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Getting It in Writing

Nearly half of large U.S. companies now offer at least one of their top executives, including CFOs, full-blown contracts.

1Sep

The offer letter from DoveBid Inc., promising a sign-on bonus and three years of salary rises, wasn't quite enough for Cory Ravid. Sure, he'd hit it off with CEO Ross Dove in interviews for the CFO post. And Ravid had great confidence in the Foster City, California, clicks-and-mortar auction house--enough to want to leave his old job as CFO and partner for Parkside Group, a private equity buyout firm in nearby San Bruno. But he also "wanted what any executive coming on board a venture- backed company would want"--vesting schedules for options, change-in- control golden parachutes, even a sort of most-favored-nation-status clause that made him eligible for any more-generous contract terms that other executives might win. The CEO asked Ravid, an attorney, to create the document himself.

Now, says Ravid, who took the CFO job at DoveBid last October, "I can just focus on doing my job instead of worrying about negotiating with the company for more compensation."

His desire for corporate commitment is hardly uncommon these days. "We have seen growth in the number and depth of contracts," says Steve Hall, managing director of executive compensation consultancy Pearl Meyer & Partners, especially contracts covering "severance under different kinds of termination." A William M. Mercer Cos. survey, in fact, shows that nearly half of large U.S. companies now offer at least one of their top executives, including CFOs, what Mercer senior executive compensation consultant Carol Silverman calls "full-blown contracts," formal, multiterm documents that go beyond the shorter offer letters favored by other companies.

They All Want The Same Stuff

For the most part, contracts cover standard items, such as compensation, benefits, severance, and post-employment restrictive covenants, and are designed to benefit the covered executive more than the company. "An executive would never not want a contract, unless the restrictive covenants outweighed the benefits," says Silverman, who notes that change-in-control clauses are the most popular to appear in the contracts. Although perk- filled contracts are usually reserved for the CEO, some companies come up with inventive contract terms for finance chiefs. Heidi Miller of Priceline.com Inc. and Carl A. Strunk of CKE Restaurants Inc., for example, have corporate loans or auto payments factored into their agreements.

Like any other executive- compensation component for the five top-level executives, a company's contract must be filed publicly with the Securities and Exchange Commission. That's one reason so many other companies eschew them. General Motors Corp., for example. "Everybody can see them, and then everybody wants the same stuff," says Greg Lau, GM's executive director of global compensation. "To me, it's better to keep them to a minimum." GM does have noncompete agreements in force, to prevent executives from going to a competitor for two years after leaving GM, but they are short of a full contract. The automaker began implementing the noncompete clauses in 1994, after former executive Jose Ignacio Lopez moved to Volkswagen AG, leading to accusations that he leaked billions of dollars in GM trade secrets.

Companies following GM's lead with stronger noncompetes sometimes include them in formal contract terms, and often with creative twists to protect their corporate interests.

No Gifts For Bad Boys

More restrictive covenants may be coming, though. The "new hot thing" in contracts, according to Silverman, are the "bad boy" and "clawback" provisions, which require the forfeiture of exercise rights for vested options and force a repayment of any stock-option profits, respectively, in the case of executives who leave a company to work for a competitor.

Some experts say that noncompete agreements and other contract restrictions probably can't be enforced beyond the requirements of state law. In most states, "you have a fiduciary duty to protect your company's trade secrets" anyway, both during and after your tenure there, according to Jack R. Bailey, a Houston attorney specializing in employment contracts. And lawsuits have been known to overturn extreme restrictions later in court. "Whether restrictive covenants are enforced is probably the most polarized area of law you'll see," says Bailey.

As contracts gain in popularity, more companies will be tempted to offer them in the competition for talent, consultants say. Even GM could conceivably implement contracts if they became necessary to attract a key individual, Lau concedes. Perhaps its reported current search to replace departing CFO J. Michael Losh could present such a situation. "Our policies are never fixed in stone," says Lau. -- Alix Nyberg

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