Severance policies replace stock options for tech firms
Elizabeth Wasserman and Lessley Anderson
Industry Standard
Monday, July 9, 2001
As tech companies slash payrolls, the question for many on the front lines isn't "How bad are the layoffs?" but rather "How good is the severance package?"
Data about severance long has been scant. But with a million layoffs nationally since the start of the downturn in spring 2000, according to outplacement firm
Challenger, Gray and Christmas -- and with 41 percent of those in 2001 coming from tech firms -- there's a renewed effort to understand the ins and outs of job
severance.
Into this void come two new studies revealing some surprising trends about the layoff payoff. The research shows that the size of your parachute depends on where you
work. Big corporations tend to pay a middle manager with two years of experience about eight weeks of severance, according to a survey of 114 Fortune 500 companies
conducted by Unifi Network, a subsidiary of PricewaterhouseCoopers.
Most ailing Net companies fall far short of that mark.
Internet service provider PSINet is typical: The firm gave four weeks in its April round of layoffs. The largest dot-com firms -- from eBay, eTrade and
Travelocity.com to the Walt Disney Internet Group -- are the most generous, doling out a median of 14 weeks of severance to two-year managers, according to a
separate survey of 24 prominent Web businesses by Unifi and the Industry Standard.
But thousands of dot-com employees lost their jobs and didn't receive a penny. Most of them worked for the 200 or so dot-coms that ran out of money; many firms
plunged into bankruptcy.
"We've all heard the stories of people being given equipment as exit packages," said Judith Fischer, managing director of Executive Compensation Advisory Services.
"The real obvious difference between New Economy and Old Economy companies is, in the end, does the New Economy [company] have money left in the till to pay
the severance?"
Hardly humane
Internet companies tend to eschew the practices that established corporations use to make downsizing more humane. Dot-coms are less likely to have written severance
policies and more likely to lay off big chunks of staff, pay severance in a lump sum so it can be taken as a charge in a single quarter, and avoid buyout offers and
extending benefits.
No one knows exactly how many people get the boot without a severance check, but some recruiters report that the percentage is high. "Eighty-seven percent of our
candidates are coming from companies that are laying off or downsizing," said Steven Pope, a recruiter with the New York City-based firm GT Solutions. "I'd say that
60 percent were laid off without severance."
Of course, setting aside money to pay severance was never part of the plan for most dot-coms. "You came in here because you wanted to reach the moon, not for the
downside insurance," explained former Petstore.com CEO Josh Newman, whose company went belly-up last year.
Do like the top guns do
One way to ensure a decent severance is to negotiate it upfront, before you accept the job. Typically this perk is reserved for senior executives. "You have to be pretty
strategic to an organization to command some guarantee upon exit of anything," said Dee DiPietro, founder and CEO of compensation consultancy Advanced-HR.
The typical executive severance ranges from one to four years of base salary plus a bonus. But there's no limit to the creativity -- and generosity -- involved.
Take Webvan, the online grocer whose stock has plunged from a 52-week high of $9.38 to 13 cents. Former CEO George Shaheen left in April -- with a package
giving him $375,000 a year for the rest of his life (and for the rest of his wife's life, if she survives him). Heidi Miller, the former CFO at Priceline, lasted only eight
months, but that was long enough for the company to forgive her $3.3 million loan as part of a severance deal.
Then there's the case of Mattel CEO Jill Barad, who walked away with $50 million last year after her company lost $171 million in a quarter.
Companies provide severance for a range of reasons. They want to help their former employees; they want to be known as benevolent so they can, in the future, recruit
top talent; and they want fired workers to have some reason to sign legal agreements designed to protect the company.
Accepting a severance package often obligates an employee to sign noncompete clauses, confidentiality agreements and nondisparagement pledges. For years, these
conditions have been written into executive contracts, but now the average worker is facing the choice: Sign it or lose it.
A generous severance package can help a company recruit later. John Challenger, CEO of Challenger, Gray and Christmas, notes: "The way you handle a downsizing,
the way you let someone go, has a lasting impact on your reputation."
© Copyright 2001 Star Tribune. All rights reserved. |
