Why do companies offer severance pay? 2027 benchmarks

 

US companies offer severance to support departing employees, protect their employer brand, and reduce legal risk. Federal law doesn’t require it, yet 92% of organizations pay severance, according to LHH’s 2027 Severance and Separation Benefits Benchmark Study of 600 US leaders. About half of leaders rate organizational transformation, cost and legal risk, and employer brand as important reasons to invest in separation support.

Why pay severance if it isn’t required?

US federal law doesn’t require companies to pay severance, according to the US Department of Labor. Still, nearly every organization does.

Workforce reductions are sometimes the only way to protect or grow a business. With 69% of organizations expecting layoffs in the next 12 months, the way companies handle separations matters more than ever. Severance helps departing employees bridge the gap to their next role. It also protects the company’s reputation, its legal standing, and the trust of the people who stay.

LHH surveyed 600 US leaders for its tenth Severance and Separation Benefits Benchmark Study. Here’s what the data says about why companies offer severance today.

Key findings at a glance

• Severance is standard practice. According to LHH’s 2027 study, 92% of organizations pay severance, whether or not they have a formal policy.
• Packages are getting leaner. 38% of organizations made severance less generous in the last two years, up from 9% in 2024.
• Layoff expectations have nearly doubled. 69% of organizations expect layoffs in the next 12 months, up from 36% in 2024.
• Brand and satisfaction are the top success measures. Half of organizations measure transition programs by employee satisfaction (50%) and employer brand impact (50%).
• Support goes beyond pay. Organizations offer career coaching (45%), mental health counseling (44%), and financial counseling (44%) to departing employees.

What are the top reasons companies invest in separation support?

LHH asked leaders to rate the importance of each reason for offering outplacement, a core part of most separation packages. Share rating each reason as important (4 or 5 on a 5-point scale):

• To reduce workforce transition costs and legal risk: 51%
• To successfully transform the organization: 50%
• To maintain a strong employer brand: 49%
• To minimize litigation: 48%
• Because it’s our responsibility to take care of our workforce: 47%
• To help impacted employees reach their career goals in the shortest time: 47%

The reasons rank close together. Most organizations aren’t weighing one goal over the others. They see separation support as serving several business goals at once.

6 reasons companies offer severance

1. Transform the organization

Market shifts, new technology, and changing skill needs drive restructuring. In 2026, AI became the most commonly cited reason for announced US job cuts. 80% of CEOs expect layoffs in the next year.

Severance helps companies make those changes while treating people fairly. It also supports productivity among the employees who stay.

Organizations don’t treat layoffs as their only option. According to LHH’s 2027 study, 99% routinely consider alternatives before involuntary terminations:

• Retirement incentives: 42%
• Voluntary departure programs: 40%
• Temporary leave programs: 38%
• Redeployment: 38%
• Reduced work schedules: 37%
• Reskilling: 31%

2. Reduce transition costs and legal risk

Severance gives companies a clear, fair way to close out employment. Most organizations tie it to conditions that reduce legal risk:

• 64% require employees to sign a release, an agreement not to sue the organization, in exchange for severance.
• 60% offer more severance to employees who sign a release.
• 56% include confidentiality covenants.

To enforce those covenants, organizations most often use clawbacks of long-term incentives (51%), the cash value of benefits (48%), and cash payments (47%).

3. Protect the employer brand

How a company treats departing employees shapes how candidates, customers, and current employees see it. Former employees share their experiences in reviews and on social media.

According to LHH’s 2027 study, half of organizations measure the success of transition programs by employer brand impact (50%). The same share measures employee satisfaction (50%).

4. Take care of the workforce

Many organizations see severance as part of their responsibility to employees. Job loss affects finances, health, and well-being, and support increasingly reflects that.

Transition support organizations offer departing employees:

• Career coaching: 45%
• Mental health counseling: 44%
• Financial counseling: 44%
• Retirement planning: 44%
• EAP continuation: 30%

5. Help people land their next role faster

Severance buys time, and outplacement helps people use that time well. According to LHH’s 2027 study, 85% of organizations offer outplacement to exempt employees, up from 61% in 2024. 79% offer it to non-exempt employees, up from 58%.

Only 36% of organizations track re-employment outcomes. Companies that measure how fast people land new roles can show the full value of their separation programs.

6. Keep up with market standards

Severance is standard in every industry. At least 83% of organizations in each industry pay it, from telecom at the low end to financial services and computers and software at 96%.

Market standards are shifting, though. 38% of organizations made severance less generous in the last two years, while 56% made it more generous. Benchmarking helps companies stay competitive without overspending.

How does your severance compare? Use the LHH severance calculator to benchmark your policy against peers.

How do companies pay severance?

Among organizations that pay severance, the most common methods are:

• A combination of methods: 36%
• Salary continuance: 27%
• Working notice: 24%
• Lump sum: 14%

For details on amounts, read How much severance should companies pay? For details on who qualifies, read Who is eligible for severance pay?

How do you make severance work for your business?

A clear severance strategy protects your people and your business. Use these benchmarks to check yours:

• Know your goals. Decide which matters most to your organization, such as brand, legal risk, or transformation, and design your package around it.
• Set clear conditions. Decide whether you’ll require a release, offer more for signing one, or include covenants.
• Look past the paycheck. Career coaching, counseling, and outplacement shape how departing employees experience a transition.
• Measure results. Track employee satisfaction, employer brand, and re-employment to show what your program delivers.

Frequently asked questions

Are companies required to pay severance?
No. US federal law doesn’t require severance pay. Still, 92% of US organizations pay it, according to LHH’s 2027 Severance and Separation Benefits Benchmark Study.

Why do companies offer severance packages?
Companies offer severance to support departing employees, protect their employer brand, reduce legal risk, and manage restructuring. According to LHH’s 2027 study, about half of leaders rate each of these as important reasons to invest in separation support.

Do companies require a release in exchange for severance?
Most do. 64% of US organizations require employees to sign a release in exchange for severance, according to LHH’s 2027 study.

How do companies usually pay severance?
Among organizations that pay severance, 36% use a combination of methods, 27% use salary continuance, 24% use working notice, and 14% pay a lump sum.

What support do companies offer besides severance pay?
According to LHH’s 2027 study, organizations offer career coaching (45%), mental health counseling (44%), financial counseling (44%), and retirement planning (44%). Most also offer outplacement.

Benchmark your severance policy

See how your severance stacks up by industry, company size, organization type, region, and role. Try the LHH severance calculator