Managing benefits during a restructure

Retaining and motivating key staff during a restructure can be a challenge, unless the right benefits package is offered, says Vicki Taylor

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The last few months have seen a steady stream of high-profile organisations announcing changes to their workforce due to company restructuring, including Aviva, Thames Water and the Daily Telegraph newspaper.

Such reshaping of a company can occur for a host of reasons, including a merger or acquisition, offshoring or outsourcing parts of the business, or a relocation exercise.

Whatever the case, a company’s benefits package can be a vital tool, used either as a way of keeping staff motivated and retaining key employees or as part of the redundancy package offered to departing staff.

Tony Clare, director of Deloitte Total Reward and Benefits, points out: “Any corporate activity is likely to lead to some restructuring. Clearly, closure of operations and relocation of operations are common triggers [for changes in benefits], as well as post mergers and acquisitions.”

Very often, a company restructure can lead to a relocation or redistribution of staff which might mean employees need to be enticed to move to another part of the UK or abroad. And for those who cannot, or are unwilling to, move an adequate package will need to be offered as recompense.

There are some common benefits that most employers will offer as part of a relocation package. “You often get an extra five days holiday or something to go and find a new home and assistance with child relocation depending on level, [such as] help with [school] fees,” says Clare.

Some employers will even offer to buy the the house that relocating employees are leaving behind, but this luxury isn’t available to all companies, especially if the restructure is happening because funds are tight.

“If you are a manufacturing business you are unlikely to have the capital kicking around to say ‘let’s go and buy 150 peoples’ houses’. [However], a number of financing houses will take [on the job] for a fee.”

Neal’s Yard Remedies is an example of a typical relocation exercise. The company moved 35 of its 70 head office staff to Dorset from London in 2005, while the remainder took a package which included help retraining and time off to look for another job. Those who relocated received an equally generous package, with a promise of a three-month sabbatical should they stay in Dorset for more than two years, as well as help finding accommodation in the area.

Ellie Gamble, senior manager in the employer solutions team at Grant Thornton, says that employers can spend up to £8,000 per employee tax-free on helping staff relocate for expenses such as removal vans and legal fees.

“Employers will [also] sometimes say [things like] ‘we’ll make a car available to you’. Obviously, that will be a taxable benefit, but they might want to do it so [staff] can visit home. They will [also sometimes] pay a percentage of salary as a resettlement grant and all of that will sweeten the pill,” she adds.

One thing that Matt Haswell, a corporate benefits consultant at accountancy firm Smith & Williamson, says employers should be aware of is the effect of any changes on employees’ insured benefits.

“If a company does relocate [people] it needs to make sure that it advises the insurers because the insurance risk may change under the scheme. If it comes to a claim and the insurance company finds that the whole workforce has moved to a different geographical area, there could be problems.”

Whatever the reason for restructuring it is likely employees will feel unsettled and this can have a demotivating effect on them.

To counteract this, some employers put interim perks in place to keep staff focused and to ensure key employees don’t leave before the restructure completes. However, in times like these, available cash can be limited, forcing employers to be creative.”[During company restructuring] there will be an impact on employees [but] throwing money at it isn’t a solution and often isn’t possible. That is when being a bit more creative [can help], so things like extra holiday might well come in or flexible working arrangements that aren’t going to cost the employer a lot [or] a childcare scheme through salary sacrifice, [for example],” says Gamble.

Employers that are lucky enough to be cash rich might offer a bonus, payable, for example, if people stay for two years. And where senior employees are at risk of leaving before the transition period ends, a company might also offer a retention fee to stay with the organisation for an agreed period.

While these types of cash incentives can be a useful strategy, employers should take care to ensure that payments are not seen as part of the redundancy package if employees eventually leave or they will risk falling foul of HM Revenue & Customs.

Gary Hull, director of human resource services at PricewaterhouseCoopers, says: “[If] you pay [departing employees] bonuses you [may] think they are part of the termination payment but they are not. You get into quite complex areas.”

Retaining key personnel during a company restructure is often a major issue and can be made harder where voluntary redundancies are being sought and a more generous than normal package is being offered as an incentive for staff to go.

By law, employees who have worked continuously for an organisation for at least two years are eligible to receive a statutory payment calculated according to their age, how long they have worked for the organisation and their salary.

However, many organisations will offer an enhanced package to some, or even all, of their workforce.

Paul Griffin, employment partner at law firm Norton Rose, says enhanced redundancy payments are typically based on the statutory model but with an enhanced multiplier, perhaps using an actual week’s pay rather than the capped week’s pay in the statutory formula. Offering an enhanced package is more common in some sectors than others. “In the UK retail banking sector almost all [organisations] offer some form of enhanced redundancy. [In the] manufacturing [sector] it is reasonably common but getting less so, [and] in organisations owned by Americans it is unheard off,” he explains.

But he adds that many companies, such as those in the UK retail banking sector, are now facing problems because the package they offer is so generous people are “fighting to get out the door”. The benefit most prized by older staff vying for redundancy is the offer some organisations make to pay out a defined benefit pension on redundancy from the age of 50 years with no reduction in benefits.

Hull believes policies like this can impact on the motivation of the remaining workforce. “There is the danger that individuals who are not selected [for redundancy] could feel hard done by. [This could happen] particularly for people who are approaching retirement because they might think ‘this would have been a great opportunity to line my pockets before I retire’.”

As part of an enhanced package, it is also common for employers to offer outplacement services, which help departing employees find a new position.

Bernard Buckley, HR director for Europe, Asia and the US at Cable & Wireless, says it provided such a service to its senior executives when it made redundancies after acquiring Energis and its 1,500 employees in November 2005.

