india inc: M&As, talent war put CXO severance packages in focus

india inc: M&As, talent war put CXO severance packages in focus

A CEO candidate for a private equity-funded firm recently negotiated a contract that stipulated that if he is sacked within three years of joining, all unvested stocks for the next 24 months will vest with immediate effect. If the termination comes between the third and fifth year, a year’s forward stock will vest.

As more acquisitions happen and the war for talent intensifies, severance pay agreements in India are witnessing a shift. An increasing number of CXOs who have equity as a significant part of their compensation are now asking for an accelerated vesting clause as part of the pact, say search firms and legal experts.

“Companies are going out of their previously held stated positions to hire, attract and retain talent. In addition to putting compensation plans to attract and retain, companies are also putting together severance contracts. These range from six months to two years’ compensation, accelerated vesting to immediate vesting of equity on employment termination or a transaction that changes employment conditions, like a merger or divestiture,” said Nitin Sethi, CEO, human capital solutions – India & South Asia at Aon.

Accelerated vesting allows an employee to speed up the schedule for access to restricted company stock or stock options issued as an incentive. It can come into play in situations such as when companies go through an acquisition or an IPO.

Globally, accelerated vesting is quite the norm, said experts ET spoke to. According to K Sudarshan, managing director, EMA Partners India, the change of control clause and accelerated vesting of options are quite common in global businesses, especially in sectors prone to consolidation and acquisitions.

For instance, according to research firm Equilar, Twitter CEO Parag Agrawal will get $42 million in severance pay if terminated. This number is based on a year’s worth of salary, plus accelerated vesting of all of Agrawal’s shares in the company due to its acquisition.

The trend is catching on in corporate India, especially in new-age sectors, and in technology and digital roles.

“Accelerated vesting clause accounts for almost 15-20% of all the mandates I have handled in the last year or so, compared to very few cases previously,” said Ashish Sanganeria, senior partner, executive search firm Transearch.

In India, CEOs typically have a 12-18-month protection of fixed pay and if there is a target variable pay amount, that’s included as well in severance clauses in contracts, said Anandorup Ghose, partner at Deloitte India. Plus, there is accelerated vesting of stock awards. Most companies also provide an extension of insurance/medical coverage for this period. For those a level below the CEO, the coverage is usually for 6-12 months.

In sectors, especially ecommerce and startups where the whole game is played on equity, CXOs try to protect equity in case there is a sale.



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