COVID-19’s Next Victim: Severance Pay?

Most companies have held separation pay steady so far, but experts wonder how long that will last.

It sometimes isn’t much, but severance pay can help cut reduce the short-term financial shock of being laid off. Thanks to the pandemic, however, even that long-time corporate staple could be at risk.

So far during the COVID-19 crisis, 28% of companies that have laid off employees did not have a pre-existing severance plan, according to a new Korn Ferry survey of about 4,000 companies worldwide. And 4% of those that did let workers go actually decreased the monetary payout from previous severance packages. Experts worry that the continued economic impacts of the pandemic could leave companies too financially strapped to pay the people they let go. “Severance is being reevaluated with an eye towards what is right to do and what makes sense to do,” says Tom McMullen, a Korn Ferry senior client partner and  leader in the firm’s Rewards and Benefits practice.

The number of new COVID-19 cases continues to increase across the world, with particularly troublesome hotspots across North America, Brazil, and parts of Africa. While analysts expect some economic recovery by the end of the year, that is not keeping companies from continuing to collectively lay off hundreds of thousands of employees each week.

Since the pandemic began, most companies have kept existing severance policies in place, opting instead to institute pay cuts and salary freezes and make changes to bonus plans and short- and long-term incentives to save money. Indeed, 60% of organizations that have laid off employees did not alter their severance packages, while 8% increased the monetary payout to employees.

However, the continuing jump in cases in the US or a second wave of cases in other countries could leave organizations too financially strapped to live up to their promises. McMullen says organizations that reduced the monetary value of severance packages likely did so either because they couldn’t afford the payout or felt their policies were out of step with market conditions. Some industries have moved faster than others at cutting the value of their severance packages; 7 % of retailers and 6% of construction firms, in the Korn Ferry survey reported that they had revised their severance policies to offer less value to employees. Both of those industries were hit particularly hard when sheltering-in-place orders began across the world.

In the US, there is no federally mandated requirement for organizations to pay severance, though some states may require it. Moreover, retail, hospitality, and other hard-hit industries typically don’t offer severance to employees outside of the senior leadership ranks. But, underscoring the financial damage wrought by the pandemic, organizations in well-developed, higher-paying sectors such as oil and gas and life sciences were among those that pulled down the value of severance packages. 

Part of the reason why organizations are hesitant to amend severance policies—which not only include a monetary payout but also typically extend benefits and offer outplacement or other kinds of transition support—is because they represent a commitment from employer to employee, says Ron Seifert, a Korn Ferry senior client partner. “Severance is a statement of the organization’s values and social responsibility to its people,” he says. Against the backdrop of the purpose movement, increases or decreases to severance commitments send a loud signal to the employees who remain about how an organizations views its obligations to people, he says. 

Moreover, severance is a valuable branding and recruiting tool for organizations, particularly at the senior and executive levels. Not offering it could hurt an organization’s reputation or chances of attracting top talent. 

Despite all that, with an event as significant and financially devastating as a global pandemic, all options are on the table for organizations when it comes to evaluating costs, and that includes severance practices. McMullen says organizations are reflecting on them 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 they can afford it or if it is too generous.”