Golden handshakes and the payout perception gap

It is almost commonplace to see departing high-ranking executives walk away with substantial payouts, even when implicated in wrongdoing. HR Leader spoke to employment lawyers to break down how these payments work and whether payouts are contractually stipulated or, as the public often contends, a “reward for failure”.

Within KPMG’s recently released Impact Plan and Data Book annual reports, it was revealed that Andrew Yates and Martin Sheppard received millions on their departure from the firm despite an established governance and cultural failure that led to the mistreatment of a whistleblower and mishandling of confidential documents.

In what might be viewed as a slap on the wrist, the former chief executive and ex-chairman were docked $700,000 and $526,000, respectively – still taking home $6.7 million and $1.8 million each in earnings and retirement payouts.

According to Patrick Will of Liquid Employment Lawyers, it is not unusual for senior leaders within large firms to receive payouts within this range, due to a notice period of six to 12 months, accrued leave and partner capital or retirement entitlements that add quickly and are already owed before any wrongdoing is considered.

He said: “Corporations Act rules ensure statutory leave and earned vested equity cannot simply be disguised as unlawful exit bonuses. As such, large sums predominately reflect the return of substantial equity and retained capital that the executive has accumulated over years of service, meaning the payout is a liquidation of personal wealth tied up in the business structure rather than severance pay.”

In this way, Will said that many cases of an apparent “golden handshake” are simply the payout of existing entitlements, rather than bonuses for leaving – although, in the case of Yates, certain amounts can be docked as deemed appropriate.

Mariam Chalak of Harmers Workplace Lawyers added that an organisation’s primary objective when entering an ex gratia payment is to manage the executive’s departure in a way that minimises its legal and reputational risks.

“These arrangements are generally accompanied by a deed of release, under which the departing executive agrees to release the organisation from any legal claims arising out of their employment,” she said.

“They will also commonly include confidentiality and non-disparagement clauses, which restrict the executive from disclosing the terms of the settlement or making statements that may adversely affect the organisation or its representatives.”

Will added that boards will often choose a negotiated exit rather than proceeding with a dismissal that would lead to litigation and further disclosures, but that flexibility is limited by contractual obligations and statutory protections.

He said that any denial of payouts without proven, repudiatory misconduct exposes the organisation to breach of contract or underpayment claims.

In this way, Chalak added that an executive’s base salary and other entitlements are important considerations with regard to seemingly large exit payments – and that while alleged millions in payments may seem substantial, “it is worth considering what that amount represents in terms of the executive’s annual remuneration”.

“Ultimately, the amount an organisation is prepared to pay will depend on the risks it is seeking to manage and the commercial value it places on securing a clean and legally finalised separation,” Chalak said.

In the case of Eileen Hoggett – who was not permitted to resign as with Yates and Sheppard, but expelled from the KPMG partnership for gross misconduct, and thereby denied her entitlements – Will said that summary dismissal for serious misconduct requires the employer to prove the conduct.

“Partners aren’t employees, so the partnership agreement governs that relationship, and expulsion clauses can remove entitlements that an employee might otherwise keep,” he said.

“Beyond employment contracts and partnership agreements, senior executives and directors are bound by statutory duties under the Corporations Act. Breaching these statutory duties can give corporations grounds to withhold discretionary benefits, claw back incentives or initiate civil penalty proceedings independently of standard employment law frameworks.”

Chalak said: “Ultimately, a departure negotiated through a deed of release is not dictated by the terms of the employment contract. It is a commercial agreement reached between parties, with the amount and terms reflecting the respective risks, bargaining positions and outcomes they are seeking to achieve.”

Reflecting on the takeaways of the KPMG situation, Will urged HR to draft contracts and clauses clearly.

“Define serious misconduct, state which entitlements are affected, and set out the investigation and decision-making steps. Include malus and clawback provisions, and conditional payouts pending investigation outcomes,” he said.

“Ambiguous clauses tend to be read against the party that drafted them.”

Will also said HR professionals must recognise that even substantive grounds for dismissal are insufficient without robust procedural fairness.

He clarified that courts and tribunals will closely examine whether the executive was afforded a genuine chance to respond to allegations before any decision – as is often a company’s failing within unfair dismissal proceedings – and that neglecting to follow a transparent, independent investigation invites successful claims in the Fair Work Commission.

In the same way, Chalak said that employment contracts should clearly distinguish between termination payment entitlements and a right to terminate employment without notice when serious misconduct is involved.

She also noted that summary dismissal clauses, in particular, should avoid ambiguity around dismissal without notice.

“Where an employee is dismissed for serious misconduct, HR should ensure a thorough investigation has been conducted, that the alleged conduct is substantiated on the balance of probabilities, and that the process is procedurally fair,” Chalak said.

“There should also be a clear and comprehensive paper trail documenting the investigation, the employee’s response, the evidence considered and the reasons for the ultimate decision.”

For employers looking to change current structures to avoid certain individuals from receiving exorbitant payouts, Will urged them to consider executive contracts that include malus and clawback clauses, and remuneration or annual executive compensation that is conditional on the outcome of an investigation.

In its recently released Action Plan version 2.0 following the publication of the independent report, KPMG Australia said it was strengthening its conduct and consequences framework to further discourage misconduct and ensure appropriate sanctions were in place.

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