What makes for a ‘good’ severance package?

When Sam Dogen was about 11 years into his tenure at Credit Suisse, he made a life-changing realization: His departing colleagues were getting one to three weeks of severance pay for every year they’d worked at the financial services company.



“I thought, if I could get laid off, I would get two or three weeks per year worked,” he says. As an executive director with a base salary of $250,000, that amount would be nothing to sniff at.



Dogen further learned from former colleagues that they got their deferred cash and stock compensations upon exit. At the time, Dogen had about “a year’s worth of compensation” in deferred cash (60 to 70% of his salary and bonuses had been deferred). Plus, he hadn’t been awarded a recent bonus, which signaled to him that his company might be trying to cut costs. He proposed the idea of his layoff with a severance package to his manager, who eventually said yes.



“I was able to get a severance package equal to three weeks of pay per year worked, so 33 weeks, plus two months of WARN Act pay , which is just two months of my salary, plus 100% of my deferred stock and cash compensation,” Dogen says. Credit Suisse also paid for six months of his $800 monthly healthcare. Because of his severance’s standard nondisclosure agreement, Dogen can’t say exactly how much he made out with, “but I will say it was in the multiple six figures and paid for five years of normal living expenses.”



That was in 2012, and Dogen, now 46, hasn’t worked full-time in an office since. “That severance package,” he says, “gave me the confidence to not sweat bullets after leaving a high-paying finance job.”



Determining the industry standard 



While not everyone seeking severance is leaving a high-paying finance job, not much has changed in terms of the severance pay-to-tenure ratio since Dogen negotiated his in 2012. Through his personal finance website, Financial Samurai , he counsels people negotiating severance packages across various industries that “the common math is one to three weeks of pay per year worked.” One is the “low end,” he adds, with only about the “top 10%” getting three. “In some special situations, you’ll see four weeks for year worked,” he says. “That’s the barometer people should use.”



Lawyers are less likely to give such a straightforward measure. They tend to stress that severance packages depend on the industry, the company, the employee, or the circumstances of the layoff. As New York-based employment lawyer Matthew Blit puts it, “There is no such thing as a standard severance agreement.” Or, more simply, “The key is to get as much money as the company is willing to give.”



It also comes down to what “the employee is willing to accept,” says Yan Fu, an attorney specializing in civil rights and employment law. He recently worked with a client who’d been at a private equity firm for about four years and was able to get them six months of base pay in severance, not including bonuses. With the “rough guideline” of one to four weeks pay for every year worked, Fu notes, “an employee who has only been at a company for a year and gets two weeks might be more inclined to be disgruntled than an employee who has been there 10 years and gets 20 weeks.”



What you can negotiate



Severance packages often come down to ensuring employees don’t leave disgruntled. That’s why they almost always contain non-disparagement clauses, which dictate former employees can’t speak poorly of the company (or, potentially, its products and workers) after they leave. Dogen recalls a 2012 New York Times editorial, “ Why I Am Leaving Goldman Sachs ,” that called out the firm’s “toxic” environment. “It really hurt their reputation at the time,” he says. “A [severance package] is about reputational management and damage control.”



Though severance agreements differ by industry and company, most include the same basic components. Besides payment and restrictive clauses like non-disparagement, there are potential benefits, like continued healthcare coverage via COBRA . Fu points out that folks who have healthcare secured after getting laid off, like through an employed family member, can ask their employer to pay them the equivalent of their COBRA benefits directly in cash.



In addition to medical benefits, employees can also ask for a continuation of certain bonuses. “A lot of employees leave bonuses and stock options on the table,” Blit says. Employees can ask for accelerated vesting of stocks they acquired through their company, letting them exercise those options earlier than they would have been able to if they were still employed.



Ultimately, companies aren’t legally required to give employees severance packages ( except for through the WARN Act , which may require companies with 100-plus full-time workers to pay two months’ severance). That’s why it’s so important for employees to understand and take advantage of their negotiating power on the way out.



How (and when) you should negotiate



That negotiation should start when an employee is hired.



Noncompetes , which can prevent people from working for a former employer’s competitor, and non-solicits, which can restrict them from soliciting former colleagues and customers, usually come up in paperwork employees sign when they start new jobs. “Negotiate that going in, so on the way out, it’s one less thing you have to worry about,” Blit says. Intellectual property, bonuses, stock options, and confidential information can also come up at the start of employment.



“We have a lot of chemists go work for pharmaceutical companies, and as they’re leaving, all their inventions are gone,” Blit says. Those chemists have no claim to what they created because they signed those rights away when hired.



What to avoid



There are plenty of hidden pitfalls to avoid on the way out, too. Some severance agreements contain sneaky clauses, like those specifying employees must continue working after a layoff. “That’s part of a lot of contracts,” says Blit. “People don’t even realize it’s in there.”



Blit also advises avoiding verbal promises (“there’s no such thing as a verbal agreement in employment circumstances”) and to not just read contracts carefully, but to hire a lawyer even when you think you might understand. He recently heard from an ex-employee who had to fly from New York to California on their own dime after a layoff to attend a deposition for their former company. If they didn’t, they’d have to give back their severance pay or else be in breach of their contract. “They didn’t understand the provision the way it was written, which is written by lawyers so that people don’t understand,” Blit says. “I see this at least once a year.”



Besides legalese, time can be a factor in getting employees to sign unfavorable agreements. Thanks to the Older Workers Benefit Protection Act , employers must give employees aged 40 and older at least 21 days to consider a separation agreement, but that’s not mandatory for younger employees. “Obviously, the more time you have, the more time you have to contact an attorney and figure out whether you have any potential legal claims,” says Fu. “I encourage clients to simply ask for more time.”



What to know before signing



Most important to successfully negotiating a good severance package is knowledge—not just of your negotiating power, but also your company’s needs.



When Dogen left Credit Suisse, even though he asked for a hefty severance package, he knew he’d likely be saving his company money. The junior employee promoted to his position had a significantly lower base salary than his. “Big firms are always looking to cut headcount, whether it’s the bottom one to 10% of people every single year,” he says.



Understanding your company’s position before negotiating severance can mean looking at its current share price and determining how it’s performing compared to industry benchmarks. If underperforming, a company might be looking to cut costs through layoffs. If performing well, a longtime employee can frame their request for a layoff with severance as an opportunity for their employer to hire someone fresh for less money.



The importance of a good relationship



Getting good severance is part of a long game. It goes best if an employee has already developed a good relationship with their manager and human resources. “This means being a good employee, being professional, cordial, going out for lunch, coffee . . . developing that real relationship,” Dogen says. 



Part of being cordial is knowing how you can help your company when you leave. “That means having people in mind to replace you,” Dogen adds, or being willing to stay to see through an ongoing product launch. “One of the common mistakes is not putting yourself in your employer’s shoes.”



Most people don’t try to negotiate severance packages because it’s uncomfortable. “Employees don’t want to go to the employers that just fired them and negotiate more money,” Blit says, thus one appeal of getting a lawyer’s help. But familiarizing yourself with what “good” severance looks like and your company’s needs can also dissipate discomfort.



After all, the key to negotiating good severance is measured and sympathetic confrontation. “Everything is negotiable,” Dogen says. “Confront your employer; be a good person; talk things out. You’ll be surprised what could happen.”