One in four companies lack executive severance policies, and of those that
do have them, only half formally define the conditions, events, and terms for
payment, according to survey results released by the Hay Group, an HR consulting
firm.
The survey also found that almost one-third of CEOs do not have employment
contracts. Executive contracts below the CEO level are even less prevalent.
Roughly half of executive vice presidents/senior vice presidents and about 65
percent of vice presidents work without contracts.
To protect companies in these litigious times, contractual agreements should
be in place before these executives start, said Bill Gerek, of the Hay Group's
executive compensation practice. The timing should be similar to a pre-nuptial
agreement, where the parties agree to the details when everyone is still happy,
he said.
The study also found that:
Only 50 percent of CEOs are paid for more than one year, and only 6 percent
are paid for more than three years. Among vice presidents, 85 percent are
paid for up to one year.
Twenty percent of the respondents calculate severance benefits as a fixed
multiple of pay. While the majority of companies determine the severance payment
based on salary, just over 20 percent include salary and bonus. At companies
with annual sales of more than $1 billion, salary and bonus is the prevalent
practice.
Companies are most exposed to costly, long-term payouts when they have narrow
definitions of "for cause" terminations. Only 13 percent of the
participating companies cited breach of contract in their definitions; fewer
than 25 percent of survey respondents included gross negligence, and just
15 percent of the companies included misconduct outside the scope of employment
as a termination issue.
To avoid lengthy and expensive payouts for poor performance or misconduct,
compensation committees need to carefully review whether the definition of "cause"is
sufficiently broad, according to Hay Group officials. The definition should
include real performance criteria to judge the executive's success. They
add that these committees should calculate numbers ahead of time, so they can
truly understand what the executive actually will be paid under various scenarios.
The survey also found that restrictive covenants were widely used in executive
severance programs. Yet, almost 20 percent of companies do not include a confidentiality
clause as part of these agreements. While the majority of companies had non-compete
restrictions, the length of the term varies from the remaining term of the contract
to periods up to two years. Some of these differences can be attributed to state
laws, which can affect the enforceability of these agreements.
The Hay Group surveyed human resource and other executives via the Internet
at 223 corporations. Approximately half of the participating companies have
annual revenues greater than $1 billion and participants represent a cross-section
of industries with the majority at healthcare, manufacturing, and services companies.
Almost one-half of the survey participants have more than 5,000 employees. The
study did not include severance programs in merger or acquisitions or other
change in control' situations.
