Magazine article Personnel Journal

Severance: The Corporate Response

Magazine article Personnel Journal

Severance: The Corporate Response

Article excerpt

Are America's businesses benevolent to departing employees?

The answer as indicated in a study conductcd by Right Associates is that employers offer a range of severance benefits that is as broad in scope as the companies themselves. But virtually across-the-board, senior executives and those employed by large companies appear to receive the best severance packages.

It was no surprise that regardless of their industry those at the top are treated more generously than others. One indication is that close to one-third of the managers polled indicated their companies had no set formula and one-third set no maximum limit on the amount of severance payments available to key executives. As for the importance of company size, it was discovered that, on average, the benefits are 30 percent better in companies with more than 5,000 employees than they are in companies with fewer than 500 employees.

Right Associates' survey of 1,784 employers nationwide represents an estimated 6 million employees working in 21 industry groups. In this, the most extensive severance study ever conducted, 61 percent of employers reported having a formal severance policy and 24 percent reported having a policy that is informal. Another 15 percent said they either have no policy at all or are considering one. But the trend clearly favors formal policies, as 72 percent of the respondents indicated that they expect most organizations to implement formal severance policies over the next five years.

But first, it's important to look at some of the basic questions and the answers received:


Is your formal policy spelled out in the personnel manual? A full 75 percent have it in the manual; 25 percent don't.

Who is eligible for severance payments? Among key executives, 87 percent are eligible; among managers, 86 percent; at the supervisory level, 81 percent; and among administrative-technical personnel, 76 percent are eligible. A total of 68 percent of the respondents indicated that all employees are eligible for severance payments.

When is severance provided? Severance is paid when a company reduces workforce (84 percent), eliminates a particular position (82 percent), when an employee is discharged for performance reasons (34 percent), for disability (14 percent) or for cause (8 percent). Also, it's provided in cases of retirement with pension (7 percent), retirement without pension (6 percent,) and when resignation is voluntary (6 percent).

What is the severance calculation based upon? Eighty-one percent of the respondents said calculations were based on years of service, making it the major criterion, by far. It was followed by the severance calculation categories of position (38 percent), salary (28 percent), reason for termination (29 percent), employee agreement (12 percent), age (6 percent), the combination of age and years of service (6 percent), collective bargaining agreement (6 percent), and union or non-union membership (5 percent).

Is severance ever decided on a case-by-case basis? Eighty-one percent of those polled said yes, 19 percent said no. How are the severance payments made? Of all surveyed, 31 percent paid in both a lump sum and over a specified period of time. Thirty percent paid only in a lump sum, and 26 percent paid only over a specified period. In addition, 5 percent offered employees a choice of how they wanted to be paid.

If payments are made over a period of time, do they continue if the employee finds a new job before the payment period ends? Thirty-seven percent said yes, 63 percent said no. Who gets what? The largest grouping of companies (31 percent) report lacking a set formula for determining how much in severance payments departing key executives are given. About 24 percent of the respondents said payments are negotiated based on that executive's employment agreement. Eight percent of key executives receive a severance that is based on a percent of their annual salary, and 7 percent get a severance that is a multiple of their annual salary. …

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