I’m curious about how companies determine severance pay packages. I assume there are state laws that dictate minimum severance amounts, or it seems there would be no severance packages at all. But some companies give more than that. One recently gave its laid-off employees six months of severance, which is very generous in these times. But why? While that’s good news for the employees, why would a company or its shareholders want to give more than it has to?
I’m also curious why upper management receives more severance. I understand that CEOs and their echelon often have prearranged golden parachutes. But managers without such agreements or contracts sometimes get more severance (in terms of weeks of pay) than others. Again, I don’t understand the benefit to the company. What’s the deal?
I hope some of the HR members of our community will chime in here. I’m sure they’ve got some good insights on this (and even better stories.) You’re asking a lot of questions, but not for advice. I’ll try to illuminate what I can, and I’ll offer some advice at the end anyway!
Why severance pay?
I don’t believe there are any states in the U.S. that require severance pay to be paid to a departing employee. For the most part severance is a company’s prerogative and an employee’s privilege — it’s not a right.
However, severance always serves the employer — it’s not a gift. It’s always a form of handcuffs because the agreement you sign will tie your hands in some ways.
One of the main reasons companies offer severance is to avoid future legal problems. A company will offer severance in exchange for you signing an NDA or a non-disparagement agreement, or a release from any further liability to you. Call it a bribe, but it often works. Sometimes the severance offer is very aggressive: “We’re willing to drop big bucks on you, but you have to agree so some pretty unsavory terms.” The more they offer, the harder it is to say no.
While extravagant severance deals sometimes border on criminal, they’re usually negotiated at the time of hire. The employer makes the deal with eyes open. So what might seem irrational is a pragmatic way for a company to convince a desirable job candidate to accept an offer.
Severance pay is practical
It’s also a practical thing to do. When used properly and for the right reasons, severance is a company’s way of parting on good terms, especially when it’s the company that terminates the relationship. (Companies rarely pay severance when you decide to leave.) It’s the complement to an employee giving two weeks’ notice before quitting.
Employment Contracts: Everyone needs promise protection
Often, severance is paid to ensure a smooth transition. The departing employee getting a nice package is more apt to leave their workflow in good condition for their replacement — and perhaps to take a call or two with questions even after they’re gone.
Severance is often based on how badly the company needs the employee’s services between now and the termination or layoff date. For example, a company might need a manager to stick around until the last employee is laid off and until the last project is wrapped up. In exchange for having less time to look for a new job, the manager accepts more severance.
It’s also good public relations
Why do some companies pay more severance than others? They’re smart. When a worker leaves a company with a nice package, he or she is more inclined to speak favorably of it to other workers, probably for years to come. That’s a competitive edge. Good public relations are no accident, and they don’t require government incentives. A company that wants a good reputation works hard at burnishing its image as a responsible employer. Severance is part of that strategy.
Managers often get better packages than staff for a few reasons. To start, their compensation is higher and severance formulas are usually rational (if not outlandish). They’re based on compensation and time served at the company. Higher compensation usually means more severance.
Managers also belong to a club of sorts, and they tend to take care of each other because they never know when they’ll run into one another again. Today’s department manager might one day hire his or her old boss, and what goes around comes around. So it’s not just public relations. It’s also professional relations.
And this brings us around to my advice. There’s a lesson you should take from all this: Not everyone gets a chance to negotiate a severance deal. But everyone should try. You might ask yourself, what will this company need from me when I depart, and what will they not want me to do? (For example, share something I learned at the job.) What’s that worth?
Don’t assume only executives or managers get severance pay. When you negotiate your next job offer, ask about severance. If you believe your job is important to the employer, you might even negotiate aggressively. Make it part of your written offer. Then you might not be so irritated about the severance deals others get!
To give you a head start on dealing with severance deals, I’ve included a special News I want you to use item this week. Don’t miss Hack that severance agreement! You’ll learn not just what you might ask for, but what to avoid agreeing to.
Do you have a good severance agreement with your employer? Are you in management? How did you negotiate your severance deal? Do you bring severance up when negotiating a job offer?
What’s a severance package?
