A June 1 evaluation, from council members, city staff and external evaluators, gave Menchaca an "average" rating.
Mayor Susan Narvaiz initially said Menchada had declined a severance offer and planned to contact an attorney.
But the mayor, at Tuesday night's city council meeting, said Menchaca agreed to accept the severance deal and not pursue a lawsuit. He has declined comment.
Menchaca was city manager of Midland from 2000 to 2007.