An Assignment Of Strategic Human Resource Management (Module V)

Submitted To:Prof. Dipamala Santra

Submitted By:- Batch:- (2010-12)

Amitesh

Golden handshake
A golden handshake is a clause in an executive employment contract that provides the executive with a significant severance package in the case that the executive loses his or her job through firing, restructuring, or even scheduled retirement. This can be in the form of cash, equity, and other benefits, and is often accompanied by an accelerated vesting of stock options. The term originated in Britain in the mid 1960s. It was first coined by the city editor of the Daily Express, Frederick Ellis. It later gained currency in New Zealand in the late 1990s over the controversial departures of various state sector executives. Typically, "golden handshakes" are offered only to high-ranking executives by major corporations and may entail a value measured in millions of dollars. Golden handshakes are given to offset the risk inherent in taking the new job, since high-ranking executives have a high likelihood of being fired and since a company requiring an outsider to come in at such a high level may be in a precarious financial position. Their use has caused some investors concern since they do not specify that the executive had to perform well. In some high-profile instances, executives cashed in their stock options, while under their stewardship their companies lost millions of dollars and thousands of workers were laid off. Golden handshakes may create perverse incentives for top executives to facilitate the sale of the company they are managing by artificially reducing its stock price. It is fairly easy for a top executive to reduce the price of his/her company's stock - due to information asymmetry. The executive can accelerate accounting of expected expenses, delay accounting of expected revenue, engage in off balance sheet transactions to make the company's profitability appear temporarily poorer, or simply promote and report severely conservative (e.g. pessimistic) estimates of future earnings. Such seemingly adverse earnings news will be likely to (at least temporarily) reduce share price. (This is again due to information asymmetries since it is more common for top executives to do everything they can to window dress their company's earnings forecasts). A reduced share price makes a company an easier takeover target. When the company gets bought out (or taken private) - at a dramatically lower price - the takeover artist gains a windfall from the former top executive's actions to surreptitiously reduce share price. This can represent tens of billions of dollars (questionably) transferred from previous shareholders to the takeover artist. The former top executive is then rewarded with a golden handshake for presiding over the firesale that can sometimes be in the hundreds of millions of dollars for one or two years of work. (This is nevertheless an excellent bargain for the takeover artist, who will tend to benefit from developing a reputation of being very generous to parting top executives). This is just one example of some of the principal-agent / perverse incentive issues involved with golden handshakes and golden parachutes. Similar issues occur when a publicly held asset or non-profit organization undergoes privatization. Top executives often reap tremendous monetary benefits when a government owned or non-profit

entity is sold to private hands. Just as in the example above, they can facilitate this process by making the entity appear to be in financial crisis - this reduces the sale price (to the profit of the purchaser), and makes non-profits and governments more likely to sell. Ironically, it can also contribute to a public perception that private entities are more efficiently run reinforcing the political will to sell off public assets. Again, due to asymmetric information, policy makers and the general public see a government owned firm that was a financial 'disaster' - miraculously turned around by the private sector (and typically resold) within a few years.

Investopedia explains 'Golden Handshake'

Sometimes these golden handshakes are for millions of dollars, which makes them a very important issue for investors to consider. For example in 1989, R.J. Reynolds Tobacco-Nabisco paid F. Ross Johnson over $53 million as part of a golden handshake clause severance compensation. Some contracts, along with compensation, include non-competition clauses that state that once employment is terminated the employee is not allowed to open a competing business for a specified period of time.

