Executive Severance: Lincoln Center, The Met and Bill O’Reilly

Nonprofit compensation committees often ask me, “Why should we offer severance to our incoming CEO; it protects the candidate, but what does it do for our organization?”   And now they may ask, “What good did it do Fox; Bill O’Reilly had a severance agreement that pays him up to $25 million even though he was fired?”

Lincoln Center and The Metropolitan Museum of Art each recently fired their CEOs for similar reasons – improper relations between the male CEO and a female employee. The firings leave many questions unanswered: Did Lincoln Center and/or the Met “pay off” their respective CEOs? Was the payment part of a formal agreement? In addition to paying Tom Campbell’s salary through June when he formally leaves the Met, will he receive a payment in recognition for the 8 or so years he had already worked at the Met? The tenure of the former CEO of Lincoln Center lasted only twenty-seven months; did he receive severance compensation as terms of his departure?

Until the audited financial statements are published we may not know the answers; and, if there is a confidential separation agreement, we may never know at all.   However, when a CEO is dismissed from an organization amid controversy, even speculation that there was a severance payment is bad for morale and undermines confidence in the board leadership.

While not exactly the same situation, news of Bill O’Reilly’s $25 million severance more than undermines Fox leadership’s moral stance and negatively affects employee morale.

Actually, severance agreements offer great advantages to the employer while providing ample comfort to the executive.   There are four categories of severance, informally referred to as: for no reason; for death or disability; for good reason; or, for cause

For no reason

Boards need the right to fire their CEO, for any or no reason.   The nonprofit board has the fiduciary responsibility to hire and fire the CEO – they should also pay more attention to retaining the CEO and succession planning, but that is for another article.   But many boards don’t follow HR best practices – conducting formal annual performance reviews, which would protect them if they want to fire a poor-performing CEO. Particularly with an employee in a “protected” class, without documented poor performance appraisals, the board puts the organization at financial risk of a costly wrongful dismissal suit. With a “for no reason” clause, essentially, the employee agrees when hired, that he or she will accept a certain payment to allow the board the right to end his or her employment for any reason –including for no reason.

Of course, the employee could sue for damages anyway, but the board has some protection since the employee has agreed to this arrangement in advance. As part of the ‘for no reason’ or ‘no cause,’ both sides agree to refrain from disparaging each other and agree to keep the details of the agreement confidential.   The organization pays the employee a predetermined amount (severance) for that right and the incident is discreetly ended.

Death or Disability

The death or disability clause seems logical and is beneficial because it clearly defines the employer’s responsibility and the employee’s rights. The clause defines the employer’s ongoing responsibility (usually none) in the event of the employee’s death and sets the period of time during which the employer must continue to compensate a disabled employee.   It’s best to agree and memorialize these scenarios in advance, which are highly emotional when they occur.

For good reason

The “ for good reason” clause is the least common of the four – perhaps because it favors the employee over the employer.   What if the board decides to cut the CEO’s compensation; or the board chair decides that she will become the acting development director and take an office in the building; or, if the CEO is promised a bonus based on achieving certain performance goals but the board won’t make time to evaluate the CEO at the end of the year and doesn’t award a bonus?

Without a “for good reason” clause, the CEO has no leverage – short of quitting.   “For good reason” usually, covers these and other situations that provide some leverage for the CEO. If the board can’t get around to evaluating the CEO, he or she can give notice to the board and, if they still don’t meet their obligations, the CEO can quit and collect a pre-stipulated severance payment.

For cause

That brings us to the “for cause” clause. The Lincoln Center and Metropolitan Museum heads, and Bill O’Reilly were dismissed “for cause.”   We may never know the specifics, but all three were situations related to sexual misconduct of some sort or another.   With a severance agreement, the potential ‘causes’ are described in writing (depending on who is drafting the agreement, it could be a few paragraphs or a couple dozen pages). In general, the causes are situations in which it is discovered that the CEO commits improper acts, frequently under the quaint rubric of “moral turpitude.”

“For cause” protects the organization because it allows for a dismissal with no obligation of compensation – the CEO, usually, will lose the right to all future compensation, any deferred compensation, benefits, etc.   We don’t know if the three executives had for cause clauses in their contract, but if so, the organization could be off the hook for future compensation.

Corporate CEOs have contracts. Nonprofit executive contracts are fast becoming the rule, not the exception. And the fair and prudent use of severance is protection for the organization and the employee. It is a prenup written and agreed to when everyone is in love with each other and is very helpful later, in those situations in which the best of human nature is not on exhibit.

James is a nonprofit compensation consultant but not a lawyer. The above is meant as a practical guide and should not be construed as legal advice.