<PAGE>
 
                                                                    EXHIBIT 10.7

                              EMPLOYMENT CONTRACT
                              -------------------


     THIS EMPLOYMENT CONTRACT (the "Contract") is entered into as of June 6,
1996 (the "Effective Date") by and between COMMUNITY PSYCHIATRIC CENTERS, a
Nevada corporation ("CPC"), and WENDY L. SIMPSON an individual ("Executive").

                                R E C I T A L S
                                - - - - - - - -

     A.   CPC has employed Executive as an executive employee pursuant to prior
employment agreements, and Executive currently serves as CPC's Executive Vice
President and Chief Financial Officer.

     B.   CPC desires to amend the terms of the currently existing employment
agreement with Executive in order to provide her with additional benefits in
recognition of the valuable services she has rendered CPC.

     C.   Executive is willing and able to render the services herein provided
for, and she is willing to refrain from activities competitive with the business
of CPC on the terms set forth herein.

     NOW THEREFORE, Executive and CPC mutually agree as follows:

                                  ARTICLE ONE

                                  DEFINITIONS
                                  -----------

     For purposes of this Contract, the following definitions shall be in
effect:

     1.1  BENEFICIARY means any Person or Persons designated from time to time
          -----------                                                         
by Executive pursuant to Section 6.5.1 to receive any benefits under this
Contract which may become due and payable to Executive following her death.

     1.2  BOARD means the Board of Directors of CPC.
          -----                                     

     1.3  CAUSE means Executive's (i) willful refusal to perform the reasonable
          -----                                                                
duties of her office after reasonable written notice from the Board and
reasonable opportunity to remedy such refusal; (ii) commission of any willful
and malicious act which has a materially adverse financial impact upon CPC; or
(iii) conviction of a felony which has a materially adverse financial impact
upon CPC.

     1.4  CHANGE OF CONTROL means a change of ownership or control of CPC
          -----------------                                              
required to be reported pursuant to Item 6(e) of Schedule 14A of Rule 14 of the
Exchange Act, including (without limitation) the occurrence of any of the
following events:
<PAGE>
 
               (i) the acquisition by any Person (or any group of related
     Persons acting in concert) of beneficial ownership (as defined in Rule 
     13d-3 under the Exchange Act), directly or indirectly, of CPC securities
     representing twenty percent (20%) or more of the total combined voting
     power of CPC's then outstanding securities; or

              (ii) a merger or consolidation in which securities representing
     twenty percent (20%) or more of the total combined voting power of CPC's
     then outstanding securities are transferred to a Person or Persons
     different from the Persons holding those securities immediately prior to
     such merger or consolidation; or

             (iii) the sale of all or substantially all of CPC's assets in
     complete liquidation or dissolution of CPC.

     1.5  CODE means the Internal Revenue Code of 1986 as amended.
          ----                                                    

     1.6  COMPETE means either directly or indirectly to own, initiate, manage,
          -------                                                              
operate, join, control, advise, consult with or participate in the ownership
(other than ownership of less than five percent (5%) of the outstanding equity
or capital or profit interests in any entity), operation, management or control
of any business similar to any line of business owned or operated by CPC.

     1.7  CONFIDENTIAL INFORMATION means any non-public proprietary or
          ------------------------                                    
confidential information of CPC or its parent or subsidiary companies, including
(without limitation) trade secrets; information concerning professionals,
referral sources, reimbursement sources, patient and customer lists; records or
research, proposals, reports, methods, techniques, financial information and
other data, and other non-public information regarding CPC and its parent or
subsidiary companies or the existing and planned businesses, properties or
affairs of CPC and its parent or subsidiary companies.

     1.8  CONSTRUCTIVE TERMINATION means the occurrence of any of the following
          ------------------------                                             
events which result in Executive's subsequent resignation from employment with
CPC within the succeeding six (6) months:

               (i) CPC's material breach of her Contract which is not remedied
     within thirty (30) days after written notice from Executive specifying such
     breach in reasonable detail; or

              (ii) the assignment to Executive of any duties of materially
     lesser status, dignity and character than her duties on the Effective Date,
     or a material reduction in the nature or status of her responsibilities
     from those in effect on the Effective Date, or CPC's relocation of
     Executive's principal place of business to a site at least thirty (30)
     miles from Executive's principal place of business immediately prior to
     that relocation.

                                       2
<PAGE>
 
     1.9  CONTRACT BENEFITS means the following benefits which may become
          -----------------                                              
payable to Executive in accordance with the applicable provision of ARTICLE
FIVE, AS REDUCED DOLLAR FOR DOLLAR for all cash amounts previously paid to
Executive pursuant to ARTICLE FOUR of this Contract:

               (i) a special salary continuation benefit in a dollar amount
     equal to two (2) times the highest Salary level in effect for Executive at
     any time during the Employment Period.  This amount shall be designated the
                                                                                
     SALARY CONTRACT BENEFIT and shall be paid at the time or times specified in
     -----------------------                                                    
     the applicable provisions of ARTICLE FIVE.

