The recession is buffeting your business and you've done everything in your power to keep from cutting personnel, but the dreaded prospect of layoffs now appears unavoidable.
It's going to hurt your displaced employees. There's no way you can prevent that. But a well-designed severance package not only can cushion the blow for the people you must lay off, it can also help preserve your company's reputation as a compassionate employer -- a vital asset when good times return and you can hire again.
But severance benefits can be a double-edged sword to the company offering them, and decisions on structuring a policy can be difficult. Judging from the numbers of firms that offer them, the prevailing view is that the benefits outweigh the potential drawbacks.
When creating a severance policy, the goal is to tide over former employees but not give away the farm in the process.
Some hard decisions usually have to be made. The two most obvious are whether to extend severance and to whom.
"I guess that depends on what your financial situation is," said Mollie H. Bowers, a professor of labor relations and contract administration at the University of Baltimore. "It depends on how many people you're letting go and what the organization determines it wants to do in terms of severance.
"If you're going out of business and don't have any money, you're probably not going to give anybody severance pay," Ms. Bowers said. However, a company that's staying in business and merely trimming or closing a portion of its business might want to consider giving money to longtime employees who are released. The amount of money given to ex-workers depends on the firm's resources, Ms. Bowers said. "It also depends, too, on if you have any collective bargaining agreements; are there any provisions that would govern the amount?"
Some companies never entertain the idea of granting severance, but those that do are usually motivated by three overriding concerns, according to management consultant Virginia Lord.
"You have to decide why you want to put a severance package out," Ms. Lord said. "Do you want to have severance as a method of helping your employees during their transition? Do you want to do it because it's the best business thing to do in your community, or because you feel a moral obligation?"
Companies that implement severance programs usually do so "because it's good business and they want to help their employees," said Ms. Lord, who's an executive with Right Associates, a Philadelphia-based consulting firm with an office in Baltimore.
Right Associates recently conducted a survey of corporations and their experiences with severance issues. At least 480 companies employing less than 500 people responded, and their survey responses indicated:
* About 72 percent have a formal severance policy included in their personnel manual.
* Sixty-five percent indicated they provide severance to ex-employees. Within that group, 79 percent extend severance packages for reductions in force. And at least a third of those within the 65 percent group said they have occasionally provided severance to ex-workers discharged for performance reasons.
* Of the small firms responding to the survey, 15 percent said they had been sued over severance matters.
The legal issues stemming from severance pay are so complicated that a lawyer should be consulted to make sure the company isn't eventually sued by an ex-worker, according to Baltimore management consultant Winnie Borden.
"There's always a question as to what the law really is and what latitude companies have as to firing people," said Mrs. Borden, ,, whose firm is called W. C. Borden & Associates. "There are just a number of legal considerations that need to be looked at."
At least two things to be mindful of from a legal perspective are the Worker Adjustment and Retraining Notification Act and the ERISA pension reform act, attorney Robert C. Kellner said.
Short of hiring the services of a lawyer, an excellent way to skirt ambiguity is to avoid verbal and handshake agreements, said Ms. Lord of Right Associates.
"Get it in writing is the basic legal advice," Ms. Lord said. "It's so important because employees want to know the elements of a severance package, and the employer has a guide showing what should be included and what is not included. It's just plain good business.
Another advantage to having a written severance policy is that it safeguards against a worker claiming he or she received severance that was different from other employees.
Paradoxically, a severance policy with too much detail can lead to problems, too.
"Essentially, the standard provisions of the plan should be in writing, but not every detail, because an employer today wants to be flexible," Ms. Lord said. "There are some situations where an employee may have a severance plan which may spell out what the severance payment will be and what are the benefits. But there may be a situation where the employer may want to provide a deviation from that."