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Succession Planning in a Slow Economy

How can HR professionals work proactively with executives to ensure that retirement planning and succession planning work together effectively for an organization?

Wednesday, May 15, 2013
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Effective succession planning relies in part on the personal retirement readiness of executives. But what happens if current executives are financially unable to retire when planned -- or simply not ready to leave the workforce? It's a question that Mercer recently addressed in its report titled Succession Planning When an Executive Can't Retire.  

The report was partially prompted by the recognition that a lot of executives are having to continue working longer than they had planned, impacted by the economy as well as employers' restructuring of retirement programs, says Heidi O'Brien, a partner in Mercer's Los Angeles office.

It can be "a lose/lose situation" for both the employee and the employer, says Bruce Barge, a senior partner who focuses on succession planning in Mercer's Los Angeles office. And, of course, it's not only the employee whose retirement may be delayed who is impacted -- the "next in line" employee ready to move into that position is impacted as well (so, in reality, a lose/lose/lose situation). Certainly for employers the potential exodus of high-potentials is a cause for concern, particularly in an economy that is beginning to see some signs of improvement.

The executive whose retirement has been delayed, says Barge, "may feel a sense of 'Well, I guess I've got to hang in there, but I'm not really happy about it' -- they may not have the level of drive that leadership demands these days; they may not be as likely to really champion a change initiative where the results would be much further down the road and it would be very demanding to do."

Today's execs, says Barge, are feeling squeezed like never before; many want out, but simply just don't have the financial wherewithal to get out at this time.

How can HR professionals help their organizations work proactively with executives to ensure that retirement planning and succession planning work together effectively?

It can be tough, acknowledges Barge, who says "one of the complicating factors here that makes everyone sort of tentative in terms of having these discussions is fear of age discrimination."

Starting with the end in mind is a good beginning, says Robert Lowe, chair of the employee-benefits practice group at Mitchell Silberberg & Knupp in Los Angeles. Employee contracts, says Lowe, are common in executive positions. "An employee contract can be used as a vehicle to cause somebody to retire at the appropriate time," he says. "The idea is that, when you enter into the contract, you're really thinking about the end game -- you're going to think about a contract term, and possibly extensions, that will get you to the retirement age."

While contracts are generally created when an executive is hired into, or moves into, an executive position, they can be offered and negotiated at other times, he says. There's nothing illegal about raising the issue of a contract after an executive has already been in a position for some time, even if that executive is near retirement age. In fact, this might also occur when there is a high-potential employee waiting in the wings and at risk of leaving for better opportunities elsewhere.

There are two important caveats though, Lowe says: The executive would need to agree to the terms of the contract; and it's likely that "you're going to have to offer the executive something as an incentive to end the contract early or possibly to move into another capacity prior to the end of the contract term."

But, even in the absence of an existing or negotiated contract, there are ways that HR professionals can attempt to navigate the sensitivities, risks and rewards of retirement and succession planning.

One important step that organizations and their HR staff can take, says Barge, is providing a higher level of communication and education to ensure that executive staff understand their retirement benefits and, especially, any changes that may have occurred in those benefits over time.

"What we're suggesting is that there needs to be a solution that involves partnership and more information," says Barge. "Once people understand a little better and have better communication about what their options are, it actually can go from a lose/lose to a win/win situation."

Mercer recommends four key questions for executives to propel that win/win situation:

§     Where am I financially and what employer-sponsored wealth-accumulation vehicles can help support my objectives?

§     What's my picture of post-retirement life?

§     What does the organization need from me?

§     What activities and timing will optimize my personal transition and succession planning for my organization?

Proactive employers, they say, will assist executives in answering these questions, which will ultimately, also have a positive impact on effective succession of others into these leadership ranks. But, of course, only if those successors are strategically selected and appropriately prepared.

"Whether retirement is a friend or foe of succession planning really depends on a company's succession planning," says Richmond Fourmy, an associate partner at Aon Hewitt Consulting in the Atlanta area.

While many companies have succession plans in place, even those that do have often not done a rigorous job of assessing and preparing potential successors. When it comes to retirements that may be delayed for whatever reasons, the issue is really dependent on "the talent pool that is beneath the potential retirees," he says.

One organization's foe may be another's friend, in other words. The oil and gas industry is a good example, he says. There, the delayed retirements of executives has been a real boost to the oil and gas industry because the talent pool beneath the Baby Boomers is very thin. In other industries—technology, sales, consumer products, financial services—this may not be the case.

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Succession management is critical in either of these scenarios. Importantly, says Fourmy, succession management is much more than the plan. Effective succession management, he says, involves steps that include:

§     A rigorous assessment of potential successors, technical skills as well as leadership styles;

§     Gaps in potential successors are identified and there is an active and focused development plan and action to develop that candidate from being ready in one to three years to being ready now; and

§     The successor has ample exposure to the potential retiree so there is an adequate knowledge transfer.

There are a fair amount of companies where this is not happening, he says. That may represent opportunities, particularly for those companies that may find themselves faced with a backlog of talent waiting for senior executives to retire.

Marie Holmstrom, director of talent management and organization alignment with Towers Watson

in Charlotte, N.C., says that "we've been working with organizations on getting creative in identifying new learning roles to prepare people for when those top leaders do retire." This includes, in some cases, creating roles to continue to grow skills.

"With people staying in roles you've got greater opportunity for knowledge transfer," she notes. "What you can do in this time is ensure that, before they retire, they've done as much as they can to groom that next generation of talent and to support or enable the organization for the transition."

For HR, she says, it is important to identify where there may be "blockers" in place -- those whose delayed retirement may be holding others back -- and then consider options and alternatives to keep the stalled talent engaged. "They're in it to grow their own careers," she says.

"What I advise clients to do," she says, "is to speak to top talent and say, 'We are dedicated and focused on helping you grow your career. We're focused on doing whatever we can to keep you challenged and to keep you advancing'."

Even if there is not a position ready for them to jump into, there may be opportunities for training, engagement, involvement and meaningful growth opportunities.

Awareness and creativity are the keys, O'Brien says, because this is an issue that is not going away any time soon.

"Unfortunately, I think this is one of those issues where it's going to get worse before it gets better," she says. "You're going to continue to see a drop, unfortunately, in the level that employers are kicking in for retirement," which means that the prospect of retiring will be less and less compelling for executives concerned about their future income streams.

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