The Termination Benefits or Severance Benefits clause in an executive employment agreement defines the benefits payable, if any, upon termination. The clauses are highly negotiated and variable. Typically, the clause provides for severance benefits in the event that termination occurs at the election of the company through no fault of the executive. In the event, that the executive resigns, no severance payments are generally payable other than the obligation of the company to pay accrued, but unpaid compensation and benefits up to the time of termination.
The parties should consider the effect of termination of all compensation and benefits payable under the agreement, including vacation, insurance and other non-cash benefits.
Severance Benefits. If the Executive's employment terminates due to [Disability], [Without Cause], [For Good Reason] or [upon a Change in Control], the Executive shall be entitled to the following:
Salary. The Company shall [continue to pay the Executive the Executive's Base Salary through the remaining term of the Executive's employment under this Agreement][pay to the Executive an amount equal to [SEVERANCE PAYMENT AMOUNT]].
Bonus. The Company shall continue to pay the Executive an annual bonus(es) throughout such remaining term. Each such bonus shall be equal to the greater of (i) the Executive's bonus during the year prior to the Executive's termination or (ii) the bonus that the Executive would have earned under the Company's bonus plan in the year that Executive was terminated had Executive remained in its employment. Such bonuses shall not be paid until they would normally be paid in accordance with the Company's practices.
Benefits. The Company shall continue to pay health and/or dental insurance benefits for a period of [BENEFITS CONTINUATION PERIOD] following the Termination Date.
[Options. The Executive shall immediately become vested in any unvested stock options upon such termination. Executive will have no right to any future ungranted options.]
Termination Payments. If the Executive's employment terminates due to Death, For Cause[, Unacceptable Performance] or Voluntary Termination, the Executive shall be entitled to the following:
Salary. The Executive shall be paid the Executive's salary through the Executive's termination date and not thereafter.
Bonus. The Executive shall not be entitled to any bonus payments which were not fully earned prior to the Executive's termination date, and the Executive shall not be entitled to any unearned pro-rated bonus payment for the year in which the Executive's employment terminates.
[Options. Any stock options granted to the Executive by the Company shall continue to vest only through the date on which the Executive's employment terminates.]
1.1 Without Cause, For Good Reason, or Change in Control. If the Executive's employment terminates [Without Cause], [For Good Reason] or [upon a Change in Control], the Executive shall be entitled to Accrued Obligations, Severance Benefits, and Severance Compensation.
1.2 Death or Disability. If the Executive's employment terminates due to death or Disability, the Executive shall be entitled to Accrued Obligations and Severance Benefits.
1.3 For Cause or Without Good Reason. If the Executive's employment terminates due to For Cause or without Good Reason, the Executive shall be entitled to Accrued Obligations[, and the Company shall have no obligation to provide any other severance payment or benefit].
"Accrued Obligations" means the sum of the following unpaid benefits as of the Date of Termination:
Accrued Salary. Payment of any earned but unpaid portion of Executive's annual base salary as in effect from time to time ("Base Salary") through the effective date of such termination;
Accrued Expenses. Reimbursement for any reasonable, unreimbursed and documented business expense he has incurred in performing Executive's duties hereunder;
Accrued Benefits. payment of any accrued but unpaid benefits (including without limitation, any bonus due by virtue of having met all applicable performance targets prior to the effective date of such termination), and any other rights, as required by the terms of any Executive benefit plan or program of Company.
Coverage Election. The Executive shall have the right to elect continuation coverage of insurance benefits to the extent required by law.
[For the purpose of this definition, except as provided in the applicable plan, program or policy, amounts shall be deemed to accrue ratably over the period during which they are earned, but no discretionary compensation shall be deemed earned or accrued until it is specifically approved by the Board in accordance with the applicable plan, program or policy.]
"Date of Termination" means:
if the Executive's employment is Terminated by the Company for Cause, or by the Executive for Good Reason, the date of receipt of the Notice of Termination or any later date specified therein, as the case may be,
if the Executive's employment is terminated by the Company other than for Cause or Disability, the Date of Termination shall be the date on which the Company notifies the Executive of such termination and
if the Executive's employment is terminated by reason of death, Retirement or Disability, the Date of Termination shall be the date of death or Retirement of the Executive or the Disability Effective Date, as the case may be.
"Severance Benefits" means the following:
Bonus. Payment of a bonus [throughout such remaining term] or [for a period of [SEVERANCE PERIOD]], where such bonus shall be equal to the greater of (i) the Executive's bonus during the year prior to the Executive's termination or (ii) the bonus that the Executive would have earned under the Company's bonus plan in the year that Executive was terminated had Executive remained in its employment
Options. The Executive shall immediately become vested in any unvested stock options.
Benefits. Pay health and/or dental insurance benefits [throughout such remaining term] or [for a period of [SEVERANCE PERIOD]].
"Severance Compensation" means an amount equal to [SEVERANCE PAYMENT AMOUNT].
This separate termination benefits clause appears in 46% of Executive Employment Agreements; in other instances, the clause is included within the [grounds for] termination clause.
Negotiating Severance Packages
"With regard to severance pay, we usually think in terms of time -- a certain number of weeks or months of base salary, for starters. One underlying rationale for paying severance pay is the length of the employee's service to the company. Another is the amount of time required to permit the employee to find an equivalent position without suffering economic hardship. At the higher levels of the corporate ladder, these concepts carry less weight than do more broad notions of appropriateness -- usually based on local or industry custom." How Do I Get A Better Executive Severance Package? A Lawyer's View, by Gary A. Paranzino
See, also Severance Practices Around the World