Controlling the cost of severance.

• Author: May, Douglas H.
• Position: Human Resources - Suggests outsourcing of severance benefits administration to cut costs

You've made the tough but financially necessary decision to reduce headcount. And you've set the numbers for each department or division. Now all you need to do is let human resources take it from there, right? Wrong.

First, you may be overdue for a review of the design of your severance benefits.

Second, even if you're satisfied with the structure of those benefits, how you handle the basic administration of severance pay arrangements can make a big difference--up to 20 percent--of your annual severance cost. That's due to the idiosyncrasies of state unemployment benefits, payroll tax regulations and new outsourcing opportunities.

Moreover, you can share some of those savings with departing employees in the form of more generous severance benefits.

Given the massive layoffs initiated during the current economic slump, and the prospect of more to come, the potential financial impact of changes in severance arrangements is nothing to sneeze at.

Moreover, the dollar value of severance benefits--at least for average workers--is trending downward. "Packages today for rank-and-file are less rich than you might have seen several years ago, particularly if you're getting into a second or third round of layoffs," observes Doug Tormey, senior vice president at The Segal Co. in New York.

Back to Basics

As a result, any approaches that help employers save would appear worth investigating. Any such review should begin with the most basic question: Why offer severance benefits? Since severance is not required by law, the question isn't academic. Analyzing the traditional rationale for severance pay provides a basic foundation to build from.

In a recent report on severance pay policies, Buck Consultants laid it out this way: The use of severance benefits "allows a company to maintain a positive public image by demonstrating fairness and concern for its employees, while also managing the risk of future adverse litigation. By offering severance benefits to terminated employees, companies also help to maintain positive morale and motivation for the active ongoing organization."

In a broader economic context, the availability of severance benefits facilitates a more flexible employment environment that benefits all employers, says John Challenger of Challenger, Gray & Christmas, a Chicago-based outplacement firm. "Today, we have 'no-fault job loss,' and people need a bridge to their next job."

A snapshot of the corporate severance policy landscape can be...