Plugging the Boomer Drain

By Jean M. Phillips, Mary Pomerantz and Stanley M. Gully Dec 1, 2007
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HR Magazine, December 2007 Can your organization stay afloat during the talent crisis? Here are challenges and solutions to consider as baby boomers jump ship.

By 2020, 16 percent of the U.S. population will be age 65 and over, up from 12 percent in 1999. According to the U.S. Bureau of Labor Statistics, 50 percent of federal employees and 70 percent of federal senior managers will be eligible to retire by 2010.

Yet leaders of many organizations ignore aging workforce issues despite the potential problems they see coming, and some damage seems likely to occur before the issues receive appropriate attention. We identified three challenges for employers posed by baby boomers' imminent retirement eligibility by drawing from our own research and conducting confidential interviews with 12 vice presidents of human resources and one CEO from a variety of industries last spring.

First, organizations can expect to have expert knowledge disappear as highly experienced workers retire.

Second, rising health and pension costs--due to aging employees--will increase labor costs, making it difficult to stay competitive in a global marketplace. Third, it will be difficult to maintain head counts in key positions requiring experienced, high-quality talent, a challenge to business strategy execution and company performance.

A single company may not experience all three challenges in the next decade, but most will face at least one--and many experience them now. Here's a brief look at each problem and some possible solutions.

Fostering Knowledge Transfer

When a key employee leaves, expert knowledge leaves as well. This challenge grows even thornier for companies facing a surge in retirements. It can take years to transfer critical knowledge--developed through years of job performance-- from experienced workers to their replacements.

According to Dorothy Leonard and Walter C. Swap's book Deep Smarts: How to Cultivate and Transfer Enduring Business Wisdom (Harvard Business School Press, 2005), it can take up to 10 years to develop the kind of "deep smarts" that these highly experienced workers will take with them. In the meantime, losing critical knowledge can hurt the competitiveness of most businesses.

While leadership and technical competencies need to be transferred, traditional ways of transferring expertise-- including formal training, on-the-job learning, observation, work progressions and structured assignments--are not sufficient for transferring these types of knowledge. Instead, this process often requires mentoring and one-on-one interaction.

To address this challenge, leaders should focus on identifying the knowledge, skills and relationships essential to senior workers' job performance. This information may include company history, values and work processes as well as relationships with key stakeholders and decision-making criteria.

The CEO we interviewed, for instance, represents the fundraising face of his regional hospital. He fears that if he leaves, the hospital will be unable to raise sufficient operating funds. The relationships on which he relies to generate donations are the result of years of building trust and can't be passed easily to a successor.

Succession management can help to transfer knowledge, but the process takes time. Phased retirements also help, but some companies' cultures are not always supportive. Increasing the supply of replacements for departing senior employees may be an appropriate goal, as well as slowing retirements to close or reduce talent gaps in leadership and executive positions. Some HR professionals experiment with creating consulting arrangements with retirees that allow them to mentor their replacements, but the sporadic availability of the retirees sometimes prevents incumbents from getting information or advice when it is needed.

Simulations can be used as a venue for retiring workers to write up case studies that capture some of their important experiences and knowledge. Other novel approaches also may be necessary to speed up knowledge transfer, such as pairing junior and senior workers in project teams.

Staying Competitive

When labor costs rise but employee productivity stays the same or falls, companies' lower return on investment for workers reduces their global competitiveness.

Some companies restructure and automate to reduce the need for workers, or relocate work to other countries where skilled employees receive lower salaries and employers do not pay employee or retiree health care or legacy pension plans. Meanwhile, back home, the higher financial investment in more-experienced, senior workers--namely, their higher pay and benefits costs, especially for health care and defined benefit pensions--may not be offset by higher productivity levels. As a result, the return on investment for experienced workers may be less than that for junior workers. In addition, the continuing health and pension costs of retired or otherwise separated workers decrease the return on investment--profitability--of their replacements.

Company leaders must limit their long-term competitive liabilities and reduce costs, but age discrimination is a big risk when addressing this challenge. Many companies are already reducing or eliminating retiree medical benefits to reduce legacy overhead expenses.

