Periodically we survey our sectors of specialization to collect, analyze and disseminate what can be called collective wisdom. Often these are as a request from our clients. In this case, one such client asked us to query our relationships in the private equity community to generate and gather some market intelligence on two questions directed at private equity portfolio companies:
- What is the prevailing standard for CEO severance in private equity-backed companies?
- Do most CEOs have an employment agreement, or are they employees at will, working off of a detailed Offer Letter that had been drafted and executed by both parties?
In our flash poll, targeting lower middle-market and middle-market private equity companies generated the following poll results, sent out in informal survey style:
Average severance was 10.7 months, median was 12 months. Some went as high as 24 months in special cases (a key founder for example).
Survey respondents noted 3 important qualifications to the above data. Severance is often either zero, or less than 12 months, if any of the following were present:
- a first time CEO
- another CxO function (e.g. CFO) or
- if the CxO is a founder or has a very large piece of the cap table.
85.4% of those PE-affiliated entities had employment agreements in place for at least the CEO, and often the rest of CxO level as well.
Comments of interest:
- One PE firm as their standard agreement gives 6 months notice, and 6 months severance. So if the PE firm asks for immediate departure of the CxO, severance is effectively 12 months. However, if a more gradual mutually agreed upon ease-out is orchestrated, the ability to get productive work out of executives who have been given notice is created, and severance of as little as 6 months may occur in these circumstances.
- One firm works simply with a severance agreement, NOT a full employment agreement.
