Category: Executive Compensation

Termination Payments

Also known as: ETP, Termination Pay, Dismissal Pay, Severance Pay, Payment in Lieu of Notice, Employment Termination Payment

Simply put

Termination payments are amounts paid to an employee when their job ends, whether through redundancy, dismissal, or the employee choosing to leave. These payments can include a final paycheck for earned but unpaid wages, and in some cases additional sums such as severance or payments made instead of giving notice. What is owed, and how it is taxed, varies by jurisdiction and the circumstances of the departure.

Formal definition

Termination payments refer collectively to the amounts payable to an employee upon separation from employment, encompassing categories that may include earned but unpaid wages (final pay), statutory redundancy pay, severance or dismissal pay, and payments in lieu of notice. In certain jurisdictions the term carries a specific statutory and tax meaning: in Australia, an employment termination payment (ETP) is generally a lump sum paid on cessation of employment subject to defined tax treatment; in the United Kingdom, a termination payment may arise on redundancy, dismissal, or voluntary departure and can include statutory redundancy pay, with tax consequences depending on the payment's composition. The precise components, entitlements, and tax treatment depend on the applicable jurisdiction, the nature of the termination, and the terms of the employment arrangement, and are not uniform across regimes. This entry is educational and not legal, tax, or payroll advice.

Why it matters

Termination payments sit at the intersection of employment law, tax compliance, and payroll accuracy, and errors in any of these areas can expose an organization to legal claims, regulatory scrutiny, and reputational harm. Because what is owed and how it is taxed varies significantly by jurisdiction and by the circumstances of the departure, a payment that is compliant in one regime may be incomplete or incorrectly taxed in another. Miscalculating final pay, statutory redundancy entitlements, or payments in lieu of notice can result in disputes, underpayment liabilities, or penalties, and inconsistent handling across similar departures can raise fairness and discrimination concerns.

The distinction between categories of payment matters for compliance. Earned but unpaid wages, statutory redundancy pay, severance, and payments in lieu of notice can each carry different legal entitlements and different tax consequences depending on the applicable regime. In certain jurisdictions the term carries a specific statutory and tax meaning: in Australia, an employment termination payment (ETP) is generally a lump sum paid on cessation of employment subject to defined tax treatment, while in the United Kingdom a termination payment may arise on redundancy, dismissal, or voluntary departure and can include statutory redundancy pay, with tax consequences depending on the payment's composition.

For governance and compliance purposes, termination payments are also a point where controls over authorization, documentation, and consistency are tested. Because entitlements depend on the nature of the termination and the terms of the employment arrangement, organizations generally rely on clear processes and appropriate professional advice to ensure amounts are calculated, taxed, and reported correctly. The specifics remain jurisdiction- and fact-dependent, and this entry is educational rather than legal, tax, or payroll advice.

Who it's relevant to

Human Resources and Payroll Functions

HR and payroll teams are typically responsible for calculating and processing termination payments accurately, ensuring that earned but unpaid wages, any statutory entitlements, and other applicable components are correctly determined and paid. Because the components and their tax treatment vary by jurisdiction and by the nature of the departure, these functions generally need clear processes and access to current rules for each jurisdiction in which the organization operates.

General Counsel and Employment Legal Advisers

Legal advisers assess entitlements arising from the reason for termination and the terms of the employment arrangement, and help manage the legal risk associated with disputes, settlement arrangements, and compliance with statutory requirements such as redundancy pay. Their involvement is often central where the facts, jurisdiction, or nature of the departure make the correct treatment uncertain.

Tax and Finance Teams

Finance and tax functions are concerned with the correct tax treatment and reporting of termination payments, which depends on the payment's composition and the applicable regime, such as the specific rules governing employment termination payments in Australia or the composition-dependent treatment in the United Kingdom. Accurate reporting helps avoid tax compliance failures and downstream liabilities.

Compliance and Internal Audit

Compliance and assurance functions may review termination payment processes to confirm that authorization, calculation, documentation, and reporting controls operate effectively and that similar departures are handled consistently. This provides assurance that the organization is meeting its legal and tax obligations across the jurisdictions in which it operates.

Inside ETP

Severance or Notice-Related Payments

Amounts payable to a departing executive or employee in lieu of notice, or as compensation for loss of office, typically defined in an employment contract, service agreement, or governing policy. The scope and calculation method vary by jurisdiction, entity type, and the terms negotiated.

Contractual Entitlements

Payments the individual is legally owed under the terms of their agreement, such as accrued salary, unused leave, or pre-agreed exit terms. These are distinguished from discretionary or ex gratia payments, which are not legally required and generally warrant closer governance scrutiny.

Treatment of Incentive and Equity Awards

Provisions addressing how unvested short-term and long-term incentives, bonuses, or share awards are handled on departure, including whether they lapse, vest, or are pro-rated. Treatment often depends on whether the departure is classified as a 'good leaver' or 'bad leaver' under the relevant plan rules.

Malus and Clawback Considerations

Mechanisms that may reduce, withhold, or recover payments where misconduct, misstatement, or performance failure is identified. Whether these apply depends on the terms of the relevant plans and, in some jurisdictions or sectors, on regulatory expectations.

Approval and Oversight Responsibility

For senior executives, the remuneration or compensation committee of the board typically has responsibility for reviewing and approving termination arrangements, with management handling operational execution. Accountability for the terms generally sits with the board committee, not with management alone.

