Until We Meet Again? – severance packages – Statistical Data Included
Kris Frieswick
SEVERANCE PACKAGES ARE GROWING MORE GENEROUS AS COMPANIES THINK TO THE FUTURE.
How many employees has your company laid off lately? The question, which was laughably irrelevant just over a year ago, is suddenly very relevant for most executives–at least those who still have jobs themselves.
In the first half of the year, U.S. companies announced plans for 770,000 layoffs, more than triple the 223,421 cuts announced in the same period of 2000, according to outplacement firm Challenger, Gray, and Christmas. The rate of layoffs has been the “heaviest we’ve ever seen since we started following the numbers [in 1989],” says CEO John Challenger.
Devastating to employees and their families? Of course. Yet thanks to some trends in the area of severance packages, layoffs today aren’t quite as bad as they used to be. While middle managers and blue-collar workers still don’t qualify for full-fledged golden parachutes (see “When Parachutes Billow,” page 46), many of them are now getting better payouts and benefits to help provide a softer landing.
Some reasons for improvements in severance policies, experts say, relate to the peculiar nature of the current wave of cutbacks. For one thing, in more than a few cases the bloodletting extends from the lowest-income workers to senior management, including the very human-resources executives who are designing severance packages in the first place. For another, companies feel they must try to position themselves to rehire many of the laid-off employees once the economy recovers–something more than a few executives expect to happen fairly quickly. Having invested heavily in training many of these individuals, employers see the advantages of staying on good terms by making them grateful for the separation benefits they receive.
Finally, some executives are trying to spare their companies the damage of the so-called survivor effect, felt by the remaining workers when their dismissed brothers and sisters are perceived as being ill-treated.
Thus, even though there isn’t any legal requirement for companies to offer severance with a layoff, experts say the increasing commitment of companies to the dearly departed is smart business.
“It’s part of an ongoing strategy to cut jobs in times of slowdown and hire furiously in times of growth,” says Challenger. Executives now “think of their workforces on a just-in-time basis.” More than ever, “the people who lose their jobs are people that the companies would prefer to keep,” he adds. “Plus, everyone is in the same boat: The CFO knows that tomorrow it could be him or her. Everyone has a vested interest in seeing that there is a good transition safety net provided.”
JDS Uniphase Corp., which has announced plans to lay off a total of 16,000 employees this year, says its severance packages are generally “much more generous” than what predecessor companies Uniphase Corp. and JDS Fitel Inc. offered. (The two merged in 1999 to create the San Jose, California- and Ottawa, Canada-based telecom behemoth.)
Not only has the number of weeks of pay for terminated employees been liberalized, but certain laid-off employees involved with plants, sites, or product lines that are being closed or relocated have been offered a temporary “retention bonus”: a 50 percent lump-sum premium above their salaries for the period between the closure announcement and the date of actual closure. That’s if they agree to stay until their particular phaseout is complete.
The bonus program has “been very successful so far,” says Anthony Muller, JDS Uniphase CFO. “We try to treat all of our employees with dignity, and hopefully, we can hire many back in the future.”
The company is now offering its nonexempt employees who are laid off two weeks of salary for each year of service, with a maximum severance of 26 weeks–if they sign a release document agreeing not to challenge the dismissal. Health benefits continue throughout the severance period. (Employees who don’t sign get 2 weeks of severance.)
“We want to do the right thing for employees in a tough market,” says Della Bynum, vice president of HR. “These are great employees who have really delivered for the company. In recognizing that, we’ve tried to do anything we could to minimize the impact. Most of our employees understand what’s happening here. We want to treat them with respect, so that when the day comes that we want to hire them back, they’ll want to come back.”
This year has been the first for major layoffs at Compaq Computer Corp., headquartered in Houston. Even before it accepted Hewlett-Packard Co.’s $25 billion (at press time) acquisition offer in September, it had slashed 8,500 jobs, or about 12 percent of its employee base. To reduce the pain, though, under that severance package workers are eligible for two weeks of salary for each year of service, with partial years rounded up. There’s an additional week’s pay for each $10,000 of salary, with amounts in excess of the last $10,000 also rounded up. Maximum cash severance is 39 weeks of salary, and the minimum is 12 weeks, according to the company. Employees receive medical, dental, and life insurance benefits for 9 weeks after termination, and three months of outplacement assistance.
There’s been no word on what terms will apply for the 15,000 employees to be laid off as a result of the HP deal. HP’s own severance terms in its July round of 6,000 layoffs provide for a maximum of 52 weeks of pay.
A QUIRK OF THE NUMBERS
Interestingly, the metrics consultants use to track overall severance payments from year to year don’t seem to show an increase in termination benefits. Indeed, based on the number of weeks of salary employees receive when they are laid off, levels have actually decreased slightly since the last time a survey was conducted, in 1997, according to Jacksonville, Florida-based Manchester Inc., a career management consulting firm (see chart, page 44). But it’s not that companies are getting stingier, says Bill Hollett, senior vice president at New York-based career management consultancy Drake Beam Morin. Rather, the numbers reflect the trend toward shorter employee tenure, since years of service is among the most common factors used to compute severance.
