Severance Design

A financial bridge to whatever’s next

Severance pay is money that an employer might want to provide for an employee who is leaving their employ. To provide severance pay to a departing employee is both a kindness on the part of the employer and a legal necessity in this era of law suits. The departing employee receives pay that will supplement his or her unemployment compensation and cushion his or her standard of living while job searching. Yet less than 50 percent of companies provide some amount of severance pay to workers whose employment is terminated.

Organizations voluntarily choose to provide severance to protect their goodwill with current, past, and future employees. These organizations generally consider the severance pay to be a sort of voluntary, supplemental unemployment compensation. Quality organizations recognize the reality that unemployment compensation, even in the most generous states, is far less than half a worker’s salary. Severance pay can alleviate some financial hardship in the short term. It is the financial bridge to whatever’s next.

Since many times a person’s employment is terminated through circumstances external to their work, the provision of severance pay is a positive and supportive gesture. The payment of severance pay is also viewed as positive by the employees who remain who judge their employer by his or her actions because, more often than not, how you treat the exiting employee is more important than how you treat the new employee (contrary to traditional corporate thinking).

Severance agreements are more than just a “thank you” payment from a company. They can prevent an employee from working for a competitor and waive any right to possibly pursue a legal claim against the company. And it is simply just the right thing to do in most circumstances.

Every organization that employs should have an established severance-pay policy. There are many factors to consider when establishing a new strategy or reviewing a established policy. Here are a few to consider.

  • Are we being fair and equitable?
  • Is this how I would want to be treated?
  • What will it cost me to do nothing?

Price is what you pay to do something. Cost is what you pay when you don’t.