Voluntary Retirement Schemes LessonLesson-08

Presented By: Furqan Ilyas Divisional Manager HR Shahkam Industries (Pvt.) Limited
7/1/2009

Effects of Excess Manpower Reducing Excess Manpower - Problems, Legal Aspects and Solutions The Reasons for Proposing VRS Procedure for Voluntary Retirement Scheme The challenges in implementing employees exit Merits of voluntary retirement scheme Demerits of voluntary retirement scheme

Results in high a labour cost which increases the production cost. It reduces the competitive ability of the enterprise. It reduces employee efficiency & productivity. Pose threat for technology upgradation which is essential in the competitive market. Result in poor industrial relations and unrest amongst labour.
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Recession in business Intense competition, which makes the establishment unviable unless downsizing is resorted to Changes in technology, production process, innovation, new product line Realignment of business - due to market conditions Joint-ventures with foreign collaborations Takeovers and mergers Business re-engineering process Product/Technology obsolescences.
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The employer has to issue a circular explaining following in detail. The reasons for downsizing Eligibility i.e. age limit and the minimum service period The benefits that are offered. The right of an employer to accept /reject any application for voluntary retirement The date up to which the scheme is open. Shall indicate income tax incidence on any voluntary retirement benefits The employees who opt for voluntary retirement and accept the benefits under such scheme shall not be eligible in future for employment in the establishment. However the employees who opt to take VRS are entitled as per law and rules the benefits of Provident Fund, Gratuity and salary for balance of privilege leave up to the date of their retirement.
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If the company is public sector obtain approval of the government. Identify departments/employees to whom VRS is to be offered If there is a union of employees in the establishment involve the union in the decision by explaining reasons for VRS, the target group and the benefits to be offered to those who opt for the scheme. Formulate terms of V R S and benefits to be offered are to be mentioned in the circular or communication to employees Decide the period during which the scheme is to be kept open. Motivate the managers through counseling. Counseling employees is an essential part of implementing the scheme. The counseling should include what the retiring employee can do in future i.e. how to manage the funds received under the scheme. For those whose application are to be accepted prepare a worksheet showing the benefits each will receive including other dues like Provident Fund, gratuity and earned leave wages for the balance un-availed earned leave, and tax incidence.
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The reasons & need to introduce V R S should be discussed with all management staff including top management. The effect of downsizing including i.e. post reduction operations to be carried on should also be planned-employees deployment. Ensure all concerned employees & managers participate in the decision. The downsizing plan should match with the Strategic plans of the company. Transparency should be seen and used in choice of persons to be retired. be prepared to manage the after effects of the down sizing -both social and psychological. Motivate employees who will stay with the company, remove their apprehensions and fears, if any. Provide professional assistance to employees who agree to accept V RS to plan their post retirement, activities and financial management. The VRS should be made attractive.
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Merits of Voluntary Retirement Scheme It offers to the employee an attractive financial compensation Voluntary nature of the schemes precludes the need for enforcement It allows flexibility and can be applied only to certain divisions, departments where there is excess manpower. It allows overall savings in the employee costs thus lowering the overall costs. Demerits of VRS To certain extent it creates fear, a sense of uncertainty among employees. Sometimes the severance costs are heavy and outweigh the possible gains. Trade unions generally protest the operation of such schemes and may cause disturbance in normal operations. Some of the good, capable and competent employees may also apply for separation which may cause embarrassment to the managements.
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It is found in practice that organisations may have to repeat the scheme if there is no response or poor response to the scheme by the employees. However, there are instances when the managements have really made the schemes very attractive by making it Golden Hand Shake. It is incumbent on the establishments that they do not recruit similar staff immediately after the implementation of voluntary retirement scheme. Such recruitment, in spirit and essence is contrary to the principle of staff being excessive or surplus.

Voluntary Retirement Scheme in Two Nepal Public Sector Banks

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QUESTIONS 1. Why retrenchment instead of cost reduction via improved management? 2. Was there adequate planning? 3. How were the sources of resistance addressed? 4. How were staff reductions targeted? 5. How did the VRS package balance between attractiveness to employees and cost-effectiveness for the banks? 6. How did the VRSs design mitigate the hardship of retrenched employees?
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A means of implementing strategic change aimed at improving performance by reducing the level of differentiation and integration and downsizing the number of employees to decrease operating costs.

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The implications of a merger or acquisition on pay and conditions of employment do not seem to be considered seriously enough in most take-over battles. Acquisitions or mergers do not always live up to expectations and one of the principal reasons for failure is the demotivation of managers and staff. This is inevitable if insufficient attention is paid to their needs and fears as well as any existing imbalances between the reward strategies and remuneration levels of the organizations set to merge. In making decisions about what should be done and how, the points on the following check-list should be considered jointly and in advance by the parties concerned.

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Executive rewards Q-1. What is the composition of the executive remuneration package?
(a)Whether the gaps between practices in the two organizations is likely to prove problematic; (b)Whether the values underpinning executive rewards are significantly different; (c) What the priorities are for the executives involved.

Salary Structure Q-2. To what extent, if at all, should a common salary be introduced?
(a)To answer this question information will be needed, first, on the economics and strategy of each business unit (b)Existing salary structures; (c)Organization structures, with salaries and grades for each job; (d)The distribution of salaries within each grade; (e)The method of job evaluation used;
(f) Policies and procedures for grading, fixing salaries or promotion; (g) Any terms and conditions negotiated with trade unions or staff associations; (h) The similarities and differences between the work carried out in each company and, therefore, the type of people employed.

