Severance benchmarks

July 1, 2005

Best practices indicate that health benefits are continued during employee and CEO transitions

WHETHER DUE to corporate restructuring, position consolidation, or staff reductions, most companies at one time or another find themselves in a position to have to sever employees. Shifts in the economy, changes in the climate of the industry, or increased competition are all factors that influence the need to release staff.

Compensation Resources Inc. recently conducted a study of severance policies and practices among employers that represent all sizes, locations, and industries. Its 2005 Severance Survey findings indicate that severance is typically associated with the separation of employees as a part of a reduction in the organization's workforce. It is least common when employees quit or are discharged for cause, or those employees who are terminated for poor performance. Only 9% of the participants indicated that they provide severance for other circumstances, such as by mutual agreement or for highly sensitive terminations.

Two-thirds of survey respondents implemented their severance policies more than three years ago, which generally coincides with the period of the depressed labor market from 2000 to 2002. About 31% of these respondents review the policy every year, while 55% review the policy on an as-needed basis. Overall, most respondents indicated they are satisfied with regard to their company's current severance policy.

SEPARATE PLANS FOR EXECUTIVES It is not uncommon to have a separate severance plan for executives. Approximately one-third (33%) of respondents stated that their company has a severance policy specific to executives, with the majority of those (72%) having a separate policy for the chief executive officer and the other executives of the company. Change-of-control agreements are provided to executives among 36% of the respondents. Change-of-control agreements provide protection for both the executive and the company in the event of a corporate merger, sale, consolidation, or other disposition.

While respondents indicated that they are satisfied with their policy statements, communication is an area where additional focus should lie. While 55% of those queried indicated that they were at least satisfied with how well the severance policy is communicated to employees, the remaining respondents believed that communication was an area that required improvement. As with any human resource program, communication is a key ingredient in the success of any severance program. Communication takes the form of discussions with senior management and the company's board of directors, who ultimately approve the plan design; education of the staff of the program's key components; and training of management on its consistent administration.

Approximately half (51%) of the respondents use length of service as the basis for determining severance benefits, which is consistent with general industry practices. Severance payments that are based on tenure also help to alleviate negative reactions, as it rewards those employees who have served the company for many years with a greater benefit. This provides these employees with comfort, as they feel that they are being recognized for their employment and commitment to the company.

Severance policies among 53% of respondents also indicate a minimum and maximum amount of severance that can be payable. Most commonly reported minimum was two weeks, with 52 weeks being the maximum allowable severance benefit.