M&A Pickup Puts Focus on Severance Policies

2014 was a busy year for mergers and acquisitions (M&A) among large U.S.-based companies and included some of the largest M&A transactions in history. With this increased corporate activity comes a renewed need to make sure that corporate severance and change-in-control plans are on sound footing from both the acquirer and target’s standpoint, with the right elements in place, according to a report on severance practices by WorldatWork,an association of total rewards professionals.

The November 2014 report, Severance and Change-in-Control Plans, draws on a survey conducted in partnership with Innovative Compensation and Benefits Concepts LLC and fielded in mid-year 2014 among WorldatWork members, who typically work at the managerial level or higher at large North America companies.

The responses highlight common severance practices in comparison with similar WorldatWork surveys beginning in 2003 and last conducted in 2011. Key findings are summarized below.

Severance Plan Types

• The most prevalent severance plan arrangement includes one plan for all employees (30 percent of respondents).

• The next most popular arrangement was to offer three total plans—one plan for the CEO, one plan for key officers/executives or direct reports to the CEO, and one plan for all other employees (26 percent).

Plan Documentation

• There was a slight downward trend in the use of plan documentation between 2011 and 2014, and the percentage of respondents stating they had unwritten or undocumented plans and policies grew from 9 percent to 15 percent over that period.

• Having plans, policies and employment agreements in writing still constituted over three-fourths of the responses (80 percent).

Benefit Calculation

• The most frequently used factors in calculating severance benefits continued to be years of service, position, pay or employment agreement, although position as a reason showed an increase from prior years.

• By far the most prevalent consideration for the amount of severance benefit received was years of service, relied on—at least in part—by 92 percent of participating organizations.

Respondents were asked, “What is the calculation of the severance benefit based on? (Check all that apply.)”
Years of service	92%
Position	48%
Pay	32%
Employment agreement	20%
Title	7%
Other	9%
Source: WorldatWork, Severance and Change-in-Control Plans.

• The most common minimum amount of cash compensation an employee might receive in severance was two weeks’ salary (32 percent) and one month’s salary (20 percent).

• The most common maximum amount of cash compensation an employee might receive in severance was one year’s salary (30 percent). Respondents limiting the maximum amount to 26 weeks’ salary was at an all-time low of 16 percent when compared with previous years.

• Regarding severance formulas, “one week per year of service” rose to 24 percent from 20 percent since 2011, and “two weeks per year of service” was down to 16 percent from 21 percent. There was also a drop in “one month per year of service” and the use of a flat amount past a threshold.

Respondents were asked, “What is your current formula for determining the amount of cash compensation for severance purposes?”
One week per year of service	24%
Two weeks per year of service	16%
Three weeks per year of service	1%
One month per year of service	2%
More than one month per year of service	1%
Number of weeks per year of service up to a tier, then flat amount thereafter	8%
No formula	5%
Other	42%
Source: WorldatWork, Severance and Change-in-Control Plans.

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Respondents were asked, “If you include bonus in your definition of ‘cash compensation,’ how is bonus defined?”
Target bonus	46%
Last year’s actual bonus	14%
Average bonus over the past 1-3 years	12%
Highest bonus in the past 1-3 years	2%
Higher of target or previous year’s actual bonus	1%
Other	26%
Source: WorldatWork, Severance and Change-in-Control Plans.

Outplacement Benefits and COBRA

• Most organizations continued to offer outplacement benefits to at least some employees affected by a reduction in force/layoff, but the duration of outplacement benefits varies widely.

• The percentage of respondents subsidizing some portion of COBRA coverage in their severance plans continued to edge upward. In 2014, 37 percent reported that they did not subsidize COBRA coverage.

Change-in-Control Plans

• Eligibility for change-in-control compensation was most often given to all employees (37 percent), the same as 2003, or only to those whose employment agreement dictated it (33 percent), up from 16 percent in 2003.

• Double-trigger vesting for equity and other long-term incentive plans increased from 39 percent to 47 percent since 2011, while single-trigger vesting declined from 27 percent to 22 percent.

• In a change-in-control situation, the number of organizations that accelerate the vesting and payout for supplemental executive retirement plans (SERPs) has declined dramatically over the years, down to only 9 percent in 2014.

*Gross-up practices for golden parachutes continued to be less popular than in previous years.

Severance for the Top Executive

• The definition of cash compensation was split between salary only (45 percent) and salary and bonus (46 percent), which was virtually unchanged since 2011.

• The most common duration of severance compensation for the top executive was 12 months (32 percent).

Frequency of Plan/Policy Review

• 38 percent and 30 percent of respondents had reviewed their severance or change-in-control policies, respectively, within the previous 12 months.

Fewer Payouts as Layoffs Declined

“Except for mergers and acquisitions (M&A) activities, with the economy rebounding, we’re not seeing as many organizations needing to use severance plans for planned mass layoffs or reductions in force,” wrote Don Lindner, CCP, senior practice leader at WorldatWork, in an e-mail to SHRM Online. “In spite of the low utilization of these plans, the good news is that organizations understand that severance plans are critical to have in place, and the majority of organizations have established plans and programs to use when necessary.”

“A cautionary note from the study is that compensation committees have not reviewed these programs as diligently or as frequently as in prior years, and with a record M&A year about to close in 2014, there may be a resurgence of interest in these plans in the next few years,” added Bob Jones, CEO at Innovative Compensation and Benefits Concepts LLC. “In addition, compensation committees may not be able to accurately predict when they may need to utilize severance and change-in-control plans in the future in an ever-changing marketplace.”

Stephen Miller, CEBS, is an online editor/manager for SHRM. Follow him on Twitter @SHRMsmiller.

Related SHRM Articles/Resources

Severance Calculations Weigh Many Factors, SHRM Online Compensation, October 2014

Severance Pay Policy, SHRM Templates & Samples, July 2014

Designing and Administering Severance Pay Plans, SHRM Templates & Samples, April 2014

Supreme Court Rules Severance Payments Are Subject to FICA, SHRM Online Compensation, March 2014

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