COO Contract and Compensation Package – Terms and Negotiations

By Robert A. Adelson

The Chief Operating Officer (COO) position fulfills an important role in US companies.  If you are currently a COO or are a current aspirant to the COO role, it is wise to carefully review and negotiate the terms of your job offer or employment contract.  This position is so high in most organizational charts that the CEO and Board will assume that you would want to review the offer and will expect you to come back with changes you want to see. 

This article describes key terms that you should negotiate and seek to include in your offer or contract.

🔵 Responsibilities and Authority

The COO role is multifaceted, encompassing oversight of all operational areas such as production, marketing, sales, and research and development. COOs are responsible for designing and implementing business operations, establishing policies to promote company culture and vision, and managing daily operations and executive tasks. 

COOs may be hired for specific reasons unique to the company’s needs, such as turning around failing operations, expanding into new markets, complementing the CEO’s skillset, preparing for CEO succession, or mentoring an inexperienced founder-CEO. 

Given these varied roles, it is important for you, as COO, to negotiate clear authority, responsibilities, and reporting structure and try to include these terms in your offer letter or employment contract.  Clarity helps to prevent overlap, overstepping, or conflict among roles. It also aids stability if there are changes in leadership or board composition, providing you a better chance to maintain your role and responsibilities as initially agreed and also providing you with potential grounds for termination and severance if the company fails to honor the contract.

🔵 Your Reliance 

In addition to setting out important duties, authority, and reporting structure, your COO offer letter or employment contract should also address significant representations made to you that influenced your decision to accept the position.  Where the representations were made by the executive recruiter, the CEO, or Board Chairman, or other advocate, it is wise to try to get these in writing and included in your final documents.  

Most COO agreements include a “merger” clause, which states that all prior or contemporaneous oral or written agreements, assurances, or understanding are merged into the written contract, whether that’s an offer letter or employment agreement.  This means any assurances you received about the company’s status or financial position, your expected role, or new company developments not included in your contract are not binding obligations on the company. 

For instance, if you are being positioned as the successor to the current CEO, it is wise to try to pin them down – specifying when and how the succession will occur. Thus, if you fulfill your duties but are not promoted to CEO in a timely manner, your offer letter or contract might then allow you to terminate your employment for good reason triggering severance benefits.  If another accommodation is not made to your satisfaction, you could then potentially leave, with full benefits, as you then seek a CEO position elsewhere.

🔵 COO Compensation Package

The COO compensation package generally includes the following items among its major components:

1. Signing Bonus: If you are recruited from your current position, you can reasonably seek and expect to receive a signing bonus.  This bonus is intended to help offset any financial transition costs, including making you whole in part or full for what you might be giving up to take this new job.  It also offers you a further incentive to join the company, while at the same time often including clawback terms that make you pay back all or part if you join and leave too soon.
2. Annual Bonuses: As COO, you can typically look for a bonus with an annual target of at least 30% of your base salary, tied to the company’s performance but often your personal performance as well.  Many companies will make these wholly discretionary, and it may be hard to change that if the annual bonus is part of a plan for all senior executives.  However, when possible, it much better to provide the company will clarify milestones early in the years, ideally with input from you and that your bonus will be determined based on the level of achievement toward the targets, whether your personal targets or those of the company. 
3. Equity Compensation: Equity is typically a significant component of a COO compensation package.  For some, it is the largest, and for some, by far the largest component.  Equity structures vary, with most comprised of some mix of Incentive Stock Options (ISOs), non-qualified stock options, restricted stock, Restricted Stock Units (RSUs), both term and performance driven (PSUs), or profits and capital interests in LLCs.   Equity compensation not only offers potential for significant financial reward especially if the company grows and generally aligns your interests with those of the shareholders. In roles where you are mentoring a founder-CEO or leading a turnaround, substantial equity stakes can be especially rewarding as the company’s value increases.  However, the structure and terms of your equity should be carefully reviewed with an executive compensation attorney well versed in US tax law.  You want to be sure that is the company does succeed, you will achieve what you seek from your equity.  Additionally, there can be great opportunities and also significant pitfalls taxwise depending on the structure chosen for equity issues to you. 

🔵 Severance Terms

Your COO contract should include comprehensive severance rights to safeguard your interests.  Especially if you are recruited and leaving a secure executive position and you have been promised an important role and relying on promises made to you as mentioned in the first two sections of this article, then it is reasonable for you to seek reasonable severance terms with two key components – Triggers and Robust Benefits.

🔹 Triggers.  The two triggers for providing you executive severance benefits are action by the company to terminate you without cause, or your action to resign your employment for good reason.   Both areas should be carefully reviewed by your counsel.  Cause needs to be defined as serious and generally intentional bad acts on your part, not substandard performance results.  Good reason should be the company’s breach of contract, not only reduction in your title, duties or compensation but also failure to fulfill any of the reliance terms you were able to get into the agreement. Additionally, but also important is that there needs to be reasonable notice by either side (usually 30 days), specifying the basis for cause of good reason and the chance to cure or refute this basis to terminate the contract.  

🔹 Robust Benefits. The severance package should be substantial to provide you reasonable protection.  Once you have left your prior company, you depend on the new company to do what it promised.  If it wishes to dispose of your services in favor of someone new or to get you to quit by not fulfilling what they promised you, then the company needs to buy you out with terms that are sufficient to deter this conduct.  A robust severance package should include:

• Severance Pay:  For COOs, at least six months, often more, paid upfront with the signing of the release or over time. 
• Benefits Continuation: Payment of your COBRA cost essentially benefits continuation to match the months of severance pay. 
• Equity: Accelerated vesting of all equity to at least the first cliff if there is cliff vesting and generally for the period of months of severance pay.
• Bonus: Payment of any earned bonus for the past year and payment of a further prorated bonus for the current year at the target level. 
• Clawback Protections: A release from any pay-back obligations on your signing bonus or relocation benefits.
• Non-Compete Relief: In some cases, relief from non-compete clauses.

As a highly regarded COO recruit, you might not feel the need for these severance protections, but things can change.  If a new CEO is hired and wants to bring in their own team, or if the company shifts direction and your role no longer fits, your employer wants the freedom to make such changes, including replacing you.  With the right severance terms in your contract, the Board will have to take into account the cost of terminating you or not honoring your agreement.  At the least, these contract terms put you in a position to negotiate the terms of your separation. 

Navigating the complexities of a COO contract and compensation package can be challenging, but it is a crucial step toward securing your career. An experienced executive employment agreement attorney can help you with the negotiations to ensure that your contributions are recognized and your interests are protected.