U.S. Severance Remains Generous, Despite Recession

But continued cost pressures will eventually take toll

By Stephen Miller Mar 26, 2009
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Severance packages for most employees at large U.S. companies have remained unchanged despite the 2008/09 recession. But as companies continue to look for ways to lower costs, those benefits—like many others—are at risk of being cut back, a new study by consultancy Hewitt Associates finds.

Hewitt's survey of 228 large U.S. companies representing 4.5 million employees found that more than 80 percent of employers conducted layoffs in the previous 24 months and 45 percent intend to make further reductions in the next 12 months. The good news, such as it is, for those impacted employees is that severance programs have remained virtually unaffected by the economic downturn. About one-half (51 percent) of companies offer a standard one to two weeks of pay for every year of service, and another one-third vary their payouts based on a formula that typically combines years of service, salary level and/or grade.

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More than half offer a standard one-to-two weeks
of pay for every year of service; another third
vary their payouts based on years of service,
salary level and grade
.

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In addition to cash payments, most companies provide at least one benefit after separation, which might include:

Health care coverage.

Retirement benefits.

Disability.

Financial assistance.

Life insurance.

Most companies (72 percent) provide outplacement assistance to severed employees.

As regards health care coverage:

30 percent of companies provide full health care coverage during the severance period and then offer COBRA at the end of the severance period.

More than one-quarter (26 percent) provide COBRA coverage immediately, with the employee paying the full premium.

But as companies look to make additional cost reductions in response to economic conditions, many say they will take a closer look at their severance packages. According to Hewitt's survey:

One in five (20 percent) plan to make changes to their severance plans.

Nearly a third (31 percent) are unsure.

Of those making changes, 43 percent plan to reduce cash payments, and one in five (21 percent) plan to reduce benefits.

"Amidst employers' cost-cutting efforts, employee severance programs have largely been untouched, in part because these benefits are viewed as a way to maintain the goodwill of affected employees. In addition, most companies simply do not understand the true cost impact of these programs on their bottom lines," says Lori Wisper, senior compensation consultant at Hewitt Associates. “Organizations now have to dig even deeper into their cost drivers—forcing many employers to take a closer look at the cost and competitiveness of their severance programs. In doing so, they realize they may be able to make changes that not only better align to those of other employers but also help them reduce costs."

Other Key Findings

Most companies (80 percent) have minimum and maximum limits on the cash portion of their severance payments. The average minimum is 4.5 weeks of pay, and the average maximum is 40 weeks of pay.

The regularity with which organizations are reducing their workforces has meant that most (72 percent) now have formal, written severance policies in place for their broad-based employee populations. In the past, these practices varied more based on circumstances.

A majority of companies (87 percent) require severed employees to sign a waiver that includes specific conditions. Most waivers include a litigation waiver and other conditions, such as nondisclosure and nondisparagement agreements.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Amid Global Recession, Severance Seen as Strategic Tool, SHRM Online Compensation Discipline, February 2009

Wide Range of Assistance for Laid-Off Workers, HR News, December 2008

Legal Trends: Severance StrategiesHR Magazine, July 2008

Quick Links:

SHRM Online Compensation Discipline

SHRM Salary Survey Directory

SHRM Compensation Data Center

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