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Four ways to avoid overspending on severance pay

Four ways to avoid overspending on severance pay

December 20, 2011
Submitted By Sanjay Sathe

Managers planning a reduction in force often face a stressful, even emotional, period. They must balance their allegiance to the company with their feelings – positive and negative -- toward departing employees. In that sometimes supercharged atmosphere, managers make decisions that can have significant impacts on the bottom line. Among them is how much to spend on a severance package.In arriving at that number, managers must weigh an imposing number of considerations. But the process can be made smoother if they focus on these four ways to avoid overspending on severance pay:1. Know your goals.Businesses set goals for all kinds of initiatives, and a reduction in force should be no different. It isn’t enough to know that measures were taken to help assist the transitioning workers. Companies have to be focused on, among other things, protection from litigation, the morale of remaining employees, and their reputation in their industry.Frequently a primary goal of severance is to obtain from the departing employee an agreement not to pursue legal action on the basis of discrimination or retaliation. In determining the value of such an agreement, it’s also vital to consider potential impacts elsewhere, especially among those who remain employed, and those being targeted in long-term recruiting efforts. An effective severance package positions the employer between the extremes of appearing uncaring and foolishly generous.Striking that balance requires a clear assessment of the company’s health, its future, and the overall impact of this reduction in force. With such an evaluation in hand, managers can construct a severance package that’s both credible and realistic.2. Know the rules.As they prepare a severance package, companies must make certain they’re on firm legal ground. Some state laws require companies to pay laid off workers for time off that has been earned but not used. And those laws vary, specifying vacation time, sick time and both. Similarly, states vary in their approaches on the granting of unemployment benefits after the signing of a severance agreement.In settling on the package, don’t forget that employees are being encouraged to try to negotiate an increase. They may ask for any number of things -- more money, more time, release from a non-compete clause – and they indeed may have some kind of leverage. It makes sense to consider such situations in devising a severance package, and discussing – in advance – some contingencies and counteroffers.3. Consider your payment options.Companies make a myriad of choices when paying severance. Perhaps the most important is whether the severance is to be paid in a lump sum or over time.More and more employers pay out severance over time, and only until the transitioning worker finds new employment. They reason that severance is paid to assist workers in their transition, not to provide them with a financial windfall.Employees can benefit under this arrangement. Payments received over time – through salary continuation or Supplemental Unemployment Benefits (SUB) plans – may be taxed at a lower rate than lump sums, and payments may be paired with a continuation of benefits.4. Offer effective outplacement.Spreading out severance payments and ending them when employees have found new jobs is an effective strategy for reducing costs. But the current economy has brought with it the expectation that many laid off workers will take more than nine months to find new jobs.Old-school outplacement providers can prolong this process with their offerings of low-return services such as group “grief” counseling, classes on resume preparation, and the leasing of expensive office space for use by transitioning workers. Company morale can be further damaged as employees see their former colleagues out of work for extended periods. Brands suffer negative implications. And for every week a laid-off employee has not found a job, companies can expect additional costs, especially with respect to Unemployment Insurance.The latest outplacement solutions reduce that historically high unemployment duration by combining technology and one-on-one assistance to find the best matches of laid-off employees and available openings. Employees recognize the value of this results-oriented outplacement, and are willing to invest their time in it.Companies considering a reduction in force need to invest in effective outplacement as well.When laid-off worker's career transition more quickly and smoothly into new jobs, their former employers are among those who benefit.Learn more about how to reduce severance costs with the right outplacement service.

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