Negotiating severance upon willing departure

Question

Background

In a welcome lunch at my current company, one of the founders (technologist) explained that he first met another of the founders (lawyer) when the technologist employed the lawyer to help him negotiate his severance from a C-level position at a large company which he was leaving by his own choice. The company he left still likes him, and tried very hard to keep him, but he wanted to leave to found his new company. The departure, and events leading up to, and following it were all amicable. There was no confrontation in any aspect of the process.

My understanding is the negotiation was primarily over how much money the technologist would receive upon departure.

The new company he formed is not in the same industry as the former company.

My Poor View

The idea of receiving a severance upon quitting a position still shocks me; the notion of hiring a lawyer in an amicable situation like this to help negotiate the severance nearly boggles my mind.

It seems that if this practice is common, it incentivizes people in such positions to leave prematurely. Suppose I am in such a position, and am offered some new position with a 20% raise and all other factors being truly equal with my current role. Love of my job and those I work with and all these qualifiers are considered neutral. If I'm able to also negotiate a severance, it seems akin to a signing bonus for taking the new position outside of my current company, with the key difference that my new company doesn't pay it.

Note: I'm not (yet) in such a position, and expect that I'll work through two level changes and a promotion or three before I am even positioned for this, but at some point I will be done at my current company and will quit of my own accord. Probably to found my own new company.

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1. Please explain how this practice benefits the company losing the employee. I fully understand asking the departing employee to sign an additional NDA and/or non-compete agreement on top of what was signed upon hiring/promotion. Does this need to be financially rewarded?

2. Please help me understand how common this is, and at what levels (senior manager, director, CxO?) this begins to come into play.

Answer 1

Its possible he had a non-compete or some other clause that would keep him from working in the original field for some period of time. Often these types of agreements, depending on local laws, can either be illegal or require the company to pay the person while they are not able to work in that field.

He probably got a lawyer because of those types of clauses, which is not abnormal for a C-Level executive to have. He has intimate knowledge of trade secrets and company intellectual property, quite a few companies will pay to keep them from working for competitors. Fortunately those clauses almost always must have expiration dates, but its not often written into an employment contract the value of that period of time.

So Q1:

Please explain how this practice benefits the company losing the employee. I fully understand asking the departing employee to sign an additional NDA and/or non-compete agreement on top of what was signed upon hiring/promotion. Does this need to be financially rewarded?

The company losing the employee benefits in that they do not have to compete against somebody who has intimate knowledge of company practices and pricing strategies. Yes, by law in some places this must be financially rewarded or its not enforcable. You can't usually bar somebody from working just because they worked in the field and know something. People should be free to make a living, and most courts won't enforce a contract that keeps somebody from being employed unless they are compensated.

Q2:

Please help me understand how common this is, and at what levels (senior manager, director, CxO?) this begins to come into play.

Very common, and typically at any C-Level, VP, President, even engineering and with the people who develop intellectual property or negotiate contracts.

Answer 2

This sort of thing is unusual, but far from unheard of. It's more common in places and situations where a company owes an employee a significant amount of severance if it fires them. The benefit to the company is that they will try to negotiate so that the employee resigns for a payment of less than they would be owed if they were fired. High-level managers often have clauses in their contracts specifying how much they get if the company lets them go. The company would be looking to reduce that.

The other benefit to the company is that it often looks better for them if an employee resigns rather than is fired. This is true of high-level managers, since firing them implies that whoever hired them didn't do a good job. Firing a popular employee may also cause waves throughout the company which they are anxious to avoid.

This scenario is not common, but it does happen, and it can happen at all levels (except the most junior where firing doesn't cost much). It's less common in the US because people can generally be fired very cheaply there.

I've personally been in such a situation, so let me explain my case. The company I had been working for a long time started treating me badly - not giving even minimal pay raises, shutting me out of meetings. Eventually they put me on a performance improvement plan, even though they couldn't point to any deficiencies in my performance, or even any changes in it. The only item on the PIP was a vaguely defined 'attitude'. I had a frank conversation with the head of HR, who had clearly been told to do this and wasn't happy about it, and she admitted they wanted me out. Since I had been there a long time, the severance was going to be significant. The PIP was a ploy to either try to make me resign, or see if they could find enough performance deficiencies to fire me with cause. I told them I was pretty sure I could achieve any performance target they set me, so at that point I was offered a negotiated settlement. I resigned in exchange for a sum rather less than the severance. I had a new job before the notice was up.

Answer 3

These things are typically negotiated up front. There is likely some unforeseen situation not covered by the initial severance, so the company is negotiating additional terms. Companies can change drastically, and partners can become competitors (a Google founder was an Apple board member, pre-iPhone), so it's not uncommon that the original terms would not offer the company sufficient protection in a non-compete.

So the benefit to the company is the additional terms they are negotiating, likely due to changing business circumstances, or a lack of foresight in the original terms. If the company is asking for any agreement, their needs to be "consideration" for the contract to be valid, which means that the employee must receive "something". As a C-level, he's probably aware he can hold out for something worthwhile.

It is not unusual for an experienced professional at almost any level to negotiate severance. If you are being courted away from another company--and therefore leaving deferred compensation on the table--it's normal to build compensation for that into the hiring terms. It's more common with sales people with significant commissions--even those not in management--and senior level managers. You should work with a recruiter for any role, and inquire with the recruiter.

Severance is unusual if you are not leaving compensation at another company, or taking a very senior role.