A New View of Severance

A long-held tool to attract and retain top talent is coming under scrutiny. Could it be COVID-19’s next victim?

See the latest issue of Briefings at newsstands or read in our new format here.

It has long been among the most refined and sophisticated hotel chains in the world, with luxury accommodations befitting society’s ultra affluent. But not unlike pretty much every other hotel chain, its business was hit hard this spring, forcing hundreds of layoffs. Only this time, there was additional news, quite unexpected, awaiting workers at one of its big-city properties: severance packages for its employees were less than promised when hired.

Used as a tool to attract and keep top talent for decades, this is yet another sacred system that firms all over find themselves forced to reconsider because of the pandemic. The very basis for severance has fallen into question, says Wayne Guay, a professor at the University of Pennsylvania’s Wharton School whose research focuses on executive compensation and other corporate governance issues. “Right now, some firms are not particularly concerned about attracting new employees, nor trying very hard to retain existing employees,” he says. “They are trying to downsize.”

(click the image below to enlarge)



Already, with their revenues or very future in doubt, companies have been forced to shift to some unpleasant scenarios, from delaying payments to long-term business partners to reneging on job offers. Still, many experts say severance isn’t likely to go gently into the night. Indeed, word alone of the hotel’s intention prompted local news coverage and a vote by the city council to condemn it. That was enough to change the property’s approach—and restore what plans were in place. More broadly, numbers suggest that changes to severance are far from sweeping. In the earlier tough months of the pandemic, a Korn Ferry survey of more than 3,500 executives found that only 4 percent had reduced their plans.

That percentage nearly doubled, though, in industries like retail and construction, where tumbling results put even more pressure on companies to dig deeper into reserves. And especially in the United States, severance is in a somewhat precarious position. Many foreign countries require it, but the US doesn’t; about 28 percent of those in the Korn Ferry survey didn’t have any formal severance policies. Tom McMullen, a Korn Ferry senior client partner and leader of the firm’s North America Total Rewards expertise group, says organizations are reflecting on the packages as they relate to the totality of their financial relationship with employees. “For those that don’t have a severance policy, that means rethinking if they should,” he says. “Conversely, for those that do it means evaluating whether it is too generous or too lean.”

Ultimately, severance does have one important ally: the purpose movement. According to Kyoko Takahashi Lin, a partner with the law firm Davis Polk & Wardwell LLP who has dealt extensively with severance practices, most formal severance plans have a provision noting that the company can change the terms at its discretion at any time. But against the backdrop of purpose, changes to these commitments send a loud signal to the employees who remain about how an organization views its obligations to its people. Indeed, Lin says many companies are converting informal policies into formal ones in a bid to provide transparency and comfort to employees who may be anxious about their job security.

Ron Seifert, a Korn Ferry senior client partner, sees the situation similarly, saying the packages represent a commitment from employer to employee. “Severance is a statement of the organization’s values and social responsibility to its people,” he says.