Severance Calculations Weigh Many Factors

Employee level and tenure often help determine who gets what

By Stephen Miller, CEBS Oct 30, 2014
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More than half of surveyed U.S. organizations do not have a standard severance plan for all employees in the event of layoffs, opting instead for plans differentiated according to experience level, job title or position within the organization, according to an October 2014 report by RiseSmart, a provider of transition services.

The firm’s 2014 Guide to Severance and Workforce Transition reflects the results of a survey of over 250 HR professionals across a wide range of company sizes and industries in the U.S. For those organizations not offering severance to all employees in cases of involuntary separation, the following positions were eligible for severance payments:

Officers (C-suite)—76 percent of respondents.

All senior executives—84 percent.

Managers—84 percent.

Professionals—73 percent.

Administrative/clerical employees—56 percent.

No policy—12 percent.

Don’t know—5 percent.

“Because reductions in force or organizational restructuring events often affect many more employees below the professional level than above it, not offering severance may have an effect on how a large number of employees choose to respond with legal action or speak about or represent the company in the media, within their social networks, and in online reviews, where their opinions may create a ripple effect,” the report points out.

Calculating Severance

Of the 48 percent of organizations that offered severance for all eligible employees, the top three factors in calculating severance payouts were:

Years of service.

Job level or title.

Base salary.

When asked for the average amount of equivalent salary offered to employees of those organizations, the top three responses were:

3 months.

2 months.

1 month.

“Factors such as employee level or tenure have often factored into severance calculations in the past; however, as the business landscape changes and the conversation in human resources includes more perspectives on fairness in compensation and reward, it will be interesting to see if severance [trends toward] standard calculations” for all employees, the report states.

Continuing Benefits

Employers with 20 or more employees are usually required to offer departing employees COBRA health insurance coverage and to notify their employees of the availability of such coverage. Among surveyed companies, 70 percent have a standard policy for COBRA health plan continuation for all employees in the event of a reduction in force. These companies indicated that they:

Provide COBRA benefits continuance as required—35 percent of respondents.

Pay COBRA/insurance premium payments directly to an insurance company—29 percent.

Give employees a lump sum to fully cover COBRA/insurance premiums—9 percent.

Give employees a lump sum to partially cover COBRA/insurance premiums—6 percent.

Partially reimburse employees’ COBRA/insurance premium payments—6 percent.

Fully reimburse employees’ COBRA/insurance premium payments—4 percent.

Other Benefits
Of those companies that had a standard severance package for all employees in the event of a reduction in force, the following benefits beyond COBRA were included in the severance package.

Outplacement services.


Payment of bonuses for which employee was previously eligible (e.g. commissions).


Retirement planning services.


Retirement benefits.


Continuation of stock options.


Life insurance.


Financial planning.


Education or retraining.


Short-term disability.


Long-term disability


Source: RiseSmart’s 2014 Guide to Severance and Workforce Transition


The Worker Adjustment and Retraining Notification (WARN) Act requires most employers with 100 or more employees to provide notification 60 calendar days in advance of a reduction in force. For layoffs not subject to the federal WARN Act or similar state statutes, just over one quarter of organizations offered only one to two weeks’ notification to employees. However, many respondents stated that the number varies and depends on the situation. In some instances there was no set maximum, all the way to one year’s notice.

Retention Amidst Layoffs

Many organizations also employ different strategies to retain high-value employees during layoffs. The most popular choice is retention bonuses, which are offered most often to key contributors, in-demand/skilled workers and high performers.

Moreover, even in the case of a reduction in force, many organizations may continue actively recruiting new talent in other divisions or departments, respondents indicated. Yet only 52 percent of organizations had formal programs in place to redeploy impacted employees into open positions within the company.

“Redeployment can provide cost savings in the form of severance, benefits and outplacement spend; however, it can prove to be a challenging initiative, even for larger organizations that would benefit from a formal redeployment program the most,” the report observes.

Brand Reputation

Companies should also recognize the importance of brand reputation and understand that “a competitive severance policy can contribute to employer branding efforts down the line,” RiseSmart President and CEO Sanjay Sathe told SHRM Online. “However, it’s surprising that of those companies that recognized brand protection as a top priority, 61 percent do not actively monitor their online reputations during a layoff” through employee review and rating sites, he noted.

On brand reputation, workforce retention, and other key matters, Sathe suggested that companies make strategic decisions about ways to align their organizational goals with their severance policies.

Severance “can affect everything from your legal liability to your future hiring,” concurred Karen Stevens, RiseSmart’s vice president for practice strategy, in the report. She encouraged HR professionals to begin or continue the conversation about severance, benefits and outplacement within their organizations.

“No one likes thinking about layoffs, but planning to offer a competitive severance package, continuation of benefits, and a useful and effective outplacement solution will not only be an advantage for your organization, but also go a long way toward protecting and promoting your relationships with your employees, both now and in the future,” Stevens advised.

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related SHRM Articles/Resources

Severance Pay Policy, SHRM Templates & Samples, July 2014

Designing and Administering Severance Pay Plans, SHRM Templates & Samples, April 2014

Supreme Court Rules Severance Payments Are Subject to FICA, SHRM Online Compensation, March 2014

Related External Article:

ACA Considerations for Employers Drafting Employee Severance Agreements, Liberty, Cassidy, Whitmore, October 2014

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