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Thursday, November 18, 2004

Are CEO employment contracts like other employment contracts?

The popular view of CEO employment contracts is that they are one-sided; the sycophants who populate the typical board give the top executive pretty much anything he or she wants.

Yet "despite all the ink spilled about executive compensation," write Stewart Schwab and Randall Thomas in a new paper, hardly anyone has actually examined these contracts systematically. Schwab and Thomas hope to rectify the omission in What Do CEOs Bargain For? An Empirical Study of Key Legal Components of CEO Employment Contracts.  The study finds some things that both support and seem to conflict with the popular view.

ABSTRACT:

In this paper, we examine the key legal characteristics of 375 employment contracts between some of the largest 1500 public corporations and their Chief Executive Officers. We look at the actual language of these contracts, asking whether and in what ways CEO contracts differ from what are thought of as standard employment contract features for other workers. Our data provide some empirical answers to several common assertions or speculations about CEO contracts, and shed light on whether these contracts are negotiated solely to suit the preferences of CEOs or have provisions that insure that the employers' interests are also safeguarded.

After giving an overview of the general characteristics of a CEO employment contract, and the process by which they are negotiated, we focus on five contracting issues: (1) the term "just cause" that defines when an executive can be terminated involuntarily with penalties; (2) the "good reason" termination clauses in the contract that permit an executive to leave voluntarily without financial penalties; (3) the non-competition clauses in the contract; (4) the use of arbitration clauses as a method of resolving contractual disputes; and (5) the contractual restrictions, if any, on the CEO selling stock options. We also discuss some of the less-well known economic terms of these contracts, including their length and the level of perquisites given to CEOs.

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