Chapter 6

Managing Employee Separations, Downsizing & Outplacement (Chapter 6)

Challenges

-Understanding employee separations

-Identifying types of employee separations

-Managing early retirements

-Practices for managing layoffs

-The role of outplacement

What Are Employee Separations?

Employee separation means the termination of an employee’s membership in an organization. The turnover rate is a measure of the rate at which employees leave the firm. Effective organizations try to monitor their turnover rate and identify and manage causes for turnover. The goals is to minimize the turnover and cost of replacing employees. An excessively high turnover rate compared to the industry standard is often a sign of problems in the organization. (Balkin et al, 2016, 210.)

(Balkin et al, 2016, 211.)

The cost of Employee Separations

The cost of turnover can be different across organization and hard to measure. Replacement costs can be particularly high for highly skilled positions. The effect of lost talent on sales, on productivity, or research and development may be hard to estimate. According to studies employee turnover is an important factor in bottom-line performance. It is a common estimate that the cost of turnover is from a conservative 25 percent to 300 percent of the lost employee’s annual compensation. The costs associated with replacing an employee can be categorized to recruitment costs, selection costs, training costs, and separation costs. (Balkin et al, 2016, 211-212.)

Separation costs: the largest separation cost is compensation in term of pay and benefits. Most companies provide severance pay (also called separation pay) for laid-off employees. Length of service is the main factor in determining the amount of severance pay, but also for example salary, grade level, and title. Employees may continue to receive health benefits until they find a new job. Administration of separation may include an exit interview to find out why the employee is leaving voluntarily, or to provide counselling and/or assistance in finding a new job. It is common for firms to provide outplacement assistance, which is a program that helps departing employees find jobs more rapidly by providing them with training in job-search skills. (Balkin et al, 2016, 213.)

Benefits of Employee Separations

When turnover rates are low, few new employees will be hired and opportunities for promotion are sharply curtailed. An organization can reduce its total labor costs by reducing the size of its workforce (salary savings from the elimination). Replacing poor performance with new and presumably more skilled employee. Advancement opportunities for high-performing employees and hiring new people with new perspectives can be an important source of innovation. Separations can be an opportunity for greater diversity, to hire employees from diverse backgrounds and to redistribute the cultural and gender composition. (Balkin et al, 2016, 214.)

Types of Employee Separations

Voluntary separation

Voluntary separation is a separation that occurs when an employee decides, for personal or professional reasons, to end the relationship with the employer. The decision may be having attractive alternatives of being unhappy with aspects of the current job, or commonly both. Voluntary separations can be avoidable or unavoidable. Unavoidable separations result from an employee’s life decisions beyond employer’s control. However, according to resent studies 80 percent of voluntary separations are avoidable, and many of those are staffing mistakes. (Balkin et al, 2016, 214.)

Two types of voluntary separations are quits and retirements. (1) The decision to quit depends on the level of employee’s dissatisfaction with the job, and the number of attractive alternatives the employee has outside the organization. Some employers have used pay early retirement incentives to encourage employees to quit voluntarily (voluntary severance plans, or buyouts), to reduce the size of workforce by avoiding the negative factors associated with a layoff. (2) Retirement differs from quit for example, retirement usually occurs at the end of employee’s career, the individual usually receives retirement benefits from the organization, and the organization usually plans retirements in advance. Most employees postpone retirement until they are close to the age of 65, because then they are titled to Medicare benefits from the government. (Balkin et al, 2016, 214-215.)

Involuntary Separations

Involuntary separation occurs when management decides to terminate an employee due to (1) economic necessity or (2) poor fit with the employee and the organization. The decision of dismiss should be implemented with ‘’due process’’ for the employee and performed within company’s employment policy. A discharge occurs when management decides that there is a poor fit between the employee and the organization, for example poor performance or serious misconduct such as theft. Most union companies and all unionized firms have a progressive discipline procedure that allows employees the opportunity to correct their behavior before receiving a serious punishment. Managers must document the occurrences of violation and provide the employee evidence and warning. (Balkin et al, 2016, 215.)

Layoffs are a means for an organization to cut costs. Change in company’s environment or strategy forces it to reduce its workforce, for example global competition, reductions in product demand, changing technologies, mergers and acquisitions. Downsizing is a company strategy to reduce the scale (size) and scope of its business in order to improve the company’s financial performance. Layoffs are one way of reducing costs or improving profitability. Rightsizing is the process of reorganizing a company’s employees to improve their efficiency. An organization needs to rightsize when it becomes bloated with too many management layers or bureaucratic work processes that add no value to its product or service. The result may be layoffs, or alternatives to layoffs, for example early retirements. (Balkin et al, 2016, 215-2017.)

