Five Key Differences Between Executive and Non-Executive Severance Agreements
A severance agreement is a type of employment contract where an employee and his or her employer exchange a series of promises when the employee leaves the employer. In the majority of situations, the employer promises to give the employee severance pay and/or other forms of compensation. In return, the employee promises not to do certain things, such as work for the employer’s competitor or sue the employer for a potential legal claim, such as unfair dismissal.
While simple in principle, severance agreements are complex employment contracts. One major factor that determines the content and complexity of a severance agreement is whether it’s for a high ranking employee (executive) or someone working at a lower level (non-executive). Below are some of the major differences when comparing an executive severance agreement with a non-executive one.
Key Difference #1: Termination Clauses
Due to an executive’s high pay and profile, an executive severance agreement will almost certainly contain termination provisions that outline the circumstances in which the executive will no longer work for the employer. Which termination clause applies will affect whether the executive gets severance pay and if so, how much. There are four main types of termination clauses in executive agreements:
- For cause,
- For good reason,
- For no reason, or
- For disability or death.
The most interesting is the “for cause” clause, which refers to a firing where the executive did something that was illegal, immoral, unethical or otherwise harmful to the interests of the employer. In these situations, the executive forfeits severance pay and benefits, although there are a few notable exceptions.
To learn more about these exceptions and the different types of termination clauses in executive severance agreements, please read our blog post titled, “Big Payouts for Getting Fired: Understanding Executive Severance Agreements.”
Key Difference #2: Special Compensation
In the average non-executive severance agreement, the departing employee receives cash, paid out over time or in a lump sum. The non-executive employee may also receive other benefits, such as several months of health insurance or a positive letter of recommendation. But in an executive severance agreement, the executive can expect even more severance benefits. One good example is the fully vested stock option.
For those who are not familiar, stock options typically found in employment contracts are special financial agreements that allow the employee to purchase a certain amount of company stock at some point in the future for a predetermined price.
A stock option allows an employee to buy the stock at the cheaper predetermined price (also known as the strike price), then immediately sell the stock at the higher market price and make a profit. Should the market price be lower than the strike price at the time the stock option vests, the employee has the option not to buy the stock (hence the financial contract’s namesake).
It’s easy to see what a great benefit a stock option can be for an employee. But there’s a catch: a set period of time must pass before the option vests and the employee can exercise it. Until the stock options vest, they are worthless to the employee.
For most non-executive employees who receive stock options, should they leave the employer for any reason before the stock options vest, the employee will never have a chance to cash them in. But in many executive severance agreements, unless the executive’s termination of employment is for cause, any remaining unvested stock options will usually automatically vest.
Key Difference #3: Payment of Attorney’s Fees
Executives are under a lot of pressure and get paid accordingly. With this level of responsibility and the amount of money the employer pays them, it’s understandable if legal disputes arise. Whether it’s a disagreement in the “for cause” termination clause of the severance agreement or the executive getting sued by the shareholders, the executive may incur legal fees. Should this happen, many severance agreements have provisions that state the employer will reimburse the executive for his or her legal expenses and fees, as long as they’re reasonable and not incurred as the result of the executive’s criminal conduct.
Key Difference #4: Extra Burdensome Restrictive Covenants
Compared to non-executive severance agreements, executives seem to get the better deal. Once exception, however, pertains to restrictive covenants. While restrictive covenants such as noncompete, nonsolicitation and nondisclosure agreements are present in both executive and non-executive severance agreements, they tend to be even more restrictive in executive agreements.
This is understandable given the level of knowledge and influence an executive will have during his or her time working for the employer. Additionally, employers can demand this level of post-employment control with the amount of severance pay the executive is likely to receive.
Key Difference #5: Indemnification Clauses
If a non-executive employee makes a mistake on the job that results in legal liability, the employee could find themselves personally liable for any monetary judgment that arises out of the mistake. But executives often do not have to worry about this.
Many executive agreements contain an indemnification clause where the employer promises to indemnify the executive for any personal legal liability the executive may incur during the course of his or her duties. One exception to indemnification is when the executive’s liability stems from his or her own criminal conduct.
For More Information
If you have additional questions about employment contracts, such as executive and nonexecutive severance agreements, feel free to contact us.