              (ii) the maximum bonus which Executive could have achieved under
     the CPC Annual Incentive Plan for the Fiscal Year in which the Contract
     Payout Event occurs.  This clause (ii) amount shall be paid whether or not
     the performance goals established for such Fiscal Year are in fact met, and
     shall be paid within sixty (60) days after the Contract Payout Event.

             (iii) the maximum bonus which Executive could have achieved for
     each three-year plan cycle which commences under the CPC Long-Term
     Incentive Plan prior to the date of the Contract Payout Event.  The clause
     (iii) amount for each such plan cycle shall be paid whether or not the
     performance goals for that plan cycle are in fact met, and shall be paid in
     a lump sum within sixty (60) days after the Contract Payout Event.
     However, the clause (iii) amount otherwise payable to Executive for any
     such three-year plan cycle under the Long-Term Incentive Plan shall be
     prorated to the extent the Contract Payment Event occurs less than halfway
     through such plan cycle.

              (iv) forgiveness of any outstanding loans CPC has made to
     Executive, except (A) any loans provided to finance the exercise of her
     options for shares of CPC common stock, which shall become due and payable
     in accordance with their terms, and (B) the special founder recognition
     award in the form of a CPC loan to Executive, which is to be forgiven over
     time in accordance with the express terms of such award.  The applicable
     clause (iv) loan forgiveness shall occur immediately upon the Contract
     Payout Event.

               (v) provision of benefits to Executive or her Beneficiary
     equivalent to each of the employee benefits described in paragraph 2.2.4
     and 2.2.5, at CPC's sole cost and expense.  These clause (v) benefits shall
     be designated the EMPLOYEE CONTINUATION BENEFITS and shall be provided for
                       ------------------------------                          
     a two (2)-year period measured from the date of the Contract Payout Event.
     CPC may, at its election, satisfy its obligation to provide the Employee
     Continuation Benefits by paying Executive or her Beneficiary the lump sum
     present value of those benefits within sixty (60) days after the applicable
     Contract Payout Event.

                                       3
<PAGE>
 
              (vi) continuation of CPC's obligations to provide Executive or
     her Beneficiary with the benefits described in paragraph 2.2.6, but only to
     the extent those benefits are available under the plans then in effect.
     Any clause (vii) benefits shall be provided until the November 30 next
     following the second anniversary of the date of the Contract Payout Event.

             (vii) provision of outplacement services to Executive by a
     counselor paid for and selected by CPC.

            (viii) continuation of CPC's obligation to pay Executive or her
     Beneficiary the car allowance provided to Executive at the time of the
     Contract Payout Event, for two year following that event.

     1.10  CONTRACT PAYOUT EVENT means any one of the following events, as
           ---------------------                                          
further detailed in ARTICLE FIVE:

               (i) the termination of Executive's employment by reason of her
     death or Permanent Disability;

              (ii) Executive's termination of employment within six (6) months
     after an event of Constructive Termination; or

             (iii) the termination of Executive's employment by CPC without
     Cause.

     1.11  CORPORATE DIVESTITURE means one or more asset dispositions effected
           ---------------------                                              
by CPC and measured on either a historical or current basis in accordance with
the following provisions:

          1.11.1   HISTORICAL BASIS.  A Corporate Divestiture shall be deemed to
                   ----------------                                             
occur on a historical basis upon the consummation of any of the following
transactions:

               (i) one or more asset dispositions which involve, on a cumulative
     basis, assets with an aggregate book value not less than thirty percent
     (30%) of the total book value of the consolidated assets of CPC, including
     its equity holdings in one or more subsidiary companies;

              (ii) one or more asset dispositions which involve, on a
     cumulative basis, assets which generate at least thirty percent (30%) of
     the consolidated revenues of CPC; or

             (iii) the disposition of any division or subsidiary of CPC which
     represents a stand-alone business operation of CPC.

                                       4
<PAGE>
 
     For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition(s) shall be measured on the basis of the
book values and revenue levels in effect for the Fiscal Year ending immediately
prior to the Effective Date.

          1.11.2   CURRENT BASIS.  A Corporate Divestiture shall be deemed to
                   -------------                                             
occur on a current basis upon the consummation of any of the following
transactions:

               (i) the disposition of assets which have, on a stand-alone, non-
     cumulative basis, an aggregate book value not less than thirty percent
     (30%) of the total book value of the consolidated assets of CPC, including
     its equity holdings in one or more subsidiary companies;

              (ii) the disposition of assets which have, on a stand-alone, non-
     cumulative basis, generated at least thirty percent (30%) of the
     consolidated revenues of CPC; or

             (iii) the disposition of any division or subsidiary of CPC which
     represents a stand-alone business operation of CPC.

     For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition shall be measured on the basis of the book
values and revenue levels in effect for the Fiscal Year ending immediately prior
to the date of such disposition.

