In the eighth edition of the Lee Hecht Harrison Severance & Separation Benefits Benchmark Study, we look at the reasons why severance is offered, how severance is typically calculated at various levels of employment, and what common severance and separation benefits, such as outplacement and redeployment, are offered.
Key findings
A fair, comprehensive and competitive severance and separation package is a key element in ensuring you are treating employees with respect and protecting your employer brand, which in turn is essential to your ability to attract quality talent.
The 2020 pandemic has cast a spotlight on certain employment issues and workforce needs. Until this point, the US was experiencing the longest economic expansion in history, with low unemployment rates and strong growth. As businesses have been forced to close, jobs cut, and governments requiring employees to stay home, what we do, how we do it and where is being completely re-imagined.
As companies respond to dynamic forces in play, we expect many will be putting more formal severance and separation policies and practices in place. A formal policy helps to reduce unnecessary risk and protect an organization. Informal or unwritten policies are often viewed as more flexible but can leave an employer vulnerable every time an exit needs to be negotiated.
However, severance practices vary widely so transparent communication is critical.
As we start to take positive steps towards reopening the economy, employers find themselves asking questions and needing to make very important decisions regarding severance and separation practices:
Can we resume normal operations? If so, do we have the right people to achieve optimal operations?
What do we communicate to employees regarding our company’s future?
What plans do we have to reinstate any reductions in salaries and benefits?
Can we still implement our current compensation plans?
What strategies can we use to retain employees during the reopening and recovery periods?
Will we need to restructure our workforce, and if so, how can we do that in a way that’s fair and equitable?
The results of our latest severance and separation practices benchmark study shed light on many of these questions. What we have learned:
Over two-thirds of respondents have reviewed their severance policies within the past 2 years, so it is reasonable to ascertain that similar timetables apply for other compensation and benefits programs.
Thirty-one percent of respondents overall reported that severance is not defined in employment agreements for all employees. Technology companies were more likely to have severance defined in employment agreements for all employees (39%), while Healthcare companies are the least likely to have severance defined in employment agreements for all employees.
Severance plans are well-documented among survey respondents who offer it. Over 80% of respondents indicated some form of written material is available regarding their severance plans. Documentation of other rewards programs is also expected. Small companies are less likely to have written documentation (30%) vs. seven percent for largest companies. Manufacturing companies are less likely to have written documentation (23%) vs. technology companies where just 5% don’t.
Respondents use various resources for communicating compensation policies and procedures, including an employee handbook, company website, managers/supervisors, and company meetings. This provides an opportunity to reach employees through various communication channels.
More than one-third of respondents report increasing severance benefits. Forty-five percent of respondents report no changes. Technology companies were more likely to report that their policy has become more generous (58%), while Healthcare was more likely to report their policy has become less generous (31%).
Most companies use a standardized formula to calculate how much an employee will receive for severance. More than half of respondents factor in “years of service” and/or “position level” to calculate severance benefits. Forty-four percent apply a flat number of weeks to their severance calculation. Only six percent of respondents apply the same flat number of weeks across all position levels. Far fewer organizations are implementing maximum severance amounts, while fewer continue to implement minimum severance amounts.
There is a lot of variability in whether companies use set formulas to calculate severance. The largest companies almost always have a set formula (91%) while 24% of small companies have no formula. Nearly one-fifth of companies within Healthcare have no set formula, while only four percent of Financial services firms report they have no formula.
Research supports the need for increased transparency in communication. Companies are rethinking their current incentive plan structures and key performance indicators. Having a solid process for communication, and being honest in what you share with employees, will enhance trust and continue to lead to enhanced employee engagement.
Employees are shouldering more costs to continue medical benefits. Companies report they are more likely to continue medical coverage for terminated employees who were enrolled prior to termination (57%) than they were in 2017 (52%). But, fewer companies are offering to share the expense of medical coverage as more companies require employees to shoulder the cost on their own.
Core motivations for offering outplacement programs remain unchanged from previous surveys. More than three-quarters of respondent companies report that they provide outplacement because it is their responsibility to take care of their workforce. A nearly equal number report that helping impacted employees achieve career goals and maintain a strong employer brand are their main reasons for providing outplacement services.
Companies want outplacement programs that include leading technology and personalized support. When designing a successful outplacement program, companies rate tools that help individuals market themselves in a job search as most important, including resume writing, job leads, technology resources, connections to hiring managers and personalized coaching.
VP-level and above employees more likely to receive comprehensive outplacement support. Fifty-seven percent of respondents typically offer senior management (C-suite leaders other than CEO) comprehensive outplacement support that includes 1-on-1 coaching and technology tools. Financial services, Pharmaceutical and Manufacturing companies are more likely to offer comprehensive support at this level.
Managing Director, SVP, and VP-level employees are more likely to be offered six-month outplacement programs. This is even more pronounced in Pharmaceutical and Healthcare companies. Retail companies are more likely to offer three-month programs to this level of employee.
Only four percent of respondents report that procurement leads the decision-making process when selecting an outplacement provider. Thirty-five percent say their CEO leads decision making, and 35% say it’s their CHRO or another HR leader.
Sixty-five percent of respondents offer some form of upskilling/reskilling to facilitate redeploying employees before implementing layoffs. However, most fail to full execute this strategy, and 35% did not compare costs of terminating employees to the benefits of upskilling/reskilling talent to deploy in new roles within the company.
More companies recognize importance of preparing employees for career transition before separation occurs. Fifty-nine percent of companies report that preparing employees for the next stage of their career is important/somewhat important. Only 10% say it’s not important.
The changing nature of work is forcing companies to rethink recruiting and hiring practices. Sixty-four percent of respondents report they plan to improve their recruitment and selection process to help find the skilled talent they need to drive business objectives.