“Outplacement assists with preparing CVs, [employees’] interviewing skills and looking at opportunities in the marketplace. [It could be] important for people who have been in one organisation for a long time and are out of touch with the market,” he says.

While a generous redundancy package might have staff fighting to get out the door, it can also have the effect of keeping staff working as usual while a restructure takes place. Buckley, for example, says Cable & Wireless has an enhanced scheme which is far more beneficial than the statutory one. “The individual is still being paid and in order for them to pick up the enhanced redundancy terms they need to carry on working in a professional manner.”

Besides using the benefits package as a way of keeping staff motivated, another thing HR can do to keep morale high is keep staff informed. When a company restructures, especially if as a result of a takeover, or merger or acquisition, employees are likely to have questions about what it means. Providing a forum for employees to put their questions to management can be beneficial.

Harriet Maurice-Williams, an associate at law firm Freshfields Bruckhaus Deringer, adds: “Communication is one of the most important things because [a restructure] is a very unsettling time for employees who are quite happy in the group they have been chugging along in for x [number of] years. It is very important to communicate what you are trying to achieve because it is much easier if you have employee buy-in to do anything.”

Of course, restructuring doesn’t always mean redundancies will be made, but it shouldn’t be assumed that staff understand this.

Stephen Lehane, director of HR and organisation development at Alliance Boots, formed from the merger of high street pharmacy chain Boots and Alliance Unichem this year, says: “We were in the fortunate position that we [were] bringing the businesses together to make them bigger so the threat of redundancy just isn’t there, but people still need to have that explained to them.”

The benefits package can also come under scrutiny when a merger or acquisition takes place.

One thing HR departments should pay regard to is the benefits included in transferring employees’ terms and conditions.

Donald Duval, chief actuary at Aon Consulting, says: “If a business has been sold every five years and someone has worked there for 20 years, probably no-one knows what the contract of employment says unless the records have been very well kept. For senior people it is not uncommon to find things that nobody knew existed.”

So how can employers avoid this situation? “Ask the right questions and get undertakings and warranties from the seller that they have told you everything and, if they haven’t, that they will compensate you afterwards,” he adds.

In some situations employers have to ensure they are aware of their legal obligations because any mistakes could be costly.

When a merger or acquisition is protected under rules known as The Transfer of Undertakings (Protection of Employment) Regulations (Tupe), for example, employees’ terms and conditions cannot be changed, even with their agreement.

This can cause problems for employers if, for example, the transferring employees previously had access to a share scheme and the acquiring company does not offer one. In this instance, the company has to offer something of a ‘substantial equivalent’ going forward.

“Some [companies] do try to buy people out of the benefits that they had, but if you are doing a Tupe transfer then that is not a failsafe,” says Maurice-Williams.

An employee bought out of a share scheme for £50,000, for example, could complain to a tribunal. “They could say it wasn’t providing benefits of a substantial equivalent because [they] could have made £250,000 with share options if the company had grown in the way it was expected to,” she adds.

Pensions are another aspect of the benefits plan that can cause difficulties. If an employee was previously eligible for an occupational pension scheme before the transfer there is now a certain minimum contribution level of 6% that the acquiring company has to provide under the Pensions Act.

“Before the Pensions Act came into force if people were Tupe transferring out of companies where they had a defined benefit scheme which was quite nice and generous they would then whip over to the purchaser which would provide them with a stakeholder arrangement with no company contribution which is obviously a massive drop in benefit,” says Maurice-Williams.

In some instances, the acquiring company offers a more generous benefit than it usually would for industrial relations purposes or says it will leave some employees’ current benefits untouched.

“By giving undertakings that [the takeover company] won’t make any radical changes might make [employees] say ‘we will give these new guys a chance’. If the employees are absolutely critical to what you are trying to do with the business [then] keeping them happy and motivated could be very important,” adds Duval.

The overall message for HR during any company restructuring exercise is to follow the letter of the law and watch out for any situations that could cause employees, or the organisation, future difficulties.

Tips for successful restructuring

Employee benefits can be a useful tool for keeping employees motivated during a company restructuring exercise.

Most employers will offer a good relocation package if they want staff to move with the company.

It is possible to offer up to £8,000 tax-free for expenses like removal vans and legal fees.

Additional benefits, like a car, can make a relocation package more attractive.

Consider the case for enhanced redundancy packages carefully.

Try not to make the package so generous that everyone wants to leave.

Take care not to mess with the benefits of staff transferring under Tupe regulations.

Think about how the rights of transferring staff compare with those of existing employees and whether there is a case for aligning entitlements

Case study: Boots

High street chemist, Boots, merged with Alliance Unichem in August 2006. Stephen Lehane, director of HR and organisation development at the newly-formed Alliance Boots, explains that communication with all employees was key even though no redundancies were made as a result of the merger. “Human beings’ normal behaviour is to be wary of change,” he says.

The company brought its 100 most senior leaders together for a conference after the merger where they were given the chance to meet one another and the new board. It also made sure that employees further down the organisation were kept informed.

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“On day one of the merger, we had some celebratory activities around all parts of our business where we had various briefings about what was going on with cake and champagne and some mementos of the day. We have also had newsletters and videos [distributed to] our colleagues to give a consistent message about what we are trying to achieve,” he says.

The company has not made any decisions yet about harmonising the benefits packages of staff, but is currently looking at bonuses for its senior management. “Clearly, if we have got people whose efforts need to be focused on Alliance Boots at the organisation, we need to reward them accordingly and that will be the rationale for change,” adds Lehane.