Guestcolumn

A new look at VRSOF late, the Voluntary Retirement Scheme VRS is being increasingly discussed and used to trim the flab and improve eff...

A new look at VRS
OF late, the Voluntary Retirement Scheme VRS is being increasingly discussed and used to trim the flab and improve efficiency in organisations as an alternative to retrenchments. A study made in the case of sick textile companies in the public sector in India found that the average cost per worker was about 17,000 calculated at the rate of 30 days of wages for each year of permanent service as against 15 days.

The VRS approach is commendable. But the package should be well-tailored so that the gains from separation are potentially large and the chances of mishandling it is reduced considerably, if not eliminated totally. A survey has revealed that the average break-even period for recovering the direct financial cost on the basis of 10 per cent annual discount rate was two years and four months, barring exceptional case.

The first stage is to decide about the size and composition. The experience of the Central Bank of Ecuador in this behalf is interesting. The Central Bankdecided to classify its personnel in three categories those who were essential, those who were clearly redundant, and those for whom it was difficult to tell. Essential workers did not have the option to leave, clearly redundant workers did not have the option to stay, and the rest of the workers were proposed a voluntary separation programme.

Next is the stage to draw up compensation packages. While the decision to fully compensate displaced workers should be made on a case-by-case basis, there are clearly no circumstances that would justify over compensation. Workers who are offered less compensation will prefer to stay, whereas those who are offered more than full compensation will accept the offer and leave.

In the case of Central Bank of Ecuador, Rama and Mac Isaac found that a well-tailored compensation could have reduced the cost of voluntary separations by 19 per cent. But another author, Assaad in the case of Egypt found that a well-tailored package could reduce the total compensation cost by31 per cent compared to the best performing rule of thumb one.

In broad terms, economic returns to downsizing are more likely to be positive when productivity is low, when potential earning out of it are high, and when the marginal tax burden is large. Whatever may be the methodology of calculating compensation, severance pay should not create an incentive for the most productive workers to leave and for the least productive ones to stay.

In the Central Bank of Ecuador, however, the compensation was based on salary and seniority twice the months average salary in 1993, multiplied by the number of years of service put in with a minimum amount and a maximum not exceeding the fixed number of times the national minimum wage.

Story continues below this ad

This was coupled with training mechanism to facilitate the transition out of the public sector free of cost. Reportedly, work is now done by 2,700 better paid employees as against 5,600 employees earlier and the morale of those who stayed has improved. It was estimated that an averageof 1.9 years would have been enough to compensate appropriately or the ensuing welfare losses.

This is against the 2.3 years as average pay-back period of downsizing operations, as surveyed by Haetiwanger and Singh. However, the above calculations are not totally appropriate for evaluating the success of the efforts, because they omit many of the potentially relevant private and social costs and benefits. In the Indian context, these considerations have an important role to play to sketch a protocol for downsizing PSU enterprises.

The author is the former chief manager, HRD, RBI