Two Tales of Staff Reductions
LIU's Voluntary Early-Retirement Incentive Program
By Daniel J. Rodas
Colleges and universities generally resist implementing voluntary or involuntary reductions in force, or see it as a last resort. However, the extraordinary economic conditions facing colleges and universities in late 2008 and early 2009 left many institutional leaders with no good choice but to reduce staff.
In late 2008, Long Island University (LIU), Brookville, New York—one of the nation’s largest independent universities—was definitely feeling the effects of the economic downturn. Conservative estimates suggested a shortfall of revenue that could have resulted in an FY09 operating budget deficit of $20 million.
Daniel J. Rodas
The university’s leadership responded by implementing a number of cost-saving measures, including a hiring freeze, reductions to general expenses, limiting staff overtime, and consolidating certain administrative functions. However, it soon became clear that such measures alone would not close a deficit that would grow in subsequent years.
In consultation with LIU’s board of trustees, the university’s senior officers decided to implement an across-the-board buyout. Time was of the essence to execute this program within the current fiscal year in order to close a budget gap that would persist into FY10 if left unchecked. Underlying this effort was a sense of urgency and a commitment to preserving the university’s core educational mission.
The major goal of the buyout was to reduce the university’s payroll (both salary and benefits) in order to close future operating deficits, allow the university to return to “normal” operations, and to free funds for necessary educational investments. We also wanted to avoid or at least limit involuntary terminations that would be painful and would require the university to absorb the added expense of unemployment insurance. We knew that an unbudgeted buyout would be costly to the university and could result in a fiscal-year deficit; however, we also knew that a buyout would, in the longer term, restore the university’s financial equilibrium. Finally, we wanted to provide a benefit to long-term employees, though not only to the longest-serving employees. For instance, we felt that we could enhance morale by offering a voluntary buyout to employees who, for personal and other reasons, would benefit from this option.
Explaining the Buyout
Once the university decided to execute a voluntary buyout, planning began immediately. The university’s senior leadership team—including the president, chief human resources officer, chief legal officer, chief financial officer, campus provosts, and chief public relations officer—worked in consultation with the board, vendors, outside legal advisors, and consultants, to craft the buyout program. Employees who had worked at the university for at least 10 years would be eligible for the buyout. The benefit provided one month of salary for every two years of employment up to a cap of 18 months of salary, a COBRA bridge (or Medicare premium reimbursements), and tuition remission. (Initially, the plan was available to all employees not covered under a collective bargaining agreement. The administration asked the unions to decide whether to allow the university to make the program available to members of their respective collective bargaining units, which some later did.)
Clear communication was essential. An initial presidential memorandum set the stage for the buyout program. A second presidential memorandum sent a few weeks later explained the context for the voluntary early-retirement incentive program and set forth the program’s parameters, including eligibility requirements and benefits. A detailed communication package was sent to eligible employees a week later. This package consisted of a letter from HR explaining the program; a detailed program description outlining eligibility requirements, program benefits, and application procedures; an election and release-of-claims form; and information on COBRA and Medicare. The package also included frequently asked Q&A’s addressing reasons for the program, how to apply, how payments would be made, continuation of health insurance, taxation of benefits, 403(b) distributions, and nonmonetary benefits.
The buyout program was offered on a first-come-first-served basis. Because we had no way of predicting how many employees would apply for the program, the university reserved the right to limit participation. All communication emphasized that the buyout program was strictly voluntary, with absolutely no pressure on any employee to accept the offer.
The employee communication package went out on March 23. Employees had 45 days to review the materials and apply to the program, with decisions to be delivered to applicants on June 1. Employees whose applications were accepted would retire at the end of the summer on August 31 and would receive their lump sum payment one month afterwards.
A member of the university’s central HR staff was assigned to answer questions about the program. The tone of these conversations was neutral and informational, since we could not legally persuade employees to take the buyout. The HR office emphasized that the decision was the employee’s and the employee’s alone. The university’s 403(b) vendor, TIAA-CREF, was briefed in advance and ready to assist employees with questions about retirement annuities and payout options.
