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The Voluntary Retirement Scheme (VRS) is the latest mantra of many a corporate a
nd Public sector units. VRS is a scheme whereby the employee is offered to volun
tarily retire from his services before his retirement date. Subject to certain c
onditions the company offers VRS to its employees It is the golden route to cut
the excess flab.

The most humane technique to retrench the employees in the company today is the
voluntary retirement scheme. It is the golden handshake for the employees and th
e only option today for the companies to downsize their headcount. The scheme wh
ich is formally permitted by the Department of Public Enterprises and which prov
ides the lucrative way for the employees to terminate their services and accept

As the name suggests the VRS is strictly voluntary i.e. one can neither compel t
he workers to accept it nor apply it selectively to certain individuals. One can
however choose the levels, units and age groups among whom one wants to offer V
RS. The company can always accept or reject the application for the VRS. But usu
ally this is not done in practical circumstances as it sends wrong signals to th
e employees. It might imply that the VRS is not actually voluntary but a selecti
ve procedure of downsizing.

Trade unions play a crucial role in introducing the VRS in any organized sector
firm. The scheme cannot be implemented without, at least, the tacit approval of
the representative union. Sometimes without the consent of the trade unions, wor
kers legalize the VRS by accepting it en masse. Very recently, the entire workfo
rce of Sri Ram Mills (1,400 workers) has accepted VRS while the major union oppo
sed the scheme tooth and nail. Other companies such as Ind Auto, SKF Bearings, N
ovartis, Biddle Sawyer, and Siemens have also been able to successfully reduce t
heir workforce through the introduction of VRS. When the workers are convinced t
hat the scheme is sufficiently attractive monetarily and/or the company is in de
ep crisis, they opt for the scheme.

When workers find the company's performance good, they refuse to accept the sche
me. In such situations, trade unions through various strategies (for instance, b
y exposing the status of those workers who have accepted VRS) persuade workers n
ot to accept the scheme. A study by Shri Ram Center for Industrial Relations and
Human Resources in 14 industrial centers of various states revealed that worker
s opted for VRS due to apprehension of closure of firms or personal reasons such
as poor health, clearance of debt, marriage, education of children, etc.

Another study observed that complaints were recorded by some of the VRS workers
who came for retraining under NRF that invisible discrimination affected their p
rospects for promotion in the organization where they were working. Thus, the at
mosphere of discrimination and apathy towards the socially disadvantaged groups
is also forcing most of the workers belonging to these groups to opt for VRS.

Employers refer to VRS as 'golden handshake', trade unions call it 'voluntary re

trenchment scheme', and for the government, it is 'unstated exit policy' which m
eans that an exit policy which may not exist on paper. VRS is one of the strateg
ies introduced in the early 1980s in central public sector undertakings (PSUs) t
o reduce the so-called surplus or redundant workforce. It gained publicity after
the introduction of new economic policy in 1991. In India, the government emplo
ys more than 70 per cent of the organized workforce; it uses all its channels to
reduce the organized sector of the workforce without antagonizing the trade uni
ons. It is envisaged in the new economic policy that VRS can provide minimum sus
tenance security to the retired individual and his family.

MAINSTREAM economists perceive voluntary retirement as a measure to shed the wor

kforce whose marginal productivity is zero. Further, it is argued that this coul
d be introduced in an industrial organization for maintaining its cost effective
ness in an increasingly competitive world. Moreover, voluntary retirement is acc
ompanied by technological modernization that warrants the replacement of labor w
ith capital. Technological modernization improves the productivity of existing w
orkforce so much so that a section of the existing workforce becomes again redun
dant even as modernization enhances the installed capacity of the technology. Th
e workforce that becomes redundant in this process has to retire or be retrenche
d. The rationale behind the introduction of voluntary retirement scheme (VRS) in
India is that any organized industrial organization has to operate within the e
xisting legislative framework, which does not allow the organization to shed the
redundant workforce without adequate compensation

The Voluntary Retirement Scheme is a legal way to down size and thus it involves
certain technicalities. The VRS candidates must have worked for the organizatio
n for minimum of 10 years and also the age of the worker must be minimum of 40.
Employees not complying with these conditions still can apply for the early sepa
ration but it would not be counted as the VRS legally. Thus these employees won'
t be able to avail the benefit of tax exemption. The employees receiving VRS can
get the tax exemption for the amount of Rs. 5 lacs lumpsum.

The Voluntary Retirement Scheme is given tax exemption as per the following limi

Three months salary per completed year of service Remaining salary Rs. 5,00,000
Whichever is least

Employees not complying with these conditions still can apply for the early sepa
ration but it would not be counted as the VRS legally. Thus these employees won'
t be able to avail the benefit of tax exemption. The employees receiving VRS can
get the tax exemption for the amount of Rs. 5 lacs lumpsum. Anyone receiving mo
re than Rs. 5 lacs would be charged under Income Tax Act
Thus an employee opting for early separation and not fulfilling the age or exper
ience criteria would be taxed on the whole amount he receives. However the lump
sum amount could be lower of the following: Three months' salary for each comple
ted year of service. The monthly salary at the time of applying for the VRS mult
iplied by the number of months left before retirement.

The normal benefits that an employee gets: Provident fund Encashed accumulated l
eave Gratuity Salary for the notice period Cost of transfer to the hometown

1. 2. 3.
Also to make the scheme very attractive for the employees the severance package
as it is called can include other benefits like Medical insurance Housing loans
Subsidies on children's education loans, etc.

