Severance agreements provide for payments to executives in the case of voluntary or involuntary termination and can play a constructive role in the recruitment and retention of key employees. Severance agreements are a way of mitigating the risk an incoming executive takes by leaving other employment opportunities and thus are often included in agreements for executives hired from outside the company to encourage him or her to leave a prior employer in case the new arrangement sours. Severance for longer-serving executives can be oriented in a way as to protect the executive's income, thereby maximizing retention, while offering the company protection through the use of noncompete agreements and "Good Reason" provisions which ensure a severance agreement does not become an incentive to leave.
Change-in-Control agreements, sometimes referred to as "golden parachutes," compensate executives for loss of job due to mergers or sale. Executives are fiduciaries, charged with taking action in the best interest of the company and the shareholders. However, CEOs face inherent difficulties when it comes to a merger or a sale of the business, the end result of which will result in the executive losing their position. Change-in-Control agreements are structured to encourage executives to seek out and enter into sale or merger opportunities when it is in the best interest of the shareholders without having reservations about losing their own positions.