Because this is a blog that discusses both employment agreements and severance/separation agreements, which are contracts by another name, an executive can benefit from understanding some basic contract concepts.
One of these concepts is “consideration.” A valid employment contract must comprise the elements of offer, acceptance, and consideration.
Consideration is a legal concept and is the bargained for exchange of promises or performances. “The test of a sufficient consideration is whether the act, forbearance or return promise results in a benefit to the promisor or a detriment to the promisee.” (Laurence P. Simpson, Contracts 2nd Edition, p. 80).
In an employment context, sufficient consideration to support an offer of employment would be the obligation to perform services by the employee and the obligation to perform wages/benefits/ and other compensation by the employer.
In a severance agreement, you may see a clause that reads something like this: “In consideration for signing this Agreement and complying with its terms, Employer agrees to pay Employee a total sum of $xxxx.”
The Severance Agreement might state further that the parties agree that the contract clauses pertaining to severance payment and other compensation/benefits constitute sufficient consideration for this Agreement
Like all contracts, the terms of an employment agreement must also be clear and definite. Of course, we are not trying to turn our readers into lawyers as we have too many as it is. Now when you hear a lawyer discussing contract issues and she says “there is a lack of consideration,” you will now know she is not complaining about some rude person.