Wockhardt VRS Scheme – on the take-over of Merind Ltd.

WOCKHARDT LIMITED : “PROJECT MILESTONE”

A CASE STUDY ON A VOLUNTARY RETIREMENT SCHEME AFTER AN ACQUISITION OF A PHARMACEUTICAL COMPANY

In an attempt to be lean, thin, and mean in today’s competitive environment the Voluntary Retirement Scheme (VRS) has become a key tool at companies in the recent past. Especially when mergers and acquisitions happen. Under the VRS employees are encouraged to “retire prematurely” (or leave) from the company after receiving payment of an attractive monetary package for the separation.

The rationale behind a VRS scheme at an organization is largely that of the company facing financial and profitability crunch and not being able to afford carry flab or deadwood. And which needs to be shed, even by paying a price for it, which it will recover in the forthcoming period by savings in the wage bill and enhanced bottom line resulting out of the implementation of the scheme.

WOCKHARDT Limited, Mumbai, a leading pharma company, is one such company to go through the process of a VRS scheme. It has bought out and taken full control of a medium size loss making company, Merind Limited, a TATA Group company, with a large workforce of about 1000 workers, staff and managers. The turnover of the company acquired was stagnant at around Rs. 300 crores . It however has a range of good vitamin formulations that have a good market potential and which were being regularly prescribed by specialist doctors allover the country. But because of low involvement and motivation (attitude) of its employees, as well as a high wage bill of salaries and benefits similar to those of the multinationals it was losing out heavily on productivity, sales and ultimately profitability.

Mr. Habil Khorakiwala, Chairman of Wockhardt Ltd., in a meeting with his Vice President – Personnel & HR, Vice President – Legal Affairs, and Vice President – Corporate Communications issued them the following instructions: “I want 500 employees, out of the 1000 employees of Merind, which we have just acquired, to be cut within three months!” He explained that he was willing to offer an attractive VRS scheme to be able to achieve this. “Plan out an attractive concept and implementation plan for a VRS scheme that will attract employees to go in for it -- across the board from factory workers, to staff and even managers! I will like this done quickly, smoothly, and with least opposition from employees, and also without any adverse publicity in the media,” he told the three senior managers sitting across his table. He also declared that he expected the three of them to set up a Task Force to device and handle the scheme in order to ensure delivery of the desired results.

The three VPs for the next few weeks met frequently to discuss the objectives, and evolve. A suitable VRS scheme and an internal communications strategy, which would make the expected number of employees of erstwhile Merind come forward to accept it quickly and readily.

Acquisitions require integration of cultures!

As a result of a series of growth oriented steps (new drugs, R&D, exports, and other acquisitions) over the past few years Wockhardt Ltd. had grown to become a large and professionally managed company. It now compared and competed with MNC’s and large Indian companies in every respect. Its turnover had reached Rs 1000 crores, and it had a total workforce of 4000 employees in its plants and offices all over India. Its growth had come from its all round performance oriented policies and practices, motivation of employees, and contemporary products (bulk drugs and formulations).

The company had always believed in a philosophy that satisfied and motivated employees were the engine for its growth. And towards this the goal, the company made sure that its employees were enlightened, progressive, assertive and self sufficient, through regular training and development programmes and periodic employee audits on the level of employee satisfaction and commitment.

Union agitation

And it just happened so! The Union and its members began an agitation to pre-empt the VRS, and urged its members ignore and resist all overtures and offers that might be made by the management. The Union leaders began protracted parleys with the VP – Personnel & HR, and even the Chairman himself, about their fears in anticipation of a VRS!

The management, stuck to its view that it was for the benefit of the company at large, and in no way anti-employees. The company was compelled to take some hard steps, or face further losses, and then being forced to sack some employees on grounds of non-performance. It may even have to consider the option of closure of the company and that would affect one and all of the employees, instead just a few who take the VRS.

The Union threatened to get a court injunction (stay order) in the matter. Which meant the issue would remain unresolved for years! And the company would stagnate further and face a dark and unpredictable future.

