Severance Pay: Single Trigger vs. Double Triggers for Entitlement

Retention agreements are typically used by employers during times of uncertainty. The company may be pursuing a new strategic direction, it is being acquired by another entity, or any other activity that could make key employees think about seeking employment elsewhere. In order to ensure success and stability, the company is willing to offer additional compensation and benefits to incentivize the key employees to stay.

Retention agreements are typically created on an employee by employee basis. Thus, employers can be selective in who they offer them to and what terms they negotiate. Among many others, one issue that is important to confer with your attorney about when negotiating a retention agreement is severance pay.

When negotiating a retention agreement, there are retention benefits that the parties agree will be paid at some point in the future. However, when it comes to severance pay, it is a contingency (often involuntary termination) which is provided to assist the key employee while he or she is trying to find new employment. As a result, most companies prefer to structure severance pay by implementing double triggers, especially in the context of change of control. The company does not want a large pay out to be triggered simply because a change in control occurred. The additional step of the employee being terminated in connection with, or as a result of, the change in control would be required before the payout is required. A time limit is often set for when the second trigger (termination) must occur in relation to the change in control for it to “trigger” the severance pay. For example, the termination without cause must occur within twelve (12) months from the date of the change of control for the severance pay to be triggered.

In limited circumstances, the company will allow a single trigger – the change in control – for higher senior executives to trigger the severance pay. Another alternative is for the company to permit the higher-level

employees to trigger their own termination with a voluntary termination for good reason. This option can also be used in the double trigger scenario to allow more flexibility to the senior executive.

There are many legal issues that should be evaluated when reviewing and negotiating retention agreements. You should always confer with an experienced attorney before you sign a contract, especially one that is critical to your financial future.

If you are an executive or other key employee in need of representation during negotiations of your retention agreement in the merger or acquisition of your company, we can help. Protecting your best interests in a retention agreement is our sole focus. Call Mailly Law and schedule a consultation today!