Human Capital & Careers

Layoff Binge Spurs Severance-Policy Flux

But many companies are giving more to their ex-workers, not less, a new study shows.
David McCannApril 10, 2009

With so many companies laying off workers, revising severance-pay policies is in vogue as well. And while a majority of employers will save money under their new provisions, a sizable minority will not, according to a new survey.

Among 180 companies surveyed by Hay Group, a human-resources consultancy, 15% had altered their severance policies in the year before the survey was conducted, around February 1, and an additional 22% said they are considering making changes.

That level of activity is “much, much more” than in the past several years, according to Tom McMullen, U.S. reward practice leader for Hay Group. The firm had not researched that issue previously because policy changes were so infrequent, but anecdotal evidence of companies making changes recently spurred it to ask the question.

To be sure, the consulting firm advises client companies on their benefits programs and thus profits when changes are made. However, Cher Wynkoop, deputy chair of the tax, benefits, and wealth planning practice for the law firm Reed Smith, confirms that many of her clients are altering their severance policies.

In the Hay Group survey, the changes are less generous to those employees receiving severance at 61% of the companies that have made or are considering them. The other 39% are offering or contemplating better terms for the ex-workers, so revising the policies is far from an across-the-board cost-cutting strategy.

For companies that are improving the terms, a fairness component may be at work, since laying people off right after diluting severance policies makes for a harsh double whammy. If the motivation isn’t fairness, it’s probably public relations. “Companies that have the means may be thinking that there are going to be people on the street talking about their separation experience,” says McMullen.

Better terms often can be justified because severance costs, at least for nonexecutives, are relatively minimal when compared with the bottom-line “bounce” companies get from shedding workers, notes Wynkoop.

The result of all the changes is a more clearly defined set of common market practices, adds McMullen. Changes may be made to the definition of who is eligible for severance; other eligibility requirements, such as length of service; the type of payment (salary continuance versus flat-dollar amount); whether to include bonuses and incentive awards as compensation for determining payouts; whether to continue benefits during the severance period; confidentiality, noncompete, or other restrictions imposed on those getting severance; the provision of outplacement services; and whether to require former employees to forgo severance benefits when they get a new job.

That last consideration is one Wynkoop says many of her clients are now looking at, with more of them opting to stop payments when a position has been secured. (Among the Hay Group survey respondents, 25% have such a policy.) Most companies doing that also don’t provide benefits continuation or pay part of the ex-employee’s COBRA health-care cost, so people are highly incentivized to find a job, she notes.

Another common change made recently was actually set in motion in 2005 with the enactment of IRS Code Section 409A. The section primarily provides for an excise tax on deferred compensation, but it also regulates the form and time frame of severance payments. It bars the once-common practice of giving laid-off workers a choice between salary continuance and a lump-sum payment. Companies were required to have amended their plans accordingly by the end of 2008.

An even more recent flurry of changes came about as a result of the economic stimulus package that became law in February, adds Wynkoop. The law provides that the government will pick up 65% of COBRA premiums for up to nine months for employees terminated involuntarily from September 1, 2008, through December 31, 2009. The ex-workers pay the other 35%. But the law stipulates that if the employer had a policy in place to pay, say, half of the COBRA premium, former employees must pay only 35% of the half they would otherwise owe, with the company responsible for making up the difference.

That’s why, says Wynkoop, in just the past two months she has seen many companies abolishing COBRA assistance.