You’ve decided to have some sort of reduction event. Whether that be a RIF, layoff or even a voluntary layoff, you will need to figure out how many weeks of severance pay you should provide your employees who will be exiting from the organization.
According to Investopedia, an employee typically receives 1-2 weeks worth of severance pay for every year of tenure that they had with the organization.
However, there are several variables that can affect the number of weeks of severance pay your organization gives to employees. It is important that your human resources team is aware of these variables when calculating payouts.
These variables include, but are not limited to:
- Industrial and geographical benchmarks
- Employee value proposition
- Position level within the company
- Type of reduction event
- Financial situation at your company
- Corporate policies
Let’s dive into each of these…
Industrial and Geographical Benchmarks
While it is typical to provide employees with 1-2 weeks of severance pay for each year that they worked at your organization, this might be different for your specific industry or location.
For example, let’s think about Silicon Valley. The war for talent is massive in this area, especially within the technology industry. Potential employees evaluate every employment option given to them, and can be picky. That means every glassdoor review, everything they have heard through word of mouth, and even the types of people that work for you will be reviewed before a candidate makes a decision to move forward with a position at your organization.
Unfortunately, if you give measly severance payouts in comparison to other technology companies in the valley, this candidate will probably know about it, and weigh it against you in their decision about your organization.
Because of this, you would want to give your employees a severance pay that is comparable with other technology companies in the area.
Silicon Valley is a great example of this variable, but don’t think it doesn’t apply to other areas, too!
Take the energy industry in Houston, Texas. Engineers that specialize in the energy field are similar to technology workers in the Silicon Valley. Their skills are in demand, and if you plan on hiring any of these types of engineers in the future, you’ll need to make sure that you don’t damage your employer brand by offering a lower than average severance pay.
And while both of these examples focus on a specific type of worker, it should be noted that you should still provide decent severance pay for all of your laid off employees. Not just the ones who have skills that are in high demand.
Why? Well not only is it the ethical thing to do, but also because a lot of word of mouth won’t carry the specifics that certain types of jobs get good severance pay. If a high skilled worker hears that a company has bad severance pay, they usually apply that to their own potential employment at your organization, not to a different type of worker.
Employee Value Proposition
This variable ties in very closely with the variable discussed above, because it also depends on your industry or geography.
According to CEB Global, “employee value proposition” (EVP) can be defined as follows:
The EVP is how the labor market and employees perceive the value they gain by working in an organization. The EVP comprises five attributes:
- Rewards: Includes compensation, health and retirement benefits, and vacation
- Work: Includes job-interest alignment and work-life balance
- Organization: Includes market position, product/service quality, and social responsibility
- Opportunity: Includes career opportunities, development opportunities, and organization growth rate
- People: Includes manager quality, coworker quality, senior leadership reputation, and camaraderie
Basically, your organization’s employee value proposition is the value that an employees feels from having a position at your organization. If your organization has a high focus on employee value proposition, you probably place huge emphasis on innovative work programs, amazing benefits, and company culture.
(A well known example of an employer with a huge focus on their employee value proposition would be Google.)
The formula is simple, if you have a large focus on your employee value proposition, then you should offer higher than average severance payouts. Instead of offering 2 weeks of pay for every year worked, maybe you offer 4 or 5.
A great way to map this out is to compare your organization’s focus on your employee value proposition in comparison to others in your industry or location.
For example, if your company has the largest focus on employee value proposition in all of the Kansas City market, then you will probably want to offer the highest severance payouts too. If the average in the Kansas City market is around 1 week of pay for every year of work, you would then want to offer more than that to be in alignment with your focus on employee value proposition.
Position Level Within The Company
It is normal for higher level executives to receive higher amounts of severance pay than other workers at your organization. There are several reasons for this.
The first being that many executives write into their job offer language that allows for the negotiation of severance pay or for a golden parachute.
A golden parachute is “ an agreement between a company and an employee (usually a high level executive) that provides significant financial benefits to the employee upon termination.”
This clause has become standard in most executive employment contracts, and is meant to help retain high level employees and protect them in case of a merger, acquisition, or buyout.
But it also means that if an executive is laid off, that your human resources team will have to fulfill the agreed upon benefits in regards to the golden parachute.
Secondly, high level executives are very powerful people. Because of this, your organization might be incentivized to provide better than average severance pay to ensure a positive relationship between the let go employee and your brand moving forward.
Type of Reduction Event
The number of weeks of severance pay you provide to your employees will also depend on the type of reduction event you are having. Particularly if your organization is planning on having a voluntary layoff as opposed to a more traditional layoff or reduction in force.
It is a common best practice to provide more financial incentive to employees that participate in a voluntary layoff. This provides motivation for employees to volunteer for such a life changing event.
So, if your HR team typically gives employees 2 weeks of severance for each year of tenure they have at your organization, you would need to increase that amount to properly incentivize for a voluntary layoff.
The amount of weeks that severance pay should increase for a voluntary layoff will be different for every organization. For many it will be an increase of twice as much, where other companies (especially those companies with a high focus on employee value proposition) may increase the severance pay by several times over.
The number of weeks of severance pay that your organization provides to employees will also be dependent on your financial situation.
Many times when an organization broaches having a layoff, they are in financial downturn. But several organizations also actively rightsize based on their business objectives, which also results in layoffs.
Depending on where your organization fits on this spectrum, you might be able to offer more or less weeks of severance pay to your laid off employees.
For example, if your organization decides to stop making hockey pucks and instead make basketballs due to changing consumer preferences, you might need to rightsize your production team to better fit this objective. That could result in a few layoffs, but they are not caused by extreme company downturn. Thus, your organization could be more generous with the number of weeks of severance pay provided.
On the other hand, if your organization is filing for bankruptcy and will have to dissolve, there might be a fairly limited amount of capital to provide severance pay to employees.
Finally, several organizations have internal compliance regulations to ensure the continued well being of their business.
It isn’t uncommon that a sizable organization has some sort of policy about exactly how many weeks of severance pay an employee can receive when they are laid off from your organization.
Before your HR team begins to create a strategy for how many weeks of severance pay your employees should receive, make sure to review any internal compliance policies that you currently have.
If you don’t have a policy in place, it is always a good idea to create one to help make this process easier in the future.
Also, beware of changing your policy shortly before a reduction event. This could lead to very disgruntled laid off employees.