With rising input costs and falling margins, it has become imperative for the company to cut costs and has decided to cut its employee strength by 20% in order to reduce its wage bills. Rather than retrench employees and invite litigation (and the wrath of trade unions), the company has advanced a more humane approach by instituting a voluntary retirement scheme (VRS) that is open to all employees.
Here are the few things I have asked him to consider while making his decision:
1) NOT A PERMANENT RETIREMENT
Although called “retirement”, a VRS does not stop the person from taking up another employment as long as the employment is not with the same company or group.
2) TAX BENEFITS
A VRS designed in accordance with Section 10(10C) of the Income-tax Act, 1961 allows the recipient to enjoy tax exemption on his compensation up to a maximum of Rs 5 lakh once in his lifetime.
3) OTHER TERMINAL BENEFITS
A VRS ideally should be over and above other terminal payouts auch as Provident Fund, gratuity and leave encashment, etc.
4) NET PRESENT VALUE ANALYSIS
Make a conservative estimate of the salary he expected to earn over the next seven years, calculate its NPV and match it against the amount that you will receive under VRS. While it would be too optimistic to assume that the VRS amount turns out to be greater than the NPV, if the VRS amount is significantly lower, say more than 50% lower, then the scheme may not be so attractive.
5) EVALUATE SELF & THE JOB-MARKET
The greater the risk of finding another job, the more he should be mindful of the NPV comparison.
6) ASSESS FUTURE OUTLOOK
A VRS may be voluntary in form but not necessarily in spirit. Sometimes companies may informally and actively “encourage” employees to apply for it. Even if he were to not opt for the VRS, faced with hard times and finding him relatively “dispensable”, the company could terminate his services a few months later by giving him notice as per the terms of his employment contract.
Here are the few things I have asked him to consider while making his decision:
1) NOT A PERMANENT RETIREMENT
Although called “retirement”, a VRS does not stop the person from taking up another employment as long as the employment is not with the same company or group.
2) TAX BENEFITS
A VRS designed in accordance with Section 10(10C) of the Income-tax Act, 1961 allows the recipient to enjoy tax exemption on his compensation up to a maximum of Rs 5 lakh once in his lifetime.
3) OTHER TERMINAL BENEFITS
A VRS ideally should be over and above other terminal payouts auch as Provident Fund, gratuity and leave encashment, etc.
4) NET PRESENT VALUE ANALYSIS
Make a conservative estimate of the salary he expected to earn over the next seven years, calculate its NPV and match it against the amount that you will receive under VRS. While it would be too optimistic to assume that the VRS amount turns out to be greater than the NPV, if the VRS amount is significantly lower, say more than 50% lower, then the scheme may not be so attractive.
5) EVALUATE SELF & THE JOB-MARKET
The greater the risk of finding another job, the more he should be mindful of the NPV comparison.
6) ASSESS FUTURE OUTLOOK
A VRS may be voluntary in form but not necessarily in spirit. Sometimes companies may informally and actively “encourage” employees to apply for it. Even if he were to not opt for the VRS, faced with hard times and finding him relatively “dispensable”, the company could terminate his services a few months later by giving him notice as per the terms of his employment contract.
