Not every employee who loses their job does because they performed poorly. There are lots of situations (especially at startups that are evolving rapidly) where you might hire someone to do a job that is no longer necessary, or has been made obsolete as your operation evolves.

Also, paying severance isn't just about doing the right thing for the departing employee. It's also about ensuring that your other employees feel good about their own jobs and don't have to worry that one day, they might be left in the cold with no cushion to help cover the search for a job (which will likely take far longer than the severance covers.)