That, however, can create other challenges. For example, if health benefits are not provided in retirement, workers often don't want to leave until they are eligible for Medicare. The result can be retention of undermotivated and often underperforming workers simply waiting out their time until retirement and preventing the advancement of moremotivated, better-performing workers.

This, in turn, can demotivate junior workers and hasten their exits from companies where they perceive their advancement opportunities to be blocked.

Providing programs to help senior workers understand the financial options available to them upon retirement can also help transition out workers who mistakenly perceive that they can't afford to retire. Tax-deferred medical accounts can help, but it is too late for many boomers to start them.

Some companies that tried early retirement programs as a way of transitioning out senior employees found that many of the "wrong" employees left. The most valued employees were often those who took advantage of early retirement programs.

Therefore, it is critical that the workforce be educated and developed prior to any large-scale departures resulting from the introduction of an early retirement plan.

Maintaining Head Count, Taming Turnover

The separation rate of senior workers is expected to outpace-- or in some cases is already outpacing--employers' ability to replace them, creating a talent shortage in critical positions and roles. This talent shortage will make it difficult to execute business strategies. Organizations in health care and other industries already experience this talent shortage and employ new attraction and retention strategies for workers of all ages. The difficult task of locating replacements is compounded by a high turnover rate among new hires in some of these industries.

Retaining retirement-eligible workers has the immediate benefit of lowering turnover and reducing staffing costs. It costs tens of thousands of dollars to replace one nurse. To encourage older nurses to stay on, some hospitals restructure jobs and offer phased-retirement plans. Some experiment with mentoring roles for senior nurses, allowing them to forgo some of the more physically demanding aspects of their jobs, such as moving and lifting patients, in favor of acting as experts.

Yet tax and medical issues limit phased retirement as an option for many senior workers. More pay or equity isn't always desired by senior employees and may not work as a retention tool. Because the tax burden on employees often becomes onerous if pensioned retirees continue to work, more-favorable Internal Revenue Service treatment of pension benefits would help many people stay in the workforce longer. The Pension Protection Act of 2006 permits limited phased retirement by allowing in-service pension plan withdrawals to begin at age 62 rather than 65, but the executives we spoke with agree that more help is needed.

Changes in vision, hearing and muscle strength can make work challenging for senior employees, as exemplified by older nurses who may no longer wish to lift patients. Technologies and work aids--such as magnifying glasses, equipment with adjustable noise levels, mechanical lifting aids for physical tasks and using larger fonts on documents--can allow senior workers to stay longer and work more safely as well as reduce workers' compensation claims.

Improving the recruitment and retention of junior workers rises in importance as high turnover rates stress recruiters already trying to replace departing senior employees. Alternative work arrangements, including part-time work and working from home, can help retain senior workers and attract nontraditional employees of all ages. For example, all of airline JetBlue's reservation agents work from home, many part time. The arrangement is an appealing option for second-income earners who prefer part-time work.

Evaluating the turnover pattern of new hires can identify critical periods and causes of turnover. For one company, turnover was highest among employees after 12 and 24 months of service because of a lack of career progression and a poor line of sight to a career path in the company. Experienced external new hires were the most likely to leave in their first year.

Designing programs to develop and engage experienced new hires and improve their understanding of their likely career advancement within the company dramatically improved retention, according to one senior executive we interviewed. For example, using rotational programs and incorporating talks about possible career paths into performance management discussions suggest that career opportunities exist and encourage workers to stay on.

In addition, exit interviews help identify any miscommunication and suggest ways to improve retention by identifying factors causing employees to leave.

Conducting regular employee surveys also helps identify negative trends in employee engagement or satisfaction that can suggest that an increase in turnover might be coming. Additionally, surveys can identify factors enhancing retention so officials can continue to support these factors and promote them as part of their employer value propositions. Because many employees leave as a result of issues with their supervisors, holding managers responsible for reducing turnover also improves retention.

