Business forum: Severance has rich, controversial history

  • Article by: MARSHALL H. TANICK
  • Updated: July 8, 2012 - 1:04 PM

Inequities in the granting of sendoff payments to departing employees separate the haves and have-nots.

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Brian Dunn, former president and chief executive officer of Best Buy Co.

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Large severance payments in recent months have made a few Minnesotans relatively rich, and many others very unhappy.

Controversy over severance payments has been highlighted by a couple of recent examples of largesse. After uncovering improprieties by its chief executive officer Brian Dunn, Best Buy gave him a $4.5 million severance and pushed him out the door. University of Minnesota President, Robert Bruininks, before leaving office a few months ago, awarded 43 of his top lieutenants large severance packages totaling about $2.8 million.

Both of these episodes generated wrath of others. Dunn's caused his predecessor, Brad Anderson, to exclaim: "Why is Brian Dunn getting a severance package?" But it was too late to do anything about it because it was a done deal.

The University Board of Regents belatedly adopted a policy (with the acquiescence of Bruininks' successor, Eric Kaler) to proscribe such giveaways, which had lowered morale at an institution that is having trouble keeping its chin up and diminished the institution's credibility when its pleads for more financial help.

These severance scenarios illustrate the inequities of such arrangements. In many cases, they perpetuate the disparities between the haves and the have-nots.

Severance has a long and notable history, dating to the Roman empire where victorious gladiators were allowed to shed their shields and swords and receive compensation from the emperor.

In modern days, severance has been a product of the last generation or so. Paying employees a sum of money upon their departure from the workforce, usually as part of a discharge or layoff, is traceable to the early 1980s when Twin Cities-based Pillsbury Co. devised a severance program.

Appropriately known as the "Pillsbury Plan," the arrangement provided for payments to departing employees of an amount linked to the length of their tenure with the company. A grid was developed that provided for payments to employees based largely on longevity.

The Pillsbury approach caught on, as many companies throughout the country came up with similar arrangements. Although the details differ, the basic concept was that severance would be paid in relationship to the amount of years an employee worked for the company.

The concept spread from large companies to more modern ones, and even the public sector. It remained a staple of the exit process for employees. But the concept underwent constrictions along with fortunes of the economy.

Over the years severances declined, and in some cases were even eliminated. In the halcyon days of the 1980s and even into the early 1990s, 3M provided severed employees with compensation equivalent to two to three weeks per year of service.

Since many of them worked there for most of their careers, employees could, upon exiting, receive a severance package in the range of two years of compensation. But that practice subsided in recent years, first being limited to one week per year of service and then capped at 26 weeks, regardless of longevity.

Other companies followed suit in adopting Pillsbury-type plans and then retrenching the payments because of declining economic conditions.

While there are no specific statistics, those experienced in dealing with severance and employee compensation have perceived a reduction of about 50 percent in severance with a significant drop since the onset of the recession in 2007-09.

Severance squeeze

The diminution of severance has impaired the standard of living of many displaced employees who have been terminated, laid off, or have resigned. The recipients also have been squeezed in other ways too.

About a decade ago, the Legislature changed the Minnesota unemployment compensation laws to allow for a deduction or set-off of severance-unemployment compensation benefits. Consequently, employees usually have to wait a longer time to get unemployment compensation benefits, until they use up their severance.

While these deprivations have saddened lower-wage earners, the recipients of large severance packages, like Best Buy's Dunn and University of Minnesota executives, are laughing all the way to the bank.

While the university employees have not been accused of any wrongdoing, Dunn's position may be different. His severance seems particularly awkward in light of the imbroglio swirling around him and the company.

Some employees get no severance because they are let go for misconduct, their companies don't feel they deserve it, or they can't afford it. But these recent incidents at Best Buy and the U reflect the hypocrisy of that mantra.

Those who oversee business operations, both in private and public sectors, need to be more vigilant in assuring that severance arrangements are imbued with the kind of equity that too often is lacking.

  • ABOUT THE AUTHOR

    Marshall H. Tanick is an attorney with the law firm Mansfield, Tanick & Cohen in Minneapolis and St. Paul. He represents employers and employees in a variety of workplace-related matters. His e-mail is mtanick@ mansfieldtanick.com.

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