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Posted: July 7, 2020
Severance agreements can be a little confusing. If an executive is fired for inappropriate conduct, they are often still paid out a handsome amount. For many people this may seem backwards or irresponsible. Severance agreements are an integral part of corporate salary structures however, and it’s important to understand the impact on both sides of the accords. These agreements will ultimately have an enormous impact on a Chief Executive Officer (CEO) facing termination. There are scenarios in which a prospective CEO should not accept a salary package without a solid severance agreement that protects them against great risk. If a company on the verge of failure is seeking a new CEO and cannot offer an adequate severance package, for instance, it may not be wise to accept the position. Severance agreements do not only work in one direction, however. They also protect the employer in a lot of ways, and can be seen as a sort of trade off to ensure that both parties are protected in the event of a firing. When looking at the value of a CEO salary, severance agreements can play a critical role. The actual “severance pay” will determine the kind of financial payout to be expected. Additionally, medical coverage and accrued vacation time play into a severance agreement for a CEO. Will medical benefits continue for a certain period of time? Will unpaid vacation time be paid out upon departure? It’s easy to see that the agreed upon payout isn’t the only factor in determining the full value of a CEO salary. If “outplacement assistance” is offered to an employee, it can potentially be redeemed in the form of a “cash outlay” at the time of termination which could reach $10,000 or more. This is intended to be used for the services of an outplacement firm in order to find a new position elsewhere. These are just a few examples. At first glance, it seems that the best case scenario for an employer is to promise the least amount of money in case of a termination. While limiting a severance agreement can be in the best interest of an employer, there are considerations that can easily be overlooked. Some of these include litigation risk, the disclosure of confidential information by a former employee, and revelation risk. In other words, the employer often exposes themselves to extra risk by limiting their severance agreements. A fired CEO can still cause harm to their ex-employer in a number of ways. In order to avoid the potential harm, a severance agreement can also represent a protective measure for the employer. Non-disparagement clauses can benefit the employer by ensuring that an ex-CEO is restricted from disparaging remarks that may cause harm to the institution. It is worth noting that this can go both ways. An employee can also require that they are protected from any future slander in order to protect their reputation and professional standing. Instead of viewing a severance agreement as “buying an employee out” it should be clear that it’s an accord that protects both parties in the case of termination. Severance agreements can add value to a CEO salary, but are also quite necessary to help provide the hiring body a higher level of protection in the long term. To learn more about maximizing executive salary, visit our Contact Page, or contact us directly by email at fglassner@veritasecc.com or by phone at 415-618-6060.
