Such sums seem tempting. But if you sign too quickly, you often lose money. Especially if you hold a high managerial position. Managers in particular usually have better options than a large one-off payment.
Christoph Abeln and André Kasten have already accompanied many separation negotiations. The two Berlin employment lawyers from the Abeln law firm specialize in representing high-ranking managers and know exactly what tricks companies use.
“Psychological pressure is often built up,” says Abeln. Time pressure, apparent concern or hidden threats are common tactics. Sentences like “You have to sign this today, otherwise the offer is off the table” or “This is the best thing for you, believe us” are often used.
However, managers should not let this deter them - and under no circumstances should they simply accept an offer, even if the sum seems high at first glance. “A hasty signature on a termination agreement can cost millions,” says Abeln. Because if you only look at the severance payment, you may be leaving assets such as stock options, bonus entitlements or pension benefits behind. And makes a bad deal.
In addition: severance payments are taxable. The tax burden can be reduced, for example by applying the so-called fifth rule. Nevertheless, a not insignificant part of the severance payment goes to the tax office.
Abeln gives an example from his practice: A 55-year-old manager who was offered 700,000 euros in severance pay would have kept around 360,000 euros after taxes. At the same time, he would have lost his company pension, which amounted to around 50,000 euros annually. “By the time you retire at 63, that would be an amount of 400,000 euros,” says Abeln. However, he would only have had 360,000 euros left of the severance payment. The bottom line is that the manager would have made a loss.
“Instead of accepting a large one-off payment, it is often wiser to structure a separation over several components,” says Abeln. He and his colleague André Kasten explain what options there are.
In the opinion of the two labor law experts, extended continued salary payments or multi-stage transitional compensation are often more lucrative than pure severance pay. Initially, the full salary continues until the end of the contract. Contractually guaranteed additional benefits - such as bonus payments, company cars or other compensation components - often continue to be granted in this phase.
This is followed by a transition phase that is usually degressive - that is, benefits decrease over time. “This phase usually takes place over six to 18 months,” says Kasten. A typical model looks like this: In the first half of the year, the manager still receives 100 percent of his or her previous salary after separating from the company. In the following six months there is still 75 percent and in the following six months only 50 percent.
According to Kasten, the transition phase can then be followed by so-called downstream competition compensation. This is paid if the person leaving undertakes not to work for a competitor for a certain period of time or to set up a competing business. The legal minimum amount is 50 percent of the last benefits paid - usually the last salary.
A multi-stage transitional allowance not only offers tax advantages compared to a one-off payment. According to Kasten, because health, pension and pension contributions are continued, there are no gaps in provision. “In well-negotiated cases, clients achieve up to 30 percent higher net effects than with a classic severance payment.”
For a sales manager with an annual salary of 300,000 euros, Kasten negotiated twelve months of continued salary payments and six months of competitive compensation at 60 percent. Total value: 480,000 euros. After taxes, he was left with between 265,000 and 275,000 euros. A severance payment would have made a similar net difference - but the pension contributions would have been eliminated. By continuing to pay, they continued to run for 18 months, worth between 60,000 and 90,000 euros.
According to expert Abeln, many managers underestimate how much capital is in their contracts. “When it comes to a separation, managers need to keep an eye on the entire economic architecture of their contract,” he says. In addition to the pension commitments or non-compete agreements already mentioned, this also includes bonuses, stock options, insurance and benefits such as company cars.
A severance payment is often sold as generous, while bonus claims or subsidies for retirement provision are tacitly eliminated. In practice, Abeln and Kasten always check first: Which claims live on, which expire, and which can be secured?
Many managers have company pension allowances of ten to 20 percent of their annual salary. In the case of a severance payment, they are usually lost or frozen, whereas in the case of continued remuneration they continue to be paid. Bonuses and stock options also deserve special attention.
“Bonus programs are often at risk in the event of a separation because the employer does not want to continue paying them because they have requested time off,” says Abeln. However, a partial or full payment can often be achieved through negotiations - provided the claim is expressly stated in the termination agreement. “Either as a fixed amount or pro rata,” says Abeln. “Otherwise there is a risk of a complete loss of claims.”
For existing stock options, the so-called vesting rule is crucial. This means that employees have to earn their shares in the company over a certain period of time. In the event of an early departure, all claims are usually forfeited without a vesting rule - unless the contract provides for a partial or complete transfer of the options for so-called good leavers.
Good leavers are employees who leave for acceptable reasons - for example, retirement, illness or if the separation is amicable. “The good leaver status and the vesting dates should be clearly stated in the contract in the event of a separation in order to secure later claims,” says Abeln.
According to Abeln and Kasten, early retirement arrangements are often the best solution for managers over 55 years of age. These are individually agreed models in which the manager leaves the company before regular retirement but continues to receive part of his salary and pension contributions.
Such agreements combine continued salary payments, pension entitlements and tax advantages and enable a smooth transition to retirement. A 60-year-old client of Abeln agreed on a three-year model with 75 percent continued salary payment including pension benefits - the total value was over 900,000 euros. “A severance payment would have brought in less than half the net amount,” said Abeln.
Temporary interim mandates or project contracts are often part of such programs. “A well-negotiated outplacement package can be worth between 30,000 and 100,000 euros,” says Abeln. For managers between the ages of 45 and 60, this is often more valuable than a high severance payment: it preserves reputation, eases the transition and significantly shortens the time to the next position.
