The employment contracts that executives negotiate with their employers tend to be far more complex than the basic employment contracts signed by lower-ranking employees. Executives have a major influence on company operations and the success of a business. They therefore command more robust compensation and benefits packages.
They also have access to information that can influence the company’s profitability and reputation. Therefore, the employment contracts for executives tend to be very thorough to help mitigate company liability and risk when adding to the executive team at an organization.
A change in control (CIC) agreement is one of the many potential inclusions in an executive contract. Executives need to understand the impact these agreements can have when the organization that employs them undergoes a major transition.
What does a CIC agreement do?
The purpose of a CIC agreement is to protect an executive’s employment and clarify their relationship with the company when there is a change in ownership. If another company purchases the business, if the members of the board of directors change, or if the company faces major financial or legal challenges, those changes may trigger a CIC agreement.
Executives sometimes attempt to leave companies at the beginning of a merger, which can reduce the profitability of the organization or the attractiveness of the merger to the other business. Their exit in the middle of a transition can leave the organization vulnerable. In scenarios where ownership or management at a business changes, a CIC agreement influences the benefits and compensation of executives. The goal is often to facilitate a smooth exit or to ensure their retention during the transition.
CIC agreements and severance pay
A CIC agreement can clarify severance pay and help protect both the executive and the business from the tax consequences of a golden parachute. The agreement can ensure that the company receives transitional support from existing executives and can provide an incentive for executives to cooperate with new organizational leadership during times of upheaval.
Reviewing the terms of an executive employment contract and the language used in a CIC in particular with a skilled attorney is crucial.