Advance Personnel Management

Chapter No. 4 Exit Policy

1.4.1 Voluntary Retirement Scheme (VRS):

• In India downsizing generally implemented through Voluntary Retirement Scheme.

• Under these schemes, the organization and its employees enter into a mutual agreement.

• Under this agreement Employees agree to voluntarily retire on payment of agreed

compensation by the employer.

• During 1991 India adopted the police of economic liberalisation, globalization and
privatization.

• Since then several organizations in both public sector and private sector have downsized in
order to reduce the surplus staff.

• VRS has been used to reduce the wage bill by offering one time compensation.

• VRS has come to be known as “Golden Hand Shake“in view of its benefits for both

employees and employers.

• In the Initial stage VRS appeared attractive and many organization successfully

implemented VRS.

• But in many cases VRS attempts have failed. Various issues involved in VRS needs to be
tackled effectively in order to make the schemes successfully.

• The main issues in VRS are as follows;

1. Identifying the needs for VRS:

First of all, the organization must check whether VRS is really necessary.

In case there is surplus manpower which can not be utilized in future, VRS may

be required.

The types of employees to be covered in the schemes and those who opt for it also need to
be identified.

2. Cost Benefit Analysis:

Before deciding to launch a VRS, its imprecation for the organization should be

carefully considered.

VRS is double edged weapon and not a panacea for all ills of human resource

management.

When targeted employees do not opt for VRS, the morale of employees may go

down.

It is also possible that employees who are unemployable do not opt for the

schemes.

In such a case the organization may lose talent and may be left with poor quality

staff.

If this happens the very purpose of VRS will be defeated.

3. Designing the schemes:

The main issues involve in designing VRS are:

o The employees to be covered in the scheme. Logic lies in covering those

employees who are least required in future. SAIL prescribe the minimum age
limit for different categories of employees.

o The compensation package to be offered. In public sector, three months

salary for each completed year of service subject to a maximum of monthly

salary multiplied by the number of months left for retirement is the norm. in

public sector banks 45 days of salary for every year of service or salary for

balance period of service which ever is less is offered.

4. Convincing trade union:

Unless this trade union agrees VRS is likely to fail.

Therefore, management must convince the union(s) by explaining various pros

and cons and suggesting alternatives which employees can adopt after opting for
VRS.

5. Rehabilitating Employees:

A firm or an association of firms may design a rehabilitation package for the

concerned employees.

Such a package should include redeployment through further training.

When employees know that they have alternative means of earning livelihood,
they will opt for VRS.

Government of India has set up five employee assistance centres at Mumbai,

Kolkata, Ahmadabad, Kanpur and Indore to provide training to displaced
workers.

1.4.2 Effects of Excess Manpower:

1. Excess manpower results in high labour costs which increase the production cost and thus
ending in high product or service costs.

2. It reduces the competitive ability of the enterprise.

3. Excess manpower in any business activity or industrial establishments reduces

employee efficiency and labour productivity.

4. Surplus human resources pose threats for technology up gradation which is essential in the
competitive market.

5. Surplus labour may result in poor industrial relation and unrest amongst labour.

1.4.3 Exit Policy as given by Govt. of India:

• Voluntary Retirement Schemes – have been legally found to be giving no problem to

employers, employees and their unions.

• The essence of the Voluntary Retirement Schemes which is approved by the government
– involves voluntary separation of employees who are above the age of 40 years or have
served the company or establishment for minimum 10 years.

• The company, many offer different separation benefits to employees in different age group
subject to overall benefits which are tax exempted up to a limit of Rs. 5 lakh, public sector
undertaking, however, have to obtain prior approval of the government before offering and
implementing the voluntary retirement schemes.

• The reason for proposing VRS:

1. Recession in business

2. Intense competition which makes the establishment unviable unless downsizing is resorted
to
3. Changes in technology, production process, innovation, new product line

4. Realignment of business- due to market conditions

5. Joint-ventures with foreign collaborations

6. Takeovers and mergers

7. Business re-engineering process

8. Product/technology obsolescence’s.

1.4.4 Procedures for Voluntary Retirement Schemes:

• The employer has to issue a circular communicating his decision to offer voluntary
retirement scheme-mentioning there in.

