Voluntary Buyouts – Why Every Shareholder Should Fight Them

Dr. John Sullivan and Michael Cox

If you are a shareholder in a major company, voluntary employee buyouts should alarm you. First, I find them to be the single most costly strategic blunder* of all HR actions. Second, their bottom-line result may actually become negative when you calculate the real costs of paying your best employees to “take the money and run.” These unintended consequences occur because your very best employees are probably your most experienced ones. Because the buyout amount increases with tenure, the most experienced and the most capable under this process receive the largest incentive to leave. A secondary benefit, because of their advanced capabilities, these valuable employees and your likely future leaders may be directly targeted by recruiters. As a result, they will get another job almost immediately, perhaps at a competitor. So, the more accurate descriptive phrase to your best should be “take the money and run over and help a competitor.”

It Isn’t Good Business To Let Someone Else Decide Which Employees Leave!

Despite the fatal flaw of incentivizing your best to leave, this cost-cutting attempt is still being used today by many notable companies and organizations. Boeing, United Airlines, American Century, Nissan, Goodyear, and FDIC recently announced that they are repeating the same voluntary buyout blunder made by several companies during the last recession in 2008. There are many problems associated with offering voluntary buyouts and early retirements. From the shareholders’ view, the primary flaw is that it reveals the shortcomings of management, including their unwillingness or inability to make the tough decisions about which employees should be let go. Under the voluntary buyout scheme, the control over the decision of which employees depart shifts and converts a management decision to an employee decision. Employees are less likely to put the strategic good of the corporation first. This shortsighted attempt to cut labor costs can backfire. When your best talent realizes that they can get a lump sum payment and an immediate offer of the same or better job, many will run to the pay window. HR won’t calculate and quantify the loss of top talent into dollars, so the shareholders won’t ever know how costly a blunder it actually was!

The Top 10 Immediate Negative Impacts From Voluntary Buyouts 

Voluntary buyouts create numerous unintended consequences and each one might cost millions of dollars. Some of the negative impacts will be short-term, while the impact of others might not be fully realized for several years. We start below with a list of the most immediate impacts. Within the list, those with the highest business impacts are listed first.

