In December 2010, the Pew Research Center released a startling statistic: 10,000 baby boomers — those born roughly between 1946 and 1964 — will reach age 65 every day for the next two decades.
Despite the probable shock that many talent professionals might experience after hearing such a forecast, most business leaders at the time pushed it out of their minds. Retirement — and the worker exodus it typically brings — was not something that required attention during a tepid economic recovery stemming from the worst global financial crisis in a generation. Companies had bigger problems.
But thanks to the recent improvement in the economy, times are different. Now, the “silver tsunami” is more top of mind, threatening to hamper organizations’ talent structures immensely.
Consider an example. A client company of The Corporate Executive Board Co., a research and advisory firm for which the authors work, recently conducted a review of its internal census data and found that nearly half of its workforce is eligible for retirement within the next decade. In this company’s case, the potential depletion would translate to about 70,000 workers it would need to replace.
What’s more, changes in potential retirement demographics are more pressing for certain industries. For example, 2014 CEB research on the financial services industry discovered that wealth management will be particularly challenged by pending retirements. The study found the number of wealth management advisers aged 50 or above jumped to 36 percent in 2012 from 24 percent in 2008.
The loss of knowledge leaving a workforce due to retirement can be costly. Take the wealth management example. According to the study, retiring employees are among the top performers, with nearly 90 percent rated as “strong” or “solid.” Considering that the research also found that it takes roughly two years for a new adviser to reach the company’s average revenue performance — and eight more years to achieve maximum performance — a sizable knowledge and capability gap looms.
Meanwhile, the financial crisis mired companies’ ability to invest in hiring and employee development. As budgets tightened, not only did development programs get cut, but the availability of time for high-potential staff to learn new skills became limited. Quality of leadership declined as a result. From 2003 to 2013, the percentage of organizations that said they would replace senior leadership team members grew to 32 percent from 12 percent, according to 2013 CEB research.
The problem isn’t unique to the United States. Population swings in Germany and Japan appear poised to place a significant burden on young workers to fund the pensions of previous generations. According to data released by the United Nations in 2008, by 2025 the number of workers aged 16 to 64 is expected to be 7 percent lower in Germany, 9 percent lower in Italy and 14 percent lower in Japan.
Though there is evidence suggesting more stable economic times are afoot, this silver tsunami is a legitimate threat. Organizations judicious enough to plan ahead now are more likely to navigate the imminent talent transition more smoothly.
Talent leaders appear aware of this. According to 2013 CEB succession management research, 63 percent said they believe succession planning is more important now than it was five years ago. Still, to ensure that organizations are equipped to handle forthcoming retirements while continuing to invest in existing talent, human resources needs to put in place an architecture for succession planning prepared to buffer the blow.
The traditional pipeline approach to succession planning is no longer sufficient. While backfilling a leader with his or her incumbent might fill a quick need, it’s not a long-term strategy. Instead, as suggested in the 2013 CEB succession management study, a portfolio approach to succession planning, where leaders identify broad-based talent from a diverse range of experiences and move depending on organizational need, should prove more effective — it helped firms see a more than 40 percent increase in leadership bench strength last year, the CEB study showed.
To start, companies need to take a look at the departments and roles within the business that are core to operations. Although this sounds simple, it is often a politically loaded issue. Most department leaders are likely to believe their work is mission-critical and that the roles they hold should always be actively managed for succession.
If a job’s required skills are transferable among a range of companies in different industries, the job is usually not of critical importance. Roles internal to a company, like human resources, legal or other support functions, largely fit this bill; having functional knowledge in these areas is more important than having industry experience.
With this in mind, organizations should start succession planning with the roles where internal experience, specific to the company and core business, matters most.
With an understanding of which roles are critical for planning purposes, the question then becomes, “What is needed in these critical roles?” This is the tricky part, as companies usually only have a few years of visibility when it comes to future talent needs. At the minimum, talent leaders should understand what makes current employees effective in their roles so they have a basis off of which to build future recruitment and development initiatives. To gain that understanding, many organizations conduct a talent audit.
The objective of an audit is to identify the capabilities of staff and compare them against an external benchmark to see how their team measures up. With this information in hand, talent managers have the information they need to determine which characteristics are most critical for their business, and thus the best anchors for a succession planning strategy.
Once talent managers are armed with a roster of critical roles — and the competencies crucial to them — they should begin to tackle the task of identifying successors. The question at this stage is, “Who are the successors, and where will we find them?”
By investing in developing talent pools — or high potential development groups — organizations acknowledge that they may not know what the future holds, but that they want to be prepared with the best leaders available when they need them. Once a framework for identifying and selecting internal talent with the greatest chances of success in future roles is in place, leaders can work to assign ready successors to open roles.
It is also important to consider the level of the role and how soon a replacement is required. If a senior-level position with an immediate backfill need is on the table and a ready internal successor cannot be identified, an external hiring strategy may be necessary.
The final step is to prepare potential successors for the future. Whether or not the successor is identified from within the organization, he or she will need time and development to become fully competent in the new role. And if the CEB wealth management study is any indicator, this could take time.
From the employee perspective, transparency of a succession planning process is critical. Employees understand that planning for the future is smart, but they worry about how the process will influence their career advancement. They want to know what information will be evaluated, who has access to it and how it will be used to make decisions about the future.
This is an area where organizations can make a lot of improvement. CEB data shows that only 23 percent of leaders and 27 percent of high potentials report that there are future opportunities with their current employers. More alarming, nearly 40 percent of high-potential employees say they will leave the organization due to changes in aspiration or to pursue opportunities with another employer.
Beyond transparency related to succession planning, employees want to know what’s in it for them — especially if they have invested time into a structured measurement activity that feeds into a talent review. Organizations should be sure to deliver on promises of development and investment, and explain to employees that their participation in the process not only helps them grow professionally but also helps the organization prepare for the future.
Talent leaders should encourage a mix of development techniques to be used when preparing potential successors. The majority of effort should be focused on experiential learning and providing opportunities for successors to interact and learn from the incumbent.
With so many employees on the brink of retirement, time is precious, and organizations should prioritize activities that allow all generations of employees to work more closely together. Mentoring and coaching are also important tools; they provide a support network that is familiar with the job and work environment.
In the end, the news for talent managers looking to prepare on this front is more promising than it might have been. Though the number of workers over age 65 is growing, the pace at which they’re exiting the workforce is likely trending slower than it might have had the financial crisis and recession — which drained the savings of many pending retirees — not happened.
As one massive crisis withers into the past and investments in talent management appear more stable, the table is set for the function to act on creating a succession framework that prepares the economy for a less traumatic but still significant business transformation.
To learn more about how to use high potential programs to develop successors, read the sidebar that accompanies this feature here.