Should an executive receive severance when terminated for cause?

Executives often benefit from the most expensive compensation packages offered at a business. The salary offered to top-performing executives could be many times higher than the average salary paid to most other employees. Their payment arrangements often include severance packages that apply if they lose their job unexpectedly. After all, executive roles don’t just open up quickly, meaning those who lose their positions often experience substantial downtime between jobs.

Organizations often have to make certain severance pay concessions to attract the best executives to open roles. Occasionally, there will be questions about whether or not it is appropriate to uphold an existing severance pay agreement. One of the scenarios in which a business could potentially choose to deny someone severance pay involves terminating a worker for cause.

Can a business eliminating an executive’s position at the company deny their severance pay without risking litigation?

Contract terms dictate company options

Often, the clauses outlining severance pay agreements specifically include provisions related to terminations for cause. In fact, some executives sometimes negotiate severance pay agreements that outline specific scenarios in which the company can deny severance pay. If the agreement allows the company to withhold severance pay for misconduct but not for poor performance, for example, then the justifications provided for an executive’s firing will ultimately determine whether or not the company can withhold or diminish the severance package.

Occasionally, the possibility of a countersuit filed against an executive due to misconduct could be enough to deter an executive from demanding their severance pay or litigating if they do not receive it. Other times, executives will fight for their severance pay, as they may have to go months before they can find another job that offers similar compensation.

The circumstances leading to the termination and the specific language in the executive’s contract will ultimately determine whether refusing to pay a previously agreed-upon severance package is an appropriate decision when removing or replacing an executive. The more evidence there is to support the company’s decision, the less risk the organization will have to accept when terminating a high-ranking employee and pushing back on their expectations for severance pay.

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