HR & FINANCE ISSUES IN A DECLINING ECONOMY

Ebonee Davis, Michelle Chapekis, Lianne Young, Jen Wroblewski,

Julia Siebert, Mallory Herr

“If there was ever a time to underscore the importance of HR, it has arrived. And sadly, if there was ever a time to see how few companies get HR right, it has arrived too…If their company is in a crisis perhaps they’ve at last seen the light. HR matters enormously in the good times. It defines you in the bad.”

-Jack Welch

WHY IS THIS RELEVANT TO ME? Highest rates of unemployment and layoffs

in more than 15 years 60% of 633 HR professionals said their

organizations expect to lay off employees in the next 12 months -- SHRM Oct. 2008

Current Company cutbacks:• Salary reduced 14.2%• Hours reduced 19.0% • Benefits reduced 12.7%• Forced to take unpaid leave 3.9% • Did not receive raise 27.0% • Did not receive bonus 18.5%•Laid off 15.1% • Other 22.9%

Current Company cutbacks:• Salary reduced 14.2%• Hours reduced 19.0% • Benefits reduced 12.7%• Forced to take unpaid leave 3.9% • Did not receive raise 27.0% • Did not receive bonus 18.5%•Laid off 15.1% • Other 22.9%

AGENDAI. Severance PackagesII. Non Monetary BenefitsIII. Early Retirement Buyouts/LayoffsIV. Real World Examples

a) General Motors b) Microsoft

V. In class severance package activity

SEVERANCE PACKAGES Benefit given when employee is

terminatedWorkforce reductionsPlant closingMergers and acquisitions Incentives for early retirement

To help bridge the gap of employment Sign a release of claims on the Employer

WHAT CAN BE INCLUDED? Employer’s Discretion

CompensationContinuation of insuranceOutplacement servicesBonus payForgiveness of loansStock optionsNon-monetary benefits

PAY CALCULATION 1 week of pay for every year of service Duration Pay out options Annuitized benefit vs. Lump sum

REGULATION Agreement between the employer and

employee ERISA (Employee Retirement Income

Security Act)“… only where such an undertaking or

obligation requires the creation of an ongoing administrative program” ~Schonoholz v. Long Island Jewish Medical Center

ADEA and OWBRA

TYPES OF SEVERANCE PLANS Private Sector Public Sector Chief Executive Officer & Senior Level

Execs. Union Employees

PRIVATE SECTOR Documented in the employee handbook, or

in a document with other employee benefits Only 39% of companies surveyed had details of

the plan in writing for the employee’s records Determined at the Employer’s discretion

Each employer varies 71% use number of years of service as the

determining amount 31% give one week of pay for each year of service 20% give two weeks of pay for each year of service

Not subject to ERISA Voluntary Program Lump sum

PUBLIC SECTOR-GOVERNMENT Regulated under ERISA

Classified as “welfare benefits plan” Varies by state Amount is paid in the beginning Determined by years of service Full pay out is 26 weeks

CEO & SENIOR EXECS. SEVERANCE PACKAGES Determined by a committee

Board of Trustees Performance is the primary factor Compared to the market Allowed extra perks

Continued membership to country clubsBonusesStock optionsAdministrative assistance

UNION EMPLOYEES: UFCW, FELRA Determined by a collective bargaining

agreementBetween the union representatives and

employer Vesting Schedule Based on:

Hourly rateYears of serviceEmployee’s age at the start of

employment

NON-MONETARY BENEFITS “There’s a cost to treating people

unfairly” In 2001, 53% of firms provided

outplacement to all officers, senior executives and executives

- In 2008, 67% of firms provided outplacement to that group

In 2009, 72% of firms provide outplacement services to displaced employees

OUTPLACEMENT SERVICES Outplacement Consultant Use of Outplacement Office Resources

Printing and sending resumesMail and telephone use Job finding workshops

Can negotiate for more complete package

AT&T BENEFITS Career Transition Centers, Workforce

Management Program“Give managers support to find jobs as they

leave” Individual counselingResource libraryTax and insurance planning$10K for education and relocation expenses

MANAGEMENT WANTS TO REDUCE THE SIZE OF YOUR WORKFORCE

Early buyouts, early retirement, layoffs

How companies target who to layoff/buyout

EARNINGS & PRODUCTIVITY OVER THE CAREER

A (t)

W (t)

V (t)

V(t)=value of productivityw(t)=wageA(t)=value of worker's tim e

T im e

V,A

, W

C aree r w ith firm

WHO SHOULD THE FIRM LAYOFF? The “keepers” are the ones in midcareer Want to get rid of the 2 extremes:

Just starting out at firm Nothing legally prohibiting the discrimination of

young peopleOlder workers

ADEA prohibits selective layoffs of older workers Need a way around it… buyouts!

