by Meridith Levinson

How to Negotiate an Employment Contract

Mar 27, 200717 mins

Want a sweetheart deal if the job goes sour? Here's how to negotiate it before you start work.

While working as a managing director in charge of IT infrastructure, Christopher Barron noticed some inadequacies in his company’s effort to comply with federal regulations. He didn’t think his company, which he declined to name, was doing enough to comply with the regs. Although he pressed and pressed, he couldn’t convince his CIO and the rest of the senior management team that what they were doing was deficient. The CIO felt the measures his company was taking were adequate, but Barron, who was leading the compliance effort, knew it wasn’t enough. Due to this disagreement, Barron and his employer decided to part ways, and Barron left the company with what he describes as a sufficient severance package. (He declined to disclose the specifics.)

Barron was entitled to that severance because he had bargained for an employment contract with the company upon being hired. “Had I not had an employment contract, I’ve been told I would have been summarily dismissed from the company,” says Barron, who is now vice president and CIO of CPS Energy in San Antonio, Texas. “Having the employment contract allowed me to maintain my ethical and professional integrity without sacrificing my financial security.”

Employment contracts are written agreements between an employee and an employer that define an individual’s role at a company over a specific period of time, usually from two to five years. They often outline the employee’s responsibilities, reporting relationship, salary, benefits, perks, and in some instances, the terms and conditions of a severance package.

As Barron’s experience shows, employment contracts are worthwhile documents to draw up when you’re negotiating a position with a new employer. These documents can protect an employee’s personal, professional and financial interests in the event the employer decides that it no longer needs the employee’s services. Such a scenario might arise if a new CEO comes on board or there’s a “change in control” because the company has been bought, sold or merged with another.

“If you don’t make earnings improve by 10 percent in the first six months, you’re out of a job. That’s the kind of risk an employment agreement protects against,” says Susan Egan, an employment attorney with Egan Law Firm in New York City. “You’re protecting against the risk that you’re going to end up out the door.”

Employment contracts are standard for CEOs and are often inked for other high-level executives like presidents, chief operating officers and even chief financial officers. However, they’re not the norm for IT executives, according to IT executives and headhunters. What’s more, many executive recruiters and employment attorneys observe companies moving away from employment contracts because they see the contracts as a liability. They’re also tricky for employees to negotiate.

Nevertheless, it’s a wise idea to ask for some kind of an employment agreement—whether a formal contract, a list of stipulations in a multipage offer letter or a severance agreement—that sets forth the terms of your hire and termination. Doing so can mean the difference between smooth sailing or a crash landing in the event your employer decides to drop you like a bad habit.

To learn more about the benefits, perils and pitfalls of negotiating employment contracts, keep reading.  

Protect Yourself

When telecommunications company Marconi sought out Greg Goluska for the CIO position it was looking to fill in 2000, Goluska asked for an employment contract. He wanted Marconi to compensate him for the retirement benefits, pension and stock options he had accrued during a 19-year career with Motorola that he would lose if he accepted the offer from the telecom. He also wanted Marconi, then headquartered in Europe (in 2006 the company was acquired by Ericsson), to cover the cost of moving him back to the United States if he lost his job or the company went bankrupt, since the prospect of relocating to Europe was such a big move. “I wanted the company to assume some responsibility for making me whole again, in the event anything like that happened,” says Goluska, who is now the vice president and CIO of DSC Logistics, a provider of supply chain management services based in Des Plaines, Ill.

Goluska didn’t have to pull teeth to get the employment contract because such agreements are far more common in Europe than in the United States , he says. Marconi even paid for the attorney Goluska hired to negotiate the contract. Goluska says Marconi was amenable to the employment contract because it was aggressively courting employees at a time when competition for IT professionals was stiff.

