Executive contract protection: clauses every senior executive should negotiate

Those who sign a protected executive contract enjoy additional guarantees compared with any other employee in the event of dismissal. The clauses to be negotiated always include financial compensation, employee benefits and corporate privileges.

What is a protected executive contract?

Protected executive contracts are employment agreements that include a series of special clauses not found in standard employment contracts and which are designed to protect the employee against unforeseen situations or decisions.

The main difference lies in the dismissal compensation, which is set out in the contract and is always higher than the amount provided for by law. In addition, payment is often contemplated even in cases of disciplinary dismissal. This is the main reason why they are referred to as “protected” contracts, since terminating them unilaterally is far more complex and costly for the employer than in the case of a conventional employment contract.

That said, employers may also include a number of clauses in their favour within this type of agreement. For example, compensation payable to the employer in the event of resignation, or a notice period longer than that normally established. They may also include agreements preventing the employee from joining a competitor for a specified period of time.

But who signs protected executive contracts?

Protected executive contracts are not exclusive to any particular sector, type of employment or professional profile. However, it is undeniable that an ordinary employee does not have sufficient bargaining power to negotiate the special clauses we will discuss below. It is also true that they do not assume the same level of responsibility or exposure as those who protect their contracts against future uncertainties.

As a general rule, protected executive contracts are signed by senior executives, chief executive officers and chairpersons of large companies. Imagine the CEO of a technology company who is “headhunted” by another business through an attractive offer. However, the decisions they make fail to reverse the company’s financial situation and, after a year, the board of directors decides to remove them from their position, with the reputational damage that this entails for their professional career. If they negotiated strong protection clauses, they will leave with their interests well safeguarded.

How to protect an employment contract: clauses every executive should include

Generally speaking, protection clauses in an employment contract relate to four main areas. Let us take a look at them.

Financial compensation

This is the most important clause in a protected executive contract. It establishes dismissal compensation that is significantly higher than the amount provided by law, which, as a reminder, usually ranges between 12 and 33 days’ salary per year of service, depending on various circumstances that are not relevant here.

However, it would be more accurate to refer to it as “compensation” rather than “statutory redundancy or dismissal pay”. Why? Because the payment agreed in the contract is subject to tax and social security contributions, whereas standard dismissal compensation is generally exempt. Although these payments are no longer as substantial as they once were, they often amount to several times the executive’s gross annual salary.

Employee benefits

This would include, for example, private medical insurance, a pension scheme or even a shareholding package in the company. In many cases, it is possible to agree that the executive will continue to enjoy these benefits even after dismissal.

Corporate privileges

These may include company cars, rented accommodation near the office, special discounts or complimentary products manufactured by the company. As with employee benefits, these privileges may continue beyond the end of the contract, although they are usually limited in duration.

Clauses employers should include in protected executive contracts

Employers must also protect their own interests when entering into protected contracts with senior executives, as failure to do so may lead to undesirable situations. These clauses are generally included as consideration for the additional benefits granted under the agreement.

Confidentiality

The company may prohibit the disclosure of company information outside the workplace. It may even restrict the executive’s participation in forums, conferences and seminars.

Non-compete

If the executive is dismissed and receives contractual compensation, they may not go on to work for a competing business. At least, not for the period specified in the contract. This is the consideration the employer should require in exchange for agreeing to compensation that is significantly higher than usual.

Exclusivity

Clearly, a senior executive of one company is not expected to work simultaneously for another. There are exceptional cases, such as Elon Musk (CEO of Tesla, SpaceX and several other companies) or Florentino Pérez (President of Real Madrid and ACS Group), but they operate under special circumstances and are not representative of normal practice.

Generally, exclusivity refers to the executive’s inability to collaborate with foundations, even charitable organisations, or to undertake self-employed work. In other words, the objective is for them to devote themselves exclusively to the business.

Minimum service period

The employer may also require the executive to remain in their position for a specified period before being able to resign or retire, for example. In fact, it is not uncommon for both parties to agree that the beneficial clauses for the employee will vest gradually over time. This is particularly common where companies invest substantial sums in training or incur significant recruitment costs.

By now, it should be clear what a protected executive contract is and which clauses both executives and employers should seek to include during negotiations. In any event, if you have been offered a senior executive contract, or if you are an employer considering offering one to an employee, get in touch with our specialist executive labour lawyers. We will provide expert legal advice to help you avoid problems in the future.