Out of 1,119 eligible employees, 82 employees applied for the early-retirement offer. The university CFO modeled the costs based on each employee’s calculated buyout and determined that all 82 could be funded. Acceptance letters were mailed indicating the final lump-sum payment due to each employee. In terms of participant demographics, the average years of service was 24 (which translated into a full year of salary under the terms of the buyout), and the average salary was $63,550. Although faculty members were eligible, few signed up, perhaps because LIU faculty have a standing early-retirement incentive program. While the majority of employees were in their 60s and older, several younger employees in their 30s and 40s took advantage of the program.
When we talked with employees who did not take the buyout, three themes surfaced: (1) concerns about health insurance beyond the COBRA subsidy period, especially for employees who would not be eligible for Medicare in the near future and who did not have a working spouse with health-care benefits; (2) concerns about diminished 403(b) account balances and prospects for their recovery; and (3) concerns about finding another job in the midst of a deep recession.
Through the buyout, the university was able to reduce payroll expense by $4.8 million in salary and $1.8 million in fringe benefits. Despite the success of the program, an involuntary reduction in force was still required. About 30 employees were laid off, terminated, or not renewed. In general, these employees were offered a standard severance package that was significantly less generous than the early-retirement incentive program. A number of terminating employees asked if they could apply retroactively for the voluntary buyout since the application deadline had passed. Such requests were denied, since the voluntary program was intended to incent retirement, and therefore was more generous than standard severance.
Between the university’s hiring freeze, the voluntary early-retirement incentive program, and the involuntary reduction-in-force, the university’s workforce had been decreased by more than 200 employees. We discovered that the university still functioned well. Productivity actually increased because we had fewer employees and similar work outputs. The program allowed the university to balance the FY10 operating budget and to fund priorities that had been cut or deferred in FY09.
Buyout Program Advice
With foresight and planning, a voluntary buyout program can be an effective way to reduce staff and cut payroll expense. However, before implementing a buyout, institution leaders would do well to consider the following.
- Does your institution have the capacity to deal with staff losses? LIU is a large institution with multiple campuses, large administrative units, and several thousand full- and part-time employees. As a result of this scale, we were probably better positioned to handle the effects of a buyout than some smaller institutions, where the risk of losing critical employees is very high and restructuring may be more difficult.
- Be prepared for questions from the media. Statements and press releases should emphasize the voluntary nature of the program, positioning the buyout as a benefit to longer-serving employees as opposed to a general downsizing or involuntary layoff.
- Program design matters. Assuming you have the capacity for a buyout, think carefully about the program’s design. In particular, decide which classes of employees will be eligible for the buyout. For most colleges and universities, this means determining whether the program is for staff only or whether faculty will also be eligible. For a variety of reasons, a staff-styled program may be less appealing to faculty, and a separate incentive program for them may be necessary. Also consider minimum age requirements, whether part-time employees will be eligible, and whether employees whose salaries are covered by grants could receive a buyout. If your institution has a standing early-retirement program, analyze how a special program will target employees who are either not eligible for an existing program or haven’t accepted it. A repackaged or slightly enhanced version of a standard early-retirement program probably won’t be effective.
- Think through technical questions in advance of the buyout. This includes the calculation of years of service, includible compensation, and taxation of lump-sum payments.
- Health care is often paramount in the minds of many potential retirees. Think about what is feasible, but also be aware that funding post health-care retirement via COBRA can be quite costly.
- Consider extending other fringe benefits aside from health and welfare. One of the most popular and highly utilized benefits at LIU is dependent tuition remission. Participants, especially those with college-age children, wanted assurances that they would receive this benefit post-separation if they accepted a buyout.
- You can’t predict who will take the buyout. Be resigned to the fact that some of the employees you want to retire won’t, and some you hope will stay will choose to leave. A few of your most highly valued employees will inevitably sign up for the program. You may need to ask certain employees to extend their contracts to complete important projects or to allow time to find a replacement.
- Resist the temptation to rehire departing employees. Some employees will ask if they can continue working for the university on a full- or part-time basis. Since the purpose of a buyout is to reduce payroll, such requests should generally be denied.
