Question

1. Queen City Treating is a metal treating company that hardens prefabricated metal products for automobile accessories, including seat belt buckles, wheel rims, radiator caps, and other items. The company is experiencing some serious cost problems. Foreign competition, which uses better technology and has different cost structures, is taking away some of Queen City’s customers by offering lower prices. As a result, Queen City is scrutinizing all of its costs. The CFO has concluded that one area that needs revamping is the high labor cost of the senior workers. The company is considering a voluntary buyout of these workers, in which they would be offered a financial incentive to leave the company before their normal retirement age. Company statistics indicate that 30 percent of the workforce has over 25 years of service and is earning the top rate of pay. The total wage difference among the highest and lowest paid production workers is about $8 per hour, and the company utilizes about two million labor production hours per year. Management believes that replacing these more senior and higher paid workers with persons at lower rates of pay would significantly improve the costs and productivity of the business.

Describe in some detail the optimal plan design to encourage voluntary separation of the senior employees.

Answer 1

Queen City's statistics indicate that 30 percent of the workforce has over 25 years of service and is earning the top rate of pay. The total wage difference among the highest and lowest paid production workers is about $8 per hour, and the company utilizes about two million labor production hours per year. Hence, the company is considering a voluntary buyout of the senior workers, in which they would be offered a financial incentive to leave the company before their normal retirement age.

It is necessary to explain the senior employees about the voluntary buyout benefits.If senior employees are doubtful about taking the voluntary buyout, it would be essential to explain them that this is the best way to guarantee their retirement. The financial incentive offered by the company can become a bridge until their pension kicks in if they are close to their desired retirement age.