Separation Agreements and Severance Payments: A Primer for California Executives

California executives who receive a severance package that they believe is inadequate may wonder if there is anything they can do about it. The short answer is yes; severance is often negotiable. But successful negotiation requires a fundamental element: leverage.

Companies are not charities, and they generally will not increase severance simply because an executive finds the package to be unfair. To negotiate a better package, you will need to identify what leverage exists, and be prepared to use it.

Forms of Leverage

Several types of leverage may come into play in a severance negotiation.

You may have legal leverage if the employer potentially violated a labor or employment law. For example, a termination that may involve discrimination, retaliation, or another legal claim can provide meaningful negotiating leverage. The strength of that leverage will depend on the facts and the potential exposure that the company faces.

Affect leverage can also have an impact. If you have served the company loyally for many years and have strong relationships with senior leadership and other team members, respect for you and an interest in maintaining those relationships may push the company’s decision-makers to sweeten your exit package.

Public relations leverage may exist when a company is concerned about the potential consequences of a contentious separation. Companies who fear that pushing you out on bad terms could lead to damaging publicity, disruption, or harmed relationships with key stakeholders may be willing to pay more to ensure a quiet, amicable departure. 

Finally, business leverage may arise when the company expects to need your cooperation after departure – such as your assistance with the transition or with customer relationships – or if the company anticipates potentially doing business with you in the future. 

Willingness to Use Leverage

Having leverage is only part of the equation. An executive also must be willing to use it. This is where many executives hesitate. They may worry about damaging relationships with the company, former colleagues, or clients, or about harming their reputation in a close-knit industry. However, a company will rarely grant, say, an extra six months of severance simply because the executive feels the package is inadequate. The negotiation will ultimately turn on the leverage available and how that leverage factors into the company’s decision-making. 

If you decide to move forward with negotiations, the appropriate strategy will depend on the circumstances. In some cases, a direct, principal-to-principal discussion between the executive and the CEO or board may be the most effective approach. In more contentious or legally complex situations, having an experienced employment lawyer handle the negotiation may be preferable.

Stock Options and Equity

Equity compensation is often one of the most significant issues in an executive separation. Many executives are surprised to discover that termination can result in the forfeiture of unvested stock options, restricted stock units (RSUs), or other equity awards. The specific consequences depend on the governing equity plan, employment agreement, and circumstances of the separation. In many cases, unvested equity is forfeited when employment ends unless the applicable documents provide otherwise. 

The best time to negotiate meaningful severance protections and equity acceleration is not when you’re on your way out the door. It’s during the recruitment stage. When a company is actively trying to recruit a sought-after executive, the executive typically has greater negotiating leverage than after the employment relationship has ended. That is the time to address protections such as severance upon termination without cause and, where appropriate, full or partial accelerated vesting of equity upon termination.

With regard to typical severance packages, there is no fixed formula under California law, and packages vary widely depending on many factors. But a common rule of thumb is two to four weeks of base salary for each year of service. Packages may also include a minimum of one month’s salary and a cap of up to 12 months of salary.

The Takeaway 

If you feel your severance package is not generous enough, you may have an opportunity to negotiate better terms. Whether the negotiation is successful will depend on the leverage that you can bring to the table, and your willingness to do so. 

Jeffrey S. Sloan is the Managing Shareholder of Workplace Legal, APLC, an employment law firm with offices in San Francisco, Oakland, and New York. For over 30 years, Jeffrey has represented businesses of all sizes, as well as high-level executives and professionals, in complex labor, employment, and HR matters.