For executives, a severance package is more than just a paycheck. It can serve as a bridge between career chapters, a financial safety net, and a bargaining tool for your next move.
Unlike standard employee agreements, a severance package for executives is highly tailored and can involve millions of dollars in compensation, benefits, and equity. This article will help you understand the key elements, spot opportunities, and avoid common pitfalls.
An executive severance package typically comprises pay, benefits, and other considerations provided to an executive upon termination of employment, often due to reasons such as termination without cause, restructuring, mergers and acquisitions, or a change in control.
Executives should evaluate not only the cash compensation offered but also how equity, benefits, and restrictive covenants are handled.
May include salary continuation or a lump sum.
Often, the most valuable element for executives.
Executives can and should negotiate severance packages. Companies expect some negotiation, especially regarding equity treatment, restrictive covenants, and cash compensation.
Key leverage points may include:
Avoid common mistakes such as signing too quickly or failing to involve professional advisors (attorney, financial planner, or tax advisor).
Lisa, a 20-year veteran in the technology industry, served as Chief Marketing Officer for a mid-sized software firm. When the company announced its acquisition by a larger competitor, Lisa’s position was eliminated as part of the merger.
The unvested stock options and restricted stock units represented a significant portion of Lisa’s potential wealth. The proposed package would cause her to lose nearly $2.5 million in unvested equity.
Understanding contract language and consulting professional advisors can significantly impact executive severance package components. Clauses involving equity acceleration and change-in-control can be key wealth events for executives.
Severance payouts can result in substantial tax implications. Lump sums might push you into higher tax brackets, while salary continuation can help spread out the tax liability.
Integrating severance payouts into your financial plan can help you keep more of what you’ve earned. [Reference: IRS Guidance on Severance Pay.]
| Feature | Lump Sum Payment | Salary Continuation |
|---|---|---|
| Cash Flow | Immediate payout, large cash infusion | Steady income stream over time |
| Tax Impact | May push income into higher tax brackets in a single year | Spreads income over multiple years, may reduce bracket creep |
| Flexibility | More control over investment timing and debt repayment | Predictable payments, but less immediate flexibility |
| Risk | Risk of overspending or poor timing of investments | Payments stop if company defaults or goes bankrupt |
| Best Fit | Executives comfortable managing a large payout with tax planning | Executives who prefer steady income and reduced tax spikes |
The right choice depends on your tax situation, investment goals, and comfort with managing cash flow. A financial advisor can help you weigh the trade-offs. [Reference: IRS Guidance on Severance Pay.]
Non-compete, non-solicit, confidentiality, and clawback provisions can directly impact your future career options. Executives should thoroughly review these clauses and negotiate changes if they are overly restrictive.
Executives nearing retirement should view severance packages as part of a broader financial plan. Consider how this influx of capital affects:
Typically, this includes cash compensation, equity treatment, benefits continuation, and sometimes non-financial support, such as outplacement services.
Yes. Companies expect negotiation, especially regarding equity, restrictive covenants, and cash payouts.
Treatment varies by contract. Some agreements accelerate vesting; others forfeit unvested shares.
Severance is generally treated as taxable wages and subject to income and payroll taxes. Equity treatment depends on vesting and sale.
Your severance package could be one of the biggest financial events of your career. Before signing anything, review the entire package with professional guidance.
Our team specializes in helping executives make informed decisions and integrate them into an overall wealth plan. Schedule a confidential consultation today.
Any discussion of taxes is for general information purposes only, does not purport to be complete or cover every situation, and should not be construed as legal, tax, or accounting advice. Clients should confer with their qualified legal, tax, and accounting advisors as appropriate.
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Jordan Bilodeau, CFP®, CEPA, is the Director of Planning & Strategy at Spaugh Dameron Tenny, where he leads firmwide planning initiatives and helps clients navigate complex financial decisions. With experience in portfolio design, tax strategies, and business succession planning, Jordan works with executives, physicians, dentists, and successful retirees to coordinate every aspect of their financial lives. He holds both the CERTIFIED FINANCIAL PLANNER® and Certified Exit Planning Advisor designations and has a Master’s degree in Wealth and Trust Management, providing tailored guidance for clients.
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