Why businesses should give severance

Posted in Businesson Jun 23, 2016

When a business has to let go of an employee, they often give a sum of money and assistance to the employee to help them while they find a new job.

While severance is nice, most businesses don’t exist to be nice, they exist to make money.  And business make money by retaining their most profitable employees.  So while it sounds backwards, offering severance is a retention policy.

The goal of severance is to make it good enough that employees know that they won’t financially suffer if the company lets them go.  Suppose a company offered a full year of severance (not widely done, but good enough for this example).  If I am enjoying my job, then I can focus on doing a good job knowing that I can postpone any job searches until I need to.

A company who doesn’t offer sufficient severance is not discouraging their employees from looking elsewhere.  Especially when business gets bad, employees actively consider the possibility of being left jobless and financially struggling.  Without a safety net, these employees will preemptively look for more security in changing jobs to a more secure company.

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