<PAGE>

                                                                    EXHIBIT 10.4

                                BERKSHIRE BANK
                     EMPLOYEE SEVERANCE COMPENSATION PLAN


                                 PLAN PURPOSE

     The purpose of the Berkshire Bank Employee Severance Compensation Plan is
to assure for Berkshire Bank  (the "Bank") the services of Employees of the Bank
in the event of a Change in Control (capitalized terms are defined in section
2.1) of ___________________ (the "Holding Company") or the Bank.  The benefits
contemplated by the Plan recognize the value to the Bank of the services and
contributions of the Employees of the Bank and the effect upon the Bank
resulting from the uncertainties of continued employment, reduced Employee
benefits, management changes and relocations that may arise in the event of a
Change in Control of the Bank or the Holding Company.  The Bank's and the
Holding Company's Boards of Directors believe that it is in the best interests
of the Bank and the Holding Company to provide long term and key Employees of
the Bank with such benefits in order to defray the costs and changes in Employee
status that could follow a Change in Control.  The Board of Directors believes
that the Plan will also aid the Bank in attracting and retaining highly
qualified individuals who are essential to its success and the Plan's assurance
of fair treatment of the Bank's Employees will reduce the distractions and other
adverse effects on Employees' performance in the event of a Change in Control.

                                   ARTICLE I
                             ESTABLISHMENT OF PLAN

     1.1  Establishment of Plan
          ---------------------

     As of the Effective Date of the Plan as defined herein, the Bank hereby
establishes an employee severance compensation plan to be known as "Berkshire
Bank Employee Severance Compensation Plan."  The purposes of the Plan are as set
forth above.

     1.2  Applicability of Plan
          ---------------------

     The benefits provided by this Plan shall be available to all Employees of
the Bank, who, at or after the Effective Date, meet the eligibility requirements
of Article III, except for those executive officers who have entered into, or
who enter into in the future, and continue to be subject to an employment or
change in control agreement with the Employer.

     1.3  Contractual Right to Benefits
          -----------------------------

     This Plan establishes and vests in each Participant a contractual right to
the benefits to which each Participant is entitled hereunder, enforceable by the
Participant against the Employer, Bank, or both.
<PAGE>

                                  ARTICLE II
                         DEFINITIONS AND CONSTRUCTION

     2.1  Definitions
          -----------

     Whenever used in the Plan, the following terms shall have the meanings set
forth below.

     (a)  "Annual Compensation" of a Participant means and includes all wages,
salary, bonus, and cash compensation, if any, paid (including accrued amounts)
by an Employer as consideration for the Participant's service during the 12
months ended the date as of which Annual Compensation is to be determined, which
are or would be includable in the gross income of the Participant receiving the
same for federal income tax purposes.

     (b)  "Bank" means Berkshire Bank or any successor as provided for in
Article VII hereof.

     (c)  "Change in Control" shall mean an event of a nature that: (i) would be
required to be reported in response to Item 1(a) of the current report on Form
8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 (the "Exchange Act"); or (ii) results in a
Change in Control of the Bank or the Holding Company within the meaning of the
Change in Bank Control Act and the Rules and Regulations promulgated by the
Federal Deposit Insurance Corporation ("FDIC") at 12 C.F.R. (S) 303.4(a) with
respect to the Bank and the Board of Governors of the Federal Reserve System
("FRB") at 12 C.F.R. (S) 225.41(b) with respect to the Holding Company, as in
effect on the date hereof; or (iii) results in a transaction requiring prior FRB
approval under the Bank Holding Company Act of 1956 and the regulations
promulgated thereunder by the FRB at 12 C.F.R. (S) 225.11, as in effect on the
date hereof except for the Holding Company's acquisition of the Bank; or (iv)
without limitation such a Change in Control shall be deemed to have occurred at
such time as (A) any "person" (as the term is used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of securities of the Bank
or the Holding Company representing 20% or more of the Bank's or the Holding
Company's outstanding securities except for any securities of the Bank purchased
by the Holding Company in connection with the conversion of the Bank to the
stock form and any securities purchased by any tax qualified employee benefit
plan of the Bank; or (B) individuals who constitute the Board of Directors on
the date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election was approved by a vote of at least
three-quarters of the directors comprising the Incumbent Board, or whose
nomination for election by the Holding Company's stockholders was approved by
the same Nominating Committee serving under an Incumbent Board, shall be, for
purposes of this clause (B), considered as though he were a member of the
Incumbent Board; or (C) a plan of reorganization, merger, consolidation, sale of
all or substantially all the assets of the Bank or the Holding Company or
similar transaction occurs in which the Bank or Holding Company is not the
resulting entity; or (D) solicitations of shareholders of the Holding Company,
by someone other than the current management of the Holding Company, seeking
stockholder approval of a plan or reorganization, merger of