Retrenchment
Retrenchment is something akin to downsizing. When acompany or government goes through retrenchment, itreduces outgoing money or expenditures or redirectsfocus in an attempt to become more financially solvent.Many companies that are being pressured bystockholders or have had flagging profit reports mayresort to retrenchment to shore up their operations andmake them more profitable. Although retrenchment ismost often used in countries throughout the world torefer to layoffs, it can also label the more general tactic of cutting back and downsizing
Retrenchment is something akin to downsizing. When a company or government goes through retrenchment, it reduces outgoing money or expenditures or redirects focus in an attempt to become more financially solvent. Many companies that are being pressured by stockholders or have had flagging profit reports may resort to retrenchment to shore up their operations and make them more profitable. Although retrenchment is most often used in countries throughout the world to refer to layoffs, it can also label the more general tactic of cutting back and downsizing. Companies can employ this tactic in two different ways. One way is to slash expenditures by laying off employees, closing superfluous offices or branches, reducing benefits such as medical coverage or retirement plans, freezing hiring or salaries, or even cutting salaries. There are numerous other ways in which a company can employ retrenchment. These can be non-employee related, such as reducing the quality of the materials used in a product, streamlining the process in which a product is manufactured or produced, or moving headquarters to a location where operating costs are lower. The second way in which a company may practice retrenchment is to downsize in one market that is proving unprofitable and build up the company in a more profitable market. If one market has become obsolete due to modernization or technology, then a company may decide to change with the times to remain profitable. States or governments may also use retrenchment as a means to become more financially stable. In capitalist nations, retrenchment is effected by lowering taxes in the hopes of pumping more money into the economy. This tactic is always healthily debated throughout all levels of government. When applied to governments, retrenchment may also refer to a state cutting costs by making jobs obsolete, closing governmental offices, and cutting government programs and services. However, this is not a classic example of retrenchment, because when expenses are cut in one area, politicians tend to re-direct them to other areas.

Employees are often the casualty of retrenchment, as the tactic does not take their interests into account. They are often considered simply as commodities that are either profiting or costing the company, and are therefore either a necessary expense or a financial liability.

Example of retrenchment

Voluntary Retirement Scheme

SAIL's Voluntary Retirement Scheme

At a meeting of the board of directors in June 1999, the CEOs of Steel Authority of India's (SAIL) four plants - V. Gujral (Bhilai), S. B. Singh (Durgapur), B.K. Singh (Bokaro), and A.K. Singh (Rourkela) made their usual presentations on their performance projections. One after the other, they got up to describe how these units were going to post huge losses, once again, in the first quarter of 1999-2000. After incurring a huge loss of Rs 15.74 bn in the financial year 199899 (the first in the last 12 years), the morale in the company was extremely low. The joke at SAIL's headquarters in Delhi was that the company's fortunes would change only if a VRS was offered to its CEOs - not just the workers.

SAIL - India's Steel Giant

SAIL was the world's 10th largest and India's largest steel manufacturer with a 33% share in the domestic market. In the financial year 1999-2000, the company generated revenues of Rs. 162.50 bn and incurred a net loss of Rs 17.2 bn. Yet, as on February 23, 2001, SAIL had a market valuation of just Rs. 34.07 bn, a meager amount considering the fact that the company owned four integrated and two special steel plants. SAIL was formed in 1973 as a holding company of the government owned steel and associated input companies. In 1978, the subsidiary companies including Durgapur Mishra Ispat Ltd, Bokaro Steels Ltd, Hindustan Steel Works Ltd, Salem Steel Ltd., SAIL International Ltd were all dissolved and merged with SAIL. In 1979, the Government transferred to it the ownership of Indian Iron and Steel Company Ltd. (IISCO) which became a wholly owned subsidiary of SAIL. SAIL operated four integrated steel plants, located at Durgapur (WB), Bhilai (MP), Rourkela (Orissa) and Bokaro (Bihar). The company also operated two alloy/special steel plants located at Durgapur (WB) and Salem (Tamil Nadu). The Durgapur and Bhilai plants were pre-dominantly long products plants, whereas the Rourkela and Bokaro plants had facilities for manufacturing flat products. In February 2000, the SAIL management received a financial and businessrestructuring plan proposed by McKinsey & Co, a leading global management-consulting firm, and approved by the government of India (held 85.82% equity stake). The McKinsey report suggested that SAIL be reorganized into two strategic business units (SBUs) - a flat products company and a long products company. The SAIL management board too was to be restructured, so that it would consist of two SBU chiefs and directors of finance, HRD, commercial and technical. To increase share value, McKinsey suggested a phased divestment schedule. The plan envisaged putting the flat products company on the block first, as intense competition was expected in this area, and the long products company at a later date. Financial restructuring envisaged waiver of Steel Development Fund (SDF) loans worth Rs 50.73 bn and Rs 3.80 bn lent to IISCO. The government also agreed to provide guarantee for raising loans of Rs 15 bn with a 50% interest subsidy for the amount raised. This amount had to be utilized for reducing manpower through the voluntary retirement scheme. Another guarantee was given for raising Rs 15 bn, for repaying past loans. Business restructuring proposals included divestment of the following non-core assets: a) Power plants at Rourkela, Durgapur & Bokaro, oxygen plant-2 of the Bhilai steel plant and the