Organizational adjustment at all levels has become extremely imperative. Over ma

nning has crept into almost all industrial units on account of the inability of
the enterprises to reduce or adjust workforce as per the business needs. The sor
t of cuts that only happened in heavy industries has now become widespread. The
days of nibbling away deadwood have long gone. It's time for the organizations t
o realign and focus on the core competencies
Hurdles in execution
The Voluntary Retirement Scheme is not as easy as eating the cake. It deals with
actual human beings. It deals with the lives of people who are offered to end t
he careers abruptly and probably do nothing for the rest of their lives. Thus a
lot many problems can arise during the actual execution of the scheme. Some of t
he problems which could be anticipated and for which appropriate action plan cou
ld be drawn are:

Non- acceptance of the VRS Over-acceptance of the VRS Operational problems Post-
VRS blues

Over and above these anticipated problems, there could be many more problems, wh
ich could arise during the execution of the scheme. These problems may be indust
ry sector specific, industry specific, company specific or any other unexpected
problems. The major hurdle in the acceptance of any scheme is trade union. The t
rade union does not easily accept such changes even if these changes are made fo
r the genuine reasons. At the same time over-acceptance can cause a lot of probl
ems, as it is visible in the PSU banks. Also due to ongoing retrenchment in the
company, the company is vulnerable to all sorts of operational problems. And if
the company does not provide for the downsizing the company must be prepared to
face the post-VRS blues.
The company can avoid or reduce the magnitude of any problem occurring due to th
e VRS scheme. There are certain aspects, which have to be kept in mind before of
fering the scheme.

The company must have a genuine reason for the downsizing. It should not be a 's
logan of the week ' nor should it be to oblige blindly the conditions of the glo
bal partner. The company must be having some genuine reasons to offer the VRS an
d this is the first step in getting the things right. The company must conduct i
ts manpower planning to analyze the manpower inventory it has in terms of number
and skills and also the manpower inventory it requires to operate at the optima
l level. This planning should be done considering all the aspects like automatio
n, technology upgradation, new working methods like optimization of resources, t
otal quality management, etc.

Depending upon the manpower planning the company should boil down to a number to
be downsized and the period over which downsizing should be done. Keeping these
figures in mind the company must move towards offering VRS scheme. Communicatio
n is the most important phase of execution of any VRS scheme. The company should
make an explicit announcement of the scheme all over the organization at the sa
me time so as to prevent the spreading of any rumors The trade union also should
be taken into confidence and the all the facts of the scheme should be explaine
d to them.

In the actual implementation of the scheme the different age limits are suggeste
d for different levels and this concept has been extremely successful. The logic
given behind this concept is that the people with higher skills retain their pr
oductivity for the longer time. Also since the qualified personnel are less in n
umber than that of unqualified ones the model is designed in that manner. But th
is theory has received criticism of being biased for the upper class or being Br
ahminist. This issue is debatable but it has worked wonders for many companies.

Once the scheme is designed, the company should implement two-pronged strategy o
f identifying the VRS candidates and also identify the key performers. This can
be done by empowering line managers and also through the system of performance a
ppraisal. Once these candidates are identified, these employees should be counse
led accordingly either to accept the VRS or to stay in the company. Keep the pro
mises you made, so as to implement the scheme smoothly. Include in the severance
package different benefits, which would help employees to accept the scheme. Al
so offer the option of receiving the package in lumpsum or in the pension form o
r in combination.

Making the employees accept the scheme is not the only objective. Also the emplo
yees who stay in the company have to be motivated enough so as to keep going. Fo
r this key performers have to be individually counseled and also the retraining
and redeployment program has to be drawn so as to keep the managers motivated an
d so as to adjust to the change in the organization.
Other Options
Besides in order to alleviate the effect of the whole exercise, company should t
ake up few measures that will help to maintain the morale of the existing employ
ees. Some of the measures, which could be provided, are: Outplacement Help of pl
acement agency Counseling

It is the in-house help provided by the organization itself in order to help the
employees during the transition phase from retrenchment to the resettlement. Th
e company can play an important role by providing counseling, training, and all
the other help required by the employees. Although this involves cost, however c
ompared to the advantages obtained in return, it is negligible. It not only help
s organization to convince employees to accept VRS but also helps in maintaining
the morale of the retained employees. Moreover this exercise also helps in crea
ting good corporate image of the organization that can help organization in the
long term like future recruitment.
Placement agency:

Besides having outplacement facility a company can also take the help of placeme
nt agency. This agency can appraise, counsel and place the retrenched employees
on deserving jobs. Also there have been practices where company purposefully ask
s the agency to tell nice things about the retrenched employees so that they wil
l have the " feel good " factor to keep their motivation even after the retrench

This is an effective tool to reduce the effect of the VRS. The retained as well
as retrenched employees could be counseled to good effect to keep up their motiv
ation level.

These techniques that are suggested above give the humane touch to the downsizin
g. This is very necessary because it is not only the posts that are downsized bu
t there are human beings involved in this process. This process should convince
them that the posts in the organization have become redundant and not the person
and the organization still values the person. Since this process involves emoti
ons and feelings, every care must be taken by the management that the process mu
st be carried out in such a manner that it keeps the dignity of the employees bu
t at the same time achieves the objective in a tactful manner.