple business challenges and potential reputational risks faced by employers. So what provisions are senior executives seeking to negotiate into their service agreement during these uncertain times?
Long notice periods
Notice periods of 12 months for senior executives are not uncommon and, in certain circumstances, notice periods in excess of 12 months are often accommodated. Increasingly, senior executives seem open to “staggered” notice periods in which the duration of the notice period reduces over several years. This formulation provides for greater protection for them in the short term, when times may be more unpredictable.
Good reason provisions
These provisions, which are more common in the service agreements for senior executives in the US, allow a senior executive the contractual right to resign on the occurrence of certain events and to be paid a severance payment.
Events such as any reduction to the executive’s remuneration and/or any material reduction in the package of incentives provided (except when the remuneration and/or package of incentives of other officers is similarly reduced) would allow the executive to invoke the provision. The pandemic is forcing senior executives (and their advisers) to look beyond traditional approaches, think creatively and adapt concepts from other jurisprudence.
These provisions operate in circumstances where a senior executive agrees to temporarily reduce their compensation in exchange for some other right to future compensation. For example, a senior executive joining a new employer during the pandemic may agree to a reduction to their compensation for 12 months in exchange for payment of the forgone remuneration plus interest in another year.
Change in control provisions
These provisions apply where there is a change of control of the employing company and entitle the senior executive to an enhanced notice period and/or a lump sum payment on termination of their employment in certain circumstances. In businesses where M&A activity may be the differences between survival or failure, these provisions can be used to facilitate transactional activity.
These provisions provide for a severance payment at a guaranteed level to be paid to the senior executive in the event they are dismissed in certain circumstances. While before the pandemic they were seen as unusual in the UK, the pandemic is forcing senior executives on entry to more closely consider adequate protection on exit.
There has been considerable focus on the treatment of variable compensation awards during the pandemic. As for equity awards, senior executives joining a new employer during the pandemic would be advised to establish whether or not there are plans to delay any annual grants and/or plans to change grant pricing. For short-term and long-term incentives, have targets already been set or are they delayed? Consideration should be given to negotiating shorter-term targets specifically relating to responding to Covid-19 as well as recovery targets and having them assessed against a group of peer companies.
What about restrictions?
It is not unusual for service agreements for senior executives to contain well drafted post-termination restrictions. These restrictions typically last for 12 months following the termination of employment and prevent the senior executive from competing, soliciting and dealing with customers and prospective customers, soliciting and hiring employees and interfering with suppliers. However, increasingly credible and persuasive arguments are being deployed to limit restrictions against competing if the senior executive is made redundant, resigns in circumstances that constitute “good reason” or leaves for some other substantial reason within a certain period of time.
Employers fight back
But a word of caution. For senior executives who negotiate lengthy notice periods, the employer may wish to reduce the cashflow implications of paying in lieu of notice by paying in instalments (as opposed to paying a lump sum). Additionally, employers are increasing imposing an obligation on senior executives to take reasonable steps to seek new employment, notify the employer of any alternative income received and reduce the amount of further instalments by the amount of such alternative income.
Of course private companies are not subject to the same constraints that apply to public companies, where there is typically less flexibility in the company’s remuneration policy to accommodate bespoke protections. Under the UK Corporate Governance Code notice periods should be set at one year or less. However, if it is necessary to offer longer notice periods to those recruited externally, the Code provides they should reduce to one year or less after an initial period. Senior executives joining public companies during the pandemic would, therefore, be advised to utilise this provision so as to obtain the protection of a longer notice period for an initial period.
This article first appeared in Personnel Today on 22nd October 2020.