     1.12  EMPLOYMENT PERIOD means the period commencing on the Effective Date
           -----------------                                                  
and continuing through November 30, 1999.  On December 1, 1996 and on each
December 1 thereafter, the Employment Period shall automatically be extended
until the earlier to occur of (i) the third anniversary of the immediately
          -------                                                         
preceding November 30 or (ii) the date on which Executive's employment with CPC
is terminated in accordance with ARTICLE FIVE.

     1.13  EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
           ------------                                                       

     1.14  FISCAL YEAR means CPC's annual accounting period for financial
           -----------                                                   
accounting and reporting purposes.  As of the Effective Date, such period begins
on December 1 each year and ends on the next following November 30.

     1.15  OPTION means any option to purchase shares of CPC common stock (other
           ------                                                               
than the so-called "converging options" granted with an original exercise price
of $29.50 per share) granted to Executive by CPC and outstanding at the time of
their acceleration under Section 5.6.3.

     1.16  PERMANENT DISABILITY means any mental or physical illness, disease or
           --------------------                                                 
condition which in the opinion of a physician skilled in the specialty does or
will result in Executive's inability to perform the essential functions of her
job for a period of six (6) consecutive months or more.

                                       5
<PAGE>
 
     1.17  PERSON means any individual, corporation, partnership, business
           ------                                                         
trust, joint venture, association, joint stock company, trust, unincorporated
organization or government or agency or political subdivision thereof.

     1.18  PRIOR CONTRACTS means all prior employment agreements between
           ---------------                                              
Executive and CPC, whether express or implied, oral or written.

     1.19  SALARY means the annual rate of base salary in effect for Executive
           ------                                                             
for each Fiscal Year within the Employment Period.  Such Salary shall be at the
annual rate of Three Hundred Dollars ($300,000) per Fiscal Year, subject to
adjustment from time to time pursuant to Section 2.2.2.  Such Salary shall be in
addition to any bonuses or other employment benefits or remuneration paid or
payable by CPC to Executive.

                                       6
<PAGE>
 
                                  ARTICLE TWO

                 DUTIES AND BENEFITS DURING EMPLOYMENT PERIOD
                 --------------------------------------------

     2.1  DUTIES.  During the Employment Period, Executive shall serve as the
          ------                                                             
Executive Vice President and Chief Financial Officer of CPC or other capacity
designated by the Chief Executive Officer or the Board, serving at the pleasure
of the Chief Executive Officer and the Board until the termination of her
employment as provided in ARTICLE FIVE.  Consistent with those positions,
Executive shall devote her full productive time, energies and abilities to CPC's
business, subject always to the authority of the Chief Executive Officer and the
Board.

     2.2  COMPENSATION AND BENEFITS.  The following compensation and benefits
          -------------------------                                          
shall be payable to Executive for her service during the Employment Period:

          2.2.1  SALARY.  CPC shall pay Executive her Salary in bi-weekly
                 ------                                                  
installments in accordance with CPC's general practice and subject to legally
required withholdings.

          2.2.2  SALARY REVIEW.  The Salary payable to Executive for each Fiscal
                 -------------                                                  
Year commencing after December 1, 1996 shall be subject to annual review by the
Board.  The Salary level in effect for Executive for each Fiscal Year during the
Employment Period shall not be less than the greater of (i) Three Hundred
                                             -------                     
Thousand Dollars ($300,000) or (ii) the Salary level most recently determined by
the Board pursuant to this Section 2.2.2.  Executive understands that the
requirement of annual review by the Board shall not be construed in any manner
as an express or implied agreement by CPC to raise her Salary.

          2.2.3  EXPENSE REIMBURSEMENT.  CPC shall promptly reimburse Executive,
                 ---------------------                                          
upon her submission to CPC of adequate documentation, for all reasonable out-of-
pocket expenses respecting entertainment, travel, meals, hotel accommodations
and other like-kind expenses, to the extent incurred by Executive in the
interests of CPC's business.

          2.2.4  GROUP INSURANCE.  CPC shall provide group life and long term
                 ---------------                                             
disability insurance and group travel and accident insurance to Executive and
group medical, dental and hospital insurance to Executive and her eligible
dependents, in each instance in the amount and on the terms made available to
other senior executives of CPC.

          2.2.5  PROFIT SHARING PLAN.  Executive shall be a participant in CPC's
                 -------------------                                            
401(k) and Profit Sharing Plans, to the extent allowed by law and by the terms
of those plans.

          2.2.6  OTHER BENEFITS.  By mutual agreement with CPC, Executive may
                 --------------                                              
participate in additional employment benefits made available by CPC; provided,
however, that this Contract itself shall neither prevent nor compel such
participation.

                                       7
<PAGE>
 
                                 ARTICLE THREE

                       COVENANTS AND CONSULTING Contract
                       ---------------------------------

     3.1  COVENANTS.  Executive shall be subject to the following covenants and
          ---------                                                            
obligations:

          3.1.1  NONDISCLOSURE.  While employed by CPC, Executive has had and
                 -------------                                               
will have access to Confidential Information relating to CPC's present and
anticipated business operations.  Executive shall at no time either during or
after her employment by CPC disclose, communicate or use any Confidential
Information which Executive learns as a result of her employment by CPC, except
to the extent required by her performance of duties for CPC, unless she obtains
CPC's prior written consent to do so.

