Severance Compensation Package for Director, VP, and C-Level Executives

By Robert A. Adelson, Esq.

As a Director, VP, or C-level executive, you may have many accomplishments and have enjoyed much success in your career and current job.

However, even for the most stellar performers, all good things sometimes come to an end.

If and when that happens to you, it is precious to have in place a severance agreement and/or executive severance package that kicks in to cushion the blow of employment termination. Provide a level of support for you and your family until you move on to your next opportunity.

In this article, I will address the following questions:

• Why do you need a severance package in your executive job offer?
• When can you later negotiate a severance agreement or package you could not obtain in your job offer when you joined the company?
• What is a typical monetary executive severance package for VPs, directors, CEOs, CMOs, and other C-level executives?
• What other non-monetary separation terms should you seek?

 

The necessity of a severance package if you can obtain it with employment

Unless you have an executive employment contract that sets a precise term of years, the employer can terminate you at any time, with or without cause, just as you can terminate at any time. This kind of contract is quite rare these days, and in almost all American jurisdictions, employment is “at will.” The only limitation is that if the true reasons for termination are illegal, you might potentially have a case for wrongful termination.

If you left a good position to take this new one if you relocated, and even if you didn’t, failure to have severance terms leaves you vulnerable if the employer has a change of heart and, for no good reason, decides to let you go with a month’s pay or even less. 

That often happens when a new boss comes in and decides to clean the house by bringing in their team.

Thus, if possible, your job offer or employment agreement should have severance terms if you are terminated without stated and defined cause or if you choose to resign for good reason because your employer breached the terms of your job offer.

 

When you may later negotiate, the company might then provide severance.

Even if the company was dead against giving you severance and you took the job offer, things can change 12 or 18 months into the employment. When you have achieved certain important milestones, your employer may become interested in retaining your services. It would be a good time to propose severance terms to be added to your package.

Alternatively, a company might offer severance terms in exchange for non-compete provisions or other considerations under any of these circumstances:

• Attempting to downsize
• Closing a plant
• Subject to a merger or acquisition
• Trying to incentivize early retirement
• Negotiating an out-of-court agreement with a terminated employee in an attempt to avoid a lawsuit

Compensation and Equity Severance for Senior Executives

Executive severance packages will likely be custom designed for the job position and circumstances. Severance pay can be a lump-sum payment or a salary from a couple of months to a year or more. You may also seek payment of a bonus earned but not yet paid, plus a prorated bonus for the current year. In some cases, companies may even offer a multiple of your salary or bonus in the package.

For many VPs, directors, and senior executives, equity is a key component of their compensation. Equity includes stock options, restricted stock, RSUs, phantom stock, capital and profits interests, or even unit appreciation rights. Your severance compensation should provide for accelerated vesting or continued vesting under a further service relationship.

If your company is going IPO or M&A, the value of the equity compensation can be much larger than the salary and bonus components of your severance package. Suppose the company is going to repurchase the equity. In that case, you should seek claw-back terms that would enable you to get further compensation should the IPO or acquisition occur within a year or two of your termination.

Your severance package may also include continuation of health, disability, pension, and other key benefits. For example, if you continue to pay the health insurance premiums, you will receive coverage should a new pre-existing condition arise in the family in the interim.

Non-monetary terms that also merit your attention  

Besides the cash and equity, you should also pay attention to these important items:

• Severance Triggers – Company’s “cause” and your “Good reason” need clear definitions, and each should provide notice and opportunity to reasonably cure.
• Restrictive Covenants – Company protections for confidential information, inventions, non-solicitation of customers and employees, and any non-compete need to be reasonable in their scope and not pose a bar to your use of your business knowledge or a bar to future job prospects.
• Non-disparagement – this should be mutual with reasonable protections for your reputation as well.
• Release of claims  – ideally, this, too, should be mutual, but even if it is not, it should be reasonable, especially if it is not an attached exhibit and is to be later provided by the company.

Whether the opportunity exists when you are taking a new job offer, later on after you have proven yourself, or at the time employment is coming to an end; whether it is by your choice or the choice of the employer, it is wise to seek executive employment counsel to ensure a fair executive severance package and reasonable protections for your career path, to the extent possible.

© 2023 Robert A. Adelson