The Layoff Payoff

Baldwin Louie — Mon, 02 Jul 2001 15:00:00 -0700

When SpinRecords, a San Diego online music company, shut down in October, 40 employees lost their jobs. Among them was managing editor Craig Combs, who had logged 16 months at the site. Like the others, he received no severance and was even denied pay for his unused vacation time and his final two weeks of work. But at least he'll be able to clean up at home: At a company auction he paid $20 for a used vacuum cleaner. "They both suck," he says of his new purchase and his former employer.

As tech companies slash their payrolls - Nortel Networks says it's sacking 10,000 more employees (on top of 20,000 previously announced), and security software firm Entrust recently dumped 400 - the question for many on the front lines isn't "How bad are the layoffs?" but rather "How good is the severance package?" Data about severance has long been scant. But with some 1 million layoffs in the national economy since the start of the downturn in spring 2000, according to outplacement firm Challenger, Gray and Christmas - and with 41 percent of those in 2001 coming from tech firms - there's a renewed effort to understand the ins and outs of job severance.

Into this void come two new studies revealing some surprising trends about the layoff payoff. The research shows that the size of your parachute depends on where you work. Big corporations tend to pay a middle manager with two years of experience about eight weeks of severance, according to a survey of 114 Fortune 500 companies conducted by Unifi Network, a subsidiary of PricewaterhouseCoopers.

Most ailing Net companies fall way short of that mark. Internet service provider PSINet is typical: The firm gave four weeks in its April round of layoffs. Yet curiously, the largest dot-com firms - from eBay, eTrade and Travelocity.com to the Walt Disney Internet Group - are the most generous, doling out a median of 14 weeks of severance to two-year managers, according to a separate survey of 24 prominent Web businesses by Unifi and The Standard. Likewise for nonmanagerial professionals, who commanded a median of 12 weeks of severance at the big dot-coms but just six weeks at Fortune 500 firms. (At The Standard, which has laid off workers this year, a manager with two years on the job received eight weeks of severance.)

Then there are folks like Craig Combs, the thousands of dot-com employees who lost their jobs and didn't receive a penny. Most of them worked for the 200 or so dot-coms that ran out of money; many of those firms plunged into bankruptcy.

"We've all heard the stories of people being given equipment as exit packages," said Judith Fischer, managing director of Executive Compensation Advisory Services. "The real obvious difference between new-economy and old-economy companies is, in the end, does the new-economy have money left in the till to pay the severance?"

Internet companies tend to eschew the practices that established corporations use to make downsizing more gradual and humane. Dot-coms are less likely to have written severance policies and more likely to lay off big chunks of staff, pay severance in a lump sum so it can be taken as a charge in a single quarter, and avoid buyout offers and extending benefits.

BIG DOT-COMS ARE STILL BIG SPENDERS Median Severance Payout in Weeks of Salary
	Large Dot-Com	Fortune 500 Company
SENIOR MANAGERS1
Less than 1 year	4	82
Two years	12	12
Five years	243	18
10 years	N/A	28
MIDDLE MANAGERS
Less than 1 year	4	42
Two years	14	8
Five years	293	14
10 years	N/A	24
PROFESSIONALS (NONMANAGERIAL)
Less than 1 year	4	42
Two years	12	6
Five years	243	9
10 years	N/A	14
NONEXEMPT EMPLOYEES
Less than 1 year	4	42
Two years	8	6
Five years	143	9
10 years	N/A	14
From a survey of 114 Fortune 500 companies and 24 prominent e-commerce dot-coms that are still in business. 1Excludes senior management covered by employment agreements. 2If company has a minimum-length-of-service requirement, these employees will likely get no severance. 3Employees with this length of service to a dot-com are almost nonexistent. Source: PricewaterhouseCoopers, Unifi Nework, June 2001

"They called us in as a group and said, 'You'll be learning from your department head today if you're in or out,'" says a worker who was laid off from Barnesandnoble.com earlier this year with seven weeks of severance after working at the company for four years. "So you'd see a person walking by with flattened boxes and know they'd be going. It was a bad way to handle it."

Nobody understands the harsh realities of the Internet job market better than Strati Papageorge. A marketing associate at financial newswire Bridge Information Systems, Papageorge was laid off in January and told he would receive in the mail a severance check covering two weeks of his salary. Instead, he got a notice that his former employer had filed for bankruptcy - and that he could make a claim for what he was owed. Recalls Papageorge: "I called the HR director and said, 'Are you kidding me?'"

No kidding. Papageorge also stands little chance of seeing any money. First the attorneys and trustees take their slice of the remaining assets. Then back taxes are paid. Employee claims come third, followed by creditors. "The issues are, 'Say goodbye [to severance],' grimly jokes Cliff Palefsky, a San Francisco labor attorney who frequently gets calls from people owed severance they'll likely never get.

No one knows exactly how many people get the boot without a severance check to soften the blow, but some recruiters report that the percentage is high. "Eighty-seven percent of our candidates are coming from companies that are laying off or downsizing," says Steven Pope, a recruiter with the New York-based firm GT Solutions. "I'd say that 60 percent were laid off without severance."