WHO SHOULD THE FIRM BUYOUT? Buyout older workers when the value of

their productivity is less than the value of their own time

Buyout the workers that will ask for/require the least

DO THE MATH

W = wage (how much they get paid)

V = Value of workers productivity (what the employee is worth)

A = Value of the workers time (how much their leisure time is worth to them in $)

Buyout?

$18 $20 Doesn’t matter! Keep! (They produce $2)

$23 $25 $30 Keep, but they will retire (unless you bump their wage to $30)

$24 $20 $21 Buyout! (He’s getting paid more than he’s worth; the value of his leisure time is pretty close to his wage…

HOW TO BUYOUT?

Workers with firm-specific human capital want a bigger buyoutAn across-the-board buyout offer will be

more attractive to workers without training (young and untrained) - good!

Low productivity people may be worth less to the firm due to wage compressionBut high ability people will have more

outside opportunities, so you get adverse selection with an across the board buyout - bad!

INCENTIVE EFFECTS

If buyouts are offered to low ability people, high ability people have incentives to shirk - won’t be as productive if they know there’s a buyout at the end of the road

To avoid the incentive problem, surprise buyouts

The firm might also want to buyout younger workers rather than laying off if reputation is an issue

REAL WORLD EXAMPLES Buyouts and Severance Packages at General Motors and Microsoft

TODAY’S ECONOMYTODAY’S ECONOMY Employers cut 5.1 million jobs

663,000 in March alone Workforce reductions

Cut short-term costs Increase chance of survival

OptionsLayoffs (severance), buyouts, early

retirement

REAL LIFE EXAMPLE: GENERAL MOTORS 7,500 employees left the company

Buyout and early retirement Offered to ALL US 62,400 hourly

employees$20,000 cash and $25,000 voucher

Hard to get employees to leaveCompany almost bankruptUAW reduced job security provisions

REAL LIFE EXAMPLE: GENERAL MOTORS Keep management and executives

Leadership talent Blue-collared workers

Easy to replaceOffered incentives to ALL workers

Other auto companies doing the sameFordChrysler

MICROSOFT LAYOFFS

Chief Executive Steve Ballmer states that Microsoft is facing "a once-in-a-lifetime set of economic conditions”

2-3% of Microsoft's 96,000 jobs worldwide will be eliminated over the next 18 months (starting January 2009)

WHY MICROSOFT IS HURTING

“The economy is resetting to a lower level of business and consumer spending” – Steve Ballmer, CEO of Microsoft

Consumer spending is down Netbooks and Linux Decline in sales of Microsoft’s Windows

operating system for personal and business computers

COST CUTS

Layoffs: 1,400 full time positions cut in January, 872 from HQ in Puget Sound region

Freeze in pay but employees still eligible for stock awards and cash bonuses

Cuts on contract labor Delays in construction Reductions in marketing and travel

budgets

SEVERANCE AND BENEFITS

"We still have fresh-ground coffee makers, free soda pop, and I ride a Microsoft Connector bus from my home ... to work in Redmond.”

"It is still the best place in the world for a techie to work. It's just a little sadder, a little more sober, and a lot more focused on weathering this storm."

Outplacement services Microsoft Alumni Network Employees eligible for 60 days of pay as

well as severance pay that is calculated on tenure and level

There was one small problem…

OOPS……

CLASS ACTIVITYCLASS ACTIVITY

Now it’s your turn:You are an executive at Dunder Mifflin and you are closing the Scranton branch. You need to decide who to buyout and what kind of severance package to provide for your employees. What elements are you going to include and how are you going to determine them?

Think about what we have discussed today…

QUESTIONS?