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severance package

Losing your job can be a punch in the gut, both emotionally and financially. You may see it coming if your company is experiencing hard times, or you may be completely blindsided. Sometimes, though, your employer will help ease your transition by offering you a severance package.

Severance packages are quite common in the workplace. Employers use them both to help employees while they seek new employment and to protect themselves from public criticism and potential lawsuits. We’ll take a look at what you should expect in a severance package and how to negotiate one for yourself.

What Is in a Severance Package?

Most severance packages will include some amount of pay and continuation of health benefits for a specified period of time. Your severance pay can vary and is often dependent on your tenure and position with the company.

According to the Consolidated Omnibus Budget Reconciliation Act (COBRA), you are able to keep your health insurance plan for 18 months after your leave your employer. However, this arrangement is costly, which is why some severance packages include a continuation of coverage without forcing you to pay COBRA prices.

What Is a Reasonable Amount of Severance Pay?

Since there’s no legal requirement to offer severance pay, it’s up to employers to determine a reasonable amount to provide. Consequently, severance pay can vary quite widely, depending on your seniority, the length of your tenure with the company and the circumstances of your departure. If you’re not a manager, you weren’t with the company long or you were terminated with cause, it’s quite likely you’ll receive little to no severance. On the other hand, if you were upper management, you spent a long time with the company or you were laid off (rather than fired), you might reasonably expect to see some severance coming your way.

Many employers base severance pay off of the employee’s years of service. In some industries, the standard is one week’s worth of salary for every year the employee worked; in other industries, it’s a month of pay per year. Top executives at large companies may have a large “golden parachute” – sometimes millions of dollars in severance pay – written into their contract. For instance, Marissa Mayer reportedly received $23 million of severance pay at the end of her brief tenure as CEO of Yahoo.

Some employees, typically executives or other high-level employees, receive their severance in regular installments. Lower-level employees are more likely to receive a lump sum after their last paycheck.

Do Employers Have to Pay Severance?

severance package

Unless your employment contract specifically provides for severance pay, employers don’t have any requirement to pay you severance.

But they often do so anyway, for a few reasons. Most of the time, the severance pay is in exchange for a written agreement from the employee not speak negatively of, or pursue legal action against, the company. Additionally, severance helps employees stay on solid ground while they look for a new job, and it’s generally thought of as a common courtesy for employers to provide it. Because of this, a company that routinely doesn’t pay severance could develop a bad reputation, potentially hamstringing their ability to recruit top talent.

Should You Negotiate Your Severance Package?

Your success in negotiating your severance package will depend on a number of factors. In many cases, an employer applies a uniform methodology to dole out severance to every employee they lay off. Again, this formula will usually depend on a combination of seniority and tenure. It’s quite likely that they won’t budge from this formula unless there are extenuating circumstances. This is particularly true of large scale layoffs where they’re providing severance to a large group of people.

If the company has a written severance policy, that’s another situation where the amount won’t be negotiable. In these situations, the policy was likely in your employment contract, so there wouldn’t be much point to negotiating.

If your employer doesn’t have a written severance policy and you’re not losing your job as part of a reduction in force, you may have better luck negotiating. When negotiating, you should decide what you want most from your employer and structure your proposals around that. If your biggest priority is pay, demonstrate to your employer how the amount they proposed doesn’t adequately reflect the value you generated for the company. If you were in a role that directly generated revenue, you can use your actual contributions to support this.

Pay may not be your biggest priority though. You could take slightly less pay in exchange for keeping your health benefits for a longer period of time. Additionally, you may want to propose taking less in exchange for a written guarantee from your employer that they will serve as a positive reference when you’re applying for your next job.

The Bottom Line

severance package

Losing your job can be an enormously difficult experience to go through. Severance pay can help you focus on your nascent job search without having to worry as much about the bills.

If you lose your job and your employer offers you a severance package, ask yourself a few questions. Is the severance pay reasonable based on your salary and your time with the company? Is the severance package negotiable? What is your biggest priority during your job search process? Use the answers to these questions to figure out your best path forward.

Tips for Finding a Financial Advisor

  • Severance pay can help during unemployment, but your job search could very well outlast it. In these situations, an emergency fund can be extremely helpful. You can stash your emergency fund in a few different ways, ranging from a savings account to a CD ladder.
  • A financial advisor can help you develop a financial plan that prepares you for anything life throws your way. SmartAsset’s free financial advisor matching tool will connect you with up to three qualified advisors in your area. Just answer some questions about your financial situation and goals, and the tool will find local advisors that fit your needs. Get started today.

Photo credit: ©iStock.com/hoozone, ©iStock.com/PeopleImages, ©iStock.com/tolgart

Hunter Kuffel, CEPF® Hunter Kuffel is a personal finance writer with expertise in savings, retirement and investing. Hunter is a Certified Educator in Personal Finance® (CEPF®) and a member of the Society for Advancing Business Editing and Writing. He graduated from the University of Notre Dame and currently lives in New York City.
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