Severance Package Costs & Liabilities: What C-Suites Need to Know Now

New Benchmark Data Available on Separation & Severance Packages and Policies

If you’re a CEO, CFO, CHRO, or any member of the C-Suite, it’s critical to understand the costs and liabilities associated with severance and separation packages. Especially in today’s unpredictable business environment and potential for virality, the right approach to severance helps mitigate financial risks and protects your company’s reputation.

For leaders navigating restructuring, layoffs, or workforce realignments, recognize how severance affects your bottom line and your employer brand.

This article outlines the financial implications of severance packages and provides strategies for managing these costs while supporting a strong employer brand in the marketplace.

The data, unless noted, is from LHH’s Severance & Separation 2024 Benchmark Study, which gathered information from 500 organizations across the US and – new this year – 200 across Canada. As a result, comparisons to results in the 2020 and 2017 editions of this report are to US data. For more information regarding the methodology, download the full report.

What is the Definition of Severance Pay Costs?

When we refer to severance pay costs, it includes routine expenses, such as severance pay, termination pay, or what’s known as “pay in lieu of notice” stemming from the end of a worker’s employment.

There are also hidden costs to severance, which we’ll discuss later in the article.

How are organizations calculating severance pay?

According to LHH benchmark data across the US and Canada, the most common (38%) calculation is based on position and years of service.

Only 7% used a flat ‘number of weeks per year of service for all employees’ method. The percentage of all respondents without a set formula at all fell 10 points since 2020 from 14 % (of US respondents) to 4% across both countries.

Although there is no requirement for severance pay in the Fair Labor Standards Act (FLSA), it’s becoming more common.

Why? As organizations have become more competitive, following the rapid scaling of workers in late 2021 into 2022, amidst the Great Resignation, and then finally, the waves of layoffs, employers have revamped their benefits at all parts of the employee lifecycle.

There are also more risks to not providing some benefits when the potential for poor publicity following a mishandled layoff or career transition experience is so great.

How many organizations pay severance?

According to LHH’s study, 91% of total surveyed organizations reviewed their policies within the last two years, up from two-thirds of US respondents in 2020.

Except for 22% in the food, beverage, and tobacco sectors, 90% of organizations across the US and Canada surveyed said they pay severance.

The Financial Impacts of Severance Packages

A severance package goes beyond simple payouts. It typically includes various elements such as salary continuation, health benefits, bonuses, and outplacement services. Each of these components affects a company’s financial standing, both in the short and long term.

In 2024, LHH benchmark data found 70% of all respondents offered healthcare coverage by the organization for employees enrolled prior to termination. This was a sharp increase by US companies from 52% in 2017, and 57% in 2020.

“This increase is unsurprising, but a welcome change in policy,” offered LHH Global SVP in Career Transition & Mobility Greg Simpson. “Because healthcare is such an impactful expense on a household budget, it’s a positive change to continue coverage. I believe this reflects the competitiveness of the talent market during this time, as well as the growing benefit to employer brands by supporting workers this way.”

The split between the US and Canada was consistent, only varying slightly by company size. Of note, even 67% of companies with fewer than 100 employees continue to cover employees in severance packages.

However, outgoing employees are expected to absorb the costs at more organizations than in the past. Past LHH studies showed in 2017, only 5% of US organizations delegated these expenses before increasing to 20% in 2020. In 2024, figures climbed to 34% in the US and 25% of Canadian organizations affirmed.

US employers taking on healthcare costs have increased as well, although up only 8 percentage points from 2020 to 40% in 2024 across both countries. Organizations sharing the expense with workers has plummeted from 48% to 28% in the last four years.

Short- vs. long-term costs of severance

While severance may feel like an immediate financial burden, it often helps companies avoid larger issues like wrongful termination lawsuits and low employee morale. A well-designed severance package is often an investment in future cost savings.

“In today’s competitive market for top talent with the right skills, employees should feel the same way about an organization on their last day of work as they did on their first day,” added Simpson. “It’s critical for an organization to have a fully planned ‘leaver’ experience that includes financial and job search assistance.”

Hidden costs

Beyond the obvious expenses, severance may lead to hidden costs such as legal fees, higher unemployment insurance premiums, and drops in productivity if layoffs are mishandled. Failure to plan for these hidden expenses easily turns challenging situations into financial crises.

So, it’s vital to understand these financial implications to make informed decisions about the structure and generosity of severance packages. Inadequate plans for these costs could leave companies vulnerable to both short-term financial strain and long-term liabilities.

