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Negotiating a Better Executive Severance Package

by lawyer Gary A. Paranzino
Updated April 2022

The best time to negotiate a severance package or "separation agreement" is before you accept a new position -- as part of your new job offer. This is not always possible, however, and it may even be ill-advised to raise the subject in certain situations.

As an aside, if you are currently negotiating a compensation package for a new job, see the related article at Offer-Letters.com, Evaluating and Negotiating Job Offers for Technology and Life Sciences Executives.

Most likely, you are reading this because there has been a decision by your employer to separate you from service, or you have decided to leave and would like to do so with severance and other benefits.

If severance has been offered, you may want to enhance it. On the face of it, you may not appear to have much leverage, but severance packages are "sweetened" every day.

This article addresses some of the considerations to take into account when confronting this matter for yourself.

It is not easy to negotiate on your own for more severance, but it is even more difficult to induce your employer to pay you to leave. The reason for this is if you suggest you want to leave, the employer will not feel a strong need to pay for what it will get eventually for free. (A potential solution for this dilemma is proposed at the end of this article).

Assess Your Rights

First, assess your legal rights. Although an attorney would be more likely to uncover existing rights to severance, you should try to identify any rights you may already have from your Offer Letter or Employment Agreement, employee handbook, e-mail or other documentation (including a written separation plan, stock option grants and equity plan documents), as well as any materials modifying your responsibilities or compensation.

Almost all employees, no matter how high in the org chart, are "at-will" -- a legal term which indicates that your employment is at the pleasure of the company and can be terminated for any reason or no reason at all.

While dependent upon the law of the state where you are employed, or live, employment "at-will" means you can be fired/let go/laid off/terminated without recourse as long as it is not for an illegal reason under applicable law and regulations.

If you believe you have been a victim of discrimination, or retaliated against for exercising a protected legal right or refusing to violate the law, you should have your situation evaluated by an attorney.

If your employment was modified verbally, in an exchange of email or a s a matter of a course of conduct, this could be evidence of a change in your employment relationship from its original terms.

Think carefully about whether your employer has not met its obligations under a written or verbal agreement, be it the original agreement or one modified during your course of employment, and whether the agreement is express or was implied.

Speaking with an attorney can be helpful in identifying conduct you may have previously minimized in an effort to be loyal and uncomplaining.

Bottom line, you are trying to determine whether you have 1) written, verbal or other rights that have been expressly violated by the circumstances of your termination; 2) whether the company's severance offer meets its contractual obligation to you (if any); 3) a basis for claims which could be settled in connection with a mutually agreeable severance package; and 4) any leverage you may have to engage the company in an open-ended negotiation of your severance package.

How to Proceed

It has been reported to me, as well as been my experience when serving as General Counsel in corporations, that employers do not take requests for additional severance very seriously when raised by the employee themselves.

There tends to a marked change in responsiveness and attitude when counsel gets involved, for a variety of obvious reasons.

The purpose of this article, however, is to set out how to approach the negotiation if you are not prepared to hire an attorney.

Most employers are willing to offer severance in return for the employee executing a release of all claims that could be brought against the company, its officers, directors and others.

To the extent the company offers to pay you anything not required by state or federal law, it is in return for your release. So as a threshold matter do not sign any document containing a release of claims unless you are already happy with what you are to receive in return.

Once you execute the release, and it becomes effective under its terms, an employer has no reason to sweeten your deal.

Depending upon the company's perception of 1) your ability to allege truthful legal claims and 2) your willingness to pursue them with appropriate counsel, you have some degree of leverage. The amount of leverage may additionally depend on the venue in which you are able, under employer documents, to pursue your claims. Court is preferable, as arbitration can be less favorable for getting employers to treat your claims seriously.

What to Ask For

The level of obtainable severance benefits is highly dependent upon the status of the employee, the size and condition of the company and the circumstances surrounding the termination of employment. As a result, it is very difficult to summarize what any individual might reasonably ask for in a general purpose article such as this.

Severance pay is usually thought of in terms of units of time -- a certain number of weeks or months of base salary, plus continuation of health coverage for that same period of time (or reimbursement of the premiums).

One underlying rationale for a employer to pay severance is the length of the employee's service to the company. Another is the amount of time that is estimated for the employee to find an equivalent position.

At the higher levels of the corporate ladder, these concepts carry less weight than do more broad notions of appropriateness -- usually based on local or industry custom. Some would say that in dealing with a senior executive, the senior executives setting severance are inclined to treat a colleague as they themselves would want to be treated.

As a legal matter, what the company has recently given to similarly-situated terminated employees becomes a standard to which the company can often be held. It can be helpful if you know what other terminated employees similar to your level have received, what the stated company "policy" may be and what exceptions have previously been made to any rule.

If bonuses or commissions constitute a significant part of your compensation, it makes sense to at least attempt to obtain what you have already earned or a portion of what would be earned during the period of severance.

Stock options or restricted stock grants (RSUs) deserve significant consideration as well. Although employers do not like to provide acceleration of vesting or continuation of vesting in severance situations, it can be successfully negotiated.

Factors to consider include how the date of termination impacts upcoming vesting events, as well as how much time is provided post-employment to exercise vested shares.

Standard agreements typically provide a former employee only ninety days or less to exercise vested options after the date of termination of employment.

The employee may have to take a financial risk to exercise "in the money" options by investing their own money in the purchase of illiquid shares of stock. Or the employee may not exercise and thereby forfeit the opportunity to purchase potentially valuable stock.

A separation agreement may more profitably focus on modifications to the stock options or restricted stock rights (such as providing additional time to exercise or accelerated vesting of unvested options) than on the cash considerations. Again, this is an area where professional assistance (legal, accounting or both) can be worth its weight in gold.

Other factors worth considering include payment for accrued but unused vacation (dependent on relevant state law), renegotiation or elimination of any preexisting non-compete or non-solicitation agreements, agreement on a characterization of the termination for public disclosure and provision of pre-agreed employment references, permission to keep a laptop computer or home office business equipment, timely reimbursement of business expenses, renegotiation or limitation of the impact of preexisting confidentiality provisions, and the like.

An employee may also have rights conferred under whistleblower statutes, or under federal and state "plant closing" laws, where layoffs of a significant number of employees by a company within a period of time trigger automatic rights to severance payments or advance notice of termination. Such whistleblower and WARN Act rights are beyond the scope of this article, but warrant the analysis of an attorney where appropriate.

Getting A Better Severance Package

In my experience, most unrepresented employees accept what the company initially offers. It is the path of least resistance in an often emotional and difficult time, and for that reason it makes sense for them.

For those who choose to battle on their own, a well-thought-out strategy and carefully modulated, polite but purposeful approach can yield financial, emotional and career benefits.

As an alternative, using a trusted attorney can provide the arm's-length distance to make the most compelling arguments, and present a compelling picture of your many contributions for that employer.

Whatever your choice, and whatever your outcome, you should strongly consider seeking to negotiate severance protections in the discussions over your next job.

You are welcome to visit my ParanzinoLaw website for more information.
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