Go For a Severance Policy, Not Free Gyms

Photography of an male employee leaving office with his belongings. His carton is wrapped like a birthday gift in gold paper with a red big ribbon
Photo credits © Daniel Grill, Tetra Image, Corbis; Dejan Sarman and Jan Matoska,
Written by Michael Froehls

What is one of the most important benefits left in many companies, and probably the most underappreciated? Severance packages! Eager employees start a new job, but rarely inquire what the company’s severance policy is. Big mistake!

Limiting your potential loss

First of all, a good severance policy is a great antidote to the “employment at will” character of your employment. Why? It puts a floor on your “loss” when losing your job. The exception is that they fire you “for cause.” In which case you will go empty-handed.

Severance policies, if transparent, allow you to assess pretty well what you will get in case of involuntary job loss. The official policies might even get better in case of special situations like a merger. Many large companies are transparent about these policies. I think it’s only fair for you to know what happens if you walk in their door and a few months later management closes it down. If a company does not reveal its policy, ask around about what people know or how the company has treated employees in the past. 

Severance policies benefit you and your employer in another way. Having a standardized policy reduces transaction costs. There is no need for individual bargaining and involving employment lawyers. You only receive severance after you sign that you are not going to sue for wrongful dismissal. 

The economics of severance

Third, severance policies have interesting economics. There is usually a minimum benefit you get from Day 1 on your job (or from when the probation period ends). The benefits rise with your tenure at the firm, but level off at a maximum.

The level of severance depends on your seniority as well. A vice president can expect both longer severance (for example, six months) and additional benefits (such as outplacement service) than a lower lever employee (e.g., six weeks, no outplacement).

Take a closer look at the economics: It can be very lucrative to get dismissed right after starting your new job if you consider how much money you receive (salary plus severance) for just a short time of work. The other end of the spectrum is less rewarding — relatively speaking — as a 20-year tenure at the company might not get you more than somebody with 15.

No matter your tenure, a common helpful benefit is that stock awards vest immediately. Moreover, many corporations let you vest unvested company contributions to retirement accounts as well. All these numbers can add up to a sizeable amount to help you cope financially with unemployment.

What to do next time

The next time you join a company, forget about gimmicks like whether your employer pays for your gym or subsidizes your commute or other small goodies. Go for protection instead: Make sure you join a company that has a severance policy.* If two companies you apply to are similarly attractive to you, pick the one with an official severance policy. Do it even if the salary is a few thousand dollars less. Compare any gap in salary with the expected discounted value of a potential severance event. Reorganizations, restructuring, cost-cutting, and mergers have become part of daily corporate life. From the day you join the company, you must assume that your employment will end at the company’s choosing, not yours. 

*Of course, this advice does not hold for startups, where your employment economics are vastly different in terms of upside and downside compared with joining a medium or large corporation.

© 2019 Michael Froehls – All Rights Reserved

Photo credits © Daniel Grill, Tetra Image, Corbis; Dejan Sarman and Jan Matoska,

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