In a recent survey, Kromann Reumert asks the question: How are non-competition and non-solicitation of customers clauses used in Danish executive service agreements? And to what extent are executives compensated for accepting such clauses? We have reviewed 237 contracts and compiled the results in a trend analysis to let you know what others are doing.
There is no fixed formula for drafting an executive service agreement. It is up to the parties to agree on termination notice periods, restrictive covenants and severance pay. But the area is characterised by lack of insight, also across industries. We have therefore reviewed 237 Danish executive service agreements in order to see how non-competition and non-solicitation of customers clauses are actually used and the extent to which executives receive separate compensation for accepting such restrictive clauses. It is not a scientific study, but the results will give you an idea of how other companies approach termination notice periods, covenants and severance pay.
We have divided the survey into three main categories: notice periods, restrictive covenants and severance pay. The overall conclusions in each category are summarised below. We also classified respondents according to business sector and registered whether the service agreement was made by a listed company. You should note that some parts of the survey are based on a limited number of contracts, thus increasing statistical uncertainty.
If you would like to see the full survey results, including the sector-specific figures, you may download them as a pdf file.
Our review of 237 Danish executive service agreements gives a general idea of how notice periods, covenants and severance payments are used in practice. The survey shows that there is trend for companies that focus on the area to protect themselves through contracts containing both restrictive covenants and slightly longer notice periods than companies that have not imposed covenants on their chief executive. So some companies take a belt and braces approach while others do not focus on the area so closely.
Executives who are subject to a restrictive covenant have, on average, both a longer resignation notice period and a longer termination notice period than executives who are not subject to a restrictive covenant. This means that companies which protect themselves by restrictive covenants have, on average, also agreed to longer notice periods than companies which do not use restrictive covenants. In other words, there appears to be no tendency for companies which do not rely on restrictive covenants to instead protect themselves against competition after termination of employment by longer notice periods for the executive.
The survey shows:
- The average termination notice period in contracts without restrictive covenants is 8.9 months for termination by the company and 5 months for resignation by the executive.
- The average termination notice period in contracts which include non-competition and/or non-solicitation of customers clauses is 9.3 months for termination by the company and 5.4 months for resignation by the executive.
The findings regarding restrictive covenants show that companies often protect themselves by imposing both non-competition and non-solicitation of customers clauses on the executive. This is the case in most of the contracts reviewed containing restrictive covenants However, non-competition clauses are also frequently used alone while non-solicitation of customers clauses are rarely found without non-competition clauses.
The survey shows:
- 37% of executive service agreements do not include any restrictive covenants.
- 35% of executive service agreements include a combined non-competition and non-solicitation of customers clause.
- 25% of executive service agreements include a non-competition clause.
- 3% of executive service agreements include only a non-solicitation of customers clause.
- The average term of the restrictive covenants is 13.7 months.
- 43.6 % of the executives who are subject to restrictive covenants also receive compensation during the restricted period. The average compensation corresponds to 56% of the base salary for the relevant term.
We also examined whether there is a connection between the level of agreed severance pay and the restrictive covenants imposed on the executive. Our findings indicate that there is no direct connection. In fact, severance pay is lower on average in cases where the executive is subject to a restrictive covenant.
The survey shows:
- 21.1 % of the executive service agreements provide for severance pay. The amount varies between 1 to 24 months’ salary, the average being 9 months’ salary.
- In agreements that contain a restrictive covenant and provide for severance pay, the average severance pay is 8.4 months’ salary. If there is no separate compensation during the term of the restrictive covenant, the average severance pay is 7.1 months’ salary.
- It means that the average severance pay is lower where the executive is subject to a restrictive covenant.
Recommendations when drawing up your next executive service agreement
Whether it is necessary for a company to impose restrictive covenants on its executives and, if so, how such covenants should be formulated depends largely on the specific circumstances, including the line of business in which the company operates, the company’s market position, and how critical the particular executive manager is for the company. If you are about to draw up an executive service agreement, you should ask the following crucial questions:
- What level of protection does my company need?
- Will the executive’s notice period provide adequate protection, or are restrictive covenants also necessary?
- How do you best balance the protection of your business with the executive’s need to move on if the employment is terminated?
Download the entire survey of the 237 service agreements.
Kromann Reumert's advice
Kromann Reumert’s employment and labour law practice group has great expertise in all legal areas involving employer/employee relationships. We provide advice to employers, CEOs and other executives in all business sectors in connection with the drafting and termination of contracts, including on the use of non-competition and non-solicitation of customers clauses, share incentive schemes and severance agreements.