Human Capital Outlook

Growing Importance of Severance Package in the overall compensation plan

Increasingly, there is a discernable trend across senior appointments amongst technology companies in India. This trend is fast evolving in the hiring process, born out of the fact that with a booming job market, potential employees want to minimize the risk associated with accepting a role in a company. Job offers with a terrific title, exciting salary & meaty role are no longer being viewed as complete. A carefully drafted severance or redundancy pay in case things don`t work out is not only becoming acceptable, but highly detailed & elaborately worked out.

India , severance was non existent even at the heights of the dotcom boom, forget about its negotiability at the outset or post haste. The biggest of companies were oblivious to severance pay being doled out to any key executive. The trend actually started with Indian companies hiring expatriates for their international operations. A common concept in the west, these executives refused to join without the separation terms being articulated in advance. Indian companies were perceived to be a high risk option, akin to start-ups, hence the insistence. Then, expatriate Indian executives carried forward the idea, asking for some form of protection having to let go their secure positions in global companies. The concept has now permeated deep & departure deals are being negotiated in advance.

The author of this article has been involved in several such appointments where severance, disclosure & release terms were sorted out well in advance. One particular example is worth mentioning. The Chairman of a 200 Mil $ Indian IT company was looking to strengthen its presence in the US. He sought to hire US Operations & approached us. We initiated the search in August of last year, introduced candidates & he closed the meetings with a shortlist by the end of Sept. An offer was made to a highly deserving candidate who was the deputy head of global sales for a billion $ Indian technology firm. The chairman was happy to offer him a total package of 300,000 USD. The employment contract was drafted in Nov. & the executive signed up in February of the next year, all the intervening months were lost in negotiating, not the salary, but severance terms! Meetings with attorneys, solving issues regarding ESOP vesting, arbitration vs. litigation, what all constitute ‘cause’ to the extent of who would pay for the attorney’s fee (!), everything was put on paper, the objective being to ensure that the company retains its rights, without compromising the employee’s options to protect his interests in case of a premature  separation

When one is being hired, all sorts of representations may be made about how he will never have to worry about looking again for a job as the company values his previous work & believes that he would be of immense value. However, unless one gets those promises in writing, the person making them is likely to conveniently forget he ever said anything of the sort or, just as likely, will no longer be with the company when the issue arises. Despite the hot job market, it is in the interest of the executive to negotiate severance terms. One is particularly well positioned to do so if he has skills that are in high demand or the person has other job offers. Also, the best time to get the best departure deal is before one even accepts a position.

For middle management jobs, one may not be in a position to negotiate for severance, he may not want to jeopardize his chances of landing a good job by dwelling too much on the issue. However, for senior management, with salaries crossing 100 Lakh coupled with roles involving relocation from an established base in a city, this takes preeminence.

Less than two years later, he lost his $100,000-plus job following a corporate realignment. The company offered two months` pay as severance.

It is still far cry from situations in the where companies like EDS have had to dole out severance package of $35 million to its ex-CEO Dick Brown or the more recent, $130 million severance package for Michael Ovitz at Disney or the $21 million package for Carly Fiorina of HP. But slowly and surely, employers in India are willing to negotiate some sort of a deal, just in case the relationship does not work out.