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Severance Practices Differ Around World

By: Bob Boyd 

While no-one ever wants to lose their job, employees in Spain who find themselves out of work leave with the healthiest severance packages. Bob Boyd, of Right Axmith, examines severance practices from around the world.

If you’re laid off from your job, you’re more likely to walk away with a generous severance package if you’re working in Canada, Brazil, or France than if you hold the same position with a U.S. employer. That’s because more than 50 per cent of Canadian firms, 36 per cent of Brazilian companies, and a third of French employers give departing executives a month of severance pay for every year of service to the company. Contrast that with the climate in the United States, where only 12 per cent of employers are that generous. (But if you’re looking at generous settlements, 92 per cent of employers in Spain provide more than a month of severance for every year of employment for employees at all levels and in Ireland that number is 86 per cent.)

These findings come from the The Global Severance Practices Survey, an assessment spanning 32 countries conducted by Right Management Consultants.

1,495 Participants

This survey included 1,495 participants, primarily senior human resource executives, from organizations in North America, Asia-Pacific, Europe, and Latin America. The objective was to provide HR practitioners with a benchmarking tool to help them better understand the organizational and cultural issues related to termination and severance practices, both locally as well as globally. HR professionals can compare their own practices with broadbased global norms to ensure they are providing fair and equitable packages while meeting the legal requirements of all countries in which they operate.

The survey was distributed and collected via a special website during the summer and fall of 2002. Of the 1,495 global participants, 32 per cent were public companies; 57 per cent were private companies; six per cent were not-for-profit charitable, cultural, or educational institutions; two per cent were public sector or government agencies; and three per cent were ‘other.’ As well, 55 per cent of the respondents came from North America with 115 Canadian organizations and 700 from the U.S.

The survey found companies in Europe, South America, and Canada tended to have more generous severance practices than do U.S. firms, largely because local and national laws mandate an organization’s actions when employees are being terminated.

“A mid-level worker who is laid off from a Spanish company after 10 years of service can expect a least 10 months of severance pay, possibly more. Contrast that with the average American worker, who is more likely to receive about 10 weeks of severance pay,” says Bram Lowsky, senior vice-president of business development at Right Axmith, Canada. “Around the world, governments play widely differing roles in labour and employment issues and local severance practices reflect that.”

In addition to severance pay, many companies also offer laid-off employees outplacement/ career transition service to help them find a new job. The number one reason that companies provide outplacement to departing employees is because “it’s the right thing to do,” according to 83 per cent of respondents. As well, 77 per cent said offering outplacement sent a positive signal to remaining employees; more than half said outplacement helped reduce the cost of litigation and was good for the company’s image; and 48 per cent said outplacement provided older employees with special career transition assistance.

About half of all respondents surveyed said their companies had formal, written severance or termination benefits policies. Another 34 per cent said they had informal, unwritten policies. The remaining 15 per cent had no policy. In the United States, 58 per cent of respondents said their companies had a formal policy regarding severance benefits. In Canada, the number was 37 per cent.

Reduction In Workforce

According to respondents, the most common event that triggered severance was a reduction in workforce (92 per cent), followed by a restructuring of an organization (89 per cent), elimination of a position (88 per cent), and relocation of the business (60 per cent). Interestingly in Canada, 44 per cent of respondents provided severance even when a termination was for cause and 20 per cent provided severance in the case of a voluntary termination.

Despite headlines announcing multimillion dollar severance packages to departing CEOs, the vast majority of companies worldwide limit exiting executives to four or fewer weeks of severance pay for each year of service, and only a quarter or fewer of employers offered perks such as financial planning, retirement planning, secretarial support, or use of office space.

“This is the ‘behind the headlines’ story,” says Lowsky, “The huge golden parachute packages worth millions of dollars have generated a great deal of media coverage. But the fact is 55 per cent of the companies we surveyed around the world place a cap on severance payments, even at the top levels of their organization.”

Among the most aggressive in limiting severance payments were companies in Canada – where 60 per cent said they place caps on payment – and the United States, where 57 per cent said the same.

Half of the companies surveyed said they based their severance practices solely on years of service. The most commonly offered benefits to departing top executives were continuation of medical benefits (66 per cent), outplacement (58 per cent), and continuation of life insurance (31 per cent).

“Quite frankly, some of those responses were unexpected,” says Lowsky. “With all the publicity surrounding the hefty severance packages to certain prominent top executives, it was surprising how few companies choose, as a rule, to provide some elementary services such as financial and retirement planning, and office space to their highest-paid people on their way out.”

When asked how much severance pay per year of services was offered to a departing, top executive, companies offered responses ranging from less than one week to basing severance on a combination of years of service and age.

Understand Termination Issues

As companies become more international, it is necessary to understand termination issues in all countries of operation and be able to compare practices with other geographies. The legal climate in each country dictates the nature and generosity of a company’s termination practices and is the single most important factor in setting policy. Multiple and inconsistent termination practices may not support the organization’s strategic growth goals and lead to an increase in employment risk associated with local culture, traditions, norms, and legal climate. The best advice to employers is to:

Employees need to recognize that ‘Brand’ building happens in bad times and good times. Use termination and severance practices to differentiate the organization as a place where top talent really wants to work. All employees will not only remember what a company did, but how they did it. Try to view career transition as an opportunity to materially help employees through a change process. This will result in good will in the marketplace and within the remaining workforce, all of which supports the company’s reputation as a desirable place to work.

Bob Boyd is vice-president of client services at Right Axmith.

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