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A CORPORATE RISK MANAGEMENT FRAMEWORK FOR END OF EMPLOYMENT DECISIONS
Most McKinsey & Company associates who enter the partnership track will leave the firm. There is an up-or-out talent system typical of most large professional service firms. But the end of employment does not mean the end of the McKinsey relationship. End of employment is the beginning of membership in the McKinsey Alumni group. The company goes out of its way to assist departing professionals and maintains an active alumni group. The Managing Partner of McKinsey routinely visits McKinsey Alumni organizations around the world to keep the relationship going.
Why does McKinsey have this philosophy?
McKinsey sees departing employees as potential referral sources for future work. Its alumni-related expenses are not “personnel” costs but “business development investments.” It is also acutely aware of the potential costs in not cultivating alumni.
Mckinsey would be on one extreme of the end of employment continuum.
The other side of the employment termination is to treat departing employees with the same perspective it treats refuse disposal: all I want is low cost and no lawsuits. I don’t care what happens once it leaves the building.”
Most of our client companies fall somewhere between these two continuums.
The purpose of this article is to provide attorneys with a perspective to help leaders decide where on this end of employment continuum they want to be or ought to be.
RETALIATORY CAPACITY
In planning for terminations, we 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 apply these concepts to end of employment decisions.
“Auwiedersehen” is German for “Until we meet again.” It has a more open-ended quality than the English “goodbye.” In an auwiedersehen scenario, the assumption is that once professionals physically leave the building, they may continue to be a factor in the firm’s future even if they honor the non compete and non disparagement clauses of their employment contracts. They have the capacity to legally retaliate against the company’s interests:
They may join other organizations and become potential allies or opponents in the firm’s efforts to gain/keep corporate clients or engage in M&As.
They may become potential referral sources for your firm or a potential source of caution to others about doing business with your firm.
They may attend alumni programs at their graduate schools or colleges
and encourage/discourage graduates from joining your firm.
Each of these scenarios assumes capability of retaliation plus uncertainty of that retaliation. It is also impossible for companies to effectively defend against these realistic threats. The best practical defense for a company that says,”Treat people with dignity on the way out because the assured costs of such treatment are less than the potential downside retaliatory risks.”
ARE COMPANIES EMPLOYING TOO NARROW A PERSPECTIVE ABOUT RISK MANAGEMENT WHEN MAKING TERMINATION DECISIONS?
With many of our client companies, termination discussions often involve HR and legal professionals meeting to discuss risk management issues, and then presenting their recommendations to finance. HR, finance, and legal perspectives are important. The danger of such a limited perspective is that termination decisions can become too focused on the specific transaction while ignoring longer term and far costlier issues of strategy, brand, and customer relations.
To structure the end of employment discussion, we employ a framework like the one below to help structure the conversation. You will notice that it will require someone from marketing or strategy to help complete the survey.
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.
Ability to harm strategic alliances.
Ability to negatively influence sales.
Ability to negatively influence talent we seek to hire.
Ability to negatively influence the community where we operate.
AUWIEDERSEHEN VS FIRM CULTURE
We love working for client companies that treat departing professionals with dignity on the grounds that it is good public relations and good for morale. It is simply part of the culture to treat people with respect during all phases the employment cycle.
We want to stress that the perspective of this article does not assume that companies have cultural values of treating people with dignity. We are stressing a contingency-based approach to managing end of employment decisions based on a broader framework of risk assessment that involves a marketing/strategy perspective. We also provide a concrete tool to conduct this assessment.
Using this contingency framework, there may indeed be times when a financially-oriented “goodbye” scenario is the best way to go. But the rationale should be based on broader considerations than most companies currently conduct.
In designing termination policies, management’s failure to take appropriate defensive measures with those possessing abilities and options to retaliate is bad business.
REFERENCE:
Thomas C. Schelling. THE STRATEGY OF CONFLICT. Boston: Harvard Press, 1980
Laurence J. Stybel is co-founder of Stybel Peabody, an Arbora Global Company. Founded in 1979, its mission is leadership change when the stakes are high.
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Laurence J. Stybel,Ed.D.
STYBEL PEABODY, an Arbora Global Company
60 State Street
Boston, MA 02109
Tel. 617 594 7627
www.stybelpeabody.com
www.boardoptions.com
Global Specialists in Leadership Change
When the Stakes are High.
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