                                       2
<PAGE>

consolidation of the Holding Company or Bank or similar transaction with one or
more corporations as a result of which the outstanding shares of the class of
securities then subject to the plan or transaction are exchanged for or
converted into cash or property or securities not issued by the Bank or the
Holding Company shall be distributed; or (E) a tender offer is made for 20% or
more of the voting securities of the Bank or the Holding Company.

     (d) "Conversion Date" means the date the Holding Company first issues
common stock pursuant to its initial public offering and Berkshire Bancorp's
mutual-to-stock conversion.

     (e) "Disability" means the permanent and total inability by reason of
mental or physical infirmity, or both, of an employee to perform the work
customarily assigned to him. Additionally, a medical doctor selected or approved
by the Board of Directors must advise the Board that it is either not possible
to determine if or when such Disability will terminate or that it appears
probable that such Disability will be permanent during the remainder of said
employees lifetime.

     (f) "Effective Date" means the date the Plan is approved by the Board of
Directors of the Bank, or such other date as the Board shall designate in its
resolution approving the Plan.

     (g) "Employee" means any Employee of the Bank or any subsidiary thereof who
has completed at least one year of service with the Bank, or any subsidiary
thereof, provided, however, that any Employee who is covered or hereinafter
becomes covered by an employment contract or change in control agreement with
the Employer shall not be considered to be an Employee for purposes of this
Plan.

     (h) "Expiration Date" means a date ten (10) years from the Effective Date
unless earlier terminated pursuant to Section 8.2 or extended pursuant to
Section 8.1.

     (i) "Employer" means the Bank or a subsidiary of the Bank or a parent of
the Bank which has adopted the Plan pursuant to Article VI hereof.

     (j) "Just Cause" shall mean termination because of Participant's personal
dishonesty, incompetence, willful misconduct, any breach of fiduciary duty
involving personal profit, intentional failure or unjustified neglect to perform
stated duties, conviction of or pleading guilty or nolo contendere to any crime
or offense punishable as a felony or to any crime or offense involving moral
turpitude, or violation of any final cease-and desist order.  In determining
incompetence, the acts or omissions shall be measured against standards
generally prevailing in the savings institutions industry.

     (k) "Leave of Absence" and "LOA" mean (i) the taking of an authorized or
approved leave of absence under the provisions of the federal Family and Medical
Leave Act ("FMLA"), (ii) any state law providing qualitatively similar benefits
as the FMLA, or (iii) a leave of absence authorized under the policies of the
Bank.  "Leave of Absence" and "LOA" are defined in this paragraph for the
exclusive purposes of this Plan.

                                       3
<PAGE>

     (l)  "Payment" means the payment of severance compensation as provided in
Article IV hereof.

     (m)  "Participant" means an Employee who meets the eligibility requirements
of Article III.

     (n)  "Plan" means Berkshire Bank Employee Severance Compensation Plan.

     (o)  "Year of Service" means each consecutive 12 month period, beginning
with an Employee's date of hire and running without a termination of employment
in which an Employee is credited with at least one hour of service in each of
the 12 calendar months in such period. The taking of an LOA shall not eliminate
a period of time from being a Year of Service if such period of time otherwise
qualifies as such.  Further if a particular 12 month period of time would not
otherwise qualify under the Plan as a Year of Service because one hour of
service is not credited during each month of such period due to the taking of a
LOA, then such period of time shall be deemed to be a Year of Service for all
other sections of this Plan.

