Ana Calves
Ana Calves is a business and finance attorney at law firm Kleinbard LLC where she focuses on mid-market M&A.

Negotiating an employment agreement during the M&A process can be daunting, particularly for first-time sellers. However, there are certain considerations executives should keep in mind when doing so during a middle-market, private company M&A transaction to ensure they are protected after the sale. Given current market conditions, executives should pay special attention to compensation and termination clauses.


To start, an employment agreement should lay out an executive’s full compensation package, including annual base salary, benefits and any bonuses and incentives.

Base Salary. Though it is rare for employers to agree upfront to salary raises in subsequent years, an executive can protect themselves by specifying in the agreement that the employer will review the executive’s base salary at least annually and be prohibited from reducing the executive’s base salary below previous salaries. If the employer pushes back on this (to provide flexibility in the event of an economic downturn, for example), the employment agreement should, at minimum, state that any salary reductions will be limited to any companywide reductions affecting similarly situated executives.

Performance Bonuses. Performance bonus provisions should be specific. An executive should include the following details in the employment agreement if possible:

  1. The financial and/or other milestones that must be met for the executive to earn these bonuses.
  2. How these milestones will be measured (for example: based on audited financial statements or specific formulas, or on written performance criteria applied by a compensation committee).
  3. Whether these bonuses are “all or nothing” or subject to a sliding scale (and if so, any applicable floors and ceilings).
  4. When these bonuses will be paid.
  5. Whether the executive must be employed on the date of payment.

The employment agreement should also specify which bonus plan will apply – whether an executive will be compensated under the company’s current plan or under a new bonus structure implemented by the buyer.

Given the current economic outlook, executives may want to explore more recession-friendly metrics for performance bonuses. For example, if financial milestones for a company do not seem achievable, bonuses tied to customer retention or cost reduction may be good alternatives. It is also important to understand company financing arrangements in this context. In addition to rising interest rates, financing arrangements today may contain more stringent covenants, including restrictions on a company’s ability to pay or modify bonus obligations.


Typically, an employment agreement will state that an executive is eligible to participate in the same benefit plans and fringe benefits available to other company employees.

An executive should consider whether there are any “special” benefits they wish to continue or obtain (for example, a company car, educational assistance, or increased PTO). This is particularly relevant in a recessionary environment, where an employer may opt to provide greater fringe benefits in lieu of a higher base salary or cash bonus. Any such benefits should be spelled out clearly in the employment agreement.

Equity Compensation

To address cash flow concerns, an employer may choose to substitute a portion of an executive’s base salary or cash bonus with equity awards such as stock options. An executive receiving equity compensation needs to understand the terms applicable to these awards, including any vesting conditions, forfeiture provisions (including upon termination of employment), exercise periods and strike prices, as well as the company’s projected performance.

Termination-Related Provisions

Most private company employment agreements today are at-will contracts with no specified term, meaning both parties can terminate the agreement at any time without legal consequence. To offer executive protection during an economic downturn, an employment agreement’s termination provisions should be considered carefully in conjunction with an executive’s compensation package.

Severance. An executive who is not a seller receiving a large payout at the M&A closing may want to seek severance pay in the employment agreement, protecting them in case they are terminated within a short time after closing. This is especially important for an executive who is subject to restrictive covenants, like a non-compete agreement, that would prevent them from finding suitable replacement employment during the restricted period – especially if the deal is happening in a tight job market.

“Cause” and “Good Reason.” A typical severance provision will require an employer to pay an executive their base salary, plus sometimes medical benefits or COBRA expenses, for the remainder of the severance period if the executive is terminated without “cause.” In such cases, special attention should be paid to the “cause” definition, since a termination for “cause” would prevent the executive from receiving severance.

“Cause” should be narrowly defined and avoid subjective criteria, such as failure to adequately perform job duties. Instead, any grounds for a “cause” termination should be tied to breaches of written policies that have been shared with the executive. In addition, the employer should be required to provide the executive with written notice of, and an opportunity to correct, such breaches.

An executive may also want to expand their severance entitlement to include a voluntary resignation for “good reason,” which provides protection in the event of an adverse change in employment situation beyond the executive’s control, such as a material decrease in job duties or job relocation. For instance, if the economy is struggling, an executive leading a division may find themselves in a difficult position with little leverage if the division is shut down or integrated, thereby causing the executive to be demoted and stripped of the ability to influence company performance (and therefore, any performance bonus).

Forfeiture of Bonuses. Lastly, an employment agreement will typically require an executive to be employed with the company on the date of payment to receive a performance bonus. To dissuade an employer from avoiding a substantial bonus obligation by terminating the executive, the employment agreement should include an exception to this rule for a termination without “cause” or a “good reason” resignation. In this case, the employer may agree to pay a prorated portion of the executive’s performance bonus based on the date of termination or resignation.

While this article focuses on the executive perspective, it is worth noting that many employers today are equally incentivized to retain talented executives to lead their post-M&A integration efforts and help achieve financial targets. With overall M&A activity down and an economic downturn on the horizon, it is critical for buyers to ensure that any M&A transactions produce the desired results. Executives should consult trusted counsel who understand current market conditions to advocate for their interests when negotiating their employment agreements.