Severance Policies Mostly Unchanged Despite Cost Cutting

Most U.S. organizations have seen workforce reductions

By Stephen Miller Jun 1, 2009
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​Since the beginning of 2008, two-thirds of U.S. organizations have had to reduce their workforce as a result of the recession. However, “although most companies have taken a variety of initiatives to trim workforce costs, their severance policies have remained unchanged,” says Steve Gross, global leader of Mercer’s broad-based performance and rewards consulting business. “Severance pay helps preserve the future good will of employees, which can be a difficult investment to measure over the short term,” he explains.

According to Gross, most organizations update their severance policies about every five years. “As companies closely examine every facet of their talent investment during these unprecedented times, it’s important to include a review of their severance policy as well.”

Severance Policy Features

Most severance policy features are applied consistently to all employees and typically include benefits continuation and outplacement services in addition to severance pay, according to Mercer’s U.S. Severance and Strategy Survey, conducted in April 2009, with responses from more than 400 mid-size and large employers across the United States.

Severance features, however, differ slightly by employee group:

Nearly three-quarters (74 percent) of organizations provide continuation of benefits to executives as part of their severance policy, compared to less than two-thirds (65 percent) for professional and technical employees and 61 percent for non-union and hourly workers.

69 percent of organizations offer outplacement services to executives as part of their severance policy, compared to 57 percent for professional and technical employees and 49 percent for clerical and technician workers.

Severance Policy Features by Employee Group*

Features

Executives

Management

Professional/
Technical

Clerical/
Technician

Non-union/
Hourly

Severance payment

98%

99%

98%

97%

95%

Benefits continuation

74%

68%

65%

63%

61%

Outplacement services

69%

63%

57%

49%

40%

Non-compete agreements

51%

28%

20%

13%

12%

Minimum service requirements

18%

21%

23%

23%

24%

Source: Mercer
*Responses based on organizations with a severance policy.

“It’s important for organizations to implement fair severance policies … because it helps uphold an employer brand they’ve worked hard over the years to build,” advises Gross. “A severance policy—and how well it’s implemented—contributes to maintaining positive relationships with employees that may return to the company some day and supports the company’s employment brand within the marketplace.”

Severance Periods

Among other findings from Mercer’s survey:

The majority of severance policies (52 percent) do not have a minimum length of service requirement for employees to receive severance if part of a workforce reduction.

Of those policies that use years of service as a key criterion for determining the length of severance payments, two to four weeks is the most common minimum period for the majority of employees.

The minimum period of payments for most executives is more than 12 weeks. The maximum period of severance payments for the majority of employees is 26 weeks, with the exception of executives, which is one year.

“In this tough economy, it’s a good time for HR executives to either develop a policy if they don’t have one or review existing policies to ensure they still reflect the company’s compensation philosophy and expense control measures,” says Gross.

Stephen Miller is an online editor/manager for SHRM.

Related Articles:

Severance Best Practices Lessen Litigation Risk, SHRM Online Compensation Discipline, April 2009

Severance Remains Generous, Despite RecessionSHRM Online Benefits Discipline, March 2009

Amid Global Recession, Severance Seen as Strategic ToolSHRM Online Benefits Discipline, March 2009

Quick Links:

SHRM Online ​Compensation Discipline

SHRM Salary Survey Directory

SHRM Compensation Data Center

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