Good Buys

Employee buyouts can help employers avoid layoffs and save money, but how they're presented, carried out and communicated is crucial.

Wednesday, June 2, 2010
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When Jay Leno chose to return to The Tonight Show earlier this year, NBC offered his successor, Conan O'Brien, a $45-million buyout package to leave without a messy fight.

O'Brien may have been blindsided, but he didn't have much choice. He went voluntarily, and even agreed not to slam Leno or the network -- offering some proof to the argument that you can get potentially resistant employees to leave if you sweeten the deal enough.

Unfortunately, it's not that simple for an employer looking to cut hundreds, or even thousands, of workers as painlessly as possible. It's one thing to write a juicy multimillion-dollar check for a superstar or top executive. It's another to convince rank-and-file workers to voluntarily leave a job, with benefits, for the uncertainty of unemployment or retirement in a miserable economy.

Yet more and more companies are doing just that. Every day, there are news reports that another automaker or university, newspaper or governmental body has offered a voluntary buyout to hundreds of workers to pre-empt a potential layoff.

Some succeed; others have to lay people off anyway. There is no magic formula, or guarantee, for success. The U.S. Postal Service, for example, exceeded its own expectations when 20,086 employees took a voluntary buyout this fall, while AOL fell short when only 1,100 out of 2,500 took its global-wide buyout; AOL ended up having to lay off another 1,400 workers in January.

Though there is no promised happy ending, there are four steps every organization -- and its HR department -- can take to maximize the success of a voluntary buyout: (1) Know your long-term goal, (2) target the right workers to let go, (3) build an appealing "carrot-and-stick" offer and (4) communicate clearly to workers and the public. Follow these steps, experts agree, and your company can avoid a layoff while preserving the corporate brand, avoiding lawsuits (see sidebar) and keeping remaining workers happy and secure.

To paraphrase Leo Tolstoy: Happy organizations may be alike, but every unhappy organization is unhappy in its own way.

When a troubled business decides to offer voluntary buyouts to avoid layoffs, it has to assess its unique situation and its future workforce needs: How many total workers need to go? Does the company want to cut certain stores or plants or skills?

The USPS, for example, needed to reduce mail sorters while keeping home delivery intact. Which competencies and individuals do you want to spare -- or get rid of? For example, school districts "notoriously" encourage older teachers to retire and replace them with teachers at half the salary, says Steven Gross, a senior partner with Mercer Human Resource Consulting in Philadelphia.

Peter Cappelli, George W. Taylor Professor of Management and director of the Center for Human Resources at the Wharton School of the University of Pennsylvania, urges HR leaders to "think carefully to structure [buyouts] to get the right number. You have to worry ... which is worse, too many [taking the buyout] or not enough?" he says. "Once you answer that question, you can forecast the generosity of the plan to at least minimize the risks."

Customizing the Cuts

Sometimes the answer is to just cut big numbers. The auto companies offered numerous across-the-board buyouts to drastically reduce their workforces. But if a business is just closing facilities or departments, it has to weigh the number of workers with transferable skills. For example, newspapers may keep those writers it can plug into other beats. Some companies may outsource certain functions, such as IT, and then move employees who have taken the buyout over to the outsource provider, a process called "rebadging."

And no, there is nothing illegal about "cherry picking" individual employees for a buyout based on their skills and even low performance -- as long as the buyout is unquestionably voluntary. But companies have to avoid even the whiff of discrimination, especially when older workers are being offered these packages.

"Certainly, the broader you can make the selection pool," the more you avoid being accused of discriminating, says Joshua Zuckerberg, a labor and employment attorney with Pryor Cashman in New York. "Often, you're trying to get rid of -- to state it bluntly -- more expensive employees and, often, the more expensive are older. ... Even if you do target older employees, it's not per se unlawful, but make sure it's voluntary."

A broad-based voluntary buyout may be advisable, but it has one big drawback: The best and brightest are the most likely to leave because they can land another job. Fortunately, experts say, there's nothing wrong with taking certain employees aside and telling them it's worth their while to stay.

Older workers are the logical target for any buyout for two reasons: First, they are more likely to accept because they are closer to retirement. Second, as mentioned above, older workers tend to have higher salaries, so there are more savings: One retired worker can be replaced by two newcomers.

Employers have two choices when offering buyouts to older workers: They can offer the same package as that offered younger workers or sweeten the deal with an "early retirement package," which bridges the gap to retirement age so the worker qualifies now for a pension.

Early retirement packages are less common nowadays because they are generally funded by a defined-benefit pension plan, and most employers have replaced defined-benefit plans with defined-contribution plans. What's more, today's pension plans aren't as well funded as they used to be.

"The reason more companies don't do [early retirement] is that most companies don't have the surplus. This was more common four or so years ago, when plans had a surplus," Gross says.