I’ve been working a lot of years now, and I’ve died on several hills in that time, but I’ve had only one severance package. That was 11 years ago this coming June when I worked for my current employer’s competitor. I was laid off (along with 300 other workers) after a buyout. For 6 years tenure I received 10 weeks of pay and Cobra. I don’t know if that was fair or equitable, but having never received a severance package, I have no bench mark to go by. I did have to sign a nasty NCA, and they gave me exactly 3 hours to make up my mind, plus I had accrued 3 weeks of vacation, and they’d only pay me for 2 weeks. Go figure!
I’ve been discreetly job hunting for several months now. While high-level managers can play this game, if I tried it at now age 63, and with at will employment giving employers Carte Blanche, I’d be immediately disqualified as a candidate.
While I understand the point, I am having a bit of trouble about someone negotiating severance before even starting the job.
Could you demonstrate how a headhunter would work that into the agreement.
@Tony: What makes it easy to at least propose a guaranteed severance package is that employers often include terms in the job offer that “cost” the new hire something. E.g., a non-compete (NCA) clause that prohibits them from working for competitors (where NCAs are legal), or ownership of anything the employee invents while employed. The pre-defined severance package is worked into the job offer as a way to compensate for what the employer will take away
Another example is when a candidate is being recruited from employment they’d not otherwise give up. In that case, the candidate’s position is this: “I’m happy and secure where I am now. To take the risk of joining your company, I’d need contractual assurance you won’t let me go after 6 months or a year or 3 years. Without such a deal it’s not worth it to me.” A guaranteed severance deal, defined in the job offer, protects the candidate. An alternative deal might be a starting bonus. There are many ways to skin the proverbial cat. :-)
It is very interesting to know that I can bring severance pay into a hiring negotiation. As a parent of a medically dependent child, betting canned with no warning is my worst nigthmare. Due to the rules of SSI for children, I am not allowed to have a meaningful amount of savings or other spendable asset. It also limits how much I am allowed to be paid and still get support for my child’s expensive medical needs. A severance package would at least let me not go instantly bankrupt between jobs. Good advice. Thanks!
@Al: Go for it, but please understand you may not get it. I hope something in this Q&A gives you ideas about how to make a good attempt. Don’t miss attorney Mark Carey’s excellent advice, which I discuss here:
Redundancy payouts, as they’re usually referred to in Australia, are covered by employment law. They vary according to the industry you work in, your age (older people get more, as they will usually find it more difficult to find another job), and how long you have worked in the job; unless you are one of the 1 in 3 who is ‘on contract’; then you get nothing.
You may get more if your employment contract includes more favourable redundancy provisions (yes, here employers may add that to make your job look more stable), and if you have a very good union, they will often try and negotiate a much better payout.
Having said that, not many people get a good payout. Sadly, employers are much more likely to bore or bully their staff into leaving. Large payouts in Australia are usually from high-profile redundancies such as banks (we have fewer but larger banks), big telecommunications companies (again, fewer but larger), mining companies and other large corporates. So yes, part of it is publicity. NDAs are more common with the middle-sized organisations who can’t weather as much bad publicity.
@/Anne: Thanks for the view from Oz!
In my state, employers must pay accrued unused leave/vacation, but aren’t required to pay severance. I’ve been offered severance (based on tenure) in exchange for updated NDAs, non-disparagement clauses, and/or non-compete agreements (meaning I can’t work for their competitors for a certain time period). The only one I didn’t sign was the one that wanted to keep me from getting a job in an entire broad industry (e.g., Information Technology) for three years and pre-publication review of *anything* I published (e.g., even a children’s picture book) in that time period. It was very like how they treated their employees throughout my entire (blessedly short) time with that company.
@Carol: I hinted in my advice that companies sometimes use severance deals as a cudgel to get you to agree to stuff you’d never agree to otherwise. If the severance deal is big enough, it can be really hard to walk away without signing it.
It’s worth pointing out that NCAs are not enforceable in some states.
Let me start by saying I agree with “At will work states” but I also think it is poor business to terminate an employee without cause. In other words, if you are doing satisfactory work and your company decides they want to eliminate the position, then I think there should be a formula based on the length of time at the company, age, etc. Finding a new restaurant job versus a mid-management role are completely different processes. I am currently in the process of finding a new position after being terminated and I just had the highest producing months of my employment while two coworkers in the same position were underperforming. My salary and commissions were needed for a different project. Even with the glowing letter of recommendation I received, it is proving difficult to secure a new position. I was only offered a few weeks severance after four years- there was no warning or indication this was coming. Companies don’t go out of business when a person quits, but a person’s life can be ruined by an unexpected termination. Some positions you can replace in a few days, others can take months or even years.