          3.1.2  RETURN OF DOCUMENTS.  Upon the termination of Executive's
                 -------------------                                      
employment for any reason, Executive shall promptly relinquish and return to CPC
all Confidential Information and all files, correspondence, memoranda, diaries
and other records, minutes, notes, manuals, papers and other documents and data,
however prepared or memorialized, and all copies thereof, belonging to or
relating to the business of CPC, that are in Executive's custody or control,
whether or not they contain Confidential Information.

          3.1.3  NONCOMPETITION COVENANT.  While employed by CPC, Executive
                 -----------------------                                   
shall not Compete or plan or prepare to Compete with CPC.  To the extent
obligated pursuant to the provisions of ARTICLE FIVE, Executive shall not
Compete with any CPC line of business, for a period of two (2) years following
the termination of her employment, in any state within the United States or any
shire within the United Kingdom in which (i) CPC owned or operated that line of
business either on the date her employment terminates or at any time within the
immediately preceding Fiscal Year or (ii) the Board had approved the
commencement of that line of business prior to her termination.

          3.1.4  NONSOLICITATION COVENANT.  For a period of two (2) years
                 ------------------------                                
following the termination of Executive's employment with CPC for any reason,
Executive shall not, directly or indirectly, solicit the services of any CPC
employee, independent contractor, customer, referral or reimbursement source, or
otherwise induce or attempt to induce current CPC employees to sever their
employment relationship with CPC.

          3.1.5  SCOPE AND DURATION; SEVERABILITY.  CPC and Executive understand
                 --------------------------------                               
and agree that the scope and duration of the covenants contained in this Section
3.1 are reasonable both in time and geographical area and are fairly necessary
to protect the business of CPC.  Such covenants shall survive the termination of
Executive's employment, except that the Section 3.1.3 noncompetition covenant
shall remain in effect following such termination of employment only to the
extent required pursuant to the provisions of ARTICLE FIVE.  It is further
agreed that such covenants shall be regarded as divisible and shall be operative
as to time and geographical area to the extent that they may be made so and, if
any part of such covenants is declared invalid or unenforceable, the validity
and enforceability of the remainder shall not be affected.

                                       8
<PAGE>
 
          3.1.6  INJUNCTION.  Executive understands and agrees that, due to the
                 ----------                                                    
highly competitive nature of the health care industry, the breach of any
covenants set out in Section 3.1 will cause irreparable injury to CPC for which
it will have no adequate monetary or other remedy at law.  Therefore, CPC shall
be entitled, in addition to such other remedies as it may have hereunder, to a
temporary restraining order and to preliminary and permanent injunctive relief
for any breach or threatened breach of the covenants without proof of actual
damages that have been or may be caused hereby.  In addition, CPC shall have
available all remedies provided under state and federal statutes, rules and
regulations as well as any and all other remedies as may otherwise be
contractually or equitably available.

          3.1.7  ASSIGNMENT.  Except as otherwise provided to the contrary in
                 ----------                                                  
ARTICLE FIVE, Executive agrees that the covenants contained in this Section 3.1
shall inure to the benefit of any successor or assign of CPC, with the same
force and effect as if such covenant had been made by Executive with such
successor or assign.

     3.2  CONSULTING CONTRACT.  Except when Executive is relieved of any
          -------------------                                           
obligation to honor her Section 3.1.3 obligations by applicable provisions of
ARTICLE FIVE, then upon the termination of Executive's employment, Executive
hereby agrees to make herself available to perform, for a period not to exceed
two (2) years following such termination of employment, such consulting and
advisory services for CPC with respect to matters relevant to the health care
industry as may from time to time be reasonably requested by the Board.
However, such services shall be subject to the following provisions and
limitations:

          (a) TIME.  Executive shall not be required to render more than eight
              ----                                                            
     (8) hours of consulting services per month.

          (b) OFFICE PRIVILEGES.  During the consulting period, Executive shall
              -----------------                                                
     be entitled to the use of appropriate office facilities and secretarial and
     administrative services to facilitate the performance of her consulting
     services.

     3.3  CONSIDERATION FOR COVENANTS AND CONSULTING CONTRACT.  Whenever this
          ---------------------------------------------------                
Contract requires Executive to honor her obligations under Section 3.1.3
following the termination of Executive's employment, then the value of her
noncompetition covenant under Section 3.1.3 and her Consulting Contract under
Section 3.2 shall be determined by independent appraisal, and the Contract
Benefits payable to Executive under ARTICLE FIVE shall, to the extent of such
appraised value, be allocated as reasonable compensation for such covenant and
consulting agreement.  The cost of any appraisal performed pursuant to the
requirements of this Section 3.3 shall be borne solely by CPC.

