By Terrie Lloyd

Commentary Dec. 09, 2008 - 05:44AM JST ( 14 )

The Nikkei reported in November that Nikko Cordial Securities was planning to substantially reduce its 7,000-person work force by offering employees “early retirement” packages, otherwise known as redundancy packages in the West. Apparently employees aged 40 are the main target and given that the company has a strong seniority culture, it is understandable that it would make the offer to the older, more expensive employees first.

What is redundancy? Basically it’s an effort by a company to let go of a large number of employees in a civilized way, without the abrupt shock of them being fired, nor the repercussions of union action or potential law suits. This approach is usually more expensive than simply firing staff, but is much better for morale since it’s voluntary, and it avoids the potential additional unplanned costs of lawyers and negative PR in the media.

Generally a redundancy program involves management identifying and approaching a particular group of employees, which in Japanese companies will be the more expensive older people, and in foreign firms will be everyone in a particular business division that will be trimmed or closed down. Typically the program applies equally to everyone within the target group, else the fairness of the program may be at risk and this could open the company to claims from ex-employees later.

The company is buying compliancy from those leaving the business, and so you can expect that the pay-out will be significantly better than a standard severance package if you were fired. There is no real standard for redundancy packages in the market, but a typical lower end offer would be around one month’s pay for every year worked, plus 1-3 months severance pay. So if you’ve been in a company for three years, you’d expect somewhere between 4-6 months of pay plus the month you’re finishing up on. Now, I have heard of some better-financed companies offering a full 12 months or even more redundancy pay, but this is more typically for high-level managers and where the numbers being made redundant are fairly small (possibly just the one person).

So what if you don’t accept the redundancy package? Does this mean that you will be fired later? Well, redundancy programs are supposed to be fair, equal, and voluntary, so in theory not taking redundancy shouldn’t affect you too much. But, in offering such packages, obviously the company is hurting, and particularly if there is going to be a closure of a particular piece of the business, you may find your job at risk. Therefore, look carefully at the reasons why the package is being offered and make sure that you have found an alternative position elsewhere in the company just in case. You should be able to find those positions open in other departments by socializing with your colleagues and managers of those teams - something you should always be doing anyway.

Getting a redundancy pay-out can be very attractive. If you’re faced with receiving many months of salary at once, it can be hard to turn down. Mentally you’re thinking, “OK, I’ll take a couple of months off, I’ve been stressed out anyway, pay off the credit card bills, then go back into the job market. I still have months in which to find another job.” But now that we’re at the start of a recession and this one will probably last at least most of 2009, you need to be cognizant of the risks of being unemployed, especially if you’re over 45.

What may initially appear to be a great deal and a temporary respite for a stretched family budget can quickly turn into a nightmare. The problem is that not having a job when you go in for interviews at new companies will lead them to suspect that there may be something wrong with you since your previous employer let you go. Of course, you can argue that the redundancy was equally offered to everyone, but the fact is that not working is a major point of weakness in negotiating a new job. This is a human nature thing. Therefore, if you are going to apply to take a redundancy package, make sure that you have another job to go to BEFORE you leave the current firm.

Terrie Lloyd writes a weekly newsletter for entrepreneurs and business people about business and political opportunities in Japan. You can find the newsletter at www.japaninc.com.