Managing Early Retirements

Early retirement is an alternative to layoffs. Early retirement policies consist of two features (1) a package of financial incentives that makes it attractive for senior employees to retire earlier than they planned, and (2) an open window that restricts eligibility to a fairly short period of time. After the window is closed the incentives are no longer available. The financial incentives accelerates senior employee’s retirement eligibility and increase the retirement income. Company’s can provide a lump-sum payment or offer continuation of health benefits until they are eligible for medical care from the government. (Balkin et al, 2016, 218.)

Early retirement programs must be managed so that eligible employees do not perceive that they are being forced to retire and consequently file age discrimination charges. Ways to manage early retirements effectively: to restrict eligibility to divisions that have redundant employees with high levels of seniority (instead of making the policy available to all employees) and asking senior employees how they would respond to specific early retirement plan. (Balkin et al, 2016, 218-219.)

Managing Layoffs

Alternatives to Layoffs

Common strategies to const-reduction without layoffs include: attribution, freezing employment, not renewing contract workers, and encouraging employees to take time off voluntarily or shorter workweek, changes in job design, employment policies, pay and benefit policies, and training. (1) Adjustments to employment policies. Attrition is an employment policy designed to reduce the company’s workforce by not refilling job vacancies that are created by turnover. Hiring freeze is an employment policy designed to reduce the company’s workforce by not hiring new employees into the company. Other employment policies aim to decrease the number of hours worked. The strategic application of employment policies to provide job security for a firm’s full-time, core employees is called a rings of defense approach to job security. (Balkin et al, 2016, 219-220.)

Changes in job design: an organization can use its human resources more cost-effectively by changing job designs and transferring people to different units of the company. Alternatively, employees may be relocated to a different location. Practice of unionized companies, called bumping, allows a senior employee whose job is eliminated to take a job in a different unit of the company from an employee with less seniority. Companies can also use job sharing when it is possible to reconfigure one job into two part-time jobs. (Balkin et al, 2016, 219-220.)

Pay and benefit policies: one way of reducing costs is to enforce a pay freeze during which no wages or salaries are increased. Pay freeze should be done on across-the-board basis to avoid accusations of discrimination. These policies can be augmented by reductions in overtime pay and policies that ask employees to use up their vacation and leave days. More radical policy to reduce labor costs is a pay cut. This approach should only be used if employees except it voluntarily as an alternative to layoffs. A long term pay policy is a structure of compensation so that profit sharing (the sharing of company profits with employees) or variable pay (pay contingent on meeting performance goals) makes up a significant portion of employees’ total compensation. By retraining employees whose skills have become obsolete, a company may be able to match newly skilled workers with available job vacancies. (Balkin et al, 2016, 220.)

Implementing a Layoff

The key issues managers must settle when implementing layoffs are notifying employees, developing layoff criteria, communicating to laid-off employees, coordinating media relations, maintaining security, and reassuring survivors of the layoff. Managers should give a notice at least several weeks before a layoff. There are also arguments in favor of no notification, because it may result in potential theft or sabotage, and the productivity of the employee may decline during the notice period. (Balkin et al, 2016, 220-221.)

The criteria for dismissal must be clearly laid out, and fair. Most important criteria used are seniority (last in, first out method) and employee performance. Seniority, the amount of time an employee has been with the firm is easily applied, and employees view it fair as long as all employees have equal opportunity to obtain seniority. When workforce is unionized layoff decisions are usually based on seniority. However, when workforce is nonunion, and especially with professional and managerial employees, companies usually base layoff decisions on performance criteria or a combination of performance and seniority. However, there is a risk of the company being exposed to wrongful discharge litigation, if decisions are based on discrimination or company acted arbitrarily in judging performance. There should be a valid performance appraisal system. (Balkin et al, 2016, 221.)

