Make It Easier to Say Goodbye

Know your target audience when offering early retirement packages.

By Eric Krell Oct 1, 2012
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After recalibrating pension payouts for the umpteenth time, huddling with external legal counsel, calling the health plan administrator, and inputting the 87th and final cost-benefit analysis into an Excel spreadsheet, the moment of truth arrives for HR professionals planning early retirement programs.

How will employees respond to the exit package? What will the rest of the workforce think? How many targeted employees will eventually accept—too many, too few or just the right number?

Managing an early retirement incentive plan, says Heidi Hayden, SPHR, chief human resource officer for New York City-based law firm Epstein Becker Green, "requires a lot of work, and you really feel like your reputation is on the line. You just told the organization, ‘I’m going to save you X dollars.’ The last thing you want to have to do is go back and say, ‘Well, our assumptions were wrong.’ "

When Hayden managed an early retirement program at another law firm, her assumptions were right on the money: Nine of 15 employees who received the early retirement offer accepted, meeting the hoped-for cost savings Hayden had projected for her executive team.

Effective early retirement programs, Hayden and others note, require about two to four months of detailed planning for a broad range of considerations, including:

  • Business rationale for the program.
  • Benefits in the offer.
  • Costs and benefits to the organization.
  • Impact of the offer on workforce productivity and morale.
  • Legal implications.
  • How the offer will be communicated—perhaps the most important planning of all.

When an employer offers an early retirement package, it’s possible that everybody who’s eligible will take it, says Judy Wierman, GPHR, vice president of human resources for Carus Corp., a privately held environmental services company in Peru, Ill., with nearly 400 employees."That may be what you want," she explains, "but you need to have a strong sense that will occur before the offer is made. The other extreme is no one takes it. If that occurs, what’s plan B?"

Who Will Accept?

In many respects, early retirement incentive plans are plan B. They often come about because business conditions have changed and it makes sense to prune the workforce. This can be accomplished via layoffs, job sharing or furloughs—or through an early retirement program.

Early retirement incentive plans are typically made available to individuals who are close to retirement. These employees tend to be older and higher-paid and tend to have higher health and benefits costs. As a result, an early retirement program can "save more money than, for example, a reduction in force targeting employees with the shortest tenure," reports Charlie Yovino, an Atlanta-based principal in PricewaterhouseCoopers’ human resource services practice. "It also isn’t viewed as a firing, and, if managed properly, it won’t have as much of a negative impact on morale."

However, if it is not managed properly—for example, if too few employees accept the offer—the employer may need to resort to plan C: layoffs. If an employer lays off employees who previously declined an early retirement package offer, it should do so with caution. "It may be seen as retaliatory," Hayden explains. Legally, because the individuals are older, "it could be viewed as discriminatory, depending on who else may be laid off at the same time."

At her previous employer, Hayden developed the early retirement proposal in response to technology developments. Prior to the program, the firm maintained about a 1.5:1 ratio of attorneys to administrative assistants. Advancements in automated dictation and the availability of low-cost transcription services enabled the firm to offload transcription duties, a major component of the administrative assistants’ work. If enough assistants accepted the early retirement offer, Hayden estimated that the ratio could be increased to about 2.5:1, saving money over time after the cost of the early retirement benefits was recouped.

Wierman also managed an early retirement program for a previous employer, a manufacturing company where executives wanted to close a plant. They stopped replacing employees who left the factory, and about 40 remained. All had at least 

20 years of service, and most were nearing retirement age.

Seventy-five percent of the employees accepted the offer, and the remaining 25 percent took jobs with a company that was acquiring that segment of the original employer’s business. The target group was ideal because they were all nearing retirement age, so the offer could be made to everyone with no risk of discrimination.

"When offering benefits from a qualified retirement plan, the option must be available on a nondiscriminatory basis," notes Arthur Noonan, a senior partner in Mercer’s Pittsburgh office. "In some cases, companies may be better served by offering a mix of early retirement offers and layoffs."

The Components

Many employees are not confident in their ability to retire comfortably. Only 14 percent of U.S. workers say they are "very confident" that they will have enough money to live comfortably in retirement, according to 2012 research from the Employee Benefit Research Institute. This suggests that an early retirement incentive plan must contain sufficient benefits to overcome a lack of confidence about retirement.

Early retirement packages may contain severance payouts, outplacement services, pension payouts and medical coverage. "Two of the core benefits, however, are typically an enhanced pension benefit … and retiree health care benefits so the individual can have a level of health care until they are eligible for Medicare coverage" at age 65, Yovino reports.

