High severance packages by IT companies: Why do they do it?

High severance packages for senior executives are complex, subject to negotiation


Recently, it was widely reported that Wipro’s former chief executive officer Thierry Delaporte received a severance package worth Rs 92.1 crore (or about $11 million), with the stipulation that he cannot join another company or engage in any job, or work in an advisory capacity in any other firm for a period of twelve months following his formal exit on May 31, 2024. This condition, known as a ‘non-compete clause’, is typically included in executive contracts to safeguard a company’s interests. Delaporte’s total compensation was more than $10 million in the financial year 2023. 

High severance packages for senior executives in the tech industry are often complex and subject to negotiation. These agreements ensure that an executive receives a certain amount of compensation if they leave the company, which could happen under various circumstances, such as layoffs, by mutual consent, or termination without cause. The components of these packages which are more common include the executive’s regular salary, cash payments, bonuses, stock options or grants, continuation of benefits, and, sometimes, outplacement services, and other perks. 

“Appointment letter of senior executives in large enterprises carries several terms and conditions to address the high stakes involved with the role. To mitigate these conditions, often there are clauses such as golden handshakes, parachutes and non-compete which allow the employer and the executive to navigate the uncertainties of the business environment. It is not unusual for companies to offer lump sums to effect a mutually agreeable separation. The reasons behind such arrangements are plenty as primarily companies are concerned about the usage of their sensitive information and access to their strategic positions that senior executives have. Sometimes, they want to create a provision for mutual separation without impacting the company’s image and perception in the minds of their stakeholders. Sometimes the separation amount is a significant sum because of the conversion of the stock options,” explained Aditya Narayan Mishra, the MD and CEO of CIEL HR. 

Experts say that severance pay serves as a financial buffer for executives to help them through the difficult and trying period of transition after leaving a company—thus providing a nice financial cushion—or to lessen the risk of allegations of wrongful termination against the company. Employers can also replace performance improvement plans (PIPs) with severance pay, or termination, to raise the bar for employees who have been underperforming. 

“The way severance pay is calculated can differ widely, influenced by such factors as seniority, the number of years worked, company rules and law, and what has been detailed in the executive’s employment contract. For instance, an executive who has worked for a period of 20 years could get two weeks’ pay for each year of service. This could total up to 14 months of pay, assuming no limit has been set. It is also worth mentioning that, while such packages are typical elements of executive compensation, they frequently undergo rigorous scrutiny and negotiation to reflect the executive’s worth and their potential effect on the company’s prospects,” remarked Girish Linganna, director of ADD Engineering Components, India, Limited a subsidiary of ADD Engineering GmbH, Germany. 

Overall, severance pay helps manage brand reputation in the face of a series of negative publicity, since brand rebuilding and reputation management following such a public relations crisis can be an expensive proposition. For this reason, many organisations now realize that paying for severance in the long run can be a great benefit. 

“Offering large severance packages to senior executives, particularly during tough economic conditions and business uncertainties, can be a controversial subject. It gives rise to concerns about financial wisdom and the signals it sends to other employees and stakeholders. Despite appearing to be extravagant, many companies defend these packages as crucial for attracting and retaining top talent, and for compensating for the risks linked to high-ranking roles,” added Linganna.

Experts point out that severance pay policies can be a challenging proposition for companies and they should weigh the pros and cons thoroughly to judge if their disadvantages outweigh their advantages before implementing such a scheme. Offering a severance package can either lead to improving a company’s overall retention levels, or become a financial burden for firms struggling with high attrition rates during business instability, or economic downturns. 

“In many of the instances, the agreements between management and business leaders were signed under a benign prospective regime. Where the growth of the IT industry followed a secular uptrend, even though there was a volatility in individual player’s performance. It has now been irrevocably established that the past premise was deeply flawed. And yes, it is important to stand by the agreed clause, because going for litigation on individual company's performance could bring down trust in the future instances,” said Alok Shende, of Mumbai-based Ascentius Consulting. 

Join our WhatsApp Channel to get the latest news, exclusives and videos on WhatsApp