Executive employment compensation is famously complex. Logically enough, executive employment contracts tend to be complicated, too. Many employers include non-compete and non-solicitation clauses, confidentiality agreements, and other restrictive covenants in executive contracts to protect themselves.
Before signing any contract, you should verify that it’s valid under state and federal employment law. In this article, we’ll take a closer look at executive employment compensation, legal review, and negotiation strategies.
Why Restrictive Covenants Matter for Executives
When negotiating employment contracts, most executives focus on compensation. That’s certainly important, but if you want to protect your career going forward, you shouldn’t overlook the restrictive covenants the employer includes.
A restrictive covenant is any clause in an employment contract that places limitations on the signer’s actions. These agreements may be effective during your term of employment, after you leave the company, or both.
In executive contracts, restrictive covenants are often included to protect the employer’s business interests. For example, many employers include non-solicitation clauses that forbid executives from soliciting employees or clients for a new business.
It’s easy to understand why a corporation would want to incorporate restrictive covenants in a contract. However, as an executive, you need to look out for yourself, too. It’s uncommon for executives to spend their entire career at one company, and restrictive covenants may get in the way of your future professional growth.
Your employer (or potential employer) is looking out for itself by including restrictive covenants in your employment contract. You should look out for yourself by hiring a reputable law firm to scrutinize the employment agreement and confirm that it’s enforceable under state and federal law.
Key Types of Restrictive Covenants in Executive Agreements
For executives, no two employment relationships are exactly alike. However, executive employment agreements often include similar restrictive covenants across multiple sectors. Here are a few common ones to watch out for.
Non-Compete Clauses
Non-compete agreements for executives are among the best-known types of restrictive covenants. These agreements usually forbid former employees from working for a direct competitor (or founding a direct competitor) for a certain period. Generally, courts will enforce non-compete clauses only if they remain in effect for a reasonable period. In most cases, “reasonable” means anywhere from six months to two years.
However, recent policy changes have shaken up the landscape surrounding non-compete clauses. In 2024, the Federal Trade Commission (FTC) issued a rule banning new non-compete clauses for senior executives. An employee counts as a senior executive if both of the following apply:
- They earn more than $151,164 per year
- They’re in a policy-making position
Notably, the rule allows existing non-compete clauses to remain in effect.
If you’re considering a position where a non-compete clause would apply, it’s important to understand that negotiating non-compete agreements is common practice. It’s worth getting an attorney’s review of a proposed contract to determine whether further negotiation of the employment agreement is warranted.
Non-Solicitation Agreements
Non-solicitation clauses in executive contracts can apply to clients, employees, or both. They usually last about the same length of time as non-compete clauses do.
While a non-solicitation agreement is in effect, former employees may not try to recruit former coworkers to work for a competitor. They’re usually forbidden from trying to lure clients away as well.
It might be tempting for former executives to recruit employees and clients from their former employer. However, the consequences of violating a non-solicitation agreement can be serious. Doing so could lead to high-stakes litigation, with former employees being ordered to pay significant monetary damages.
Confidentiality Agreements/Non-Disclosure Agreements (NDAs)
C-suite executives and other high-level employees typically have access to sensitive information. To protect its trade secrets and other confidential information, a prospective employer will often require new hires to sign a confidentiality agreement. Breaching a confidentiality agreement or NDA could lead to significant reputational harm and monetary damages.
Non-Disparagement Clauses
If an employee (executive or otherwise) has a bad experience with an employer, they might understandably want to share that experience with the world.
A dissatisfied hourly employee probably won’t have a noticeable effect on a corporation’s bottom line. But if a former company executive starts criticizing a corporation, it may have trouble attracting talent in the future. For that reason, it’s not uncommon for executive employment agreements to include explicit non-disparagement clauses that aim to prevent harmful badmouthing.
“Garden Leave” Provisions
Some non-compete clauses are more enforceable than others. For employers who are particularly concerned about departing executives spilling company secrets or immediately signing with a competitor, a provision known as “garden leave” is becoming increasingly common.
After an executive employee gives notice or is terminated, they may be placed on garden leave during a set period, usually one to three months. They receive pay and often benefits during this term, but they must stay away from the office. They also may not start working for a competitor or for themselves. The name comes from the idea that the exiting employee might use the time to pursue gardening or other hobbies.
Garden leave can be costly for the employer, but in some situations, it can help protect vital business interests. By keeping a former executive away from the office for a time, the company can reduce the chances that the former employee will become a threat.
Enforceability Considerations and Legal Risks
Confidentiality agreements for executives and other restrictive covenants aren’t always enforceable. And unless you’re an attorney, it can be challenging to determine whether a proposed covenant would be upheld in court or not.
The following are some key considerations courts and attorneys use when trying to decide whether a given agreement is enforceable:
- Does it protect a legitimate business interest?
