One of my good friends Christine is thinking about negotiating a separation agreement with her employer of six years. She works in marketing at Gap and is ready for a change of pace and a new career path. She got married to her college sweetheart last year and would really like to work at a public service company like the Friends of the Urban Forest, a non-profit organization which plants over 1,000 trees a year in San Francisco!
Christine grew up in the backroads of Billings, Montana, completely surrounded by nature as far as the eye can see. Although San Francisco is a relatively green city, after two years of living downtown, she moved to the Presidio Park where she could feel at home again surrounded by grass and trees. Her dream job would be to work at the Friends of the Urban Forest which happens to be conveniently based in the Presidio, an easy half mile commute by bike or shuttle. Sounds like a great gig to me!
I’ve known Christine for a while and I think she’s pretty savvy. She’s learned not to quit a job, but to try and get laid off instead. Why? Well if she simply quits her current job right now, she will receive no severance and might not be eligible for unemployment benefits given California’d deem that she doesn’t need UI benefits if she voluntarily quits. That’d be a risky move since it could take her months or even a year or two to land her next ideal job.
Even though the economy has roared back from the depths of despair, there’s growing uncertainty with the stock market correcting in 2018 and real estate markets all over the country slowing down. If corporate earnings are coming down, the future is at risk.
So before talking to her manager and to HR, both of whom she fortunately gets along with very well, Christine came to me for some advice with the big question what is a typical, average severance package like?
The Average Severance Package Comes In All Sizes
What’s important to note is that employers are under no legal obligation to offer a severance package. As an “at will” employee, you can literally be sent home packing one day without any recourse. If a company is closing down, it is also highly unlikely you will receive any severance package because whatever money that is left on the balance sheet is returned to creditors.
Given smaller/newer companies have a higher risk of closing down than larger, older, publicly traded companies, you should take into consideration the potential lack of severance should your position be eliminated. Remember that everything has value, not just the salary you collect from your job. You should also look at your health care benefits, company profit sharing, retirement matching, and severance package potential.
Keep in mind that because severance benefits are not mandatory, there is no one-size-fits-all package for employees. However, a commonly accepted formula for coming up with the average severance package is:
Number of Years Worked X 1 – 3 weeks + Minimum State Mandated Base = Severance Package.
Here are some examples of the formula at work based on extensive research talking to hundreds of people about their severance since 2012:
* 32 year old employee at a high tech/internet firm worked for 1 year and got 4 months.
* 30 year old employee in finance making $200,000 received 2 months base + 16 weeks after working for 8 years. Total severance amount = $96,153
* 28 year old employee at internet start-up making $80,000 worked for 2 years and got 2 weeks pay. Total severance amount = $3,076. Because the employee works at a private startup, the startup isn’t subject to paying the minimum WARN Act payment of two months in California. Her startup was money losing, like most startups are.
* 48 year old employee in manufacturing making $120,000, worked for 20 years and got 2 months base + 26 weeks. Total severance amount = $80,729. The employee has a classic severance package paid out to loyal employees.
* 34 year old employee making $250,000 at a strategy consulting firm worked for 11 years and got 3 months base + 22 weeks. Total severance amount = $168,269
* 38 year old employee making $180,000 at a large consumer goods company worked for 15 years and got 6 months. Total severance package = $90,000.
* 33 year old employee in the consumer appliance retail industry quit her job after a 3 month maternity leave. Received no severance. Quitting your job is the worst move possible because if you quit, you get nothing. You don’t even get unemployment benefits that can amount to as much as $1,900 a month for six months.
Another formula that is somewhat common is: 0.5 x N. N is the number of years worked, and the output would simply be the number of months in severance one would receive. Five years at a job = 2.5 months of severance.
Don’t Forget To Negotiate Your Severance
As we can see in the examples above, there is no set amount of severance. Based on the first formula, I’ve seen companies offer anywhere from 1 week to 4 weeks per year worked as severance. Given the wide range, it’s worth negotiating with your boss /HR manager to try and get the most possible. After all, the worst they can say is “no”!
And remember you can negotiate more than just money too. For example, you can coordinate a later separation date due to upcoming stock or benefits you will be receiving by offering to help finish a project or train someone. You can also also ask the company to pay for your COBRA healthcare insurance for a longer period of time after you are no longer working. There are generally outplacement services to help you find a new job as well. Be appreciative when negotiating, but do negotiate.
The reason why companies offer severance, even though they don’t have to is because they want to create “Goodwill” and protect their reputation. Can you imagine if a company like Apple laid off a 30 year veteran and gave him zero severance? That type of negativity would spread all around the Internet in a nanosecond!
Even if the 30 year veteran got 120 weeks of severance that was valued at $500,000, that’s chump change to a company like Apple with billions in cash. Just look at what that Greg Smith guy from Goldman Sachs did when he wrote his scathing good-bye letter in the NY Times. His letter alone probably cost Goldman hundreds of millions of dollars in market value!
Just look at the reputational destruction that occurred at Uber after it was discovered a manage repeatedly sexually harassed a female employee. The female employee reported the manager to HR multiple times and don’t do anything about it.
If HR asks you to sign a voluntary separation agreement, you will inevitably be given a massive document that highlights many points to protect the firm, ex. you can’t sue, go to a competitor for X amount of days, say bad things, etc. Burning bridges is never a good idea, so agreeing to those types of terms usually isn’t a big deal unless your employment rights after you separate from your company are severely restricted.
Leave With Money In Your Pocket
As more and more people look to leave the traditional 9-5 job for a more untemplate lifestyle, it’s good to know what your options are before you take the leap of faith.
I negotiated a severance in 2015 after nine years at my job. I never thought it would have been possible until I read Financial Samurai’s book, How To Engineer Your Layoff: Make A Small Fortune By Saying Goodbye. His book taught me my rights as an employee, and it helped give me the confidence to ask for what I want.
My severance ended up being worth equal to about eight months worth of pay. We figured out an ingenious plan where I was to work only two days a week for several months at FULL PAY. This essentially gave me a massive raise. Further, once the severance agreement was on the table, all my stress of dealing with clients and being a high performer went away.
At the end of the four months of part-time pay for full-time work, I received a severance and a goodbye gift. It was the best feeling ever! A year later, I was invited back to do consulting work for my company for a 35% higher rate. It was amazing.
Remember, half the battle in good negotiating is to come prepared with as much information as possible. It’s important to know where the realistic upper and lower anchors are so that you can maximize what you deserve! Aim high and try to get better than the average severance package.
Manage Your Finances In One Place – Get a handle on your finances by signing up with Personal Capital. They are a free online platform that securely aggregates all your financial accounts in one place so you can see where you can optimize. They also offer other free financial tools to help you monitor your cash flow, stick to a budget, reduce fees in your 401(k) and track your net worth in realtime. Let Personal Capital track your finances so you can gain more freedom to do your own thing. It takes less than one minute to sign up!
Latest posts by Sydney (see all)
- How To Engineer Your Layoff Book Review: Best Severance Negotiation Strategies - August 9, 2019
- Should You Switch Jobs? 8 Factors To Consider Before Starting A New Job - July 29, 2019
- LINK by Prudential Review: Reach Financial Goals Easier - July 25, 2019