Structuring Severence
Thursday, August 4, 2011

When dealing with severance for an employee leaving your organization there are a number of issues to consider.

The first and foremost is consulting with your legal counsel  to make certain you know what is fair and required by law. Once you have determined how much you are offering then you have to consider how to structure the severance package. I have seen a wide range of severance structures while working with individuals who are provided career transition services, however they tend to fall into one of two main categories, lump sum or salary continuance.

When we consider what severance is (beyond the legal requirements), one school of thought is to provide an income stream for the individual until he/she finds new employment. There are other opinions as to what severance is intended for but for the moment , let’s assume it is to financially tie the person to the next career.

The lump sum option accomplishes this very well. It requires some management on the individual’s part to make certain the amount is not spent too quickly yet provide a reasonable standard of living the person has been accustomed to (some adjustments are going to be made reducing expenses) but it works.

Salary continuance often is designed with a claw back provision where the continuance period is specified, however, if the individual finds another position within that period one half of the remaining amount is paid out to the individual in a lump sum. This would seem like a win-win situation, the individual is bridged financially to the new position and receives a lump sum as well. The organization paying the severance saves money by not paying the full continuance period. Great in theory and sometimes it works that way. However, too many times I have seen this structure act as a disincentive for the individual to actively engage in a job search by simply letting the salary continuance period run its course. For those individuals the fact he/she could have a lump sum of half the remaining amount is lost in their thought process. They think “if I’m entitled to X amount then I’m going to get it”. Another common comment I hear, “I may never have a chance to have this time to myself so I might as well take advantage of it.”

These individuals are hard to motivate to get started in their job search and when they do they are at a disadvantage because a considerable period of time has passed since their last job. Recruiters and potential employers will want to know why the individual has been unemployed for a lengthy period and it is difficult for the individual to explain and still appear to be a highly motivated individual.

I believe salary continuance is fine, it is easy on the former employer’s cash flow and easy for the individual for budgeting purposes. However I would not recommend the claw back provision. When structuring the severance, determine an amount and stick to it. However, if the individual finds employment within the continuance period, pay out the full amount. As one of our clients who in the past have used salary continuance with the claw back said to me “we have never saved any money with the claw back so we stopped using it.” I agree.

Joe Moore
Joe Moore , FCPA, FCMA, CMC
Partner
902.424.1101
Joe has been providing leadership development, career guidance, financial counselling and retirement planning advice to Knightsbridge Robertson Surrette’s career management and career transition clients for over 20 years. Joe has a real talent for offering advice that is rich in common sense, and makes the complex simple and manageable.