The survey also found that almost one-third of CEOs do not have employment contracts. Executive contracts below the CEO level are even less prevalent. Roughly half of executive vice presidents/senior vice presidents and about 65 percent of vice presidents work without contracts.

To protect companies in these litigious times, contractual agreements should be in place before these executives start, said Bill Gerek, of the Hay Group's executive compensation practice. The timing should be similar to a pre-nuptial agreement, where the parties agree to the details when everyone is still happy, he said.

The study also found that:

• Only 50 percent of CEOs are paid for more than one year, and only 6 percent are paid for more than three years. Among vice presidents, 85 percent are paid for up to one year.
  
  
• Twenty percent of the respondents calculate severance benefits as a fixed multiple of pay. While the majority of companies determine the severance payment based on salary, just over 20 percent include salary and bonus. At companies with annual sales of more than $1 billion, salary and bonus is the prevalent practice.
  
  
• Companies are most exposed to costly, long-term payouts when they have narrow definitions of "for cause" terminations. Only 13 percent of the participating companies cited breach of contract in their definitions; fewer than 25 percent of survey respondents included gross negligence, and just 15 percent of the companies included misconduct outside the scope of employment as a termination issue.

To avoid lengthy and expensive payouts for poor performance or misconduct, compensation committees need to carefully review whether the definition of "cause"is sufficiently broad, according to Hay Group officials. The definition should include real performance criteria to judge the executive's success. They add that these committees should calculate numbers ahead of time, so they can truly understand what the executive actually will be paid under various scenarios.

The survey also found that restrictive covenants were widely used in executive severance programs. Yet, almost 20 percent of companies do not include a confidentiality clause as part of these agreements. While the majority of companies had non-compete restrictions, the length of the term varies from the remaining term of the contract to periods up to two years. Some of these differences can be attributed to state laws, which can affect the enforceability of these agreements.

The Hay Group surveyed human resource and other executives via the Internet at 223 corporations. Approximately half of the participating companies have annual revenues greater than $1 billion and participants represent a cross-section of industries with the majority at healthcare, manufacturing, and services companies. Almost one-half of the survey participants have more than 5,000 employees. The study did not include severance programs in merger or acquisitions or other change in control' situations.