Talent Velocity and Total Rewards: Lessons from Retirement Plan Design

Things are not always what they seem.  Sometimes the reward design decisions we make in the name of cost reduction or risk transfer can end up doing neither -- even delivering some unfortunate and unanticipated consequences down the road.

These are the lessons from some new research by Haig Nalbantian, Senior Partner at Mercer, and featured in a recent Wall Street Journal At Work blog post.  In an unpublished but intriguing analysis, Nalbantian examined the internal talent flow of two similar clients in order to track the impact of their retirement plan design choices.  Both are global, mature consumer products companies with an emphasis on promoting employees into upper levels rather than hiring from outside.

The key difference between them? Company A jettisoned its defined-benefit pension plan in the late 1990's and replaced it with a 401(k).  Company B kept its pension plan in place despite pressure -- internally and externally -- to abandon it.  There was no obvious workforce impact from these different choices, according to Nalbantian, until the recession began interfering with typical retirement plans.

From the blog post:

As the economy slowed, Company A began to develop choke points in its talent pipeline: a lack of retirements was preventing young go-getters from moving up in the organization. The company’s “velocity,” or the percentage of people getting promoted or making lateral moves, stalled at 11%.

A map of the company’s internal labor market showed that, at the senior professional and senior manager levels, the probability of moving up dropped considerably. Even worse, said Nalbantian, up-and-comers at those levels were among those with the highest probability of quitting.

“They were stalling out in their careers,” he said. “The future of the organization was walking out the door.”

Meanwhile, Company B had no such choke points. Its velocity was about 18% even in a tepid economy. And far fewer of its active employees were eligible for retirement than at Company A, indicating that individuals were retiring as expected. Average retirement age for Company A workers who joined after the 401(k) was established was 64; at Company B, the average was around 60.

Nalbantian and his colleagues at Mercer’s retirement-consulting practice believe the retirement-plan design is the variable distinguishing the dynamics at the two firms.

By replacing defined-benefit with defined-contribution plans and shifting the market risk from organization to employees, companies create a different type of risk in eliminating a lever that could strongly influence employees' decisions to stay or leave.  As Nalbantian notes, each person who stays creates a "cascade of impacts" through the workforce.  With this ripple effect, it doesn't take a lot of delays in retirement to create the kinds of choke points noted above.

Will this discovery and its lessons reverse the shift from pension plans to 401(k)s?  Unlikely.  Company A in this scenario did not choose to reinstate its pension plan.  But by better understanding the talent velocity impact of that retirement plan design choice, however, it could move to address the choke points in other ways, such as an increased focus and emphasis on talent mobility for high performers.

Our broader takeaway?  In an era where business strategy and competitive advantage are considered temporary and speed is everything, are we paying sufficient attention to the larger workforce implications of our reward design decisions?  Are we modeling out (or at least thinking about) the macro implications of our micro design choices?

Sometimes we forget that we are not ultimately hired to design and manage reward plans.  We are hired to influence the organization's talent base in a manner that supports its success, however that success is determined today ... and tomorrow.  Do we have our eye on the right ball?

Because things are not always what they seem. 

Ann Bares is the Founder and Editor of the Compensation Café,  Author of Compensation Force and Managing Partner of Altura Consulting Group LLC, where she provides compensation consulting to a range of client organizations.  Ann and fellow Compensation Café writers, Margaret O’Hanlon and Dan Walter will soon be releasing a new book on communicating compensation - stay posted! Ann serves as President of the Twin Cities Compensation Network (the most awesome local reward network on the planet) and is a member of the Advisory Board of the Compensation & Benefits Review.  She earned her M.B.A. at Northwestern University’s Kellogg School, is a foodie and bookhound in her spare time. Follow her on Twitter at @annbares.

Image "man climbing ladders to top" courtesy of master isolated images/ FreeDigitalPhotos.net

Comments

[Trevor Norcross]

Great post Ann! Uncovering the unintended consequences is always interesting. In this case you are right that companies are unlikely to reinstate a pension plan but with the knowledge they can implement other programs to counteract the issues that are created.

This just reaffirms my belief that we can't just work in our silos. Everything has to be integrated. When you plug one leak in a hose you need to understand that it could create a leak somewhere else.

[Ann Bares]

Thanks Trevor - couldn't agree more!

[E. James (Jim) Brennan]

When short-range thinking dominates executive decision making, bucking the trend set by top management can be both difficult and uncomfortable. That's when the total rewards professionals must prove their true value.

[Dan Walter]

As always Ann, great post. Too often we try to solve today's problems without thinking of the real impact of tomorrow. In an industry where three years is considered long-term I'm not exactly sure what we consider retirement to be anymore. This is important information and we should be thinking about this a little more clearly going forward.

[Tony Bergmann-Porter]

I certainly agree that everything we do has knock-on effects and, in all likelihood, unforeseen perverse incentives. And accordingly, it's something we need to be particularly vigilant about.

When we parse out this report we are left to believe that in a mature global consumer goods company, advancement opportunities are a zero-sum game. Which makes perfect sense; advancement opportunities are a zero-sum game in any organization that isn’t growing, and are by definition so when you are dealing with an indivisible prize such as a C-level job.

However, if it’s a mature global company, you’d think that a “harvest” business strategy is appropriate. And if a “harvest” strategy is appropriate, why would you want to pay the premiums necessary to attract and retain fast-track / high potentials in the first place? You don’t need superstars to run Clorox or Campbell’s Soup.

But the more fundamental questions I’d like to ask of this research are: Did Company B outperform Company A? By how much, and is the difference sufficient to offset the incremental cost of the retirement plan vs. the 401K? Is there any evidence that the performance of the company was compromised by the performance of the 61-64 year old cohort? If so, why were they retained? If “velocity” is a combination of promotion plus lateral, what are the relative contributions of each, and do they differ between Companies A and B? Is there actual evidence (as opposed to inference) that these “choke points” are the result solely of differences in retirement plans?