A common pension enhancement is to treat retiring employees as if they are older and have more years of service. "Adding five years to age and service means a larger pension as a result of the extra service and smaller reduction for early commencement," Noonan reports. He points out that there is less leeway to offer enhanced benefits in defined contribution plans, such as 401(k) plans, because annual contribution limitations apply to those plans.

But the greater flexibility defined benefit pensions offer may also present a planning complication. The offer needs to be calibrated to appeal to the targeted group in a fair manner, without costing the company too much or offending the rest of the workforce. For example, if the early retirement incentive plan is offered "to everyone over 60, what is the person who is 64 going to say?" Hayden asks. "That person is going to say, ‘I’ve been here longer than that 60-year-old who is getting five years [of retiree health coverage], and you’re only giving me one year.’ "

Employers may choose to provide dental and vision coverage—and any other benefits employees receive. However, HR professionals must review each benefit plan’s eligibility requirements. Some plans have provisions stating that benefits can be provided to employees but not to retirees. Some employers opt to pay COBRA premiums for a specified period instead. Hayden reached an agreement with her previous firm’s health benefits provider to alter the plan’s eligibility requirements so early retirees were covered until they reached Medicare eligibility at age 65.

Offering severance payments is a fairly typical practice, but the payments vary significantly in size. Organizations frequently use a standard formula based on tenure; for example, executives and exempt employees receive two to three weeks’ salary for each year of service, Hayden says.

Outplacement services are commonly included in early retirement incentive plans in cases where the targeted employees are likely to look for other jobs rather than retiring permanently. Organizations creating early retirement incentive plans commonly require employees who accept the package to sign releases absolving the employer from employment-related liability. Hayden says most releases are drafted by counsel. The amount of time companies give employees to weigh their decisions varies, but 45 days is frequently identified as a useful time frame.

"Thinking through the structure of the offering is really where the strategy comes in," Hayden says, describing this as the most time-consuming, challenging and important aspect of the process. Although Hayden sought assistance—from an actuary on pension calculations, from benefits administrators on eligibility questions, and from a labor and employment lawyer on legal issues—she conducted the cost-benefit analysis on her own with an Excel spreadsheet.

Optimizing the costs and benefits of the early retirement incentive plan is rivaled in importance by how the offer is communicated. Hayden carefully considers who will present the offer to employees. "The person who delivers the news should have an established rapport and a high level of trust," she adds.

Qualitative Considerations

Given the quantitative nature of calibrating a plan that will appeal to employees and the employer, qualitative factors might be neglected. Addressing the following questions can help HR professionals ensure that their programs meet business objectives and are accepted by employees:

What is the business objective?

Identify "what you’re trying to achieve for the business," Hayden says.

What is the executive team’s leadership and decision-making style?

When Hayden approached leaders of her former firm with the business case for an early retirement program, she knew they would approve her cost-benefit analysis, even if the cost savings were minimal, because they wanted to save every dime possible, she says. On the other hand, Hayden has worked at companies where the leadership team would probably reject an opportunity to save $40,000 if doing so would potentially have any negative impact on the workforce. In those environments, the projected cost savings of the program would have to be significantly higher. Understanding how the leadership team approaches cost reduction can help HR professionals craft programs that are likely to be approved.

What’s in it for employees?

The business case for an early retirement program must add up for employees as well as the employer. "Understand what’s important to employees who will decide whether to accept the offer, and then make sure the program addresses those issues," Hayden says.

What knowledge does the employer need to retain?

Although Wierman’s former company was closing a plant, executives wanted to retain the knowledge of some potential retirees. Wierman offered additional cash payments to workers in exchange for sharing their expertise through a knowledge transfer process described in the offer. "We were very transparent," she recalls. "We essentially said, ‘You have some really valuable information, we’re willing to pay you for it, and here’s how you can share it.’ "

Do employees understand the offer?

Accepting an early retirement incentive plan typically means an employee cannot return to work for the company. That was the case at Wierman’s former company. When you have voluntary retirement programs, "make sure employees understand what they are accepting," Wierman says.

To strengthen comprehension, Wierman invited the spouses and family members of the 40 employees who received the offer to the initial presentation. "We knew many of the spouses took care of the financial details," Wierman explains. "We knew they would likely want to hear about the offer directly from us at some point in their decision-making, so we thought it was helpful to just bring them in at the beginning."

Wierman also advises HR professionals to consider the highly personal nature of employees’ responses and be sensitive to employees’ concerns. Doing so influences results and shapes HR’s reputation with the remaining workforce after the early retirement window closes.

The author is a business writer based in Austin, Texas, who covers human resource, finance and social marketing issues.

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