Resources Icon




Home > Resources & Tools > Financial Library > Business Planning > Severance

Business Planning

Severance Packages—Not Just for Top Management

A new trend is evolving in the hiring process, born out of the downsizing of corporate America. Potential employees are requesting and receiving severance packages to help cover issues such as continuing health and life insurance coverage. How long should a person's salary continue in the event his or her employment is terminated?

While many companies offer comprehensive severance packages to their key executives, they typically have a different plan for other workers. In most cases, these plans are usually less involved—with terminated employees receiving severance pay of, perhaps, one week's salary for every year of service. However, a new trend that never would have been considered in the past is to give middle-level employees up-front severance packages.

The question of the appropriateness of a severance package needs to be addressed on an individual basis, but there are a few basic questions that should be asked of a prospective employer:

Is a Severance Agreement Right for You? Most key executives have severance agreements because of their potentially precarious job security; however, employees on the very next rung of the management ladder should also consider whether asking for a written severance agreement makes sense for the very same reason. As a standard rule of thumb, some compensation planners suggest that this should include anyone who earns approximately $100,000. However, in lower paying jobs, a prospective employee may not want to jeopardize his or her chances of landing a good job by dwelling too much on the issue of a severance package.

Another factor that should influence your decision is the industry's track record. If you work in a cyclical industry that has a history of consolidations followed by mass firings, your job security may be negligible. Likewise, if you move from a secure position to a start-up venture, you may want to consider asking for some form of protection.

How Much is Enough? While severance packages vary from employer to employer, they typically take the form of a written contract in which you will receive either a lump sum or have your salary continued for some length of time after your departure.

Severance agreements providing for lump sum payments are atypical. Under most severance packages, your salary will continue for a specified length of time, generally from one month to six months, depending on the nature of the agreement. Once the length of the agreement is determined, you should discuss how bonuses and stock options would be handled.

What About Life and Medical Insurance? Most employees have the right to continued health insurance under the Consolidated Omnibus Budget Reconciliation Act (COBRA) for a period of up to 18 months. Since you most likely will have to pick up your own tab when you elect COBRA coverage, it makes good sense to cover this option in your discussions.

Employers generally are not required to continue life insurance coverage. You should leave this option open for negotiation.

Is There a Downside to Discussing Severance? Be careful about how and when you raise the severance issue. Negotiating for a new job should be a positive process. The severance issue could potentially sour it. Therefore, choose the time and circumstances wisely.

Copyright © 2003 Liberty Publishing, Inc. All rights reserved.


Equal Housing Lender Member FDIC