Reasons to Consider Executive Severance & Change of Control Agreements
Many technology and life science companies periodically review the severance and change of control components of their existing executive employment and compensation agreements, to ensure that they are competitive and drive the right incentives.
Severance and change of control protections provide a limited group of executives and key employees with cash and equity-based rights in the event of an involuntary termination of employment either prior to or in connection with a change of control.
Jason Borrevik, a Principal at Compensia, notes that such rights may include continued salary payments, a pro-rata or full annual bonus component, company-paid health and welfare benefits and equity award vesting acceleration. Companies may consider establishing updated (and potentially standardized) severance frameworks for eligible executives (and certain employees) in their periodic compensation reviews for key reasons:
- Contribute to overall competitiveness of executive total compensation and enhance the company’s ability to attract/retain key executives.
- Avoid “one-off” severance negotiations both at time of key executive hires and in actual termination scenarios; encourage prompt, rational decisions around executive “viability” and continued employment.
- Align the interests of key executives with those of the company’s shareholders (and across the executive team) and promote objective evaluations of strategic alternatives by executives.
- Motivate executives to drive business success independent of the possible occurrence of any change of control transaction and reduce distractions associated with the potential for a transaction or termination of employment.
- Maximize shareholder value by retaining “key” personnel through deal close so that the company is delivered in the condition bargained for by a potential acquirer; also, protect the company in the event the transaction is not completed.
Jason Borrevik states that companies should aim to ensure that severance and change of control rights are designed to be cost/tax efficient and aligned with best practices and key investor or investor advisor preference (where necessary).
An Industry Leader in Compensation Solutions
Jason Borrevik states that he prides himself on tackling challenging compensation issues and developing solutions that are customized to the client and align with the interests of the shareholders. With over 20 years of experience in executive compensation, Jason’s clients range from early-stage IPOs to mature publicly traded companies. With a strong focus on technology and life science companies, he advises boards of directors and executive management teams on the implementation of compensation programs. For more information on Compensia and their services visit www.compensia.com.