Terrie's Job Tips -- Severance Pay

Whenever the US economy hits speed bumps, through bitter experience business people in Japan start battening down the hatches. Such is the business environment now, that is not just hatch battening, but many are also starting to think about retrenchment, both as firers and fired. Today we look at severance packages, and what you should expect.

Although foreign companies have an image of quick to hire, quick to fire, the fact is that most companies will try to protect and keep their best employees, even in a severe downturn. This is only commonsense, since most companies are only as good as their top performers. Those laid off in a bad economic patch will generally be marginal performers, and those last in to the company (i.e., younger staff and mid-career hires). If you match this last category, you should be doing some contingency planning.

The exception to the above rule about keeping good people on; is when there is a "perfect storm" in a particular industry. Back in the dotcom bust of 2001, the industries affected were the high tech sector and the speculative finance (VC, Private Equity) sectors. Today, with the sub-prime problem ever expanding and threatening to grow towards half a trillion dollars of direct losses, the perfect storm looks like it's headed directly for the investment banking sector. Accordingly, even generally safely tenured individuals must be wondering what is going to happen. People are wondering whether we are looking at a repeat of the 9/11 fallout, when foreign firms in Tokyo alone retrenched over 10,000 financial professionals. My gut feel is that the sub-prime impact won't be sudden. Instead, it will gradually peak in a round of the belt tightening by banks, occurring over the next 6 months.

So, if you get laid off, what is the standard payout that a company has to make? After all, you have done nothing wrong, and this termination is for the convenience of the company. So they should pay, right? Well, the law agrees and says that the company has to either give you one month's notice or pay you the amount of one month minus the actual notice period. They also have to pay out any holiday pay and any other benefits that would normally be due to you. Bonuses paid for sales and other direct activity would be included in the payout, unless contingent on collection of the cash or completion of some other activity. Unfortunately, the usual Japanese-style bonuses would not be paid, since generally it is accepted that you have to be employed as of the date of bonus payment to receive it.

If you think you've been unfairly singled out for retrenchment, or that the company picked a firing date just a few days ahead of your bonus date in order to save money, then you probably have fair cause to go to the Labor Standards Office and lodge a complaint. After you do this, the Office will assign a case officer and that person will negotiate on your behalf with the ex-employer for a better payout. This doesn't always work, especially if you don't have a case. But if you do, you can expect to receive a fair portion of that unpaid bonus, or some other form of compensation.

While the above is the standard severance arrangement, in the financial industry, and also for those in senior management positions, the rules are a bit different. In both of these cases, the employers are concerned about continuity, keeping the retrenchments low profile, and maintaining the morale of those remaining - especially since the market is still hungry to hire trained, proven staff.

We did a survey of recruiters, and found severance packages in the finance industry tend to be as follows.
i) Junior staff member, such as a trader, admin person, or desktop engineer, who has been in the bank less than 2 years: 3 months' severance and unused holidays.
ii) VP level person or senior manager who has been in the bank for 5 years or more: 5+ months severance and unused holidays.

So clearly, there is more money to deal with severances in this industry. Indeed, we know of very senior managers who were able to negotiate 12-18 months separation. While our survey found that most financial companies set a cap on total payout as 18-24 months, the caveat is that these kinds of packages are during normal times. In a perfect storm, if one is coming, the amounts will be smaller and the rules about who goes, stricter. Therefore, if you think you are going to be targeted, timing your departure may provide a better payout. I.e., look at leaving with the first round of voluntary retirements, rather than a later round.

Senior managers in non-financial industries should normally have severance conditions written in to their employment contracts. If you don't have such conditions, you should go back and negotiate them in, even though this can be a tough subject to discuss. A typical low-end severance term would be 1 week for each year of service, while a high-end one would provide up to one month for each year. The cap for most companies is 20 months. From practical experience, I've seen the Labor Standards Office apply the high-end calculation as a starting point for a negotiation, and reach a compromise of about 50% of this.