Study Says That Severance Plans Have Held Steady Through the Recession

© Olivier - Fotolia.com
© Olivier - Fotolia.com

Is there anything good you can say about employee layoffs?

According to some new research from WorldatWork, there is and it’s this: While companies have been slashing payrolls in recent years, at least they haven’t been trimming their severance packages, because severance and change-in-control plans have survived the recession and its aftermath fairly intact.

The study — titled Severance and Change-in-Control Practices 2011 — was just released this week by WorldatWork, a not-for-profit organization providing education on global HR benefits and compensation issues, and Innovative Compensation and Benefits Concepts (ICBC), an HR consulting firm. Here are some of the key findings:

  • Many organizations still maintain a formal written severance plan as they always have for the CEO, one for key executives, and one for everyone else.
  • Years of service, position, pay level, and employment agreement still seem to be the most important determinants of severance status.
  • Most organizations still provide one or two weeks’ severance pay per year of service, with many providing a tier of benefits up to the maximum.
  • In spite of the difficult economy, 44 percent of organizations continue to subsidize COBRA (full or partial) for all employees.
  • Nearly half of surveyed employers provide outplacement benefits to all affected employees while 36 percent provide it on a case-by-case basis, up from 27 percent two years ago.
  • Tax gross-ups — the practice of increasing the amount of a cash payment to offset the tax impact on the individual resulting from the cash payment — continue to decline. Six percent of respondents said they provide full or partial gross ups of their executives’ severance pay, down from 8 percent in 2009.

Important tool “to ease the job transition”

“One finding that may come as a surprise is that severance and change-in-control plans are being reviewed less frequently by companies today than two years ago,” said Don Lindner, CCP, executive compensation practice leader for WorldatWork, in a press release about the survey. “But that doesn’t diminish their importance as employee benefits and tools to ease the job transition.”

It’s good to know that severance packages are generally remaining intact, because I have heard of too many cases where organizations that used to give employees two weeks of severance pay for every year service have reduced it by 50 percent — to one week for each year.

At Fortune 500 newspaper publisher Gannett (full disclosure: a company where I worked as a top editor for five years back in the 1990s), they don’t even do straight severance pay anymore. Instead, they do something called “transition pay benefits.”

According to Jim Hopkins’ non-company affiliated Gannett Blog, “The TPP provides one week of benefit for every year of service up to a maximum of 36 weeks. There is a minimum of three weeks and all payments are offset by state unemployment benefits (emphasis added).”

By that measure, the findings of the WorldatWork survey are pretty positive news.

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Tax gross ups: They’re going, but not gone yet

Another positive in the survey, at least from my perspective, is the slow elimination of tax gross ups added to severance pay, because nearly all those “gross ups” go exclusively to fired CEOs and senior executives who are already getting pretty hefty payouts to make them go away. The WiseGeek blog gives some good background on this highly controversial practice, including a little dig at former Home Depot CEO Bob Nardelli.

When Nardelli departed, his gross up included “an extra $3.3 million to take care of his personal taxes on various perquisites. In Nardelli’s case these included forgiveness of a personal debt and family travel on the corporate jet.” WiseGeek adds that, “shareholder and media criticism over excessive executive pay packages, including bonuses and perks, has made the implementation of tax gross-ups a controversial issue.”

The Severance and Change-in-Control Practices 2011 survey (you can find the full survey here) was conducted in May 2011. Survey invitations were sent electronically to 5,278 WorldatWork members randomly selected from the full domestic, Canadian and foreign membership. The survey closed on June 3, 2011, with 567 responses.

Is severance pay a burning HR or talent management issue? Well, it is if you are dealing with layoffs, as so many organizations have been, over the past few years. This survey provides some good background on what the current best practices with severance issues, and that has the potential of being even more important if the economy continues to wobble.

The conclusion to the survey makes that point very clearly, and they’re words to keep in mind:

In the face of a still-turbulent environment, severance and change-in-control plans have remained remarkably stable. There are a few important trends as noted above that this 2011 survey provides for the reader. Companies continue to adapt and mold their plans as they see fit to meet the “new normal” of the present-day war for talent. It is clear from the current environment that these plans will continue to help companies respond better to radical changes in financial circumstance or simply provide a needed cushion for executives who are involuntarily severed not for cause or due to a change in control.”

John Hollon is Editor-at-Large at ERE Media and was the founding Editor of TLNT.com. A longtime newspaper, magazine, and business journal editor, John has deep roots in the talent management space. He's the former Editor of Workforce Management magazine and workforce.com, served as Editor of RecruitingDaily, and was Vice President for Content at HR technology firm Checkster. An award-winning journalist, John has written extensively about HR, talent management, leadership, and smart business practices, including for the popular Fistful of Talent blog. Contact him at johnhollon@ere.net, connect with him on LinkedIn, or follow him on Twitter @johnhollon.

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