Human Resources: Creating Equitable Severance Packages in a Tough Economy

Severance is intended to bridge the gap between one job and the next. The two most significant factors in determining the length of time this process takes are the age and salary level of the individual, not the length of service, which most companies use to create a severance policy. Including age and pay level in the overall formula creates a more equitable policy. Nevertheless, on average, companies provide between one and two weeks´ pay for each year of service unless the employee has a negotiated employment contract or is at a senior level.

Organizations should keep the following six standard components of a typical severance package in mind when putting together a restructuring or downsizing plan:

Severance Pay-- Although not legally bound to do so (unless by an employment contract or union agreement), most companies will provide severance pay to help bridge the gap between jobs. Severance payments are either made by salary continuation or in a lump sum.

Outplacement-- Approximately 80 percent of employers in the U.S. provide outplacement services to separated employees. In most cases, the length of the program provided is tied to the departing employee´s seniority level within the organization. It is also necessary to assess each individual´s needs based on his/her marketability and career goals.

Medical Insurance -- Continuation of health care provisions were enacted as part of the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA). The law requires employers to offer employees and qualified beneficiaries COBRA health care continuation coverage for 18 months after an employee leaves the organization. There may be a period of time before COBRA coverage becomes available to the employee and many employers continue coverage until this point.

Vacation Pay-- Sometimes an organization will allow its employees to accrue vacation time from one year to the next. It is recommended that companies following this practice account for departing employees´ vacation time in crafting their severance package.

Bridging To Retirement-- Organizations often are willing to grant time for bridging to retirement if an employee is within a few years of eligibility for either early or normal (full) retirement. This is typically done by adding years, to age and service. If the organization´s pension plan is funded, bridging costs little to provide.

Stock Options -- Generally, departing employees have 90 days after they have been laid off to exercise vested stock options before they are lost. It should be noted, however, that employees can negotiate to have this period extended and be able to exercise their unvested options.

In addition to these standard components, the following benefits may also be included in a severance package: long-term and temporary disability insurance, life insurance conversion privileges, long-term care insurance, accidental death and dismemberment insurance, 401k plan conversion, employee loan, employee assistance plan, tuition refund plan, and relocation.

The way a company treats its departing employees today will not soon be forgotten - by them, by the people with whom they share their experience, or by the employees that are left behind. A general rule of thumb to keep in mind is to think about how you would like employees to feel once they leave your organization. If you want to attract and retain top talent in the future, stay focused on what you can do today. After all, departing employees may one day be potential customers.

About William Hollett

William Hollett is Vice President and Senior Consultant, Organizational Restructuring for DBM. DBM (www.dbm.com) is the world´s leading provider of strategic human resource solutions that help organizations align their workforces to meet changing business needs. Known for over 35 years for its innovative and effective career transition services, DBM offers in-depth capabilities in employee transition, retention, development, and selection. Founded in 1967, the company has more than 225 locations in over 45 countries.