                                       9
<PAGE>
 
     3.4  SELECTION OF INDEPENDENT APPRAISER.  Whenever the appraised value of
          ----------------------------------                                  
Executive's obligations under Sections 3.1.3 and/or 3.2 must be determined
pursuant to Section 3.3, Executive and CPC shall, within ten (10) business days
following termination of Executive's employment, select an independent third
party (either an experienced tax counsel or a nationally recognized accounting
firm) to perform that appraisal.  Should Executive and CPC be unable to mutually
agree upon the selection of such third party, then the Compensation Committee of
the Board shall designate a nationally recognized accounting firm to perform
such appraisal, provided such firm has not previously served as CPC's
independent auditors or provided prior tax advice to Executive on personal
matters.

                                       10
<PAGE>
 
                                 ARTICLE FOUR

                        CORPORATE DIVESTITURE BENEFITS
                        ------------------------------

     4.1  BENEFIT ENTITLEMENT.  Upon each Corporate Divestiture effected during
          -------------------                                                  
the Contract Term, the Board may elect, in its sole discretion, to pay Executive
a special interim payout calculated in accordance with this ARTICLE FOUR.  The
total value of any and all such interim payouts shall reduce, dollar for dollar,
any payout made to Executive pursuant to ARTICLE FIVE.

     4.2   INTERIM PAYOUT AMOUNT.  The interim payout amount that may be paid to
           ---------------------                                                
Executive in connection with any Corporate Divestiture shall be determined by
the Board, in its sole discretion.

     4.3   PAYMENT.  The interim payout to Executive in connection with each
           -------                                                          
Corporate Divestiture shall be subject to CPC's collection of all applicable
withholding taxes.

                                       11
<PAGE>
 
                                 ARTICLE FIVE

                          PAYOUT OF CONTRACT BENEFITS
                          ---------------------------

     5.1  TERMINATION OF EMPLOYMENT.  Executive's employment may be terminated
          -------------------------                                           
at any time by either Executive or CPC, for the reasons and with the
consequences set out below.  In the event of such termination, Executive may
become entitled to payment of the Contract Benefits in accordance with the
provisions of this ARTICLE FIVE.  In any event, the provisions of ARTICLE TWO
shall cease to have any force or effect upon the termination of Executive's
employment, and the compensation and benefit provisions of this ARTICLE FIVE
shall supersede and replace the provisions of ARTICLE TWO.

     5.2  DEATH.  If Executive dies, her employment shall terminate on the date
          -----                                                                
of her death.

          5.2.1  CONTRACT BENEFITS.  In such event, CPC shall (i) pay the
                 -----------------                                       
Beneficiary the Salary to the date of Executive's death, within sixty (60) days,
and (ii) continue to have the obligations described in Sections 2.2.4 and 2.2.5,
to the extent those benefits are available under those plans then in effect.

     5.3  PERMANENT DISABILITY.  Either CPC or Executive may terminate
          --------------------                                        
Executive's employment, upon thirty (30) days prior notice, by reason of her
Permanent Disability.

          5.3.1  COVENANTS.  Following such termination of employment, Executive
                 ---------                                                      
shall remain subject to the covenants and obligations set forth in Section 3.1.

          5.3.2  CONTRACT BENEFITS.  Executive or her Beneficiary shall be
                 -----------------                                        
entitled to receive payment of ninety days' Salary, less applicable withholding,
in a lump sum within sixty (60) days after the termination date of Executive's
employment under this Section 5.3.  In addition, Executive or her Beneficiary
shall be entitled to receive the Contract Benefits described in Sections 1.9(ii)
through 1.9(vi) on the terms stated in those provisions, in consideration for
Executive's covenants in Section 3.1.

     5.4  TERMINATION BY CPC FOR CAUSE.  CPC may terminate Executive's
          ----------------------------                                
employment for Cause.

          5.4.1  NO CONTRACT BENEFITS.  Following the termination of Executive's
                 --------------------                                           
employment for Cause, Executive shall not perform any of the services described
in Section 2.1, nor shall she have the right to receive any Contract Benefits,
but she and her eligible dependents shall be entitled, at their sole cost, to
receive continued health care coverage to which they may be entitled by law
("COBRA Coverage").

          5.4.2  COVENANTS.  Following such termination for Cause, Executive
                 ---------                                                  
shall comply with her covenants and obligations under Section 3.1 (other than
Section 3.1.3).  However, CPC may elect, at its sole discretion, to enforce
Executive's covenants under Section 3.1.3 and her consulting agreement under
Section 3.2 following such termination of employment.  If CPC so elects, then
(i) CPC shall so notify Executive in writing, as provided in Section 6.7, within
ten (10) days following

                                       12
<PAGE>
 
the date of her termination, and (ii) CPC shall, as consideration for such
Section 3.1.3 covenant and Section 3.2 consulting agreement, compensate
Executive at the Section 3.3 appraised value of such covenant and consulting
agreement, payable in equal bi-weekly installments (beginning with her
termination date) over the two (2)-year period her Section 3.1.3 covenant and
Section 3.2 consulting agreement are to remain in effect.

