Generous severance can hamper firm performance, says study

But packages needed to attract, retain CEOs, say experts
By Sarah Dobson
|Canadian HR Reporter|Last Updated: 01/31/2012

Canada has seen its share of generous severance agreements for departing CEOs. In 2011, former Enmax CEO Gary Holden walked away with more than $4.6 million in severance pay while Tim Hortons paid outgoing president and CEO Donald Schroeder a $5.75-million severance package.

But the existence and structure of such agreements can negatively influence subsequent firm performance, according to Peggy Huang, a professor in the department of finance at the A.B. Freeman School of Business at Tulane University in New Orleans.

“In general, firms that offer their CEOs severance contracts tend to underperform… but what’s interesting is that the component or structure of the severance contract makes a huge difference,” she said.