If someone were to tell me, you've got 12 weeks left on your job. And then adds, and you can leave early when you find work. I'm probably not going to be the most motivated/productive employee. In fact, I might cause more harm than good.

It's better to just rip that bandaid off and let people move on with their lives. 12 weeks severance is (hopefully) enough time that the former employee can find new work, and also that the company can start adjusting to the down sizing.

A non-productive worker is probably worse than no worker at all.