What Exactly Is a Severance Package and Do All Companies Offer It?

Woman stands in front of glass modern building of corporation office where she worked dismissal from position girl with sad uncertain face looks ahead holding box with packed things unemployment stock photo
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No one likes being laid off from their job, but in some cases, the transition can be easier thanks to a company severance package. Although not offered by all companies, a severance package is compensation given to employees who are terminated.

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Typically, the size of the package is determined by a number of variables, from length of service to salary to position. Although no two severance packages are the same, most share some common characteristics. Here’s a quick overview of what severance packages are and what they most commonly contain.

Typical Severance Package Components

According to the Society for Human Resources Management, severance packages often contain some or all of the following benefits:

  • Ongoing salary benefits: These can last from weeks to months and may range from 25% to 100% of prior monthly pay.
  • Extended health benefits: Many firms will offer a certain number of months of ongoing health insurance; others may offer to pay an employee’s COBRA insurance premiums for a certain period after termination.
  • Job placement services: Some companies may help terminated employees find a job at other divisions within the same company or at outside firms.
  • Agreements regarding unemployment benefits: This allows terminated employees to file for unemployment benefits without having to worry about receiving them.
  • Maintenance of certain perks: For example, a terminated employee may be able to keep a company cellphone or laptop, participate in a company retirement plan or have outstanding obligations to the firm canceled, such as repayment of student loan assistance.
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Generally speaking, the primary benefits of a severance package are ongoing pay and medical benefits that hopefully last until an ex-employee can land a new job. The longer an employee has been at a job, the more likely they are to get generous perks. For example, some long-tenured employees may qualify for a cash bonus in addition to their regular severance package. Generally speaking, however, a garden-variety severance package will offer one to two weeks of pay for each year that an employee has worked.

Which Types of Companies Are Most Likely To Offer Severance Packages?

Generally, severance packages are only offered by larger, well-funded companies. Your local mom-and-pop store down the street might be able to offer two weeks of pay if they’re forced to let you go, but it’s unlikely that they’ll provide a comprehensive severance package that will last for months. In most cases, smaller companies run close to the edge of profitability, and they don’t have the capital reserves to offer significant severance packages. 

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Can You Negotiate a Severance Package?

Severance packages usually come with an expiration date. For example, you may only have a few weeks to decide if you want to accept a package or not. Depending on your company, some perks may be negotiable. This is particularly true when it comes to secondary benefits, such as job assistance or the extension of insurance coverage. The actual dollar amount that is offered in a severance package, however, is usually calculated by company actuaries and can be harder to negotiate.

How Does a Severance Package Help a Company?

Usually, the reason that companies have to resort to severance packages is because they’re being forced to cut costs to remain profitable. Although the initial expenditures of a severance package may seem significant, over the long run, having employees off the payroll will result in larger savings. As long as they can maintain their revenue with their remaining employees, layoffs can ultimately result in greater profitability, even after factoring in the cost of severance packages. 

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About the Author

After earning a B.A. in English with a Specialization in Business from UCLA, John Csiszar worked in the financial services industry as a registered representative for 18 years. Along the way, Csiszar earned both Certified Financial Planner and Registered Investment Adviser designations, in addition to being licensed as a life agent, while working for both a major Wall Street wirehouse and for his own investment advisory firm. During his time as an advisor, Csiszar managed over $100 million in client assets while providing individualized investment plans for hundreds of clients.
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