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Termination & CIC

Employment Agreement

The contract, or CD&A-disclosed terms, governing an executive’s pay and severance.

An employment agreement is the negotiated contract setting an executive’s compensation terms, including salary, bonus and equity, along with severance, change-in-control and restrictive covenant provisions. Not every named executive officer has a standalone signed agreement: some companies disclose the same commitments only through the potential-payments section of the proxy’s Compensation Discussion and Analysis, or cover executives under a company severance plan instead. The difference is where the terms live, not whether the company has made a real commitment.

An employment agreement is the negotiated contract that sets an executive’s compensation terms. It typically states the pay elements the executive is entitled to, the severance and change-in-control benefits payable on a qualifying departure, and the restrictive covenants that continue after the executive leaves, and it is the document that turns those commitments from policy into a contractual entitlement.

Not every named executive officer has a standalone signed agreement of this kind. Some companies disclose an executive’s potential severance terms only through the "Potential Payments Upon Termination or Change in Control" section of the proxy’s Compensation Discussion and Analysis, or cover senior executives under a company-wide severance plan rather than an individually negotiated contract.

Both forms are legitimate disclosure, and both are read the same way for the purpose of understanding an executive’s severance exposure. The difference is where the terms live — a filed exhibit, a plan document, or a CD&A narrative — not whether the company has made a real commitment. An executive covered by a board-approved severance plan has an enforceable entitlement just as an executive with a signed contract does.

Where an agreement does exist, it is generally filed as a material contract exhibit to the company’s annual report or proxy, which is why a reader can usually find the negotiated text rather than only a summary of it. A filed agreement carries its own effective date and, where relevant, an amendment history, which is a level of paper trail a CD&A-only disclosure does not provide.

The terms inside are mostly defined by reference. Severance is usually expressed as a multiple of a defined pay base, such as base salary alone or salary plus target bonus, so the amount changes as those figures change without the agreement being renegotiated. Equity treatment on a change in control is defined separately, and may accelerate in full, on a pro-rata basis, or not at all.

Two defined terms do most of the work in a severance clause. A termination "without cause" is an involuntary departure the company initiates for reasons other than those listed as cause, and a resignation "for good reason" is a departure the executive initiates after one of a listed set of events, commonly a material reduction in duties or pay or a required relocation. Both are executive-favorable categories and typically trigger the same severance, with the definitions themselves varying considerably by company.

Most agreements are not fixed-term contracts. A large share are evergreen arrangements with an automatic renewal each year unless either side gives notice, and executives are often employed at will, with the severance provisions doing the work that a fixed term would otherwise do. Restrictive covenants — non-compete, non-solicit and confidentiality provisions — typically appear in the same document, and a clawback provision may sit in the agreement or be incorporated by reference to a separate company policy.

The agreement is only one of the places severance terms are described, and it is rarely the most useful one for getting a figure. The proxy must disclose and quantify the payments each named executive officer would receive under a range of termination and change-in-control scenarios, computed on stated assumptions, and that disclosure is where the practical size of the commitments in the agreement becomes visible.

How it works
  1. Terms are negotiated at hire
    The company and the executive agree the pay elements, severance entitlements and restrictive covenants, usually before the executive starts.
  2. The agreement is filed as an exhibit
    Where a signed contract exists, it is filed as a material contract exhibit to the annual report or proxy, with its effective date and any amendments.
  3. Pay elements are defined by reference
    Salary, target bonus and equity terms are stated in the agreement or set by the committee under it, so severance formulas can move as those figures change.
  4. Severance triggers are defined
    The agreement defines cause, good reason and the change-in-control window, which together determine whether a departure is a qualifying one.
  5. Covenants run past departure
    Non-compete, non-solicit and confidentiality provisions continue for the stated period, and a clawback provision may apply to incentive pay already received.
  6. The proxy quantifies the outcome
    The potential-payments disclosure reports what each named executive officer would receive under each scenario, on assumptions stated in the filing itself.
In practice
One executive’s severance terms as the fields that describe them.
Executive
The officer whose terms these are.
Leslie Fautsch
Officer
The role the terms attach to.
Chief Human Resources Officer
How the terms are disclosed
The kind of document the terms come from.
Terms as described in the company’s compensation discussion
Source filing
The filing type in which the terms appear.
DEF 14A
Section
The part of the filing the terms sit in.
CD&A Potential Payments

Leidos's severance terms for Leslie Fautsch, its CHRO, are disclosed through the proxy's CD&A potential-payments section rather than a standalone employment contract — a legitimate form of disclosure, not a lesser one.