When Goluska did leave Marconi in December 2001 after it hid the skids, he was awarded a year’s salary, his target bonus (which was 55 percent of his base salary), a buy-out of his six months’ notice and the right to remain on the company health plan at the current cost. The value of this package was equivalent to more than two years’ worth of salary. In sum, he walked away with more than a half-million dollars in severance. “It was a nice position to be in,” he says. “You don’t get to be in that position too often.”

And you don’t get to be in that position unless you speak up and carefully present your demands. Next, we’ll cover how to do that.

The Executive’s Pre-Nup

Negotiating any kind of an employment agreement is dicey, whether a formal contract, the terms of an offer letter or a non-compete clause. “It’s like asking for a prenuptial agreement,” says Patricia A.M. Serafinn, a contract lawyer based in New York City. “It takes the glow off a new relationship.” After all, you’re discussing the reasons you might get fired and how much you’re going to get paid if the company terminates you at the same time that you’re hammering out an offer, says Shawn Banerji, a recruiter with Russell Reynolds Associates.

Because discussing the terms of one’s hire and termination is uncomfortable, employees are shy about asking for employment agreements. They’re also hesitant because they’re concerned their future employer will perceive them negatively if they ask for more than they’re being offered, says Goluska. They don’t want to jeopardize the position they’re in. And for good reason. Over-negotiating employment agreements can backfire.

“You could lose the deal by being too aggressive,” says Dora Vell, managing partner and CEO of executive recruiter Vell & Associates based outside of Boston . She once had a candidate for the vice president of marketing position nearly lose a job offer because the candidate was trying to rewrite the company’s vesting plan for stock options, which was not negotiable.

Given the difficulty and importance of negotiating employment agreements, here are some tips for broaching the subject with a prospective employer.

How to Start

There are a number of ways to go about discussing the terms of your hire with a future employer, but Serafinn says that ordinarily it’s best to do so before you come on board. Employment contracts and agreements are rarely negotiated after an employee has been hired, unless some subsequent event prompts the company to seek assurances that the employee will stay through some particular point in time, she adds.

One situation in which it makes sense to propose the conditions of your hire is when you’re working out your salary and benefits with your future employer. If you’ve settled on your pay and perks, and the company hands you an offer letter, non-disclosure agreement and/or non-compete agreement to sign, Serafinn recommends saying to the hiring manager at that moment, “Let me show this to a lawyer and I’ll get back to you.” Speaking with an attorney may provide a pretense for adding extra stipulations to the offer letter or for negotiating the terms of the non-compete agreement.

“Typically, such agreements state that the employee was given the opportunity to review the agreement with the counsel of his choosing,” says Serafinn. “It’s better to have an agreement reviewed before signing than to seek an interpretation after problems arise.”

Having an attorney look over an employment agreement is a wise idea. Most employment contracts are negotiated through attorneys because they’re so complicated, says Russell Reynolds’ Banerji.

You may be able to rely to some extent on the executive recruiter who tapped you for a position to find out which benefits and perks are industry standard and where there’s room to haggle. But you may not want a headhunter negotiating for you; they’re usually retained by the hiring organization. Consequently, recruiters don’t necessarily have your best interests at the top of their minds.

“If you’re dealing with hard-core employment contracts, you are best served by retaining a lawyer to look at it,” says Banerji. “Unless your headhunter is an employment attorney as well, you’re going into a shooting match with a switchblade.”

The other advantage of hiring a lawyer (and ideally you’ll want someone who specializes in contracts or employment law) is that they can and will negotiate directly with your future employer. That way you don’t have to play hardball; your lawyer does the dirty work for you.

What to Ask For

How the precise terms of your employment agreement take shape depends upon the hiring company’s financial resources, the value you bring to the table as well as what’s standard for the company, industry and position for which the company is hiring.

To determine what you can reasonably ask for, CPS Energy’s Barron advises IT executives to consider the unique strengths they offer to the company courting them and the risk they’re assuming in taking a new job. For example, if a company is aggressively wooing you, if you’d have to leave a stable job where you’re well-respected, if you’d have to relocate, if you’re being asked to lead a complicated, high-profile project such as an infrastructure upgrade, or any combination of those circumstances, then you’re well positioned to negotiate a cushy contract.

