Why Do Companies Offer Severance Packages?

A question we get asked with some frequency is, why do companies pay severance if it isn’t mandatory in the U.S.?

Recent data from LHH’s 9th Severance & Separation Benefits Benchmarks Study reveals a significant trend: severance packages have become more generous across industries, with an overall 72% increase in the past four years. But what drives organizations to offer these benefits? Let's explore the strategic reasons behind this growing corporate practice.

6 Reasons Why Companies Offer Severance Benefits

In a survey of more than 700 organizations across the United States and Canada, HR leaders ranked the importance of severance packages.

• 52% said severance is important “to successfully transform our organization.”
• 50% said “because it’s our responsibility to take care of our workforce.”
• 49% feel it’s important “to help impacted employees achieve their desired career goals in the shortest amount of time.”
• 48% indicated severance’s importance is “to maintain a strong employer brand” and “to reduce risks, costs, e.g. unemployment insurance.
• 45% agreed it was important to “minimize litigation.”

Maintain A Strong Employer Brand

One of the primary motivations for offering severance packages is maintaining a strong employer brand. In an era where company reputations can be made or broken on social media and employer review sites, how organizations treat departing employees significantly impacts their ability to attract future talent. Companies understand that today's job candidates carefully evaluate potential employers' treatment of their workforce – including how they handle separations.

Related: Why Competitive Severance Pay is Critical to Employer Brands

Managing Workforce Anxiety

There's currently an unprecedented level of employment anxiety in the workforce. Companies recognize that providing robust severance packages helps alleviate these concerns for both current and prospective employees. When workers know there's a safety net in place, they're more likely to feel secure in their role and remain engaged in their work, even during periods of organizational change.

Successfully Transform the Organization

As businesses navigate digital transformation, market shifts, and evolving skill requirements, workforce restructuring has become increasingly common. Severance packages play a crucial role in facilitating these necessary organizational changes by:

• Providing a smooth transition process for affected employees
• Maintaining productivity during transformation periods
• Supporting the company's ability to adapt to market demands
• Demonstrating corporate responsibility during difficult transitions

Minimize Litigation and Costs

While not the primary driver, reducing litigation risk remains an important factor in severance policies. Companies typically tie severance benefits to the signing of release agreements, helping protect the organization from potential legal challenges while ensuring departing employees receive meaningful support.

Industry Competition and Market Standards

Competition for top talent remains high across industries, especially for workers with hard-to-find skills. Financial services, healthcare, and technology sectors have shown some of the most significant increases in severance benefits, with some seeing jumps of over 80% in recent years. Companies recognize that competitive severance packages are now an essential component of total compensation packages when attracting top talent.

Supporting Career Transitions

Modern severance packages often include more than just financial compensation. Many organizations now offer comprehensive outplacement services, helping former employees transition to new opportunities. This approach:

• Demonstrates genuine care for employees' long-term success
• Maintains positive relationships with alumni who might become future clients or partners
• Reinforces the company's reputation as a responsible employer

Conclusion

Though in the U.S., there is no requirement for companies to provide laid off employees with severance, in most cases, it makes good business sense. Offering severance helps maintain a strong employer brand, supports workforce transitions, and minimizes legal risks. These benefits make it a strategic investment that aligns with both corporate responsibility and business sustainability.

If you’re interested in learning more about how your severance policies compare to your peers, get in touch!