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Making the Best of Buyouts

Plan buyouts carefully to retain top talent and minimize legal risks.

October CoverAs the recession deepened this year and last, it seemed that not a day went by without an announcement by one employer or another offering employees voluntary buyouts to reduce costs.

Although the pace seems to have slowed, HR executives now understand more about designing and implementing buyouts to:

  • Help avoid involuntary layoffs.
  • Protect relations with remaining workers.

Keep in mind that deciding whether to take a buyout can be wrenching for employees. When Jim Cox, a purchasing agent at Honda Motor Co.’s Marysville, Ohio, manufacturing plant, was offered a voluntary buyout earlier this year, hewas nervous about taking such a step after nearly 30 years with the company. 

Managersheld meetings with employees to explain the buyout, then followed up with information mailed to their homes. Once Cox received his package, he knew he had to be prepared to make his decision when the offer was officially open.

Because the buyout was available to only a certain number of employees on a first-come, first-served basis, Cox was worried that the offer would be closed if he took too long to decide.

After considering his options and talking with his family—and with his colleagues—Cox decided to take the buyout and use the opportunity to launch a home-repair franchise in the Columbus, Ohio, area. He had done remodeling as a side business for years and had served as general contractor for the construction of his own house, so he felt confident that he had another means to make a living. However, "some people didn’t feel they had any options other than to continue working at the plant," Cox says.

Providing Options

Showing employees that they do indeed have options following a buyout should be part of the process. Ford Motor Co. adopted that tactic after a 2005 buyout drew far less employee interest than expected. In fact, participation was significantly lower than similar previous Ford buyout offers and lower than General Motors had achieved with its buyouts—the benchmark for Ford’s plan.

To find out why participation lagged, Ford undertook a study led by Kim Schatzel, a marketing professor and dean of the College of Business at the University of Michigan-Dearborn. "We took a different [marketing-based] approach todetermine why employees were not buying the buyout package Ford was selling," she says.

By studying the buyout-eligible population’s demographics and psychographics—attributes relating to personality, values, attitudes, interests or lifestyles—researchers determined that the inherent stress and uncertainty of choosing a buyout was causing many employees to choose what they saw as the safer choice—doing nothing.

"That is not surprising considering that a buyout is not a trial [situation] where individuals can change their minds," says Schatzel. "Taking a buyout is a final decision. And employees will not know for many months whether they made the right decision. There is a high degree of uncertainty."

To identify ways to improve the situation, the research team looked at how well Ford was communicating and providing information about the buyout. The team surveyed 2,000 eligible employees about the types and sources of information available to them to support decision-making. Family members were the primary sources of information, followed by financial planners.

Acting on this finding, Ford offered eligible employees access to financial planners to help them determine if taking the buyout made sense financially. After this service was offered, the percentage of employees accepting the buyout rose from the high teens to more than 40 percent, Schatzel says.

What’s more, for employees to accept a buyout, the study team found, they had to feel optimistic about their abilities to continue making a living. This led Ford to provide information about, and access to, educational institutions through education fairs where employees could learn how to use the buyout to change careers. The company also held career fairs for these employees. "By providing a lot of tangibles and information, it was possible to create a greater degree of optimism," says Schatzel.

Ultimately, these efforts led to more than half of the eligible employees taking the buyout.

Others can learn some lessons from Ford’s experience. "Overcommunicate about the buyout, providing as much detail as possible," Schatzel advises. "Don’t assume employees can’t handle the complexity of information, but also recognize that they may need professional advice to support the decision-making process."

Communication Is Key

Clearly, a buyout’s effectiveness depends on more than design. It requires good communication. "Design a program that achieves the company’s business objectives while also demonstrating respect for employees," says Cheryl Wright, director of employee experience with Sprint Corp. in Overland Park, Kan. "HR executives need to keep in mind that their audience is not just the employees who are making the decision to leave; it is also the employees who will remain. How you treat exiting employees in any type of separation situation has a profound and lasting impact on the level of engagement within the retained workforce."

In communicating to employees about a 2008 buyout,Sprint focused on explaining the business rationale. The decision to undertake the buyout "was based on an understanding of what our internal labor costs were and where they needed to be," Wright says.

