Tiered Severance Plans Up; Fewer Apply to All Workers

By Kathy Gurchiek Dec 4, 2007
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Fewer employers are offering severance to all their employees, but more are providing a three-tiered severance structure covering the top executive, next level of senior executives and all other employees, according to new findings.

It’s also rare for employers to conduct an annual review of non-executive severance plans, according to WorldatWork’s study, Severance and Change-in-Control Practices 2007, released last month. Similar to past findings, 13 percent of employers have never reviewed their plan, and 61 percent have not reviewed it in the past year, the study found.

This is the third such study WorldatWork has conducted since 2003. Findings, which have an error margin of 3 percent, are based on responses from more than 500 people at the managerial level or higher working at the headquarters of large companies in North America.

Considering the “heightened awareness of the governance responsibilities of boards of directors with regard to these types of plans,” there is a need for severance and change-in-control (CIC) plans, WorldatWork writes in the executive summary.

It’s especially prudent, and a best practice for companies with 10,000 or more employees and with revenue of $1 billion or more, to review their severance package annually, said Bob Jones, the report’s author.

“A lot depends on how many executives would be covered by change-in-control and severance, and who might have their own employment agreements with the company,” he noted.

HR can help initiate the conversation about reviewing the severance and CIC plans, Jones told SHRM Online.

“In a lot of cases, by default it falls to HR” to point out the need for reviewing the severance package, he said. “Sometimes your HR leader who’s the liaison to the board and compensation committee needs to be very much in the midst of it,” he said.

“Clearly, a compensation committee chairperson … will either be directing the calendar or working with HR to direct the calendar. The idea is if it isn’t on [the calendar], it ought to find its way on there, and HR can do that,” Jones said.

Once the review is on the table, “sometimes a good consultant can help you through the pitfalls, someone who is knowledgeable of change-in-control [documents] and employment agreements,” he added.

“If the compensation committee needs help in a couple of directions, just in terms of topics to review and quantification of what is there, sometimes HR can do all that for them. Sometimes you need an external consultant, sometimes you may need counsel to help. In many cases, counsel often implements [the review itself],” Jones said.

A separate survey by Mercer, also released in November 2007, found that 60 percent of firms had changed their change-in-control efforts in the past two years, with some involving an alteration of design as to whether the equity awards involved have accelerated vesting.

There is a fertile environment for severance and CIC plans, according to the WorldatWork study, which found that 58 percent of respondents experienced a reduction in force (RIF) from May 2006 to May 2007. A slightly greater number planned RIFs in 2008.

Although fewer employers offer severance to all their employees compared with results from the 2005 survey, it is “not a pronounced trend,” Jones observed.

It might reflect a general decline in employers offering broad-based employee plans in general, WorldatWork suggests. Cradle-to-grave employment is no longer the norm, and severance typically is reserved for employees with a certain number of years of service, Jones said.

Unlike 10 and 20 years ago, “new hires are asking about severance upfront and negotiating that,” he added.

WorldatWork’s compensation practice leader, Jim Stoeckmann, said in a press release that “companies, both large and small, would be wise to have a formal severance plan in place for all employee levels.”

Two weeks’ salary and one month’s salary are the most common minimum amounts of cash severance, offered by 42 percent and 17 percent of employers, respectively, the survey found. The maximum amount is 26 weeks’ salary, followed by one year’s salary (25 percent and 20 percent, respectively).

Other plans vary widely, from one week of severance, to four weeks, to eight or nine weeks.

Non-cash benefits often are included in a severance package, and three months is the typical duration for these, according to the findings.

Outplacement assistance, such as individual counseling and general office and secretarial services, are popular non-cash severance benefits, with 42 percent of organizations offering this to all affected employees. Another 31 percent offer outplacement as part of severance on a case-by-case basis.

In 2005, 22 percent did not offer any outplacement assistance, and that crept up to 28 percent in 2007.

Including outplacement services as part of the severance package is “a strong trend. It’s not going away,” Jones observed.

But employers are taking a hard look at it. “They’re managing it” like any corporate expenditure, he added. He recommends that employers seek feedback from employees who have used it to learn how it’s working and if employees have had success using it.

More than half of employers surveyed don’t offer a continuing health care subsidy or coverage assistance as part of their severance plan. Among those who do, 4 percent provide it to employees with certain levels of service, 16 percent provide a partial subsidy for a limited period, and 25 percent provide full subsidy for a limited time.

Among those that offer the subsidy, though, most do so for a one- to three-month period, WorldatWork found.

Its most recent survey also found that almost half did not offer stock options or equity awards as part of their severance plan.

Kathy Gurchiek is associate editor for HR News. She can be reached at kgurchiek@shrm.org.

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