The Advisors' Blog

As discussed in this 32-page Meridian memo, most companies have migrated to using severance agreements for CEOs in lieu of entering into employment agreements when an executive comes aboard. However, employment agreements are still a useful approach for some companies. About 36% of Russell 3000 companies continue to go this route – with it being more prevalent in industries like consumer discretionary, health care, communication services and financial services. Employment agreements are also more common at small-caps than large-caps.

In addition to stats on prevalence, the memo shares trends in key terms from the 100 or so S&P 500 companies that have entered into agreements – including:

• Exclusivity requirements

• Duration and renewal terms

• Compensation provisions

• Post-termination arrangements

• Restrictive covenants and releases

• Clawback provisions

• Change-in-control protections

• Indemnification and D&O insurance requirements

• Administrative provisions

Appendix C gives a convenient summary of typical provisions. In evaluating existing or potential CEO employment agreements, the memo suggests that boards consider whether the agreement:

• Serves as a useful tool for talent acquisition, retention and risk management (which, as noted above, may depend on the company’s size and industry, among other factors)

• Provides competitive levels of compensation, benefits and severance,

• Safeguards corporate interests

• Allows for terms to be reset through sunset provisions

• Reflects the current corporate governance environment

• Addresses dispute resolution

• Complies with applicable regulatory requirements, and

• Includes terms which clearly and unambiguously reflect the intent of the parties.

– Liz Dunshee