The Top Five Elements Of A Strong Severance Pay Policy

The Top Five Elements Of A Strong Severance Pay Policy

By Tom Wilson and Susan Malanowski at the Wilson Group

The below article highlighting the five key elements of a strong employee and/or executive severance policy is a summary of the compensation data compiled in the Wilson group’s compensation survey: 2017 Severance and Paid-Time Off: Results from the Special Survey.

Forty-five companies from a variety of industries including Technology, Manufacturing, Healthcare, Education, Financial Services, Retail among others provided information about their employee and executive severance and paid-time-off policies and practices.

The survey analyzed employee pay data within the following employee/organizational levels:

  • Executives
  • Senior Management
  • Directors
  • Managers
  • Individual Contributors
  • Services and Operations Employees (non-exempt)

Key highlights from the survey include:

Who is Eligible for Severance?

Participants reported that virtually all executives (top levels) and employee groups are covered by such policies. Union employees who have severance benefits are covered by the union contracts.

Under What Conditions Are Employees Eligible for Severance Payments?

Employees are eligible to receive severance payments for any or all of the following reasons:

  • when there is a reorganization
  • their positions are eliminated
  • there are layoffs due to reductions in force
  • there is a change in control
  • for specific performance based terminations

Executives tend to have an employment contract or agreement that defines their severance program.

How Much Severance is Paid?

Practices and policies were found to vary significantly based on the information provided by participants. The greatest variance was found at senior levels of management.

  • The survey results provide an average number of minimum and maximum weeks of pay by employee/organizational level. Executives receive almost 6 times the number weeks as non-exempt employees at a minimum and 2 times as much as the average maximum. This difference typically takes into consideration that it takes longer for senior level talent to find new jobs. On average, there was no difference between Individual Contributors and Services and Operations Employees in the minimum and maximum weeks of severance. This may imply that these two categories of employees are covered by a consistent severance policy from which there is rarely much deviation.
  • The survey also provides number of weeks by years of service. Most typical severance policies base the amount of severance on years of service, with 2 to 4 weeks being the norm for those with less than 3 years of service.

What Compensation is Included in Severance?

For most employee groups, severance only includes base salary. In cases where incentives are a significant portion of an employee’s total compensation, the calculation of incentive is also included, the most common being target incentive. The survey also found that organizations negotiate with the employee at the time of termination what is included in the severance calculation.

In Meridian Partner’s 2015 Survey of Executive Severance from proxy data, it was reported that Named Executive Officer Severance agreements typically include:

  • Cash severance
  • Current year bonus
  • Continuation of health care benefits
  • Perquisites/personal benefits
  • Vesting and settlement of long-term incentive compensation

Are Employee Agreements Required to Receive Severance?

In most cases an agreement is required in exchange for the compensation received. These documents tend to include non-disclosure and non-disparagement statements, to confirm no legal action will follow as a result of the termination, but exclude non-compete and non-solicitation.

There are a variety of approaches organizations take with severance. For determining what should be your policy, ask what does your organization believe is fair, reasonable and competitive for the type of talent you attract. The challenge is to be fair, competitive, and fiscally responsible. Find the balance.

To obtain the full 2017 Severance and Paid-Time Off: Results from the Special Survey report from the Wilson Group, please contact Tom Wilson (twilson @ wilsongrouop.com) or purchase it online via this link.

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