A study by HR consultant Hay Group shows that 25% of companies don’t have a written pact governing how departing executives will be compensated. Moreover, even for those companies that offer executive severance, only half formally define the conditions, events, and terms for payment.
In fact, almost a-third of CEOs do not have employment contracts while such pacts below the CEO level are even less prevalent. Roughly half of executive vice presidents/senior vice presidents and about 65% of vice presidents work without contracts, according to the report.
“In order to protect companies in these litigious times, contractual agreements should be in place before these executives start,” said Bill Gerek, Hay Group’s Global Director of Regulatory Expertise in its Executive Compensation Practice, in a news release. “The timing should be similar to a pre-nuptial agreement, where the parties agree to the details when everyone is still happy.”
The study also found, unexpectedly, that only 50% of CEOs are paid for more than one year following their departure, and only 6% are paid for more than three years. This compares to the vice presidents, where 85% of whom are paid for up to one year.
Twenty percent of the Hay respondents said they figured severance benefits as a fixed multiple of pay. While the majority of companies determined the severance payment based on salary, just over 20% included salary and bonus. At companies with annual sales of more than $1 billion, salary and bonus is the prevalent practice, however.
The study also found that companies were most exposed to costly, long-term payouts when they had narrow definitions of “for cause” terminations. Only 13% of the participating companies cited breach of contract firings in those documents, fewer than 25% included “gross negligence,” and just 15% of the companies include misconduct outside the scope of employment as a termination issue.
Almost 20% 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.
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