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Severance pay a misguided mess

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Large severance payments have made a few people relatively rich, including some in Minnesota, and many others very unhappy.

The latest was the $25 million severance reportedly paid out late in April to ousted Fox News TV megastar Bill O’Reilly following his dismissal due to mounting sexual harassment accusations against him and $13 million paid by Fox in settlements to some of the claimants.

A week earlier, Wells Fargo announced that it was clawing back some $75 million from two executives who departed in the wake of the false-account scandal that surfaced late last year, bank employees opening unauthorized accounts for customers and running up phony charges against them.

The take-back this spring was on top of another $60 million that was reclaimed earlier. The money, in the form of severance payments and stock options, was part of packages in excess of $200 million that the chieftains received upon their departure from Wells Fargo by former Chairman and CEO John Stumpf, a Minnesota native, and Carrie Tol­stedt, one of his top lieutenants.

The reclamation of the funds begs the question of why they were paid so much in the first place following their faulty oversight, or lack of oversight, of the fraudulent scheme.

No, all is not well, not just at Wells Fargo. The business community has seen these severance scams going on for a long time. While the high-echelon personnel get rich, the employees who work at lower levels end up with pink slips, reduction-in-force (RIF) layoffs, and other dispositions with very little recompense.

It has happened often here in Minnesota, which, coincidentally, can lay claim to being the home of modern-day severance arrangements.

Five years ago, after revelation of improprieties by its CEO 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 around the same time, awarded 43 of his top subordinates large severance packages totaling nearly $3 million.

Both of these episodes generated the wrath of others. After Best Buy was done with Dunn, his predecessor, Brad Anderson, questioned: “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 giveaways at the U were hardly academic. The University Board of Regents belatedly got around to adopting a policy — with the acquiescence of Bruininks’ successor, Eric Kaler — to proscribe those payments, which lowered morale at an institution that is having trouble keeping its chin up, along with diminishing the institution’s credibility when it pleads for more financial help.

Those payments are understandable from a business standard. They incentivize high-level individuals to join and stay with companies, showing that when the ax falls, they will be treated well financially.

The companies also can write the payments off on their taxes, although in many cases they ought, in all fairness, to be paying gift taxes on the giveaways.

Yet these big payouts persist despite a trend of retrenching severance payments for employees overall.

The practice of paying employees a sum of money as they departed a company, usually as part of a discharge or layoff, is traceable to the Pillsbury Co., which in the early 1980s devised an arrangement known as the Pillsbury Plan that provided for payments to departing employees of an amount of money linked to the length of their tenure with the company.

Other companies followed suit, offering at times two or three weeks of pay per year of service for exiting employees. Terms became less favorable in recent years. While there are no specific statistics, those experienced in dealing with severance and employee compensation have perceived a reduction in severance of about 50 percent or more over the past decade, with much of the decline occurring since the onset of the recession in 2007-08.

While the recipients of large severance packages are laughing all the way to the bank, when rank-and-file employees are let go, often for no fault of their own, their severance is minuscule or nonexistent and often cloaked in euphemism.

Albertsons, a grocery chain, explained its layoff in 2015 of some 2,500 employees at stores in Nevada and California as a means of “simplifying the organization and reducing expenses,” a rhetorical slight to the 13 percent of the workforce it displaced.

Some employees get no severance because they are let go for misconduct, their companies don’t feel they deserve it, or the companies can’t afford it. But these recent incidents of corporate largesse 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 is too often lacking.

This article was originally published in the Star Tribune.