(a) The reason for downsizing

(b) Eligibility i.e. who are eligible to apply for voluntary retirement

(c) The age limit and the minimum service period of employees who can apply

(employees who is 40 and above and those who have completed minimum 10 years

of service in the establishment.)

(d) The benefits that are offered.

It should be noted that employees who offer to retire voluntarily are entitled as

per law and rules the benefits of Provident fund, gratuity and salary for balance

of privilege leave up to the date of their retirement, besides the voluntary

retirement benefits.

(e) The right of an employer to accept or reject any application for voluntary retirement.

(f) The date up to which the scheme is open and applications are received for consideration
by the employer.

(g) The circular may indicate income tax incidence on any voluntary retirement benefits
which are in excess of Rs. 5 lakh, which is maximum tax free benefits under such schemes.

(h) It should also indicate that those employees who opt for voluntary retirement and accept
the benefits under such scheme shall not be eligible in future for employment in the
establishment.

1.4.5 Steps to be taken for introducing and implementing Voluntary

Retirement Scheme:

1. If the company is public sector undertaking obtain approval of the government.

2. Identify departments/employees to whom VRS is to be offered (Target group of

employees-age above 40 years and employees with more than 10 years service in the
company.)

3. If there is a union of employees in the establishment involve in the union by

communicating to them the reason, the target group and the benefits to be offered to those
who opt for the scheme.
4. Formulate terms of VRS and benefits to be offered are to be mentioned in the circular or
communication to employees and decide the period during which the schemes is to be kept
open.

5. Motivate the managers through counselling.

6. Counselling employees is an essential part of implementing the schemes. The counselling

should include what the retiring employee can do in future i.e. rehabilitation, how to manage
the funds received under the scheme.

7. After receipt of applications for accepting VRS, scrutinize, decide whose applications are
to be accepted and those whose are not to be accepted.

8. For those whose application are to be accepted prepare a worksheet showing the

benefits each will receive including other due like Provident Fund, gratuity and earned
leave wages for the balance unveiled earned leave, and tax incidence should the VRS

amount exceed Rs. 5 lakhs.

1.4.6 The challenges in implementing Employees Exit Policy:

1. The reason and need to introduce VRS should be discussed with all management staff
including top management.

2. The effects of downsizing including on the work or activities of the establishment carried
on is to be considered i.e. post reduction operations to be carried on should also be planned-
post plan reduction employee deployment.

3. Ensure all concerned employees and managers participate in the decision making to down
size.

4. The downsizing plan should match with the strategic plans of the company.

5. Transparency should be seen and used in choice of persons to be retired.

6. Be prepared to manage the after effects of the down sizing-both social and

psychological.

7. Motivate employees who will stay with the company, remove their apprehensions and
fears, if any.

8. Provide professional assistance to employees who agree to accept VR to plan their post
retirement, activities and financial management including, out placement.

9. The VRS should be made attractive and no pressures should be used to ease out people.

1.4.7 Merits & Demerits of Voluntary Retirement Scheme:

Merits of the VRS:

1. There are no legal obstacles in implementing VRS- as is predominantly encountered in

retrenchment under the labour laws.

2. It offers to the employee an attractive financial compensation than what is permitted under
retrenchment under the law.

3. Voluntary nature of the schemes precludes the need for enforcement which may give rise
to conflicts and disputes.

4. It allows flexibilities and can be applied only to certain divisions, departments where there
is excess manpower.

5. It allows overall savings in the employee costs thus lowering the overall costs.

Demerits of the VRS:

1. To certain extent it creates fear, a sense of uncertainty among employees.

2. Sometimes the severance costs are heavy and outweigh the possible gains.
3. A trade union generally protests the operation of such schemes and may cause disturbance
in normal operations.

4. Some of the good, capable and competent employees may also apply for separation which
may cause embarrassment to the managements.