Retirement-Proof Your Company

Can you name the specific, valuable skills your older workers have? If you can’t, you’re not alone — and you’re potentially putting your company at risk.

A substantial portion of the global workforce is nearing retirement age. In the United States, there were 65 million people over the age of 60 in 2017. This number is expected to grow to more than 77 million by 2020. Germany, the largest economy in Europe, has a population that is not only aging but also declining overall.

Studies suggest that these trends will have significant implications for workforce planning. Older workers may exit organizations in large numbers, for example. And when they exit may get more difficult to predict: Increasing numbers of older people are working longer, due to necessity, desire, or a combination of both. We don’t know much about how actual companies are preparing (or not) for an older, and less predictable, workforce. In particular, there’s very little research on how organizations are managing the transfer of knowledge and skills when older employees walk out the door.

Our research, funded by the Alfred P. Sloan foundation, begins to address this gap. It is aimed at understanding how organizations are adjusting their skill composition in response to demographic changes and what practices are working effectively. We are currently writing up a study consisting of interviews in eight manufacturing facilities: four in the U.S. and four in Germany. In total, we talked to 43 site managers, human resource managers, area supervisors, and employee representatives. We also conducted eight focus groups with older workers.

Unsurprisingly, we learned that an aging workforce increases firms’ risk of skill loss as older employees retire. This means companies must develop both younger workers and those in the middle of the age distribution, and then monitor and adjust their entire workforce based on the inflow and outflow of skills. Few companies are doing this, however, and only one firm we studied had a formal plan to monitor skills and adjust its workforce.

We also found that top management and frontline supervisors view the aging issue very differently from each other. In both the U.S. and Germany, managers were largely unconcerned about the effects of mass retirements on their workforces’ skill composition. As one site manager of a U.S. chemical facility explained, “I don’t worry about knowledge transfer too much, provided it’s a trickle, and not a tsunami, of people leaving that’s been predicted. Is there ever going to be a tsunami?” A site leader at a German electronic component facility, when asked whether he was able to manage retirement, responded, “Yes. At the moment, yes. I think in the next five, 10 years it will not be a problem.”

Why is this the prevalent sentiment? Top leaders are focused on the quantity of labor from a strategic point of view. Most of the site leaders we spoke with explained that their workforces have been shrinking for years due to competitive pressures, and that they are not having trouble finding entry-level employees when needed, despite increasing skill requirements for those positions. Retirements, in their view, are just another way of helping them keep the right number of people in the organization. Even employees are keenly aware of this: One participant in our U.S. electronics focus group explained, “Although [my company] is good at making product and making money, one of the products they make money at is loss of headcount.”

Frontline supervisors have a very different perspective, however. In our interviews, their concern about retirements and workforce aging was palpable, particularly about the quality of skills at risk. While high-level leaders were concerned mostly with headcount, supervisors were worried about losing particular high-skill workers in strategically important positions. Supervisors naturally deal with a smaller subset of workers, so when their unit includes one or more retirement-eligible employees with a rare or high-level skill set, they see a greater risk.

At a U.S. electronic component facility, one supervisor managed two employees over age 70 at an off-site facility. These employees were the exclusive support for a legacy product that the company no longer manufactured but for which maintenance support was still strategically important. There was no plan to replace the employees when they retire — and all documentation was in the employees’ native language of Russian. “I don’t know when these guys are gonna leave, and if they left tomorrow, I’m done,” the manager told us. A supervisor at a German electronic component facility expressed similar concerns: “Knowledge goes, and the way the company runs, it’s not guaranteed that it will be replaced, either here or anywhere else.”

Supervisors ultimately faced a two-pronged problem. First, because of hiring freezes and planned attrition in previous decades, there were no younger or midlevel employees ready to step into the roles that would be vacated by these highly skilled older workers. Second, because top management was concerned more with headcount than with skill management, there was little institutional support for knowledge transfer and employee development to fill skill gaps. Frequently, key positions required organization-specific knowledge and skills that could not be found in the external labor market and that were too complex to be automated.

Adding to the difficulty is managers’ perceived inability to discuss retirement plans due to concerns of age discrimination. A supervisor in a U.S. chemical facility explained it best: “It’s almost taboo. We don’t discuss age.” We observed this concern in both the U.S. and Germany, at all organizational levels.

