The High Cost of Buyouts

By Dr. Sullivan

Mar. 20, 2009

Tough economic times aren’t fun for anyone in the HR profession. During economic downturns, the HR budget is often the first to be cut, and no matter how well labor costs are contained, the function is routinely blamed for any fallout from even the smallest of layoffs. Given the climate, HR leaders shouldn’t make matters worse by utilizing what are commonly know as “voluntary” buyouts (as opposed to the nonvoluntary variety, also known as layoffs) that might result in your most valuable talent walking out the door.

    Buyouts have become quite popular these days. Noted companies such as Disney, Nissan, Sprint Nextel, Best Buy and IBM have recently used them to shed excess labor. They are favored by many in management because they allow managers to avoid making tough decisions and having emotional conversations with individual employees who need to be laid off. On the surface, buyouts seem like a win-win because no one gets emotional and the firm gets to cut labor costs, but buyouts may actually cause more problems than they solve.

Buyouts can be damaging and expensive
   Buyouts are an approach that let wimpy managers cede control of what should be a strategic decision to employees—the people who probably do not possess the knowledge or interest to make decisions that place the needs of the organization first. By letting employees self-select, you risk losing high-value employees who always have options, leaving you with low-value employees who probably can’t go anywhere else.

    Employees with mission-critical skills know who they are, and they know that their skills give them options even in the toughest of times. The same goes for another group: those who have always demonstrated an ability to do more with less. If a disproportionate share of employees from either of these camps opts out, they will carry with them any chance of your buyout program producing a positive ROI in the medium and long term.

    The reasoning is simple: Rarely do high-value employees receive compensation proportionate to their increased level of contribution. While you may shed labor resources with slightly greater compensation than average and below-average workers, you lose substantially more in terms of organizational capability, which is expensive to restore.

    Paying experienced employees to leave means losing many seasoned and knowledgeable workers who provide organizational capability. Their loss will likely cause serious economic damage in the long term, because ability to solve problems under pressure within your firm’s culture is not something easily replaced. Under voluntary circumstances, such employees are more likely to leave. Experienced workers are in more demand and usually have more incentive to leave because they are offered much larger buyout packages based on seniority.

There goes Tiger Woods
   In addition to losing experienced and resourceful people, there’s another problem with the volunteer approach, and perhaps the biggest one. The employees who are most likely to accept a buyout are probably your top performers. They’re smart—they realize that for months, possibly even years following a major reduction in force, life inside the organization won’t be fun. Development budgets will be cut, capital growth plans will be postponed, and pretty much any opportunity to innovate and grow will be limited. Faced with stagnation, those with options are the ones most likely to take the money and leave. Top performers know that even in a down economy, they will have numerous opportunities, so the last thing you want to do is offer them a large incentive to resign.

    Fortunately, firms such as Charles Schwab and Boeing have learned lessons from the mistakes made by others. This time around, they are abandoning buyouts and instead focusing their efforts on retaining experienced top performers. Another indication that many executives have learned a valuable lesson regarding consciously retaining experienced skilled workers is that the Bureau of Labor Statistics reports a 3 percent increase in the number of workers 55 and older who were employed last year. During that same period, the number of employed people ages 25 to 54 fell by nearly 3 percent.

    HR often institutes detrimental practices such as hiring freezes, pay freezes and buyouts without identifying their many unintended consequences. Rather than letting employees make a workforce reduction for you, HR must to learn to prioritize skills, individuals and positions, and to quantify the costs in dollars of losing valuable employees. Executives must know the actual dollar costs of paying your best people to walk out your front door.

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