fertilizer plant at Rourkela. b) Salem Steel Plant (SSP), Salem. c) Alloy Steel Plant (ASP), Durgapur. d) Visvesvaraya Iron and Steel Plant (VISL), Bhadravati. e) Conversion of IISCO into a joint venture with SAIL having only minority shareholding.

The Dilemma
The major worry for SAIL's CEO Arvind Pande was the company's 160,000-strong workforce. Manpower costs alone accounted for 16.69% of the company's gross sales in 1999-2000. This was very high, compared with other steel producers such as Essar Steel (1.47%) and Ispat Industries (1.34%). An analysis of manpower costs as a percentage of the turnover for various units of SAIL showed that its raw materials division (RMD), central marketing organisation (CMO), Research & Development Centre at Ranchi and the SAIL corporate office in Delhi were the weak spots. There was considerable excess manpower in the non-plant departments. Around 30% of SAIL's manpower, including executives, were in the non-plant departments, merely adding to the superfluous paperwork. Hindustan Steel, SAIL's predecessor, was modelled on government offices, with thousands of "babus" and messengers adding to the glory of feudal-oriented departmental heads. SAIL had yet to make any visible effort to reduce surplus manpower. A senior official at SAIL remarked: "If you walk into any SAIL office anywhere, you will find people chatting, reading novels, knitting and so on. Thousands of them just do not have any work. This area has not even been considered as a focus area for the present VRS, possibly because all orders emanate from and through such superfluous offices and no one wants to think of himself as surplus."With a manpower of around 60,000 in these offices and non-plant departments like schools, township activities etc, SAIL could well bring down its employee strength to less than 10,000. Reduction of white-collar manpower required a change in the systems of office work and record keeping, and a very high degree of computerisation. Officers across the organisation employed dozens of stenographers and assistants. Signing on note sheets was a status symbol for SAIL officers. From the beginning, SAIL had to contend with political intervention and pressure. Many officials held that SAIL had to overcome these political pressures. One top official commented, "Many employees do not have sufficient orders or work on hand to justify their continuance, and yet political pressures keep them going. It is time that the top management takes a tough stand on such matters. One does not have to call in McKinsey to decide that many SAIL stockyards and branch offices are redundant."