It is crucial to communicate with the employees who will be laid off as humanely and sensitively as possible. Laid-off employees should first learn their fate from their supervisors in a face-to-face private discussion. The information session should be brief and to the point, and the manager should express appreciation what the employee has contributes and explain how severance pay and what benefits will be provided. (Balkin et al, 2016, 221)

Rumors of an impending layoff can be very dangerous to the workforce’s morale as well as to the organization’s relationship with customers, suppliers, and the surrounding community. The organization should develop a plan to provide accurate information about the layoffs to external clients and the workforce. Layoff may have positive effect of reducing labor costs and restoring financial balance to an organization. However, layoffs can have a negative impact on the organization. Managers should reassure the survivors of the layoff by communicating clearly about the layoff. (Balkin et al, 2016, 222-223.)

Outplacement

Outplacement is a program created to help separated employees deal with the emotional stress of job loss, and to provide assistance in finding a new job. Outplacement activities often handled by consulting firms retained by the organization. Companies are often willing to pay for outplacement to avoid risks associated with layoffs, such as negative publicity or unions’ attempts to organize the workforce. Outplacement programs aim to control the disruption caused by layoffs and other employee separations. Most important goals are (1) reducing the morale problems of employees who are about to be laid off so that they remain productive until they leave the firm, (2) minimizing the amount of litigation initiated by separated employees, and (3) assisting separated employees in finding comparable jobs as quickly as possible. It can also help keep the remaining employees focused on their work. Most common outplacement services are emotional support and job-search assistance. The programs usually provide counselling to help employees deal with the emotions associated with job loss: shock, anger, denial, and lowered self-esteem. Job-search assistance includes teaching separated employees the skills they need to find a new job, for example resume writing, interviewing, and job-search techniques. (Balkin et al, 2016, 223-224.)

Case a

Nokia Announces Abolition of 4000 Jobs

Nokia is planning to close a plant in Germany and relocate it to lower cost are Romania. According to ETUC, European Trade Union Confederation, Nokia announced the abolition of 4,000 jobs arguing that the plant was not competitive enough. Nokia has received state assistance from Germany, and the government would be prepared to make concessions if German jobs could be saved. Juergen Ruettgers, conservative state premier of NRW, western German state, told that Nokia had received over 80 million euros in German public funding for the Bochum plant. Romania receives aid from the bloc party partly supplied by Germany, which would not be used for the relocation. However, commission spokeswoman Eva Kaluzynska says that the industrial park where Nokia was based in Romania probably was financed partly by the EU’s pre-accession fund before joining the bloc in 2007. Nokia announced the abolition of 4,000 jobs without the slightest information or consultation. This, according to Reiner Hoffmann, Deputy General Secretary of the European Trade Union Confederation (ETUC), demonstrates the urgent need to revise the EU directive on European Works Councils (EWCs). It must be guaranteed that companies cannot ride over European and national workers’ rights without sanctions, and without prior thorough information and serious consultations with the workers’ representatives and their trade unions. (Communicating Labor Rights, 2008.)

In this case, the company terminated employees involuntarily due to economic necessity, and it has a profound effect on the organization and especially on the employee who loses their job (Balkin et al, 2016, 215). It might have an effect on the morale of the remaining employees, who fear losing their jobs in the future, if the company again moves the production to a lower cost area. 4000 jobs is a huge number of jobs, and eliminating those will also have a huge effect on the area’s economy and community. Before conducting layoffs, there should be proper measures taken to examine and possibly implement alternatives to layoffs and cost reduction, in order to protect jobs. The government had given support to the company in order to sustain those jobs. According to the article (Communicating Labor Rights, 2008) Nokia implemented layoffs of 4000 jobs without any information or consultation. Sometimes harsh measures to cut costs are necessary to secure the operation, however I consider Nokia’s actions and the way to announce the relocation of the plant, described in the article (Communicating Labor Rights, 2008) very questionable given the countries financial support and willingness to make concessions. 

Case b

Nokia Cuts 3500 Jobs, to ‘’Ensure Profitability’’

Nokia has informed employees of drastic job cuts, terminating total of 3,500 employees. The plant in Cluj Romania, just four years old, will be closed. The company’s Executive Vice President of Markets, Niklas Savander told YLE the job cuts were intended to ensure the company’s profitability. ”It is impractical to manufacture products in Europe when the components are first flown to Europe and then the readymade phones back to Asia,” he stated. The company is planning to end the assembly of phones in Finland at the Salo plant and transfer operations to Asia. Nokia is reconsidering the role of the Salo plant. It is to become a specialised unit for product customising, designing smartphone software and marketing. The roles of facilities in Komárom, Hungary and Reynosa, Mexico are also being re-evaluated. These changes are expected to result in job losses next year. Nokia plans to reduce staff in units including Location & Commerce, which was set up in June. Nokia estimates that some 1,300 people will be let go from the unit internationally. Operations in Bonn, Germany and Malvern, USA will be shut down. The mobile phone giant will also continue redundancy talks that it began last April in its sales, marketing and support services. (Yle, 2011.)

