Top Management Story

Writen by Larry Stybel

There is an economic chill in the air.

Despite low unemployment rates in the United States, there is a sense that corporate layoffs and employee layoffs will once again take place. One level of decisions facing leaders is "who stays/who goes." A second level of decisions revolves around "how do we treat people who leave?" This second level of decisions puts leaders in a dilemma between being generous to people that you are harming versus being prudent with owners' money during times of economic stress.

At one end of the termination continuum, many associates who enter partnership track at the international law firm of Bingham McCutchen may not be elected to that role. Whatever their reasons for leaving the firm, one of the things that make Bingham stand out is that it considers former associates to be future resources. End of employment is the start of membership as Bingham McCutchen Alumni. The firm goes out of its way to assist departing professionals and maintains an active alumni group.

At the other end of the employment termination continuum are companies that treat departing employees with the same corporate rationale as they treat office refuse: Remove it with as little cost as possible and do not involve us in litigation. We don't care what happens to our refuse or our former employees after exiting the facility.

These two approaches represent extreme ends of attitude towards end of employment decisions. Where does your company fit? Where should it fit?

The purpose of this article is to provide leaders with a framework for helping them decide where on this continuum their company ought to be. And we want to provide a framework with a more business-like rationale than, "It's nice to be nice."

In planning for terminations, it might be useful to look at the threat analysis framework developed by the 2005 Nobel Prize for Economics winner, Thomas C. Schelling. Schelling is professor of Economics at the University of Maryland. He received his Award for applying game theory to conflict. His focus was on the weapons issues but we have applied his ideas to the design of executive termination packages.

Schelling says "uncertain retaliation is more efficient than certain retaliation" when bargaining and "the capability to retaliate is more useful than the ability to defend." Now let's get practical.

GOODBYE SCENARIO

As a verb, "Goodbye" denotes parting. Saying "goodbye" assumes that once employees leave the building, they will never be a factor for the firm's future. The relationship was transactional and the transaction is now over. If the firm defines termination as a goodbye scenario, the firm should be guided by a business model that says, "What's the least expensive way of terminating this relationship consistent with reducing legal risks?"

AUWIEDERSEHEN SCENARIO

"Auwiedersehen" is a German word that is often used when people depart. But Auwiedersehen is not "Goodbye." It literally means, "Until we meet again." Saying "Auwiedersehen" assumes that once employees physically leave the building, they have only physically left the building. They can continue to be factors for the company's success or failure. For example:

Once their non-compete agreements end, they may join other firms in your industry. Will they be opponents of your M&A plans or attempts to foster industry-wide standards or strategic alliances?

As you seek to attract new talent to your company, are the people you terminated considered thought leaders in your physical or industry community? Will they caution new talent about joining?

Once their non-compete agreements end, they could work for customers or potential customers and encourage customers to go elsewhere.

Each of these scenarios assumes capability of retaliation plus degrees of uncertainty about that retaliation. This is the Schelling scenario. Signing a Waiver of Rights either does not reduce these risks or reduces it for a defined period of time. From a company perspective, the two questions are:

• How much higher than zero is the probability of retaliation?

• Does it matter?

ARE COMPANIES EMPLOYING TOO NARROW A PERSPECTIVE ABOUT RISK MANAGEMENT WHEN MAKING TERMINATION DECISIONS?

With many of our client companies, termination discussions often involve representatives from Finance, HR, and Legal meeting to discuss risk management and cost factors. All three functional perspectives are important. They are also incomplete.

In examining risk factors, the voice of marketing and strategy need to be at the table.

We employ a framework like the one below to help structure the conversation.

TERMINATION THREAT ANALYSIS ONCE NON-COMPETITION AND NON-DISPARAGEMENT AGREEMENTS LAPSE.

Rate each factor on a 0-9 scale. A score of "0" means that the factor does not apply. "1" means "minor threat" whereas "9" means a "significant threat."

SCORE FACTOR

Ability to harm M&A objectives over the next 36 months.

Ability to harm strategic alliances over the next 36 months.

Ability to negatively influence sales over the next 36 months.

Ability to negatively influence talent we seek to hire over the next 36 months.

**

We used 36 months as a framework because many critical business decisions in building product lines, acquiring companies, or being acquired require that type of time perspective.

The above is a framework for discussion during the termination planning stage and can apply to group as well as individual termination decisions.

The people around the table have different areas of competency to evaluate these marketing/strategic issues. HR and sales can best discuss the impact on attracting and retaining talent. But strategy people can best discuss M&A plans.

In applying these and other risk factors, the objective of the meeting is for the group to determine if the end of employment decision approaches the Goodbye end of the continuum or the Aufwiedersehen end of the continuum.

In moving towards the Goodbye end of the termination continuum, a company should pay departing employees severance fees no greater than median relative to other companies its size in the industry and should keep outplacement costs to a minimum. There would be no follow-up with employees once they leave the building other than what is legally required. The company message is: "Good bye. We want to give you a running start on your job search."

In moving towards the Auwiedersehen end of the termination continuum, a company should pay departing employees severance fees and outplacement programs using the median as a starting point. At the extreme end of Auwiedersehen, former employees would be called Alumni and there might be a section on the company website for Alumni to learn about what is going on with the company and to communicate with other Alumni. At the same time, those who frequent the Alumni section are useful targets for the company's sales staff. Alumni would be invited to reapply for job openings the company would have in the future. The company message is: "We would like to see you land on your feet in the wake of this termination decision and we want you to know that you are still a member of our business 'family.' We are sure that our paths will cross again."

COMPANY CULTURE

As someone who works with leaders in their departure from organizations, we love working for client companies that treat departing employees with dignity because it is integral to their culture. Our perspective in this article, however, is a contingency-based approach to managing end of employment decisions. Our framework suggests that representatives from marketing and strategy be present when termination decisions are made and some specific questions be raised to examine threat from a broader perspective than a strict legal perspective.

End of employment decisions can be oriented towards the Goodbye scenario or oriented towards the Auwiedersehen scenario. Where your company is on that continuum should be a carefully thought out business decision.

REFERENCE: Thomas C. Schelling. THE STRATEGY OF CONFLICT. Boston: Harvard Press, 1980