Cover

December, 2003

Cover Story

VRS Experience

Corporate downsizing by retiring the employees earlier than the completion of their tenure is widely used to address problems caused by changes in technology or the market demand. But this method of Voluntary Retirement Scheme (VRS), or the "golden handshake" as it is also called, is frequently disturbing the proverbial hornet's nest in Nepal triggering a spate of trade union opposition on the one hand and expression of concern from the armchair intellectuals about the addition of some hundred or thousand persons to the group of the unemployed.

In this context, it was no surprise that the recent effort by the two ailing public sector commercial banks - Nepal Bank Ltd.(NBL) and the Rastriya Banijya Bank (RBB) - to retire some four thousand people through VRS was almost proving a failure had not the banks added more facilities at the last minute.

An analysis of some of the experiences so far in VRS implementation in Nepal reveals interesting lessons.

The primary problem associated with this scheme seems to lie in the lack of a national policy on worker retrenchment. The Labour Act is completely silent about it. The employment safeguards measures in Nepal are quite strong in favour of employees (see box in Page 45).

The country's labour law has not incorporated any provision for VRS. Though it has some provisions for 'pay-offs' and 'lay-offs', these are not sufficient provisions for the private sector which is constantly demanding for a clear system to regulate the exit of the firm from a business by retrenching the employees. The situation now is likened to a case in which though the person is dead the doctors have not declared so because the family says it lacks the money needed for the last rites of the deceased. This analogy better fits some public enterprises which are already bankrupt, but the declaration is not made because in that case there should be enough fund arranged to pay off the employees. Though some private sector companies have successfully implemented VRS, the success is attributed to the understanding shown by the employees.

VRS Experience
Organization	How the VRS Incentives Looked Like
Harisiddhi Brick	20-25 days salary for each year of service
Bansbari Leather & Shoe Factory	Before privatization 1.5 month's salary for each year of service. After privations 1 month's salary for each year of service (in 1994). Later 20-25 days salary for each year of service.
Raghupati Jute Mills	1 month's salary per year of service if the total service period is above 15 years, 20 days' salary per year of service if the service period is between 10-15 years, 5 days salary per year of service if the service period is less than 10 years
Nepal Rastra Bank	Between 1.5 and 2.5 month's salary for each year of service
Nepal Electricity Authority	Rs. 100,000 for officers and Rs. 50,000 for junior staff (but the scheme was not implemented)
Solid Waste Management Company	4 months salary for each year of service
Nepal Lever Ltd.	About Rs. 400,000 - Rs. 700,000 per person
Nepal Waste Supply Corporation	Salary for a number of months which is less from the following two calculations 1. No of years of service multiplied by 1.5 2. No. of years of service remaining to reach the compulsory retirement age
Nepal Bank Ltd.	1 month's salary for each year of service if the service period is 20-25 years and 22.5 day's salary if the service period exceeds 25 years (but the age of the employee does not exceed 57 years). Later the amount increased to the salary of 1.5 month for each year of service completed.
Rastriya Banijya Bank	Lump sum amount between Rs. 95,000 and Rs. 350,000 [lowest level employee with largest service period (29 years) to get Rs. 95,000 and the highest level employee with shortest service period (20 years) to get Rs. 350,000]. Later the facilities increased by about 20% and the clerical level persons were promoted one level for the retirement benefit calculation.
Soaltee Hotel Ltd.	3 months salary for each year of service completed.
Jawalakhel Distillery (P) Ltd.	15% addition on the gratuity amount (Between Rs. 80,000 and Rs. 300,000)
Hulas Metal Craft	Rs. 25,000 addition on the normal facility

Another very interesting finding is that though there are many cases of VRS implementation recorded, the learnings from the previous experiences seem to be rarely used in the subsequent schemes. The method is used more in public enterprises (PEs) in the course of their privatizations, though it is also used by some private sector organisations. And neither the PEs nor the private sector corporates seem to be following a broad policy framework. Each company seems to have implemented its own scheme structured uniquely. This difference was there also in the NBL and RBB example and one of the reasons for that was the unique personnel rules that these banks (and any other institution) has. For example, while NBL has a pension system, RBB has life insurance system. The retirement package was to be different also to address these differences in the personnel rules.

