When an employer terminates the employment relationship, in several countries they must make a compensatory payment towards the employee. In some cases, the law treats this as a counterbalance to the employer’s power to terminate.

However, as stock options, restricted stock units (RSUs), free shares (and other equity-based incentives) have become more common in pay packages, particularly of senior staff, they have complicated these dismissal calculations.

In this article, we explore how stock options and awarded shares are taken into account, if at all, for the determination of a severance payment in over 25 different jurisdictions worldwide.

Across countries, different types of payments might arise when an employment relationship ends. For the purposes of this article, we focus on severance-type payments. These tend to rest on a straightforward premise: losing a job has real financial consequences for the employee, and the employer who initiates the termination should bear part of that cost.

Depending on the country, this compensatory payment is referred to in different ways. This includes, for example, a ‘dismissal indemnity’, a ‘severance indemnity’ or ‘severance pay’. The payments may also arise in slightly different scenarios, most commonly where:

• employment is terminated by the employer without cause;
• the employer terminates with immediate effect (and these payments function as termination compensation in lieu of any notice period);
• termination occurs in defined statutory scenarios (e.g. a business closure / redundancy scenario or incapacity); or
• compensation is agreed or awarded on termination (e.g. via a settlement), but there is otherwise no legal right to severance.

In this article, we exclude the following from ‘severance pay’: salary owed, whether during a worked notice period or otherwise; accrued entitlements, such as unused and accrued holiday; and other routine contractual or statutory payments that arise on termination but are not linked to the circumstances of dismissal.

We also generally exclude compensation awarded by courts or tribunals for wrongful or unfair dismissal. However, in some jurisdictions, the calculation and/or components of such compensation may be noted for context where it provides helpful insight (including, for example, where no statutory severance regime otherwise exists).

These types of awards don’t always sit easily within traditional dismissal frameworks. They can be conditional, discretionary or governed by separate plan rules. Employers therefore often ask how equity-based remuneration should be treated when calculating the severance compensation owed upon dismissal. The answer varies from one legal system to another, reflecting differences in how courts and legislators view the employment contract, the nature of variable remuneration, and the scope of employer discretion.

In the table below, we examine, on a country-by-country basis, how each legal system addresses the inclusion of stock options and share awards in the calculation of severance pay.

Stock options and share awards can greatly affect dismissal costs in some countries and so employers should review equity plan rules, employment contracts and local law carefully. In cross-border roles, they should not assume both countries will treat these the same way and so jurisdictional risk needs to be taken into account in design and termination planning.