  1. Recent economic pressures may force your historically loyal employees to leave. Clearly, your most experienced and longest-tenured employees are loyal (or they wouldn’t have stuck with your company over all these years). However, their years of loyalty may be challenged by recent economic events. A significant percentage of these employees have been idle and unable to work because of facility shutdowns/shelter in place orders. The incomes of their spouses/partners may have been reduced. In many cases, their recent reduction in family income has drained their savings to the point where these traditionally loyal employees may be tempted to take a cash buyout to get out of their economic rut. The loss of their savings and the accumulated debts recently incurred may force them to jump at the idea of a lump sum buyout that solves their economic problems overnight. Even in a down economy, their performance and experience are desirable. They will likely be able to quickly get another job in another industry or company that could offer increased job security and better health coverage.
  2. Exceptionally talented employees will be immediately poached. Every firm has a cadre of employees that are so impactful that they are internally labeled as “exceptional.” If this were the NBA, they would be labeled as “LeBron level talent.” Executives, of course, want to keep every one of them. However, your competitors know who they are because they routinely “map” your exceptional talent. Exceptional talent has a standing opportunity to join a competitor. Although, they have been treated so well that under normal circumstances most wouldn’t leave. But, with an announcement of a large-scale buyout offer, they realize that they will be facing a year or two of severe budget cuts, severely limiting their opportunities to try new projects and to innovate. Meaning, they may be the first to leave. Consider, in addition to the large cash buyout, they may be offered a sufficient level of budget, new headcount, and resources to make a job jump that would be multiple times more exciting than their bleak future if they remain. Also, if they leave, they will take two or three top employees along with them. The costs to the organization will be multiplied. From the shareholders’ perspective, the loss of any significant amount of exceptional top talent will mean that the performance of the company will go down, while your competitor’s talent capabilities and performance will simultaneously go up. The damage will be much higher at companies like Boeing that allow all employees at all levels to take advantage of the buyout.
  3. Expect high impact losses among top performers and the most experienced. The next level of talent within your organization can be classified as top performers. Once again, this high-value group is likely to be in high demand at other companies. Recruiters love to target them because they are easy to identify and place. And, because they are top performers, they will be attracted to other companies that, at the present time, haven’t instituted limits on the rewards that they care most about. For example, freezes on raises/bonuses, promotions, new headcount, and stock options. With top performers able to work remotely, your buyout program may literally pay for a comfy chair at their new job.
  4. Critical teams will be disproportionately impacted. Under traditional layoffs, executives consciously avoid releasing any talent that is working on critical teams and functions. Under the voluntary buyout scheme, you have no control over the number of members of any particular team that choose to leave. The losses to critical teams may be disproportionately higher because recruiters at other companies prioritize the poaching of any members of teams that are critical at both firms. So, you can expect to lose a disproportionate portion of sales, product development, data security, and technology teams. The net result will be that your critical teams will be hurt by understaffing, while your competitor’s teams will be bolstered with “your talent.” Unfortunately, HR won’t calculate the costs of missing key deadlines within project teams that have been decimated. This uneven loss in critical teams will make managing extremely difficult, especially if there is an accompanying hiring freeze which limits hiring replacements. 
  5. Voluntary buyouts may cause you to lose critical “future skills.” Across the board, voluntary buyouts may cause you to disproportionately lose employees with essential “future skills.” In our rapidly changing VUCA world, this will be damaging because the skill sets needed by organizations to succeed frequently shift. Employees that possess the skills that will be needed in the future become more valuable. Once again, under the “self-selection” approach, these employees know the value of their skill sets, so they know they can get a large buyout and another job almost immediately. You will disproportionately lose employees across the organization that possesses technology, data, cloud, quantum computing, and the ability to innovate remotely. 
  6. Losing experienced talent will hurt productivity, problem-solving, and your culture. Under traditional layoffs, executives focus on releasing employees with less tenure. With voluntary buyouts, the buyout amounts and the recruiter demand for those with low years of tenure will be small. So, even though you might want them to leave, a large proportion of your inexperienced employees will end up staying. Instead, your most seasoned and experienced talent will get the largest payouts and have the highest probability of getting another job without skipping a beat. Losing the most experienced and seasoned talent can cause serious losses in productivity, and delay work production schedules. These experienced employees that “get the work done” will be the first to realize that the next year after a major layoff certainly won’t be “fun.” Limited resources including hiring/salary freezes, no promotions, and severe budget cuts are disincentives for top performers. To avoid the upcoming turmoil, your most experienced employees may be convinced to leave with the foreseeable changes. VUCA environments are exactly the time when you need your most experienced top performers around. 
  7. The voluntary buyout may inadvertently reduce revenues. You may disproportionately lose your best business development and salespeople. Those losses will directly impact your revenues. In addition, losing salespeople may damage your relationships with key customers and strategic partners. Some corporations have decided against offering voluntary buyouts to sales while offering the program to other departments. This can also be damaging. Your sales and client-facing employees still need a support structure to operate successfully.
  8. Voluntary buyouts will likely create angry customers. Because acceptance is voluntary, you won’t know until it’s too late if you lose a disproportionate number of customer service employees. As a result of buyouts, reduced staffing levels will certainly be noticed by your customers. And in some cases, the reduced staffing may anger your customers. When the most experienced and top-performing individuals that interact with the customers leave, organizations can quickly kill their “brand image” for customer service. Customers will likely read about buyouts and that will increase the likelihood that they will assume turmoil and reduced service levels. Having your best people “paid to leave” and reduced staffing levels can increase error and accident rates to the point where your customers will notice. And, if your best product development people decide to leave, the negative revenue impacts may continue for years.
  9. Voluntary buyouts may cost you more. On the surface, buyouts might seem like a good way to reduce headcount and labor costs. Unfortunately, buyouts often carry with them unintended consequences, which can erode much of the anticipated savings. If a goal for the layoff is to save salary costs, you might be unpleasantly shocked (and not meet your salary savings target) if a disproportionately large number of your “cheaper” low salary employees decide to take the severance package. Your more experienced employees will cost more initially because more years of tenure will mean that they get a larger buyout package. In addition, few buyouts will actually end up saving money because budgeted “headcount employees” are often just replaced with consultants, temps, interns, and other “off the book” spending. In some cases, these external consultants and workers will actually be more expensive than regular employees. In the end, the company is in a situation where your overall “labor costs” won’t go down at all. Hidden costs will increase when managers facing labor shortages increase their use of overtime to get the work done. At time and a half, for nonexempt, this solution is relatively expensive. 
  10. Not enough employees will choose to accept the buyout. Due to the record high unemployment and the likely stretched out nature of this business disruption, a significantly lower percentage of your planned number of employees may choose to take the buyout. Instead, individuals will choose the option that provides them with the most job security. This will reduce your possible salary savings and it may force the company to follow up with a string of actual layoffs.

Tomorrow on 5/12/20, we will publish a companion article entitled “Voluntary Buyouts – The Delayed Impacts That May Linger For Years.” It will cover some additional negative impacts from voluntary buyouts that take a while to impact the bottom line.

*Just ahead of not measuring and rewarding individual managers for excellent people management results.

Author’s Note: If this article stimulated your thinking and provided you with actionable tips, please take a moment to follow and/or connect with Dr. Sullivan on LinkedIn and subscribe to his weekly Talent Newsletter.

About Dr John Sullivan

Dr John Sullivan is an internationally known HR thought-leader from the Silicon Valley who specializes in providing bold and high business impact; strategic Talent Management solutions to large corporations.

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