- Does it avoid causing undue hardship to a former employee?
- Does the employee receive acceptable consideration (like compensation or special training) in exchange for signing?
- Is the proposed duration reasonable?
- Is the geographic scope limited to where the employee worked?
These agreements should always be evaluated on a case-by-case basis. Never rush into signing an employment contract, especially one with multiple restrictive covenants.
Executive Contract Review and Negotiation Strategies
Wading through the muddy waters of executive employment compensation, legal review, and negotiation strategies can be a challenge. While it’s generally wise to work with an attorney when reviewing a potential contract, these executive compensation negotiation strategies can help you set out on the right foot.
Verify That Job Duties Are Clearly Defined
This may not sound terribly important at first. However, if you take on a new role without a clear idea of what it entails, you’ll expose yourself to risk. If your employer has clearly outlined your job duties, it will be much more difficult for them to fire you for unclear reasons.
Assess Compensation Structure
Your base salary is a primary consideration, but it’s only the beginning. You’ll also want to consider negotiating for restricted stock units (RSUs), stock options, and other types of equity compensation that can give you a meaningful share of company ownership.
Focus on Severance Pay and Termination
No one takes a job expecting to be terminated, but this scenario is always worth addressing during executive contract negotiation. Specifically, you should ensure that you’ll receive severance pay if you’re let go without cause.
To avoid confusion and ensure your bases are covered, it’s also a good idea to ask the employer to outline what constitutes a valid reason for termination. If you’re a high-level executive, you might even work out a “golden parachute” provision that guarantees compensation if you lose your job because of a merger or acquisition.
Consider the Impact of Restrictive Covenants
Restrictive covenants can often be used to negotiate more favorable compensation. However, it’s still essential to consider how each type of covenant might impact your career. If a particular agreement could lead to serious professional damage, you may want to reconsider.
Know Market Rates
Before you walk into a negotiation, take the time to research the market rates for similar roles. Public company filings and executive recruiters can both be valuable resources for uncovering this information.
Use Specific Data Points to Prove Your Worth
During negotiations, it helps to point to accomplishments and job performance data to show a prospective employer how you stand out. Be prepared to provide hard numbers and concrete examples to demonstrate your expertise in your field.
Establish Your BATNA
In any negotiation, it’s important to know when to walk away. When you decide your BATNA (best alternative to a negotiated agreement) ahead of time, you give yourself the power to do just that.
For example, imagine that one company has offered you a salary of $195,000. You’re trying to negotiate a $250,000 salary with another employer. The $195,000 offer is your BATNA, so if the other employer offers less than that, you’ll be ready to walk away from the negotiating table.
Compensation and Severance Negotiation Linked to Covenants
Restrictive covenants are an imposition for executives. That’s why businesses almost always offer high compensation, generous severance packages, and other benefits to employees who agree to them.
Generally, the stricter the proposed covenant is, the more leverage you’ll have. If you’re tempted to walk away from a contract with significant restrictions, it might be worth seeing if you can negotiate a higher salary, equity acceleration, or extended benefits in return.
Post-Employment Compliance and Practical Tips
As any executive knows, violating a restrictive covenant can lead to serious consequences. Even if you fully intend to comply, a careless error could still land you in legal trouble. Here are a few tips to help you remain compliant with a former employer’s restrictive covenants.
Thoroughly Review Your Contract
Years may have passed since you signed your initial employment contract. If you’re leaving your company, take some time to revisit your contract and make sure you understand what is and isn’t allowed. If needed, clarify the terms of the restrictive covenants with your employer.
Be Mindful of Electronics Use
Make sure you don’t have company files, client lists, or other potentially sensitive data on your personal electronic devices. You should also double-check that you’ve returned all of your company’s electronic devices.
Remember That a Buyout Might Be an Option
What happens if you’re bound by a restrictive covenant but have a new company eager to hire you? It might be worth trying to negotiate a buyout. This is where you offer financial compensation (or volunteer to waive a bonus or benefits) in exchange for early release from the contract.
Keep Prospective Employers Informed
If you’re looking for a new job while restrictive covenants are still in effect, be honest and up-front with potential employers. Otherwise, you risk running afoul of your agreement.
Get Reliable Legal Advice for Your Next Career Move
When it comes to executive employment compensation, legal review, and negotiation strategies, you shouldn’t go through the process alone. Corporations rely on experienced legal counsel when putting together compensation packages and drafting restrictive covenants. Having a legal representative looking out for your employment rights and interests can help level the playing field.
At Weberman Business Law P.C., we’re deeply familiar with corporate executive employment law. When you choose us to handle your executive contract legal review, we’ll tell you whether your contract is enforceable under state law and offer advice for negotiating restrictive covenants and other provisions.
If you need an attorney to look over a contract offer or have questions about another aspect of employment law, contact us today to schedule a consultation.