Objectives for the Task Force
The objectives before the Task Force formed for the purpose, therefore, broadly were:

1. To offer an attractive VRS scheme which the employees – workers, staff, and managers – will accept and opt for willingly. Its dynamics and mechanics should be so planned that the implementation is smooth and free of problems.

2. The scheme is backed by right communications – for awareness of the features and its benefits. Along with a positive projection of the management’s image among the employees, and the resultant corporate growth and synergies as a result of the acquisition.

3. To create a promotion strategy for the VRS which would build interest in the “offer” among the qualifying employees, as well as the remaining employees in the improvement of their productivity and leading to the success of the merged entity.

4. To create a pressure on the Union members from among the out going and remaining employees not to appose the VRS; and in fact act as a catalyst in the smooth process of the scheme.

Within these objectives, the Task Force came up with a VRS scheme that was branded as “PROJECT MILESTONE”, and was described as being a “Viability and Rehabilitation Scheme” for the employees of Merind, now a part of Wockhardt.

The VRS scheme and its promotional programme in the words of the VP – Corporate Communications was “A unique recipe for a secure future of the employees. It was a project to pull together for the larger benefit of Wockhardt Ltd.”

The need now was to evolve and develop an attractive and strong internal promotional programme for the scheme among all the employees. It should be tailor-made to the situation in the company and offer a strong “reason why” to get the employees to understand, accept, and go in for the VRS urgently.

“Project Milestone” – Background

In any such situation of a “golden handshake” at a company it is necessary to ensure that the features of the scheme and the monetary package are, firstly, fair and honest, and secondly, there is neither a winner nor a loser in it. The whole approach has to be balanced and tactful one. It needs to be such that it is evolved around the common economic and workplace interests of the employees.

The Task Force in their analysis of the company situation, in this case, surveyed the legal and taxation implications of a VRS scheme as prevalent in the industry (under section 10 (10C) of the Income Tax Act of 1961). The key aspects found in this were:

1. The compensation received by an employee is exempt from tax unto Rs. 5 lakhs.

2. Compensation should be received at the time of voluntary retirement.

3. Compensation should be according to the scheme approved by the Chief Commissioner or Director General of Income Tax.

4. Except Directors of the company, the scheme is applicable to all employees of the company who have completed 10 years service or completed 40 years of age.

5. The scheme was to be drawn to result in overall reduction in the existing strength of the employees.

6. The vacancy caused by voluntary retirement shall neither be filled up, nor will the retiring employee be employed in another company or concern belonging to the same management.

7. The compensation must not exceed three months salary for each completed year of service, or the last salary multiplied by the balance months of service left.

The main criteria for the economic viability of the scheme thus were that it should adhere to the prescribed guidelines, and it should result in overall reduction in the existing strength of the employees of a company.

Now, the task before the company was to cut down the employee strength of Merind employees after the acquisition, through a VRS scheme that the employees would accept and its implementation would go smooth and hassle free.

The basic fabric of the organizational culture of Merind has been that of a lethargic organization. The employees have a good academic and professional background, but their potential has not been fully exploited, and accountability of their actions and performance in a competitive environment was low. The company also has been paying employees high salaries and liberal benefits, and as a result certain undesirable work practices had evolved over the years. Merind employees expect that the prevailing culture and monetary benefits would not be upset after the aquisition, and if anything it will be more liberal!

The company has a strong internal Union that had been pampered by the earlier management, and had entered into various agreements on work and productivity related areas which were greatly advantageous to the employees in general. The Union has a good stronghold on the staff at the factory as well as the headquarters. The acquisition by Wockhardt, therefore, was not a very welcome happening for them. They believed that Wockhardt had a “task master” philosophy and lacked human approach in managing employee related issues! The employees also believed, and have sensed, that as a consequence of the acquisition there will be considerable reduction in employee strength among them. Several rumors were floating freely in this respect. This was creating a strong feeling of insecurity and uncertainty throughout the organization.