- Don’t repeat a buyout. A number of employees asked if we would repeat the early-retirement incentive program. For the program to be effective, we felt that it should be a one-shot deal. We also needed to return to the business of running the university, and implementing a buyout program is enormously time-consuming. As it turned out, we did end up doing several off-cycle, voluntary, early-retirement programs for collective bargaining units that later decided to participate in the offer.
- Establish clear criteria for refilling positions. Since the purpose of the incentive program is to reduce payroll, it will take considerable self-discipline to avoid refilling positions. Yet, some positions may ultimately need to be refilled, and having a process in place to justify and defend those decisions will be critical.
- Think about the timing and process of involuntary terminations. Voluntary reductions-in-force are often followed by layoffs, and most often there is little time between the two events. Recognize that it can be upsetting for employees to go immediately from a voluntary buyout program to an involuntary layoff. In LIU’s case, we began the process of involuntary terminations a few weeks after the deadline for applications to the voluntary early retirement incentive program closed. While in some respects we didn’t feel this was enough time, we also didn’t have a better choice, since the voluntary reductions coincided with the fiscal year-end when annual employee contracts are either renewed or terminated.
- Determine how to thank retiring employees. No matter who accepts a voluntary retirement, this decision represents a mile marker or at least a significant transition in an individual’s career. A special thank-you letter from the president, a recognition event, or an engraved plaque provides something tangible to outgoing employees that helps celebrate their years of service with your institution and paves the way for their personal transition.
Daniel J. Rodas is vice president for human resources and vice president for planning at Long Island University, Brookville, New York; e-mail: email@example.com.
UW’s Involuntary Layoffs Initiative
By Mindy Kornberg
The University of Washington (UW), Seattle, is the Northwest’s academic and research powerhouse and a major economic engine for the state, receiving more federal research dollars than any other public university in the United States. With more than 47,000 students, approximately 32,000 employees, three campuses, and three medical centers, UW is also one of the largest employers in the Northwest. During the past three years, UW has lost approximately $132 million in state support—a 33 percent reduction. As has been the case for many institutions, UW’s endowment was also severely impacted by the economic downturn. As the institution’s economic future grew dim during the waning months of 2008, university leaders began preparations for unprecedented budget reductions.
The preplanning assessment of the situation covered a wide range of temporary and permanent salary-saving measures. I and other university leaders were very interested in exploring the “gentler” approaches like voluntary early retirement, furloughs, and salary reductions. However, we found that these measures would require changes to labor contracts and/or state law. Given the time line for reductions and the complicated process for amending state law or renegotiating labor contracts, these workforce-reduction options would not be feasible.
In addition, UW’s 32,000 employees are paid from a wide variety of funds, with fewer than 20 percent paid with money derived from state support. The idea of spreading out the cut using an across-the-board furlough or salary reductions would not work since it would violate terms of grant and contract funding and unfairly penalize groups of employees not tied to state funding. Likewise, limiting furloughs or salary-reduction initiatives to only those employees paid from state funds would create major inequities across job classes, as it would have some employees taking pay cuts while other employees in the same positions—perhaps working side-by-side on the same team—would not have to take pay cuts simply because of their funding source.
More importantly, over the span of several weeks while options were being analyzed and discussed, the magnitude of the state deficit grew increasingly clear. Despite the sincere desire of university leaders to explore every possibility other than employee layoffs, involuntary position eliminations were the only viable option on the table to achieve the massive and permanent budget reduction the state was requiring us to take.
Philosophy and Administration
UW human resources initiated a full-scale review and reengineering of layoff policies, processes, and resources for classified and professional staff to manage what would be the largest involuntary reduction in the university's history. Processes and practices had to be more than compliant; they needed to be contemporary and responsive to the needs of affected employees, their managers, and the university.
At the start of the reengineering process, I asked the team to take a philosophical approach to its work to ensure that the layoff process would be grounded in respect and dignity for those employees impacted and in support of managers making these tough decisions, delivering the news, and dealing with the aftermath. This was especially important since UW employees are state employees and are not entitled to any severance packages. With Seattle’s other major employers making similar workforce reductions, UW’s laid-off employees would be facing an extremely difficult transition. Given this situation, even seemingly small efforts could make a difference, such as making sure layoff-effective dates were the first of the month so that the employees received an extra month of benefits, and dedicating one of our trainers to provide one-on-one career coaching.
