How Do I Negotiate a Better Executive Severance Package? A Lawyer's View
by Gary A. Paranzino
Copyright 2002-2019. (Update pending -- but the general principles still apply). Bookmark this site for future reference.
Most executives and employees do not want to think about it when they accept a new position, but it is a near certainty that one day they will leave their new employer. Experience tells us that a significant proportion of those who will someday leave will be leaving in less than friendly circumstances.
If you elected not to negotiate your severance package before you took your latest job, you may find yourself asking the question "Is my employer offering me a fair severance package?"
The best time to negotiate a severance package, or "separation agreement" is before you accept that new position. Once you start work, it is too late to raise the specter of things not working out. And once one side decides to part ways with the other, whether it be you or your employer, it is really too late for a friendly discussion.
Any discussion regarding enhancing severance that occurs after the decision to terminate will require both brains and brawn. But severance packages do get sweetened every day. This article addresses some of the considerations to take into account when confronting this matter for yourself.
As an aside, if you happen to be reading this in the course of negotiating a compensation package for a position with new employer, you might be interested in reading my detailed article on the subject at Offer-Letters.com, entitled How to Evaluate an Offer Letter for an Executive Job and Negotiate a Better Deal. If you are high-enough in the corporate hierarchy to be negotiating the details of your compensation package and terms of employment, you should be addressing the terms of a future severance as well.
Assess Your Rights
First, you need to assess your legal rights. Without an attorney, it will be difficult to fully assess all of the grounds you may have to challenge your termination or the severance package you have been offered (or not offered, as the case may be). Nonetheless, you should immediately locate a copy of any offer letter, employee welcome package, employee handbook, e-mail, and other documentation (including stock option grants and plan documents) relating to your original job offer, and any materials relating to the modification of your responsibilities or compensation. It is often helpful to review pay stubs to determine accrued but unused vacation time and your exact salary rate.
In the event you were given an employment contract, your rights will likely, for better or worse, be set forth in that document with some degree of specificity.
Most likely, the materials you collect and review will indicate that your employment is "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 none at all. While this concept will depend on the law of the state in which you are employed, generally speaking, employment "at-will" means you can be terminated for any or no reason as long as the reason is not an illegal one under the applicable law.
It is possible that the terms of your employment were modified verbally or that a course of prior conduct could indicate a change in your employment relationship. You should think closely about whether your expectations as established by your employer were not met, or whether you were discriminated against or required to work in an inappropriate environment. While ultimately few terminated executives may be able to establish such circumstances, it is not uncommon for hard-charging and successful people to underestimate the impropriety of conduct to which they have been subjected in the performance of their duties. Many such executives attempt to overcome negative circumstances through sheer will and determination. In the event that fails, it helps to consider the situation objectively. On the other hand, it can be equally important to carefully consider, as objectively as possible, any claims of grievance you might have, to determine whether there is a legal basis for complaint. Not all unethical or unpleasant human conduct is actionable in the workplace. An attorney can help you evaluate the merits and value of any potential claims.
In assessing your rights, you are generally trying to determine whether you have 1) written, verbal or other rights that have been expressly violated by the circumstances of your termination or the level of the company's severance offer; 2) a basis for claims which could be settled in connection with a mutually agreeable severance package; and 3) leverage to engage the company in an open-ended negotiation of your severance package.
How to Proceed
In negotiating an offer of employment, executives using attorneys for advice nonetheless often conduct the direct negotiations themselves. There are many good reasons for this, the most important being the need to maintain and reinforce the good feelings between the employer and the prospective new employee. The situation is reversed when negotiating for an enhanced severance package. In most cases, it is crucial to hire an attorney to show the employer that you are serious. While hiring an experienced attorney does not automatically achieve this, it is extremely difficult to establish seriousness when handling the matter on your own.
Assuming you are, for now, going it alone, it is crucial to understand that most companies will offer you some severance in return for executing a release of all claims you could bring against the company, its officers, directors and others doing its bidding. 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 it is a threshold matter that you not sign any document containing a release of claims. You should strongly consider having any documents proffered for your signature reviewed by an attorney before signing anything in this situation.