Thus it was an accepted fact by the Wockhardt management that any sort of VRS scheme, or reduction in staff, would as a matter of routine will be apposed by the Union.

Industry practices in such VRS

At the point of Wockhardt Ltd.’s VRS scheme, industry practices on payment of compensation at such a separation were:

1. Lumpsum Payment – three months salary for every completed year of service; or one month’s salary multiplied by the balance months until the age of actual retirement; or upto a maximum of 5 lakhs, and a minimum of 3 lakhs.

2. Deferred Payment – last drawn salary for twenty years; or upto the age of retirement, whichever is earlier on monthly basis.

Based on this the Task Force made a rough calculation that if one were to take, for instance, 100 employees opting for VRS as a base, the cost burden of the scheme to the company would be in the tune of:

1. Lumpsum Payment = Rs. 5 to 10 crores to the company
   Rs. 5 to 7 lakhs payment per employee

2. Deferred Payment = Rs. 11.5 crores to the company
   Rs. 5.5 lakhs payment per employee

Need analysis for “Project Milestone”

For Wockhardt (i.e. Merind employees) the Task Force undertook the initiative of doing a detailed need analysis in order to formalize a single scheme that would be beneficial to all who qualified, and also others who opted for VRS.

The analysis was done on the factors of age group, the need for which the money could be put to use and the means available. The picture that emerged from the analysis was:

Age Need/s

1. Below 35 years Secured/assured earnings
   Marriage/settling down in life

2. Between 35 to 45 years Assured/secured earnings
   Children’s education and marriage
   Liability of old parents
   Asset creation – housing in particular
   Saving to meet contingencies
   Start preparing for retirement

3. Above 50 years Assured/secure monthly income
   Health protection/assurance
   Saving to meet contingency

After due consideration of these factors, the Task Force went ahead and formalized the scheme, and obtained the Chairman’s formal approval. After which it was announced internally to all employees, and implemented it thereafter.

“Project Milestone” – the shape of the VR Scheme

The final proposal for the VRS scheme to be offered to Medha Pharma employees worked out was for three groups of employees, taking the age group and number of years of service put in into account:

1. Group I – either less than 10 years of service, or 40 years of age

2. Group II – either more than 10 years of service, or 40 years of age upto a maximum of 54 years of age

3. Group III – age of 55 year and above

For each of the three groups the compensation scheme (package) worked out was:

Group I (employees not falling within IT criteria)

Rs. 3500 per month for 20 years, or till the age of actual retirement that ever is earlier

OR

Present value of the same on the date of retirement

Group II (employees falling in IT criteria upto the age of 54 years)

Rs 4000 per month for 20 years, or till the age of actual retirement whichever is earlier. Plus lumpsum of 3 months salary for every completed year of service unto a maximum of 2 lakhs.

OR

Minimum of 3 months salary for every completed years, or one month’s salary multiplied by balance number of months till the age of retirement. Upto a maximum of 5 lakhs.

Group III (Employees above 54 years of age)

Full salary till the age of retirement on monthly basis.

OR

Present value of the same on the date of retirement.

Over and above this scheme and in line with the legal and taxation norms, the company also is willing to go out of its way and offer other fringe benefits/incentives to all who opt for VRS under the announced scheme/s.

“Project Milestone” task – marketing and communications to Employees

Target Group = All employees of erstwhile Merind Ltd..

The USP of the scheme = Assured monthly income, lumpsum capital, plus, plus.

Communications to employees:

A consolidated action plan with details on activities, promotional material and budgets needs to be evolved, developed, and implemented.

At the same time ensuring that no bad/negative publicity is received in the media.

The final cost to the company -- viz the scheme, getting about 500 employees to sign up and leave the company within the agreed compensation worked out:

1. About Rs. 17 crores for the entire scheme, including the fringe benefits.

2. About Rs. 5 lakhs per individual person opting for VRS.