Game Theory and Severance: Why You Should Always Negotiate

July 28th, 2022

Your career isn’t a game, especially if you face the unexpected, unwanted or unjustified end of your current tenure. But if your employer decides to show you the door and offers you a severance package, you’re playing a high-stakes game, whether you like it or not. As with all negotiations, hashing out a severance package involves strategy, moves and countermoves, calculating potential risks and rewards, and the desire to win.

But as the saying goes, “You can’t win if you don’t play.” 

Unfortunately, too many C-suite executives and other high-level employees take themselves out of severance negotiations by giving up. If a soon-to-be-former employer doesn’t offer a severance package, the employee may believe it’s game over and move on. If the employee receives an underwhelming severance proposal, he may not make a counteroffer, thinking he has no leverage or that pushing back will result in his losing the offer. 

In either case, failing to negotiate severance is a costly strategic blunder. To see why, apply “game theory” to severance negotiations. 

What Is ‘Game Theory’?

Game theory is a mathematical model of interactions between two rational decision-makers when they try to settle conflicts or initiate negotiations. Researchers developed it in the 1940s while trying to find solutions to zero-sum games in which only one of two participants would benefit. 

During negotiations, game theory takes many different forms and applies several models, depending on the individuals and circumstances involved. You may have heard of game theory concepts like the prisoner’s dilemma or chicken. The model most often applicable in severance negotiations is what game theory expert and author William Spaniel refers to as the “Ultimatum Game.”

The ‘Ultimatum Game’ and Severance Negotiations

Perhaps the biggest impediment that keeps otherwise business-savvy executives from engaging in severance negotiations is the belief that they have zero bargaining power. They might believe employers hold all the cards. As we previously discussed in detail, this is a costly fallacy. 

Employees are mistaken if they believe they have no leverage and that any offer from their employers is a take it or leave it proposition. As Spaniel notes, the ultimatum game shows “that a party with the exclusive right to make proposals has all of the bargaining power.”

But in severance negotiations, the employer does not have the exclusive right to make proposals. An initial offer isn’t an ultimatum. But if employees focus exclusively on their own pressures and priorities without considering their employers’ pressure points, it may seem like one. 

If your employer offers you a severance package, the business isn’t doing so out of charity or kindness. The organization wants something from you – a release of any claims you have, your agreement not to compete or your silence. That gives you leverage, which should give you the confidence to make a counteroffer if the initial offer isn’t adequate. According to Spaniel, even making a single counteroffer significantly increases an individual’s bargaining power. 

As a result, don’t presume you have no cards to play in the severance negotiation game. Don’t forfeit your opportunity to emerge with a better deal. And remember that your employer plays this game all the time; you don’t. That’s why you should work with an experienced employment lawyer who knows the tactics and strategies that can help you leave your job on a winning note. 

If you’d like to discuss a proposed severance package or need assistance with your negotiations, please contact Halunen Law or call us at (612) 605-4098 for a free consultation. 

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