The High Cost of Severance
Tech firms are racking up billions in severance costs, but are now regretting letting some people go.
Much like hidden fees or service charges, severance costs rarely get noticed—until they do, and then the problems start.
As companies report second-quarter earnings over the next few weeks, severance costs—typically a rounding error on a firm’s balance sheet—are growing large enough to be worth paying attention to. According to a recent analysis of 10-K filings, some major technology firms have racked up severance costs ranging from $500 million to $2 billion or more as they reduce workforces and restructure operations to make way for AI. By comparison, disclosed or announced severance charges were under $300 million at some large food and beverage, aerospace and defense, and retail firms.
In a stable environment, says Tom McMullen, a senior client partner in the Total Rewards practice at Korn Ferry, severance charges usually comprise less than one percent of total workforce spend in a given year. Meanwhile, salary, bonuses, taxes, and other employee compensation account for between 50% and 70%. Even during large restructurings, severance costs rarely exceed 5% of total workforce costs, he says. “But the attention severance costs attract is often far larger than the money firms spend on it,” he observes.
To be sure, experts note that what’s attracting attention isn’t the money being spent on severance, but rather the fact that some firms are already rehiring people they’d previously replaced with AI. According to one survey, more than half of employers who replaced workers with AI say they made the wrong decision. In another survey, one-third of firms that eliminated a role for AI ended up rehiring a human for that position or another similar one. More recently, a major automaker and fintech firm outsourced entire departments to AI, only to restaff these departments with human beings after experiencing quality and customer-service issues. “Companies are realizing they may have laid off too many people too quickly,” says Iktimal Daneshvar, a vice president in the Recruitment Process Outsourcing practice in EMEA for Korn Ferry.
It’s an issue that firms deal with all the time at times of transformation, with experts debating the merits of scaling back the workforce in one fell swoop or in stages. CFOs generally prefer the former, so that they can treat severance as a onetime cost rather than a recurring expense. But experts say that numerous external factors affecting AI’s development—from regulatory obstacles and cybersecurity risk to quality and performance issues—may alter that strategy. “It may be smarter and more cost-effective to carry employment costs longer than it is to pay severance, only to have to rehire again a few months later,” says Daneshvar.
For Scott Sette, sector leader for children’s healthcare at Korn Ferry, it all comes back to the partnership between humans and AI. Study after study shows that AI combined with human judgement consistently outperforms AI alone, for instance; other data shows that AI automation can fully replace humans in only about one-quarter of job roles. “If organizations can adopt the mindset of AI as more of an augmentation of people than a replacement,” says Sette, “it likely will be more valuable in the short and long term.”
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