     5.5  TERMINATION BY EXECUTIVE WITHOUT CAUSE.  Executive may terminate her
          --------------------------------------                              
employment at any time without cause, i.e., for grounds other than those
described in paragraphs 5.2, 5.3, 5.6, and 5.7.

          5.5.1  NO CONTRACT BENEFITS.  Following Executive's termination of
                 --------------------                                       
employment under this Section 5.5, Executive shall not perform any of the
services described in Section 2.1, nor shall she receive any Contract Benefits,
but she and her eligible dependents shall be entitled, at their sole cost, to
COBRA Coverage.

          5.5.2  COVENANTS.  Following such termination of employment, Executive
                 ---------                                                      
shall comply with all her covenants and obligations under Sections 3.1 and 3.2,
and CPC shall, as consideration for her Section 3.1.3 covenant and Section 3.2
consulting agreement, compensate Executive at the Section 3.3 appraised value of
such covenant and consulting agreement, payable in equal bi-weekly installments
(beginning with her termination date) over the two (2)-year period her Section
3.1.3 covenant and Section 3.2 consulting agreement are to remain in effect.

     5.6  CHANGE OF CONTROL.  Simpson may terminate her employment in connection
          -----------------                                                     
with a Change of Control, provided such termination is, pursuant to written
notice delivered to CPC, effected at least six months and within one (1) year
after such Change in Control.

          5.6.1  COVENANTS.  Following such termination of employment, Simpson
                 ---------                                                    
shall comply with all her covenants and obligations under Sections 3.1 and 3.2.

          5.6.2  CONTRACT BENEFITS.  Simpson shall be entitled to all of the
                 -----------------                                           
Contract Benefits, with the Salary Contract Benefit to be paid in a lump sum
within sixty (60) days after the termination date of Simpson's employment.

          5.6.3  VESTING OF OPTIONS AND OTHER BENEFITS.  Whether or not Simpson
                 -------------------------------------                         
terminates her employment pursuant to this Section 5.6, all Options and related
stock appreciation rights outstanding at the time of the Change in Control shall
vest and become exercisable for all of the underlying shares of CPC common stock
immediately prior to the effective date of such Change of Control, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Simpson under any plan or arrangement maintained
by CPC for her benefit shall lapse immediately upon

                                       13
<PAGE>
 
such effective date.  Simpson may exercise her Options or related stock
appreciation rights at any time until the earlier of (i) the specified
                                          --------                    
expiration date of the option term or (ii) the expiration of the twelve (12)-
month period measured from her termination date, and any Options or stock
appreciation rights not exercised prior to the applicable expiration date shall
lapse.

     5.7  CONSTRUCTIVE TERMINATION.  Executive may terminate her employment
          ------------------------                                         
within six (6) months after any event qualifying as a Constructive Termination
under Section 1.8.

          5.7.1  COVENANTS.  Following such termination of employment, Executive
                 ---------                                                      
shall not perform any further services for CPC and shall have no obligation to
perform her covenants under Section 3.1.3 or her consulting agreement under
Section 3.2.

          5.7.2  CONTRACT BENEFITS.  Upon Executive's termination of employment
                 -----------------                                             
under this Section 5.7, Executive shall become entitled to all of the Contract
Benefits, with the Salary Contract Benefit to be paid in a lump sum within sixty
(60) days after her termination date.

          5.7.3  OPTION VESTING.  If Executive terminates her employment
                 --------------                                         
pursuant to Section 5.7, all Options and related stock appreciation rights
outstanding on the employment termination date shall vest and become exercisable
for all of the underlying shares of CPC common stock as of that date, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Executive under any plan or arrangement
maintained by CPC for her benefit shall lapse immediately on that date.
Executive may exercise her Options or related stock appreciation rights at any
time until the earlier of (i) the specified expiration date of the option term
               -------                                                        
or (ii) the expiration of the twelve (12)-month period measured from her
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.

     5.8  TERMINATION BY CPC WITHOUT CAUSE.  CPC may terminate Executive's
          --------------------------------                                
employment at any time for reasons other than those described in Sections 5.3
and 5.4.

          5.8.1  CONTRACT BENEFITS.  Upon such termination of employment,
                 -----------------                                       
Executive shall become entitled to all of the Contract Benefits, with the Salary
Contract Benefit to be paid in a lump sum within sixty (60) days after her
termination date.

          5.8.2  COVENANTS.  Following the termination of Executive's employment
                 ---------                                                      
pursuant to this Section 5.8, Executive shall not perform any further services
for CPC and shall have no obligation to perform her covenants under Section
3.1.3 or her consulting agreement under Section 3.2.

