A wise decision Featured

10:05am EDT July 22, 2002

Why pay severance? After all, the departing employee or executive is no longer your company's responsibility. For whatever reason-market shifts, business reversals, poor performance-what does the business owner have to lose by returning a worker to the tender mercies of the market?

According to the experts: plenty. "Most companies want people leaving happy," says Barry K. Lawrence, manager of media relations for the Society for Human Resource Management in Alexandria, Va. "That certainly helps avoid lawsuits. But it also does another key thing: It gives you some good public relations, so when things are going good again, people will want to work for you again. And when things go bad, they still know you'll take care of them." Severance packages, Lawrence and others believe, can be key for employers hoping to retain the goodwill of the community and the available labor pool. "You kind of want to be seen as the employer of choice," Lawrence adds.

A 1995 survey by the Society, the latest available, found that 83 percent of responding businesses-250 of 1,000 member companies-provided severance pay to eligible employees who are terminated. Perhaps surprisingly, nearly 23 percent of these offer severance even to employees fired because of poor performance.

Another survey, of discharged executives and managers, by international outplacement firm Challenger, Gray & Christmas, found that after a long slide in severance totals, employers in 1997 offered an average 21.8 weeks severance, up 70 percent from 12.8 weeks in 1996. Companies are now as worried about losing the goodwill of employees who remain, observes Executive Vice President John A. Challenger, as they are about those discharged.

"It's as much about retention as it is about goodwill," agrees Jane K. Weizmann, senior consultant with the human-capital group at Watson Wyatt Worldwide in Washington, D.C. Employers should structure their severance packages in accordance with the company's strategic goals, including fairness to the employee and impact on the business's reputation among potential employees-especially in tight labor markets.

For employers who want to formalize a policy, Weizmann says a recent Watson Wyatt survey showed the standard severance for executives is now two weeks per year of service; 1.6 weeks for the salaried manager; and 1.4 weeks for the wage-earner. Some companies offer an additional week of severance pay for each year after four years of work. Some employers also supplement or supplant portions of severance pay with in-kind contributions, including use of office equipment and automobiles.

Fortune 500's may take a "cookie-cutter" approach, but smaller companies with valuable employees who wear many hats should consider tailoring severance packages to the individual's contributions, says Willard Archie, CEO of the New York City management consultant firm, Mitchell & Titus, LLP. "We want to feel that maybe we'll have a friend wherever they land," Archie says, because a discharged employee may wind up working for a client.

Severance may be proportionately higher older employees, Archie adds, since some may have a harder time finding appropriate new work. Weizmann cautions employers to avoid discriminating on the basis of age, race or sex. But Archie adds that some firms he advises attach a signed, written agreement with a severance package to protect against future litigation.