Due to fierce competition and automation, organizations have to make disruptive and painful changes. Typically, companies resort to restructuring and routine layoffs, but in the long term they damage employee engagement and company profitability. In 2011, as the Nokia’s mobile phone business was struggling, the companies decided to lay off 18 000 employees across 13 different countries over the next two years. However, Sucher and Gupta (2018) argue, that this time Nokia implemented a program to ensure employees felt the process was equitable and laid off employees would have a soft landing, unlike in the layoffs done in 2008. Layoffs are a short-term solution for lowering costs, but they create many difficulties. Charlie Trevor of University of Wisconsin, and Madison and Anthony Nyberg of University of South Carolina researched on the effects of layoffs in the organization and employees. As a result of eliminating employees companies lose the time invested in training, networks of relationships, and knowledge. It effects also the remaining employees, and may lead to voluntary turnover, low morale that weakens engagement, fear of no guaranteed jobs despite hard work and performance, decline in job satisfaction, and in organizational commitment. (Sucher & Gupta, 2018.)

Case c

Voluntary Severance Packages

Former Nokia employees at the consultancy firm Accenture are leaving the company and claiming severance packages. Accenture has offered the packages to workers who were only outsourced by Nokia, and 400 former Nokia workers have accepted the packages. Nokia transferred 1,200 Symbian developers to Accenture and continued to work on the Symbian operating system while contracted to their new employer. Around 40 percent of those sought the payoffs and majority have signed leaving agreements according to shop steward Sami Sallmén. Sallmén says that there is now so little work left, that the severance packages have been an agreeable offer for many outsourced developers. The severance packages are worth up to 15 months’ pay, according to Sallmén. The smallest payouts are a few months’ salary. Unions criticized the outsourcing arrangement from the start as they feared that Symbian operating system was to be replaced by Windows Phone as the main smartphone platform for Nokia. Accenture management are keeping a low profile and communication department explained by email that the lay-off program is voluntary. It says that the packages have been offered to those former Nokia employees that have not yet found new responsibilities within Accenture. (Yle, 2012.)

I think Nokia was fair to offer employees to accept a monetary compensation if they were to leave the company. Voluntary layoff program was an efficient way to avoid selecting employees to layoff and cutting costs of salaries. They give employees also the option to decline the offer and employees most dedicated and willing to work for the organization will remain. Employees also that were not satisfied with the job could choose to leave. The risk for the company is that the employer might lose its most valuable employees, unlike when the decisions to select employees to be laid off is done by supervisors. On the other hand according to the article (Yle, 2012) many of the relocated employees had no responsibilities in their new job. The 40 percent of the employees that accepted the severance package might have felt under coercion to choose that alternative, and fear to be laid off later on possibly without compensation. With Nokia’s fluctuating success, employees likely don’t feel very secure in their job position.

Article 1

Creative alternatives to layoffs.

Sivasubramaniam (Berrett-Koehler) introduced creative alternatives to layoffs to reduce costs. Across-the-board wage cuts keep employees employed while reducing payroll expenses. One option is voluntary separation incentive packages, either a retirement allowance (if close to retirement age) or a separation allowance. The company could also reduce the hours worked in a week, with the proportional decrease in salary. Unpaid leave of absence (usually between 3 to 12 months), but not terminating the employment relationship. Companies want to be seen as ‘’employers of choice’’ so they can attract and retain great staff, even under difficult economic conditions. (Clear HR Consulting 2019.) There are various alternatives to reduce costs and avoid layoffs, and decision to layoff might not always produce the anticipated results. Sivasubramaniam (Berrett-Koehler) distinguished reasons why layoffs are a bad idea. Downsizing does not automatically make a company more profitable nor perform better. Layoffs are a quick solution ‘’band-aid approach’’ to a long-term problem, and the benefits are temporary. According to research employees would make individual sacrifices (such as reducing working hours, job-sharing, or pay cuts) to avoid their co-workers being laid off, because of the relationship between co-workers. (Sivasubraniam, Berrett-Koehler.)

