What Should an Executive Employment Agreement Include?

An executive employment agreement is negotiated at the start of a relationship and read at the end of one. The clauses that decide what the executive walks away with, and what the company can hold them to, are the definitions of “cause” and “good reason,” the severance formula, the equity acceleration terms, and the restrictive covenants. We advise both companies hiring executives and executives negotiating their own terms through our contract review and executive counsel practice, and the issues below are where the two sides’ interests diverge most.

Role, reporting, and compensation

The agreement should state the title, the duties in general terms, the reporting line, and whether the executive sits on the board. Vague duties invite a later dispute over whether a reassignment was a demotion, a common “good reason” trigger. State the location of the role and any remote-work arrangement, since relocation is another common trigger.

Compensation has three parts. Base salary, with any guaranteed review cycle. Annual bonus, which should specify the target percentage, how performance is measured, how much discretion the board keeps, whether a partial-year bonus is paid on termination, and when payment is made. Benefits, including any executive-level perquisites. Most U.S. executive agreements remain at-will with severance protection rather than a fixed term, because a fixed term can obligate the company to pay out the full term on an early exit.

The definitions of cause and good reason

These two definitions are the heart of the agreement, because severance usually depends on them: the executive receives severance if terminated without cause or if the executive resigns for good reason, and nothing otherwise.

“Cause” should be a closed list. The company wants it broad: poor performance, failure to follow directions, any policy violation. The executive wants it narrow: felony conviction, fraud, willful misconduct, material breach of the agreement, with a written notice and a cure period for anything curable. The honest middle is a specific list of serious conduct, a cure period for curable items, and a determination by the board rather than a single manager.

“Good reason” is the executive’s protection against being pushed out without being fired. The standard triggers are a material reduction in base salary or target bonus, a material diminution in title, duties, or reporting line, a required relocation beyond a stated distance, and the company’s material breach of the agreement. The clause should require the executive to give notice within a set period after the triggering event, give the company a chance to cure, and resign within a window if it does not. Without those mechanics, good reason provisions tend to produce litigation rather than a clean exit.

Severance and change in control

Severance is typically expressed as a number of months of base salary, sometimes plus a pro-rated or target bonus, plus a period of subsidized health coverage. It should be conditioned on the executive signing a release of claims within a fixed period, and the agreement should say when payment begins so that the release timing does not create a problem under the deferred compensation tax rules in Section 409A of the Internal Revenue Code. Those rules are technical, and getting them wrong can expose the executive to penalties; have a tax advisor confirm the timing language.

Change-in-control protection is a separate layer. A “single trigger” pays enhanced severance or accelerates equity on the sale of the company alone. A “double trigger” requires both a sale and a qualifying termination within a window after it, often 12 to 24 months. Double trigger is the market norm and the version acquirers prefer. Agreements for senior executives should also address the excise tax rules on excess parachute payments, usually with a “best net” provision that cuts the payment back only if that leaves the executive better off after tax.

Equity: grants, vesting, and acceleration

If the executive is receiving options, restricted stock, or RSUs, the agreement should state the size of the grant, the vesting schedule, and whether the grant is subject to board approval and the plan’s terms. It should also address what happens on termination: whether unvested equity is forfeited, how long vested options remain exercisable after departure, and whether any acceleration applies on a termination without cause or good reason resignation, with or without a change in control. Executives often overlook the post-termination exercise window, which can force a sale or forfeiture at a bad time. The mechanics of vesting and the 83(b) election apply here as they do for founders; see our post on founder equity splits and vesting.

Restrictive covenants and confidentiality

Noncompete and non-solicitation covenants in executive agreements are enforced, or not, under state law. Virginia, the District of Columbia, and New York each take a different approach, and a covenant drafted to another state’s standard may be unenforceable where the executive works. The District, for example, restricts noncompetes for most employees below a compensation threshold and imposes specific requirements above it. The history of the federal effort to ban noncompetes is covered in our post on the FTC’s noncompete rule. Garden leave, where the executive is paid during a notice period while kept out of the market, is increasingly used as an enforceable alternative.

Confidentiality and invention assignment clauses are standard. Clawback provisions are now common as well: public companies must maintain a policy to recover incentive compensation after an accounting restatement under the exchange listing rules, and many private companies adopt a contractual clawback for misconduct. The executive should read the clawback carefully for what triggers it and who decides. CLP’s corporate governance and internal policies team drafts these policies so the agreement and the company’s policy say the same thing.

Indemnification, insurance, and disputes

An executive who will make decisions on the company’s behalf should have an indemnification commitment, either in the agreement or in a separate indemnification agreement, backed by directors and officers insurance. The agreement should name the governing law, choose arbitration or court, and say who pays attorneys’ fees in a dispute. Finally, both sides should review the full document against the method in how to review a contract before you sign it, because the exhibits, plan documents, and policies the agreement incorporates often contain terms the main document does not. For a company drafting its first executive agreement, our contract drafting and negotiation team can produce a form that fits its stage and state.

If you are hiring an executive or negotiating your own agreement, Capitol Law Partners can draft or review the terms so that the exit provisions are as clear as the offer. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our executive agreements and advisory page or schedule a consultation.