<PAGE>
 
                                                                   Exhibit 10.13

 
                                WEST ESSEX BANK
                     EMPLOYEE SEVERANCE COMPENSATION PLAN

                                 PLAN PURPOSE

        The purpose of the West Essex Bank Employee Severance Compensation Plan
is to assure for West Essex 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 West Essex Bancorp, Inc. (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 Employees of the Bank who have been with
the Bank for a minimum of one (1) year 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 the "West
Essex Bank Employee Severance Compensation Plan."

        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.
<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 West Essex 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
Home Owners' Loan Act of 1933, as amended, the Federal Deposit Insurance Act or
the Rules and Regulations promulgated by the Office of Thrift Supervision
("OTS") (or its predecessor agency) as in effect on the date hereof (provided
that in applying the definition of change in control as set forth under the
rules and regulations of the OTS, the Board shall substitute its judgment for
that of the OTS); or (iii) 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.

        (d)  "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 

                                       2
<PAGE>
 
appears probable that such Disability will be permanent during the remainder of
said employees lifetime.

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

        (f)  "Employee" means any Employee of the Bank or any subsidiary of the
Bank or any parent of the Bank 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.

        (g)  "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.

        (h)  "ERISA" means Employee Retirement Income Security Act of 1974, as
amended.

        (i)  "Expiration Date" means the date ten (10) years from the Effective
Date, unless the Plan is earlier terminated pursuant to Section 8.2 of the Plan
or extended pursuant to Section 8.1 of the Plan.

        (j)  "Termination for Cause" shall include termination because of a
Participant's personal dishonesty, incompetence, willful misconduct, breach of
fiduciary duty involving personal profit, intentional failure to perform stated
duties, willful violation of any law, rule or regulation (other than traffic
violations or similar offenses) or violation of any final cease-and desist
order, or material breach of any provision of the plan. 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.

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

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

        (n)  "Plan Year" means the period beginning on the Effective Date and
ending on December 31 and the 12 consecutive-month period ending each year
thereafter.

        (o)  "Plan" means this West Essex Bank Employee Severance Compensation
Plan.

                                       3
<PAGE>
 
        (p)  "Year of Service" means each consecutive 12 month period, beginning
with an Employee's date of hire 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 a 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 purposes of this Plan.

        2.2     Applicable Law
                --------------
        The laws of the State of New Jersey 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
                -------------

        The term Participant shall include all Employees of the Employer who
have completed at least one (1) Year of Service with the Employer at the time of
any termination pursuant to Section 4.2 of this Plan. 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.

                                       4
<PAGE>
 
                                  ARTICLE IV
                                   PAYMENTS

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

        A Participant shall be entitled to receive from his respective Employer
a Payment in the amount provided in Section 4.3 of the Plan if there has been a
Change in Control of the Bank or the Holding Company and if, within one (1) year
thereafter, the Participant's employment by an Employer shall terminate for any
reason specified in Section 4.2 of the Plan, whether the termination of
employment 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 of the
Plan, Disability, or as a result of Termination for 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 the Participant's function,
duties or responsibilities which would cause the 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 twenty-five (25) 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 the 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 reduction in benefits and perquisites
generally provided to all Employees of the Employer 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
Employer'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 Termination for Cause.

                                       5
<PAGE>
 
        4.3     Amount of Payment
                -----------------

        (a)      Each Participant entitled to a Payment under this Plan shall
receive from the Bank, a lump sum cash payment equal to one-twelfth of his
Annual Compensation for each Year of Service up to a maximum of 199% of 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 the 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 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.

                                       6
<PAGE>
 
                                  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 Employer 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 Employer, expressly and
unconditionally to assume and agree to perform the Employer's obligations under
this plan, in the same manner and to the same extent that the Employer 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 of the
Plan, 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.

        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.

                                       7
<PAGE>
 
        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 Employer may terminate an Employee's employment at any time,
but any termination by the Employer, other than Termination for Cause, shall not
prejudice the Employee's right to compensation or other benefits under this
Plan. Employee shall not have the right to receive compensation or other
benefits for any period after Termination for Cause as defined hereunder.

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

        10.5    All obligations under this Plan shall be terminated, except to
the extent determined that continuation of the Plan is necessary for the

                                       8
<PAGE>
 
continued operation of the association: (i) by the Director or his or her
designee, at the time the Federal Deposit Insurance Corporation or the
Resolution Trust Corporation enters into an agreement to provide assistance to
or on behalf of the association under the authority contained in Section 13(c)
of the Federal Deposit Insurance Act; or (ii) by the Director or his or her
designee at the time the Director or his or her designee approves a supervisory
merger to resolve problems related to the operations of the association or when
the association is determined by the Director to be in an unsafe or unsound
condition. Any rights of the Participants that have already vested, however,
shall not be affected by such action.

        10.6    Any payments made to a Participant pursuant to this Plan, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
Section 1828(k) and 12 C.F.R. 545.121 and any regulations promulgated 
thereunder.

                                  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 of Directors of the Bank (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 if
the Plan is subject to such requirements. 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 if
applicable.

        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, if any, of the reporting and disclosure requirements of Part 1 of
Subtitle B of Title I of ERISA.

        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 

                                       9
<PAGE>
 
(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    Benefits solely from general assets. The benefits provided
                -----------------------------------
hereunder will be paid solely from the general assets of the Employer. Nothing
herein will be construed to require the Employer 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 Employer from which any
payment under the Plan may be made.

                                      10
<PAGE>
 
Having been adopted by its Board of Directors on June 8, 1998, this Plan is
executed by its duly authorized officers this 8th day of February, 1999.

<TABLE> 
<CAPTION> 
ATTEST                                          WEST ESSEX BANK
<S>                                     <C> 


/s/ Dennis A. Petrello                  By: /s/ Leopold W. Montanaro 
--------------------------------------     ------------------------------------
                                           Leopold W. Montanaro
                                           For the Entire Board of Directors

</TABLE> 
                                      11