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IMPORTANCE OF CEO AGREEMENTS

CEO AGREEMENTS

After the introduction of the Companies Act of 2013, it has given rise to a new genre of the corporate personnel who were referred collectively as the KMP (Key Managerial Personnel). The concept of the KMP has been collectively defined under Section 2(51) of the Companies Act which includes the Chief Executive Officer (CEO) of the company.

The Chief Executive Officer (CEO) is considered as the highest-ranking executive within the company, whose primary role & responsibilities include making major corporate decisions concerning the company, managing the overall operations and the resources of a company, functioning as the main source of the communication between the Board (Board of Directors) and the corporate operations, and being the public face of the organization who has appointed him as the CEO. The CEO is elected and appointed by the board and its shareholders. The appointment of the CEO is through a CEO Agreement which includes several important clauses that are mandatory to be taken into consideration such as:

1) Terms & Renewal of Contract

This clause includes the basic term of the contract and its validity. It also inhibits the renewal of such contracts if the parties are willing to do so. A lock-in period of 3 years is most common in our experience, but longer or shorter terms are possible.

2) Job Description

This clause highlights the key roles and responsibilities of the CEO such as taking major corporate decisions, managing the overall resources and operations of the company, and communicating with the Board of Directors, management authorities, and corporate operations.

3) Remuneration

This clause deals with the remuneration which will be paid to the CEO for his services. The benefits of HRA and PF shall all be included in this clause. This clause should also specify the one-time signing bonus, if any, paid to the CEO. The CEO of the corporations usually get paid based upon the recommendations made by the Board of Directors of the corporation. The Corporate Boards generally include a subset of the Board called the Compensation & Remuneration Committee. 

4) Incentive Plans & Performance Bonuses

This clause deals with the incentive plans which shall be provided to the CEO and the performance bonus that shall be given as a reward-based upon his work and efforts which he contributed to the corporation.

5) Retention Bonus

This clause talks about the retention bonus which is a targeted pay or reward outside of the CEO’s regular salary which is offered to him as an incentive in order to keep the key employee on the job during the crucial business cycle particularly, such as during the merger or acquisition, or during the period of crucial production. This additional payment has its focal view towards preventing a CEO from leaving their position, which typically is a one-time payment.

6) Retirement/ Saving Plan Benefits

The Company is supposed to provide the CEO of the Company a defined benefit which is qualified and the defined contribution retirement plans which will be established through this clause during the term of this Agreement. Supplemental Executive Retirement Plan (SERP) allows you to provide your CEO with additional retirement benefits beyond those provided by qualified plans.

7) Non-Compete

The Non-Compete Clause is a contract that is legally binding whereby the CEO agrees not to work with any competitive corporation or start a similar sort of trade or profession for a period of time which is specified after leaving his current employer. This has now been considered as a standard practice for the companies to add the ‘non-compete’ provisions in contracts of employment of the CEOs.

8) Confidentiality Clause

As the CEO is impliedly the most important strategist within the corporation who is generally responsible for all concerned aspects of the strategic management such as formulation of the strategies, its implementation, analysis, and its evaluation, this key position is required to maintain a certain level of confidentiality as his role is very vital and significant for the strategic decision making of the Company. The code of conduct for such confidentiality is provided under this clause.

9) Intellectual Property Clause

Intellectual Property (IP) widely refers to a property specifically which the human mind creates that often includes trademarks, patents or copyright. The contracts include a definition for IP which specifies what the agreement is considering as an IP. The Intellectual Property clause is essential to protect the assets of the corporation. Such clauses play a vital role if the business’ primary asset lies within the creation of IP.

10) Termination Clauses

This clause is also referred to as the ‘Termination Provision’. It is by far the most crucial part of the CEO Agreement. This clause provides the circumstances in which the CEO of the Company can be terminated such as:

  • If the CEO is indulged in a scandal.
  • If the CEO is not meeting the set objectives and expectations of the Company.
  • If the CEO is not having majority control of the Company.
  • Due to a new buyer.
  • If the CEO fires themselves (resignation of CEO)
  • If the CEO has lost influence over his team.

In the event that the Company outgrows the CEO’s ability and the majority of the board decides that the services of the existing CEO are no longer required, for whatsoever reason, the contract of employment is said to be terminated.

11) Arbitration

This particular clause is a section of the CEO Agreement which specifically deals with the parties’ rights and resorts in the event of any legal dispute which arises over the agreement. In most of the arbitration clauses, the parties mutually agree not to sue each other and rather resolve their disputes by way of arbitration. Arbitration is the process that allows a third-party arbitrator to manage the discussions between the parties to the contract.

12) Governing Law

This clause provides the existing Laws and Provisions which shall be governing the agreement during its existence. The CEO comes within the purview of the Key Managerial Personnel (KMP) and the provisions which are applicable to the KMPs are implicitly applied to the CEO as well.

EMPLOYEE EQUITY

CEO’s are Level “C” employees and are often offered Equity with Employment. Employee equity is often offered via an Employee Stock Ownership Plan (ESOP). 

The Employee Equity is a compensation in the form of a non-cash pay which represents ownership within the firm. Such type of compensation can further take many forms, restricted stock, including options, and the performance shares. Equity compensation permits the CEO of the firm towards sharing the profits through appreciation and to encourage retention, specifically if there are any vesting requirements. This particular option has been opted by most of the corporations and is now mentioned in the employment agreement as well.

SHARING OWNERSHIP

A share of ownership in any company is referred to as stock. It basically constitutes the equity of its stockholders or the owners. In a company, these stocks are further partitioned into the shares. This partition of shares represents the fraction of the ownership which any individual or a legal entity holds in that particular company.

HOW STOCK OPTION WORKS?

An employee stock option is a vested right provided to the employee by the employer in order to buy or exercise a specific number of shares of the company stock at a pre-set price which is also called the “grant price,” “strike price” or “exercise” price over a particular time period which is called the “exercise period”. Mostly, these options are granted on the stock which is publicly traded, but this is a possibility for the companies which are privately held in order to design similar plans using their own methods of pricing.

Generally, the strike price is equivalent to the stock’s market value at the time the option is being granted but this is not always possible. It can also be lower or higher than that, depending upon the type of option which is offered. However, in the case of options of the private company, the strike price is usually based upon the price of shares during the company’s most recent round of funding.

The method of equity compensation has been opted by many public companies along with some private companies, specifically startup companies. Firms that are recently launched may lack the resources or wish to invest cash flow into the growth initiatives, making the method of equity compensation an option to attract employees of high-quality. Traditionally, the tech companies in both the start-up phase and in the more mature phase have opted for the equity compensation in order to reward their employees.

CONCLUSION

For a corporation to achieve its aims & objectives, it has to appoint the CEO and design a salary package for him which is well balanced with the work and the performance of the work. This can only be achieved by the corporation doing a thorough review of the appointment in order to ensure that such an appointment remains fruitful, competitive and worthy.

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