Care and Feeding of CEOs Part Four : Employment Contracts

Care and Feeding of CEOs Part Four : Employment Contracts

One of the problems with being thousands of miles away from your subsidiary, added to the problems of language and cultural differences, is that you can never be sure what is really going on in your Japan operation. I know of a number of instances where even large and famous companies have had fraud and cronyism problems at CEO level simply because the CEO couldn't be monitored properly. Thus, it is no wonder that most foreign firms focus very hard on contracting expectations between themselves and the CEO candidate.

The first challenge in creating a CEO engagement contract is whether the candidate will accept it at all. While work contracts are commonplace in Japan, one which is sufficiently strict and clear for CEO-level transgressions and penalties is not. If the candidate is straight out of a major Japanese company, most likely he/she has never seen such a contract, and it will be a scary experience. If the candidate is desirable, more than likely if such a contract is waved in front of them at the wrong time, they'll simply decide that the risk is not worth it and go with one of the offers from a Japanese firm.

Thus, delivering a contract has to be done with sensitivity - note that I'm not saying the language has to be diluted - just the negotiation and final presentation have to be done right.

Sensitivity typically means that the employer has to spend a lot of time with the candidate, engaging them and getting buy-in. Usually this can be done by assigning someone senior to look after the candidate and emotionally bind them into a commitment. Many of us know the term "nemawashi", or root-binding, which essentially means gaining consensus. In this case the consensus is between a party of just two, but the process is the same. Lots of verbal interaction and explanations of company values, problems experienced in the past, and reasons for there to be a clear document of understanding between the parties.

Usually I do this process by creating a list of business points, and discussing and negotiating each with the candidate as I am getting him/her excited about the opportunity. A spoon full of sugar helps the medicine go down, and over a period of time, perhaps 2-3 weeks, the candidate will begin to understand the key points. By the time the contract is ready, although the contract language will be more strict, the candidate will with my help recognize those agreed points and be less intimidated.

As to what goes in the contract, it is of course up to each company to negotiate, but usually it will discuss the term, services to be rendered by the CEO, compensation, options plan and benefits, handling and allowance of expenses, death benefits (to family), probation, non-competition, non-solicitation, non-disclosure, investments in other companies, etc.

The one area which is critical in any CEO contract is the terms and conditions of termination. As in other countries, the background situation for the termination is important: i) whether for cause or not, and ii) whether the person decided to resign themselves or not. If the termination is due to a decision by the employer and not related to the CEO's performance or actions, then this clearly is the most expensive way out. I've been asked a number of times what is the appropriate termination amount in such cases. The answer is that it is up to negotiation.

A starting point on the employer's side would probably be 3-6 months salary, plus 1 extra month for each year of service. On the CEO's side, however, the starting point is more likely to be 12-36 months on full pay! Not cheap. The general thinking by the candidate will be that it was a difficult decision for them to leave the previous secure position to come work for you. In fact, their appointment would have been a major career disruption, that, if they're over 50 years old, may be irretrievable. Thus, for them to be jettisoned out into the open job market is a death sentence that will have to be paid for. This of course is a good reason why sometimes it is better to employ a younger CEO. Else, get someone very senior and near retirement so that the buy-out period is limited.

As always, contact your Japanese lawyer if you need advice on any of the above points.