There are various alternatives to terminating employees, and usually employees are willing to make temporary sacrifices in order to sustain the long-term employment relationship, their as well as their co-workers’. As Sivasubramaniam (Berrett-Koehler) stated layoffs are a quick short-term solution to reduce costs. I have investigated in the previous cases and articles the various negative effects of layoffs on the organization. Taking those, such as lower performance and reduced organizational commitment, employers should work together with employees to discuss and implement alternatives to reduce costs. Both parties would benefit from that. If the layoffs are essential, the effort of the company to discuss alternatives in order to sustain employees, will give a positive impression of the organization to the remaining employees. Also a humane and appropriate approach to conducting the layoffs is crucial to how the remaining employees will feel towards the organization. The company could for example give assistance to the terminated employees in job search, which shows that the company cares for the people who have contributed to its success.

Article 2

Pros & Cons of Voluntary Redundancy

Jones (2017) distinguishes pros and cons of offering voluntary redundancy. Biggest advantage associated with voluntary redundancies is cost savings in staff salaries, which is often a large proportion of a company’s costs. Voluntary redundancies are also a way to avoid making compulsory redundancies. It allows those who are unhappy or already considering leaving, to leave. It also eliminates the need to select those that will be chosen for compulsory redundancy. Offering voluntary redundancy is viewed as more positive for morale. It is more consultative, and less damaging on company’s reputation. There are disadvantages to your business of offering voluntary redundancy. The risk of losing the bestemployees. The most valuable employees are likely confident of finding new employment elsewhere. Higher costs of redundancy pay than compulsory redundancy strategy, as the staff with most to gain financially are the ones that choose to go. Risk of discrimination claims. It can be avoided by keeping clear records and selecting fairly and objectively. Those who are not selected for voluntary redundancy may feel demotivated. Careful consideration of these pros and cons will help to decide the right option between voluntary and compulsory redundancy. (Jones, 2017.)

Voluntary separations occur, when an employee decides, for personal or professional reasons to end the relationship with the employer. There are several benefits to layoffs to employer as well as employee. Employee might be able to escape unpleasant work situation. Employee can reduce its labor costs, replace poor performance, create advancement opportunities for high-performing employees, new employees bring new perspectives and innovation, and employer will have the opportunity to increase diversity by hiring people from different backgrounds. (Balkin et al, 2016, 214.) For employee accepting a voluntary separation offer may be a good decision for example if the company is not doing well and downsizing is likely to be followed, if the employee is close to retirement age, and if the payment is fair.

References

Balkin, D.B., Cardy, R.L. & Gomez-Mejia, L.R. 2016. Managing Human Resources.  Global Edition 8th ed. Pearson. London. pp. 209-225.

Clear HR Consulting. 2019. Creative Alternatives to Layoffs. URL: https://clearhrconsulting.com/blog/retention/creative-alternatives-to-layoffs/. Accessed: 18 March 2020.

Communicating Labor Rights, 2008. Nokia closes plant in Germany and relocates in Romania. URL: https://communicatinglabourrights.wordpress.com/2008/01/17/nokia-closes-plant-in-germany-and-relocates-in-romania/. Accessed: 13 March 2020.

Jones, M. 2017. Voluntary redundancy: pros and cons. URL: https://www.breathehr.com/blog/voluntary-redundancy-pros-and-cons. Accessed: 18 March 2020.

Sivasubramaniam, J. Berrett-Koehler. Five Reasons Why Layoffs Are A Bad Idea. URL: https://www.bkconnection.com/bkblog/jeevan-sivasubramaniam/five-reasons-why-layoffs-are-a-bad-idea. Accessed: 19 March 2020.

Sucher S.J., & Gupta, S. 2018. Layoffs That Don’t Break Your Company. URL: https://hbr.org/2018/05/layoffs-that-dont-break-your-company. Accessed: 19 March 2020.

Yle, 2011. Nokia cuts 3500 jobs ‘’to ensure profitability’’. URL: https://yle.fi/uutiset/osasto/news/nokia_cuts_3500_jobs_to_ensure_profitability/5431070. Accessed: 13 March 2020.

Yle. 2012. Hundreds of Nokia’s outsourced Symbian developers leaving Accenture. URL: https://yle.fi/uutiset/osasto/news/hundreds_of_nokias_outsourced_symbian_developers_leaving_accenture/5252177. Accessed: 17 March 2020.