Even if you’re not a celebrity in your field, all IT executives should be sure to get the amount of their bonus and the criteria by which it will be awarded in writing, says Sam Gordon, director of executive search firm Harvey Nash‘s CIO practice. “Quite often, executives won’t be eligible for a bonus if they’re not employed on the day bonuses are paid,” he says. So if you get fired two days before bonuses are due, you’re not entitled to your bonus unless your offer letter states otherwise, he adds.

Similarly, if you leave one employer in the middle of the year to take a new job and are thus forgoing a bonus with the company you’re leaving, you can ask your new employer to cover the monies you’re walking away from by giving you a sign-on bonus or a generous relocation package, says recruiter Vell. “The more money you are leaving behind, the better case you have,” she adds.

Harvey Nash’s Gordon also recommends getting the notice period in writing—that is, the amount of time you need to give your employer before you leave and the amount of time it needs to give you if it decides to replace you.

Mark Polansky, the managing director of Korn/Ferry International‘s North American information technology practice, says two to four weeks’ notice is common in American companies. In Europe, three- to six-month notice periods are the norm for senior roles, according to Gordon, who has recruited CIOs for European companies.

In addition to bonuses and notice periods, CPS Energy’s Barron advises IT executives to make sure they define what will happen in the event they and their employers need to part ways, and how such a situation will be treated. That means establishing the reasons why an employee may be terminated (also known as establishing “cause” or “cause for termination”). Cause may include failure to perform one’s duties, lying, stealing from the company, divulging trade secrets, or some other behavior that reflects poorly on or materially damages the company.

Attorney Egan notes that employers will often state in an employment agreement that if an employee is fired for cause, the employee gets nothing. Then, if the company decides it no longer wants or needs the employee’s services, Egan says the employer will say it’s terminating the worker for cause in an attempt to relieve itself of its obligation to pay the employee severance. To prevent such a situation from occurring, employees should ensure that “cause” and the circumstances for which they can be terminated without severance are abundantly clear in the employment agreement.

Barron also advises IT executives to make sure they lay out the severance package they’ll receive in the event they leave, are laid off due to a change in control, or the company decides it just doesn’t need them any longer, as well as how their departure from the company will be communicated internally and externally. When Barron resigned from his managing director post, he left his employer on good terms because he had negotiated a diplomatic parting of ways in his employment contract. “The company agreed to specific language to communicate to the workforce and vendors why I left, that I had left in good standing, that there were no issues and that we decided to amicably part ways,” he says. His former employer also agreed to give him a good reference: “If someone called to check my employment, I wanted to get credit for the good work I did and not just, ‘This person worked here for this amount of time,’ ” he says.

A year’s worth of severance is standard for most CIOs, according to Banerji. He recommends IT executives ask for a year’s salary and benefits (or related coverage, such as Cobra health insurance). According to Banerji, two years’ worth of severance is a “very good” package. Anything beyond that is exceptional; anything less than six months is sub-standard, and should make a candidate wonder what a prospective employer is trying to put past him, he adds. (To see a generic severance program, see Sample Executive Severance Agreement.)

Beyond the basics of bonus, notice period, cause for termination and severance that all IT executives should set out in an employment agreement, there are a number of other protections you can request:

