To Entice Top CEO Talent, Boards Offer Up Contracts
In its most recent Proxy, Marsh & McLennan lays out some of the terms of its employment agreement with its CEO, Michael Cherkasky, who took over the company’s corner office in the autumn of 2004. The agreement, among other things, solidifies Cherkasky’s right to severance pay, which includes “full vesting of all outstanding equity awards.”
Executive employment contracts are a relatively new thing for Marsh. Cherkasky’s predecessor, Jeffrey Greenberg, didn’t have one. By venturing into this uncharted territory, the embattled $12 billion insurance company has become part of a growing trend.
A Survey of 120 search firms and corporate recruiters shows the use of executive employment agreements increased from 21% in 2005 to 36% in 2006. ExecuNet, an executive career management center, conducted the poll.
Contracts between executives and their employers traditionally have been considered beneficial for the executives only. That’s because they often guarantee benefits an executive might not otherwise be entitled to, especially if he is terminated involuntarily.
Because employment contracts are known for being executive-friendly, both directors and industry specialists agree th increase in their use is a function of supply and demand.
“Contracts have been around for a long time. [The increase in their use] is emblematic of what we’re seeing in the war for talent,” says David Opton, CEO and founder of ExecuNet.
In light of the competition for human capital, employment contracts are becoming necessary as a tool for retention and recruitment, experts agree.
“Given the volatility in turnover at the top of corporations these days, a fair employment agreement may be necessary to attract the quality of talent a board will want,” says James Jones, chair of the governance committee at KeySpan.
According to Paul Dorf, managing director at Compensation Resources, boards increasingly are looking outside of their own companies to fill C-level positions. That, he says, is contributing to the trend.
Experts may agree on the reasons for the increased use of executive employment contracts, but the extent to which the agreements are detrimental to shareholder interests is more controversial. Alexandra Higgins, senior compensation analyst at The Corporate Library, says whether an executive contract is bad news for a company’s corporate governance depends entirely on the contract’s provisions.
“We don’t like to see guaranteed minimum salaries, guaranteed bonuses, any type of guarantees in an employment agreement,” she says. “We don’t like to see any severance provisions exceeding one time their base compensation, although the average is about three times their base compensation.”
Other clauses, such as ones that entitle executives huge payouts as part of change-of-control agreements, are also controversial.
“There actually are a lot of big companies that say, ‘We don’t have any kind of employment agreement or change-of-control agreement with any of our executive officers,’” says Higgins. She notes that Apple doesn’t have employment contracts with its executives, and that Costco does have such agreements, but they contain “no guarantees, no golden parachutes.”
But some board members are warming up to even those provisions.
“There are reasons for a company to have even takeover-type, golden parachute-type provisions in a contract,” says Charles Yamarone, chair of Continental Airlines’ HR committee.
“If [the company is] a likely takeover candidate, you probably want something like that so you know your CEO will have an incentive to do the right thing and stay until the end of what could be a difficult process.”
