Senior executives and directors can have a significant influence on the direction, performance and value of a business. They may also have access to commercially sensitive information, key customers, strategic plans and important employee relationships.
For this reason, a standard employment contract may not provide enough protection when appointing someone to a senior role.
An Executive Service Agreement sets out the terms on which a director or senior executive is employed and can provide greater clarity around responsibilities, remuneration, termination and post-employment restrictions.
What is an Executive Service Agreement?
An Executive Service Agreement is an employment contract designed for a senior executive, director or other key individual within a business.
It will normally cover a lot of the same basic areas as an ordinary employment contract, but in greater detail and with additional provisions reflecting the individual’s seniority and responsibilities.
The agreement, as with all contracts, should be tailored to the role rather than treated as a standard template.
Clearly define the executive’s role
The agreement should set out the executive’s position, duties and reporting responsibilities.
For senior employees, it may also be appropriate to address:
- Board responsibilities
- Decision-making authority
- Reporting lines
- Responsibility for budgets or teams
- Compliance with company policies
- Obligations to devote appropriate time and attention to the business.
Clear drafting can help avoid uncertainty over what is expected and provide a useful reference point if performance or conduct issues later arise.
Set out remuneration and benefits carefully
Executive remuneration packages can be more complex than standard salary arrangements.
An Executive Service Agreement may need to deal with:
- Basic salary
- Bonus arrangements
- Commission
- Pension contributions
- Private medical insurance
- Company cars or allowances
- Share options or other incentives
- Expenses and other benefits.
Bonus arrangements should be drafted particularly carefully.
The agreement should make clear whether a bonus is contractual or discretionary, how performance will be assessed and what happens if the executive leaves part-way through a bonus period.
Consider notice periods
Senior executives will often have longer notice periods because replacing them can take time and their departure may create significant disruption.
However, very long notice periods can also reduce flexibility for the employer.
The appropriate period will depend on factors such as the executive’s role, seniority, responsibilities and the likely time needed to recruit a replacement.
Employers should also consider whether the agreement allows for payment in lieu of notice, giving the business the option to end employment immediately while making the appropriate contractual payment.
Should garden leave be included?
A garden leave clause can allow an employer to require an executive not to attend work during some or all of their notice period while continuing to employ and pay them.
This can be useful where an executive is leaving to join a competitor as well as other specific circumstances.
During garden leave, the business may be able to:
- Transfer customer relationships
- Protect confidential information
- Introduce a successor
- Restrict access to systems or sensitive projects
- Reduce the executive’s influence over employees or clients.
The agreement should contain appropriate wording if the employer wants the option to use garden leave.
Protect confidential information
Senior executives are often exposed to some of the business’s most valuable information.
This may include:
- Business plans
- Pricing strategies
- Financial information
- Customer lists
- Product development
- Acquisition plans
- Intellectual property
- Trade secrets.
Confidentiality provisions should clearly explain how this information can be used during employment and what obligations continue after the executive leaves.
The agreement should also deal with the return of documents, devices and company information on termination.
Consider restrictive covenants
Employers may want to restrict certain activities after a senior executive leaves.
These restrictive covenants can potentially include:
- Non-compete restrictions
- Non-solicitation of customers
- Non-dealing with customers
- Non-poaching of employees
- Restrictions on interfering with suppliers or other business relationships.
Restrictive covenants need to be drafted carefully in order to actually be enforceable. . Broadly, they should protect a legitimate business interest and go no further than is reasonably necessary.
A restriction that is appropriate for a managing director may not be suitable for a more junior employee.
Employers should therefore review restrictive covenants when an executive is promoted or their role changes.
Address intellectual property
Senior executives may create or contribute to valuable intellectual property during their employment.
The agreement should clearly address ownership of relevant intellectual property and require the executive to assist with any steps needed to protect or register those rights.
This can be particularly important for technology, creative, professional services and research-led businesses.
Plan for termination
The agreement should clearly explain the circumstances in which employment can be terminated and what happens afterwards.
This may include provisions covering:
- Notice
- Payment in lieu of notice
- Garden leave
- Gross misconduct
- Return of company property
- Resignation from directorships
- Treatment of bonuses and benefits
- Share options or incentive arrangements
- Continuing confidentiality and restrictive covenants.
Clear termination provisions can make it easier to manage an executive exit if the relationship later breaks down.
Remember that employment, directorship and share ownership are separate
A senior executive may simultaneously be an employee, statutory director and shareholder.
Ending their employment does not automatically remove them as a director or require them to give up their shares.
The company’s articles of association, shareholders’ agreement and any share incentive documentation should therefore be reviewed alongside the Executive Service Agreement.
This is particularly important where the business wants leaver provisions to apply when an executive leaves.
Keep Executive Service Agreements under review
An Executive Service Agreement should not necessarily remain unchanged throughout someone’s career.
A review may be appropriate where:
- The executive is promoted
- Responsibilities increase significantly
- The business expands into new markets
- New share incentives are introduced
- The individual gains access to new confidential information
- The company undergoes investment or restructuring
- Existing restrictive covenants may no longer reflect the role.
Updating agreements as roles develop can help ensure that the business remains properly protected.
Getting executive contracts right
A well-drafted Executive Service Agreement can provide clarity for both the business and the individual while protecting important commercial interests.
The agreement should reflect the executive’s actual role, responsibilities and influence within the organisation rather than simply adapting a standard employment contract.
DTM Legal’s Employment & HR team advises employers on the preparation, review and negotiation of Executive Service Agreements, including remuneration, termination, confidentiality and restrictive covenants.
If you are appointing a director or senior executive, or need to review an existing Executive Service Agreement, contact DTM Legal’s Employment & HR team to discuss how we can help.