     2.2  Applicable Law
          --------------

     The laws of the Commonwealth of Massachusetts shall be the controlling law
in all matters relating to the Plan to the extent not preempted by Federal law.

     2.3  Severability
          ------------

     If a provision of this Plan shall be held illegal or invalid, the
illegality or invalidity shall not affect the remaining parts of the Plan and
the Plan shall be construed and enforced as if the illegal or invalid provision
had not been included.

                                  ARTICLE III
                                  ELIGIBILITY

     3.1  Participation
          -------------

     For purposes of this Plan, the term "Participant" shall include:

     (a)  Without regard to Years of Service, all Employees who were employed by
the Employer as of the Conversion Date; and

     (b)  All Employees employed after the Conversion Date who have completed at
least One Year of Service with the Employer at the time of any termination
pursuant to Section 4.2 herein.

                                       4
<PAGE>

     Notwithstanding the foregoing, persons who have entered into and continue
to be covered by an employment contract or change in control agreement with the
Employer shall not be entitled to participate in this Plan.

     3.2  Duration of Participation
          -------------------------

     A Participant shall cease to be a Participant in the Plan when the
Participant ceases to be an Employee of an Employer, unless such Participant is
entitled to a Payment as provided in the Plan.  A Participant entitled to
receipt of a Payment shall remain a Participant in this Plan until the full
amount of such Payment has been paid to the Participant.

                                  ARTICLE IV
                                   PAYMENTS

     4.1  Right to Payment
          ----------------

     A Participant shall be entitled to receive from its respective Employer a
Payment in the amount provided in Section 4.3 if there has been a Change in
Control of the Bank or the Holding Company and if, within twenty-four (24)
months thereafter, the Participant's employment by an Employer shall terminate
for any reason specified in Section 4.2, whether the termination is voluntary or
involuntary.  A Participant shall not be entitled to a Payment if termination
occurs by reason of death, voluntary retirement, voluntary termination other
than for reasons specified in Section 4.2, Disability, or for Just Cause.

     4.2  Reasons for Termination
          -----------------------

     Following a Change in Control, a Participant shall be entitled to a Payment
if employment by an Employer is terminated, voluntarily or involuntarily, for
any one or more of the following reasons:

          (a) The Employer reduces the Participant's base salary or rate of
compensation as in effect immediately prior to the Change in Control.

          (b) The Employer materially changes Participant's function, duties or
responsibilities which would cause Participant's position to be one of lesser
responsibility, importance or scope with the Employer than immediately prior to
the change in control.

          (c) The Employer requires the Participant to change the location of
the Participant's job or office, so that such Participant will be based at a
location more than thirty (30) miles from the location of the Participant's job
or office immediately prior to the Change in Control provided that such new
location is not closer to Participant's home.

          (d) The Employer materially reduces the benefits and perquisites
available to the Participant immediately prior to the Change in Control,
provided, however, that a material

                                       5
<PAGE>

reduction in benefits and perquisites generally provided to all Employees of the
Bank on a nondiscriminatory basis would not trigger a payment pursuant to this
Plan.

          (e) A successor to the Bank fails or refuses to assume the Bank's
obligations under this Plan, as required by Article VII.

          (f) The Bank or any successor to the Bank breaches any other
provisions of this Plan.

          (g) The Employer terminates the employment of a Participant at or
after a Change in Control other than for Just Cause.

     4.3  Amount of Payment
          -----------------

          (a) Each Participant entitled to a Payment under this Plan shall
receive from the Association, a lump sum cash payment equal to 1/12th of his
Annual Compensation for each year of service up to a maximum of 199% of such
Annual Compensation.