One important point of criticism to VRS seems to be based on the fact that these schemes are found to be focused only on the cash benefits that go to the people who are retiring under the scheme. Being silent about the benefit for those who will remain in the company after the VRS, the scheme is looked upon with indifference by the staff members not entitled for the golden handshake. At the same time, those employees who are eligible for VRS find it a tricky decision. If they opt for VRS they may lose the opportunity of hefty pay rise that the organisation may introduce later. If they do not volunteer to go out now and such pay rise is not introduced by the company later, they will lose the additional benefits offered in the present scheme.

VRS Blues

Measures to Mitigate Them

# A company offering VRS can avoid or reduce the magnitude of some potential problems by keeping in mind following aspects before offering the scheme.

# There must be a genuine reason for downsizing the workforce. Simply fulfilling some conditions imposed externally, such as by the government or the foreign partner (or the World Bank in NBL-RBB case) is not enough. And it is a must that such reason is clearly conveyed to all the stakeholders in the company, i.e. the trade union, the investors, the general people and the government.

# Analyze the existing manpower inventory in terms of number and skills and estimate the manpower inventory required to operate at the optimal level. Aspects such as automation, technology upgradation, new working methods to be adopted have to be taken into consideration. Prepare a manpower plan accordingly and decide at the number to be downsized and the period over which downsizing should be done.

# Have right communication. The scheme should be announced all over the organization at the same time so as to prevent the spreading of any rumors. The trade union should be taken into confidence and the all facts of the scheme, including the need for it and the possible consequences if the downsizing is not done, should be explained to them. All the workers in the organization should be explained the why's and how's of the scheme. They should be convinced why the severance package offered is lucrative. Also the assurance should be given to all the employees that whoever accepts the scheme would be helped by the company in resettlement. At the same time assurance should be given that all those who will be retained need not worry about further retrenchment.

# Apply different age limits for different levels to entitle them for VRS. People with higher skills retain higher productivity for longer period. Moreover the qualified personnel are less in number than the unqualified ones. So, devise the scheme in such a way that higher skilled people are retained.

# Identify the possible VRS candidates and the key performers. This can be done by mobilizing line managers and through the system of performance appraisal. The identified persons should be counseled accordingly either to accept the VRS or to stay in the company.

# Offer wide range of choice. Include in the severance package different benefits, which would make it attractive to the employees to accept the scheme. For example, offer the option of receiving the package in lumpsum or in the pension form or in combination.

#l Motivate those who stay. Adjustment to the changed organization is not easy. Counsel them, retain them and redeploy them at right place.

# Provide outplacement service to those retrenched. This can be done by an in-house department or by pressing into service an outside agency. Provide counseling, training, and all the other help required. Although this involves cost, it is negligible when compared to the advantages obtained in return. It not only convinces employees to accept VRS but also helps in maintaining the morale of the retained employees. This exercise also helps in creating good corporate image for the organization and it can help in the long term such as in future recruitment. Moreover, it convinces that only the posts have become redundant, not the individual employee and that the organization still values highly the person who is being retrenched.

(Based on a material from the website indiainfoline.com)

As one explanation of the reason why the NBL and RBB schemes initially received a cold response was the recent development in Nepal Rastra Bank where there was a very substantial increase in the allowances to the employees. Since traditionally the public sector banks follow the lead of the central bank in salary and allowances, the employees in NBL and RBB were expecting similar rise in their salary and allowances in the near future.

