Page 250 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

236 The Complete Guide to Executive Compensation

group actions in their formulas. Thus, they may give two weeks plus two weeks of pay for
every year of service for an individual whose performance is no longer acceptable, but will
give two weeks plus three weeks for every year of service when an installation is being closed
or a department within a site phased out. Such payments occur only after all attempts to
otherwise place affected employees elsewhere within the company have failed, since the
individual is being terminated due to organizational restructuring, not poor performance.
Some companies add an additional week for every year of service if an employee signs a waiver
indicating he or she accepts the severance as full settlement and will not pursue legal options.
Where waivers are used, their legality should be carefully reviewed. Among other require-
ments, waivers must comply with the 1990 Older Workers’ Protection Act (OWPBA). This
act requires that (1) the waiver be clear and understandable, (2) the rights being waived for
compensation are stated (future acts of age discrimination cannot be waived) and must refer
to rights and claims protected by the ADEA, (3) employee be advised to review the waiver
his or her own attorney; and (4) the individual have at least 21 days (45 days if the termina-
tion is part of a group action) to determine whether or not to accept and at least 7 days after
signing to change his or her mind and revoke the contract. The enforceability of these
waivers has been challenged, so it is imperative that actions be reviewed by legal counsel.
In designing severance pay formulas, consider not only years of service but also age and
what might be available from the pension plan. For example, a person being severed with
30 years of service at age 65 probably has less financial need (being eligible for a full pension)
than a 55-year-old also with 30 years’ service. The second individual might be able to retire, but
the pension may be significantly discounted or reduced for early retirement. While considering
age in this situation seems logical, it is difficult to do because of age discrimination rules.
The Department of Labor (DOL) has also looked at the pension/severance issue in light
of the Employee Retirement Income Security Act (ERISA). It concluded in 1979 that for
severance payments not to be considered a pension plan and come under all of its require-
ments, severance benefits must not exceed two years of pay, and payment must be completed
within two years of termination (or after normal retirement date if early retirement
benefits were elected). In determining the amount of severance, all compensation, including
employee benefits, should be considered. While some all-company severance plans are rather
generous, few exceed two years’ pay. To illustrate, a formula providing four weeks plus three
weeks per year of service for a person with 30 years would still be eight weeks short of two
years. Nonetheless, the Multiemployer Pension Plan Amendments Act of 1980 amended the
DOL restrictions and permitted the Secretary of Labor to establish rules by which severance
plans could be treated as welfare rather than pension plans under ERISA, thereby increasing
flexibility in design and funding.
Most broad-based severance plans are of only moderate importance to executives since
the protected pay period (i.e., weeks of pay) is likely to be insufficient. It typically takes longer
for higher-paid individuals to find a new job simply because there are fewer of them. It is
possible to devise a formula to address this problem. A simple one would be one day of
severance pay for every $1,000 of earnings, or alternatively to develop a graduated scale such
as the following:

• Up to $50,000—one week per every $25,000
• $50,000 to $100,000—one week per every $20,000
• $100,000 to $250,000—one week per every $15,000
• $250,000 and up—one week per every $10,000