Senior Level Departures – Negotiating Your Exit

Negotiating Senior Level Departures in Financial Services

By Eleanor Rowswell, Partner at Farrer & Co

Leaving your employment can be difficult at the best of times, but at a senior level in financial services the process is particularly delicate (often so difficult that it is described as akin to divorce).

Not only will executives wish to negotiate the best financial package possible, they must also consider the wider industry view on their departure and of course regulatory implications, especially if they are looking to continue working in the same sector.

While this can add pressure to the situation, there are a number of key considerations that are worth considering when negotiating the terms in an exit agreement, which is typically addressed in a settlement agreement between the executive and the employer.

The wider landscape

For senior executives, reputation is very often paramount – often more important that cash, as maintaining one’s reputation in the market is often key to securing a role in the future. That means that threats of litigation against an employer may well then sound hollow, given that cases are generally in the public eye and could be reputationally damaging to the executive, even if the executive is ultimately vindicated in court. On the other hand, an employer may themselves be keen to minimise publicity about any dispute or for a senior executive’s departure to be seen as amicable.

Where possible, executives should ensure they have advanced sight of any public announcements regarding their departure and that they are consulted on the organisation’s communications with colleagues or key clients or stakeholders. Timing may be of the essence, especially for directors of listed companies, as board decisions must be swiftly announced in accordance with stock exchange rules. Likewise, there may need to be communications with the regulator (including possibly an exit interview or specific questions in connection with senior-level departures), and there will also need to be a well-documented handover from anyone carrying out a senior management (SMF) function.

If there are issues in connection with ongoing fitness and propriety or any disciplinary matters, these may need to be recorded in any future regulatory reference.  While firms cannot fetter their regulatory obligation to provide an accurate regulatory reference, it may be possible to negotiate a right to see and comment on any regulatory reference in advance of it being provided to a new employer.

Executives may also wish to ensure that appropriate and mutual confidentiality and non-disparagement provisions are agreed, subject of course to appropriate regulatory carve outs.

Understand the legal position

Before deciding on their negotiating strategy, executives must have a clear understanding of their legal position. This requires consideration of their position under their employment contract, the terms of any deferred compensation schemes, as well as any statutory claims.  Often, individuals will have significant amounts of compensation tied up in deferred bonuses, which means that securing good leaver status is critical (which they may not be contractually entitled to). It is common for employees in financial services to be dismissed unfairly without due process but to instead be offered compensation which equals or exceeds the value of an unfair dismissal claim (compensation for which is capped). In order to exceed the cap on compensation for unfair dismissal in an Employment Tribunal, executives need to show that their dismissal was either because they were a whistleblower or was in breach of the Equality Act 2010 as a result of discrimination on the grounds of a protected characteristic. That can be difficult to prove and will require a careful analysis of the facts.

It is therefore vital executives understand their legal position before taking an aggressive legal stance, for example based on an unfair dismissal claim alone (given the limited compensation that this offers). Aggressive approaches off the bat may backfire and encourage decision-makers to take a hardline response, when a more collaborative approach may have been more effective at the outset if the legal position is not strong.

Representation

In addition to the strength of their legal position, executives should also give thought to whether negotiations are better handled between lawyers, or directly between themselves and their employer.

Sometimes it can be helpful for executives to agree the terms in principle directly with their employer prior to instructing a lawyer to negotiate on their behalf, especially for those looking for an amicable exit.  In other circumstances, particularly in contentious situations or where an executive has strong legal claims, it is better for a lawyer to kick off the negotiation to demonstrate effectively the strength of the legal position.

Tax

Executives should not always assume their employers have handled matters in the most tax-efficient manner. In cases where multiple jurisdictions are involved (for example the US) the timing of payments must be considered to ensure penalty taxes aren’t inadvertently incurred. In the UK, employees are often able to benefit from compensation of up to £30,000 tax free, and if legal fees are covered in a statutory settlement agreement, they will also benefit from a tax exemption.

Final thoughts

When approaching negotiations for an exit agreement, executives should consider where they would like to be in 6-12 months’ time and how their approach to negotiations will best align with those priorities. A retiree may want to hold out longer for a better deal, but an executive hoping to work again may not have this luxury of time. There is no’ one-size fits all’ approach to exit agreements – but keeping these key considerations in mind, alongside any personal goals in the context of the wider industry, will help executives achieve the best deal for them.