EXECUTIVE SEVERANCE PACKAGE
Below is an article by Robert Adelson that was first posted in March 2013 at his website executiveemploymentattorney.com The article indicates how severance negotiations, a separation agreement or a severance agreement can protect and executive employed on an at-will or other basis in the event of termination without good cause, and that it is wise to provide for severance terms in an employment agreement or offer sheet at the outset of employment. However, a severance agreement can be made at any time throughout the employment of the executive.
There is no such thing as a typical executive severance package or CEO severance package. A severance package is not a cookie-cutter legal agreement but will likely include a variety of specific provisions applicable to the circumstances of the job position. The article further indicates how severance agreements address continuation of salary and also address other issues that might be very important to the executive including
- Continuation of health and other key benefits,
- Payment of bonus, or prorated bonus
- Vesting and other rights in stock, options or phantom stock of the company
- Protections for the executive’s reputation
Finally, the article also address items the employer may seek including non-competes, releases and waivers and negotiation strategies for executives on such items.
Severance Agreements Protect Sought-After Executives
By Robert A. Adelson
A new job, like a new marriage, brims with excitement. Often the job does result in success and brings even further opportunity. Like a prenuptial agreement, however, it is wise to plan for a separation when such high stakes are involved.
A severance agreement protects executives employed on an at-will or other basis in the event of termination without good cause. A Board of Directors can fire an executive employed at-will at any time and for any reason that is not forbidden by law. Executives not employed at-will have much greater leverage when negotiating a change in position for the business. It is wise to provide for severance terms in an employment agreement or offer sheet at the outset of employment. However, a severance agreement can be made at any time throughout the employment of the executive.
Without a legal agreement in place, an executive has no particular right to severance pay. However, a company may choose to pay severance in the event the employer:
- Is attempting to downsize
- Is closing a plant
- Is subject to a merger or acquisition
- Is trying to incentivize early retirement
- Is attempting to negotiate an out-of-court agreement with a terminated employee in an attempt to avoid a lawsuit
Severance agreement benefits
Executive severance packages can be a complicated area of law. A severance package is not a cookie-cutter legal agreement but will likely include a variety of specific provisions applicable to the circumstances of the job position. A severance agreement may be a lump-sum payment or a salary over a period of months. If not a lump-sum payment, the agreement may pay an executive’s salary for anywhere from a couple of months to a year or more.
The severance agreement does not simply have to be a base salary. Some multiple of the executive’s salary, equity and bonus may be included in the severance package. It is not unheard of for a CEO to receive a severance package that includes three times the executive’s base salary for a period of months.
The severance agreement should also address other issues that might be very important to the executive including continuation of health and other key benefits, payment of bonus, vesting and other rights in stock, options or phantom stock of eye company. He executive may also be concerned about protections for his or her reputation that can be contained in the severance agreement.
The executive severance contract will include a provision regarding termination if the employee is fired “for cause.” The definition of “for cause” will be in the agreement, and will likely render the agreement void if the executive acts fraudulently, with gross negligence, does not perform his or her duties, embezzles money and may include a host of other actions that amount to cause. However, these terms also need to be carefully reviewed to assure they don’t extend to merely subpar performance and that if there is an issue of not following directives the executive receives notice and an opportunity to correct defective performance.
A severance agreement may also contain a reasonable non-compete clause. This clause may prevent the executive from giving away company trade secrets or finding employment with a competitor for a year or longer which is sometimes tied to the length of the severance package.
Finally, a severance agreement will normally include a release of claims waiver, meaning that the employee agrees not to sue the company for a variety of reasons such as age, race or gender discrimination or wrongful termination.
Executives looking to protect themselves should contact an employment law attorney with experience in drafting executive severance packages.
- Are you are an employee or executive reviewing a job offer or employment agreement with or without severance terms and need advice on terms or its enforceability?
- Have you been terminated or face termination and have similar concerns?
- Have you received a severance agreement and need advice on its terms or what to seek in negotiations?
Robert A. Adelson, Esq. is a corporate and tax attorney and partner at Engel & Schultz LLP, Boston, Massachusetts. He represents C-Level executives and key employees in negotiations over employment terms, equity, compensation, relocation, retention and separation agreements, severance packages, and where necessary suits over wrongful termination.
© 2013 Robert A. Adelson