          (b) Notwithstanding the provisions of paragraph (a) above, if a
Payment to a Participant who is a "Disqualified Individual" shall be in an
amount which includes an "Excess Parachute Payment," the Payment hereunder to
that Participant shall be reduced to the maximum amount which does not include
an Excess Parachute Payment.  The terms "Disqualified Individual" and "Excess
Parachute Payment" shall have the same meanings as under Section 280G of the
Internal Revenue Code of 1986, as amended, or any successor provision thereto.

     The Participant shall not be required to mitigate damages on the amount of
a Payment by seeking other employment or otherwise, nor shall the amount of such
Payment be reduced by any compensation earned by the Participant as a result of
employment after termination of employment hereunder.

     4.4  Time of Payment
          ---------------

     The Payment to which a Participant is entitled shall be paid to the
Participant by the Employer or the successor to the Employer, in cash and in
full, not later than twenty (20) business days after the termination of the
Participant's employment.  If any Participant should die after termination of
the employment but before all amounts have been paid, such unpaid amounts shall
be paid to the Participant's named beneficiary, if living, otherwise to the
personal representative on behalf of or for the benefit of the Participant's
estate.

                                   ARTICLE V
                    OTHER RIGHTS AND BENEFITS NOT AFFECTED

     5.1  Other Benefits
          --------------

     Neither the provisions of this Plan nor the Payment provided for hereunder
shall reduce any amounts otherwise payable, or in any way diminish the
Participant's rights as an Employee

                                       6
<PAGE>

of an Employer, whether existing now or hereafter, under any benefit, incentive,
retirement, stock option, stock bonus, stock ownership or any employment
agreement or other plan or arrangement.

     5.2  Employment Status
          -----------------

     This Plan does not constitute a contract of employment or impose on the
Participant or the Participant's Employer any obligation to retain the
Participant as an Employee, to change the status of the Participant's
employment, or to change the Employer's policies regarding termination of
employment.

                                  ARTICLE VI
                            PARTICIPATING EMPLOYERS

     6.1  Upon approval by the Board of Directors of the Bank, this Plan may be
adopted by any Subsidiary or Parent of the Bank.  Upon such adoption, the
Subsidiary or Parent shall become an Employer hereunder and the provisions of
the Plan shall be fully applicable to the Employees of that Subsidiary or
Parent.  The term "Subsidiary" means any corporation in which the Bank, directly
or indirectly, holds a majority of the voting power of its outstanding shares of
capital stock.  The term "Parent" means any corporation which holds a majority
of the voting power of the Bank's outstanding shares of capital stock.

                                  ARTICLE VII
                             SUCCESSOR TO THE BANK

     7.1  The Bank shall require any successor or assignee, whether direct or
indirect, by purchase, merger, consolidation or otherwise, to all or
substantially all the business or assets of the Bank, expressly and
unconditionally to assume and agree to perform the Bank's obligations under this
plan, in the same manner and to the same extent that the Bank would be required
to perform if no such succession or assignment had taken place.

                                 ARTICLE VIII
                      DURATION, AMENDMENT AND TERMINATION

     8.1  Duration
          --------

     If a Change in Control has not occurred, this Plan shall expire as of the
Expiration Date, unless sooner terminated as provided in Section 8.2, or unless
extended for an additional period or periods by resolution adopted by the Board
of Directors of the Bank.

     Notwithstanding the foregoing, if a Change in Control occurs this Plan
shall continue in full force and effect, and shall not terminate or expire until
such date as all Participants who become entitled to Payments hereunder shall
have received such Payments in full.

                                       7
<PAGE>

     8.2  Amendment and Termination
          -------------------------

     The Plan may be terminated or amended in any respect by resolution adopted
by a majority of the Board of Directors of the Bank, unless a Change in Control
has previously occurred.  If a Change in Control occurs, the Plan no longer
shall be subject to amendment, change, substitution, deletion, revocation or
termination in any respect whatsoever.

     8.3  Form of Amendment
          -----------------

     The form of any proper amendment or termination of the Plan shall be a
written instrument signed by a duly authorized officer or officers of the Bank,
certifying that the amendment or termination has been approved by the Board of
Directors.  A proper amendment of the Plan automatically shall effect a
corresponding amendment to each Participant's rights hereunder.  A proper
termination of the Plan automatically shall effect a termination of all
Participants' rights and benefits hereunder.

