Executives overlook exit clauses during contract negotiations

Moving jobs at a senior level involves considerable risk. That’s the reason boards are willing to negotiate good exit clauses for their top executives, says remuneration expert Michael Robinson of Guerdon Associates.

“It opens up the recruitment options and makes you more reasonable as a potential company to work for,” Robinson says.

However, few senior executives use their leverage to negotiate strong termination and departure clauses, according to Kathryn Dent, a director of an employment law firm, People + Culture Strategies (PCS).

Instead, leaders focus on pay. “The major points of negotiation in senior executives’ employment contracts have focused on benefits such as bonus payments, commissions and share options,” Dent says.

Changes in attitudes

Exit payments have traditionally been non-negotiable. This is changing, and for good reason.

Conditions such as restraint clauses – in which leaders are restrained from finding work with rivals –can make it difficult to secure a new job, and/or can land executives in court.

Clearer exit conditions protect careers and bank balances. “At end of contracts, you won’t be spending money fighting the contract in court,” Dent says.

Losing the top job can end a career, says Robinson. “One you are fired at the top, when you are at the top of your game, your career is ended. And you are in your 50s, not in your 60s,” he says. “At the top level, it is like drinking from a fire hose: you just have to keep gulping it down and not spill a drop.”

Why bargain?

Executive movement globally is at a seven-year high, according to research by consultants Booz & Co, and will increase when economic conditions improve. Given the risks, executives are driving a harder bargain on exit clauses.

“The main thing for executives is thinking ahead,” Dent says. “When you are presented with a contract, think about what happens when that employment is terminated. What benefits will I receive, and what the contract restrict me from doing?

“There have been high-profile cases where restraints have been enforced. While it is difficult, courts will recognise a company’s legitimate business interests. If the geography of the restraint, the nature of the activities and the time are reasonable, the restraint will be upheld.”

Boards face legal constraints on what they can offer executives on termination, Robinson says. “Under the Corporations Act, the maximum someone can be paid on termination is 12 months of their average fixed pay, which counts everything in their salary package. If you have a termination that also requires a restraint from competing, which is covered by the Trade Practices Act, then the total payment still has to fit with within 12 months of average fixed pay.”