Severance packages take a dive

When it comes to severance packages, it pays to be laid off early in the retrenchment cycle.

It's natural to assume that those who are fired early get the worst deal - after all, they've been out of work longest. But when it comes to severance packages, on average, those who were the first victims of the subprime-sparked crunch got better deals.

At Goldman Sachs, for example, those who were retrenched in the summer got statutory severance plus a pro rata bonus for the months they had worked, based on 2007 levels of incentive compensation. In the third quarter, those who were laid off at Merrill Lynch and UBS also got severance pay plus a payout to compensate them for the fact that they would not be on the payroll at bonus distribution time. But by then, the percentage of last year's bonus had dropped to around 25%, pro-rated.

Things went downhill quickly thereafter for bankers in the firing line. In the large round of layoffs at Citi towards the end of the year, different parts of the bank got different packages, with the statutory severance the only thing consistent between divisions. Some parts got a one-time payout of one month's pay for every year worked, while others received only 20 days for every year worked. The payout was generally capped at one year's salary - so if you had more than 12 years' service in the former instance, you still got only 12 months' salary. No-one got a payout to compensate them for the bonus they would forego for the year.

Deutsche Bank was a little more generous and in addition to one month for every year worked, employees who were let go in December got 10% of the 2007 bonus. This all seems set to change with lay-offs still to come. Cash bonuses for 2008 at firms such as UBS were capped, while others, including the Royal Bank of Scotland, paid no cash bonus for 2008 performance. At Goldman Sachs and other US investment banks there is a move to pay as much incentive compensation for 2008 as possible in stock, both to bind employees to the firm and to reduce cash outflow.

Employees who are laid off this year will probably just get the statutory minimum due to them, based on the jurisdiction in which they are employed.

This article is part of the FinanceAsia March cover story "Out of Pocket", which takes an in-depth look at compensation trends across the banking industry.

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