Similarly, the latest schemes of NBL and RBB, as the earlier ones in different organisations also lacked anything as to the future career of those who retire. If evaluated on the basis of the bulk of the money offered, the VRS package from Solid Waste Management Company is perhaps the heftiest among all such packages so far in Nepal. But it is reported that some of the ex-employees of this company simply spent off the money they received as they did not know how to invest it. More importantly, the employers who send their people away on VRS do not bother to keep track of their ex-employees. There is no motivation for ex-employer do such monitoring.

Why VRS
(Some Major Causes for VRS)

# Globalization that forces the countries as well as companies to leave the business where there is comparative cost disadvantage and to concentrate in businesses where there is comparative cost advantage.

# Change in the nature of jobs as a result of growing mechanization. This development has made many jobs at the operative and clerical levels redundant.

# Overstaffing, which was caused in the past for various reasons (e.g. by political appointments in public enterprises).

# To remove “deadwood” or the unproductive members of the staff. Since the selective retrenchment of such staff is difficult due to strong employment safeguard provisions in the labour laws, the firms have to go for VRS even if it means flooding out good staff.

# Economic downturn caused by events such as South East Asian Crisis, September 11 and war in Afghanistan and Iraq (plus the Indian Airline hijack, restrictions on export to India and Maoists insurgency).

# Outsourcing practice being extended to more and more of services.

VRS Beneficiaries
Organization	Number who retired under VRS
Harisiddhi Brick & Tile	9 in first batch, 50 in 1994 All the rest converted into contract workers in 1999/00
Nepal Film Devt. Corp.	50 (after privatization)
Bansbari Leathers & Shoe	100 before privatization 154 in 1995, after privatization All the rest the same year (1995) as the location of the factory was shifted outside Kathmandu valley
Raghupati Jute Mills	All employees (except security guards and some essential staff) in the course of privatization Balaju Textile 82 in the course of privatization
Nepal Rastra Bank	472 in the first batch. Second batch is being planned
Nepal Drinking Water Supply Corporation	38
Nepal Lever Ltd.	70 (out of 143 no of total employees 136 had applied for VRS)
Jawalakhel Distillery (P) Ltd.	79 (10 of them absorbed in Himalayan Distillery which is promoted by Jawalakhel Distillery)
Nepal Bank Ltd.	1400 applied out of nearly 2500 eligible
Rastriya Banijya Bank	1300 applied out of 1500 eligible
Solid Waste Management	All employees
Nabil Bank Ltd.	About 45 (in 2000)

Employment Safeguard Measures in Nepal
Privatization Act, Article 14
No redundancy clause to “ensure the continuity of the services of the present workers”
Compensation clause to “arrange for reasonable compensation or benefits”
ESOP clause to “issue of shares at free or at discount prices to the employees”
Guarantee of accrued salaries and facilities earned by the employees
Labour Act
There is no provision for VRS in the Act. However, there are provisions for layoff and payoff
Layoff	Prior approval of the government required, employees to be paid 50 percent of their salaries and 100 percent of their facilities during lay off period
Payoff	Prior approval of the government required for payoffs for more than three months, last in first out method to be used for payoffs, one month notice or one month salary in lieu of notice, preferential treatment to pay offs for re-employment
Seasonal employees to be paid 25 percent of their wages as retaining allowance.
Compulsory Retirement	After 55 years with the possibility of five more years of extension

Organizations Planning for VRS in Nepal Future

Dairy Development Corp. (Govt. owned)

Nepal Rastra Bank (central bank It will be the 2nd phase)

Agricultural Lime Factory (Govt. owned, work force about 250)

Khadya Udyog Ltd. (owned by Salt Trading Corp.)

Nepal Water Supply Corp. (Govt. owned, work force about 250)

Agriculture Development Bank (Govt. owned, targeted lay off between 1,000 and 1,500)

Nepal Bank Ltd. (Second phase, target about 850)

Rastriya Banijya Bank (Second phase, target about 1200

At least in this regard there seems some consideration made in NBL and RBB case. It is reported lately that the World Bank has promised a fund of 1.2 million US dollar to train the NBL and RBB people who take VRS so that they would be able to continue with new economic activities. However, the banks themselves have no motivation to conduct such trainings or counselling. May be it would be a good idea to set up a specialized agency to conduct such activities. But the sources say that the government has not shown any interest.

