Northeastern Mutual Life: Preparing for Employee Terminations

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Case Study: Northeastern Mutual Life: Preparing for Employee Terminations -------------------------------------------------

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Introduction
Northeastern Mutual Life, the major subsidiary of the Calgary Insurance Group, is one of the largest life insurance providers in Canada. Northeastern Mutual Life has more than three million individual and business customers in Canada. Among its nine thousand employees, Northeastern Mutual Life employs two thousand six hundred administrative staff. Gordon Gillingham is the president and chief executive officer (CEO) of Northeastern Mutual Life. From 1996 to 2000, the return on equity (ROE) of Northeastern Mutual Life has declined steadily from 11.5 per cent to 7 per cent. The constant decline in ROE has been brought to the shareholders’ attention. In early 2000, a meeting of Senior Management Partnerships (SMP), the management body of Northeastern Mutual Life, made a decision that administrative costs had to be cut by 20 per cent. Because employee salaries form the largest part of administrative expenses, employee terminations appear to be the only way to reduce expenses. -------------------------------------------------

Stakeholders
As noted above, Northeastern Mutual Life acquires more than three million individual and business customers in Canada. Moreover, Northeastern Mutual Life has almost three thousand members of the company’s sales in Canada, making it the largest among Canadian insurance companies. Despite of those facts, Northeastern Mutual Life still replies “heavily on its public image and reputation for new sales” (pg.5). Gordon Gillingham, the president and CEO of Northeastern Mutual Life, faces a difficult decision of balancing shareholders and employee interests. CEO’s fundamental duty is profit-maximization for shareholders, and Gillingham is not an exception. Since the ROE of Northeastern Mutual Life has decreased from the past four years, Gillingham, seemingly, must reduce administrative expenditures, which is largely employee salaries, by twenty per cent. Reducing the numbers of staff would be the most efficient way to reduce the administrative expenditures. However, he wonders whether he should put more consideration into the employees’ interests. The shareholders of Northeastern Mutual Life are concerned about the steady decline in ROE of the company. This trend might simultaneously reduce the stock price of Northeastern Mutual Life, which is something the shareholders are very concerned about. Therefore, the senior managers have decided that “administrative cost [has] to be cut by 20 per cent and that an acquisition of a U.S. –based rival would permit additional increased efficiencies” (pg.5). There are nine thousand employees in Northeastern Mutual Life and two thousand six hundred of them are administrative staff. Sales staff are commission-based so they will not be included in the termination decision. Therefore, administrative staff are the target of termination However, most duties performed by these administrative staff are not easily transferable to other companies, and it may be difficult for them to find similar jobs elsewhere. As a result, administrative are arguably the most affected by Gillingham’s decision. Government authorities such as the Pension Commission of Alberta are the ones who implemented regulations that are also affecting Gillingham’s decision. Pension Commission of Alberta could order a partial windup of the pension fund of the company if a certain percentage of staff is terminated. The main purpose of mandatory windup legislation is to protect the interests of the long-term pension plan members and ensure the safety of their pension benefits. -------------------------------------------------

What has Changed?
* Since 1996, the ROE has declined steadily from 11.5 per cent to 7 percent. A decision of reducing in the number of administrative staff has been made. * The...
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