The concept of lifelong employment and a stable job is no longer relevant. Growth opportunities or the lack of them, business expansion or retraction, mergers or acquisitions, corporate shake-ups, and the increasing globalization of the economy and industry are some of the many factors that are shaping the hiring and firing policies of companies across the board.
This has transformed the way employees seek and accept employment opportunities. Today’s employees don’t seek stability and long-term affiliations. Instead, they look for challenges and want immediate gratification in terms of financial benefits.
The most dramatic change, however, has been seen in the case of senior management. The reason for this, say experts, is the supply crunch in leadership talent and the high stakes involved in an increasingly complex business environment.
In all this, the negotiation process of seeking and granting employment has taken on an altogether different dimension. One piece of key evidence of this is the letter of employment, signed by both the employee and the employer. The new employment deal has morphed from a simple document into a complex legal contract. “The straightforward employment letter has given way to a legal document that sets forth the rights and duties on part of the employer and the employee in a representative and articulate manner,” says R. Suresh, managing director, Stanton Chase India, an executive search firm.
Illustration: Jayachandran / Mint
A typical employment letter today includes provisions for job description, probation, place of work, compensation and perquisites, medical expenses, retirement benefits, training and work outside the country of employment, holidays, anti-poaching clauses, intellectual property, confidentiality, notice period, summary termination and governing laws.
Besides the business environment, and changing aspirations, the gap in demand and supply of talent has brought about significant changes in the employment process. “The demand-supply gap has given executives, especially top guys, tremendous power to negotiate,” says Sangeeta Bharti, managing partner, Jurisperitus, a law firm that handles shareholder agreements, joint venture agreements, employment contracts and other services for companies such as Indian Oil Corp., State Trading Corp. of India Ltd, ICICI Bank Ltd and HDFC Group. “This was not the case earlier since there were fewer jobs and more talent.”
Expectations of benefits based on lifestyle requirements are forcing employers to provide for these aspects to remain competitive. “Some expectations-based clauses could include maternity benefits/rights, paternity leave, time off for dependents, right to apply for flexible working or work from home options,” says Anita Belani, country head, Right Management Pvt. Ltd.
Changes in labour laws as well as recent court orders on service contracts have also shaped the terms and conditions of contracts. “Over the years, employees have become entitled to a wide range of statutory rights derived from parliamentary Acts or regulations which affect the employment relationship,” says Belani. The biggest change is for senior management. “An organization’s well-being rests in the hands of its key executives. The organization’s present and future depend on the talent and the commitment of these employees. A wrong move in hiring at the top can actually derail a company’s future,” says Bharti. Besides, these top-rung officials play a crucial role in determining a company’s business strategy and pre-empting competition. They have access to sensitive information and if they decide to switch loyalties, the organization in question may have to pay dearly for their decisions. So, organizations are taking extra care to make sure that when such employees move on, they do so without causing much damage to business.The most dramatic change, however, has been seen in the case of senior management. The reason for this, say experts, is the supply crunch in leadership talent and the high stakes involved in an increasingly complex business environment.e level of risk is no different for these top employees. Since most of them get million-dollar salaries, an abrupt end to their careers can lead to a significant personal loss. So, they, too, are taking steps to ensure minimum damage to their financial health and reputation.The way gold-collared staff (top management) negotiate their employment terms is very different, compared to white-collared or blue-collared workers,” says Dharmesh Srivastava, a partner and human resource and employment specialist at FoxMandal Little, a law firm. “In that sense, not much has changed in the contracts of junior- and middle-level employees.”
Agrees Suresh of Stanton Chase, “The contract for a senior executive looks at all aspects pertaining to the employee-employer relationship in all possible business situations.”
Additionally, employment contracts are now supported by confidentiality agreements that give details of the employee’s obligation towards protecting the employer’s intellectual property and data, among other things. “Companies go to great lengths to get leadership talent and top executives ensure that their interests are protected to the maximum,” says Srivastava. For example, at senior levels, there are clauses for gardening leave or a cooling off period to protect client relationships and business goodwill.
Mint takes a look at some of the interesting clauses and terms that have crept into the employment contract of today’s senior executives.
1. Gardening leave: This clause requires an employee to stay home —and pursue some hobby such as gardening, which is where the clause derives its name from—and avoid all contact with customers for a period of three to six months after resigning. The employee continues to receive a pre-decided salary and benefits for this period.
“Gardening leave must also be expressively created by a clause in a contract and is subject to a test of reasonableness with regard to its duration,” says Sanjay Asher, partner, Crawford Bayley and Co., a Mumbai-based law firm.
The purpose of this leave is to strip the ex-employee of contacts and give the employer a head start in trying to hold on to clients before the ex-employee begins working at a different firm.“The clause used in contracts of senior executives mainly in the financial services sector is often used by employers to protect themselves against competition or poaching of customers, clients or staff,” says Asher.
2. Golden parachute: This clause promises financial benefits to executives in the event of termination without cause. It is a contractual compensation over and above legally entitled terminal benefits that include severance pay, superannuation and other benefits, such as deferred bonus, pension, health and insurance benefits.
Samsung Electronics India Pvt. Ltd offers a golden parachute to top executives as risk protection to attract top talent. “We (give) sign-on bonus as part of our retention strategy to key executives,” says Sanjay Bali, vice-president of human resources (HR), Samsung India. “Executives leaving before a year have to forfeit the bonus amount.”