See LDOS’s full page →
Where it appears
The exhibit index of the annual report or the proxy statement
The filed agreement itself, listed as a material contract exhibit under Item 601(b)(10) of Regulation S-K, with its effective date and any amendments.
The "Potential Payments Upon Termination or Change in Control" section, under Item 402(j) of Regulation S-K
What each named executive officer would receive under each termination and change-in-control scenario, quantified on stated assumptions.
The Compensation Discussion and Analysis
How the committee treats severance and change-in-control terms, and which executives are covered by individual agreements rather than by a severance plan.
A severance plan or policy filed as an exhibit, where the company uses one
The terms that apply across a group of executives, which is where an executive without an individual agreement draws their entitlement from.
Individual employment agreement vs. CD&A-only severance disclosure

Both describe a real commitment, and the practical difference is where a reader has to look to find the terms.

Individual employment agreementSeverance plan or CD&A disclosure
Where the terms were setIn a contract negotiated with the executiveIn a plan or policy adopted by the board or a committee
Where a reader finds themFiled as a material contract exhibit to the annual report or proxyDescribed in the CD&A and quantified in the potential-payments disclosure
Level of detail availableThe negotiated text itself, including definitions and amendment historyA description of the terms the company has committed to, without an individually signed contract
What it typically coversPay elements, severance, change-in-control terms and restrictive covenants in one documentSeverance and change-in-control terms, which may differ by executive within the plan
How the terms changeBy amending the agreement, which produces a new filed exhibitBy amending the plan, which can apply to every participating executive at once
Whether the commitment binds the companyYes, as a matter of contractYes, as a matter of the plan the board has adopted
Effective date and historyThe agreement carries its own effective date and amendment recordThe plan or policy carries the date, not any individual negotiation
Common misreadings
  • Assuming that an executive with no filed contract has no severance commitment — the same commitments are often disclosed through the CD&A or made under a severance plan instead.
  • Reading the potential-payments table as a forecast of what an executive will receive — it is a hypothetical calculated on stated assumptions, typically as if the triggering event occurred on the last day of the fiscal year.
  • Treating a termination without cause and a resignation for good reason as opposites — both are qualifying terminations that normally trigger the same severance, and the agreement’s definitions determine which applies.
Frequently asked
Does every named executive officer have an employment agreement?
No. Some companies have individual signed agreements with some or all of their named executive officers, and others disclose severance terms only through the Compensation Discussion and Analysis or cover executives under a company severance plan. Both are legitimate disclosure, and the absence of a filed contract does not by itself mean an executive has no severance entitlement.
What is typically included in an executive employment agreement?
The pay elements the executive is entitled to, the severance payable on a qualifying termination, the treatment of equity on a change in control, and restrictive covenants such as non-compete and non-solicit provisions. The specific terms vary widely by company and by executive, which is why the agreement itself is worth reading rather than assuming a standard form.
Where can an executive’s employment agreement be found?
Where a signed agreement exists, it is generally filed as a material contract exhibit to the annual report or proxy statement, and the terms are also described in the executive compensation disclosure and quantified in the potential-payments section. Where no agreement is filed, the terms may instead appear in a severance plan exhibit or in the CD&A narrative.
What is a resignation for good reason?
It is a resignation the executive initiates after the company takes one of a listed set of actions, commonly a material reduction in duties or pay, a required relocation, or a failure to pay agreed compensation. A good-reason resignation is treated as a qualifying termination that triggers severance, in the same way a termination without cause does. The list of qualifying events is defined in each agreement and varies by company.
Do employment agreements run for a fixed term?
Many do not. Evergreen agreements renew automatically each year unless one side gives notice, and many executives are employed at will while still holding contractual severance rights. A fixed-term agreement exists at some companies, but the severance provisions are what usually determine an executive’s practical exposure on departure either way.
Related terms
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