To meet the severance needs of this newjob-jumping generation, some companies are switching over from years of service to a different formula that may be more relevant and potentially more lucrative for the employee. “Severance is a bridge to something else,” says Hollett, “and your years of service have nothing to do with the time it takes to bridge.” Some companies are structuring severance packages that incorporate other factors such as age, job level, and salary, with less weight given to years of service.
Even if the average number of weeks of severance has dipped, however, noncash benefits like insurance and outplacement services have risen considerably. In 2000, for instance, 76 percent of companies offered their nonexempt employees health insurance other than what was provided under the federal Consolidated Omnibus Budget Reconciliation Act of 1986 (COBRA), up from just 59 percent in 1997. Outplacement services were available at 55 percent of companies, up from 50 percent. And 45 percent of companies allowed laid-off employees access to the company employee assistance program, up from 38 percent. In addition, the survey shows, companies are offering employees extended access to their E-mail and voice-mail accounts to assist their job search, and are speeding up stock-option vesting schedules, or granting new options if old ones are underwater.
LAID OFF, FOR NOW
When San Francisco-based Charles Schwab Corp. laid off 2,000 employees this past April, it wanted to make sure that affected employees retained their favorable attitude toward Schwab. “Our goal was to he as consistent as possible with the values we have as a company,” says spokesman Glen Mathison. “We felt that the way we handled this layoff was as important as the benefits we give our employees when they are here.”
Schwab purposely announced the layoffs a month before terminating anyone, and at the same time revealed details of the severance packages, Mathison says, “so we could provide some sense of what was coming down the pike.”
To compensate for vested options that were largely worthless at current stock prices, and which employees would lose anyway when they left the firm, Schwab granted 500 to 1,000 stock options to employees. Their price was based on the market value at the time of the layoffs (about $30 a share), and the options vested immediately and could be exercised within 15 months. “We assumed that a lot of these people had stock options that were underwater,” says Mathison. “We granted these in the hopes that they would be helpful to our employees in the near term. It allowed people to continue to speak well of the company, even as they emptied their desks.
Schwab’s severance packages topped out at 10 months of salary, on top of a two-month notice period with full pay and benefits, says Mathison, and the company also gave employees cash payments to offset their costs for COBRA coverage for the number of weeks used in their severance calculation.
As an extra incentive to stay tuned for possible economic turnarounds, Schwab added a little farewell zinger. It offered a $7,500 bonus to any employee from the April round of layoffs who is rehired during the next 18 months. (The company announced in August that it was slashing another 2,000 to 2,400 jobs.)
“We invested considerable time and effort in developing employees,” says Mathison. The bonus would help allay “the trauma of going through a layoff. That’s important not only for those who are leaving, but also for those who stay,” he says.
Avoiding the survivor effect–lower morale and a decrease in productivity among remaining employees–is one accepted advantage of a generous severance package, according to a stady by Andrew Klein, an analyst with the HR consulting firm William M. Mercer Inc. When firms offer reasonable severance terms, “surviving employees can more easily focus on their jobs, and not be as burdened by feelings of guilt” when former co-workers are perceived as being ill-treated, he wrote in a recent white paper on the subject.
LOYALTY FADES
That commitment to care for employees, of course, may not itself survive when a firm is facing serious financial problems. Evidence of ill treatment abounds in the horror stories of employees dismissed from start-ups and dot-coms, many of which canned staffers with little notice, or severance.
Somewhere between the extremes are old-line companies like Polaroid Corp. The financially troubled Cambridge, Massachusetts, instant-imaging company announced 2,000 job cuts in June, bringing its total number of layoffs so far this year to nearly 3,000. In the first round of 950 job cuts, in February, says Polaroid spokesman Skip Colcord, the company gave employees one week’s base salary for each year of service, with a minimum of four weeks, and medical, dental, and life insurance benefits for a maximum of one year. It also offered outplacement services.
Round two developed differently. The outplacement continued, but severance was cut to four days for each year of service, and medical, dental, and life insurance were capped at three months for employees with less than 10 years’ service. For employees with 10-years-plus, the cap was put at six months, or until they got a new job. Says Colcord, “We had to balance our concern for individuals…who have been loyal, hardworking employees” against Polaroid’s need to assemble “a package we could afford to offer.”
The change has been hard on employees, he admits, but Polaroid has “some other issues beyond the layoffs right now,” he adds. “The survivor syndrome is compounded because of the other financial challenges. Everybody is trying to just concentrate on the day-to-day job responsibilities and stay focused.”
What about Polaroid’s need to stay on good terms with laid-off workers? “Bringing people back isn’t a point of discussion right now,” says Colcord. “We’re not in a position to project out that far.”
It’s a reaction to be expected from more companies if the economic hard times continue.
KRIS FRIES WICK (KRISFRIESWICK@CFO.COM) IS A STAFF WRITER AT CFO.
THE LONG GOODBYE
The fewer weeks of severance paid reflect shorter tenure of workers.
