Asian Companies Pay Highest Severance Worldwide

By Roy Maurer Jan 31, 2014

Asian employees receive the highest severance payouts worldwide, no matter what their position or seniority, or whether they voluntarily or involuntarily separated from the company, according to a new study.

Right Management’s Severance Practices Around the World includes input from more than 1,800 senior executives and human resource professionals from 19 countries and 19 industries.

Not surprisingly, top executives earn more severance per year of service than any other level of employee, with workers in Europe and Asia generally receiving more severance than their peers in the Americas.

“The increasing importance of talent to an organization’s success has created a new focus on how severance practices, as part of a broader workforce strategy, can impact a company’s brand value,” said Bram Lowsky, Right Management’s group executive vice president for the Americas. “The need to continually realign and right-size talent persists in today’s uncertain economic environment, and companies that have competitive severance practices in place are ahead when it comes to future retention and recruitment efforts and engagement of remaining employees after a restructuring.”

Severance Policies Well-Established Worldwide

Three out of four companies surveyed (75 percent) said their company had a formal, written severance-benefits policy. Formal policies were most popular in Asia (82 percent), particularly in Japan (94 percent) and China (92 percent); they were in place in 72 percent of companies in Europe and 73 percent in the Americas. Severance policies are well-established in both emerging markets (80 percent) and developed economies (73 percent).

The most important factor shaping severance practices is the legal environment in which the business operates, the survey found. Globally, severance policies are most frequently governed by a combination of company policy and local or national law (52 percent). Companies in emerging markets are more likely to have severance policies established solely by local or national law, which is the case with 28 percent of organizations, than are companies in developed markets, where this is the practice of 21 percent of businesses. Organizations in developed markets are more likely to govern policy by company regulations (26 percent) than are companies in emerging markets (23 percent). More employers in Brazil and Italy, for example, have policies dictated by national and local laws, while organizations in India, Sweden and Belgium more commonly dictate severance policies. Only 5 percent of companies have no formal severance policy.

“The increase in formal severance policies stems from greater awareness by companies that their talent truly is their only sustainable competitive differentiator and an important reason they want to ensure people are treated fairly,” said Mary Haskins, Right Management’s regional vice president and practice leader for Americas West. “Those who do not have any policy in place run the risk of being unprepared for change and may lack knowledge about local laws and customs, increasing their exposure to litigation and government penalties.”

Severance Eligibility

There are many regional differences when it comes to severance eligibility. More than half of companies in Asia (57 percent) and Europe (51 percent) require employees to have a minimum length of service before they may receive severance pay; however, just 38 percent of businesses in the Americas have this requirement. Fifty-five percent of companies operating in emerging markets require workers to have a minimum tenure before they are eligible for benefits, compared with 46 percent in developed economies.

One-third of companies require employees to put in a year or more of service in order to qualify for severance benefits. This figure was slightly higher in Europe and Asia, where 35 percent of organizations require a year of service, and slightly lower in the Americas, at 28 percent.

Notably, 44 percent of companies employing more than 50,000 people required a year or more of service for severance eligibility, while this was true of only 30 percent of businesses with fewer than 100 workers.

The report indicated that the main trigger for activating the severance provision was a reduction in workforce (64 percent), followed closely by an organizational restructuring (62 percent). More respondents in the Americas (77 percent) reported severance being activated by a reduction in workforce than did those in Asia (59 percent) and Europe (57 percent).

More than half of companies (55 percent) place a cap on severance payments. This is more common in Asia (61 percent) than in the Americas (58 percent) and Europe (48 percent). Large employers are more likely to cap payments (59 percent) than smaller ones (43 percent).

Executives worldwide most frequently receive severance as a lump-sum payment. Employees in the Americas (40 percent) are more likely to be offered a lump sum than are their counterparts in Europe (33 percent) or Asia (31 percent).

Companies may offer lump-sum payments because they are easier to administer and provide employees with their money more quickly, observed Frank Ribuot, Right Management’s senior vice president for Asia-Pacific. “In many cases, companies also use these payments as part of their retention strategies, as they want to keep remaining employees engaged and performing if they are relocating the business or closing a plant.”

Separation Benefits

Right Management found that, regardless of position, the top benefits tend to be assistance programs (outplacement and financial planning), followed by continued benefits (health care and financial compensation) and, to a lesser extent, company resources (office space or a car). Employers in the Americas consistently offer continued health benefits, more so than in Europe or Asia. This may be due to more socialized health care programs being available in countries outside of the Americas, according to the report. In contrast, employers in Europe and Asia offer company resources more frequently than in the Americas.

Two-thirds of companies around the world (66 percent) require separated employees to sign a waiver or release to access severance benefits. More organizations in the Americas (73 percent) require a waiver than in Asia (67 percent) or Europe (59 percent). Examples include China, where 88 percent of companies require a waiver, and the United States, where 86 percent require this document.

“Regardless of location and industry, we’re seeing an evolving and strengthening connection between competitive severance practices and favorable brand image in the marketplace,” said Lowsky. “Organizations that provide outplacement support, and demonstrate fairness, care and respect for those leaving, not only ensure a positive restructuring outcome but also realize an improved brand value that ultimately attracts and retains new and current employees.”

Roy Maurer is an online editor/manager for SHRM.

Follow him at @SHRMRoy

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