One in Five U.S. Companies Does Not Pay Severance
Of those that do, a three-tiered severance structure is most popular
(Scottsdale, Ariz.) – As many as 18 percent of companies in the U.S. do not provide severance for regular (non-executive) employees, according to a study released this week by WorldatWork and Innovative Compensation and Benefits Concepts LLC (ICBC), an HR consulting firm.
The study, Severance and Change-in-Control Practices 2007, reveals that of those employers offering a severance plan, 71 percent use the number of years served as the basis for determining the amount of severance provided to employees. Nearly one-third of companies (31 percent) offer one week’s salary per year of service, while one out of every five employers (20 percent) provides two weeks salary for every year served. Other factors considered in determining severance include an employee’s position (21 percent) and pay (17 percent).
Of the companies paying severance, 42 percent offer a three-tiered structure. One tier focuses on the top executive, another on senior executives, and the third on all other employees. Significantly, only 37 percent of surveyed companies have detailed severance plans and policies in writing.
Another noteworthy finding: annual reviews of non-executive severance plans are rare. In fact, 69 percent of organizations have not reviewed their severance plans in at least the past 12 months, while 13 percent of organizations report never having reviewed their plans since these were established.
“Companies, both large and small, would be wise to have a formal severance plan in place for all employee levels,” said Jim Stoeckmann, CCP, compensation practice leader for WorldatWork.
Commenting specifically on executive severance and change-in-control plans, the study’s author, Bob Jones, JD, CPA, CEBS, points out that annual reviews of an organization’s severance and change-in-control plans, especially because of the size and importance of these plans, should be conducted by Compensation Committees. “This is a best practice in general (in conjunction with a tally sheet analysis of the top executives’ Total Rewards) in order to ensure that plan costs are being prudently monitored,” said Jones. “This is best done by making this topic an agenda item that is covered on a regular, recurring basis.”
About the Survey
The Severance and Change-in-Control Practices 2007 survey was conducted in June 2007. Surveys were sent electronically to 4,590 WorldatWork members with a response rate of 11 percent (523 responses). This high response rate and a similar demographic profile between survey respondents and the general WorldatWork membership provides a high level of confidence regarding the validity of the data. The survey’s margin of error is +/- 3 percent. The survey has been conducted every two years since 2003.