Terminating an employee is a gut wrenching experience. George Clooney in recent movie - Up In The Air - made it look smooth and easy. It is not.
Amongst many considerations, how much settlement to offer is a question that often arises.
The first thing to remember is that settlements are intended to help the employee over the period between his former job and a new opportunity. Settlements are rarely, if ever, paid as punitive damages for the termination.
There are four things to consider when determining a possible settlement:
Basic Amount - We recommend a basic, fixed amount that applies in all situations. Regardless of other factors, everyone needs a little time to get over the stress of being terminated. We usually recommend 8 weeks salary, but in some cases this could be as low as 4 weeks. This basic payment goes to everyone, regardless of service, age or current salary.
Years of Employment - Long service usually means that the terminated employee has been out of the labour market for a considerable time. The longer his/her service, the more time will be needed to find another job. We recommend 2 weeks per year of service.
Age - Like it or not, older employees take longer to find a replacement job than their younger colleagues. We recommend 1 week salary for each 5 years of age over 35. So someone aged 47 would get an additional 3 weeks salary.
Salary - Higher paid individuals usually take longer to find suitable employment. We recommend an additional week salary for each $5,000 salary above $35,000. So someone earning $65,000 before termination would be paid an additional seven weeks salary.
In addition, some orgnizations will increase the basic settlement by a factor to represent the value of benefits. This could be between 5% and 20%, depending on the value of the company's benefits program.
We were recently asked to recommend a severance package for a 62 year old employee making $65,000, with 9.5 years service. The calculation is:
Basic Amount: 8 weeks
Years of Service: 9.5 19 weeks
Age: 62 6 weeks
Salary: $65,000 7 weeks
Total: 40 weeks
Total Dollars: $50,000
Value of Benefits: 15% 6 weeks
Total Weeks: 46 weeks
Total Dollars: $57,500
Many companies would include a cap - often something like 15 months regardless of circumstances. A formula like this would be a useful basis to determine a termination clause in a contract for a more senior person.
Sometimes it is helpful to make an offer that is a little light - perhaps 4 weeks less than your ideal settlement, and be prepared to give away the 4 weeks in a negotiation. People like to win something, particularly in a stressful situation like a terminand this approach can sometimes prevent an acrimonious fight.