We also paid special attention to the “unaffected”—the remaining employees—so that these employees stayed engaged and informed, and felt supported. Otherwise they might lose trust in management, not support changes in their work assignments, or look for other employment opportunities at a time when their contributions were most needed here. Any misstep during this emotionally charged time could easily damage the reputation of the HR department and, ultimately, the university.
The period of time between the economy’s downward spiral and the end of the state’s legislative session seemed painfully long. Managers and employees were on edge and needed information, even if final decisions would not be made until completion of the state’s budget. The communication efforts started early, with briefings and forums aimed at helping employees deal with the uncertainty of the situation. I, along with UW’s president and provost, held forums for employees to share information and take questions. Vice presidents, deans, and vice provosts held similar sessions for their organizations. Employees were encouraged to share ideas and ask questions on the president’s blog and to follow the budget news coming from the state capital in Olympia.
Because the fiscal makeup of a large public research university is much more complex than the average employee realizes, a lot of time was spent educating and sharing information that usually takes place behind the scenes. New tools and training programs were created to guide leaders through the workforce planning process and implementation of reductions. Tools such as the “Administrator’s Guide to Layoff,” the “Manager’s Guide to Conducting a Layoff Meeting,” and the “Layoff Communications Planning Guide” were provided to assist leaders in making sound decisions driven by business necessity and implementing those decisions in compliance with applicable rules. Several training sessions to managers and leaders were delivered that ran the full cycle of workforce reductions, including sessions on delivering difficult news, managing through implementation, planning in chaos, and positive self-management in challenging times. (See sidebar, “Five-Point Plan for Employee Communications.”)
Affected employees received extensive resource packets customized for their employment program and based on whether they were facing position elimination or reduction in FTE. These packets included information about their rights and what to expect over the next several months. In addition, we purchased and distributed a book called Surviving a Layoff and other job-search resources. Each affected employee also received a personal benefits summary and had access to a benefits consultant to discuss questions and options, as employment benefits were often the first things the employees wanted to understand. We also offered extensive career-transition services free of charge through UW's HR training division and King County. A drop-in career-transition center was opened and staffed by our training and employment teams that provided career counseling and resume assistance. Training sessions were also offered on conducting a job search and interview preparation.
Employee relations consultants were supported with scripts, workforce planning tools, and a SharePoint site that housed new workforce planning, layoff, and rehire tools and served as an online knowledge-sharing center across the institution. For tracking purposes, a layoff database was developed. Finally, we made good use of UW CareLink, our faculty and staff assistance program. In addition to heavily promoting its counseling and financial planning services to employees facing layoff, the program offered department and individual sessions for other employees having difficulty managing through the uncertainty.
Legal Considerations and Risk Management
To facilitate early identification and mitigation of potential risk factors associated with high-volume layoffs and reductions, several robust protocols were implemented. Two major practice changes formed the basis of the risk-mitigation effort. First, the layoff process was centralized so that human resources assumed responsibility for administering layoffs across UW’s different employee populations, including professional staff, classified non-union, classified unions, and academic student employees. This key step allowed us to unify practices so that every position targeted for elimination went through the same level of scrutiny and each affected individual received the same level of outreach and services.
The office of the provost required each department to present a business plan that detailed how it would make reductions for the coming fiscal year. As part of that plan, department leaders included positions targeted for position elimination or reduction along with documentation of what would happen to the eliminated or reduced position’s tasks and responsibilities. Would duties be eliminated? Would they be transferred to another employee? Or was there some efficiency found that allowed the work to be done differently or even automated? This level of detail aided the analysis of legal and policy issues.
HR conducted a detailed case-by-case review of the justification for each layoff and evaluated aggregate data regarding unit composition. To ensure consistent and rules-compliant implementation of layoffs and reductions, HR evaluated past practice to ensure clarity on interpretation of contracts, Washington Administrative Code, and applicable policies.
