Job Cuts: How Executives Avoid the Most Expensive Severance Mistakes

Executives often forfeit large sums in severance negotiations due to errors concerning garden leave, bonuses, company cars & royalties. A checklist and example calculations in the Handelsblatt article show which legal and tax pitfalls managers must be aware of to avoid losing five- to…

Job Cuts: How Executives Avoid the Most Expensive Severance Mistakes

When companies implement rationalization measures and lay off executives, costly mistakes often occur during the subsequent severance negotiations. This affects not only the salary but also numerous other items such as bonuses, company car regulations, and outstanding royalties. Experts point out that without comprehensive knowledge of the relevant legal and tax pitfalls, managers can easily give away five- to six-figure sums, as many subtleties only become apparent at second glance. October 1, 2026, brings the relevance of this topic into focus, as economic fluctuations can always bring about the need for restructuring.

A common mistake lies in the insufficient consideration of variable salary components. Bonuses and royalties due for the current or past financial year must be included in the severance pay. Companies often try to reduce or completely cancel these benefits. The use of company cars beyond the release date or their financial compensation is also a relevant point that should be carefully negotiated to avoid tax disadvantages or unnecessary costs. A detailed breakdown of all claims is essential, as, for example, unused vacation days or overtime also represent significant value.

The tax optimization of the severance payment is another decisive factor. The so-called "one-fifth rule" (Fünftelregelung) can significantly reduce the tax burden if the severance pay is treated as extraordinary income according to certain criteria. Here, the exact wording in the termination agreement is crucial. A premature signature without a legal review can result in long-term financial disadvantages. This also applies in particular to blocking periods for unemployment benefits, which can be minimized through skillful negotiation to ensure seamless financial security.

For aspiring and established executives, especially those pursuing further education through an MBA program, understanding such mechanisms is of growing importance. An MBA not only prepares one for strategic decisions within the company but also sharpens awareness for one's own career planning and risk minimization. Knowledge of labor law and contract design can represent significant added value in critical transition phases such as job cuts and help prevent financial losses. The ability to conduct complex negotiations and represent one's own interests in a well-founded manner is a core competence that goes beyond the purely technical aspect.