I’ve died on this very hill you’ve also died on, and have been blind sided as well as were you.
However, I’m adamantly opposed to at will employment, and hope for the day reasonable cause and progressive discipline will become the law of the land (wishful thinking).
“Give a good faith effort and integrity”. That’s it. That’s my mantra
For what it’s worth, I wish you well. Everything you’ve said, I can parrot.
@Looking: Sorry you’ve had this experience. This is when it becomes difficult to argue against labor regulations, unions and collective bargaining. As you point out, companies are far better equipped to survive a resignation than employees are to survive a sudden, unexpected layoff.
Inconvenient as it may sound, this is why I always tell people that you must always have a low-level job search going. There’s no telling what your employer may do. Having options at the ready is crucial.
I wish you the best in your job search. I hope you find some useful resources here on Ask The Headhunter.
@Looking and @Antonio: My heart goes out to each of you. I have suffered a situation in this category too. One of the best things I’ve learned from @Nick (which is saying something) is that there’s no on-the-job leverage like the option to leave the job for new one. So agreed: Let’s always keep our low-level new-job searches going.
Nick – Your reasons for why companies provide severance packages ring true based on my personal experience.
There are two additional reasons I’ve encountered: first, the owner/CEO or senior decision maker feels guilty about the decision to let someone go and a severance package eases their guilt. That leads to the second reason, which is now they’ve set a precedent and they are concerned about not offering something similar to the next person. This is usually why companies start setting internal rules/guidelines (2 weeks for every year of service) – so there’s consistency with packages.
Severance is also about retention for the remaining employees – I’m more likely to stay at a company that just let my coworker go unexpectedly if I see that he was treated well on the way out.
My sister in Maine gave 2 weeks notice at a small financial company that had been taken over by a large out-of-state bank. She noticed that her incoming work ceased, and a day or two later she was let go, not only with no severance, but also without payment for accrued vacation, which apparently is legal in Maine.
So, what’s the lesson for survivors? If you plan to leave, take a long vacation, return to work long enough to receive the vacation pay, then quit with no notice. Seems like a stupid lesson for an employer to teach, but there it is.
@!JR: I’m afraid I agree with you. Wish it weren’t so because not all companies behave like this. But when enough members of a community behave badly it reflects on the rest. Then it’s up to the rest to police their professional community or suffer for the bad behavior of the errant ones.
I’ve been on both sides of the table Giving and getting severance, and getting Severances can take many forms, some of which don’t use the name.
Think of severance as anything you can get because they want you to leave. Termination does not have to be one sided.
Several forms of policy driven severances are around & I’ve been around or involved with all of them.
There are those one associates with downsizing..i.e. large #’s of people let go in concert, vs singular departures.
As a manager it’s one of the most unpleasant things I’ve had to do, because in most cases on one asked for your input leading to a result which you know isn’t right. Letting go people who should remain, and retaining people who should go.
As someone pointed out, being able to offer severance takes the edge off of guilt, even though what I’ve offered is simply following a formula.
Somewhat related to Nick’s point about PR & guilt is layoffs affect those left behind. Those that didn’t get laid off. It leaves a survivor guilt a mixture of grieving and fear. Lay offs are not morale builders, so knowing the company gave a good severance package takes the edge off of the survival guilt, minimizes hostility toward the company plus it eases the fear of being next and helps things to keep going.
Then there’s a variant I call “We want to reduce headcount, if you volunteer we’ll make it worth your while and you’ll save someone else’s job” And it’s announced along with a not too subtle warning as “the severance for the actual layoff won’t be so good should you wait and then get tagged”. And historically everyone knows they aren’t BSing. From the corporate side, there’s a real risk to this approach..in that the wrong people often volunteer e.g. high performers, rare skills. I’ve seen this happen.
Then there’s the “stick around please bonus” Usually invoked with Project shutdowns, plant shutdowns where there’s a high risk that people with critical skills or roles will quit before everything is wrapped up or shipped. That’s usually extra X weeks pay, so for awhile you’re double dipping while job hunting.
