CFO Employment Contract: Terms And Negotiations
This article was published in CEOWorld Magazine on September 7, 2019.
The demand for chief financial officer (CFO) is as high as ever. If you are a CFO or a seasoned financial executive, you may find many attractive opportunities coming your way. Before you leave what you have and take up a new position, you are well advised to negotiate the terms of your executive employment so that your interests are protected and you secure the compensation you deserve.
CFO Role and Responsibilities
Before taking up a new position, you should have a clear understanding of your roles and responsibilities. Generally speaking, the CFO is the officer of a company that has primary responsibility for managing the company’s finances, including financial planning, record-keeping, financial reporting and management of financial risks. In addition, the CFO is also the “face” of the company when it comes to representing the truth to customers, vendors and bankers regarding the financial viability of the company to deliver on its brand promise.
Some CFOs are hired to focus on external financial matters such as fundraising, IPO or company sale, interfacing with the Board of Directors, etc., while other CFOs focus on internal accounting and finance operations.
Specifying your roles and responsibilities in your CFO employment contract is important because your performance evaluation is based on your responsibilities, and in turn, your compensation, continued employment, and even severance depend on your performance. In addition, you should get a clear understanding of your team resources and budget, office, expense accounts, etc. prior to accepting an appointment. After all, you’ll need resources to achieve high performance.
CFO Cash Compensation Package
Your compensation package is a major part of your CFO contract and you want to be fairly compensated for your work. CFO compensation may include a base salary, bonuses, equity compensation, and benefits including healthcare and life insurance, relocation, a car, etc.
What is a fair salary for CFOs? Generally speaking, CFO salaries vary depending on the company size, stage of company and the CFO’s duties. In the Boston area, for example, CFOs of $20-50mm companies may get $250-400k base salary. 25% – 50% bonus range is common. Larger companies pay more. To find your fair salary, you should check industry data for salaries offered at peer companies.
As said above, CFOs may have different roles and responsibilities. CFOs whose job is focused on external finances such as IPOs and fundraising are likely to be get more lucrative equity compensation and back end cash bonuses. CFOs who focus on internal financial operations are often compensated based on years of experience and company size.
For executive bonuses, you should ensure that there is a formula for paying cash bonuses, with provisions for performance goals linked to the formula. This formula or your target should be in writing and set out early in the year so you know the goal posts you are working toward. The bonus should also be based on level of performance not a cliff, all or nothing if you don’t meet the target.
CFO Equity Terms
For most private companies, equity is an important part of your executive compensation package. In startup and early stage companies, it is quite important because in such a pre-IPO company it offers the biggest chance at a big gain, and also the potential that the gain would be at a tax favored capital gain rate. Equity can also be more important in a startup company because in such companies the CEO may be taking a cut in your normal pay rate, so you want make it up in the equity terms.
Equity compensation is also important in established and public companies. Such companies are sometimes limited in the level of cash compensation that can be paid. So again, the shortfall is made up with equity. Also, as with the startup company, tax-favored equity can offer the possibility of capital gains treatment and if the stock does rise in value, there is potential for still greater leverage for that part of your compensation package.
You want to pay attention to the mix of equity and terms you are offered, including terms related to vesting and expiration, cashless exercise and net settlement. For more information and analysis, you may want to review one or more of my earlier articles published in CEOWorld on
- Incentive stock options (ISOs),
- Non-qualified stock options (NQSOs)
- restricted stock grants
- restricted stock units (RSUs)
You may also want to pay attention to clawback clauses in your CFO equity compensation. These are terms that requires you to forfeit stock awards and vested shares should you violate company loyalty pacts, or are involved in fraud or misconduct. If you don’t see clawback terms in your CFO employment contract, ask for a sample stock agreement. You will likely find the terms there.
CFO / COO Arrangements
In small to medium-sized businesses, the CFO sometimes take on the Chief Operating Officer (COO) role as well, adding non-financial duties to his or her position. This may be a temporary arrangement to fill the role for a relatively short period until the COO position is filled. However, many times, this can be longer term. The company is comfortable with the CFO and feel he or she can fill the larger role and offers that larger role with no expiration date in mind.
If the longer-term change in role is planned, then as CFO you should seek a new executive employment agreement to reflect the changed employment position. There should be a meaningful increase in base salary and target bonus, but also in equity and perhaps character of the equity as well.
As part of your revised CFO / COO employment agreement, you also should seek to delineate your responsibility and authority and reporting as COO. You will also want to provide for revised termination terms so that if the company later seeks to take this title and authority back from you without your consent, this could trigger termination for good reason and severance.
CFO Severance and Termination
Yes, you need to consider leaving the job even as you are negotiating to get it. You could be asked to leave under various circumstances, such as change of control, or you could even be wrongfully terminated. In other circumstances, a new CEO comes in who wants his or her own team, so you are being squeezed out and you need the ability to resign for good reason.
In each of these cases, you need severance terms to protect your interests.
On the other hand, after a few years, you may be lured by a bigger and better position elsewhere and you’ll need to assure that restrictive covenants such as non-disclosure and non-compete terms do not make it impossible for you to leave.
Severance compensation terms may include a 280G tax provision that allows a company to pay you either the maximum possible or a gross up amount in the event the additional compensation triggers the excise tax that the IRS imposes on excessive severance payouts (golden parachutes). Conversely, in case a company is unable to pay the severance due, “rabbi trusts” can be set up to ensure that you will duly receive all the deferred compensation that you deserve.
Re-negotiating your CFO Contract or Fielding a New Offer
When you have achieved success at your job, and are happy to stay, you may still want to review your employment contract from time to time to ensure that you are properly compensated for your work. My article on how to renegotiate your CEO employment contract when you have achieved success addresses this need.
Without properly navigating the CFO employment agreement, you could lose a lot of money or limit your career. If your skills and experience are what the company needs most, then you deserve – and can negotiate – terms commensurate with your value. The best time to negotiate an employment contract is before an offer is made or accepted. These issues are important to you and your career. So, as you negotiate, it is wise to have an experienced hand in your corner: go get an experienced executive employment attorney to secure the best employment terms for you!
~~See also my representative case on CFO employment contract and equity compensation terms – Massachusetts high tech company.