Director’s Service Contract - Bonus & Share Option Arrangements
Directors’ Service Agreements are referred to as “Directors’ Service Contracts” in the Companies Act 2006 but the difference is in name only. This Director’s Service Contract – Including Bonus & Share Option Arrangements contains the basic terms and conditions which may be used by a company in employing a director who is entitled to a bonus and to participate in the company’s share option scheme. It includes a payment in lieu of notice (PILON) provision. Previously, a version of this employment contract was available without a PILON clause. This version has now been removed, as with effect from 6 April 2018, all PILONs, regardless of their nature, are to be treated as earnings subject to income tax and Class 1 NICs. Click here for more information.
This employment contract has a General Data Protection Regulation (GDPR)-compliant data processing clause. After 25 May 2018, employers must use this clause, as employers will not be able to rely on existing generic consent clauses.
An executive director, for example, a finance director or a managing director is both an officer of the company and an employee. As such, he or she will require an employment contract.
This director’s contract includes both an entitlement for the director to participate in the company’s share option scheme as well as an entitlement to be paid a bonus. The director’s entitlement to participate in the company’s share option scheme has been included but drafted deliberately broadly. This is because a company should avoid binding itself to provide a share benefits plan which it may not be able to deliver in future. In addition, if employees have a contractual right to a particular share plan, they may need to consent to any changes the company may subsequently wish to make to that plan.
The contract also provides for the director to be paid a bonus. The operative clause is within the body of the contract entitling the director to be paid a bonus with the detail attached as a schedule at the back of the contract. This bonus provision has been drafted on the basis that the director has a contractual entitlement to receive a bonus but that this is qualified by the director having to achieve certain personal performance targets each financial year before the bonus will be paid. This means that the bonus scheme itself forms part of the contract but that the company has reserved itself some flexibility by providing a framework to benchmark the payment of the bonus against.
Note that in this contract, the entitlement to a bonus has been carved out of the PILON clause, so that both within the main body of the contract and within the attached bonus schedule, the PILON clause only covers basic salary and there will be no liability for the employer to include any element of the director’s entitlement to a bonus within it.
This contract has been updated in accordance with the Pensions Act 2014 which introduced a new state pension for people reaching state pension age on or after 6 April 2016; replacing the previous basic state pension and additional state pension and ending contracting out for defined-benefit schemes. This employment contract has been updated accordingly with the removal of the clause referring to the contracting out certificate.
This contract contains three possible restrictive covenants; non-competition, non-solicitation of customers and non-solicitation of employees. The non-competition clause provides that for a period of time after termination of employment the employee will not compete with the company’s business. The non-solicitation clauses provide that for a period of time after termination of employment the employee will not deal with the company’s customers (with whom the employee has had dealings) and can’t poach employees of the company.
It is important that the restrictive covenants are no wider than is necessary to protect your “legitimate business interests”, otherwise they may be unenforceable. Please consider each restrictive covenant carefully, and remove any that are not relevant to your particular business and to the individual in question. For those remaining, insert time limits and geographical limits that are appropriate and reasonable to the nature of your business.
Please note that if the clause is tailored to match the particular individual it is more likely to be deemed reasonable and therefore more likely to be enforceable. Using identically worded restrictive covenants for different employees without tailoring them to the individual may encourage a court to interpret the restrictive covenants as unreasonable.
A copy of every Director's Service Contract must be open to inspection with the company under section 228 of the Companies Act 2006 either at the company’s registered office or at the single alternative inspection location permitted under the Act (in the latter case, the company must notify the Company Registrar of the location of the Service Contracts). The copies must be retained by the company for inspection for at least one year following the date of termination or expiry of the Service Contract.
Under section 188 of the Companies Act 2006, Directors’ Service Contracts with a guaranteed term which is (or may be) longer than 2 years must be approved by an ordinary resolution of the shareholders of the company. Determining the length of the guaranteed period is subject to complex rules. The guaranteed term of a director’s employment is either:
(a) the period (if any) during which the director’s employment continues (or may be continued) except at the option of the company (whether under the original agreement or under a new agreement entered into in pursuance of the original agreement), and it cannot be terminated by the company by notice, or it can be terminated only in specified circumstances, or (b) in the case of employment which can be terminated by the company by notice, the period of notice required to be given. If the employment has a period within paragraph (a) and a period within paragraph (b), the aggregate of those periods will be the guaranteed term.
If the company enters into a further service contract more than six months before the end of the guaranteed term of a director’s employment (except where the original contract gives the other party that right), then the unexpired period of the guaranteed term of the original contract will be added to the guaranteed term of the new contract.
Clauses with optional and alternative phrases :
Options and alternatives appear in blue font. The way in which this document is designed ensures that it will make sense with or without the optional clauses. Tailor this contract by removing all phrases and clauses which are not relevant to your business. Once you have finished, please remember to highlight the whole document and switch the font colour to black.
This Director’s Service Contract – Including Bonus & Share Option Arrangements is in open format. Fields should be completed where indicated. Wording in square brackets is optional and can be deleted or retained according to requirements.