Companies favor buyout's way out

THE BALTIMORE SUN

A generation ago, companies looking to cut costs typically laid off workers with just a pink slip.

Today, still struggling to contain current costs and also staring at huge postretirement benefit costs, companies are increasingly using voluntary buyouts as the preferred method to trim their work forces - whether by dozens of employees or, as with the buyout offer made last week to General Motors' entire hourly work force, thousands of them.

For employers, offering retirement and other incentives to entice employees to leave early has many advantages. It eases much of the personal pain by making the process voluntary. Companies can avoid many legal issues involved in involuntary cutbacks, and work around union contracts that make it difficult to lay off workers.

Buyouts can be seen as more humane in an image-conscious corporate America.

And they can embolden people who have worked for one employer for years to revitalize their lives with new challenges.

But buyouts are not a perfect solution for employers or employees, experts say.

Companies incur huge upfront costs to reap future savings. Employers run the risk of losing their best midcareer employees to competitors. Workers, especially older ones, are forced to make a difficult choice between immediate cash payouts and staying put, with their future job security in question.

"They just don't know what the future holds in the sense of 'Will I have enough money to retire?'" said Jeffrey Keefe, associate professor of labor and employment relations at Rutgers University. "Most of these people don't end up retiring fully. They have to work other jobs."

Brian Woollen, 47, of Fallston is eligible for the buyout offered by General Motors, which is dangling packages ranging from $35,000 to $140,000, depending on age and length of employment. But he doesn't believe he'll take it.

The 20-year veteran is three years shy of retiring with full benefits, and with a 14-year-old son and a 10-year-old daughter who will soon be going to college, he said he couldn't afford to forfeit medical benefits. As a member of the so-called job bank, a mechanism written into GM's labor contracts that guarantees laid-off workers at least 95 percent of their pay, he has a shot at winning a full-time job at GM's White Marsh plant, which is expanding to accommodate production of hybrid light truck transmissions.

"On the surface, I would think a lump sum looks attractive," said the electrician, who was laid off from GM last May when the company shuttered its van assembly plant in Southeast Baltimore. "But not when you consider the costs."

No national statistics exist on the buyout trend. But some labor and workplace experts say buyouts have become a more common alternative to mass layoffs since they are "typically viewed as an enlightened way to reduce the work force as opposed to terminating people involuntarily," said Mark Iwry, a senior fellow at the Brookings Institution and former chief pension regulator at the U.S. Treasury.

"It's saving the company future wage costs," Iwry said. "It's also saving the company, in many cases, future retiree health and pension costs and reducing the liabilities for those post-retirement benefits on the company's books."

Manufacturing industries such as autos and steel have seen their share of buyouts since the 1990s as global competition has intensified. When once-dominant Bethlehem Steel was sold to a new owner in 2003, International Steel Group Inc. offered exit packages to its work force companywide. Nearly 860 steelworkers at Baltimore County's Sparrows Point mill took the offer.

Sophia Koropeckyj, an economist with Economy.com in West Chester, Pa., said manufacturing companies use voluntary separations and buyouts as a way to trim unionized work forces because contracts can complicate layoffs. And, it's cheaper for the auto companies, because their union agreements require them to keep laid-off workers on the payroll via job banks, Koropeckyj said.

Members of United Auto Workers often receive 95 percent of their salaries if they are laid off. Paying a one-time severance package is less costly than continuing to pay those workers, she said.

Buyout offers are not limited to blue-collar or unionized work forces. But union officials argue that companies likely would fire workers unless collective bargaining agreements that guarantee some exit benefits were in place.

In recent years, many companies in the media, telecommunications and technology industries have had buyouts: The Sun has had several rounds, most recently in January, and The Washington Post announced plans this month to eliminate nearly 10 percent of its newsroom jobs.

For many companies, layoffs are still more common. And those that offer exit packages do so for reasons of self-interest, such as maintaining morale, keeping up their corporate image and giving employees less reasons to unionize, workplace and labor experts say.

Companies can reduce potential litigation risks by offering buyouts rather than resorting to layoffs, said John A. Challenger, chief executive of Challenger, Gray & Christmas, a global outplacement company in Chicago.

"It's a human resources calculation done by companies to determine whether or not it's in the company's best interest" to offer buyouts, said Ethan Kra, a chief actuary for retirement at Mercer Human Resource Consulting.

In 2003, FedEx offered 14,000 eligible employees, managers and nonunion staff, a choice of two voluntary separation packages.

The company needed to trim the work force as it restructured, and voluntary separations were the preferred way to do it, said FedEx spokeswoman Sandra Munoz.

"It was really in keeping with our no-layoff philosophy," she said. "Whenever possible, we want to offer them something other than layoffs."

The company met its reduction goals, and it was well received by employees, she said.

More recently, Northrop Grumman Electronic Systems in Linthicum didn't have to lay off as many people in the state as previously thought because more people opted for buyouts than expected, said spokesman Jack Martin Jr.

In October, the company announced it would eliminate 400 jobs across its facilities in Maryland by the end of last year. However, Martin said that so many people accepted voluntary separation packages, the company eliminated only 80 positions involuntarily.

Patrick Baker, state administrator of dislocation services for the state Department of Labor, Licensing and Regulation, said he has seen an increase in the number of voluntary separation packages being offered by companies as an alternative to layoffs.

In 16 years with the department, he has noticed that the incentives included in those packages have become sweeter. Companies are not only offering cash, but they are providing health care and other benefits for a period of time.

"That used to be rare," Baker said.

One group that doesn't like buyout programs is Wall Street, because companies must take write-downs related to the cost of offering the packages, Koropeckyj said.

Analysts say GM can expect to spend at least $1 billion on buyouts for its workers. Despite the large upfront costs, companies end up winning later, experts say.

"Companies are saying, 'Let's sacrifice now. Let's have horrible earnings now to try to get to a new place,'" Challenger said. "It's heavy upfront costs versus long-term company fortunes."

And there is another risk to buyouts: Too few or too many people could leave the company, Koropeckyj said. And other experts say companies risk losing their most productive workers who leave knowing they will find a job elsewhere.

"Often, people who take it are those who are most confident in their future," Challenger said.

hanah.cho@baltsun.com

allison.connolly@baltsun.com

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