Is a buyout a good deal?

In economic tough times, more and more employers begin to offer buyout deals. If you come into work and find that your boss has posted a notice inviting interested employees to contact human resources, should you jump at the opportunity to cash out?

It is tempting. In the best possible case, you could walk away with several months worth of salary, go relax on a beach somewhere, then come back and immediately find a new job.

Unfortunately, taking a buyout is rarely that simple. The first question you should ask yourself is if your employer is in serious trouble. If you suspect your workplace is about to go belly-up, grabbing a buyout is nearly always a smart idea, since you could end up with nothing in a bankruptcy.

But that isn’t the case most of the time. And that’s why considering a buyout deal can be a lot like playing poker. In most non-unionized companies, employers announce that buyout deals are available—but they won’t spell out the details until you volunteer.

The problem is that volunteering for a buyout puts you in danger. If you express interest, and the deal’s not as lucrative as you expected, it’s tough to say no thanks without repercussions. “At that point you’ve basically told your boss you’re not committed to the company,” warns Fiorella Callocchia, a human resources consultant in Mississauga, Ont. When layoffs come—and they often follow a buyout offer—don’t be surprised if you’re the first pushed out the door.

To avoid nasty surprises, develop realistic expectations about how much money is likely to be on the table. A junior employee will probably be offered no more than two weeks’ severance pay for every year that he or she has been with the company. A mid-level manager might get two to three weeks for every year of seniority. Anyone with keys to the executive washroom will get around a month per year of service. No matter how many years you’ve put in, there will be limits. Lower level employees top out at around half a year’s pay; higher-ups at a year and a half.

You should limit your expectations about how much a buyout can change your life. “People think they’re going to go back to school and start a new career, or do something else amazing with the money,” says Stephen Viscusi, a New York-based human resources expert and author of Bulletproof Your Job. What tends to happen is they buy a new car or go on vacation, and the money runs out. “And then they can’t find another job.”

If you are still determined to take the money and run, here are a few tips that can help you on your way out the door:

Negotiate for more

Never accept the first buyout offer. Even a junior employee should demand more than two weeks’ severance per year of service, says Daniel Lublin, an employment lawyer in Toronto. He points out that companies are supposed to calculate severance based on more than just tenure. The older you are, the more you should receive. How long it will take you to find a new job also matters. A good starting point is to argue for a month’s pay per year of service.

Lump sum vs. salary continuance

Companies pay severance in one of two ways: in a lump sum, or broken up into continuing paycheques—a practice known as salary continuance. Given a choice, you should go for the lump sum if you think you can find another job fast. This ensures you keep every penny. Otherwise, employers will cut off your severance paycheques the minute you find work.

On the other hand, if you expect to be unemployed for a long time, go for salary continuance since you usually get an extra month or two of severance pay for picking this option. You should also choose salary continuance if your spouse doesn’t have a benefits program at work. Salary continuance usually means your benefits will continue for the duration of your paycheques.

Shelter your money

Lump sum severance works best when you can shelter it from the taxman. Depending on how much unused RRSP contribution room you have, ask your employer to dump all or part of your severance into your RRSP. If you don’t shelter your buyout, watch out. You could end up owing thousands to the government at tax time.

Of course, if you really want to avoid frittering away your severance money, you’ll get out there and find another job fast. Then you’ll really be jumping for joy