Benefit Generosity in Voluntary Severance Plans: The U.S. Experience

Abstract

Mandated severance benefits have been the focus of much analysis, motivated largely by firing cost concerns. Less attention has been paid to voluntary systems, as in the U.S., although theory would suggest that these too induce firing costs. In a voluntary system, of course, benefit generosity is likely to be limited, unless firing cost distortions are modest or job displacement insurance is unusually valuable. Bureau of Labor Statistics (BLS) surveys indicate that approximately one-quarter of the U.S. workforce is covered by a severance pay plan, but the BLS does not systematically collect information on program generosity. We are instead forced to rely on private surveys by associations, management consulting firms, and others for plan descriptions. Although differing in sample and survey instrument design, these studies reveal remarkable uniformity of the basic benefit formula over the last half-century, with most plans offering scheduled benefits equal to a specified number of weekly wage payments for each year of service up to a service or benefit maximum. This benefit algorithm, similar to those in many mandated plans worldwide, mimics well-established empirical regularities in job displacement losses. The benefits however are modest. The modal private plan offers one week of pay per year of service for all but the highest levels of management, perhaps one-fourth of average capital losses from a job displacement.