Golden parachute: an executive’s exit terms under Israeli law

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What is a golden parachute?

A “golden parachute” is a common name for an arrangement in which an executive, such as a CEO or a vice president, receives a payment or benefits when their employment ends in circumstances set in advance. The term does not appear in the Companies Law or the Severance Pay Law. The Companies Law, 5759-1999, uses the term “retirement grant”. It includes it in the definition of an officer’s “terms of office and employment”, alongside an exemption, insurance, indemnity and any other benefit or payment given for the office or the employment (section 1 of the Companies Law).

Under that section, an “officer” is a general manager, chief business manager, deputy general manager, vice general manager, anyone filling such a role even under a different title, and a director or a manager directly subordinate to the general manager (section 1 of the Companies Law). An executive employed as an employee is also covered by the Severance Pay Law and the Advance Notice Law. So a golden parachute is built from two layers: the floor set by employment law, and what the agreement adds to it.

The statutory floor: severance pay

A person who worked one year continuously for one employer or at one workplace and was dismissed is entitled to severance pay (section 1(a) of the Severance Pay Law, 5723-1963). For a monthly-salaried employee, the rate is one month’s salary for each year of employment, and part of a year after a year of employment gives proportional severance pay (section 12(a)). The salary components included in the calculation, and the calculation method, are set in regulations (section 13).

Resigning because of a material deterioration in working conditions, or because of other circumstances in the employment relationship in which the employee cannot be expected to continue working, is treated as dismissal for severance pay purposes (section 11(a)). Payments to a benefits fund or a pension fund replace severance pay only if this was set in a collective agreement that applies to the employer and the employee, or if they were approved by the Minister of Labor, and to the extent set or approved (section 14).

The Severance Pay Law sets two routes for denying severance pay in full or in part: in circumstances that a collective agreement says justify it (section 16), and, in a sector with no collective agreement, when the Regional Labor Court decides that the dismissal took place in such circumstances (section 17).

The Law does not detract from a right given to the employee in an employment contract, and does not exhaust their rights in negotiating terms of retirement from work (section 31(a)). A settlement or a discharge receipt regarding severance pay is valid only if it was made in writing and states expressly that it concerns severance pay (section 29).

Advance notice

An employer that wants to dismiss an employee must give them written advance notice, stating the day the notice is issued and the day the dismissal takes effect (section 2 of the Advance Notice of Dismissal and Resignation Law, 5761-2001). For a monthly-salaried employee, after the first year of employment, the notice is one month (section 3(3)). The employer may waive the employee’s presence and work during the notice period, in whole or in part, provided it pays them compensation equal to their regular salary for that period (section 6(a)). An employer that dismissed without advance notice pays compensation equal to the regular salary for the period for which notice was not given (section 7(a)).

An employee who resigns must also give advance notice (sections 2(b) and 5). The Law does not detract from a right given to the employee in an employment contract (section 12). So an executive’s contract can give them longer advance notice of dismissal than the Law does. The Regional Labor Court has exclusive jurisdiction over a proceeding whose cause of action is in this Law (section 9).

What the exit agreement can add

Beyond the statutory floor, the employment agreement or a separate exit agreement can give the executive additional terms (section 31(a) of the Severance Pay Law and section 12 of the Advance Notice Law). Examples are a grant in an amount set in advance, continuing related benefits for a defined period, or provisions on options. The law does not set a template for such an agreement, so its scope depends on the wording the parties agreed on. This article does not deal with the taxation of these payments.

The triggering event, or “trigger”, must be defined in the agreement. The Severance Pay Law gives a right to severance pay when the employee was dismissed (section 1(a)) or resigned in circumstances the Law treats as dismissal (section 11). A sale of shares or a “change of control” does not appear in it as a ground for severance pay. A payment for such an event can be set in the agreement, which can add to the rights under the Law (section 31(a)).

It is worth having the agreement state expressly whether the grant is paid on top of the statutory severance pay and advance notice or as part of them. It should also state what happens with each way of ending: dismissal, resignation, ending by agreement, and circumstances in which the agreement denies the grant. A restriction on working after the employment ends is examined under separate rules; see the guide Non-compete agreement.

A public company: compensation policy and approvals

In a public company, and also in a private company that is a bond company, the board of directors sets a policy on the terms of office and employment of officers (the “compensation policy”), after considering the recommendations of the compensation committee. The policy requires the approval of the general meeting (section 267A(a) of the Companies Law). In a public company, approval at the meeting requires a special majority. Either the majority must include a majority of the votes of the shareholders taking part in the vote who are not controlling shareholders and have no personal interest in the approval, or the opposing votes among them must not exceed two percent of all voting rights (section 267A(b)). The board may set the policy even if the meeting opposed it, if the compensation committee and then the board discussed it again and decided, on detailed grounds, that it is in the company’s interest. This is not possible in a “public grandchild company” (section 267A(c)). A policy for a period of more than three years requires re-approval every three years (section 267A(d)).

On retirement grants, the Law sets two express requirements. When the terms of office include retirement grants, the policy must address the officer’s period of office or employment, their terms of office and employment in that period, the company’s performance in that period, their contribution to achieving the company’s goals and maximizing its profits, and the circumstances of the retirement (Part A, item 5 of the First Schedule A). And it must set a ceiling on retirement grants (Part B, item 4 of the Schedule; section 267B(b)).