The government of Pasco County, Fla., was up-front about the motives behind its Voluntary Separation Incentive Program last fall. Pasco had to reduce a $36 million deficit in its 2010 budget. Its strategy was to buy out the highest-paid workers so they could be replaced by lower-salaried workers.

Because the highest-paid workers tend to be the older, Pasco offered the VSIP to workers 55 years and older with six or more years of experience as well as workers with 22 years of full-time service. Four hundred workers were eligible for the buyout, most of them hourly, non-union workers earning $30,000 to $40,000. Thirty-five applied; 23 were accepted.

All 400 workers were offered either a lump sum of $5,000 or three years of medical coverage, with the county covering the employee share. The package was not an early retirement package. In fact, the county was clear that an older worker could take the buyout without retiring under the Florida Retirement System Pension plan.

"The county administration evaluated each one. ... We looked at their salary and compared it to the cost of hiring a new [person] at [the lowest range]. If we were saving $10,000 or more, it was approved," says Personnel Director Barbara DeSimone. "If they wanted to voluntarily leave [by taking the buyout] and we hired someone at a lower salary, it was win-win."

The USPS has always relied on retirement and attrition to trim its ranks. Last year, it faced potential layoffs to address a predicted $7 billion net loss.

The organization responded to the challenge by offering a broad-based voluntary buyout to 300,000 workers in retail sales and sorting; (mail deliverers were immune because the number of addresses is still growing by 1.5 million a year). Everyone, whether near retirement or not, was offered a lump sum of $15,000, distributed in two payments. But the USPS knew its ace in the hole was the large number of workers close to retirement age.

The program, which ran from August to December 2009, was more successful than USPS officials had anticipated. A total of 20,876 took the buyouts, avoiding layoffs and saving the agency $394 million. Of that number, 4,465 of the 15,329 eligible for retirement took the voluntary buyout.

"I thought it ran very well. ... I was surprised we exceeded expectations," says Anthony Vegliante, the USPS's executive vice president and chief human resource officer. "It's easy for us to attract people [into a buyout] because a lot are looking to retire" and the USPS has a generous federal-employee retirement program "versus other companies that don't have [such programs]," he says.

Designing the Carrot

It's harder to convince younger workers, who are not approaching retirement, to quit and take their chances in a depressed job market. In that case, the incentive has to be sweet enough to overcome resistance and legitimate fears.

The challenge is to design an appealing "carrot." The two most common packages for workers not eligible for early retirement are (l) a lump sum of cash and (2) a financial incentive based on years of services. A common formula is one to two weeks' severance for each year of service, with a minimum of four weeks and maximum of 26.

Not every industry can match Ford Motor Co.'s offer of a $25,000 new-car voucher. But the average company may sweeten its package in other ways: with continued insurance coverage, educational vouchers or outplacement services, which range from seminars and resume writing for the rank-and-file to personal counseling for executives.

"They say cash is king," says attorney Paul Hamburger, head of the Washington practice of Proskauer. "If you can provide additional cash or outplacement to encourage people to leave, it's always a good thing."

In Pasco County, insurance was the key to success. Workers were offered $5,000 in cash or three years of fully paid medical coverage. Only three of the 23 who took the package opted for the cash.

"Insurance is a big issue for a lot of people, especially if they're within two to three years of [receiving] Medicare," says DeSimone. "Some people were doing the dance of joy when they were approved."

Over the last four to five years, every Ford employee has had the chance to take one of 10 voluntary packages. In its last buyout in December, the company narrowed the options to its two most effective plans. One plan offered workers with at least one year of service a pretax lump sum of $50,000, the choice of a $25,000 pretax new vehicle or $20,000 in cash, and basic health care coverage for six months. The second, an early retirement package, offered $40,000 for skilled trade workers and $20,000 for non-skilled, plus a $25,000 new vehicle or a lump sum of $20,000.

"The way we've offered [buyouts] has changed. ... It has to do a lot with the dramatic reductions we've gone through," says Ford spokesperson Marcey Evans. "We've now gotten to the point that to offer that number of choices of programs doesn't make sense. ... We did tweak it on the basis of feedback we got from workers," she said.

For example, Ford has offered three generous education packages in the past, including one package that gave a worker 50 percent of his or her annual salary for four years to attend college or vocational school full time, plus tuition reimbursement of up to $15,000 a year. But the packages were dropped by the last buyout because workers weren't interested in degree programs.

"Employees were offered the educational program again and again, and didn't take it," Evans says.

Facing a severe cutback in its $200 million state allocation, the University of Illinois at Urbana-Champaign decided to offer its first buyout this year, after considering tuition hikes, furloughs and layoffs.

The university designed a voluntary buyout package with a pretax lump-sum payment of 50 percent of annual salary, to a maximum of $75,000. The same lump sum package was offered to civil service and academic professional employees with four years of service, and to faculty members eligible for early retirement.

The buyout started in February and ran through April; within two weeks, more than 350 employees had applied, including 50 faculty members.

