Design Your Own Severance Package: Everything Is Negotiable
Last updated: 2021-06-02 (originally published on 2019-07-10) — by Will Elton
Leaving your job with a good severance package will give you a financial buffer when you’re struggling to make ends meet. Being laid off ranks 8th in life’s top 10 most stressful events according to the Holmes-Rahe Life Stress Investory. Yet in this unpredictable and fast-moving time, no one is free from the anxiety of losing their job. When you see colleagues packing away their belongings into the ubiquitous brown cardboard box, you can’t help but worry that you are next. Your fate is in the hands of the bosses above, but that doesn’t mean you can’t do anything to mitigate your losses.
You might think you are in no position to bargain with your employer when your service is no longer wanted. But that’s not true. Your employer often hopes to get something in exchange for granting you a satisfactory severance package. By paying you a fair sum of money for your time at the company, your employer can end your contract on good terms, free of personal grudges. This can save the company from potential lawsuits from ex-employees and establish a reputation for fairness. If you play your cards right, you may just have the leverage to negotiate a fair package for your hard years of work.
Items in your Severance Package
At this point, some may be wondering what exactly a severance package is. This is the money or benefits that an employee gets when he is terminated or forced to retire. So what does a good severance package look like?
In Hong Kong, employees who are employed under a “continuous contract” for more than two years and are dismissed by reason of redundancy, are entitled to statutory severance payments. A continuous contract is automatically deemed if the employee has worked for the same employer for at least 18 hours in each of the past four weeks before getting laid off. Capped at HK$390,000, the general calculation for a redundancy payment is as follows:
⅔ of either the last full months’ wage
⅔ of the average wages in the last 12 months
HK$22,500 (whichever is lowest)
Years of service (pro rata for any incomplete year)
This is the standard amount you will get for a severance payment, but bargaining for more isn’t going to hurt if you stand on reasonably good grounds.
Start with taking a look at how much other employees in the same position were paid in the past.
In addition, you should negotiate clear terms with your employer regarding the payment of the severance. For example, if the severance is to be paid continuously for a period of time, the terms should indicate whether reemployment, disability or death would cease such payments.
Beyond the Paycheck
Other than severance payments, other possible items under a severance package are generally not regulated by the law, at least not in Hong Kong.
However, it is up to employees and employers to negotiate what they wish to include. A severance package can cover items beyond your salary, like stock options, health insurance, outplacement assistance, and continued funding for further education, to name just a few. Taking the arrangement of stock options as an example, an employee may request for a “cashless exercise” of his/her vested stock options, which means that he need not pay anything out of his own pockets to exercise the option. Alternatively, he/she can bargain for an extension of the authorised period to exercise those stock options. Attempts to bargain for these benefits can be futile, but it never hurts to try.
Tips on Negotiation
Negotiating a favourable severance package requires skill and tactics, and going in emotional is probably not going to get you anywhere.
1.Know your standing and make reasonable demands accordingly
Taking an inventory of your own strengths is a good start. What’s your historical worth to the company? How long have you stayed with your employer? Highlight your contributions and the reasons why you deserve a more generous severance package.
Once you know your worth, set a reasonable range in your mind before entering any negotiation. A big mistake is to throw a random number at your employer as you may low-ball yourself or deter your employer from any genuine discussion if you come out too aggressive and without any consideration for the dollar amount. Looking into the company’s financial soundness also helps. It’s frivolous to bargain for something extortionate if you know the company is cash-strapped.
2. Make the first offer or re-anchor
It may sound risky to make an offer without first knowing where your employer stands but the truth is that the first offer sets the stage. Parties will work around the first number that was put on the table, and as a result, the actual outcome tends to resemble the content of the first offer. Psychophysics describes this as the “anchoring bias”, which explains how individuals are prone to rely heavily on the first piece of information they see and then adjust their values to assimilate towards that piece of information. Putting this in context, if you set a particular standard at the start of the negotiation, chances are your employer will subconsciously use it as the “anchor” for subsequent discussions and you can be in control what that anchor will be.
So, making the first offer creates a bias favourable towards yourself, but what if your employer blurted out a number before you even opened your mouth? In this case, what you need to do is “re-anchor” the discussion. Let your employer know his offer is way off, and reset the standard at a level closer to your ideal number. Going back and forth with your employer increases the chances of achieving your ideal outcome.
3. Rank your demands and reject offers if necessary
It is important that you anticipate the possible scenarios, organise your thoughts, and rank the priority of your demands beforehand. Without formulating a clear picture in your head, you may be thrown off guard when your employer comes up with something you hadn’t considered. If you have a clear ranking order, you’ll also be able to balance the costs and benefits of accepting the terms.
What To Do If Your Employer Makes You A Bad Offer?
In any event, don’t turn any offer down immediately, because this is the best opportunity for you to make trade-offs or counter offers. If your employer insists on offering you an insultingly paltry sum, walk away and let some time pass. It’s wise to keep the space open and find another opportunity to negotiate instead of becoming hostile, which may ruin any chances for further negotiation.
Each negotiation is unique and will depend on the circumstances of your departure, the company’s culture, and the macroeconomy, all have bearing on the terms of your severance package.
The tips above form a general guide to advance your position. You can always consider appealing to your employers through other ways that are special to your situation. The key takeaway is be prepared and think through the details before entering into any form of negotiation.
This article does not constitute legal advice.
The opinions expressed in the column above represent the author’s own.