A Renaissance for Early-Retirement Packages

As the prospect of layoffs looms large, companies are offering employees a less-painful way to exit -- for everybody involved

The moment of truth is fast approaching for older members of Chrysler Corp.'s white-collar workforce. About 3,600 salaried employees at the troubled North American unit of DaimlerChrysler have until the end of February to decide whether to cut short their Chrysler careers now and grab a sweetened early-retirement package -- or confront the possibility of a layoff.

As Chrysler goes, it seems, so goes the nation. With the sudden slowdown in the economy, the early-retirement-incentive programs that seemed to fade from public consciousness over the past decade are just as suddenly on workplace radar screens again. A partial list of companies that have offered such plans in recent months includes Unisys, Whirlpool, Xerox, and Union Pacific.


  But the reappearance of the ritual that became familiar to thousands of fifty- and sixtysomethings during the recession and massive corporate restructurings of the late 1980s and early 1990s doesn't necessarily mean conditions are dire. From 1989 to 1998, according to a study by the Watson Wyatt Worldwide human resources consultancy, 61% of Fortune 100 companies tried to induce older employees to leave their jobs by providing an early-retirement offer, although much of the activity took place during the recession years of the early 1990s.

Few if any studies examine the current scene, but attorneys at some large law firms representing employers say they began seeing a renewed client interest in these packages late last fall. Marko Mrkonich, partner in the Minneapolis office of Littler Mendelson, says he noticed an increase in the offers shortly before the Presidential election, as companies began issuing disappointing third-quarter-earnings results. Neal Schelberg, a partner in the New York office of Proskauer Rose in New York City, and Bruce Schwartz, a partner in the White Plains (N.Y.) office of Jackson, Lewis, Schnitzler & Krupman, report similar spikes. "If you see more layoffs, you'll see more early-retirement packages," Schwartz says.

Compassion aside, it's easy to understand why employers choose this route. Voluntary exits are less traumatic than layoffs for both a company and its surviving employees. Not to mention that employees who depart willingly are less prone to litigate than those who are fired, says Carole O'Blenes, a partner in the New York office of Proskauer. "Bigger companies, if they can, seem to favor bridging to early retirement rather than termination, because it buys peace," concludes John Hotz, deputy director of the Pension Rights Center, a nonprofit advocacy group in Washington, D.C.


  Although the offers vary widely from company to company, a typical package pushes early retirees closer to full-retirement benefits by giving them two to five years of added age and service credit. One of the packages Chrysler is offering allows those who are at least 53, have worked at the company for at least 10 years, and earn less than $85,000 annually to get the same pension and health-care benefits they would receive if they were 62, the company's usual retirement age.

Companies sometimes throw other goodies into the package, especially ones related to their business. For its older-than-62 employees, for example, Chrysler is offering a cash bonus -- and a $17,500 voucher toward the purchase of a new Chrysler car. Christopher Bone, chief actuary for Aon Consulting Worldwide, a Chicago-based human resources consultancy, cites a telecom company that gave union early retirees the same deal on phone service that its conventional retirees received -- a monthly $35 discount.

There are some differences between early-retirement packages of today and those of 15 or so years ago, when they first became a staple of daily business news. Some packages today, for example, contain provisions for early vesting of stock options, those compensation darlings of the late 1990s, says O'Blenes.


  Human resources managers are also being more selective about who gets offered a deal, for fear that too many employees, especially those with talents in short supply, will bolt. That's a lesson DuPont Co. learned in 1985, when 12,000 employees, double the target, snatched an early-retirement incentive.

When Unisys officials crafted their offer late last fall, they excluded units that depend on "critical skills," such as information technology and engineering. "We knew we couldn't afford to lose those folks," says David Aker, senior vice-president for worldwide human resources at the Blue Bell (Pa.) computer-services company. Companies also have learned to deal with grumbling from those miffed because they weren't invited to the party. At Unisys, all ineligible employees received a letter explaining "how important they are to the company," Aker says.

Employee psychology has changed incentives in another way, too, says Joan Boughton, a principal at William M. Mercer, a human resources consultancy. Employers today are less likely than in the past to make frequent offers, after finding that in such cases employees tended to postpone a decision, figuring if they waited, they could accrue extra service credit that would make the next package more lucrative.


  Finally, a federal law enacted in 1990 has forced employers that wish to avoid post-package lawsuits to give employees enough time to consider whether to accept the plans. Many employers get employees to sign releases saying, essentially, that they accept the early-retirement package in exchange for an agreement not to file an age-discrimination lawsuit. Under the Older Workers' Benefit Protection Act, however, such waivers can lose their validity if the employer fails to give employees 45 days to consider the offer. Employers also must give employees who have accepted the offer seven days to change their minds, according to Laurie McCann, a senior attorney at AARP (formerly the American Association of Retired Persons).

Despite the tighter rules, now may be the right time for employers to reopen early-retirement offers. Why? The bull market of the 1990s: Older employees whose personal investments benefited from the run-up in stock prices may now have a financial cushion large enough to allow early retirement. And companies with overfunded pension plans, thanks to the market, can tap the excess to help foot their early-retirement bill. That's how Unisys helped fund the $60 million price tag of its incentive program, Aker says.

Still, whether early-retirement incentives will remain a fixture in downsizings is an open question. Two forces are operating against them. One is the growing acceptance of the idea that companies need to adapt quickly to rapid changes in the economy and that they no longer bear lifelong responsibility for their employees. "The shame or embarrassment [about layoffs] is by and large gone," says Alan Johnson, managing director of Johnson Associates, a compensation consultancy in New York. "Most executives look at reducing a workforce as part of business as usual."

At the same time, despite the current economic downturn, many human resources specialists foresee continuing tight labor markets, especially as the U.S. approaches a huge wave of baby boomer retirements.

For many employers, therefore, the big question over the next few years may be not how to nudge graying employees out the door -- but how to get them to linger a bit longer.

By Pamela Mendels in New York

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