3 Biggest Liability Risks for CEOs and CFOs to Know

Severance packages come with potential legal and compliance risks leadership teams including CEOs and CFOs must be prepared to manage.

1. Compliance with employment laws

Employers must follow laws like the Worker Adjustment and Retraining Notification (WARN) Act, which mandates advance notice for large layoffs. Missteps in compliance can lead to substantial fines and penalties.

2. Discrimination claims

Severance packages must be applied fairly across the workforce to avoid potential claims of discrimination or unfair treatment. Inconsistent practices could trigger lawsuits that damage both finances and reputation.

3. Reputation management

Poorly handled severance processes can lead to negative press, erode employee trust, and hurt recruitment efforts. Ensuring a transparent and fair process helps mitigate these risks and preserve the company's reputation.

A proactive approach to managing severance liabilities can save a company from costly legal battles and reputational damage that are often more expensive overall than the severance payouts themselves.

3 Strategies to Manage Severance Costs Without Sacrificing Reputation

Balancing cost management while preserving a positive reputation is key for CEOs and CFOs handling severance packages.

1. Tailored severance policies

One size doesn’t fit all when it comes to severance. It’s important to design severance packages that reflect both your financial realities and your company’s values. Customizing the package based on employee tenure, level, and role can make the process fairer and more manageable.

2. Negotiation strategies

Offering severance in installments or structuring performance-based severance can help companies manage the cash flow implications of large payouts. This can reduce the strain on the company’s finances without compromising on fairness.

3. Outplacement and career transition services

By offering outplacement services, organizations support exiting employees in finding new jobs faster, which may shorten the duration of severance payments. This approach helps manage costs and enhances your brand’s reputation as a responsible employer.

When severance is managed strategically, it’s feasible for companies to reduce financial pressure while nurturing employee goodwill and brand loyalty.

More than ever, organizations understand the value of preparing workers for career transitions before separations occur. In 2024, 83% of surveyed employers say this is either ‘important’ or ‘somewhat important,’ versus 59% (of US respondents) in 2020, and only 10% in 2017.

In 58% of surveyed organizations across US and Canada, HR leaders are selecting the outplacement partner, up from 35% of US organizations in 2020. The CEO is the decision maker in 35% of organizations, while only 5% of organizations delegate the decision to CFOs.

LHH provides comprehensive career transition and outplacement services, combining technology and industry experts for an impactful experience.

Best Practices for CFOs and CHROs to Forecast and Manage Severance Budgets

For CFOs and CHROs, forecasting severance costs requires precision and foresight. As you work with your teams, keep these best practices in mind.

Cost forecasting models

It’s essential to build a robust model forecasting potential severance costs based on different restructuring scenarios. By factoring in elements such as employee tenure and role, it's easier to predict the fiscal impact more accurately.

Data-driven decision making

Using severance benchmark data and historical trends helps ensure decisions are grounded. Having clear insights into the typical severance packages in your industry helps you stay competitive while avoiding overspending.

Restructuring and cost savings

Aligning severance packages with broader restructuring plans keeps layoffs or workforce changes from obstructing your company’s financial goals. By planning severance packages as part of overall restructuring, companies can soften the financial blow.

According to LHH’s Outplacement and Mobility 2024 Trends Report, 73% of surveyed organizations around the world are considering or initiating layoffs in the next year. So, we encourage proper forecasting and financial planning to ensure severance packages are both competitive and sustainable if layoffs are necessary.

Conclusion – Take the Time to Proactively Review Severance & Separation Policies – You'll Be Glad You Did

Managing severance costs and liabilities is a critical responsibility for C-suite teams, including CEOs and CFOs, especially in an era of uncertainty.

If you understand the financial implications of severance, proactively manage liabilities, and adopt strategic cost-saving measures, it’s easier to navigate the complexities of workforce restructuring while preserving both financial stability and corporate reputation.

Now is the time to review your severance policies and ensure they are aligned with both your company’s financial health and your commitment to a fair and responsible approach to employee transitions.

For more data on topics such as retention bonuses, severance variances by role, and more, be sure to get the newest benchmark report.

Download LHH’s Severance & Separation 2024 Benchmark Study

LHH surveyed 700 HR leaders who help their organizations manage talent. Our survey sample represented 500 organizations across the United States and 200 in Canada.

The organizations we consulted came from over 15 separate sectors and represented a range of sizes from those with under 100 employees to those with over 25,000.

The topics covered in this study include severance, outplacement, redeployment, stay bonuses, and early retirement programs. For more methodology specifics, see the full report.