Page 251 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 6. Employee Benefits and Perquisites 237

The graduated scale and the flat formula of one day for every $1,000 of earnings are
illustrated in Table 6-5—both with and without an additional factor of two weeks per year of
service. As stated earlier, anything over 104 weeks would be capped at the two-year
maximum. The flat formula without a service add-on could result in a very large severance
for short service. The graduated formula seems to reflect a nice balance of service and pay
considerations. However, under the flat formula a person with 10 years’ service paid $250,000
would receive 50 weeks (70 weeks if there was a service add-on of two weeks per year of
service); however, the same executive would receive only 14.5 weeks under the graduated
formula, but 34.5 weeks with a service adjustment. Note that under $50,000, severance pay
is two weeks plus two weeks per year of service.

Flat Formula
Plus Two Weeks per Year of Service
No Service
Pay
Add-on 5 Years 10 Years 20 Years 30 Years
$500,000 100 110 120 140 160
$250,000 50 60 70 90 110

$100,000 20 30 40 60 80
$50,000 10 20 30 50 70
Graduated Formula

$500,000 39.5 49.5 59.5 79.5 99.5
$250,000 14.5 24.5 34.5 54.5 74.5

$100,000 4.5 14.5 24.5 44.5 66.5
$50,000 2.0 12.0 22.0 42.0 62.0

Table 6-5. Flat vs. graduated severance formula

Less egalitarian companies may adopt a more traditional two or three weeks per year of
service for all employees except those whose pay is determined by the company’s compensation
committee. Disclosing the severance pay policy in this manner effectively cloaks the benefits
that will be paid to executives.
In addition to level of compensation, another factor in severance pay formulas is the
general marketability of the departing executive. Other things being constant, the person with
experience in several industries has an advantage over a person who has spent all of his or her
life in one industry. Similarly, a person who has management experience in several functional
disciplines is more marketable than a person who has specialized in one area. While these
factors might not be as easily reduced to a formula as age, years of service, and level of compen-
sation, they are just as important and could be considered in increasing or decreasing the payment.
Furthermore, companies are likely to be more generous with an individual who has given
all the outward appearances of trying, still makes consistently loyal statements about the
organization, has made a significant contribution earlier in his or her career, and/or knows