The Voluntary Retirement Scheme

As a part of the restructuring plan, McKinsey had advised Pande that SAIL needed to cut the 160,000-strong labour force to 100,000 by the end of 2003, through a voluntary retirement scheme. Pande was banking on natural attrition to reduce the number by 45,000 within two years, but GOI's decision to increase the retirement age to 60 further delayed the reduction. Subsequently, SAIL had requested GOI to bail it out with a one-time assistance of Rs 1,500 crore and another subsidized loan of the same size for a VRS, to achieve the McKinsey targets. In a bid to 'rationalize' its huge workforce, SAIL launched a VRS in mid 1998, for employees who had put in a minimum service of 20 years or were 50 years in age or above. The scheme provided an income that was equal to 100 per cent of the prevailing basic pay and DA to the eligible employees. About 5,975 employees opted for the scheme. Of them, 5,317 were executives and 658 non-executives. Most of those who opted were above 55 years. On March 31, 1999, SAIL introduced a 'sabbatical leave' scheme, under which employees could take a break from the company for two years for studies/employment elsewhere, with the option of rejoining the company (if they wanted to) at the end of the period. The sabbatical allowed the younger members of the SAIL staff to leave without pay for "self-renewal, enhancement of expertise/knowledge and experimentation" which broadly translated into higher studies or even new employment. On June 01, 1999, SAIL launched another VRS for its employees. Employees who had completed a minimum of 15 years of service or were 40 years or above could opt for the scheme. The new VRS, which was opened to all regular, permanent employees of the company, would be operational till 31st January 2000. Its target groups included: Those who were habitual absentees, regularly ill and those who had become surplus because of the closure of plants and mines; Poor performers. Under the new package, employees who opted for the scheme, depending on their age, would get a monthly income as a percentage of their prevailing basic salary and dearness allowance (DA) for the remaining years of their services, till superannuation. Employees above 55 years of age would be given 105 per cent of the basic pay and dearness allowance (DA) every month. Those employees who were between the age of 52 and 55 years would receive 95 per cent of the basic pay and DA while those below 52 years would get 85 per cent of the basic pay and DA. The new scheme, like the old one was a deferred payment scheme, with extra incentive like a 5% increase in monthly benefits for each of the three age groups. By September 1999, over 4,000 employees opted for the new scheme. About 1,700 employees opted for VRS in the Durgapur steel plant while in the Bhilai, Bokaro and Rourkela steel plants. The number varied between 400 and 700. In September 2000, SAIL announced yet another round of VRS, in a bid to remove 10,000 employees by the end of March 2001. The company planned to approach financial institutions for a credit of Rs. 500 crore. Pande said: "We are awaiting the government nod for the VRS scheme, drawn on the pattern of the standard VRS by department of public enterprises. We expect to get the clearance by the end of the month." On February 08, 2001, SAIL ended its four year recruitment freeze by announcing its plans to fill up more than 250 posts at its various plant sites in both technical and non-technical categories. According to a senior SAIL official: "This recruitment is being done to ease the vacancies created due to natural attrition and those that arose after the previous VRS."

The Persuasion
In mid 1998, in a bid to convince its employees to accept VRS, SAIL highlighted six 'plus' points of VRS, in its internal communique, Varta. They were as follows: During the next 4-5 years, SAIL has to reduce its workforce by 60,000 for its own survival. Employees with chronic ailments, and habitual absentees, who add to low productivity, have to go first - maybe, with the help of administrative actions. The employees may have to be transferred to any other part of the country in the larger interest of the company. For those who started their career as healthy young men 25-30 years ago, the VRS will take care of their financial worries to a great extent, and they can discharge their domestic duties more comfortably. VRS can be used for special purposes like paying huge sum of money for getting one's son admitted to a professional course. VRS will give many individuals the money and time on pursuing personal dreams. It can be a good opportunity to do social service. On December 27, 1999, SAIL initiated a company-wide information dissemination program to educate the staff on restructuring. The company drafted an internal communication document entitled "Turnaround and Transformation" and a special team of 66 internal resource persons (IRP) had been assigned the task of preparing a detailed plan to take this document to a larger number of people within the company. The 66-member team was constituted in September 1999 and was stationed in Ranchi to undergo a detailed briefing-cum-training course. A generalized module was presented to the IRP team during the course, which then summarized the root causes of SAIL's crisis and the strategies to overcome it. According to an official involved with the program: "Initiatives like the power plant hive-off or the Salem Steel joint venture will hinge on employee concurrence, particularly at the shop floor level, and therefore there has to be an intensive communication program in place to reassure employees that their interests will be protected." The 66-member IRP team conducted half-day workshops across plants and other units based on three specific modules: A video film conveying a message from the chairman of the company. A generalized module of the recommendations of the turnaround plan focusing on restoring the financial foundation, reinforcing marketing initiatives and regaining cost leadership. A module covering plant-specific or unit-specific issues and strategies for action. The exercise was expected to cover at least 16,000 SAIL employees by the end of March 2000. A senior official at SAIL said: "The idea is that the employees covered in this phase would take the communication process forward to their peer group and fellow colleagues." The staff education exercise was stressed upon, particularly in view of the power plant hive-off fiasco, which could not take off as scheduled due to stiff resistance from central trade unions. The problem, at the time, was that the SAIL top brass had failed to convince the employees that jobs would not be at risk because of the hive-off.