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Q-3. What are The Advantages / Disadvantages of Merging Salary Structures? Advantage: A common basis is established throughout the group which facilitates movement and a consistent approach to salary administration. Disadvantage: The disturbance and potential cost of merging i.e. Salary Adjustments, Job evaluation & Market survey cost. Why go to all this trouble if the operations in the respective companies are dissimilar and they are located in entirely different parts of the country? It could even be damaging. Q-4. If salary structures have to be merged, how should this be done? A full job evaluation exercise or The arbitrary slotting of jobs into the new structure using existing job descriptions or A compromise between (a) and (b), slotting in jobs without a full evaluation if the fit is obvious, but evaluating doubtful or marginal cases. Note that if pay is negotiated with a trade union or staff association they would have to be involved and they will obviously fight against any detrimental changes. Using this as an opportunity to adopt a new structure based on job family models/generics and broader pay bands.
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Q-5. What should be done about staff whose grade or salary range is changed as a result of merging pay structures? To re grade people and adjust their salaries to higher levels could be prohibitively expensive. To reduce salaries could be impossible, especially if there are trade unions in existence. It might then be necessary to red circle staff affected by grade changes, that is, give them personal to job holder grading and salary brackets which they retain as long as they are in the same job. Salary Reviews Q-6. Should general salary reviews be centralized and take place simultaneously in all locations? Yes if a common salary structure exists or pay is negotiated centrally. If structures or pay levels vary or if site negotiations continue, then it may be best to maintain local arrangements.
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Performance management and performance related pay Q-7. Should performance management processes and linked salary procedures be standardized? Ans. It is tempting to say that they should, in the interests of consistency and control and to facilitate career and salary planning for the new group as a whole. But there are strong arguments for maintaining the local scheme if it is operating effectively. Managers who are familiar with one system might resent change. They could be forced to accept: it but reluctant reviewers are bad at performance management, especially in a year of great uncertainty. Salary administration Procedures Q-8. Should standardized procedures operate throughout the new group? A. A bureaucratic centralized approach is inevitable in some organizations, but if local arrangements work well, why change them for changes sake?

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It depends on how close the links between establishments are. There is much to he said for retaining effective local bonus schemes which have an immediate link to performance as long as they do not conflict too much with group policies.

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A. Clearly, if there has been a complete take-over and the merged company loses its status as a separate profit center or can no longer issue shares under arrangements such as profit sharing share schemes, then the scheme in the company which has been taken over must be discontinued and employees moved into the take-over companys scheme. If one exists. If there is no scheme in that company, consideration would have to be given to some form of compensation which could be as high as three times the average of the last three years payments.
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A. This is quite common and, obviously, there is no problem for staff if benefits are better. However, the back-funding of previous pension arrangements in order to pay for improvements can be very expensive, and it may be necessary to maintain separate schemes. When the pension scheme in the acquiring company is inferior, it may be possible for members to choose under which scheme they will retire in the unlikely event that both schemes can continue. However, many employees may leave the taken over company before retirement and there will only be a handful of genuine anomalies reaching retiring age.

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(a) Company cars; (b) Free petrol for company cars; (c) Life insurance; (d) Sick pay; (e) Private medical insurance; (f) Mortgage subsidy; (g) Season ticket and other staff loans; (h) Lunch arrangements, including luncheon vouchers; (i) Leave entitlements; (j) Discount facilities?

The degree to which benefits should be harmonized depends on: The philosophy of the controlling company (the extent to which it believes in centralization and absolute consistency in the treatment of employees) the circumstances in each company (the degree to which their operations and their geographical locations are linked or adjacent).
A brutal approach to harmonization which significantly reduces the total remuneration of the affected employees will damage morale - will the take over company wants its acquisition to be operated by de motivated people?
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The term "pay progression" refers to how the pay rates of employees are adjusted over time. OR process by which an individual employee attains higher levels of pay within a range attached to a pay grade or band Generally, pay progression strategies fall into three categories that can be used singly or in combination: Time-based strategies determine pay increases based solely on time spent at a pay level. Performance-based strategies include a wide variety of approaches that all use the employee's level of performance to determine the amount of pay increase. Skill/competency development-based strategies reward the employee's development and demonstrated proficiency in newlylearned knowledge, skills, abilities, value-adding characteristics, and/or other attributes.
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Systems for pay progression may be designed to achieve a number of key aims:
to support business strategy by encouraging and rewarding desired characteristics or behaviour in employees such as performance or length of service to maintain competitiveness of pay while also controlling pay bill costs within set parameters including affordability to provide employees with a fair and, as far as possible, transparent process by which individual pay increases are determined.

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Advancement to higher grades or levels Pay progression may be attained either by moving to higher points on the pay range within a band or grade, or by gaining promotion to a higher grade or level.. Differentials In a traditional graded pay structure, differentials refer to the percentage difference in pay levels between the midpoint of one grade and the mid-point of the adjoining grade. The differential needs to be high enough to reward employees for the taking on of a post at a higher level of responsibility. In a typical narrow-graded pay structure, for instance, a common differential would be around 20%.

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The Employers Organization

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QUESTIONS 1. What do you understand by the term People Management? 2. What is pay progression and discuss its relevance to this case.

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End of Material

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