     8.4  No Attachment
          -------------

          (a) Except as required by law, no right to receive payments under this
Plan shall be subject to anticipation, commutation, alienation, sale,
assignment, encumbrance, charge, pledge, or hypothecation, or to execution,
attachment, levy, or similar process or assignment by operation of law, and any
attempt, voluntary or involuntary, to affect such action shall be null, void,
and of no effect.

          (b) This Plan shall be binding upon, and inure to the benefit of,
Employee and the Bank and their respective successors and assigns.

                                  ARTICLE IX
                            LEGAL FEES AND EXPENSES

     9.1  All reasonable legal fees and other expenses paid or incurred by a
party hereto pursuant to any dispute or question of interpretation relating to
this Plan shall be paid or reimbursed by the prevailing party in any legal
judgment, arbitration or settlement.

                                   ARTICLE X
                              REQUIRED PROVISIONS

     10.1 The Bank may terminate the Employee's employment at any time, but any
termination by the Bank, other than Termination for Cause, shall not prejudice
Employee's right to compensation or other benefits under this Agreement.
Employee shall not have the right to receive compensation or other benefits for
any period after termination for Just Cause as defined in Section 2.1
hereinabove.

     10.2 If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Bank's affairs by a notice served under
Section 8(e)(3) or 8(g)(1) of the

                                       8
<PAGE>

Federal Deposit Insurance Act, 12 U.S.C. (S)1818(e)(3) or (g)(1), the Bank's
obligations under this contract shall be suspended as of the date of service,
unless stayed by appropriate proceedings. If the charges in the notice are
dismissed, the Bank may in its discretion (i) pay the Employee all or part of
the compensation withheld while their contract obligations were suspended and
(ii) reinstate (in whole or in part) any of the obligations which were
suspended.

     10.3 If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order issued under
Section 8(e)(4) or 8(g)(1) of the Federal Deposit Insurance Act, 12 U.S.C.
(S)1818(e)(4) or (g)(1), all obligations of the Bank under this contract shall
terminate as of the effective date of the order, but vested rights of the
contracting parties shall not be affected.

     10.4 If the Bank is in default as defined in Section 3(x)(1) of the Federal
Deposit Insurance Act, 12 U.S.C. (S)1813(x)(1),  all obligations of the Bank
under this contract shall terminate as of the date of default, but this
paragraph shall not affect any vested rights of the contracting parties.

                                  ARTICLE XI
                          ADMINISTRATIVE  PROVISIONS

     11.1 Plan Administrator.  The administrator of the Plan shall be under the
          ------------------
supervision of the Board of Directors of the Bank or a Committee appointed by
the Board (the "Board").  It shall be a principal duty of the Board to see that
the Plan is carried out in accordance with its terms, for the exclusive benefit
of persons entitled to participate in the Plan without discrimination among
them.  The Board will have full power to administer the Plan in all of its
details subject, however, to the requirements of ERISA.  For this purpose, the
Board's powers will include, but will not be limited to, the following
authority, in addition to all other powers provided by this Plan:  (a) to make
and enforce such rules and regulations as it deems necessary or proper for the
efficient administration of the Plan;  (b) to interpret the Plan, its
interpretation thereof in good faith to be final and conclusive on all persons
claiming benefits under the Plan; (c) to decide all questions concerning the
Plan and the eligibility of any person to participate in the Plan;  (d) to
compute the amount of Payment that will be payable to any Participant or other
person in accordance with the provisions of the Plan, and to determine the
person or persons to whom such benefits will be paid;  (e) to authorize
Payments;  (f) to appoint such agents, counsel, accountants, consultants and
actuaries as may be required to assist in administering the Plan; and (g) to
allocate and delegate its responsibilities under the Plan and to designate other
persons to carry out any of its responsibilities under the Plan, any such
allocation, delegation or designation to be by written instrument and in
accordance with Section 405 of ERISA.

