Introduction

An Employment Agreement (or an employment contract) is a legally binding contract entered into by an employer and an employee. It outlines the rights, duties, obligations, and responsibilities of both parties.

A Chief Executive Officer (CEO) is the highest-ranking executive officer in a company. His primary responsibilities include making major corporate decisions, managing the overall operations of the company, and acting as the link between the Board of Directors and the corporate officials.

Since CEOs are employees as well, they also have to sign an employment agreement when they take the position of CEO. This employment agreement generally has a lot of different parts and elements to it.

   Duties and Scope of Employment

• Defines the term of employment as CEO

• Defines the various obligations the CEO must fulfill while being employed as such. For example:

  • The CEO will perform his duties to the best of his abilities

  • The CEO will not engage in any other professional position for any compensation without prior approval of the Board

  • The CEO will keep the Board informed of the company’s business affairs at all times

• Lays out representations that the CEO must make to get this position, such as:

  • He is not disqualified from acting as a CEO by any provision of the Companies Act

  • His assignment as CEO will not affect any contract he is a party to prior to this

  • The employment agreement has been executed by the CEO when he signs it.

Compensation

Several forms of compensation are given to the CEO, which is all outlined in great detail in an employment agreement.

• Base pay – This is an annual salary as compensation for the CEO's services.

• Variable pay – Based on the company achieving certain milestones, the CEO may be entitled to some compensation which is dependant on the milestones which the company hits.

• Stock compensation – The CEO will be granted a certain amount of stock in the company (generally shares) at the beginning of every fiscal year, and this amount may vary based on the decision of the Board of Directors.

There is generally also a clause that allows for a review and change of this compensation based on decisions taken by the Board of Directors.

Employee Benefits

The CEO is entitled to any employee benefits which the company may offer during his or her tenure. These benefits are completely under the control of the company and can be changed or canceled at any time.

Expenses

The CEO is entitled to reimbursement from the company for certain expenses that he might make (travel, entertainment, or other expenses). These reimbursements are to be within reason and are also connected to the CEOs' performance of their duties.

Severance

The severance clause generally has multiple parts, due to the different possible scenarios in case of severance.

• Termination in cases other than a just cause, death, disability, or resignation with good reason – In these cases, the CEO will generally receive some amount of compensation for a while after his employment is terminated. This compensation may be in the form of a salary or stock options, but that depends on each contract and how the company wants to pay out the severance fee.

• Termination for cause or resignation without good reason – In these cases, the CEOs employment is terminated immediately, and they receive no severance fee at all. All the stock options which have not been vested yet will also return to the company.

There are certain conditions that need to be met for these severance clauses to be applicable.

• Non-Solicitation – The CEO during their term of employment must not have solicited any employee of the company to leave the company and work for them.

• Non-Competition – Generally, companies will not give out severance packages without getting the CEO to sign some form of a non-competition agreement stating that the CEO will not partake in any business venture which is in direct competition with the company, for some specified period of time.

Confidential Information

Every employment agreement, including the CEO employment agreement, will have a clause which states that the employee must agree to abide by the Confidential Information Rules of the company. These rules vary from company to company, but a violation of them is almost always grounds for termination with good reason.

Assignment

This clause takes care of any potential problems which may arise due to either the death of the CEO of the company being acquired by somebody else.

• Upon the death of the CEO, the benefits entitled to him can only be transferred to his heirs or executors by way of a will or through the laws of succession. Any other attempted assignment or transfer will be null and void.

• If the company is acquired by another company, any such successor will be deemed substituted for the Company in the agreement. This is to ensure that such a situation does not make this agreement void automatically.

Other Clauses

Apart from these major parts of a CEO employment agreement, there are certain other clauses which can be found as well. These clauses might not be specific to a CEO employment agreement but are important nonetheless.

Definitions

This clause defines the various terms used in the agreement which may not be clear at first. Some examples of terms that may be seen here are "disability", "good reason", "cause", etc.

Severability

This clause ensures that if any one provision of the agreement is found to be void, the rest of the agreement will hold.

Arbitration Clause

Integration

Companies may include an arbitration clause which will state that in case of any disputes arising from the agreement, the settlement will be done through arbitration.

This clause states that the Agreement will include all other agreements signed by the company and CEO (arbitration agreement, a confidential information agreement, etc.), and any prior agreement between the parties is suspended when the present employment agreement comes into force.

Indemnification Clause

The company has to indemnify the CEO against any costs and expenses incurred by him in connection with any suit or legal proceeding to which he is made a party by virtue of being CEO of the company.

IP Ownership

This clause transfers ownership of any intellectual property the CEO comes up with within the course of their employment to the company.

BY-

Shivalik Chandan