Stock Options and Bonuses in Severance Packages Should Be More Than Afterthoughts

April 28th, 2022

For many people, the icing is the best part of the cake. For many C-suite and high-level executives, the “icing” on their compensation packages – such as stock options, restricted share units (“RSUs”), bonuses and other nontraditional or speculative compensation structures – are often worth much more than the cake of their annual salary.

Accordingly, if you find yourself involuntarily parting ways with your employer, these non-salary forms of remuneration should be critical parts of severance negotiations. Failing to understand your rights or focus attention on vested or nonvested stock options, bonuses and similar forms of compensation in a severance package can be a costly mistake. That’s one of the many reasons you should consult an experienced employment attorney before signing a proposed severance agreement.

Incentive Stock Options

A stock option is the right to buy your company’s stock. It’s a common part of executive compensation packages, with those options vesting after having met certain milestones, or performance targets, or at a time noted in your employment agreement. Once vested, you can exercise your option by purchasing shares in the company at a specified “exercise price,” which is usually lower than market value.

If your termination or separation happens while you’re sitting on vested stock options you have yet to exercise, you shouldn’t lose your right to do so. Most companies, however, limit how long you can purchase the stock after your separation date. Employers typically put a relatively short deadline to exercise options, though you and your lawyer can negotiate the time as part of your severance discussions. If you don’t exercise your options within the required time, they’ll expire, and you’ll no longer have the right to buy the company stock.

Make sure you and your attorney discuss whether you want to exercise your stock options and, if so, whether you’ll need additional time to assemble the funds required to purchase your shares.

Restricted Share Units

Unlike stock options, which only give you the right to purchase shares upon vesting, restricted share units are equity interests actually granted to you when vested. In many executive employment agreements, RSUs vest over time, with a percentage of those units vesting annually, quarterly or monthly.

At the time of your separation, another vesting of RSUs may be imminent. The value of those units may be substantial, and unless you and your employer agree on the fate of these unvested units – such as granting you a pro rata share for the current vesting period – you’re likely to lose them.

Additionally, if your termination comes conspicuously close to your next vesting date, it may raise questions about whether or not your employer was acting improperly or in bad faith when terminating you. As a result, any potential claims you may have against your employer can be powerful leverage you and your attorney can use in your severance negotiations.

Earned Bonuses

Performance or incentive bonuses are the direct result of your hard work, and if you have accomplished the goals or reached the targets to earn those bonuses, you shouldn’t forfeit them upon termination. If you earned bonuses your employer hasn’t paid, make sure you don’t leave them on the table.

While you may have had no say about your termination, you have plenty to say about the terms of your severance package. An experienced employment attorney can help you understand your rights and options, develop and implement an effective negotiation strategy, and ensure that you leave with the maximum amount of compensation and benefits available.

If you have questions about a proposed severance agreement or would like help negotiating the terms of your departure, please contact Halunen Law or call us at (612) 605-4098 for a free consultation.

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