                                       14
<PAGE>
 
          5.8.3  OPTION VESTING.  If CPC terminates Executive's employment
                 --------------                                           
pursuant to Section 5.8, all Options and related stock appreciation rights
outstanding on the date of termination of Executive's employment shall vest and
become exercisable for all of the underlying shares of CPC common stock on that
date, and any restrictions or forfeiture provisions applicable to any shares of
CPC common stock or stock units awarded to Executive under any plan or
arrangement maintained by CPC for her benefit shall lapse immediately on that
date.  Executive may exercise her Options or related stock appreciation rights
at any time until the earlier of (i) the specified expiration date of the option
                      --------                                                  
term or (ii) the expiration of the twelve (12)-month period measured from her
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.

     5.11  WITHHOLDING.  All payments made to Executive or her Beneficiary
           -----------                                                    
pursuant to the provisions of this ARTICLE FIVE shall be subject to withholding
by CPC of such amounts for income and other payroll taxes and deductions as CPC
may reasonably determine should be withheld pursuant to applicable laws and
regulations.

                                       15
<PAGE>
 
                                  ARTICLE SIX

                           MISCELLANEOUS PROVISIONS
                           ------------------------

     6.1  ENTIRE CONTRACT.  This Contract contains the entire agreement and
          ---------------                                                  
understanding between Executive and CPC regarding the terms and conditions of
her employment with CPC and the benefits to which she may become entitled upon
the termination of such employment, and supersedes and replaces all Prior
Contracts as well as any other negotiations, understandings and representations
(other than the express terms of the special founder recognition award/loan made
to Executive) regarding the terms and conditions of her employment or
termination benefits.  This Contract may not be modified except by a writing
executed by both Executive and CPC.

     6.2  ASSIGNMENT BY CPC.  This Contract shall be binding upon and shall
          -----------------                                                
inure to the benefit of any successors or assigns of CPC.  As used in this
Contract, the term "successor" includes any Person or group of Persons acting in
concert which at any time in any form or manner acquires all or substantially
all of the assets or business or more than twenty percent (20%) of the
outstanding voting securities of CPC.

     6.3  NONASSIGNABILITY BY EXECUTIVE.  Neither Executive nor any Beneficiary
          -----------------------------                                        
shall assign, transfer, pledge or hypothecate any rights, interests or benefits
created hereunder or hereby.  Any attempt to do so contrary to the provisions of
this Contract, and any levy of any attachment, execution or similar process
created thereby, shall be null and void and without effect.  CPC shall have no
obligation to provide any payments or other consideration to any Beneficiary
until and unless CPC has received such Beneficiary's written assurance that she
will comply with the provisions of this Section 6.3.

     6.4  SPENDTHRIFT PROVISION.  Prior to actual receipt by Executive or her
          ---------------------                                              
Beneficiary (as the case may be), no right or benefit under this Contract and,
without limitation, no interest in any payment hereunder shall be:

               (i) anticipated, assigned or encumbered or subject to any
     creditor's claim or subject to execution, attachment or similar legal
     process; or

              (ii) applied on behalf of or subject to the debts, contracts,
     liabilities or torts of the Person entitled or who might become entitled to
     such benefits or subject to the claims of any creditor of any such Person.

     6.5  BENEFICIARY; RECIPIENTS OF PAYMENTS; DESIGNATION OF BENEFICIARY.
          ---------------------------------------------------------------  
Payment of all Salary, the proceeds of the Policy, and all other compensation
and benefits payable by CPC pursuant to this Contract shall be made only to
Executive during her lifetime or, in the event of her death, to her Beneficiary.
If Executive has not designated a Beneficiary, then the payments shall be made
to her estate.  CPC shall have no obligation to make payments to any person not
designated as a Beneficiary pursuant to Section 6.5.1.  Furthermore, CPC shall
have no obligation to make any payments to Executive's Beneficiary until and
unless that Beneficiary has agreed in writing to be bound by the provisions of
this Section 6.5. Executive or her estate or Beneficiary, as the case may be,
shall discharge, defend and hold CPC harmless from any liability for payments
actually made to

                                       16
<PAGE>
 
such Beneficiary or to Executive's estate if no Beneficiary has been designated.

          6.5.1  DESIGNATION OF BENEFICIARY.  Executive may designate and from
                 --------------------------                                   
time to time change the Beneficiary only through a written, signed designation
to CPC's Corporate Secretary pursuant to Section 6.7.

          6.5.2  ELECTIONS.  Whenever this Contract provides for any election
                 ---------                                                   
exercisable by Executive or her Beneficiary, that election shall be made solely
by the person or persons receiving payments pursuant to this Contract at that
time and shall be made in that Person's sole discretion and without regard to
the effect of such decision on subsequent payment recipients.  Such decision
shall be final and binding on all subsequent recipients of payments.

     6.6  ARBITRATION.  Any controversy, question or dispute arising out of or
          -----------                                                         
relating to the construction, application or enforcement of this Contract shall
be settled by arbitration.  Among the disputes which are to be settled by
arbitration are any claims by Executive that the termination of her employment
breached any express or implied contract of employment.