Disclosure Requirements

In many jurisdictions, listed companies must disclose termination payments to senior executives and directors, often in the remuneration report or similar filing. The specific disclosure obligations depend on applicable listing rules, statutes, and reporting frameworks in the relevant jurisdiction.

Common questions

Answers to the questions practitioners most commonly ask about ETP.

Does the board directly negotiate and approve every executive termination payment?

Not typically. In many jurisdictions and under most governance frameworks, the board's role is oversight rather than operational execution. The remuneration or compensation committee generally sets the policy framework and reviews significant or exceptional payments, while management and human resources functions usually handle the operational negotiation within delegated authority. Where a payment falls outside approved policy or exceeds delegated thresholds, escalation to the committee or full board is common. The precise allocation of responsibility depends on the entity's delegation framework, listing rules, and applicable law, so this should not be read as a universal rule.

Are termination payments the same thing as severance imposed by statute?

Not necessarily. The term is often used loosely to cover several distinct things: statutory minimum entitlements set by employment law, contractual amounts specified in service agreements, and discretionary or negotiated payments made on separation. These carry different legal characters. Statutory entitlements are binding legal requirements that vary by jurisdiction; contractual amounts derive from the agreement between the parties; and discretionary payments are subject to policy, disclosure expectations, and sometimes shareholder approval. Conflating them can obscure which obligations are mandatory and which involve judgment. This entry is educational and not legal advice; specific entitlements depend on jurisdiction and the facts of each case.

How should a remuneration committee document its rationale for approving a termination payment?

As a general practice, committees maintain a record that links the payment to the approved remuneration policy, identifies the components (for example contractual notice, accrued entitlements, and any discretionary element), and sets out the reasoning for any exercise of discretion. Documentation often references whether malus or clawback provisions were considered, how any performance conditions were treated, and the basis for concluding the outcome is consistent with policy. The appropriate level of detail depends on the entity's governance framework and applicable disclosure requirements, and legal or compliance input is commonly sought.

What controls help ensure termination payments stay within approved policy?

Common control approaches include delegated authority limits with defined escalation thresholds, a requirement that payments be checked against the approved remuneration policy before execution, and independent review by functions such as legal, compliance, or internal audit. Distinguishing control design from operating effectiveness is important here: a policy that requires committee sign-off is a design feature, whereas evidence that sign-off actually occurs for every in-scope payment addresses operating effectiveness. Assurance over these controls generally sits with functions independent of those negotiating the payment. Specific control frameworks vary by entity and are a matter for professional judgment.

When do termination payments trigger disclosure or shareholder approval requirements?

This depends heavily on jurisdiction, entity type, and applicable listing rules or corporate law. In some regimes, listed companies must disclose termination arrangements for named executives, and certain payments may require or benefit from shareholder approval or a say-on-pay vote. Whether a particular payment crosses a disclosure or approval threshold is a fact-specific and jurisdiction-specific question that should be assessed against the relevant legal and regulatory requirements with appropriate professional advice. This entry does not state the provisions of any specific statute or listing rule.

How do malus and clawback provisions interact with termination payments?

Where an entity's remuneration arrangements include malus (reduction of unvested or unpaid amounts) or clawback (recovery of amounts already paid), these provisions may be relevant when calculating what is properly payable on termination. As a matter of practice, committees typically consider whether any triggering circumstances apply before finalizing a payment. The enforceability and scope of such provisions vary by contract terms and jurisdiction, and applying them can raise legal and factual questions. This is an area where legal review is commonly warranted rather than a mechanical calculation.

Common misconceptions

Termination payments are always contractually fixed and non-negotiable.

While some elements are contractual entitlements, others may be discretionary or negotiated at the point of departure. Discretionary and ex gratia payments generally attract greater governance scrutiny because they are not legally required, and their appropriateness typically depends on the facts and the committee's judgment.

Management can approve executive termination payments without board involvement.

For senior executives and directors, approval of termination arrangements typically falls to the board's remuneration or compensation committee rather than to management alone. Treating this as a purely operational management decision misattributes an oversight responsibility.

Once agreed, termination payments cannot be reduced or recovered.

Where malus or clawback provisions apply under the relevant plan terms, and, in certain sectors or jurisdictions, under regulatory expectations, payments may be reduced, withheld, or recovered in defined circumstances such as misconduct or material misstatement. Whether such mechanisms are available depends on the applicable agreements and rules.

Best practices

Ensure the remuneration or compensation committee, not management alone, reviews and approves termination arrangements for senior executives and directors, and document the rationale for any discretionary or ex gratia amounts.

Clearly distinguish contractual entitlements from discretionary payments when structuring and disclosing exit terms, applying greater scrutiny to amounts that are not legally required.

Define 'good leaver' and 'bad leaver' outcomes in incentive and equity plan rules in advance, so the treatment of unvested awards on departure is transparent and consistently applied.

Incorporate and periodically review malus and clawback provisions in relevant plans, confirming they align with any applicable regulatory expectations in the entity's jurisdiction and sector.

Confirm disclosure of termination payments meets the specific listing rule, statutory, and reporting-framework obligations that apply in the relevant jurisdiction, rather than assuming a single universal standard.

Obtain jurisdiction-specific legal and remuneration advice when structuring significant exit arrangements, recognising that requirements and enforceability vary by jurisdiction, entity type, and the facts of each departure.