Cushioning the Blow

While offering severance packages to departing employees can provide benefits on both sides of the employment equation, new research uncovers how employers may be missing the mark when separations become necessary.

Monday, February 23, 2015
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Severance packages are typically thought of as a way to make life easier for laid-off employees while protecting the organization's reputational brand. However, Sanjay Sathe feels they're doing neither very effectively.

"There's a big disconnect between the goals of severance policies and the way they're actually implemented," says Sathe, founder and CEO of San Jose, Calif.-based outplacement consultancy RiseSmart.

RiseSmart recently conducted a survey of 250 U.S.-based HR professionals on their organizations' severance policies. The findings, published in the Guide to Severance and WorkforceTransition, note that 39 percent of employers that offer severance don't offer it to all their employees. In some industries, such as banking, 56 percent of companies don't offer severance to all employees.

The question of severance eligibility typically depends on your rank: 86 percent of organizations offer severance at the executive level, whereas only 56 percent offer severance to those working in clerical/administrative positions, according to the survey.

"If the No. 1 goal of severance is to take care of employees, then the practice should be to offer it to all employees," says Sathe.

Granting severance eligibility to all won't necessarily break the bank, says Margaret-Ann Cole, a senior vice president at Philadelphia-based Right Management. Companies can offset the expense of severance payments via tax-advantaged vehicles such as Supplemental Unemployment Benefit plans."A SUB plan is more affordable for companies than traditional severance payments," she says.

Originally designed as a way to mitigate the effects of cyclical layoffs for employees covered by collective-bargaining agreements, SUB plans have become more common among non-union employers as well. Under a SUB plan, the organization pays weekly severance as a supplement to an ex-employee's state unemployment compensation-both the organization and the recipient are exempt from paying payroll taxes on the money, says Cole.

Although executives tend to get the biggest severance packages, some tend to do much better than others. A 2014 survey by Right Management on global severance trends found, among other things, that U.S. executives trail their global counterparts in terms of the amount of severance granted, especially in China: Chinese executives receive an average of 4.24 weeks of severance per year of service, whereas Americans averaged 3.16 weeks. The global average for executives was 3.48 weeks of severance per years of service, according to the study, titled Severance Practices Around the World.

The numbers for China deserve some context, however, says Cole.

"Chinese companies may be offering these very generous severance packages, but how often do they have to offer them-and do the executives actually need to take them? Experienced executives in China are in high demand and may have no trouble quickly finding another job," she says.

Generous severances may not always be a good idea, says Cole.

"One of the things we've seen is that the bigger the severance, the less inclined someone may be to quickly get involved in finding their next role," she says. Even so, she adds, generous packages may be necessary in cases where finding an equivalent position will likely be a lengthy process for the person being laid off.

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In other findings, the Right Management survey found that three out of four companies (75 percent) have a formal, written severance policy and that severance is most often offered as a lump-sum payment. Top executives earn the most severance per year of service, regardless of whether they were voluntarily separated (3.53 weeks per year) or involuntarily separated (3.48 weeks per year).

The most common maximum amount of cash compensation an employee might receive in severance is one year's salary, offered by 30 percent of organizations, according to a severance study from last year by Scottsdale, Ariz.-based WorldatWork. The most common minimum amount of severance is two weeks' salary (offered by 32 percent of organizations), while 20 percent offer a minimum of a month's salary. The overwhelming majority of organizations (92 percent) consider years of service-at least in part-as a basis for determining the amount of severance, according to the survey, titled Severance and Change-in-Control Plans.

Nearly half of employers (49 percent) offer outplacement services as part of their severance packages, the survey found, while 33 percent offer it on a case-by-case basis and 18 percent don't offer it at all.

The number of employers that offer COBRA subsidies as part of their severance packages has edged up over the years: Only 37 percent did not offer COBRA subsidies to laid-off employees last year, compared to 50 percent who did not in 2003, according to the survey.

"Most large employers offer COBRA subsidies to their laid-off employees," says Sue Holloway, WorldatWork's executive-compensation practice leader.

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