Resignation with good reason could be in the event of a change in the employee’s position with the company that materially reduces his/her level of responsibility or a reduction in his/her level of compensation (including base salary, fringe benefits and participation in bonus or incentive programmes) or relocation of his/her place of employment without the consent of the executive. Termination without cause is when the service of an employee is ended because of organizational restructuring, merger or acquisition. Often, top executives seek golden parachutes to hedge such risks.
Illustration: Jayachandran / Mint
3. Professional indemnity: This clause provides for all legal expenses to be paid by the employer in case an executive is sued by a third party for losses arising out of negligence or by an ex-employer on intellectual property or copyright issues. This cover is typically sought by lawyers, accountants, financial advisers or executives who are privy to confidential information, technology and strategic practices.
According to a Mumbai-based corporate lawyer, who did not wish to be named, information technology companies such as Infosys Technologies Ltd and Wipro Technologies Ltd provide professional indemnity to key executives. Replying to an email sent by Mint, Wipro spokesperson Radha Radhakrishnan said, “We would not like to comment on this.” There was no response from Infosys to the email sent to it. Health care services provider Max India Ltd said it provided the benefit to employees on a case-by-case basis.
4. Factor equity: In this case, a chief executive officer or a very senior employee gets single-digit equity in the company instead of employee stock options. Factor equity is predominantly used to attract leadership talent to start-ups and, sometimes, growth companies.
5. Golden handcuffs: A lucrative incentive to an executive intended to discourage resignation or ensure long-term cooperation even after departure. Employee stock options are an example of golden handcuffs. Often, much of the compensation received must be given back if the employee leaves for another company. For instance, if a host at a television company has signed a “golden handcuffs” deal with the network, it means she cannot appear on any rival channel.
6. Golden hello: It is a bonus offered by hiring firms if the new hire joins the company from a rival firm. It is very similar to the traditional joining bonus offered by firms but is used to attract top executives from rival companies.
7. Blue pencil authority: The blue pencil authority can only be applied if the unenforceable part of the clause can be removed (blue penciled) without requiring any addition or change in the remaining part of the contract and if the remaining terms and conditions continue to make sense. An unenforceable part of the clause could include a non-compete agreement that is unreasonable and inconsiderate. “The blue pencil authority is applicable if removal of an unenforceable clause does not change what the contract sets out to do,” says Asher.
8. Voluntary redundancy/golden boot compensation: Voluntary redundancy (VR) is a financial incentive offered by an organization to its employees to entice them to leave in a downsizing or restructuring situation. A VR programme is most often driven not by short-term revenue goals but by a strategic decision to remain competitive or change the demographics within the company to suit business needs. Past examples include Tata Steel and MTNL (Mahanagar Telephone Nigam Ltd), which offered VR packages to lay off excess people.
Golden boot compensation is an inducement using maximum incentives and financial benefits for an older worker to agree voluntarily to retire early.
9. Golden umbrella: This is another risk protection clause sought by top guns joining a start-up or a small family-owned company from a multinational company or a large organization. It guarantees a certain payout for the risk a chief executive officer or a chief operating officer bears in running a start-up or a small enterprise.
10. Sign-on bonus as restricted stock units or sign-on as stay-on: Both these benefits are used as a retention tool. A typical sign-on bonus, a lump sum amount paid to an employee on joining, is paid in the form of restricted stock units (RSUs). RSU is a grant valued in terms of company stock but the stock is not issued at the time of the grant. After the employee satisfies the vesting requirement through duration of stay with the company or by company or individual performance, the company gives out shares or the cash equivalent of the number of shares used to value the RSU.
In case of sign-on as stay-on, the bonus payout happens over three years. Companies such as Max India Ltd and Dabur India Ltd use this to retain key executives. “We offer this type of bonus as a retention strategy only to top executives and that too on a case-to-case basis,” says A. Sudhakar, executive vice-president, human resources, Dabur India Ltd.
11. Collapsible stock options: This basically means that in the event of a change in management control owing to a merger or an acquisition, unvested stocks will vest on the day of the event. Collapsible stock options have tag-along rights, meaning the stocks are tagged for sale along with equity sale, if any, preceding the change of control.
The benefit of this option is that executives holding such stocks get the amount from a sale of shares immediately.
A checklist for employees
1. Check and, if required, clearly ask the human resources person your monthly take-home salary out of the cost to company figure offered by the company. This will give you a clear picture of what you will get in hand post taxes, among other things.
2. Check your social security (provident fund, employees’ state insurance, retirement benefits ) contribution details on both the employer and employee sides.
3. Do a comparative review of the benefit allowances and perks being offered to you. Some of them can be tax-friendly. Most companies offer a tax-friendly salary structure; you could discuss this with the HR person.
4. Carefully look at the performance incentives. Are they based on any defined statistical targets, or are they just subject to the will of the senior management?
5. Review your employment contract for any harsh obligations related to work timings, overtime, holidays and reporting, among other things.
6. Review the sick leave policy and the medical expenses reimbursement policy being offered to you and your family.
7. Review the employment exit clause and the related binding obligations, especially exit compensation and liabilities.
8. Check the post employment, confidentiality and non-compete clauses and other similar restrictive covenants.
9. Find out if your new employer has a grievance-handling mechanism which has a employee-friendly approach.
10. Check the inter-office or inter-department transfer policy. Check the organizational structure and reporting times and carefully read the employee handbook. This document forms a part of your employment contract.
Source: FoxMandal Little