Severance policies around the world

June 11, 2018

There are two quite obvious goals of an HR department: to attract and to retain. These overarching goals have shaped HR strategies for ages, both in regard to compensation and benefits offerings. And while these two components do get a good bulk of the attention within the HR industry, there is still another task that is just as critical as these two, if not more so — and that’s knowing how to handle involuntary termination.

Of course, letting an employee go is never an easy task, but it’s a necessary component of workforce management, which is why there are a variety of common (and sometimes uncommon) policies, strategies, and programs that exist within organizations around the world. Many countries also have statutory requirements to be followed where involuntary employee termination is concerned. Still, it’s hardly a painless process, which is why many companies offer short-term payments to ease their employees’ transition back into the job market. These short-term payments are better known as “severance payments” within the industry, and they’re a vitally important part of any company’s HR policies and procedures. Even so, they remain a consistently tactful issue, and you wouldn’t be alone if you found yourself approaching them with a bit more anxiety or apprehension than usual.

Fortunately, a recent survey analyzed severance policy trends around the world, all with the goal of shedding light on this delicate issue and how it’s being approached throughout over 30 different countries. In countries where statutory requirements exist, having a policy is important as companies may choose to provide more — notice or severance — than required. In the absence of local legislature, an HR policy is even more critical.  Here, you’ll learn some of the key insights pulled from the robust survey findings, many of which highlight how top organizations are optimizing their own severance policies to remain fair to their employees while also remaining competitive within their respective markets.

Severance Payments: Calculations and Distribution

To ensure consistency and fairness for all of your employees, you need to ensure that you’re calculating your severance payments through methodologically sound processes. You can do this in a number of ways, whether you reference the terminated employee’s salary, their age, the provisions of his or her contract, the duration of his or her service, or just take into account his or her specific role within the company. Regardless of your approach, you must always be able to prove exactly how and why one employee received X-amount of severance pay, while another employee received Y-amount of severance pay.

Severance payments calculation breakdowns graphic

The most popular answers from surveyed organizations around the world on how they are calculating their severance payments were:

  • A formula based on years of service 76% of organizations
  • A formula based on years of service plus the employee’s age14% of organizations

After HR professionals determine a fair pay rate for letting an employee go, they must then determine the most efficient way to distribute it. As it turns out, there are actually a handful of popular severance payment options that organizations are choosing, as seen in the following findings:

  • 64% of organizations provide lump-sum payments.
  • 16% of organizations provide a combination of lump-sum payments and salary continuations.
  • 13% of organizations provide salary continuations.

The survey also found that a small percentage of companies provide employees with a choice or vary their approach to severance payments according to the employee’s level.

In some cases, the distribution of severance payments can be complicated by benefits or incentives that are owed to employees at the time of involuntary termination. However, only two-thirds of companies currently include accrued annual leave in their final severance payments, so it’s important to ensure your organizational policy addresses how to handle annual leave that is owed to an employee.

Notice Periods Before Involuntary Termination

The negative impact of involuntary termination can sometimes be lessened (though rarely totally alleviated) if HR professionals offer their employees a decent heads-up beforehand. These notice periods are not only fair and considerate to your employers, but they also afford them enough time to prepare themselves to reenter the job market and also finalize any outstanding workplace tasks. Oftentimes, these notice periods can be mandated by regulations within a country so you will want to be aware of the minimum requirements at least.

Regarding recent research findings, there were several interesting takeaways:

  • 48% of surveyed companies around the world designate their notice periods as a set number of two weeks.
  • 62% of surveyed companies around the world provide the same amount of notice to all of their employees, regardless of career level or tenure with the organization.

Sometimes, even with adequate notice, unexpectedly letting an employee go can lead to feelings of discouragement, especially as employees reach their final days. While a sensitive matter, this visible dismay can still pose a legitimate threat to the morale of other employees in the workplace. Recognizing this threat, different organizations opt for different notice period options when letting an employee go. One of these options is referred to as pay in lieu of notice, a type of severance policy which immediately dismisses employees from their duties, but continues to provide them with pay until the end of the their designated pay period.

Of the 78% of organizations who offer pay in lieu of notice, half said their employees may be forced to receive it, while one-quarter said they gave their employees the option to receive it. Even still, other employees may be much less enthused about paying employees to stay at home while still receiving pay; in these cases, they may allow them to take their remaining annual leave during their notice period, thereby achieving the same ends.

When Employees Want to Return

Last but not least, it’s important to remember that severance pay doesn’t always mean the end of the line for your employees. In fact, many companies actually go out of their way to offer competitive or attractive severance policies so their most valued employees will want to return if they’re needed again. After all, whenever market conditions change (and they can change quitedrastically), the first move of many employers is to rehire the most skilled individuals whom they were forced to part ways with in the past. It’s a mutually beneficial process that saves time, costs, and countless other resources as these rehires have already undergone the proper training and amassed the on-the-job know-how to perform at a high level.

Because of this, it should come as little surprise that 60% of surveyed organizations said they permit their former employees to return even after they’ve received severance payments in the past. In addition, 53% of organizations said they willingly recognize and reward prior years of service when certain employees return to their organizations, whether that’s for the majority of their rehires or on a strictly case-by-case basis.

Severance Pay Policies Around the World

With Mercer’s brand new global survey, US Severance Pay Policies Around the World or Canada Severance Pay Policies Around the World, you can assess in-depth data gathered from more than 30 countries throughout the Americas, Asia Pacific, Central and Eastern Europe, the Middle East and Africa, and Western Europe.

The data contained within this insightful new Mercer offering comprehensively covers severance pay policies, notice period practices, severance payment strategies, and payment formulas for executive, management, professional, and para-professional career levels. In addition, Mercer’s Severance Pay Policies Around the World is available in either regional collections or a robust global edition.