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Basis for severance pay must be made clear, say hiring experts

Human resource experts said that one to two years is the average pay given to senior employees at the time of exit, but companies should give out a clear rationale behind such transactions.

M Saraswathy Special Correspondent, Moneycontrol

At the heart of ongoing tussle between the founders and the board of Infosys is the 24-month severance pay given to former Chief Financial Officer Rajiv Bansal.

In an interview to Network 18’s Vir Sanghvi, Infosys co-founder Narayana Murthy said that such a payout—Rs 17.38 crore--was not an industry norm, and hoped that Bansal did not have some damaging information on the company.

Human resource experts said that one to two years is the average pay given to senior employees at the time of exit, but companies should give out a clear rationale behind such transactions.

Infosys, in a statement in October 2016, said that the company signed a separation agreement with Bansal on October 11, 2015. The agreement provided for extended non-compete obligations, besides other rights and obligations usual for such agreements. Bansal was replaced by as the CFO after his resignation at the close of business October 12, 2015

“If someone left the company at their own volition, why would they be given a severance pay,” says the head of compensation at a global human resource firm.

Infosys has now reworked contracts of employees after Bansal’s exit.

Severance pay is an amount, pre-decided by the company, given to an employee who is required to exit the company.

A severance pay of six to 12 months is not unusual and in some cases it could be as high as two years for senior level employees.

In global companies, it can even go upto 36 months case when it the CEO who is being asked to step down due to M&A activity or restructuring. However, if the individual has been accused of any wrongdoing or embezzlement of funds, no such pay is given.

Rituparna Chakraborty, executive vice president, TeamLease Services says: “If a company has a severance policy, they will have a policy around and may not do it as a one-off case since it may raise questions later. Here, sometimes the tenure and past contributions are also taken into consideration.” She added that it is advisable that organisations have a severance policy for a certain grade and above that is clearly stated and documented.

There is no law mandating an amount to be given as a severance pay and it differs across companies. Usually when there is a merger of two companies, one set of senior managers including the chief executive officer and chief financial officer are no longer required in the merged entity. Hence, as an incentive for them being in the company and also as an enabler, severance pay is given out.

“Mostly, severance pay is given when someone is asked to leave or when an agreement is struck at the time of hiring that person or if there is a contractual obligation,” Chakraborty added.

Labour laws do not have any specific provisions regarding the pay to be paid to top management if the company shuts down or there is any restructuring. The law states that if a company which has more than 100 employee is letting go of people, they are required to take permission from the labour department. They can work out a severance pay which can go upto 15 days (of every year of service) of a worker’s average salary.

These laws are primarily applicable to factory workers and have been designed to protect their rights and curb employer misuse. The new labour code has proposed increase of severance pay to 45 days of employee salary for every year of service as severance pay so that the individual is not inconvenienced without another job in hand.

Apart from company restructuring, smaller entities and new companies also have such packages for incoming employees.

Sunil Goel, managing director, GlobalHunt said even startups or new entities hiring top management from the market make such provisions. “This is to give an assurance that if a company does wind up in a short duration, these executives have an incentive to join. The severance pay here is usually six months to one year and is in consideration of the individual taking time to find a new company. But if it is a stable company, severance pay is not part of the joining agreement,” he said further.

Infosys, in its press statement, had said that the Chairman Mr. R. Seshasayee made a statement at the Company's Annual General Meeting on June 18, 2016 explaining the rationale for the severance quantum and assuring the shareholders that there was no impropriety of any nature.