A decade ago, when GE parted ways with Jack Welch a public
clamour broke out over his $417-million golden handshake. How could
a publicly traded company justify such high severance?
Notwithstanding that disapproval, the trend hasn't changed;
most chief executives can expect to receive huge payouts at
For example, if the current CEO of CBS, Les Moonves, were to be
terminated today, he would be due more than $251-million in
severance pay. And it is no different in Canada. When roughly
$50,000 is the Canadian employee's severance norm, how can
senior executives continue to negotiate such disproportionate
Employees tend to accept many unfavourable terms in their
employment agreements when taking a new job because they fear
losing the offer if they attempt to negotiate a better agreement.
Many worry they will be perceived as "difficult" going
into a new relationship. In any event, most employees have little
leverage to improve the terms of their employment as they are
considered more or less replaceable.
Courts recognize this significant imbalance of power. Employers
dictate the rules of the game. But this idea is turned on its head
at the executive level. The chief executives, chief financial
officers and the rest of the C-suite occupants, have the power in
Employment law favours the rich. The more senior the role, the
more money one makes, the longer the courts believe it will take an
executive to become re-employed and, as a matter of law, the more
months of severance they receive, let alone their total
remuneration per month.
In a recent case, Paul Love, an employee for barely more than
two years at Acuity Investment Management, was awarded more than
three months severance for each year of service. The 50-year-old
who was making in excess of $600,000 a year, was awarded nine
months severance. In making its decision, the court considered the
likelihood of Love finding comparable employment and the time it
would take for him to do so.
Quite apart from what courts will award if there is no contract,
my experience acting for senior executives is that large
organizations often agree to virtually anything to procur the
talent they want. Accordingly, executive compensation packages
include large base salaries, high annual bonuses in both cash and
stock options and much more. Increasingly, shareholders or, at
least directors of the board, want CEOs to be paid in stock to
align their motivations with the success of the company. But the
other side of this is that terminated CEOs are being paid vastly
more than what they would be otherwise entitled to in court.
And if a CEO's reputation is tarnished in the course of
being terminated, additional damages may be sought. Joel Matlin,
former president and CEO of AlarmForce Industries Inc., recently
said he is suing his former company for $11-million in damages for
wrongful dismissal, punitive damages and loss of reputation. Matlin
was allegedly "shocked" when the board of directors fired
him without warning or severance — despite not being
terminated for cause.
His damages may even be substantially increased if his claims
for loss of reputation are supported. Matlin was client facing and,
given his extremely public and negative departure from AlarmForce,
he is arguably now "tainted" and rendered less
employable. His personal branding has been associated with one
company for so long that he has become a household name. It will
undoubtedly be difficult for him to find a similar position
offering a similar level of pay — that being the test the
court applies in determining how much Matlin is owed.
Because an organization's direction is largely dependent on
the strength of its senior executive team and payouts on
termination of senior executives affect companies' investment
value, it is time to take a closer look at the financial
motivations provided by compensation and termination
This article originally appeared in the Financial
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