What You Need To Know About Incentives and Severance

New employment has the sparkling shine of a newly minted penny; however, just as every new penny eventually tarnishes, so does a job which means getting your contract’s executive compensation right matters.

As a C-suite executive, you’ve been around the industry for a long time, but industry knowledge is different from being able to legally protect your rights.

With rising public concern about executive salaries, getting fair compensation may be more difficult than in the past.

When entering negotiations, you need to know what questions to ask to ensure that you are being justly compensated for your talents.


People work not only because of their passion, but also because of the economic compensation.

This means that you need to understand the impact incentive choices have on your overall personal bottom line.

There are several differences between the types of packages that can be offered.

Long-Term Incentives

The name of this incentive sums up its definition.

Money or stock options are awarded after a specified period, usually three years. These incentives try to hold the C-suite accountable for the overarching corporate long term objectives.

The incentive traditionally relates to how well a company’s stock or earnings have done over the course of the period.

For example, if the company’s earnings have increased by 10% from the start of the period until the end, then the individual will be awarded an extra 10% of their salary in bonus.

While if the earnings are at 5% increase, there may be a 5% of salary bonus awarded. If the earnings increase less than 5%, no award would be provided.

The problem with this kind of award is that the incentive may be based less on the senior executive’s skill and more on things out of their control such as the stock market.

Short-Term Incentives

Again, the name of these implies the goal and purpose.

These incentives are often called annual incentives and are intended to reward achievement of short term company business strategies.

These plans are written as a percentage of salary with target and maximum levels of performance to meet target and maximum levels of pay. To mitigate risk taking, the maximum levels may be capped.

What Does This Mean For You?

Neither type of incentive is better. In terms of a contract, this is where your attorney can help you by discussing your long-term needs.

Long term incentives related to longevity in position and commitment to the company.

Senior executives are expected to commit to the long haul. This means that the contract intends to encourage decisions for long term growth and to discourage leaving before those goals have been achieved.

Short term incentives intend to encourage the ongoing day-to-day processes that help keep a company afloat.

From the corporate perspective, long term may be more important. From the individual perspective, short term may be more important.

When deciding on contract terms, both parties need to agree on a vision for employment and on an overall employment picture.

Severance & Change In Control

Upon being offered a position, most people react with excitement. In the long term, however, contracts are supposed to help protect the interests of both parties. This particularly applies to employment termination.

Consideration Of Severance

This section of the agreement includes more than just money.

Should the company terminated your employment, you want to ensure that you know the manner through which payments would be made, when they would be paid, and how they will be reported for tax purposes.

In addition, health insurance benefits should be included in this section of the contract. In the modern day, health insurance may be even more important than money.

In terms of health insurance, you want to know whether you will be covered under a group COBRA policy after termination, how long that will last, when the premiums are paid, and whether other insurance premiums such as life and disability are covered.

Finally, another important piece to the severance section would be equity. If you have earned equity such as stock options, restricted stock units, phantom stock, or stock appreciation rights, you want to know how these will be treated.

You want to consider whether you would want a cash value negotiated, how your eligibility requirements will be met, and whether there will be a potential buy-back situation.

Change In Control

Start-ups sometimes have amazing ideas that can be leveraged if another company chooses to buy them.

In this case, if you are working with a startup, you want to think about what would happen to you as an executive in the event of a change of control, or more specifically in the event your company is sold.

The goal of a change in control agreement would be to protect you for a period after the sale of the business.

Most important in looking at the contract, you want to make sure that the time is reasonable, that the salary and vacation accrued are included, and that all outstanding equity is considered.

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