Structuring an Effective Early-Buyout Incentive by DANIEL SHEEHY

The current state of funding for public education puts enormous stress on the finances of school systems nationwide. The normal response--program cuts, pay freezes and staff layoffs--are marginal and demoralizing solutions to cost containment.

Because staff salaries and fringe benefits make up the largest portion of the typical school system’s operating budget, a properly structured early-buyout severance plan can be the most effective way of achieving cost savings while maintaining the quality of the education program.

Over the past decade, our firm has worked with hundreds of school system administrators who state that the cost savings and the opportunity to reallocate resources are the two main reasons for offering an early-buyout severance plan. The most effective plans encourage staff at the top of the pay scale to exit, creating opportunities to replace the departed with staff at much lower salaries.

Before your district offers any incentive plan, study it with great attention to detail. You must take into account the many elements of employee demographics and the overall impact the plan is likely to have on a school system both in the short term and in the long term.

Expanded Eligibility
There are hundreds of reasons why individuals decide to leave their jobs, regardless of their age and eligibility for pension benefits. To be effective from a cost-savings standpoint, the eligibility criteria should not be limited to those who are eligible to retire.

By expanding eligibility to include staff members at the top of the pay scale, regardless of pension eligibility, the success of the early-buyout severance plan will be enhanced. This approach attracts individuals who may not have been planning to leave a school system for another five, 10 or 15 years. This is where a plan’s long-term cost savings is generated.

Historical data shows the percentage of participants in buyout programs breaks down this way: 25 percent between ages 38 and 52; 28 percent between ages 53 and 56; 28 percent between ages 57 and 60; 15 percent between ages 60 and 62; and 4 percent 63 or older.

Participant Benefit
Greater advantages to a school system exist by using a cash benefit paid over several years rather than a lump-sum cash payment. A monthly stream of income for 7-10 years provides the participant with a greater sense of security, where as a lump-sum payment (after taxes) is easily spent within 1-2 years of departure.

Because lump-sum payments may be perceived as a bonus, employees most likely to participate are those who would have retired within the next three years, which eliminates any chance of a protracted cost savings to the district. The employer gains from the multiyear payout approach by being able to pay the benefit over time, thereby reducing the shock on cash flow in the first several years of the plan and by creating a participant demographic that generates a real savings.

Several tax approaches are available to pay the benefit over time and maximize savings to the school district. Each should be looked at closely to determine which is right in the case being considered.

Additionally, to maximize its effectiveness, the early-buyout plan should be offered during a one-time, 45-day window. Consider allowing the choice of more than one date that would be the participant’s final date of employment or exit date. This can increase participation and give the school system greater lead time to recruit and reallocate personnel.

It would be imprudent to place any type of severance incentive plan into a collective bargaining agreement. Here a plan will quickly lose its effectiveness as an incentive for staff to exit early and instead becomes a bonus at normal retirement.

Counseling and Hiring
Providing comprehensive counseling to all eligible staff members will greatly increase participation. Most of the time, employees feel reluctant to discuss the plan and their options with a member of the administration. Administrators are not inclined to counsel employees in light of the liability they may place themselves and the school system under. Having a team of counselors unaffiliated with the employer available to assist employees with the process of considering the plan serves all parties well.

In most cases, school districts are replacing 100 percent of the vacated positions with lower-salaried employees, achieving the balance of significant cost savings with no reduction in staff. Opponents of early buyouts argue that a district loses its best and most experienced teachers; yet recent history suggests that not all of the most seasoned and productive staff opt to leave their classrooms. Additionally, surveys of our firm’s clients indicate that the combination of the remaining experienced teachers and the energy of newly hired staff creates a better working and learning environment .

Daniel Sheehy is a senior managing consultant with Educators Preferred Corp., 26877 NW Highway, Suite 305, Southfield, MI 48034. E-mail: