Incident severity levels are crucial for measuring the impact of an incident and facilitating communication and categorization within an organization. When designing these levels, it is essential to have a consistent set across the entire organization, provide clear guidance on how to set them, and choose the right number of levels (typically 3-5). The recommended severity levels are Low, Medium, High, and Critical, with human words being preferred over code words for clarity. These levels should be customized according to an organization's specific needs and business impact.