If your workforce is following the national trend, the number of older workers in your organization is increasing. This could be good news if you want to retain their experience, knowledge and skills; however, there could be negative consequences if older workers have to continue working longer than they (or your organization) had originally planned. This paper will discuss the following:

• Reasons that some older workers are delaying retirement
• Expected effects on organizations
• Implications for the design of compensation and benefits programs
• Actions that will facilitate effective workforce planning

Shifting expectations about retirement

Many Americans are wondering when they will be able to retire. According to a recent Gallup Poll, two out of three people said that their top financial concern was not having enough money for retirement. This concern also featured in Mercer’s proprietary What’s Working™ 2011 survey of employee attitudes to work. Asked what mattered most from a list of 13 employer offerings, US workers ranked a good retirement savings/pension plan second:

The reasons behind this unexpected emphasis on retirement benefits could in part be explained by the wariness still felt by mid- and late-career employees after more than a decade of stock market volatility. Many still harbor bad feelings about the bursting of the tech bubble in 2000, when internet stocks ravaged the markets for three years. Although the following five years showed significant gains, the credit crisis that began in 2008 caused many to rethink their retirement expectations once again.

Perspectives on delayed retirement

Whether it is due to lack of assets or lack of confidence in the economy, many employees are deferring retirement. This behavior might affect an organization in different ways.

One way to measure the impact is to look at the value attached to the increase in tenure that comes with delaying retirement. From this point of view, tenure serves as a proxy for issues affecting productivity or service delivery, such as:

• Organization-specific experience, know-how and efficiency
• Institutional memory
• Internal networks of contacts
• External networks of customers and suppliers

At one end of the spectrum are organizations that view long-term employment as a competitive advantage. In these organizations, talent development is emphasized and becomes a source of pride with senior managers and an important part of the business culture. These organizations value tenure because a wealth of firm-specific experience and skills results in better customer relationships – both internal and external. This in turn improves operating results.

Case in point: A financial services firm found that for each additional year of tenure (measured for the workforce as a whole), an additional $40 million in revenue was generated through existing clients and increased market share (see chart below). Bank leadership immediately recognized the value of increasing employee tenure and acted quickly on that knowledge, for example, by taking steps to reduce attrition.

Although tenure may generally be held in high regard, there are potential conflicts if employees work longer than they or the organization had anticipated. Some adverse effects could include:

• The next generation of workers may be depleted if, seeing their prospects for advancement being put on hold, they look elsewhere for opportunities.
• Productivity may suffer if some employees continue to work merely because they cannot afford to retire.
• The cost of benefit programs may inch up if health and disability plan usage increases, as may be expected from older employees.

Before your organization assumes that delayed retirement is undesirable, or takes action to encourage early retirement, wouldn’t you want to know whether tenure creates value and, if so, by how much?

Organizations at the other end of the spectrum are focused on hiring new talent. They do not value tenure because the required skills can be provided by the available labor market. These organizations may prefer contingent or contract employees to keep labor costs manageable and to counteract the high turnover common to such positions. This business model values current performance and knowledge, and positions can be filled easily from the outside. In this case, delayed retirement may have adverse implications for revenue and profits.

Designing compensation and benefits programs

Tenure is not about the mere passage of time. Rather, it is about the build-up of knowledge, contacts and wisdom that comes from performing different jobs, experiencing different circumstances and connecting with a wide variety of colleagues and clients in one’s career with an employer.

An organization that views tenure as value-adding would be best served by a compensation program that, while sensitive to market fluctuations, supports long-term careers. A good retirement program can be a critical element of the overall  inducements to stay with an enterprise. The costs to the employer are more than recouped by the value created by the long-term employee, and the continued accumulation of pre-retirement savings benefits the employee’s eventual retirement income.

When it comes to tenure and its value to the business, sometimes employers inadvertently say one thing and do another. Case in point: A company’s executives verbally declared the value of tenure to the business; however, a detailed analysis proved otherwise. The chart below shows that the company failed to reward employee tenure – for certain groups of employees, building a long career with the employer meant earning relatively less over time. Getting the facts about the value of tenure to the enterprise and testing the alignment of incentives (compensation and retirement) helps to avoid this inadvertent gap between word and deed.

Quantifying the issues

Organizations concerned about the timing of retirements and the potential implications for workforce management and business results should quantify the associated risks. Some best practices for consideration are summarized below.

1. Determine exposure:

• Who is eligible to retire over the next three to five years?
• Which individuals are most able to retire?
• What units, departments, lines of business, etc., would be affected?

2. Quantify the effects of retirement:

  a) Earlier than expected:

   - Talent/knowledge gaps

   - Client relationships that may be at risk

   b) Later than expected:

   - Productivity and labor costs

   - Effect on the next generation of employees

3. Identify the value:

• Relationship between tenure and business performance
• Alignment of total compensation programs with workforce strategies

4. Consider interventions:

• Changes to compensation and benefit plans, including access to retiree medical benefits/coverage
• Job sharing or part-time employment
• Early retirement incentives

Summary

Retirement patterns will continue to change with economic conditions, employment prospects and increases in longevity, with a significant effect on business results.

The design of programs that influence tenure can be a critical lever in managing your workforce. An analysis of expected retirement patterns provides an opportunity to determine gaps in experience or roadblocks to effective succession planning that may adversely affect workforce planning and operating results. This information will help managers make informed hiring and retention decisions that may not align with past practices but may more appropriately reflect business goals.

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Mercer’s Retirement, Risk & Finance Perspective series contains articles written by senior Mercer consultants that reflect their unique insights andobservations on a variety of important topics affecting retirement and benefit programs. The views expressed do not necessarily reflect the views and policies of Mercer.

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