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A 5 step guide to saving $2.5M (offer an Early Severance Incentive)

By: David Gaus, President GausSystems.com

As a former school business official there were two main discussion points when the topic of employee compensation came up with the board and administrators. The first discussion always revolved around pay increases that would be given to employees for the new school year. The second discussion was could we afford these pay increase with the current staff. And if not, would we need to offer an early retirement incentive. The goal of the early retirement incentive was to pay people who were eligible for their state pension, and give them a “bonus” on the way out the door. The retiring employees had normally “bottomed out” on the salary schedule and the goal was to hire new teachers at a lower cost. This initially made sense, a “bottomed out” teacher whose salary and benefits equaled $100,000 would be replaced by a new teacher. The new teacher’s total salary and benefits would be $60,000, this would result in a savings of $40,000. But here is what I quickly found out. There were normally only a handful (5 to 10) employees who would take this plan. So, the savings would be $200K to $400k, when we needed the savings to be $1.5M. Let me introduce the Early Severance Incentives. In Gaus Systems this ESI calculation took me less than 30 minutes.

An Early Severance Incentive (ESI) is a monthly payout to those employees on the salary schedule who are near the bottom of the salary schedule, and may or may not be state pension eligible. An ERI (early retirement incentive) is only for those who are pension eligible, while the ESI focuses on those who are near the “bottom” of the salary schedule. You may hear administrators refer to those at the “bottomed out” stage at “topped out”. But visually most salary schedules work in a downward format which we will illustrate later on, and why I use the term “bottomed out”.

What is the goal of an ESI? Well as a school business official my goal was twofold. Goal Number 1: Reduce the general fund budget by offering an ESI. Why not reduce other expenses? Because salaries and benefits make up 80% or more of the General Fund budget. In order to make an impact and see greater general fund savings you need more employees to participate in the ESI. Goal Number 2: Reduce the general fund but over a 3 to 4 year period and not all at once. If you offer an ESI and pay it out as a lump sum “bonus” then the impact on your budget is immediate and often you won’t be able to afford it. The benefits to the school district are simple, reduce the general fund expenses while paying for it over a 3 to 4 year period.

What are the benefits for the employee? The employee who participates in the ESI will see a few benefits. First, a monthly stream of income for a 3 to 4 year period. Second, they can collect on this stream of income while continuing to work. Third, a small lump is often given in the first or second year to help incentives more people to participate in the ESI.

How can your school district launch a successful ESI (early severance incentive)? Here are a few steps.

  1. Planning a year before is vital. Identify how many staff you will need for the new school year. Identify the total expenses you are trying to reduce from the general fund. Use Gaus Systems to calculate those savings using our projection model, and by using the scattergram to identify who has “bottomed out” on the schedule.
  2. The ESI should be a one-time incentive offered every 5 to 7 years. Do not put this in your collective bargaining agreement because it loses its effectiveness. Call me to discuss why you should not do this. 419–721–5000
  3. Have your tax professional and labor attorney draft releases and waivers for those participating in the ESI
  4. Begin your recruitment at local universities to attract top talent a year before they graduate. This help attract top talent as “bottomed out” employees participate in the ESI.
  5. Have an outside representative explain the ESI to eligible employees. Don’t do it alone as the employee thinks there is a “gotcha” game going on.
  6. Most import, make sure the ESI is attractive and there is an actual monthly benefit to the employees. If the plan is not attractive it will fail. With Gaus Systems you can model what is attractive based on the total savings using our “quick compare” feature.

Here is how Gaus Systems handles calculating the savings from an Early Severance Incentive.

First, use the scattergram to identify the eligible employees. You need to pick the step(s) that will be eligible for the ESI.

Second, use the scattergram to sum the FTE and then multiply the maximum amount of savings. Normally, a well planned Early Severance Incentive will attract between 30% to 40% of the eligible group. This district could see $2M to $3.2M in payroll costs reduced just by 39 employees participating in the ESI. Now, remember that you must replace those 39 employees who left with new employees and calculate the early severance incentive for a 3 to 4 year period.

Third, add an Early Severance Incentive compensation schedule to the projection in Gaus Systems. You can modify the ESI and plan as much as you like in our system, so don’t be afraid to try different amounts. For this illustration I simply plugged in $1,500 per month ($18,000 annually).

Fourth, add 39 employees to this ESI incentive and remove their old compensation. This is quickly done on those 39 employees. Remember, you can run an estimated ESI incentive then once employees begin to sign up for the ESI you can apply the actual ESI compensation schedule to their employee profile for the fiscal year the ESI applies to. We are happy to show you how to do this.

Fifth, add “new employees yet to be hired” to replace those 39 employees. This is very simple as we are just mocking this up to see the total savings. We are happy to do this with you.

Now, calculate and compare in Gaus Systems to see the savings from a projected Early Severance Incentive. Remember, once employees begin signing up for the ESI you can run a new projection and begin to implement those changes so we can feed the new data to your payroll system for that fiscal year.

By using Gaus Systems, I calculated this ESI in less than 30 minutes. This Early Severance Incentive for FY18 would save this district $2.5M dollars in year one alone. This is just a projection, and with Gaus Systems you can run a new scenario and apply the ESI to the actual employees who sign-up for the ESI to see your true savings. Our data is then formatted and ready for your payroll system. We are always happy to assist as you begin calculating your General Fund savings by implementing an Early Severance Incentive for your school district. To learn more visit us at GausSystems.com or call us at 419–721–5000.

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