Contribution or Sacrifice?

Both of the principles - contribution and sacrifice - can be found being followed while implementing VRS in Nepal. Under contribution principle, the people getting VRS are compensated on the basis of their contribution to the organisation. Usually, the number of years of service is taken as the level of contribution that the employee has made. Hence, higher the number of service years completed, higher the VRS compensation package and vice versa. In sacrifice principle, the employees taking the VRS are compensated on the basis of the sacrifice that they have made by opting for VRS. Under this principle, the lower the service period of the retiring employee, higher the sacrifice he or she is making in terms of the opportunity to work and earn income. Therefore, the employee with lower number of years in the service is paid higher compensation package while the employee with longer service period is paid lower as it is considered that the older employee was going to retire anyway in the next year or so.

Though both of the principles are backed by equally strong logic, it would be a better idea to follow one principle for nationwide uniformity in the scheme though by allowing enough flexibility as to the details so as to suit the specific needs of the organisation where it is being implemented.

Other Goods & Bads of VRS

Some macroeconomic analysts in favour of VRS point out at the economic growth of the mid 1990s as contributed at least partly by the mass retirement of people from the government and other public sector enterprises. Particularly the finance companies of today are set up and managed by such people. But on the flipside, they also point out the example of Nepal Rastra Bank. The present day problems in the country's banking sector are, according to such analysts, caused by the weak monitoring capabilities of the central bank and such weakness is partly attributed to the brain drain caused in the central bank during the previous VRS.

One bad aspect of VRS is associated with the slow speed. If the company lets the rumour of imminent VRS to lenger, the employee productivity naturally goes reducing.

More important adverse effect is the heavy expense that has to be borne to pay off the employees who retire. The effect lingers long in future. For example, the heavy salary and supplement expenses of HMG now are attributed partly to the pension for those who retired in this way. In corporate business firms, the VRS needs to be followed by speedy improvement in productivity so as to cover the VRS expenses as early as possible and to start generating profit.

Trade Unions and VRS

The trade unions are found to be in dilemma regarding VRS. If the scheme is implemented, the membership base of the trade unions will erode. Therefore, it is not in the interest of the TUs to have VRS. But the members of the TU are reportedly pressing the TUs to negotiate with the management for better terms of VRS. The example of this is said to be provided by Agriculture Development Bank (ADB/N) where the employees are reportedly pressing the TU to negotiate for better package. Another aspect to it is also interesting. If senior people retire, the junior members of TU will get better chances for promotion - both in the TU and corporate hierarchy.

Also the managements are facing dilemma. They often find that those very people whom they intended to retire by bringing the VRS do not apply for retirement. As the participation in the scheme is by definition "voluntary", the management may reject the application of those employees whom it does not want to go away, but it cannot force someone to go away under VRS just because it wants them not to remain.

To avoid this problem, the managements have limited options. One Nepali experience in this is provided by Nepal Drinking Water Supply Corporation which specified quota for each layer of the employees. In another instance, which is from the private sector, the Nepal Lever Ltd. received 136 applications out of a total workforce of 143 while it was targeting to retire only 70. The Nepal Lever sources say those whom the company wanted to retain were counselled not to take the retirement. But in another such instance from a public enterprise (Nepal Electricity Authority), the entire scheme was withdrawn because good people were also likely to take retirement.

Clearly, the management needs to establish that it should be the prerogative of the management to select people whom it wants to retire.

As the recent VRS in NBL and RBB is said to be the first phase only, implying that the next phase is likely to be announced soon, let us wait and see how these forthcoming VRS packages will look like and what precedences will be established.

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