New Hay Group Study Finds Twenty-Five Percent of Companies Do Not Have Executive Severance Policies: Almost One-Third of CEOs Lack Employment Contracts

New Hay Group Study Finds Twenty-Five Percent of Companies Do Not Have Executive Severance Policies: Almost One-Third of CEOs Lack Employment Contracts. For those companies that offer executive severance, only half formally define the conditions, events, and terms for payment.

Philadelphia, July 12, 2004: A new study by Hay Group, a global organizational and human resources consulting firm, shows that one in four companies do not have executive severance policies. For those companies that offer executive severance, only half formally define the conditions, events, and terms for payment.

In fact, according to the Hay Group study, almost one-third of CEOs do not have employment contracts. Executive contracts below the CEO level are even less prevalent. Roughly half of executive vice presidents/senior vice presidents and about 65 percent of vice presidents work without contracts.

In order to protect companies in these litigious times, contractual agreements should be in place before these executives start, said Bill Gerek, Hay Groups Global Director of Regulatory Expertise in its Executive Compensation Practice. The timing should be similar to a pre-nuptial agreement, where the parties agree to the details when everyone is still happy.

Severance Calculation

The study also found, unexpectedly, that only 50 percent of CEOs are paid for more than one year, and only six percent are paid for more than three years. This compares to the vice presidents, 85 percent of whom are paid for up to one year.

Twenty percent of the respondents calculate severance benefits as a fixed multiple of pay. While the majority of companies determine the severance payment based on salary, just over 20 percent include salary and bonus. At companies with annual sales of more than $1 billion, salary and bonus is the prevalent practice.

Termination Triggers

The Hay Group study also found that companies were most exposed to costly, long-term payouts when they had narrow definitions of "for cause" terminations. Only 13 percent of the participating companies cited breach of contract firings; fewer than 25 percent of survey respondents included: gross negligence, and just 15 percent of the companies include misconduct outside the scope of employment as a termination issue.

To avoid lengthy and expensive payouts for poor performance or misconduct, compensation committees need to carefully review whether the definition of 'cause is sufficiently broad. It should include real performance criteria to judge the executives success, said Doug Jensen, head of Hay Groups US Executive Compensation practice. Also, these committees should be proactive and have numbers calculated so they can truly understand what the executive actually will be paid under various scenarios.

The Hay Group study also found that restrictive covenants were widely used in executive severance programs. Yet, almost 20 percent of companies do not include a confidentiality clause as part of these agreements. While the majority of companies had non-compete restrictions, the length of the term varies from the remaining term of the contract to periods up to two years. Some of these differences can be attributed to state laws, which can affect the enforceability of these agreements.

For the study, Hay Group surveyed human resource and other executives via the Internet at 223 corporations. Approximately half of the participating companies have annual revenues greater than $1 billion and participants represent a cross-section of industries with the majority at healthcare, manufacturing, and services companies. Almost one-half of the survey participants have more than 5,000 employees. The study did not include severance programs in merger or acquisitions or other change in control situations.

About Hay Group

Hay Group is a global organizational and human resources consulting firm that helps its clients -- Boards, CEOs, Executives, and HR Managers -- on virtually all aspects of their people-related business issues. Founded in 1943, Hay Group has over 2,200 employees working from 73 offices in 38 countries.

Their areas of expertise include:

- Design and analysis of organizations and jobs;

- Assessment, selection, and development of executives, managers, and teams;

- Compensation, benefits, and performance management;

- Executive remuneration and corporate governance ; and

- Employee and customer attitude research.

Hay Group works with nearly three-quarters of FORTUNEs top-50 Most Admired Companies, as well as many mid-sized and non-profit corporations, public institutions, and governments.

For more information, please contact:

Jeff Meyers, (215) 861-2623

This press release was distributed through eMediawire by Human Resources Marketer (HR Marketer: www.HRmarketer.com) on behalf of the company listed above.