How to Renegotiate Your CEO Employment Contract When You Have Achieved Success
By Robert A. Adelson, Esq.
This article was published in CEO World Magazine on February 1, 2018.
You’re a successful CEO. You’ve proven yourself to be much more than a good hire. You have shown yourself to be an exceptional executive, one who has well exceeded the performance goals established at the time of your hire. Under such circumstances, this may be the time to renegotiate your CEO employment contract.
When you were hired, you already possessed the experience, connections, temperament and other qualities the Board was seeking. But as with any new executive hire, both parties hoped for the best but could not be at all sure the hire would meet with success.
Yet, in your case, it all worked out. You brought just the skills and qualities needed to fully exploit the business opportunities you were presented, and the company has prospered handsomely under your leadership. You have more than vindicated the trust you were given.
JUSTIFICATION TO RE-VISIT YOUR CEO PACKAGE
When a CEO produces a significant success, that can translate to a big impact on the company’s bottom line and deliver substantial value to the shareholders.
After that level of success, it is appropriate for the CEO to ask the Board to revisit his or her terms of employment, compensation, and equity.
In seeking these changes, the CEO finds a more significant share of the benefits his or her leadership has brought to the company. The CEO also aims to refresh the level of incentives as he or she takes the business to the next level.
Why should the Board agree to sweeten the CEO’s package during the term of employment? Here are some reasons:
- Fear of losing a successful executive
- Costs of recruiting a replacement
- Disruption to a successful team
- Uncertainty of how a successor would work out
- Loss of momentum as the company goes through a new transition
- Loss of promise of where the CEO might take the company if allowed to build on his or her success.
WHAT ITEMS TO RE-NEGOTIATE?
If a reliable executive employment attorney represented you at the time of your job offer, there are likely a number of points where you tried but did not achieve what you seek when joining the company. Now, after you have proven yourself, it’s a good time to re-visit items asked for but not at first achieved. These include
- Equity – Refresh of your equity incentives. This can include not only an increase in your percentage equity stake but often equally important, a recasting of equity in a tax-favored form designed to allow you capital gains treatment of the appreciation if growth continues. Also, include features to limit dilution, to assure liquidity in the future and tag along provisions to ensure your equity is sold on the same terms as the largest shareholders,
- Salary and Bonus – You may want to obtain a salary increase to market if you were below market. Try to negotiate a salary that is commensurate with your level of performance. Also, adjust the bonus formula to realistic expectations of what you can achieve both for yourself and for the company. You want the recipe to allow for full or partial payment of the bonus based on a level of achievement.
- Severance and termination provisions. These often require adjustment to assure severance is triggered not just by termination by the company for a cause but also termination by the executive for good reason if the company fails in its promises to the executive. You wanted not only the proper level of severance but also essential provisions for payment of bonus earned and a pro rata bonus for the current year and accelerated the vesting of equity.
- Non-compete and restrictive covenants. You may also want to revisit restrictive covenants so that they are limited to the narrow field of your work, those with whom you dealt, and direct competitors of the company in its major lines of business.
PREPARING TO NEGOTIATE: THE READY ALTERNATIVE
By virue of your very success, you are now a more sought-after commodity on the market. Other opportunities will be offered to you. You will need to weigh whether to continue if the company is not forthcoming in sufficiently rewarding past success and incentivizing future success. Is it better to “cash out” – accept an offer from a company that seems to more highly prize the value you can bring and is willing to back up that desire with the sort of compensation and equity terms that have proved elusive with the current employer?
Part of the preparation for renegotiation is to be prepared to get your terms elsewhere if your current company won’t step up. You want to open the channels with recruiters and at least explore some other opportunities. If you have found other opportunities that you would be willing to take, then the time is right to approach your current chairman and give your current company a chance to retain your services.
In that discussion, you need not disclose the terms you have been offered. Your current company really should offer more because you have proven yourself to them. They know you can deliver. And if, after all, you have done, your current company will not offer more, then perhaps it is time to “cash in your chips” – to go with another company that will step up, and offer the terms you have earned.
ACE IN THE HOLE: WHAT YOU COULD DO NEXT
In these negotiations, it’s always good to have “an ace in the hole” to try to close the deal. That ace is to share your vision of the future with your chairman. Thus, in the justification for a revisited and refreshed CEO package, the Company is not just giving you a “thank you” gift in recognition and gratitude for what you have done, but even more important, to assure retention of your services for what you have told them you plan to accomplish over the next 12 to 24 months. And with your track record, there is a lot of credibilities that you could well deliver on that future promise.
Thus, as you achieve higher levels of success for the company, it is helpful to hold something in reserve – a new plan, a new direction – that you hold back until the right moment in negotiations to give the company that final incentive.
YOU DESERVE THESE BETTER TERMS: Go for it!
The desire not only to avoid loss of momentum but to get the chance to see if you can indeed lead the company to the next level you have shared with them, will work for a successful negotiation.
And don’t forget an experienced executive employment attorney can help guide you through the process.
You have earned this. Don’t be shy. Go for it!
I have represented CEOs and senior executives working for companies in Massachusetts, elsewhere in New England and across the country, and I am available to answer all of your important questions. Contact me, your attorney for executive employment agreements, at firstname.lastname@example.org or call 617-875-8665.