COVID-19 Briefing: Should one take severance or furlough option?

More than 17 million Americans have filed for unemployment benefits in the past four weeks, the worst since the Great Depression. 

As folks reached out to me for job interviews and career coaching help, I had come across multiple cases that one needed to choose between two options: 1) taking a severance package now or 2) taking a furlough option to wait for up to 12 weeks.

I believe more companies will start layoffs because the economy is at free falling due to drastic decline in both demand and supply. Companies like Google and Facebook have huge amounts of cash on hand. But the digital advertising spend is being cut dramatically. For example, large Google advertisers such as AirBnB and Zillow have cut most of their marketing spend. They have practically shut down their marketing. Why did they do that? Because the demand for their products and services are not there. As a result, variable marketing spend is one of the very first things companies would cut to conserve cash. However, cutting marketing spends can only help to a certain extent. It is inevitable for employers to take a hard look at fixed expenses. For most tech companies, headcount expenses are the largest component of their fixed expense structure. So, I will not be surprised if Google and Facebook start laying off people in non technical areas. If Google and Facebook will have to lay off people, I think most other companies will not be immune to layoffs.

Now, there are some silver linings here. With the Federal stimulus package, the unemployment benefits are much improved in the next four months until the end of July. Generally, individuals are paid half of their weekly wages based on earnings from the previous four quarters. In January 2020, unemployed workers were paid an average of $385 per week, and most benefits lasted 26 weeks, according to the Center on Budget and Policy Priorities. Under the new stimulus package, workers will be paid an additional $600 per week on top of what they would normally receive for up to four months until July 31. Once that additional federal assistance is exhausted, they will continue to receive their normal benefit amount, administered by their state.

Furlough, a unique construct that is more commonly used in the government and manufacturing sectors, is starting to surface in the high tech sector. As I mentioned earlier, several coaching clients have reached out to me to seek guidance on whether they should take a severance now or take the furlough option. Let me walk you through an actual example. 

John is a director at an internet company in the travel space that had been hit hard. He currently makes $200K base with 15% performance based bonus plus Restricted Stock Units. His annual RSU grant is about $60K at time of grant ($15K/quarter). The stock price has taken 40% hit (i.e. the $15K/quarter is now worth $9K). On March 30 He was offered two options. Please note: This is a hypothetical example based on my experience. To protect confidentiality, I have modified the numbers. But both the structure of the two options and compensation numbers are very similar to reality. 

Option 1: Take a severance immediately. He will be eligible for unemployment on April 1.  He was offered 3 months of severance and fully COBRA coverage during the 3 months. Monthly COBRA coverage costs $1,500/month if John pays out of the packet. So, the three months of COBRA coverage has a value of $4,500.

Option 2: Take 12 weeks of furlough. During the 12 weeks period, John will not get paid. However, he is eligible for unemployment payment. His stocks will continue to vest during the 12 weeks. By the end of 12 weeks, the employer might bring him back if the business improves. If the employer cannot bring him back, then he will be laid off and receive the same severance package.

Key Considerations:

  1. A key question for this person to answer is “what is the probability for him to land an offer in the next two months.” If he ends up getting a job in the next two months, he will be likely to start his new job before July 1. He will be better off to take the severance package now. His total April – June take-home income will be $61,820 for severance option vs. $20,820 for the furlough option.
  2. If this person anticipates that it will take him until late June or later to land an offer, he will be slightly better off to take the furlough option from purely financial standpoint. However, the financial upside is limited in this example (e.g. by the end of September, this person’s total net income for severance option will be $64,340 vs. $73,340 for the furlough option assuming he won’t be able to return to the same employer. 
  3. I think the recovery will take some time. If one is put on furlough, he should assume he needs to look for a new job instead of returning back to his previous employer.
  4. Each employer’s financial and business situation is different. There is a risk that an employer might not be able to afford the severance package in 12 weeks when the furlough deadline hits. If you are very concerned about your employer’s runaway, you should consider taking the severance now because you’ll get a lump sum into your bank account.
  5. If you want to see the model I built for above analysis, please take a look at my shared Google Sheet

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