THESE DAYS, the focus when taking on a new job seems to be more on the end game than on the work: severance packages are the order of the day. For example, when Girish Paranjpe and Suresh Vaswani, former CEOs of information technology major Wipro, were asked to leave the company in December last year, each received a severance package of Rs 7 crore along with their December salaries, as well as stock-based compensation till January.
“Negotiating severance packages is a common practice during compensation discussions today, especially among senior executives,” says Shiv Agrawal, managing director of Kolkata-based recruitment service provider ABC Consultants.
Such packages, which became popular during the boom years of IT and business process outsourcing in 2005, were rare during the 2008 global recession. “They have picked up again,” says R. Suresh, managing director, Stanton Chase, a Mumbai-based executive search firm.
While the quantum of the severance package can vary, they are more popular in industries such as logistics, biotechnology, and health care information services, because these sectors do not have proven track records, thus increasing their chances of failure. “Senior executives have to be careful of their reputations,” says Suresh.
Atul Vohra, managing partner of Delhi-based executive search firm TRANSEARCH India, believes that the demand for severance packages is also quite high in startups, early-stage businesses, and when multinationals are setting up new businesses in this country, since these are all businesses that are vulnerable to changes in the economic environment and policy.
Employers are also willing to offer these packages, despite the potentially larger expense, not only to attract the best talent, but also to ensure that there is a happy parting of ways in case things don’t work out.
“It remains more of an issue of demand and supply because successful and experienced CEOs are difficult to come by,” says Agrawal. Suresh agrees, saying that chief officers across sectors demand some form of protection to let go of their current positions.
The terms of separation, however, come with a rider. If the service of a senior executive has been ‘terminated with cause’ the package is not paid. Other than that, there is no defined formula to calculate the terms.
“The ability to work out the best deal depends largely on the negotiating power of the individual,” says Agrawal. Most severance packages, explains Suresh, come in two parts: There is a cash component and a stock component. “While the cash is given at the time of separation, the executive may choose either to cash out or hold on to his shares.” This holds good even when a company is being sold to a third party or when the promoter has to sell his shares to a new promoter.
If a candidate’s contract is terminated before time, he is paid the full salary for the years of service left. “But in most other cases the compensation is either one year’s salary with perks [best-case scenario] or just six months’ basic salary [worst case],” says Vohra.
However, headhunting firms are unwilling to disclose the amount worked out for senior executives. All that Agrawal of ABC Consultants is willing to say is that it is usually two to four times the annual compensation. “Now you can do your own calculations.”