Executive severance negotiation mistakes can cost leaders tens of thousands of euros — sometimes far more. When an executive receives a termination notice, they face unique challenges: the bargaining position differs from that of regular employees, the sums are higher, and the traps are more numerous. Precisely here is where many executive severance negotiation mistakes happen, because those affected don’t know the special rules that apply to executives. This article shows the most common errors and how to avoid them.
Why Executives Must Negotiate Differently
Executives often have years of negotiation experience — with clients, suppliers, and staff. Yet when it comes to their own severance, different rules apply. Beyond base salary, variable compensation, bonuses, stock options, company cars, and contractual severance clauses all come into play. At the same time, the pressure is greater because the professional future depends on the severance amount and the next position isn’t found overnight.
Many executives believe they can simply transfer their professional negotiating strength. But the employer usually has more experience with these negotiations and knows the legal margins better. Anyone who negotiates without preparation makes expensive mistakes quickly. That’s why professional advice matters — for instance from a specialist lawyer for employment law. RechtStark is a litigation funder that supports employees in financing labor court proceedings. We are not a law firm and do not represent you ourselves, but we assess whether we can cover the costs of an unfair dismissal claim or severance negotiation.
Mistake 1: Misjudging Your Own Negotiating Position
A frequent executive severance negotiation mistake is misjudging one’s own position. Some accept the first offer although more would be possible. Others demand unrealistically high sums and lose the negotiating basis. The position depends on tenure, age, contract structure, the company’s economic situation, and the grounds for dismissal. A flat formula like “half a month’s salary per year of employment” is only a rough benchmark, not a statutory entitlement. Whoever commits to a figure too early surrenders their negotiating leverage. Better to start with a high but realistic demand and leave room to move. The threat of an unfair dismissal claim is also a powerful tool — but only if you’re prepared to follow through.
Mistake 2: Underestimating Tax Traps on High Severance Payments
A high severance sounds tempting, but the tax authority takes a substantial share. Severance payments are fundamentally taxable and taxed at your personal rate. Because the payout often occurs in a single year, it can significantly increase taxable income and push you into a higher tax bracket. The so-called one-fifth rule can soften the tax burden, but applies only under certain conditions and must be claimed in the tax return. The timing of the payout also matters: in some cases it makes sense to spread the payment across two calendar years. A specialist lawyer for employment law cannot give tax advice, but can flag such structuring options.
Mistake 3: Ignoring Deadlines and Formalities
Employment law has strict deadlines. The most important is the three-week deadline for the unfair dismissal claim: miss it and you generally lose your dismissal protection. This applies to executives as well. Beyond that, deadlines exist for asserting claims and for challenging a termination agreement. Whoever misses these deadlines loses their claims irrevocably. Another formal error is signing a termination agreement too quickly without examining the exact conditions. Often hidden inside are clauses on vacation, overtime, employment references, or a blocking period for unemployment benefits. The three-week deadline can be used to negotiate calmly — as long as the claim is pending, the employer has an interest in settlement.
Mistake 4: Signing Without Legal Counsel
Executives are used to making decisions independently. But in a severance negotiation, large sums are at stake and the employer has experienced lawyers on their side. Anyone who negotiates without legal counsel enters a structural imbalance. A specialist lawyer for employment law knows the typical pitfalls, can assess the prospects of an unfair dismissal claim, and negotiates the best possible severance. The costs are often well invested, because a higher severance usually covers the legal fees many times over. If you cannot afford the costs, RechtStark as a litigation funder assesses whether it can cover the proceedings — so you can instruct a lawyer even without your own budget.
Mistake 5: Overlooking Consequences for Unemployment Benefits and Pension
A severance also affects unemployment benefits and pension. Anyone who resigns voluntarily or signs a termination agreement may face a blocking period for unemployment benefits. Additionally, the severance can trigger a suspension period if the employer issued the dismissal. The pension insurance can also be impacted if contribution periods shrink due to prolonged unemployment. The exact rules are complex and case-dependent. That’s why it’s important to inform yourself early and, if necessary, seek advice from the Federal Employment Agency or a specialist lawyer.
How to Secure a Fair Severance — Your Next Steps
Most executive severance negotiation mistakes are avoidable if you proceed systematically. Check the dismissal for formal correctness and grounds for dismissal. Observe the three-week deadline and file an unfair dismissal claim if necessary. Obtain professional advice — a specialist lawyer for employment law can assess your prospects and lead the negotiation. Don’t negotiate rashly and don’t let yourself be pressured. Consider taxes and social security and check whether a payout across two calendar years makes sense. Have the termination agreement examined closely — especially clauses on vacation, overtime, employment reference, non-compete clauses, and exclusion periods.
If you follow these steps, you avoid the costliest errors. On our page on unfair dismissal claims you’ll find an overview of requirements and process. And if you want to know how a severance is calculated and which rules of thumb apply, we recommend our guide to severance payments. Another helpful article is our post on BEM and severance negotiation — there we show how you can use the company integration management for stronger negotiating positions.
Take the time to review your options and get support — it pays off in the end.
Note: This article is for general information purposes only and does not replace individual legal advice. For a free initial assessment of whether litigation funding may be an option for your case, you can contact RechtStark.