Severance, Golden Parachutes and Reference Letters

When an employee is fired or laid off, he or she may be offered a severance or separation package. This package can be a combination of salary, a lump sum of cash, stock options or other benefits. It is designed to thank terminated employees for their work and to ease their transitions to new jobs. The amount of severance pay offered depends on the position held, length of service with the company, service record and the reason for termination. Some terminated employees manage to negotiate for more severance money based on these factors or by giving up the right to sue.

Some companies have written severance policies while others propose a different package for each individual. A severance package could equal a year’s worth of pay or much less, but almost everything received as part of a severance is taxable.

An employee may continue to receive a salary or get a lump sum in his severance package. A lump sum payment is just what it sounds like - you get all the money agreed upon in your severance package in one lump payment. This has some key advantages, including a clean break from your employer; there’s no need for continued correspondence because you’ll have your money. However, an employee’s other benefits, such as health insurance, will cease once he gets a lump sum.

Salary continuation means that the terminated employee stays on the payroll and is paid every pay period as if still an employee. According to the agreement, the salary continuation may last for a set period or until the former employee finds a new job. The ex-employee also retains benefits when on salary continuation, again because he or she is still on the payroll and is treated in many ways like an employee (albeit one who no longer shows up for work). A similar method to salary continuation, but one with clear disadvantages, is periodic payments, in which the terminated employee receives several equal payments over time. The former employee is not officially on the company’s payroll, meaning that there is less oversight, potentially no financial record and uncertainty about how missed payments can be requested or recovered.

If given the choice between a lump sum, salary continuation or periodic payments, keep in mind the amount of money offered compared to your needs and how long it might take you to get a new job.

Golden Parachutes
Also called golden handshakes or change-in-control payments, a golden parachute is a large sum of money -- or a combination of cash, stock options, consulting contracts and other benefits -- to be paid to one or more executives in the event of a takeover or change in ownership of a company. The practice became popular in the 1980s, and now golden parachute arrangements are in place for almost 80 percent of companies in the S&P 500 [ref]. Golden parachutes were initially intended to guarantee compensation to an executive should he or she be fired after a merger or takeover. Now some CEOs get large pay packages in mergers and still remain in control of the new company. An example is former Gillette CEO James Kilts, who received a $165 million pay package after orchestrating the sale of Gillette to Procter & Gamble in 2005. He was particularly criticized by members of the Boston media, where Gillette was based; critics claimed he benefited financially at the expense of shareholders and the 6,000 jobs that were cut from the combined company.

Some executives also receive golden handshake-type severance packages when they resign. In January 2007, Home Depot CEO Bob Nardelli resigned and received a severance package worth roughly $210 million. However, other executives have declined opportunities to receive large payouts, claiming that their regular compensation is sufficient and that executives should match company performance and align with shareholders’ interests [ref].

Severance payments more than 2.99 times an executive’s average annual compensation are subject to a 20 percent tax, but further regulation and government oversight may happen in the future. Some shareholder groups have begun lobbying to allow shareholders a greater say in executive compensation, and many companies are responding, usually by allowing their stockholders to submit non-binding resolutions on executive pay.

The golden parachutes, extremely large severance packages, that many ousted executives have received in recent years have drawn criticism.

References
Though letters of reference may be one of the last things on your mind when you’re fired, this is actually the best time to consider them. Of course, obtaining a letter of reference can depend on the circumstances of your termination, but not putting down a past employer as a reference will be taken as a bad sign by prospective employers. If you are unhappy with a reference letter, you can try to discuss it with the writer.

You can also request a service letter explaining the reasons for your termination. A service letter is required by law upon request in California, Maine, Minnesota, Missouri, Montana, Nebraska, Nevada, Oklahoma and Washington. If unable to obtain a service letter, ask your supervisor for the reason behind your termination and write it down. Include the date, time, place and any witnesses. Read the letter to your supervisor and ask him to confirm its content.