The following is a guest post from ESI Money, a blog that focuses on achieving financial independence through earning, saving, and investing (ESI). It’s written by a fifty-something ex-executive who’s now enjoying the fruits of early retirement. Severance negotiation stories are great because they are never discussed. The more you know, the more power you will have. – Sam
As most ONIG Financial Blog readers know, Sam is the expert on engineering your layoff.
His methods have helped hundreds negotiate great packages as they leave their employers for greater things. Obviously this is a tried and true method for maximizing your exit from a company.
But it’s not the only way. Today I’ll be telling you how you can negotiate your severance before you even take a job.
This post will detail the ins and outs of employment contracts (sometimes referred to as employment agreements). I prefer the former since that’s what every executive I’ve ever worked with calls them.
Employment contracts are negotiated between an employer and employee prior to the employee joining the company. These contracts grant rights and privileges to each party as well as impose requirements on both.
This post is not meant as legal advice but rather a guideline to help you learn about employment contracts and potentially make use of them. If there are lawyers with personnel contract experience join us in the comments to fill in any blanks I miss.
I’m a business executive who has dealt with employment contracts for two decades, had employment contracts with four separate companies over almost 20 years, and had payouts on two of those agreements for almost $200,000 total.
As with any legal document, employment contracts can take many forms. But here are some of the most common requirements an employee may agree to in an employment contract:
Here are some common provisions an employer may agree to:
In addition to the above, there are often sections pertaining to the overall agreement such as:
To boil things down to the vital elements, here’s the essence of an employment contract:
If it’s not obvious, the pros and cons for the employee boil down to these:
In other words, it’s a pretty sweet deal for the employee. Having visibility is why most executives want an employment contract.
Generally at some time in the recruiting process, the subject of an employment contract is brought up, usually by the employee. Employers are loathe to sign such an agreement as it requires them to pay an employee if there’s a falling out.
Employees want a contract, of course, because it guarantees them a payout if the relationship goes south.
So the topic is brought up and the negotiation is started. Is there an agreement? What are the key provisions? Who does what? And so forth. Until there’s some sort of resolution.
Employment contracts are difficult to get, especially in a slack labor market.
As I noted above, employers don’t like to give them because they basically take on financial liabilities (which no company likes to do) without a lot of compensation in return.
So why do employers give them and who gets them?
Employers give contracts to key employees in order for them to 1) accept a job initially and 2) remain in a job (with a sense of security) as long as useful.
In short, the employee has to be valuable enough that the benefit of having the employee is greater than the liability of the agreement.
As such, they are generally given at the executive level to managers who have the ability to deliver substantial business results. That said, any level of employee, as long as they are important to the company, can get one.
Many of these principles can be illustrated through my personal experience.
In 1999 I joined a new company as a vice president.
It was standard for them to have employment contracts with all executives.
The standard agreement at the company basically entitled me to one year’s salary if I was let go for almost any reason. The exceptions were so unlikely to happen (get convicted of a felony, act immorally in a way that hurt the company, etc.) that there was virtually zero chance of me not getting a payout if I was let go. I was thrilled.
Five years down the road I was ready for a change and preparing to be hired by a new company as an executive vice president. This organization was much smaller, but about as profitable as my current company. The new, small company had no one with an employment contract — they didn’t even know what one was (or said they didn’t).
I provided them with a copy of my current agreement and told them I needed one before I would come aboard. They consulted their lawyer and basically copied the one I had at the old firm. The only change was they reduced the one year payout to six months. This was agreeable to me given my new compensation was much better and I joined the firm.
I worked for that company for nine years when another company wanted to hire me as their president in August 2013, a significant move for me. Again when I brought up the subject of the employment contract the Owner/CEO claimed he’d never heard of one. I provided my copy and they eventually copied it. I joined the firm.
The first full year I was with them, we had a record sales year. The fourth month into year two the CEO left to run another business, they brought in a new CEO who didn’t want a president, and they laid me off in May 2015. Or in kinder terms they “exercised my contract”. I was paid $150,000 to go away. Not bad.
At that point I contemplated early retirement, but Sam had not yet convinced me of its benefits. I interviewed with a new firm and was hired within three months of being laid off. They too claimed they had never heard of an employment contract. I gave them a copy of my most recent one and we began to negotiate back and forth.
Two significant provisions changed:
1) there was a sliding scale based on when I was let go of what I would receive (if let go without cause within the first year I got one year’s salary, if let go without cause within years 2-5 I got six month’s salary, and so forth)
2) there was a provision added that detailed how the employer could get rid of me if I didn’t perform the way they wanted.
I was fine with option #1 but pushed back on #2. The purpose of an employment contract is to pay the employee a set amount if he is let go for ANY reason other than criminal activity or significantly hurting the company. They wanted to add a performance element, something that is usually not in an employment contract. I had been around the block a few times and knew that employers can trump up almost anything to be a performance issue if they want, so I didn’t want the provision.
But they held fast and gave me a take-it-or-leave-it ultimatum. In the end I took it since even if they enacted the performance clause I still received five months’ worth of guaranteed salary which wasn’t that different than the six months I had.
Well, as you might know it, things did not go well. They created nonsensical issues and gave me unattainable objectives to hit within a 40-day grace period (the first part of my severance time). I knew I wouldn’t hit them, didn’t hit them, and 40 days later they exercised part two of my contract and paid me almost $50,000 to get lost. You can read the specifics in my series titled I Retired!, which is what I did at the end of it all.
Now that we all have a common understanding of how employment contracts work, here are a few tips for you to consider as you work to negotiate your severance before you’re hired:
I know this is a broad and complicated topic and you likely have a ton of questions and thoughts. I’ll stop by several times throughout the day to try and answer what I can or at least point you in the right direction.
In closing, the time to think about negotiating your severance is the same time you’re considering taking a new position. Take the steps upfront to ensure your severance is set before you even set foot at the company.
Note from Sam: I first published How To Engineer Your Layoff in 2012 and have since expanded it to 180 pages from 100 pages in the 3rd edition for 2021 and beyond. I’ve continuously used reader feedback and successful case studies to make this the best and only book on the market to teach people how to negotiate a severance.