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A More Profitable Way To Handle Severance Pay

Let's take a look at what has become in the last decade an all too shortsighted and by far too unimaginative business phenomenon. No, it's not bankruptcy - but you're close; severance packages.

Let’s take a look at what has become in the last decade an all too shortsighted and by far too unimaginative business phenomenon. No, it’s not bankruptcy – but you’re close; severance packages.

“Now, hold on just a union-busting minute!” you say. “Severance pay is the law, and a legitimate part of doing business!” And you’re right. It is. More about the law in a moment. The issue at hand is: could there be a more profitable option available to both the company and the severee, not to mention to the Canadian economy as a whole?

In short, it wasn’t lower revenues or higher interest rates that ultimately sent companies scrambling for court protection this last decade (though these items did play a role in forcing companies to downsize). Bankruptcies, in fact, were more often caused by the ridiculously high payouts – and the consequences of those payouts – which corporations were providing their terminated employees.

Let’s consider this.

What would stop that same downsizing company from locating a related business or small start-up in the field, one that required money and managerial expertise, and introducing it to their own, would-be severee? Instead of paying out a lump sum severance payment, the downsizing company would invest the funds in a business opportunity to be owned and managed by the severed employee or a group of former employees.

Why not form a joint venture with the severee for ownership of that company: give the severee a 51% holding, keep 49%, offer a little support, and watch the investment grow?

If they chose to – and if the new company was at a sufficiently developed stage – they could even take the relationship further and contract the business for parts, or service, or expertise, or whatever. In short, they could help that company grow and become profitable, and in so doing increase the value of their own 49% stake. Space-sharing arrangements, and a myriad other possibilities exist for the parent company to get something back for their initial investment.

Yet there’s more. Over time, as the new executive builds his little wonder enterprise and its value increases, he has the option of buying out the parent company’s 49% stake.

He now owns his own profitable business; and for the proud parent company, that might have flushed millions of dollars down the drain in severance settlements (or more – don’t forget, several severees might end up running one of these new start-up operations), it now has the potential to recoup its investment when it sells off its stake.

Everyone wins, an entrepreneur is born and the economy grows.

It requires a little imagination, no doubt, and effort. But most CFO’s and corporate development people know exactly where these “high value-added” businesses and start-ups are in their fields. And if they don’t, there are third-party brokers out there to give them a hand. And though these same businesses might be available for purchase by the severee on his departure from the company, it becomes a much less difficult task when there’s a sponsor there to help make things happen.

For it to work, though, parent companies have to be committed to the procedure. They have to properly assess the entrepreneurial capacity of the employee and make realistic assessments of the companies they intend to engage in these ventures. And Lord knows, not all of these projects are going to succeed. That’s the nature of the game. But the rewards will certainly have been better than just throwing money at the severee on dismissal. The task is to become builders of new enterprises and new wealth, not breakers, and that requires imagination. There is no greater reward than owning and managing a successful enterprise. As for the law? Current Ontario labour law entitles a severing or retiring employee to a minimum of one week’s pay time’s number of years served. It seems that a lot of exceptions and precedents have become policy setting – to the detriment of too many companies, and the Canadian economy.


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