Sweetening Early-Retirement Programs
An early-retirement program that entices more employees does not necessarily result in the greatest cost savings. When staff reductions become necessary, encouraging voluntary early retirement can be an attractive solution. Some employers worry, however, that extensive--and costly--sugar coating will be necessary to encourage an appropriate number of employees to retire. How justified are their concerns?
Certainly, increasing the level of retirement benefits will increase the number of employees who are likely to accept early retirement. Yet an early-retirement program does not necessarily have to achieve a very high acceptance rate to be cost-effective. In fact, an employer can save as much money from an early-retirement program with a moderate level of benefits and a relatively low acceptance rate as it can from a program with a high level of benefits and a high acceptance rate.
Exhibit 1 illustrates this point. It shows the payroll savings and benefit cost of three early-retirement program offered to the same group of employees. As the benefit level increases, more employees accept the program, resulting in a higher benefit cost to the employer. Note, however, that the higher cost is offset by the greater payroll savings as more employees leave the organization. Thus, in this example, the employer's real savings--defined as payroll savings less additional benefit cost--are identical in each case even though benefit levels differ radically.
Suppose, however, that this organization could increase the actual acceptance rate under the moderate program from 40% to, say, 50%. Although the benefit cost would increase to $25 million, payroll savings would increase to $50 million, producing a total real savings of $25 million--$5 million more than is produced by either of the programs with higher benefit levels.
To increase real savings, therefore, employers need to find a way to increase acceptance rates without increasing benefit levels. How can they do this?
First, employers need to dispel a common myth: that the level of the benefits offered in an early-retirement program is the only factor affecting employee acceptance. If it were, similar early-retirement programs would produce similar acceptance rates. Yet actual rates vary considerably among companies, even when programs are virtually identical. Thus factors other than benefit level are also important to employees.
Second, employers must take the other factors into account in designing an early-retirement program. Those factors include communication, geographic/industry practices, employee expectations, and related assistance programs.
Communication is critical to the success of an early-retirement program. An excellent program can fail if it is poorly communicated, while a mediocre program often will succeed if it is communicated well. A good communication effort also helps ensure that advance "word of mouth" about the program is positive.
When word about the program gets out prematurely--as it invariably does--it is crucial that the information be reasonably accurate. If talk of a generous benefit level travels the grapevine and only an average benefit level is offered, the likelihood of success is reduced. Effective communication during a program's development helps limit the number of unfounded rumors circulating throughout the organization.
No one type of communication works best. All types--from brochures and videotapes to employee meetings and electronic news reports--should be used. The more communication, the better. Some of the more recent communication tools being used by employers are individual retirement counseling and financial planning as well as telephone hot lines to ensure that employees and their spouses can get information quickly. Whatever method is used, make sure employees know they have all …