Negotiating a management contract can be a delicate task because the relationship between the future manager and his/her new employer and their trust in each other are on the line. For example, if the future employer thinks the manager demands too much, it can destroy the relationship before it has begun. Therefore it is important to understand the manager’s expectations and why he/she has them. Equipped with this knowledge the company can be better prepared for the real “first date” with its future leader.
Flexibility vs. security. Negotiations are driven by a manager’s eagerness for security. This tends to clash with a company’s typical need for flexibility. While the manager wants to have everything set out in the contract and precisely described, the company wishes to have the contract limited to the absolute minimum and many issues left to a “gentleman’s agreement”. This sometimes blocks negotiations and makes it hard for the parties to find middle ground.
Employee status. Some managers like to be hired on the basis of an employment contract. This gives them “employee” status and the protection provided by employment law – in particular, general protection against termination, holiday entitlements etc. However, companies prefer to engage a manager on the basis of a service contract to which employment law does not apply. Market practice is split 50/50 in this respect.
Tax structuring. Managers are typically aggressive when negotiating their position in relation to income tax. This used to be a key factor when deciding the type of contract under which to engage a manager. Nowadays it is less relevant, as the manager’s tax position under a service agreement is very similar to under an employment contract. Room for optimisation is limited, as both types of contract are subject to similar tax and social security contributions even if the manager is a registered entrepreneur. The only difference between them relates to VAT issues. The latest rabbit from the tax advisors’ hat is tax structuring of the manager’s bonus. Recent favourable tax rulings suggest that it is possible to disguise a bonus as a “financial instrument”, which is subject to capital gains tax at 17% instead of progressive income tax ranging from 18% to 32%.
Termination clause. The termination clause is always a hot topic during negotiations. Given the level of security expected by managers, key issues for them are both the length of the notice period and a description of the instances that allow the company to terminate the contract either with or without notice. The latter is always a red flag for a manager. Typically, the fiercest discussions take place when the parties are negotiating a service contract, as they have more freedom to regulate these issues contractually. In relation to an employment contract, there is a statutory benchmark that can only be changed to the manager’s benefit. For example, the manager will expect the termination notice to be 3 or 6 months from the outset. In any case, managers typically want to secure their exit position by ensuring they receive contractual severance pay if they are dismissed. Sometimes they even fight for employment guarantees that require the company to pay out a full remuneration package in the case of early termination. A typical problem is whether such severance pay will include base salary and bonuses.
Benefits. Employee status gives a manager a host of employment law benefits such as: holidays, sickness pay, severance pay in case of redundancy etc. A manager hired on a service contract typically wants the contract to provide for some employment-like benefits such as e.g. the right to annual leave, sick pay etc. Companies often agree to such demands, but careful wording is required so that the risk of the contract being reclassified as an employment contract is not raised.
Remuneration structure. There is a never-ending dilemma concerning what part of the manager’s package should be “fixed salary” and what part should be structured as “variable”. Companies are always eager to have a bigger chunk of the remuneration package structured as a variable bonus, with metrics subject to separate arrangements. Safe for regulated financial sector, this is a business decision. However, it can have legal consequences. If the parties are negotiating a service contract they have more freedom in structuring the bonus and the preconditions of its payment. However, when a manager is engaged on the basis of an employment contract, his/her bonus rights will be better protected. In particular, some preconditions may be deemed as unenforceable as being against the rules or principles of employment law.
Post-termination non-compete restrictions. The key here is the scope of the non-compete prohibition and the company’s right to unilaterally withdraw from the restriction. Typically, managers want the scope of the prohibition to be as narrow and precisely described as possible so they are not barred from the market for too long. If the company pushes for a wide scope, managers’ typical response is to ask for high compensation for adhering to the post-termination restriction, which would adequately compensate them for their idle time. Under service contracts there is no statutory benchmark for such compensation, unlike under employment-related non-competes, where 25% of salary is the legal minimum.