Unintended effects of retirement incentives . . .

Must Downsizing Cripple an Organization?

Conrad Weisert, April 3, 2007
©2007, Information Disciplines, Inc.

NOTE: This article may be reproduced and circulated freely, as long as the copyright credit is included.

Large organizations are finding themselves with surplus staff as a result of a corporate merger, falling sales, new technology. or just bad planning. Instead of shedding the least competent or the newest employees, some of them establish financial incentives for senior staff who voluntarily take early retirement.

The problem with such voluntary programs is that the people who elect to take early retirement tend to be highly qualified staff members, who are confident of their ability to secure other employment or to launch a successful second career. Getting two year's salary in a lump sum and then starting a new life can be quite tempting for a fifty year old.

Then who are the people who choose to stay? Some are just too comfortable to make a major change. They may love the company and the familiar surroundings. But others are non-performing "deadwood", staff members whose contributions are chronically minimal or even negative. Since they lack confidence in their ability to earn a living elsewhere, they stay put as long as possible.

So the effect of voluntary early retirement programs is to reduce personnel costs but to reduce far more drastically the productivity of the staff and the quality of their work. I know one organization that went through such a downsizing twice in a decade, and was left with a collection of marginal people performing at the sub-25th percentile level. Needless to say, that organization suffered greatly, and it's unlikely that management ever saw the connection between the cause and the results.

Obviously, an organization forced to reduce its staff would be much better off shedding the deadwood and retaining its best people. However, many executives are reluctant to take that approach, because:

Of course, it has been established that computer programmers exhibit a 20-to-1 range of productivity and that the most productive also turn out the highest quality work. Less dramatic but still significant ranges apply to managers. If an organization knows how to recruit top people, then it should also be able to prune a staff of people it already knows well.

The best protection against the distasteful task of reducing staff is to avoid overexpansion in the first place. When the future is highly uncertain, it's better to use an outside contractor than to take on staff that you may have to let go six months later.

Last modified April 3, 2007

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