Are GCs neglecting the importance of their severance packages?

In GC recruiting, the negotiation between the company and the successful candidate is critical, sensitive and can entail a lot of nuances.

At the top of that list is the issue of compensation, which can be a tricky and personal topic for everyone involved.  

However, another part of this negotiation that frequently is overlooked until the 11th hour is the specific terms of a severance clause or provision.  

This is a matter that is often not discussed early on in the recruiting process, yet increasingly the terms of a severance provision can be highly critical to a candidate’s decision regarding whether or not to take a specific job. 

It’s a contractual term to which both individuals and companies should be paying closer attention.

Background

By way of background, some type of severance provision is included in nearly every offer letter made to a general counsel. 

However, the terms of this provision can vary significantly.

The length of time can be anywhere from six months (sometimes even less) to two years; the provision can cover base salary alone, or frequently the GC’s target cash bonus, and can even at times include the equity component of the GC’s package. 

Therefore, a candidate who already has a severance provision in their current package is highly likely to compare its terms to the severance provision in an offer from a prospective employer. 

If the terms are less “generous,” they will absolutely push back and seek to negotiate.

Sticking point?

There are differing viewpoints in the marketplace as to how much of a sticking point the severance package should be in a negotiation — with valid reasons behind each. 

For instance, I recently spoke to a chief human resources officer at a well-known public company who said the terms of the severance provision tend to be merely the starting point for discussion or negotiation if the general counsel leaves the company and the severance language is triggered.  

That is, there would typically be a negotiation upon the GC’s departure from the organization, and this negotiation could cover a number of items: the time period of severance, what categories were being covered, and the timing of payout. 

The outcome of this negotiation rarely ever results in absolute adherence to the language of the severance provision – and could depend on a huge number of factors.

These factors include the length of the GC’s tenure, reason for departure, financial stability of the company, as well as the personal relationships between the GC and other senior business leaders. Even a factor as simple as how the decision-maker was feeling that morning could make a difference!

Furthermore, it’s important to be strategic about how much emphasis to place on this issue, especially in initial conversations with a future employer. 

A candidate who is overly fixated on the severance provision may rub hiring managers the wrong way and make them wonder why they are so focused on an issue related to their future separation from the company.

Need for more focus

Meanwhile, another public company GC, and former CEO, that I’ve spoken to noted that he thinks the terms of the severance provision are vastly (and almost criminally!) ignored by the majority of candidates, and that they should put considerably more emphasis on the terms when negotiating their offer letter.  

In his experience, particularly for mid-size or smaller companies, he said it is more likely than not that there will be a future event (i.e., sale of the company, change of leadership, geographic move) where the provision will be triggered.

And even if not, the existence of this kind of language in the severance provision tends to make GCs and other leaders in the organization even more laser-focused, by providing them with the comfort and security to do their jobs very well.

Of course, as this GC noted to me, there is definitely a risk that GCs with generous severance provisions could rest on their laurels and not be sufficiently motivated.

But that’s not very common, as most general counsels are action-oriented, come to the table with a lot of career and academic pedigree, and tend to strive to succeed. 

Lastly, when I asked about the considerable cost to a company that comes from a more generous severance provision, the GC pushed back and said the real cost actually isn’t very high because the severance language is usually triggered alongside a major company event. 

Therefore, the cost of the severance will tend to be very minimal in comparison to all of the other company costs being incurred around the transition of the event.    

Different views          

What can be challenging about this area, I have learned, is that no two candidates are going to look at the issue in the same way.  

My team recently conducted a public company general counsel search in the Midwest where the terms of severance were at the low end of the payout range.

When the first candidate to receive an offer letter reviewed it in its entirety, she called to let us know that, if the company couldn’t change the severance provision language, it might be enough alone to get her to turn down the entire offer.  

Once she did decline, the company turned to a second candidate – a seasoned GC who had nearly 30 years of legal experience.  

While he did negotiate the offer, he never mentioned the issue of severance once. It was completely a non-issue to him. So two GC’s — both of whom were experienced and worldly — saw this issue and its importance entirely differently. 

Unique approach

Each individual is going to view the importance of severance uniquely, but it’s critical that they at least spend the time to go through that mental calculus. 

While of course there are optics present when it comes to this issue, it doesn’t dilute from the fact that it’s an important part of a GC’s employment agreement that may have a more tangible impact on their new position than they might expect.  

Educating yourself, whether you are on the individual or company side, is the first step toward being able to address the severance issue more confidently and arrive at an appropriate conclusion.