The agreement with a particular officer is approved according to their role, and in any case only if it is in the company’s interest (section 270):

• An officer who is not a director and not the general manager: the compensation committee and then the board, in line with the compensation policy (section 272(c)(1)–(2)).
• The general manager: the compensation committee, the board and the general meeting, in that order. In a public company, the meeting requires the special majority in section 267A(b) (section 272(c1)(1)). The compensation committee may exempt from the meeting’s approval an agreement with a candidate for the role who meets the conditions in section 240(b). It may do so if it found, on grounds it set out, that bringing the agreement to the meeting would frustrate the engagement, provided the agreement is in line with the policy (section 272(c1)(3)).
• A director, regarding their terms of office and employment: the compensation committee, the board and the general meeting (section 273(a)).
• In a public company, when the officer is the controlling shareholder or their relative: the compensation committee, the board and the general meeting by a special majority, and re-approval every three years when the engagement is for a longer period (sections 270(4) and 275).

In special cases, an agreement that is not in line with the compensation policy can be approved. The compensation committee and then the board approve it based on the considerations in section 267B(a), addressing the matters in Part A of the First Schedule A, and the agreement includes the provisions in Part B of the Schedule. The general meeting must also approve it, in a public company by the special majority (section 272(c)(2)). The compensation committee and then the board may, in special cases and on detailed grounds, approve an agreement even if the general meeting opposed it, after discussing it again and examining the opposition (section 272(c)(3)). This provision also applies to approving an agreement with the general manager (section 272(c1)(1)(c)), and does not apply in a public grandchild company.

A transaction between a company and one of its officers has no effect towards the company and towards the officer if it was not approved as required. This includes a case where the approval process had a material defect, or where the transaction departed materially from the approval (section 280(a)). In a corporation whose securities were offered to the public by prospectus or are traded on the stock exchange, the periodic report sets out the compensation given in the reporting year. Among others, it covers each of the five highest-paid senior officers. “Compensation” for this purpose includes retirement compensation that is not a pension payment (regulations 2(a) and 21 of the Securities Regulations (Periodic and Immediate Reports), 5730-1970 (תקנות ניירות ערך (דוחות תקופתיים ומיידיים), התש״ל-1970)).

In a financial corporation, such as a banking corporation or an institutional body, the Compensation for Officers in Financial Corporations (Special Approval and Non-Deductibility of Expense for Tax Purposes due to Exceptional Compensation) Law, 5776-2016 (חוק תגמול לנושאי משרה בתאגידים פיננסיים (אישור מיוחד ואי-התרת הוצאה לצורכי מס בשל תגמול חריג), התשע״ו-2016) also applies. An engagement whose expected expense exceeds NIS 2.5 million a year requires approval. (This is the amount set in the Law; it is linked to the index from the day the Law was published, so the threshold today is higher.) The approval is by the compensation committee (or, if there is none, the audit committee), the board, and in a public company also the general meeting. It will not be approved if the ratio between it and the lowest compensation the corporation paid, by full-time position cost, is 35 or more (section 2). “Compensation” for this purpose includes retirement compensation that is not a pension payment and is not statutory severance pay (section 1).

A private company: who approves

The duty to set a compensation policy applies to a public company and to a private company that is a bond company (section 267A(a)). In any other private company, an agreement with an officer who is not a director on their terms of office and employment requires the approval of the audit committee and then the board. If the company has no audit committee, the board’s approval alone is enough (section 272(a)–(b)). An agreement with a director on their terms of office and employment requires the approval of the board and then the general meeting (section 273(a)). Here too, a transaction that was not approved as required has no effect towards the company (section 280(a)). On the officer’s own duties, see Duties of an officer in a company.

Where a dispute over a retirement grant is heard

The Regional Labor Court has exclusive jurisdiction over claims between an employee and an employer whose cause of action arises from the employment relationship (section 24(a)(1) of the Labor Court Law, 5729-1969). It also has exclusive jurisdiction over a proceeding whose cause of action is in the Advance Notice Law (section 9 of the Advance Notice of Dismissal and Resignation Law).

If you are an executive negotiating exit terms, or a company drafting and approving such an agreement, you can read about representing employees and employers on the page Employment law and about support for employers.

Frequently asked questions

What is a golden parachute?

A “golden parachute” is a name for an arrangement in which an executive receives a payment or benefits when their employment ends in circumstances set in advance, beyond what the law requires. The term does not appear in the Companies Law or the Severance Pay Law. The Companies Law uses the term “retirement grant”, and includes it in the definition of an officer’s “terms of office and employment” (section 1 of the Companies Law).

Does a golden parachute replace the statutory severance pay?

The law sets a floor: severance pay (sections 1 and 12 of the Severance Pay Law) and advance notice (sections 2, 3 and 6 of the Advance Notice of Dismissal and Resignation Law). Neither law detracts from a right given to the employee in an employment contract (section 31(a) of the Severance Pay Law and section 12 of the Advance Notice Law), so the agreement can add to the floor. A settlement or a discharge receipt regarding severance pay is valid only if it was made in writing and states expressly that it concerns severance pay (section 29 of the Severance Pay Law).

Who approves a retirement grant for a senior officer in a public company?

An agreement with an officer who is not a director requires the approval of the compensation committee and then the board, as a rule in line with the compensation policy (section 272(c) of the Companies Law). An agreement with the general manager also requires the approval of the general meeting, by the special majority in section 267A(b) (section 272(c1)). This is subject to exceptions, including those in section 272(c1)(3) and (c)(3). The compensation policy must set a ceiling on retirement grants (Part B of the First Schedule A to the Companies Law), and a transaction that was not lawfully approved has no effect towards the company (section 280(a)).

Does the sale of the company entitle the senior officer to severance pay?

The right to severance pay arises when the employee was dismissed (section 1(a) of the Severance Pay Law) or resigned in circumstances the Law treats as dismissal, such as a material deterioration in working conditions (section 11(a)). A sale of shares or a “change of control” does not appear in the Severance Pay Law as a ground for severance pay. The employment agreement can add to the rights under the Law (section 31(a)), so it can set a payment for such an event and its conditions.