The termination of an executive’s employment by his or her employer is often accompanied by the offer of a severance package for the departing executive.  It is crucial for the executive to fully understand the respective rights and obligations of the parties, both to guide the executive’s subsequent employment search and to negotiate more favorable severance terms.  Accordingly, here are three key considerations for any executive in evaluating a severance offer:

Identify All Pertinent Documents  

For most executives, there are a number of agreements between the employer and the executive that contain legal obligations and restrictions that should be considered in the context of a severance offer.  The following documents should be identified and gathered: any employment agreements and/or letters offering employment or describing terms of employment; any agreements addressing non-competition, non-solicitation and confidentiality (if separate from an employment agreement); any executive severance plan or personnel policy dealing with severance and termination; and any stock, phantom stock, equity or bonus plan documents.  Once an executive’s existing rights and obligations have been identified, the terms of the severance offer can be fairly evaluated. 

Consider Stock Options And Bonuses  

Although severance packages are often judged in terms of severance pay, that is merely one aspect of the financial consideration.  An executive must consider the effect of the termination on his or her complete compensation package.  For example, does the executive own restricted stock and, if so, what happens to the stock upon termination?  Also, an executive should determine any bonuses to which he or she would have been entitled.  Understanding the compensation opportunities lost can provide a persuasive basis upon which to negotiate a more favorable package.  Moreover, it may be an easier “ask” to request the accelerated vesting or the extension of a period to exercise an option rather than arbitrarily requesting additional months of severance pay.  Similarly, requesting the payment of a bonus (or pro rata portion) should be considered by the executive.

Evaluate Restrictive Covenants  

Executive severance agreements typically include or reaffirm existing restrictive covenants, such as non-competition, non-solicitation (of customers and employees) and confidentiality covenants, and typically include non-disparagement clauses.  An executive must anticipate the effect of these restrictions on future employment opportunities and consider negotiating shorter restricted periods, a narrow scope of restricted activities (such as limiting a non-compete to the division for which the employee worked) or additional severance pay to mitigate these limitations.  In addition, the executive must evaluate the consequences for violating a restrictive covenant and the employer’s rights in such a scenario.

These considerations are by no means exhaustive but are critical areas to be contemplated in the context of executive severance agreements and negotiations.  For more information, please contact Daniel B. Fitzgerald (dfitzgerald@brodywilk.com).