At least 127,000 tech employees were laid off as part of mass job cuts in 2025. Whether due to ongoing economic uncertainty, advances in AI, or overambitious hiring, companies are being forced to make tough personnel decisions.
For compensation leaders, this presents a challenging task: designing fair and consistent severance packages. To help you navigate these decisions, we analyzed Pave survey data to explore the ins and outs of severance pay.
Keep reading to learn more.
What is severance pay?
Let’s start with the basics. Severance pay is granted to employees after termination of employment. It’s not a requirement under the Fair Labor Standards Act (FLSA), but it’s common for companies to offer severance packages when letting employees go.
Severance packages usually include a cash element, but sometimes companies also provide:
- Laptops or tech equipment
- The option to purchase vested stocks
- Vacation or bonus payouts
- Continuation of health insurance benefits
- Career counseling services
- Immigration support services
Providing these additional benefits helps companies part on good (or, better) terms with employees and helps preserve the company’s reputation, showing they care, even during difficult times.
In our survey of compensation leaders at 200+ leading companies, most reported offering severance packages for executives, but fewer offered severance to non-executive employees.
What is a typical severance package?
The size of a severance package depends on the way each company structures this type of pay. Executive severance packages are highly customised, but companies typically structure severance pay packages for non-executives in one of three ways:
- Tenure-based: Severance pay is calculated based on the number of years of service at the company. For example, if an employee has worked at a company for five years and the company offers two weeks of severance pay per year of service, they’d receive 10 weeks of severance pay. According to our data, 50% of companies cap the number of weeks of severance pay they offer. At public companies, the median cap is 26 weeks, and at private companies, it’s 12 weeks.
- Level-based: In this approach, severance pay is tied to the employee’s level or position at the company. Executives and senior leaders typically receive larger severance packages than individual contributors.
- Level- and tenure-based: This approach combines both the tenure and level methods. Using the data below, a P5 employee who’s been with the company for three years would receive 10 weeks of severance pay.
4 weeks baseline + (3 years of service * 2 weeks) = 10 weeks
According to Pave’s survey, the level- and tenure-based methodology is the most common severance pay structure at both public and private companies. Among companies who use this approach, here is how the formula breaks down across various employees:
It’s important to note that there can be other components of severance packages that aren’t included in this survey data. For example, when it comes to employee equity, some organizations may have policies around vesting schedules or exercise windows for employees who are laid off.
Severance packages differ in size and scope from company to company, but most competitive organizations offer cash in addition to other resources, like career support and extended health insurance coverage.
Is severance pay taxable?
The short answer is yes, but as with most tax matters, there are nuances.
Severance pay is subject to:
- Federal income tax withholding: When an employer uses the flat rate method, severance payments under $1M are subject to a 22% withholding rate, and that jumps to 37% for amounts over $1M. When companies use the aggregate method, severance pay is included in the employee’s last paycheck and is subject to the same payroll income tax brackets as other wages.
- Social security tax and medicare withholdings: Much like typical wages, severance packages are subject to social security (6.2%) and medicare (1.45%) withholding taxes.
- State income tax: State tax withholdings vary by state and individual situation. States without income tax, like Florida, Nevada, New Hampshire, Texas, and Washington, for example, don’t tax severance packages.
Tax implications vary based on your unique situation, so to get concrete answers, it’s best to consult a tax professional.
Data for Confident Decision Making
Severance pay is only one part of a comprehensive compensation strategy in 2026. Do you know what else your peers are planning and budgeting for in the year ahead?
Join Pave Data Lab to participate in the 2026 Budgeting and Trends survey to gain access to the complete results on key compensation considerations, including:
- 2026 compensation planning
- Merit cycle trends
- Pay transparency insights
- Equity guidelines
- Severance pay best practices
Get the data to help you make more informed compensation decisions. Join Pave Data Lab today.
The information provided is for informational purposes only. Pave does not provide tax, accounting, or legal advice.
Pave is a world-class team committed to unlocking a labor market built on trust. Our mission is to build confidence in every compensation decision.