From a practical standpoint, the company can breathe a sigh of relief when you sign the release. Until the release is signed, 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 could pursue your claims, court being preferred, arbitration being disfavored. This will depend on your written agreements and prevailing laws.
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.
With regard to severance pay, we usually think in terms of time -- a certain number of weeks or months of base salary, for starters. One underlying rationale for paying severance pay is the length of the employee's service to the company. Another is the amount of time required to permit the employee to find an equivalent position without suffering economic hardship. 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 is important to consider what you know about what other terminated employees 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 one's compensation, it also makes sense to consider whether arguments exist in favor of seeking some or all of those expectations in a severance package. For example, an executive that closed a major deal that would have led to a commission or bonus at year-end can argue that some or all of the payment be included as part of severance.
Stock option or restricted stock grants deserve significant consideration as well. A careful analysis of how the termination of employment will impact vesting expectations, as well as the remaining time to exercise vested shares, is crucial. It is typical for an employee to have only ninety days or less to exercise vested options after termination. This places the employee in a situation where they may have to take tremendous financial risk to exercise "in the money" options by investing their own money into an illiquid security. Or it may result in potentially valuable options being allowed to expire.
A proper severance package in some cases 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 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 (mandatory in states like California), renegotiating or eliminating any preexisting non-compete or non-solicitation agreements, agreeing upon a characterization of the termination and providing for pre-agreed employment references, keeping possession of laptop or home office business equipment, timely reimbursement of business expenses, renegotiating or limiting the impact of preexisting confidentiality provisions and the like.
An executive or employee may have additional rights 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 "WARN Act" rights are beyond the scope of this article, but warrant the analysis of an attorney where appropriate.
Getting A Better Severance Package
If you find yourself, like so many others, with an unsuitable severance offer from your employer, and no advance written agreement providing otherwise, you start the process with your back against the wall. The company holds most of the practical cards. They can cut you off from your colleagues and can deny you access to your e-mail and rolodex. They have plenty of access to lawyers to prepare release documents and separation agreements and can dangle some much-needed money to entice you to sign their agreements. They can impose arbitrary deadlines for you to decide whether you will accept their severance offer (a tactic limited somewhat by federal law if you are age 40 or over).
From anecdotal experience, it appears that the overwhelming majority of unrepresented employees in this situation simply choose to "take what the company offers." It is the path of least resistance in an often emotional and difficult time. For those who choose to negotiate for a better severance package with a well-thought-out strategy and carefully modulated but purposeful approach, there can be great financial, emotional and career benefits. A trusted attorney who understands the area can provide substantial assistance in achieving a successful resolution. Whatever your choice, and whatever your outcome, you should resolve, before concluding negotiations for your next job, to negotiate for your severance package in advance.
Copyright 2002-2019 Gary A. Paranzino
The author represents individuals who are considering leaving or who have left their employment, whether it be voluntary or involuntary. In these situations, Gary Paranzino deals directly with the employer and its counsel to enhance the separation terms and relieves the employee from having to do so on their own.
Learn more about leveling the playing field and getting a better severance package when leaving your employer.
For information on negotiating a better employment offer in your next job, see the author's related article.
Gary A. Paranzino, admitted to practice in California and New York
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By e-mail: firstname.lastname@example.org
Gary Paranzino has practiced law for three decades. He served as General Counsel and Chief Legal Officer for two prominent venture-funded technology companies, PointCast and Ashford.com, where he negotiated and drafted offer letters, employment agreements and separation agreements for CEOs, executives and employees.
Previously, he represented Wall Street firms and media companies in high-profile litigation in New York. He is a graduate of Cornell Law School (J.D.) and Cornell University (A.B.).
Today, in private practice, he spends a significant proportion of his time representing executives and employees entering and leaving technology companies, financial firms and multinational corporations.
Visit Paranzino's web site for more information.
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