What is an Early Retirement Incentive?

Kathy Heydasch

A company that needs to save money on payroll costs may offer an early retirement incentive which is a motivation for an employee to resign from his or her job. An example of an early retirement incentive might be for an employer to give an employee a severance package which includes several months’ pay in order to tempt an employee to leave months or even years before his or her retirement plan takes effect. This strategy helps a company to shed some payroll cost while avoiding negative press or sentiment for causing job layoffs.

Retirement incentives like severance packages are offered as a way for a company to cut down on payroll costs.
Retirement incentives like severance packages are offered as a way for a company to cut down on payroll costs.

There are a number of reasons that a company may have to reduce costs of operation, such as decreased sales, increased inventory or market conditions. When that happens, one of the first expenses that a company can analyze in order to save money is payroll costs. Employees are expensive to maintain, above and beyond their salary or hourly wages. There are social security and Medicare payroll taxes, insurances, pension and 401k matches or contributions, etc. Business have other overhead costs associated with employees, such as office expenses, personnel management, etc. For these reasons, cutting the amount of employees on payroll is one of the first options to consider when needing to reduce overall operating costs, and offering an early retirement incentive is one of the easiest ways to go about this.

An early retirement incentive can come in many forms. There may be a flat bonus amount for agreeing to resign. There could also be a severance package which might offer full or partial pay for a period of time after leaving. Some companies have retirement or pension plans already in place for employees once they reach a certain age. In such a case, an early retirement incentive might allow that age to be lowered in order to accommodate those taking advantage of early retirement.

In any ideal case, an early retirement incentive should benefit both parties. This is because it is a voluntary option on behalf of the employee. If it is not voluntary, it is considered a layoff. Employee layoffs at companies are notorious for causing ill will in a company or its community. There could even be negative press associated with the action which could affect a company’s sales or stock performance. Therefore, offering an early retirement incentive can hopefully avoid any negative sentiments.

In addition, if a company can afford to do it, an early retirement incentive allows for a younger, fresher work force. While it may lose some valuable experience, a company can replace older workers with younger workers while avoiding discrimination lawsuits.

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