Study: Good Idea to Review Severance Plans

March 4, 2004 ( - With the post-scandal regulatory environment paying so much attention to employee severance packages - particularly those for chief executives and high-level officials - companies need to regularly review their severance policy.

A survey conducted by Aon Consulting and WorldatWork found that 56% of 704 companies questioned haven’t taken another look at the policy in the last 12 months, or since it was established, while 44% haven’t executed a similar perusal of their change in control policies and 78% don’t have a set schedule for updating their top executive’s severance arrangement (even though 51% have reviewed it in the last year).

Slightly more than half of the responding firms described their severance and related plans as “detailed,” but an alarming 14% said their organization’s plan or plans were unwritten or undocumented.

These days, the study said, that isn’t such a good idea. “Our findings show that many of these programs have not been reviewed or revised for several years – in spite of significant changed circumstances such as the three-year recession, an increase in merger and acquisition activity, regulatory overload including Sarbanes-Oxley, the ongoing war for talent, and several major corporate scandals,” said Bob Jones, head of Aon Consulting’s US Compensation practice, in a statement. “Employers without formal plans, or those whose plans are not documented or based on outdated assumptions or underlying data, should take note, and take action.”

The plans could not only be increasingly relevant because of regulatory concerns, but, as the study pointed out, “Regular review is also a good idea because (the policies) can represent sizable amounts of corporate assets.”

Not only aren’t severance and chance in control plans updated on a schedule, but the study found the plans vary greatly in structure. More than a third of companies (36%) said they had one plan for the CEO, another plan for executives, and a third for all other employees. Some 18% have no severance plan at all.

A week’s pay per year of service is the most common severance formula (except for CEOs) while two in 10 firms use a two weeks per year of service standard, the survey found. Executives commonly receive a lump sum payment of severance that equals at least 12 months of their monthly salary, according to the survey, which was conducted in October 2003.

The study is available to WorldatWork members at no cost on the WorldatWork Web site, . Non-members can purchase an electronic copy of the survey for $7.95 from the WorldatWork website or by calling 877-951-9191.