The pros and cons of voluntary buyouts
Yesterday the Trump Administration announced it was offering voluntary buyouts for over two million federal workers. Employees who voluntarily leave their positions will receive a payment equal to eight months of their salary. Obviously, the goal is to reduce the size of the federal workforce and related expenses.
From time to time, our clients ask us about doing similar voluntary exit incentives to shrink their labor-related expenses. These voluntary programs are not without their pros and cons. Some of those tradeoffs look like this:
Pros
- By allowing employees to volunteer to resign or retire, the company can accelerate the departure of employees who are planning to leave anyway or who are on the fence about whether to leave. The buyout may provide them the final nudge they need.
- Employees on the cusp of retirement often elect the voluntary buyouts. These employees are often the highest-paid employees. It avoids difficult decisions. The company doesn’t have to make the difficult decision of who to keep or let go if the employee is willing to leave. Employees who choose the voluntary buyout know that they must sign a general release in order to receive incentive payments. So, the risk of post-termination discrimination lawsuits is significantly diminished.
- Cons
- A company-wide buyout offer can lead to critical employees leaving the company. The departure of those key employees can cause serious skill-drain and corresponding loss in productivity/revenue. As a result, the buyout may be entirely counterproductive.
The company may be left with the worst performing employees. The most valuable (and highest-performing) employees of a company are usually confident that they can find new jobs in the market. They are therefore more likely to accept the buyout. In contrast, employees who are not performing well (especially those who have become complacent due to a lack of supervision) tend to not elect. Rarely are the effects of a buyout evenly distributed across all departments. A voluntary buy-out can lead to a concentration of employees in a few departments, which could cause a workforce imbalance. Let’s say, for example, that the IT department of a company is understaffed and employees are unhappy because of this. In a buyout all IT employees vote, leaving no one left in the IT Department. The marketing department is overstaffed and the work demand is low because of this. The buyout is not a choice for any marketing employees. The end result is that the company loses employees it needs and keeps employees it doesn’t.
- While financial payments are necessary to incentivize anyone to voluntarily resign, the uncertainty surrounding healthcare insurance and related costs often prevents employees from accepting the buyout. Employees are often reluctant to accept the buyout offer unless there is a continuation of healthcare coverage (often via COBRA) that will last long enough to allow them to transition to their next job, or to Medicare. After weighing the pros and cons of voluntary buyouts, companies often decide to skip them altogether or carefully select which employees are eligible. It is not unusual for companies to use a two-step approach: a voluntary buyout followed by a reduction in force to remove any remaining excess.
