How to Negotiate a Better Severance Package in Your Offer Letter

As an executive contemplating a new job opportunity, you’re probably laser-focused on the role’s responsibilities, compensation, and potential for impact. But before you sign on the dotted line, there is one more crucial item to consider: negotiating a robust severance package as part of your offer letter.

In today’s business climate, severance agreements are more critical than ever. A well-crafted severance package provides financial security and peace of mind, empowering you to take on the new role, knowing that should things not pan out, you are covered.

At TONG LAW, our California employment attorneys have deep experience helping executives negotiate severance packages before accepting a new position. Here are our top tips for proactively securing severance as part of your job offer.

Understand the Key Elements of an Executive Severance Package

Executive severance agreements are typically far more extensive than those offered to rank-and-file employees. In addition to severance pay, an executive package may include:

• Accelerated vesting of stock options, RSUs, or other equity grants
• Continued health insurance benefits or COBRA premiums
• Ongoing life and disability insurance coverage
• Additional retirement account contributions
• Outplacement/career transition services
• Retention of a company car, phone, laptop, or other equipment
• Reimbursement of relocation expenses
• Payment of legal fees incurred in reviewing the agreement
• Garden leave or paid notice period
• Release of claims against the company

When negotiating severance terms, consider your holistic financial needs and push for a package that will sustain your lifestyle for a reasonable period while you search for a comparable executive role.

Tie Severance to Specific Termination Scenarios

Most executive severance packages are contingent upon certain termination events, such as:

• Termination without cause
• Constructive termination/resignation for good reason
• Termination in connection with a change in control

“Cause” should be defined narrowly and objectively, limited to egregious conduct like willful misconduct, felony conviction, or material breach of your employment agreement. A broad or vague definition of cause gives your employer wide latitude to fire you without paying the negotiated severance.

Likewise, severance agreements should define “good reason” for you to voluntarily resign and still receive severance. Sufficient grounds often include diminution of duties, reduction in pay or benefits, change of geographic location, or other material breaches of your agreement. Delineating events that constitute a good reason to quit allows you to exit with severance if the position substantially changes.

Negotiate a Mutual Non-Disparagement Clause

Many severance agreements include a non-disparagement provision that bars the departing executive from making negative statements about the company. However, these clauses are often one-sided.

It’s prudent to negotiate a mutual non-disparagement clause that prohibits both parties from disparaging each other. This is especially important if:

• You are leaving the company on contentious terms
• You have reasons to believe or you have received threats from a supervisor about damaging your reputation
• You have raised concerns about misconduct within the company

A mutual non-disparagement clause prevents a disgruntled former employer from undermining your professional standing with former colleagues or prospective employers. It helps ensure an amicable and professional parting of ways.

Lock Down the Severance Payment Terms

Executive severance is commonly expressed as a multiple of your annual base salary, typically 1-3x, with C-suite severance often on the higher end. Severance is then paid either in a lump sum or via salary continuation over 12-24 months.

You can seek to negotiate a higher severance multiple based on tenure—e.g., 1x salary if terminated before one year of employment, 2x after two years, and so on. Another tactic is to request a greater multiple if terminated without cause in the first 1-2 years and a lower multiple thereafter. This insulates against being promptly pushed out while still providing a safety net longer-term.

Ensure Your Equity Vests

If a significant portion of your pay is in stock options, RSUs, or other equity, your severance agreement should accelerate vesting in full upon any qualifying termination. You’ve worked hard to increase the company’s value, and you shouldn’t forfeit that equity if forced out.

Without accelerated vesting, you would have to quickly exercise stock options with your own money upon termination, triggering a painful tax bill. Ask for ample time to exercise vested options post-termination, ideally a year or more.

Resist a Non-Compete

California law prohibits non-compete restrictions in most employment contracts. However, some companies still try to hamper executives from working for competitors through expansive confidentiality provisions or by conditioning severance on not going to work for a competitor.

As an executive, your career can’t afford to be sidelined from your industry if you need to leave your job. Reject any covenants that unreasonably limit your professional opportunities.

Do Not Be Afraid to Negotiate

In a tight labor market, companies are vying for top executive talent. This gives you real bargaining power to negotiate severance as part of your offer package.

Raising severance at the offer stage may feel uncomfortable, but it’s expected in executive hiring. Companies know severance is part of the deal. If anything, insisting on an appropriate severance package demonstrates business sophistication and financial acumen.

Approach the severance discussion tactfully. Wait until you’ve aligned on core job responsibilities and pay. Then, frame severance as an essential component of any executive role, reflecting the company’s commitment to you and pledge to treat you equitably. Don’t get adversarial, but hold firm that severance is a necessary element.

Partner with a California Employment Lawyer

Executive severance agreements are nuanced contracts that can significantly affect your finances and career. Partner with an employment attorney to negotiate your package to ensure competitive and maximally protective terms.

At TONG LAW, our California employment lawyers have negotiated lucrative severance agreements for hundreds of C-suite officers and senior managers. We collaboratively support our executive clients and their career advisors to craft severance terms that squarely align with their professional objectives and personal needs.

If you are a California executive evaluating a new job offer, contact TONG LAW for guidance on negotiating severance provisions. We will be your steadfast advocates to secure the most favorable severance agreement.