HR & Finance Issues in a declining economy

1. HR & Finance Issues in a declining economy Ebonee Davis, Michelle Chapekis, Lianne Young, Jen Wroblewski, Julia Siebert, Mallory Herr

2. “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

3. 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%

4. Agenda • Severance Packages • Non Monetary Benefits • Early Retirement Buyouts/Layoffs • Real World Examples • a) General Motors • b) Microsoft • V. In class severance package activity

5. Severance packages • Benefit given when employee is terminated • Workforce reductions • Plant closing • Mergers and acquisitions • Incentives for early retirement • To help bridge the gap of employment • Sign a release of claims on the Employer

6. What can be included? • Employer’s Discretion • Compensation • Continuation of insurance • Outplacement services • Bonus pay • Forgiveness of loans • Stock options • Non-monetary benefits

7. Pay calculation • 1 week of pay for every year of service • Duration • Pay out options • Annuitized benefit vs. • Lump sum

8. 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

9. Types of severance plans • Private Sector • Public Sector • Chief Executive Officer & Senior Level Execs. • Union Employees

10. 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

11. 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

12. 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 clubs • Bonuses • Stock options • Administrative assistance

13. Union Employees: ufcw, felra • Determined by a collective bargaining agreement • Between the union representatives and employer • Vesting Schedule • Based on: • Hourly rate • Years of service • Employee’s age at the start of employment

14. 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

15. Outplacement Services • Outplacement Consultant • Use of Outplacement Office Resources • Printing and sending resumes • Mail and telephone use • Job finding workshops • Can negotiate for more complete package

16. AT&T Benefits • Career Transition Centers, Workforce Management Program • “Give managers support to find jobs as they leave” • Individual counseling • Resource library • Tax and insurance planning • $10K for education and relocation expenses

17. Management wants to reduce the size of your workforce Early buyouts, early retirement, layoffs How companies target who to layoff/buyout

18. Earnings & Productivity Over the Career

19. 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 people • Older workers • ADEA prohibits selective layoffs of older workers • Need a way around it… buyouts!

20. 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

21. Do the math

22. How to Buyout? • Workers with firm-specific human capital want a bigger buyout • An 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 compression • But high ability people will have more outside opportunities, so you get adverse selection with an across the board buyout - bad!

23. 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

24. Real World examples Buyouts and Severance Packages at General Motors and Microsoft

25. Today’s Economy Today’s Economy • Employers cut 5.1 million jobs • 663,000 in March alone • Workforce reductions • Cut short-term costs • Increase chance of survival • Options • Layoffs (severance), buyouts, early retirement

26. 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 leave • Company almost bankrupt • UAW reduced job security provisions

27. Real Life Example: General Motors • Keep management and executives • Leadership talent • Blue-collared workers • Easy to replace • Offered incentives to ALL workers • Other auto companies doing the same • Ford • Chrysler

28. 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)

29. Why Microsoft is hurting • Consumer spending is down • Netbooks and Linux • Decline in sales of Microsoft’s Windows operating system for personal and business computers • “The economy is resetting to a lower level of business and consumer spending” – Steve Ballmer, CEO of Microsoft

30. 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

31. Severance and benefits • Outplacement services • Microsoft Alumni Network • Employees eligible for 60 days of pay as well as severance pay that is calculated on tenure and level • "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." There was one small problem…

32. OOPS……

33. Class activity Class 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…

34. Questions?