Study Finds Big Gaps In Executive Severance Policies

Despite the intense scrutiny focused on executive compensation issues in recent years, a new study finds that many organizations are leaving gaping holes in their compensation policies that could invite trouble. For example, the study showed that 25% of companies do not have executive severance policies, and of those that do, only half formally define the conditions, events and terms for payment. Nearly one-third of CEOs do not even have employment contracts. "In order to protect companies in these litigious times, contractual agreements should be in place before these executives start," says Bill Gerek, global director of regulatory expertise in the Hay Group's Executive Compensation Practice. "The timing should be similar to a pre-nuptial agreement, where the parties agree to the details when everyone is still happy." The study also found that companies that use narrow definitions of "for cause" terminations were the ones most likely to get exposed to costly payouts. "To avoid lengthy and expensive payouts for poor performance or misconduct, compensation committees need to carefully review whether the definition of 'cause' is sufficiently broad," explains Doug Jensen, head of Hay Group's U.S. executive compensation practice. "It should include real performance criteria to judge the executive's success." For the study, the global consulting firm surveyed 223 corporations representing a cross-section of industries.

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