Cost-Benefit Analysis Of VRS

Cost and Benefits to the Company:  A company introduces VRS with a view to reducing its surplus-labor. If a company can reduce its workforce through retrenchment it has to pay compensation at the rate of 15days salary for every year of completed service. Companies employing more than 100 persons cannot retrench their employees without giving

  • Prior Notice.
  • Consultation with Employees.
  • Paying compensation under the law

  • Obtaining prior permission of the appropriate government. Experience shows that the government rarely gives permission for closer lay-off or retrenchment. Therefore companies began to introduce schemes to induce workers to retire voluntarily. Such inducement has to be in monetary terms, much higher than the normal retrenchment compensation. How high the VRS amount will be is dependent on a number of factors such as the following:
  • The relative health of the enterprise: if the enterprise is chronically sick and has a record of not paying salaries and other statutory dues, workers can agree to a lesser amount. In fact, in several small sick units, workers lost their jobs and did not even get statutory dues like earned wages and accumulated benefits under the provident fund and gratuity legislations. Therefore, the tendency of workers in such an enterprise could well be sometimes is better than nothing. In contrast in companies that are growing and earning profits, employees would be reluctant to go on VRS  because they feel no threat to their job and earning.
  • The real cost to the company is not the amount spent on VRS: the real cost could often be intangible and not easily represented in monetary terms. firstly of losing redundant workers, be actually losing the workforce in areas where their continuance in employment in the company is critical. With the result that it may be forced to recruit the workforce again to fill critical skill shortages. If the workforce redundancy problem persists after VRS such VRS adds to the cost and entails no saving or benefit to the company. Secondly, even among the surplus categories more often than not, it is the employees with marketable skills who choose to leave voluntarily. The less skilled and less motivated under-performers may not leave because they cannot get better opportunities elsewhere. This may adversely affect the company’s competitive ability when the average quality of its employees in the post-VRS scene is lower than before. Thirdly, it is generally observed that while in the public sector VRS is usually voluntary, it is not quite so in most private-sector enterprises. When a company introduces VRS every now and then or when it coerces some of its employees to compulsorily take ‘VRS’ it might affect the morale and motivation of the employees who remain in the company.