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More companies are hatching plans to compensate for the impending crush of retirements by senior executives. Will they be able to put a dent in a potentially ruinous problem?
David McCann, CFO.com | US
May 7, 2008
Companies may be having a hard time finding qualified young people to fill their junior accounting and finance positions, but that's nothing compared to the struggles they'll likely be facing in the next few years at the other end of the age spectrum.
The long-dreaded era of Baby Boomer retirements has finally dawned, and with the oldest Boomers turning 62 this year, the fallout may reach epic proportions in the early years of the next decade. The impact on corporate well-being will be most severe in the senior executive ranks, which are chock-full of people in their 50s and 60s who, unlike most others in their generation, can afford to retire.
That means many companies will be hard-pressed to shore up their finance functions with leaders as experienced as those they have had until now. At Fortune 500 companies, about half of senior managers are expected to retire in the next five years, according to Jay Jamrog, senior vice president of research at The Institute for Corporate Productivity, which researches social, political, legal, economic, and other trends on behalf of its members, mostly large corporations. At the same time, there will be fewer people to replace them with. The Bureau of Labor Statistics estimates that over the next 10 years there will be a 15 percent decline in workers age 35 to 54, concurrent with a 25 percent increase in demand.
The looming problem is particularly acute in industries that experience historically low turnover or whose fortunes tend to be cyclical, with their hiring concentrated in boom times, according to Eric Lesser, an associate partner in IBM's Global Business Services Group, the company's business consulting unit. Such industries include public utilities, oil and gas, metals and mining, industrial products, and health-care companies, said Lesser, who oversees the group's research and thought leadership on human capital management issues.
Most disturbing is that there seems to be no great solution to the problem, let alone an ideal one. "Nobody's got any good plans for replacing people or keeping them longer," Jamrog told CFO.com. "What kind of lure can you provide for a senior executive who can afford retirement? Keeping them on as mentors is a very good idea, but how do you do that?"
Indeed, in a 2006 study by the Society of Human Resources Management, only about a quarter of the 1,232 respondents said their employers were offering employment options designed to attract and retain semi-retired workers, and 62 percent were not even planning any action on this front. The numbers were similar for "changing retirement policies and plans as a result of projected demographic changes." And almost 70 percent said they had no plans to try to bring back former executives as mentors.
But while mounting such efforts will not eradicate the serious underlying demographic realities, it could be of some help. More companies are buying into that idea, according to human resources consultants, who are interested parties because they get paid for helping set up succession-planning programs.
"We are seeing movement now, a real urgency that even 18 months ago did not exist," said David de Wetter, senior consultant for human resources transformation at Watson Wyatt Worldwide. The impending retirement of senior executives is "like a train coming at you through the tunnel, and people are recognizing that it's a lot closer than they thought," he said.
Strategies that are increasingly being used include allowing retirement-age executives to work part time — a limited number of days or hours per week, or on a project basis, or six months on and six months off. Telecommuting can be an attractive option as well. "Companies are actively looking to tap into individuals who are around the traditional retirement age and want to continue to work but perhaps not in a traditional job environment," said Lesser. He also noted that a number of large corporations are using the services of YourEncore.com, which serves as a contracting agency for knowledge-intensive retired executives.
There may be a disincentive, though, for someone who has already retired to come back to work: a likely suspension of pension benefits (if performing a similar role as in pre-retirement days) and a reduction in Social Security benefits. That's not likely to dissuade a wealthy, high-earning executive, but it could be a factor for some, especially retirees from smaller companies.
It's not all about keeping the older folks around, of course. Another shift, according to de Wetter, is that some companies are moving away from grooming specific people for specific future executive roles in favor of a more fungible approach. The idea is to create leadership pools, composed of people who display qualifications as leaders that are transferable enterprise-wide.
"We're seeing that people in finance don't necessarily have a straight, predictable shot up the finance ladder in the organization," de Wetter told CFO.com. "One thing we're seeing in several organizations is finance people a level or two down from the CFO taking a sidestep into, of all things, human resources for a couple of years. They're trying to bring some of the discipline of finance into the H.R. function, before going back to finance." As a bonus, he added, "It makes you a better finance leader if you understand the people side of the equation. Because after all, all any company has are people and money."
Some companies also are putting the onus on C-suite executives to come up with solutions to the expected spate of retirements, basing compensation in part on their success in retaining key executives, according to de Wetter. And in some cases, mandatory retirement ages are being pushed back to 70 or even 75.
Providing technology and other training to older executives is another strategy growing in popularity. "Typically in the past companies have been hesitant about allowing their older workers to take part in training because they didn't see the ROI," said Lesser. But that is changing, given how rapidly the needed skills change in today's market, combined with the goal of keeping executives around longer.
That goal is bound to have an impact on compensation for senior executives, and in fact it already is, said Terry Gallagher, president of recruiting firm Battalia Winston. "As executive recruiters, we're finding it harder to extract the 'A players' out of their current employment, because they've been better compensated," he said. "That's what is happening here: too many jobs chasing too few executives, and when that happens, supply and demand dictates that they will be better compensated. And you'll see even more creative compensation schemes."
Meanwhile, is the economic downturn having any influence on retirement demographics? One possible effect is that some executives, whose retirement funds were very tied up in investments they thought were quite safe only to see their value plummet, will delay retirement. Another is that companies may seize the opportunity to trim their "B and C players" from the ranks, noted Gallagher, though he added, "That doesn't help the issue of losing your 'A' talent." At the same time, the faltering economy may in fact present advancement opportunities to CFOs at bumpy companies where boards of directors have shown the CEO the door.
Losing any top talent is bad enough, but corporations face the very real fact that they will lose a majority of their top talent in a very short time span. "It's one thing if you're the CEO and you bring in a new CFO but your heads of sales, marketing, and operations are still there," said de Wetter. "But if you have three of your five top leaders all leaving within a year, that's an enormous change."