Voluntary severance packages (VSPs) are back in the news again, as they seem to be every so often, usually when the economy is facing headwinds. VSPs are proffered as a quick fix for a failing firm, but they aren’t.
We can control costs by immediate dictate (within regulatory boundaries and contractual obligations), so is that a quick fix? Cutting costs is often not the cure, and it may even accelerate the demise of the firm, particularly if it is done recklessly, But employee salaries are often the biggest operating cost so that’s our first port of call.
However, it is the most difficult exercise to get right. Staff salaries are the biggest cost item because people are the most important, albeit most complex, asset of the firm.
VSPs don’t work, and they never will. The whole idea of getting the people who work for you to self-select their value within the firm when only they know their value outside the firm — if any — is fundamentally flawed.
It follows logically, if not obviously, that the first people to go (and get paid for doing so) will be those who can afford to, those who can get a job elsewhere. The most valuable employees leave (with an all-expenses-paid ticket to their next destination) and the least valuable stay behind because they have no choice. You’d have to be an idiot not to figure that out.
There is never a positive net present value to this exercise. The actual payments made not only cost money (with no return), but the process leaves behind a workforce less capable of coping with the business problem that gave rise to the failing circumstances in the first place. In effect, you end up funding an upfront payment that hastens, or could even precipitate, your demise.
Quite the opposite strategy is required. Pay your best people (as measured and correlated to output) more money, and get rid of the dead wood. While more difficult to achieve in practice (it requires a negotiated agreement), it has the desired effect on current sustainability and future prosperity. The one easy part of it is that everybody knows who the weakest players are. Who doesn’t get this?
The real problem manifests when those who contribute less are being paid more — starting right at the top with the CEO and executive management. Weakness appoints weakness, and those incapable of leading appoint followers. I needn’t name names; again, everybody knows.
Once the strong have pocketed the cash (a bonus bridge between their present jobs and the new one easily attained) the whole organisation is weakened, and ironically this is comfort to the weak stayers in the mix. Cold comfort, as it inevitably turns out.
To reverse the process, recognising the need for the skills of those who happily left will cost a damn sight more than it would have cost just to keep the incumbents, some of whom will be top of the selection list to return. Ask Transnet.
At the core of solution design for this problem is to put in place variable cost, performance outcome-based remuneration structures to replace the fixed-cost, fixed-term employment contracts that push up your breakeven point. The civil service is a classical example of where remuneration has more to do with rules and benchmarks than it has to do with merit and performance.
Take the hard road. Once you’ve matched the appropriate cost and capital structures to your economic model, put more contributors in the mix and take a lot more detractors out.
It’s pretty obvious stuff, as are all the other fundamental rules that determine business success or failure: don’t be greedy, know fair market value, grow within your restraints, plant to harvest, don’t BS yourself, blah, blah, blah.
The building blocks of business don’t change, there are just different people in charge from time to time. It is, like so many things, the survival of the fittest that must prevail over the populist lowest common denominators.
• Barnes is an investment banker with more than 35 years’ experience in various capacities in the financial sector.
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