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N. American Execs Want Severance Deal Before Starting
08/30/04
By: Anupama Chandrasekaran, Reuters
NEW YORK (Reuters) - More and more North American executives who are weighing job offers want to know what they would get if the company they join eventually decides to let them go.
Along with such compensation as salary, bonus and stock options, high-level managers are negotiating their severance even before the ink on their employment agreements is dry.
In good times, companies were happy to offer contracts that paid executives through the end of a guaranteed period even if they were kicked out before then. But with cost-cutting still a priority, fewer companies offer such deals, which means executives have far less job protection.
Besides, many executives have learned from the spate of corporate scandals in recent years that their jobs could be in jeopardy if those above them get driven out over an accounting blowup.
"Companies are saying that 'we can hire and fire at will' and a lot of companies are not offering employment agreements (for a guaranteed term)," said Dan Moynihan, a consultant at Compensation Resources Inc. in Upper Saddle River, New Jersey. "So the next best alternative is to get a negotiated, upfront, going-away present."
For the company, such an arrangement is still cheaper than a long-term contract, he said.
Many job candidates are following the advice of employment lawyers, who recommend discussing a severance package with the future employer before taking a position there.
During the hiring process, both sides feel very positively about each other, said Ken Suddleson, an employment lawyer in the Los Angeles office of law firm Morrison & Foerster LLP.
"When people are leaving, those feelings have changed, often dramatically," he said, "and it is extremely difficult under those circumstances to negotiate a severance."
But corporate watchdogs complain that such deals could sometimes harm shareholder interests as companies pay millions in severance.
"There should be some employment protection if people lose their jobs for no fault of their own, whether that is because of a merger or through the appointment of a new CEO, but one year's salary is the maximum that should be paid in any of the situations instead of three years' salary and bonus," said Paul Hodgson, a researcher with Portland, Maine-based Corporate Library, which provides corporate governance data.
SHOW ME THE MONEY
Moynihan of Compensation Resources said he recently helped negotiate a severance package for a client who was offered a management position at General Electric Co. (GE.N: Quote, Profile, Research) . The executive demanded the equivalent of one year's salary plus continued benefits, and the conglomerate approved it.
One reason executives are asking for severance at the employment interview stage is that managers below the top tier face an increasing risk of getting fired because of a financial scandal.
Earlier this year, Nortel Networks Corp. (NT.TO: Quote, Profile, Research) (NT.N: Quote, Profile, Research) , North America's largest maker of telecom equipment, fired its chief executive, chief financial officer and controller because of accounting problems. More recently, it terminated seven other individuals involved in financial reporting.
Scandals aside, job-hunting executives also are concerned that the CEO who hires them may not always be there.
Often the team brought in by a departing chief executive is "at the mercy of the new leadership," said Rick Junius, executive vice president at outplacement firm Lee Hecht Harrison's Los Angeles office. As a result, many executives are asking for some kind of severance deal upfront.
Compensation consultants are also fueling the trend by spreading the word about what a corporation -- say, Company A -- is offering its executives, said Rakesh Khurana, who teaches organizational behavior at Harvard Business School.
"Company B's executives ask 'Why aren't we getting the same deal?"' Khurana said. "Executive recruiters say this is the new norm and this is the new standard."
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