These challenges will become more common as workforces continue to age. In fact, our findings suggest that skill shortages are likely to be seen not in the form of larger numbers of unfilled positions, as has been suggested, but in larger numbers of unqualified individuals being moved into key positions. Companies that cannot find ways to fill the gaps will finally experience the long-term consequences of hiring freezes and running lean.

There are ways to get in front of these issues, however. We observed a number of formal and informal tactics being used by organizations and frontline managers to address skill gaps. Some work better than others.

Delay and transfer. One common practice involved delaying the loss of skills as long as possible so that they could be transferred to other employees. For example, in both the U.S. and Germany some companies were able to move a few older workers from rotating shifts to day-shift positions, which helped them train other employees and encouraged them to retire later. Other companies in Germany offered older employees slightly reduced working hours. In the U.S. we saw several cases in which retired employees were brought back as expensive contract workers because they could not be replaced quickly enough. A few facilities were in the middle of documentation processes to capture knowledge, as a part of either formal organization initiatives or informal, supervisor-driven ones.

All of these steps were effective in some situations, but they had significant limitations. Special positions were always limited in number, if available at all. Reduced hours do not always match well with the organization of work, and may be perceived as discriminating against younger workers. Contracting with retirees is expensive. And formal documentation processes were often met with resistance by employees, who perceived it as additional work.

German companies may have an advantage when it comes to the delay-and-transfer strategy, due to the way labor is organized in the country. We found that union representatives there were active participants in shaping an organization’s response to workforce aging, whereas representatives in the U.S. considered it a lower priority. We also observed that many of the negotiated, alternative retirement paths in Germany benefited both employers and employees. These included partial retirement schemes, which allow employees to work reduced hours while maintaining nearly full-time pay, and a “block model” form of partial retirement, in which an employee works full-time for two years and then not at all for two years, receiving 80% pay throughout. We also found that German facilities tended to have a more-flexible response to aging than U.S. facilities did. Employees had access to reduced schedules, more time off, and time accounts in which they could bank extra hours worked and put them toward early retirement. These alternative pathways make retirements easier to predict, and can be mutually beneficial to employers and employees.

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The Aging Workforce

Just How Old Are We Getting?

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The charts don’t lie.

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Mixed-age teams. In the companies we studied, creating informal mixed-age teams was a particularly effective way to help younger employees build skills. These teams both allowed them to learn directly from older workers and made the older workers feel that their knowledge and skills were valued by the organization. Area supervisors overwhelmingly reported positive experiences with mixed-age teams.

The primary challenges were with resource availability and job design. Few supervisors could justify the teams’ personnel cost solely as a development measure. In fact, we observed that mixed-age teams were used only when they were a natural consequence of work organization or a part of informal supervisor initiatives. Not all jobs supported these kinds of arrangements. So while mixed-age teams are likely to have more long-term success than delay-and-transfer strategies, they were rarely introduced formally in our sample.

Tracking changes over time. The organizations that best managed aging and skill composition were those that explicitly tracked it. Though several facilities monitored the certifications employees had earned or the training programs they had attended, only one facility — a U.S. electronics manufacturer — had a formal program for directly tracking age-driven skill composition. With this program, supervisors regularly assessed how many people in their unit were capable of doing each job, how important each role was to the organization’s success, and how likely it was that someone could take over a job if the employee currently in it left. Positions were assigned a numerical score that indicated how urgent it was that someone be trained for that role. Resources were then diverted to those needs.

This formal program was put into practice because the site leader at this facility empowered frontline supervisors to address the issue of skill composition. “If we have a job that only one person in the plant can do, that’s a [high score],” he told us. “So then we kind of force the issue: You have to have a plan to get other people trained.”

Leaders should emulate this approach, tracking any threats to skill composition before they become a problem. At the highest levels, companies should be aware of who is eligible for retirement, what knowledge and skills they will be taking with them when they leave, and how these factors contribute to the flow of skills entering the organization. For too long, companies have implemented hiring restrictions and constraints on employee development without considering the long-term implications on skills. The large-scale use of these practices must end.

Although we have learned some valuable things about how companies are responding to workforce aging, many questions remain. Our next task is to explore whether there are other country-level differences that constrain organizations’ responses. As the proportion of older workers grows, it will only become more important to understand how aging affects the flow of skills in and out of organizations and what practices are most effective, under what circumstances, and why.The Big Idea