POSITIONS 2001 AVERAGE 1997 AVERAGE
SEVERANCE SEVERANCE
Officer level 45 weeks 47 weeks
Senior executives 37 weeks 42 weeks
Exempt managers 28 weeks 33 weeks
Nonexempt employees 24 weeks 30 weeks
Source: Manchester Inc.
BEHIND THE HANDSHAKE
Across the various levels of employment, severance benefits are
gradually increasing.
OFFICER LEVEL
1997 2001
Health insurance (other than COBRA) 67% 77%
Outplacement 75% 74%
Access to employee assistance program 42% 51%
SENIOR EXECUTIVES
1997 2001
Health insurance (other than COBRA) 67% 80%
Outplacement 75% 77%
Access to employee assistance program 42% 52%
EXEMPT MANAGERS
1997 2001
Health insurance (other than COBRA) 64% 77%
Outplacement 70% 72%
Access to employee assistance program 39% 46%
NONEXEMPT MANAGERS
1997 2001
Health insurance (other than COBRA) 59% 76%
Outplacement 50% 55%
Access to employee assistance program 38% 45%
Source: Manchester Inc.
(Non)profiting from a Layoff
The need at some companies to reduce payroll and still stay on good terms with employees has given rise to some novel approaches. As part of its March announcement of 6,000 layoffs, Cisco Systems Inc. unveiled a unique severance program: laid-off employees could choose between the regular termination package and a voluntary program that pays employees 33 percent of their salary, with full benefits, if they work full-time for one year at one of a number of nonprofit organizations with which Cisco is affiliated.
The company limited involvement in the pilot program to 80 employees, who come from all parts of the organization, including finance. They are still internal employees during their outside work, and may take another job as long as it is not with a Cisco competitor. (The company’s regular severance package includes six months of continued salary. Cisco also gives employees three months to exercise vested, underwater stock options, and four months of outplacement services.)
Company officials plan to evaluate the new program’s effectiveness in six to nine months based on how much more effectively the nonprofits function–as measured by increases in donations, projects completed year over year, and so on–and will then decide whether to expand participation.
“Giving back is one of the pieces of our corporate culture,” says Mike Yutrzenka, senior manager for community investment at Cisco. “And we’re giving employees an option to severance.”
Laid-off employees who opted for the voluntary plan signed a form waiving the traditional severance package and, in exchange, Cisco made a commitment to bring them back into the-firm once the one-year pilot program is over. Yutrzenka is not concerned that Cisco may change its mind about bringing these people back into the fold, even if the firm’s fortunes continue to decline. “It won’t happen,” he says. “We’ve made a commitment and they’ve made one.”
Such programs let companies retain an experienced talent pool, which is crucial, according to Bill Hollett, senior vice president at New York-based career management consultancy Drake Beam Morin. That’s because unemployment is still relatively low in the United States, and “we’re seeing employees switch to new jobs more readily than they have in previous economic downturns,” he says.
“These programs bank on the economy turning around soon, and I think it’s a good gamble,” says Hollett. “With unemployment still so low, even if it gets up to 5 percent, employees can move on to other jobs. If companies can do something to instill continued loyalty, they should do it.”
The Cisco option also insulates those employees who can take advantage of it from exposure to further layoffs while their participation continues. These employees are betting that by the time the program ends, an economic turnaround will be under way, and this round of downsizing will be nothing but a bad memory.
When Parachutes Billow
Eye-popping severance packages, like those given to former Lucent executives Richard McGinn and Deborah Hopkins, Mattel CEO Jill Barad, and farmer Webvan CEO George T. Shaheen, can seem staggering in light of the companies’ troubles. But the terms should shock no one who was paying attention, says Brent Longnecker, executive vice president of compensation consulting firm Resources Connection Inc., based in Spring, Texas. After all, most packages are spelled out in executives’ employment agreements.
Says Longnecker, “When these plans were put into place it was a crazy time. The supply of hot-shot executives wasn’t anywhere near the demand.” While agreements “were put into place in good faith,” he adds, “no one thought of the repercussions down the road.” Shareholders, though, “have a right to ask why no one thought about this before.”
And ask they do. A study by Russell Reynolds Associates indicates that 89 percent of U.S. investors polled think severance packages for top officers are too high, and 91 percent want limits on severance packages for terminated CEOs.
A court can invalidate a severance package challenged by shareholders, but only if it finds that the agreement was negotiated without good business judgment by an independent board, with adequate due process. Longnecker says that “if a compensation committee approved a package and never even had a meeting about it, it could be in trouble. I think a lot of time they just get poor advice.”
More than 40 percent of companies surveyed by career management and consulting firm Manchester Inc. insist on such negotiated severance agreements for officers, up from 15 percent in 1997. Overall, due to increasing scrutiny the packages now face, there is a lot more discussion about them at the board level, says Longnecker. Contract durations are shorter these days, down from what he calls “insane” highs of 7 to 10 years during last year’s feeding frenzy. He sees more “claw back” and “bad boy” provision, too, requiring forfeiture if a package’s noncompete or other terms are violated. Some shareholders would likely argue that it’s about time.
COPYRIGHT 2001 CFO Publishing Corp.
COPYRIGHT 2001 Gale Group
