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Keeping a grip on the golden handshake


Few things rouse public anger quite as much as the payment of huge golden handshakes, particularly to people who are seen as poor performers when the taxpayer is funding the payout.

GOING, GOING, GONE: Novartis chairman Daniel Vasella was forced
to turn down a large part of his $90 million golden handshake because
of public outrage.

Recently, Lesley Longstone was given a payment of more than $425,000 when she stepped down as secretary for education. The payment included a severance payment of about $270,000 and around $160,000 in outstanding holiday pay and pay in lieu of notice.

Now, we are told Solid Energy chief executive Don Elder received a payout despite the fact that Solid Energy was a financial mess.

When Helen Clark led the Labour government to victory in 1999 she campaigned against golden handshakes in the public sector. Her policy was that if people were to be paid a significant payout from the taxpayers' purse then that should generally only happen if they won a court case awarding them the money. However, in one form or another payments did continue in moderation during her term. More recently we have seen an increase in the number and level of payouts.

So why do employers give golden handshakes if they are both voluntary and unpopular?

Where there is a breakdown in the relationship between a board and its chief executive in the private sector or between a minister and a chief executive in the public sector the future is ominous. You cannot make people like or respect each other if they don't trust one another. If trust and confidence have broken down, there is normally no way back.

In the state sector, chief executives have a standard contract which is easily accessed on the State Services Commission's website. It simply has a notice provision for ending a chief executive's employment.

So why doesn't the employer simply give that notice and let the relationship end in accordance with the contractual provision?

The difficulty is that Parliament many years ago intervened by creating personal grievances. These provide remedies for unjustified dismissal. This means there has to be a legally acceptable reason for all terminations. For example misconduct, poor performance or a restructure of the position. A fair process must also be followed.

With chief executives, the impact of a termination will be severe on both employer and employee. Often, the government of the day will not want the dirty linen relating to a relationship breakdown aired in the courts. Neither will the chief executive.

In private sector CEO contracts sometimes there is a provision dealing with a payout for the irreconcilable breakdown of the relationship. However, the personal grievance provisions remain.

If such a payment is significant it may be acceptable to both parties regardless.

So what is a fair payment? This will depend upon the remuneration the employee receives and the quality of their performance. If the board has changed and they simply want another chief executive, then a high-performing chief executive would expect a high payment to depart peacefully when they have done nothing wrong. On the other hand, a chief executive who has performed badly would expect far less. The length of time the person has been in the position would be an important factor.

A high-performing chief executive who had done no wrong and who had been in the role for some time might expect to receive a payment equivalent to a year's salary. A poor-performing chief executive who was new in the role might expect between three and six months' salary.

These disputes don't often come before the courts so there is not a large number of precedents for chief executive departures. Most are settled privately. An interesting example, though, is the 1993 case of Karl Trotter, formerly a senior Telecom manager who was awarded $374,266 by the Employment Court after he was dismissed unjustifiably.

In recent years, Lee Hazley, the chief executive of Kapiti Coast District Council, received $280,000; Paul Henry, at the time a newsreader with TVNZ, $150,000; and Ralph Craven, chief executive of Transpower, received $350,000.

Payouts in the public sector generally become public because taxpayer money is involved. The Office of the Ombudsmen will generally favour disclosure in the public interest.

Private sector payments typically are not publicised. However, much outrage was provoked recently when Daniel Vasella, the chairman of Swiss Pharmaceutical company Novartis, was offered a severance payment of US$78 million (NZ$94m) in February of this year. The political backlash was so great that the Swiss electorate voted in a referendum to ban golden handshakes. Because of the outcry, Vasella backed down from accepting this huge sum of money.

The reason for golden handshakes is a mix of the impact of the law on unjustifiable dismissal, the cost of litigation, goodwill still existing between the parties but most significantly, reputational damage to both employers and departing chief executives.

In the public sector we are dealing with taxpayer money. In my opinion, golden handshakes are acceptable. A complete ban on such payments and always forcing litigation is going too far. However, moderation must be exercised in the public sector because one is using taxpayer money.

On the other hand, in the private sector a company board can pay a person whatever it likes - that is really a question for the board wherever the person works. A negotiated settlement is usually better than a court imposed outcome.

Cullen - The Employment Law Firm was one of the first eleven law firms in New Zealand approved to provide employment law services to Government and the public sector.

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