  • If you’re leaving a company a year or six months before your benefits have fully vested, you can ask the employer hiring you to compensate you for the benefits you’re walking away from.
  • You can negotiate the number of stock options you get, but unless you’re a CEO, generally not the manner in which they’re granted or the terms of vesting, says Vell.
  • Banerji recommends that IT executives request a change-of-control agreement that triggers full vesting or accelerated vesting of at least a portion of their equity, especially in the event their company is sold. He notes that one cannot expect full or accelerated vesting if one is being terminated for cause or poor performance.
  • If the company with which you’re negotiating refuses to budge on salary or bonus, you can have the firm pay for you to move if you have to relocate for the job. DSC Logistics’ Goluska says that if he were leaving a metropolitan area to work for a company based in a small community with few job opportunities, he would also want the company to commit in an employment agreement to relocating him back to his previous home in the event the company laid him off.
  • If you can’t get your new employer to pay for your move, you might be able to get it to float you a loan to cover your moving expenses and to forgive a certain amount of money each year (say, $25,000 for a $100,000 loan), though public and private companies are shying away from this, says Vell.

The more terms you bring to the table, the more likely you are to get the agreement you want because your employer will have options. “Realize that a company can do anything it wants to. The first time you hear a ‘No’ doesn’t mean you can’t get an employment contract,” says Barron.

If you’re getting all these concessions, what must you give up?

Red Flags

Although employment agreements largely favor employees, you do have to make some trade-offs. “There’s usually a quid pro quo,” says Korn/Ferry’s Polansky.

For example, to get a generous severance package, you may have to waive your right to future litigation against the employer. CPS Energy’s Barron had to sign a release separate from the employment contract promising that he would not sue or take part in any lawsuits against his former employer.

You may also have to sign a non-compete agreement, non-disclosure agreement (NDA) or non-solicitation clause. The non-compete essentially states that you won’t go to work for a competitor for a specified period of time after you leave your employer. The NDA effectively ensures that you won’t share your company’s trade secrets or intellectual property. The purpose of the non-solicitation clause is to prevent you from taking fellow employees with you when or after you leave.

Harvey Nash’s Gordon says to beware of overly restrictive non-compete agreements because they can hamper a professional’s ability to get a new job. For example, you may be faced with a non-compete that says you can’t work for any competitors for a year. If you’re in a rapidly changing industry, such as high-tech or financial services, where being out of the industry for 12 months effectively renders you obsolete, signing that non-compete is probably a bad idea.

If a non-compete states that you can’t do exactly what you’re currently doing within 150 miles of where you currently work, the company is effectively saying that if your job doesn’t work out, you have to move to find a new one, says Egan. “Anything that prevents you from doing anything you’re trained to do at a new employer is onerous. Any of those non-competes is worth making a big stink about,” she advises.

You should also be leery of agreeing to a non-compete or NDA that requires you to sign over all of your inventions or ideas to the company. Serafinn notes that inventions and ideas can include software, processes and methodologies that the employee develops, owns and brings with him to the new company as well as those he developed while employed. “You can’t be marketing [your work] to your next employer if you can’t bring it with you,” she says, and that could certainly prevent you from easily finding a new job. Unusually long notice periods are another red flag. Sticking around for more than two to four weeks after you’ve given your notice becomes “quite uncomfortable,” says Polansky. “Even though you’re there wrapping up loose ends and going through the transition, people start looking at you differently and vice versa. Your relationship with your boss and the people you work with has changed,” he says.

What’s more, protracted notice periods can make you unattractive to other employers, according to Gordon. A prospective American employer may pass you up if you have a three-month notice period in favor of an equally qualified candidate who can start sooner, he says.

In addition to burdensome non-compete agreements and lengthy notice periods, don’t commit to unreasonable performance expectations. If the company hiring you wants you to commit to improving its profitability by, say, 60 percent over two years, that’s a hard outcome to quantify, especially for an IT executive who doesn’t have direct control over profitability. Vague or unreasonable performance expectations could provide the company with an easy out of the terms of the agreement if it wants to let you go.

Finally, remember that the employment agreement is just a piece of paper. “It’s an important one, certainly, but if you’re only going to work for an organization because this piece of paper gives you assurance, then you probably shouldn’t work for them,” says Banerji. “If the only confidence and comfort you get is from this piece of paper, you should not do the deal.”