Few things cause shareholder or media outrage like a poorly structured executive severance agreement. When a CEO is terminated for poor performance and walks away with tens of millions in severance payments, it’s understandably a hard pill for company stakeholders to swallow. So how can boards avoid the fall-out around severance pay following an executive departure?
In this episode, Ryan Harvey, partner with Meridian Compensation Partners, frames the importance of a well-structured severance arrangement and outlines several best practices for today’s boards and compensation committees.
Executive severance arrangements can be construed as ‘pay for failure.’ There definitely are examples out there of severance arrangements…that reinforce that stereotype. But, if they’re well-constructed, they can really support the needs of shareholders and can remove a lot of headaches for the board.
— Ryan Harvey, partner with Meridian Compensation Partners
Having a pre-established severance agreement, Harvey explains, saves the board from ad-hoc negotiations following an executive termination, which can be a delicate time. Yet, severance arrangements have also become a competitive practice in the world of CEO pay. Harvey details the elements that compensation committees should consider when structuring the agreement.
“On the company side, [compensation] committees need to step back and think about what kind of restrictions they might want to place on the executive post termination,” said Harvey. “Pretty universally, severance payments have a waiver on legal claims, but beyond that I would generally recommend that companies take a look at adding a non-disparagement restriction, a non-solicitation of employees, and a non-solicitation of customers.”
Also in this episode, Harvey outlines the key mistakes compensation committees make when structuring severance agreements.