Few things cause shareholder or media outrage like a poorly structured executive severance agreement. When a CEO is terminated for poor performance and walks away with tens of millions in severance payments, it’s understandably a hard pill for company stakeholders to swallow. So how can boards avoid the fall-out around severance pay following an executive departure?

Having a pre-established severance agreement, Harvey explains, saves the board from ad-hoc negotiations following an executive termination, which can be a delicate time. Yet, severance arrangements have also become a competitive practice in the world of CEO pay. Harvey details the elements that compensation committees should consider when structuring the agreement.

“On the company side, [compensation] committees need to step back and think about what kind of restrictions they might want to place on the executive post termination,” said Harvey. “Pretty universally, severance payments have a waiver on legal claims, but beyond that I would generally recommend that companies take a look at adding a non-disparagement restriction, a non-solicitation of employees, and a non-solicitation of customers.”

Also in this episode, Harvey outlines the key mistakes compensation committees make when structuring severance agreements.