Except for stick around bonuses the above are examples of HR driven, regimented packages, that apply across the board.
But yes you can negotiate as an individual, if you don’t get wrapped around the axle of cash. Cash compensation usually is cast in policy concrete, and changing it is above your boss’s pay grade. So don’t bother trying.
So take heart and ask for other stuff. What have you got to lose? afraid of being fired? oh wait you are being terminated. so go for it.
Here’s something I did on the receiving end. I knew I was going to let go. I wasn’t told, but I’m adept at reading handwriting on the wall. Given that, I knew what policy would offer as severance. Credit due, the company did not the severance package a dark secret. The policy was company public.
So I made a list of other things I wanted. that I was sure was within my boss’s authority to grant. I made it reasonable. Don’t ask for things that would take an act of god to grant. Sure enough, my boss dropped in for a visit & he dropped the axe. I gave him my list with rationale (give bosses what they need to sell it to themselves or their bosses). And I got most of it. Things like.
*My Apple Workstation, with it very expensive monitor. This was worth about 10K. I know because I bought it. And all the applicable software and cabling. (reason. I had no PC at home & I’d be job hunting)
*A phone budget
* Request not to drop me from the phone and email directory for X months
* Executive Outplacement
and on and on.
No cash involved. but it all had some value. But just accounting entries.
No one called it severance. To do so might set precedent. I was asked not to disclose it. Fine with me.
And he signed a blank property pass so I could haul all that stuff out of there.
Oh & per policy our trusty HR rep was in the room with me.
Here’s what I did as a manager when someone tendered his resignation. this is another case where I read handwriting on the wall and suspected and expected a layoff. I didn’t have a huge department. If this guy left I’d be one down and would most likely have to cut 1 more from my headcount when the layoff came. He’d already accepted an offer & was giving me the traditional 2 weeks notice, so I couldn’t & wouldn’t ask him to wait. I told him for budgetary reasons, I didn’t want my headcount to drop. I couldn’t ask him to change his start date, so I proposed that I’d change his end date with us. and just go off and start his new job. And he’d continue getting his pay until I stopped it. We’re talking 2-4 weeks past his real departure. So in essence I gave him a 2-4 week severance where he’d double dip for awhile. When the layoff came, I put him on the list. As I expected I had a small team & only was expected to reduce headcount by one. The company got their one, and I saved someone’s job. Win win win all the way around.
I was pretty much required to sign mine immediately and then was escorted out. The NDA (Non Disclosure Agreement) was basically for me not to blab to anyone that I actually got a severance because I was in a unique situation after a buy-out. Because it happened at the peak of the Great Recession (Dec 2007 overlapping the Covid-19 Recession)[In my case, circa 2009.], what saved my financial behind was emergency Obama-COBRA, which locked in my health insurance at my employed rates instead of the typical exorbitant COBRA post-employment rates. This kept me from just rolling the bulk of my severance into healthcare for the next two years while I was still jobless. Which is why I never badmouth at least one ex-president.
The only advice I can give for severance comes more from the arena of accountants than lawyers. There were some post-departure conversations with HR. I was still too much in shock to to think clearly, so I had no idea of how to deal with the tax situation. Fortunately, on the next year’s taxes, my tax person informed me that I overpaid my taxes on the severance by over $10K, which was not a small piece of change for a guy who was long-term unemployed.
So make sure your tax person is kept in the loop, or get a tax person if you usually don’t use one.
@CitizenX: Great point about getting tax advice before signing a severance agreement! That’s another reason to slow down the process — tell the employer you need to consult your accountant.
@CitizenX makes an excellent point on determining the best way to handle the ERISA benefits – by talking to an accountant first on the tax consequences.
I’ve been through this kind of scenario a few times in the past; some good business/contract lawyers would tell you to be aware of third-party vendors handling the ERISA benefits after your termination. Also, if the situation warrants it, you can check with the state agencies (Labor Department, UI office, etc.) to verify any information that most companies are required to provide on their laid-off employees via WARN Act, etc.
You are not required to sign a severance pay agreement if there are numerous unresolved issues at the time of your termination. Send a brief letter of explanation to the HR representatives – their response (or non-response) would determine the course of a negotiation. Keep in mind that your ERISA benefits are protected by federal law.