Of course, setting aside money to pay severance was never part of the plan for most dot-coms. They weren't going to revolutionize the business world if they were worried about how to handle layoffs. "You came in here because you wanted to reach the moon, not for the downside insurance," explains former Petstore.com CEO Josh Newman, whose company went belly-up last June.

Still, some struggling dot-coms have made it a point of pride that they treat workers well - or at least say the right things. Bolt, a Web site for teens, laid off 35 employees in February, granting each of them two weeks of severance. "We wanted to do something for our employees," says Tracey Wilk, Bolt's director of human resources. At Ask Jeeves, a manager who was laid off in December received two months of pay. "I thought it was very generous," she says.

When dot-coms do give severance, they follow some familiar patterns. Almost 80 percent of the companies in the Unifi survey of large Internet firms had no formal, written policies; many simply made up the rules as they went along. As a result, employees at some companies have received vastly different severance payouts from one round of layoffs to the next, and remaining staffers had no assurance that they would get anything. Teligent, the telecommunications company, provided less severance with subsequent rounds of layoffs, to the point where some got zero, according to employees. By contrast, 64 percent of Fortune 500 companies have written policies, according to the Unifi study.

One way to ensure a decent severance is to negotiate it up front, before you accept the job. Typically this perk is reserved for senior executives. Seventy percent of the large dot-coms surveyed by Unifi had top executives under employment contracts that included severance; 81 percent of traditional corporations used such employment contracts for senior execs. "You have to be pretty strategic to an organization to command some guarantee upon exit of anything," says Dee DiPietro, founder and CEO of compensation consultancy Advanced-HR.

The typical executive severance spelled out in these contracts ranges from one to four years of base salary plus a bonus, according to executive recruiters. But there's no limit to the creativity - and generosity - bestowed on those in the corner offices. Take Webvan, the online grocer whose stock has plunged from a 52-week high of $9.38 to 13 cents. Former CEO George Shaheen left the firm in April - with a package giving him $375,000 a year for the rest of his life (and for the rest of his wife's life, if she survives him). Heidi Miller, the former CFO at Priceline, lasted only eight months, but that was long enough for the company to forgive her $3.3 million loan as part of a severance deal. Earlier this year, as NBC was poised to buy NBCi, a $2 million bonus was added to CEO Will Lansing's goodbye package, which included his $1.7 million annual salary and bonus and forgiveness of a $4 million housing loan. Still, that's chump change compared with the notorious case of former Mattel CEO Jill Barad, who walked away with $50 million last year after her company lost $171 million in a quarter.

These lavish payouts don't sit well with the rank and file. Former employees of eToys who say they were denied their accrued vacation pay were upset when they learned founder Toby Lenk was paid $500,000 in consulting fees as the company was shutting its doors. "It sent a message that if you weren't management, you didn't count," says Kathy Hernandez, who was employee No. 5 at eToys and got two months of severance.

Companies provide severance for a range of reasons. Firms genuinely want to help their former employees; they want to be known as benevolent so they can, perhaps in the future, recruit top talent; they want fired workers to have some reason to sign legal agreements designed to protect the company.

In fact, accepting a severance package often obligates an employee to sign noncompete clauses, confidentiality agreements and nondisparagement pledges. For years, these kinds of conditions have been written into executive contracts, but now the average worker is facing this sort of Hobson's choice: Sign it or lose it. In the Unifi survey, 19 of the 24 dot-coms surveyed said they required laid-off employees to waive their right to sue the company in order to collect severance.

"They said, 'Here's your amount. But to get it you have to sign this waiver and write off any future claims,'" said a worker laid off from business e-commerce firm Commerce One, who asked for anonymity. "For all I knew, they were blowing asbestos through the air ducts. If I were to die in 20 years, my wife couldn't sue them. But given that I was only there for a few months, I realized that was highly unlikely, and I signed it."

Some companies sweeten the pot to induce employees to sign away their rights. Cisco Systems' standard package for some of the 8,500 workers to be laid off this year was two months of pay. But sign an exit agreement with the standard restrictions and you get four additional months. Cisco says most of the workers signed and took the six months.

Amazon.com rolled out a similar plan but got nailed for it in the press. After the online store cut 1,300 positions in January, it asked workers to sign a nondisparagement agreement to receive a more lucrative payout. Amazon quickly backtracked, asking only salaried employees to comply.

A generous severance package can also help a company recruit in the future. That's why Cisco offered 12 weeks of severance pay to about 70 graduate students whose offers of employment were rescinded in April. "They're waiting for the next surge in business when they need to hire again," says John Challenger, CEO of Challenger, Gray and Christmas. "The way you handle a downsizing, the way you let someone go has a lasting impact on your reputation."

That's one lesson that dot-coms have been slow to learn. "I loved my job," says Mike Donatello, who worked for two years as the research director at Washingtonpost.Newsweek Interactive before being laid off in May. At 38, Donatello had 15 years of experience at traditional newspapers and advertising companies; he's still miffed that he got only four weeks of severance.

Now Donatello says he has a new concern when he goes on a job interview. "The first thing I want to ask is, 'What's the possibility of getting an upfront severance agreement?'" These days, that seems like an awfully good question.

Kathi Black and Maryann Jones Thompson contributed to this report.

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The Layoff Payoff