Sprint’s buyout offer was the equivalent of what employees would receive following an involuntary layoff and was based on length of service and level within the organization. The company also provided access to outplacement services and to its employee assistance program.

"We did not start with a specific goal in mind" in terms of number of employees taking the buyout, Wright says. "We just opened it up to see who would be interested. For the most part, employee populations that tend to have the most direct interface with our customers were not eligible." The excluded customer-facing employees generally were in Sprint’s sales, customer care and support organizations.

Sprint used a variety of communication outlets to ensure that employees received the information they needed to make informed decisions; some outlets were companywide, while others were aimed at specific business units. The company sent e-mails directly to all eligible employees, set up an intranet web site and made HR subject-matter experts available to explain the benefits.

The company launched a blog about the buyout so employees could comment directly. Learning from past experience, Sprint made sure that all of the materials communicated exactly who was eligible and who was not, to avoid confusion.

Developing a Program

Effective buyouts allow a company to achieve its goals without generating avoidable legal risks. Thus, before rollout, the program should be examined by legal counsel for pitfalls that leave the company open to lawsuits charging discrimination based on age, gender, race or disability. For example, a company would run afoul of employment laws if it tried to force or unduly influence specific employees or groups of employees, such as older workers, to take buyouts.

Experts identify the following additional preliminary steps:

Determine if the buyout is necessary.

Buyouts can have long-lasting consequences, so be clear about the business reasons. "Some companies are being very shortsighted to save money," says Jane Goldner, CEO of HR consultancy The Goldner Group in Atlanta. "When the economy turns the corner, they’re going to need good employees." 

Moreover, Goldner says, buyouts can affect a company’s position in the community and its ability to attract talent. Therefore, consider less-drastic alternatives first, such as shortened workweeks. When employees take buyouts, she says, "a lot of institutional knowledge and wisdom walk out the door, and companies lose people who can mentor younger people and ensure an appropriate knowledge transfer."

Make sure the program is strategic.

A buyout may cost the company promising talent. The best people will take the buyout, and business leaders will be left with people who could not get jobs somewhere else, explains Ellen Raim, a principal at business consulting firm the Corragio Group in Portland, Ore. "If this happens, companies are essentially paying their best people to leave."

To avoid this, approach buyouts strategically by focusing offers on specific departments, functions or divisions. Figure out how to save money by focusing on areas of least productivity and any projects that will stop, says Raim. For example, if a department has five administrative assistants or 20 engineers, and managers think the department could operate with fewer, the buyout offer could be limited to those groups.

No matter what group of employees receives offers, document the business reasons for the decisions, says Tim Davis, an attorney with Grasch & Gudalis in Lexington, Ky. For example, Davis suggests documenting the divisions considered for the buyout and what economic reasons led to a particular division being targeted. Documentation can reinforce that the buyout decision and the employee populations chosen were based solely on concrete business reasons.

Make sure the program is truly voluntary.

The decision on taking a buyout must rest with the employee. Although there is nothing inherently wrong with noting that the company may undertake involuntary layoffs if enough volunteers do not opt in, "there are definitely legal issues with respect to presenting the buyout program in a coercive way," says Marc Mandelman, senior counsel with Proskauer Rose LLP in New York. "The problems occur when individual managers want to encourage certain people to participate" by suggesting those individuals might be laid off if they don’t take the buyout offer. Such behavior could be construed as trying to force only specific members of the eligible employee group to take the buyout.

Evaluate the incentives.

If a buyout does not attract enough interest, consider offering incentives to increase participation. "Sometimes, offering standard severance pay is not going to be enough, especially in this economy," says Mandelman. To sweeten the pot, the company might offer, for example, a lock-in for certain retirement benefits that would not be available to employees who declined the buyout, such as retiree medical coverage or a pension plan enhancement geared toward people who are near full plan vesting.

Make the terms clear.

Finally, any documents involved in completing the buyout must be easily understandable by all eligible employees. Although it may be tempting to try to add protections by filling documents with legalese, "Craft documents that are very simple and easy to understand," says Davis, thereby protecting the company against claims that an employee did not understand the meaning of the buyout or of the documents he or she signed.


The author is a New Jersey-based business and financial writer.

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