Early retirement packages are a tried and true method used by companies to reduce their workforce. The idea is to reduce a bloated workforce, cut expenses and keep Wall Street happy.

Verizon offered its employees an incentive package which included a five per cent increase in pension benefits, a one-year extension of medical coverage, two weeks' pay for each year of service and a one-time severance benefit of up to $30,000 for managers. So much of the workforce jumped at the opportunity that the company was rushing to "promote rank-and-file employees to replace the 16,000 managers who'd abruptly vanished."

Verizon had hoped to lower its personnel costs by $1 billion, but instead the incredible expense of the buyout was $3 billion. It would take several years for this miscalculation to show up on the bottom line.

Retirement package offers may seem generous to those facing retirement. Companies have traditionally not worried about the cost as they dip into existing retirement plans to fund this technique. In the past, these retirement plans have been cash heavy with extra money from stock market investments.

However, with the economic turndown these retirement programs have been more difficult to fund. As a result, the use of these programs as a cost-savings tool in workforce reduction has been less attractive.

Companies have used a broad brush approach in advertising these offers to their employees. As a result, often high performers have accepted them and the low performers have chosen to stay. Frequently these high performers have had difficult-to-replace skills. And oftentimes, find jobs with the competition.

With the loss of these key people, companies have had to hire new employees, or hire back the retired employee as a freelancers or consultants. Cost effectiveness suffers as the company scrambles to continue good customer service and maintain a calm work setting.

Dan Ishac and Alex Dike are consultants with the Chicago office of Watson Wyatt International. Instead of offering a buyout to most of the workforce they recommend that the company target specific business units or job classifications. "You want to be sure that you're getting at the areas where you have redundancy or pockets of poor performance." Once a company identifies that group it should come up with a package that will attract it. According to Ishac, a target group that is 5 to 10 years away from normal retirement needs the most incentives to leave. They need severance and medical coverage as incentives. Those who are 2 to 5 years away may be happy with "temporary cash enhancement to their pension, until Social Security kicks in."

John Challenger, chief executive officer of the consulting firm Challenger Gray & Christmas recommends a strategy for companies who want to retain key employees who may take advantage of buyouts. They could be offered plum assignments, "affirming their importance to the company's future." When the early retirement announcement comes, the key performers will know it was not meant for them.