ABC’s of Hiring #17: Employment Contracts/Severance Agreements

An offer letter typically details the terms of employment, scope of responsibilities, salary, benefits, covenants not to compete, non-disclosure agreements, patent assignment clauses, arbitration, and reasons and grounds for termination. What distinguishes an employment contract from an offer letter is primarily, but not exclusively, the inclusion of a severance agreement. There may be other binding clauses based on the specific business involved, but an employment contract almost always comes with guarantees regarding length of employment and termination.

Severance Issues

Many employers will not consider an upfront severance agreement at the time of offer. This can be a very sensitive issue, insulting to the potential employer implying that you are already thinking of leaving before you even start, and appear to be not fully committed to the new company. Others feel it is business as usual and it is a standard business practice for them. As a potential employee, it is important to find out how your new employer views this question. Do your homework and use your network to find out what the company has done in the past, then workout your roadmap for negotiation.

Timing

A severance package is similar, conceptually, to a pre-nuptial agreement. In today’s environment, the best time to negotiate your severance is when you are hired. Make it part of your overall initial compensation package. That is the moment of greatest leverage when each party is at their best trying to accommodate each other. Employers want to be seen as fair and compassionate. They want to avoid any possibility of a lawsuit. Severance is insurance against legal action and acceptance releases the company from legal claims.

Components to Consider

A severance package can contain more than just the money an executive will receive – either as salary continuation or a lump sum payment. Remember to negotiate with the decision maker, not HR.

  • Benefit coverage to last until severance ends and/or payment of Cobra coverage.
  • Professional outplacement services for 6 months or longer.
  • Office space and clerical support to last during the severance period.
  • A letter of reference and an agreement that states exactly what the company will give as the reason the executive has left the company.
  • If in an overseas assignment, fully funded repatriation.
  • Get employer commitments in writing with specific arrangements detailed. Do not accept vague assurances of future potential benefits.
  • Below VP level, individual severance agreements are unusual.
  • If severance can be denied “for cause”, have a clear written understanding of what constitutes “cause”.

Benefits to Each Party

Employment contracts are good for everyone because it makes a clear, definitive record of what everyone is agreeing to at the time of the agreement. Employers don’t have to worry about potential verbal promises made by a manager that could come back to haunt them. Employees are protected if their management changes and if memories fade about promises that were made. A contract can avoid legal issues and ensure that promises made are kept.

Summary

If the company appreciates your skills, they should be willing to describe how they would take care of you if their focus or direction changes. This avoids leaving you in the lurch, if you are not part of them moving forward. The prospective employer should be willing to have a mutually respectful discussion. If it is a deal breaker for you and the company flat out won’t consider it, find out early and move on.

 

Bob Harrington Associates has been in the executive search business for 20 years and can help you find the best people for your business.

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