Money Talks: Using Severance Agreements to Seal the Deal

Etiquette might suggest that when accepting a job offer, negotiating what happens if it doesn’t work out is bad form. As top talent—and, in many cases, HR departments—in a growing range of industries come to understand the strategic and practical value of severance agreements, that attitude is changing.

A severance agreement provides compensation to an employee for a period of time after the employee is terminated. Severance is only triggered if a company terminates the employee without fault, meaning electing to leave as a result of a management change or poor company performance would not trigger severance, and neither would fireable offenses like violating company policy. Most industries do not regularly use severance agreements, particularly at the offer stage of a hiring process. However, this underutilized tool can be a useful part of negotiations to address risks or concerns an employee may have about an otherwise appealing opportunity.

For employers, a severance agreement helps attract top talent to positions that could have a short shelf life. For employees, it mitigates the risk associated with taking a job that could end for reasons unrelated to work performance. It’s a powerful bargaining tool for both sides, and it’s critical for companies and candidates alike to understand how and when to deploy it.

Pre-hire: When is severance appropriate?

Severance agreements can be negotiated both for new hires and existing employees making lateral moves within a company. Generally, the more external factors that may impact the longevity of tenure, the more value a severance agreement can provide. Severance agreements can be used if there is potential for change in control of the company, such as an impending CEO change or a spin-off/merger during which certain positions could become redundant. They are more popular in fast-moving industries, such as media and entertainment, where these changes happen frequently.

Regardless of the risk level, pre-hire severance agreements are typically reserved for high-level candidates, as these candidates can be harder for companies to find.

Upon termination: Who gets severance?

If severance wasn’t discussed pre-hire, there may be another opportunity to negotiate it upon termination, but only when the employee is terminated for reasons other than cause. Companies occasionally offer it—or an employee can make a good case for getting it—if the termination is a direct result of poor company performance or an acquisition in which positions became redundant. However, as with pre-hire agreements, the opportunity for severance depends on an employee’s level of seniority and length of tenure with the company.

What’s in a severance package?

The terms of a severance agreement, just like any contract, are highly negotiable though there are general norms. Pre-hire severance agreements generally provide employees between six and 12 months of total cash compensation. However, recently, we have seen candidates ask for—and receive—up to two years of severance in limited circumstances. Companies may also sweeten the agreement by offering accelerated vesting of an equity component of the contract. General counsels can seek similar severance terms to other members of the C-suite or similarly situated executives.

There is far less flexibility for negotiation following termination. While the length of tenure and circumstances of termination can impact the severance package, the general formula is one month of severance for each year of service with the company.

Negotiating Severance

When possible, candidates in the running for higher-risk positions should attempt to negotiate a severance agreement as part of their offer of employment. This provides a degree of certainty to both the employee and the employer of what can be expected upon termination for reasons outlined in the severance agreement. It also provides both parties the ability to define the terms of severance—including what circumstances would trigger severance and how much severance would be provided—in a more neutral context. Though it may seem like proving oneself in the job first could make an employer more amenable to offering a good package, the fact is that employees are at the mercy of the company after accepting a job offer.

Employers should consider proactively offering severance packages as a way to attract the very best talent to positions that could change rapidly. They show foresight and a commitment to employees that candidates value. An upfront severance offer is also a strategic move since the terms of the agreement almost always favor the company itself; the employee can’t trigger severance without the company deciding that termination is the right course of action.

A severance agreement need not be a part of every job offer extended. However, understanding the value that severance agreements can provide to both employers and potential employees in specific circumstances can help bring a successful close to what could otherwise be a tricky hiring process.

Read this article on Law.com

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Brandyne RussellBrandy Russell is a Managing Director in the In-House Practice Group. Based in the New York office, Brandy helps build the in-house legal departments for clients in a variety of industries. With experience as a commercial litigator, Brandy brings insight into the inner workings of top-tier law firms as well as the in-house departments of financial institutions to her recruiting practice.

 

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