     11.2 Named fiduciary.  The Board will be a "named fiduciary" for purposes
          ---------------
of Section 402(a)(1) of ERISA with authority to control and manage the operation
and administration of the Plan, and will be responsible for complying with all
of the reporting and disclosure requirements of Part 1 of Subtitle B of Title I
of ERISA.

                                       9
<PAGE>

     11.3 Claims and review procedures.
          ----------------------------

          (a)  Claims procedure.  If any person believes he is being denied any
               ----------------
rights or benefits under the Plan, such person may file a claim in writing with
the Board.  If any such claim is wholly or partially denied, the Board will
notify such person of its decision in writing. Such notification will be written
in a manner calculated to be understood by such person and will contain  (i)
specific reasons for the denial,  (ii)  specific reference to pertinent Plan
provisions, (iii) a description of any additional material or information
necessary for such person to perfect such claim and an explanation of why such
material or information is necessary and  (iv) information as to the steps to be
taken if the person wishes to submit a request for review.  Such notification
will be given within 90 days after the claim is received by the Board (or within
180 days, if special circumstances require an extension of time for processing
the claim, and if written notice of such extension and circumstances is given to
such person within the initial 90 day period).  If such notification is not
given within such period, the claim will be considered denied as of the last day
of such period and such person may request a review of his claim.

          (b)  Review procedure.  Within 60 days after the date on which a
               ----------------
person receives a written notice of a denied claim (or, if applicable, within 60
days after the date on which such denial is considered to have occurred) such
person (or his duly authorized representative) may (i) file a written request
with the Board for a review of his denied claim and of pertinent documents and
(ii) submit written issues and comments to the Board.  The Board will notify
such person of its decision in writing.  Such notification will be written in a
manner calculated to be understood by such person and will contain specific
reasons for the decision as well as specific references to pertinent Plan
provisions.  The decision on review will be made within 60 days after the
request for review is received by the Board (or within 120 days, if special
circumstances require an extension of time for processing the requests such as
an election by the Board to hold a hearing, and if written notice of such
extension and circumstances is given to such person within the initial 60 day
period).  If the decision on review is not made within such period, the claim
will be considered denied.

     11.4 Nondiscriminatory exercise of authority.  Whenever, in the
          ---------------------------------------
administration of the Plan, any discretionary action by the Board is required,
the Board shall exercise its authority in a nondiscriminatory manner so that all
persons similarly situated will receive substantially the same treatment.

     11.5 Indemnification of Board.  The Bank will indemnify and defend to the
          ------------------------
fullest extent permitted by law any person serving on the Board or as a member
of a committee designated as Board (including any person who formerly served as
a Board member or as a member of such committee) against all liabilities,
damages, costs and expenses (including attorneys fees and amounts paid in
settlement of any claims approved by the Bank) occasioned by any act or omission
to act in connection with the Plan, if such act or omission is in good faith.

     11.6 "Plan Year"  means the period beginning on the Effective Date and
           ---------
ending on December 31, 1999 and the 12 consecutive-month period ending each year
thereafter.

                                       10
<PAGE>

     11.7 Benefits solely from general assets.  The benefits provided hereunder
          -----------------------------------
will be paid solely from the general assets of the Bank.  Nothing herein will be
construed to require the Bank or the Board to maintain any fund or segregate any
amount for the benefit of any Participant, and no Participant or other person
shall have any claim against, right to, or security or other interest in, any
fund, account or asset of the Bank from which any payment under the Plan may be
made.



        [The remainder of this page has been intentionally left blank]

                                       11
<PAGE>

Having been adopted by its Board of Directors, this Plan is executed by its duly
authorized officers this ___ day of _______________________,2000.


Attest:                                  BERKSHIRE BANK



_____________________                    By:  _________________________________
                                              For the Entire Board of Directors


Having been adopted by its Board of Directors, this Plan is executed by its duly
authorized officers this ___ day of ________________________, 2000.


Attest:                                  [HOLDING COMPANY]



________________________                 By:  _________________________________
                                              For the Entire Board of Directors

                                       12