Discussions were held in advance with union leaders to inform them of UW layoff procedures and to notify them of impending actions. Upon request by the union, specific layoffs were informally reviewed in additional detail. This effort paid off, as no unfair labor practice claims were made.
Another important, although not permanent, change was made to the official notification period, which was increased from 30 to 60 days to help cushion employees facing layoff and give them as much time as possible, within the constraints the university faced, to find new employment. It also allowed HR more time to properly identify positions held by employees with bumping or reversionary rights. Layoffs resulting from grant and contract-funding expirations were not impacted by this new rule.
Although in theory this change sounded like the right thing to do by employees, in practice it only extended some of the interpersonal difficulties associated with involuntary reductions by having employees facing layoff in the workplace for a longer period of time. Affected employees cannot be put on “home assignment,” because except in extraordinary cases, the state views the practice as an improper “gift of funds.” The extended notice period resulted in managers and laid-off employees working together for two months—a situation that can be uncomfortable in the best of circumstances. What surprised us even more was how disruptive the extended notification was to employees who were unaffected by layoffs. Survivor’s guilt resulted in productivity loss and heightened emotional anxiety from staff on teams where one or more members were losing their jobs over this extended notification period.
Among other lessons learned:
- No matter how prepared you are, enacting involuntary staff reductions is always more difficult than you anticipate.
- Timely and forthright communication goes a long way toward mitigating employee anxiety.
- People really appreciate little things, such as an extra month of benefits, classes, and access to personal services from benefits and employment experts.
- Establishing systems and tools for documentation are extremely valuable for such a complex process. The SharePoint site and the layoff database were critical in mitigating institutional risk and facilitating the work of our employee relations consultants.
Financial Costs and Benefits
It is difficult to discuss financials without momentarily revisiting the topic of furloughs. While furloughs would have been more digestible to our university community at large, UW’s leaders and our board of regents decided that because the state was requiring us to make a permanent reduction in dollars, any temporary reductions would only have to continue from year to year, thereby affecting a much greater number of employees for many years to come.
Between FY09 and FY11, the university’s reduction in state support totaled $132 million, requiring 450 position eliminations, 850 vacancy eliminations, and 400 professional staff reductions. On a more positive note, 600 teaching assistant positions were salvaged with some temporary funding and approximately 300 research assistant positions received funding from the American Recovery and Reinvestment Act during this period.
The university is now in the second year of a statewide salary freeze, and employees are growing anxious about stagnating salaries. UW human resources is turning its attention to developing an engagement plan to help faculty and staff members understand the true value of UW employment—from spelling out their total compensation, to making sure we have robust and ample career and professional-development opportunities, to assisting in work/life balance issues that are supportive and accessible. While facing the reality of another round of budget cuts scheduled for next year, the university is striving to promote a culture that rewards process improvements, cross collaboration, and other efficiencies.
Mindy Kornberg is vice president for human resources at the University of Washington, Seattle; e-mail: firstname.lastname@example.org.
Five-Point Plan for Employee Communications
As part of UW’s extensive management training effort, HR provided managers and supervisors with a five-pronged communications approach for delivering difficult news about staff reductions. Communication to employees should be:
- Honest. Be accurate, complete, and direct. Convey information that employees need to hear, even if it is not pleasant. Don’t attempt to sugarcoat or minimize a difficult situation.
- Authoritative. Make sure the message is delivered from a person whom employees trust to provide accurate information.
- Inclusive. Include all levels of an organization in the communication plan. It is critical that individuals or groups not feel bypassed or left out when important information is delivered.
- Timely. Convey information when it is fresh and not as an afterthought. Providing important information at the last minute does not give employees an opportunity to absorb, react, or ask questions. Employees who are most affected should hear the information early on. For example, employees should hear the news first from their department managers, not from clients who have received advance notice about service changes.
- Responsive. Employees should have an opportunity to comment, ask questions, and provide input to decision makers. If service changes are required, provide employees with information they can share with clients. It is disheartening to employees and clients alike when employees can't provide useful information in response to a client’s questions.