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"At this moment, I'd say the number of people is exactly as many as we'd hoped for. It's going to be a balancing game," says Elyne Cole, associate provost for human resources. The retiring faculty have to leave no later than August 2011, which allows the university to plan ahead. "In exchange for that decision, no one gets targeted. ... These are people who are probably thinking of retiring anyhow. It's up to them."

Showing the Stick

Sometimes, even the most generous package can't offset the fear of being unemployed. Employees have to be convinced that the stick -- inevitable layoffs -- is hanging over their heads or they may opt to stay and take their chances.

"[The buyout] has to be sweet enough and helpful enough to the individuals to help them bridge to their next employment," Gross says. "The only reason I'd take [a buyout] is if I felt my job was in jeopardy and this is sweeter than I'd get later, so you're doing a risk/benefit tradeoff."

That's especially true in Detroit, where many employees of the major carmakers turned down buyout after buyout rather than risk being out of work in a one-industry town.

The General Motors Co., which is working its way out of bankruptcy, went through three rounds of voluntary buyouts for salaried employees and four rounds for hourly workers in 2008 and 2009. Hourly workers got a vehicle voucher plus cash; salaried workers got two weeks' pay and benefits for each year of employment.

It's hard to predict who will take a buyout, says GM spokesperson Tom Wilkinson. "The thing that had a bigger impact in a lot of cases was family situations. ... A lot of the choices were not because of the plan [itself]. There might have been some employees who just wanted to hold on another year or so while they looked to relocate or go to another industry."

The stick -- the impending threat of layoffs -- is still a strong motivator, says Thomas Callahan, associate professor of management at the University of Michigan-Dearborn. In 2005, the university was hired by Ford and the United Auto Workers to analyze why buyout packages offered at two plants in New Jersey and Missouri had not attracted more takers.

Researchers compared the 282 former employees who took a buyout with the 140 who rejected it. The package included three early retirement plans and a lump-sum severance of $100,000. The study found that two groups were most likely to take a buyout: workers confident they could find another job and lower-tenured workers who figured they wouldn't get a better deal.

Above all, the study concluded that using the stick of potential layoffs was highly effective -- if you mean it. "You need to make very clear this is a final offer, absolutely. That was a very strong predictor of who would take the severance pledge," says Callahan, administrator of the study.

Keep Communicating

Once the carrot and stick are determined, the real work begins -- communicating the purpose and details of the buyout program to the entire workforce. This process is critical to the smooth operation of the buyout, and the post-buyout. Employees want to hear from their corporate leaders; they want to know the corporate rationale and strategy, and they want to know how buyouts will affect them.

"Communication is critical," says the USPS's Vegliante. "It's not just an HR thing. It's a corporate thing. Everybody is involved. ... Make sure [everyone] is educated and informed, and that you have a good implementation plan."

In the case of USPS, that meant staggering the departure dates for workers who took the buyouts so customer service would not be disrupted.

GM used all the tools at its disposal to keep employees in the loop during the buyout process, including the company's intranet, plant newsletters, broadcasts by CEOs and others, and diagonal slice meetings, mixing members of different teams.

"Even before we got into the bankruptcy, GM adopted a policy of being very transparent with employees," says Wilkinson. "In some cases, the rumors were worse than the reality. We wanted people to have as accurate information as possible. ... There was no attempt to sugarcoat."

AOL would be in this camp as well. When the New York-headquartered online-content provider announced its across-the-board voluntary buyout in November in the wake of a major restructuring, it made sure workers knew layoffs were next.

"We were very transparent in communications to employees. ... We communicated well around the future of the company in our next three to four years," says Dave Harmon, AOL executive vice president of human resources and corporate services. "There was considerable discussion of involuntary versus voluntary. ... It's all about the employee's versus the employer's risk. There are pluses and minuses for both. Our mantra was: Employees come first."

Harmon says the buyout packages varied by level and involved months of service times salary, with benefits coverage. Employees knew the voluntary package was "richer" than a layoff deal.

AOL still fell short of its goal of one-third of its 7,500 global workforce, however. It considered doing a second buyout, but decided it wasn't fair to those who took the first buyout. "You can't predict personal situations or geographical factors," Harmon says. He suggests some stayed because the company painted such a promising picture of the future. "My view on this is the CEO [Tim Armstrong] is charismatic. ...The majority of the base truly believes he will turn the company around. ...We were very convincing."

Companies don't want to offer voluntary buyouts -- but they want even less to lay off workers. If communication is clear and honest, workers can appreciate the economic pressure the company is experiencing and feel they were treated as well as could be expected. And if a company achieves its long-term financial goals as well, a buyout can be successful.

"You're offering a soft landing versus a hard landing," Vegliante says. "If you give people the option and entice them, it'll be a soft landing because it's voluntary. And we prefer to do it voluntarily."

See also:

Why You Need a Waiver

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