McNay on Money

When to take a Severance Package

In 1991, the IBM plant in Lexington, Ky. became Lexmark. IBM offered employee severance packages. People could take the package or take a chance that Lexmark would keep them on.

In the end there is once dance you'll do alone
 
-Jackson Browne 

In  1991,  the IBM plant in Lexington, Ky. became Lexmark.   IBM offered  employee  severance packages.   People could take the package or take a chance that Lexmark would keep them on.
 
Several IBM employees came to me for advice.   Some took the package and others did not.   After seeing that, I concluded that taking a  package is an individual decision. 
 
Many of the IBM employees  were engineers or had heavy statistical backgrounds.  They wanted an answer they could quantify.  They sought me to calculate the present value of their package.
 
After 30 seconds crunching the numbers, I asked the essential question: What are you doing to do with the rest of your life?
 
Some had well thought out plans.  They wanted to do charity work or start a second career.   Others didn't.  Working at IBM was not just a job, it was a lifestyle. They had never thought about life outside the corporation.
 
IBM  employees were  like a large family.  They had generous benefits and perks. Most socialized with other IBM employees.    Once someone started at IBM, they generally stayed for life.
 
The idea of leaving IBM was painful.
 
Companies offering severance packages are generally established companies who sold the concept of lifetime employment concept.   They are not places that fire employees without warning. 
 
I've found that people leaving  old line companies, even with a severance package,  were  more bitter than those where companies treated employees like  interchangeable parts.
 
 There are people who are married to their jobs.  They don't have  hobbies or outside interests.  Those are people who need to forget about a severance package and stay put.
 
An engineer who came to my office with  many boxes of data  (that he brought  on a dolly). He had spent hours trying to quantify his decision.    Before I went through his boxes, I asked  some  questions .
 
 Did he like his job?  Yes.  Did they want him at the new company?  Yes. Would he enjoy retirement? No.    Could he find a similar job?  Not in this part of the country.  Was moving an option?   No.
 
I told him to skip the number crunching. .  He needed to stay where he was.   He was stunned.  He kept wanting me to look at his boxes.
 
I wouldn't look at his data. I told him it was irrelevant. After a while, my words sunk in. 
 
He worked happily for another decade. 
 
Economic decisions shouldn't be ignored.    Some severance packages are lucrative and offered on a one time basis.    Financial considerations are one part of the package, not the whole package.
 
 The  health of the company and industry are important factors to consider.
 
I've seen people pass up a buyout and have their company go down a few years later.  People often think their own industry is healthier than it is.  It is good to get an objective opinion.
 
 There are economic factors I look for in a plan.   First is lifetime income.   It's easier to leave if your  lifetime income is secured.  A second factor is health insurance.  Larger companies have better benefits than what people can get on their own, even with the new health reform laws coming into play.
 
  I warn people getting lump sum packages  not to make any sudden or stupid financial decisions.  When severance plans are offered, I see hucksters come running, pitching everything from financial products to fast food franchises.  
 
The best advice is to take a deep breath.
 
Talk, really talk, with your family, your bosses, your co-workers   and the stakeholders in your decision.  Get some outside and impartial advice.  Make a decision based on information and logic, not on fear or emotion.
 
It's one of the most important decisions of your life.  Even with good information, it is a decision you will ultimately make alone.

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