          6.6.1  APPOINTMENT OF ARBITRATORS.  Within five (5) days after the
                 --------------------------                                 
delivery of written notice of any such dispute from one party to the other, CPC
and Executive shall each appoint one person to hear and determine the dispute,
and, if the two persons so selected are unable to agree on its resolution within
ten (10) days after their appointment, they shall select a third impartial
arbitrator, and the three arbitrators so selected shall hear and determine the
dispute within sixty (60) days thereafter.

          6.6.2  FINALITY.  The determination of a majority of the arbitrators
                 --------                                                     
shall be final and conclusive on Executive and CPC.

          6.6.3  PROCEDURE; FORUM; WAIVER OF JURY TRIAL.  The arbitration shall
                 --------------------------------------                        
be conducted in accordance with the then-current Model Employment Arbitration
Procedures of the American Arbitration Association in the State of Nevada.
Executive and CPC each hereby waive any right to trial by jury of any such
dispute.  Notwithstanding the foregoing provisions, however, nothing in this
Contract shall limit or waive any right of either Executive or CPC to obtain
injunctive relief in any court of competent jurisdiction.

          6.6.4  DISCOVERY.  The parties shall be entitled to avail themselves
                 ---------                                                    
only of discovery procedures as the arbitrators permit.

          6.6.5  DISPUTES NOT GOVERNED BY CONTRACT TO ARBITRATE.  The parties
                 ----------------------------------------------              
have not agreed to arbitrate any dispute except for those disputes arising out
of or relating to the construction, application or enforcement of this Contract.
For example, and without limitation, the parties have not agreed to arbitrate
wage-hour, workers' compensation, defamation, or public policy discharge claims,
or claims arising under state or federal employment discrimination laws.  Both
parties expressly reserve all rights and remedies available to them, at law or
in equity, to resolve any dispute which they have not expressly agreed in this
Contract to arbitrate.

     6.7  NOTICES.  Any notice provided for by this Contract and any other
          -------                                                         
notice, demand, 

                                       17
<PAGE>
 
designation or communication which either party may wish to send to the other
("Notices") shall be in writing and shall be deemed to have been properly given
if served by (i) personal delivery, (ii) registered or certified mail, return
receipt requested in a sealed envelope, postage and other charges prepaid, or
(iii) telegram, telecopy, telex, facsimile or other similar form of transmission
followed by delivery pursuant to clause (i) or (ii), in each case addressed to
the party for which such notice is intended as follows:

     If to CPC:            Community Psychiatric Centers
                           Board of Directors
                           6600 West Charleston Boulevard
                           Las Vegas, Nevada 89102
                           FAX: (702) 259-3650

     If to Executive:      Wendy L. Simpson
                           1704 Wincanton Drive
                           Las Vegas, Nevada 89134
                           FAX: (702) 242-3385

          6.7.1  CHANGE OF ADDRESS.  Any address or name specified in this
                 -----------------                                        
Section 6.7 may be changed by a Notice given by the addressee to the other party
in accordance with this Section 6.7.

          6.7.2  EFFECTIVE DATE OF NOTICE.  All Notices shall be given and
                 ------------------------                                 
effective as of the date of personal delivery thereof or the date of receipt set
forth on the return receipt.  The inability to deliver because of a changed
address of which no Notice was given or rejection or other refusal to accept any
Notice shall be deemed to be the receipt of the Notice as of the date of such
inability to deliver or rejection or refusal to accept.

     6.8  GOVERNING LAW; JURISDICTION.  This Contract shall be construed in
          ---------------------------                                      
accordance with and governed by the laws of the State of Nevada, without
reference to its choice of law rules.

     6.9  SEVERABILITY.  In the event any provision or provisions of this
          ------------                                                   
Contract is or are held invalid, the remaining provisions of this Contract shall
not be affected thereby.  In the event that any provision is held to be overly
broad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and the intentions of the parties hereunder.

                                       18
<PAGE>
 
     6.10  ATTORNEY'S FEES AND EXPENSES.  If any arbitration proceeding is
           ----------------------------                                   
commenced following Executive's termination of employment, the prevailing party
shall be entitled to recover its reasonable attorney's fees, costs and all other
expenses incurred in connection with the arbitration.

          IN WITNESS WHEREOF, this Employment Contract has been executed and
delivered by the parties as of the date first set forth above.


                                    /s/ Wendy L. Simpson                
                                    ------------------------------------
                                    WENDY L. SIMPSON                    
                                                                        
                                                                        
                                    COMMUNITY PSYCHIATRIC CENTERS       
                                                                        
                                                                        
                                    By:  /s/ Dana Shires                
                                         -------------------------------
                                    Dana Shires, M.D.                   
                                    Chairman, Compensation              
                                    Committee                           
                                                                        
                                                                        
                                                                        
                                    By:  /s/ Richard L. Conte           
                                         ------------------------------- 
                                    Richard L. Conte                    
                                    Chairman, President                 
                                    and Chief Executive Officer          
 

                                       19