Many younger workers look for different things in an employer than did workers 10 or 20 years ago (see "The Tethered Generation" on page 40 of the May 2007 issue of HR Magazine), making them harder to retain. Younger employees' work values and desires for schedule flexibility are different from those of senior employees, and younger workers often identify with a career opportunity rather than a company.

Long-Term Strategic Planning

To address these three challenges, a company should analyze and diagnose what is important to operate its business effectively over time, and identify critical talent and jobs. Evaluating how the aging and retirement of talented employees will affect a business involves deciding whether to survey employees, hire an actuary or contract with a planning services firm.

Running workforce planning and succession scenarios for forecasting and planning purposes helps sell the problems to others in the company. This is best done with the help of legal counsel to avoid age discrimination charges.

The analysis should start with a determination of the number of employees eligible to retire--a number culled by the company's HR department or retirement services provider. Necessary information includes job categories and the estimated impact on the organization upon retirement. This information should be compiled to preserve workers' confidentiality.

Companies need to go beyond age profiling and conduct financial analyses around labor costs, comparing them with competitors' and projecting the forecasts out to anticipate the declining competitiveness of their businesses or locations over time. As one vice president of HR for a large manufacturing company said, "Labor costs may be less than 20 percent of overall product cost, but if [labor costs grow] 10 percent to 12 percent a year, it gets noticed."

Senior executives as well as HR practitioners must begin immediately to assess the impact on their corporations of the specific problems they face. Despite clear demographic data suggesting an imminent surge in retirement-eligible workers, many companies are just beginning to create strategies to address these challenges.

Many of the executives we spoke with have begun doing analyses and diagnostics to measure the likely impact of baby boomers' retirement. A few have progressed to investigating how HR can intervene to put operational or transitional programs in place that will respond appropriately to the identified challenges. Several executives said they're gathering information in an effort to understand what younger employees need and want and are adapting to those preferences.

Leaders of one manufacturing company introduced programs to satisfy less-senior workers, such as allowing flexible scheduling and offering a defined contribution retirement plan rather than a pension plan. They are providing more choices to meet the needs of all employees. For example, when officials found that older workers like having annual bonuses spread out over time while more-junior workers prefer to receive them in lump sums, they made both options available.

The Society for Human Resource Management's 2005 Future of the U.S. Labor Pool Survey Report found that, of the 263 companies surveyed, 45 percent were just becoming aware of the issues posed by the retirement of the baby boomers and 36 percent were only beginning to examine internal policies and management practices to address the coming challenges. Right now, leaders at only a few organizations are fully prepared for these demographic shifts, and only a handful are proactively working toward solutions. As talent ages, don't let your organization number among those in crises.

Jean M. Phillips and Stanley M. Gully are professors of human resource management at Rutgers University and members of the college's Board of Advisors for the Center for Human Resource Strategy.

Phillips is also a co-author with Gully of
Strategic Staffing, due in spring 2008 from Prentice Hall.

Mary Pomerantz, SPHR, is president of Mary Pomerantz Advertising, a marketing firm in Highland Park, N.J., specializing in recruitment and employee communication.

Web Extras

SHRM article:
The Truth About the Coming Labor Shortage (HR Magazine

SHRM article:
The Tethered Generation (HR Magazine

SHRM article:
Checking the Exits (HR Magazine)

SHRM survey report:
2005 Future of the U.S. Labor Pool 

SHRM report:
The Aging Workforce

Measuring the Impact of Boomers’ Retirement

These three steps can help employers prepare for the nation’s looming talent crisis:

1. Analyze and diagnose.

  • What is important to operating the business effectively over time?
  • Who are the employees and what are the jobs critical to the company?
  • What is the likely impact of future retirements on different positions?

2. Identify how HR professionals can respond appropriately.

  • By managing succession.
  • By hiring replacements before senior workers retire to provide time for knowledge transfer.
  • By augmenting transfer knowledge through mentoring programs, phased retirements, project teams, consulting arrangements, simulations or case studies.

3. Adapt to the needs of both senior and junior employees.

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