Formal executive severance programs increasing

In today's tight labor market, a shortage of talent has required companies to formalize executive severance programs, providing added security and protection for executives.

According to a recent survey of more than 200 companies by Hewitt Associates, a management consulting firm, 75 percent of companies that provide general severance programs offer a formal executive severance program, when no change in control is involved, up from 61 percent in 1991.

"More companies are defining how to end the employment relationship up front, through formal arrangements, which provide executives with some financial security in the event of an unsuccessful employment tenure," said Robert Romanchek, an executive compensation consultant at Hewitt Associates, in a press release. "These programs also make a difficult situation more tenable, by defining upfront precisely what must occur in the event employment is terminated by the employer."

Calculation and payment of severance amount. More than half of the companies surveyed (59 percent) calculate the amount of an executive's severance payment on a fixed multiple of pay, regardless of other factors such as length of service or age, Hewitt stated. The remainder of companies (41 percent) use a formula to calculate the severance benefit amount, with the most common formula factors being length of service, salary level and organization level.

A company's size has little impact on the severance formula factors. Nearly half of the companies surveyed (48 percent) pay severance benefits by continuing to pay on a normal payroll basis. Thirty percent pay the benefit as a single lump-sum payment. Other options include payment in a specific number of equal installments (16 percent).

Companies usually include confidentiality (87 percent) and waiver of discrimination claims (85 percent) in their severance arrangements. Future cooperation provisions (54 percent) and arbitration provisions (47 percent) are also common.

"It is not surprising that in today's highly-competitive and ever-changing workplace, more companies are offering executive severance programs, formal or informal," Romanchek said.

"The shortage of executive talent has given qualified candidates a stronger negotiating position in requesting such formalized protection and, as more companies with informal programs experience difficulty in attracting new executive talent, we will probably see a continuing increase in the formalization of these programs," he added.

Bonuses included in the definition of pay. Larger companies are more likely to include bonuses in the definition of pay when computing severance benefits. Sixty-four percent of public companies with annual revenues exceeding $5 billion include base and bonuses in the definition of pay.

Medical and other benefits. Fifty-six percent of public companies with revenues between $1 billion and $5 billion per year include bonuses and 45 percent of all other companies (public companies with revenues under $1 billion, private companies and not-for-profit companies) include bonuses.

Nearly seven in 10 companies (66 percent) continue medical benefits throughout the severance period, a slight increase from 60 percent in 1991.

These companies begin COBRA coverage at the end of the severance period (46 percent) or on the date of severance (20 percent). Another 30 percent of companies also provide medical benefits, but do so only for the 18-month COBRA coverage period.

In addition, most companies that continue other welfare benefits continue dental coverage (90 percent) and life insurance (83 percent) for terminated executives.

Almost three-quarters of the survey respondents (73 percent) reported having some form of nonqualified retirement benefit. Of these companies, the majority (82 percent) do not provide enhanced benefits, such as special vesting or credits of contributions under the deferred compensation program.

Further, most companies (68 percent) with nonqualified defined contribution plans do not continue company contributions during the severance period. Hewitt's study was commissioned to provide information to companies facing executive severance situations, unrelated to change in control.