In addition to employment contracts being beneficial for business owners, they also can play a very important succession role with key managers. Business owners commonly have concerns that key managers, critical to the continuation of the business’ success, could be recruited away by a competitor. There is also concern that the key managers could become frustrated with their perception of the succession plan and jump ship after the owner’s retirement rather than give the successors a chance to earn respect.  And the nightmare of nightmares is that with access to customer lists, processes and technology, a key manager could hook up with a competitor and inflict devastating damage on the business. These concerns about the commitment of key managers commonly impede exit strategy, successor identification and preparation, the transfer of management responsibility and the transfer of stock.

A key manager employment contract prepared by a qualified attorney can provide significant succession planning assurance to both the owner and the key manager. Notably, the contract could recognize and affirm the contribution and role of the key manager by providing him or her special, non-qualified “golden handcuff” salary continuation benefits that are not subject to the traditional vesting requirements of qualified plans like a 401k plans. The contract could document lucrative supplemental incentive based benefits (gold) that in combination with an extended vesting schedule would bond (handcuff) the key manager to the business for a length of time that would assure support for successors. Equally important, the employment contract could state that these lucrative golden handcuff benefits are offered as consideration for covenants stipulated in the contract which restrict the key manager from competition within a reasonable market area for a reasonable period of time. These covenants can also restrict the dissemination of confidential proprietary information regarding the owners, business, processes and customers. And finally, for a reasonable period of time, the employment contract can relieve the owner’s concerns by restraining a terminated key manager from recruiting employees away from the business. 

The employment contract is a versatile yet sophisticated succession planning tool that can address many succession planning concerns pertaining to the owner’s personal financial security as well as the retention of key managers. It is noteworthy that due to perceived compensation abuse by public companies, the IRS in their traditional “punish the little guy” style has taken a very active role in regulating these benefits for closely held small businesses as described in IRS Code 409A, as amended. Consequently, it is imperative that an experienced and technically astute (law is a very broad profession) attorney be involved to assure compliance with numerous IRS and DOL regulations.

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