Author: Fay Hansen

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Inside Heartland Payment Systems’ Successful Sales Recruiting Machine

With new growth initiatives now on the table for many industries, Heartland Payment Systems Inc. is doubling the size of its sales force.


The Princeton, New Jersey-based payments processor announced in early 2010 that it will hire 1,299 new sales professionals by the end of 2011. Eight hundred positions are still open.


To fill the jobs, Heartland is relying on an approach to recruiting, assessment and incentives that it has refined over the past decade. That formula has helped Heartland capture the No. 1 spot the past two years on Selling Power magazine’s 50 Best Companies To Sell For Now list for sales professionals. The list is based on the compensation, training and career mobility.


While many employers are meeting new demands with temporary workers or independent contractors, Heartland’s belief is to hire full-time payroll employees.


“It would be less expensive for us to use independent contractors, and that’s certainly common in our industry, but we don’t believe in that and never have,” says Sanford Brown, Heartland’s chief sales officer. “We have a brand to protect.”


Heartland, the fifth largest payments processor in the United States, delivers credit, debit and prepaid card processing and payment services to more than 250,000 business locations nationwide. The company reported revenue of $1.7 billion for 2009 and employs 3,400 workers nationwide.


Recruiting more than 1,000 employees for specialized selling positions requires a mix of strategies that fit with the philosophy of hiring full-time workers. Heartland relies on a six-person in-house recruiting team supported by several recruitment process outsourcing, or RPO, providers that specialize in certain industries and local markets. The internal recruiting team works across most geographies and job titles.


“We run a grass-roots recruiting organization consisting of sales professionals and managers,” Brown says. “But as we grow, we know we need to remove some of the administrative functions from the sales managers, so we are using a variety of methods for sourcing, including social media and job boards, and we outsource some portions of recruiting. But at the end of the day, it always comes down to the sales managers.”


The internal recruiting team and two RPO providers are handling the new sales positions. The jobs do not require a college degree, but candidates must have prior success in selling business products or services.


All candidates take an assessment test. “We looked at standard tests but couldn’t find one that fit,” Brown says. To develop a customized test, the company studied its top 100 and bottom 100 sales professionals and isolated the traits for both.


“We found that sales skills are the least important characteristic for success,” Brown says. “The most important are behavioral traits related to values and motivation.”


The company bases about one-third of the hiring decisions on the assessment test score; one-third on the candidate’s work history, the interview and references; and one-third on the intuition of the sales manager. Brown believes this mix produces solid hiring decisions.


“When we’ve failed, it’s because there was an emotional factor—a marriage breakup or a personal problem, for example—that we didn’t uncover and that created an obstacle to the person’s success,” he says.


Several identifiable groups account for most of the company’s new hires. Twenty percent are first-generation immigrants.


“They are attracted by the huge upside potential and by the fact that this job is more than just a job,” Brown says.


Another key group is former small-business owners. “If you run a small business, you have to be proficient in selling yourself to some extent,” he notes.


Other new hires have been sourced from industries that laid off large numbers of employees during the recession.


“We recruit a lot of business-to-business sales professionals from the insurance and mortgage industries,” Brown says. “And recently we’ve hired salespeople from the pharmaceutical industry, which is in a very sharp downturn. These are highly trained people who simply need a product to sell.”


The new hires span several age groups.


“The first consists of young people with two to four years in the workforce who have seen the good and the bad of sales work and want something better,” Brown says.


The second group consists of people with substantial work experience who want to take a new direction in a second or third career.


“A candidate may be someone who has owned their own business for 10 to 15 years and wants to break from those demands,” Brown says.


In addition to meeting the hiring goals for new growth, Heartland must engage in heavy ongoing recruiting to cope with high turnover. Among the company’s sales professionals, turnover is 50 percent in the first year.


“This is higher than we would like to see,” Brown says. “Our goal is to reach a retention rate of two out of three in the first year.”


After the first year, turnover drops to 12 percent, and after the third year it falls to 5 percent.


“In other words, if they stay for three years, we have them for life,” Brown says.


The company offers new hires a choice of two compensation plans. One pays employees on a commission-only basis from the first day on the job.


“This is our most aggressive compensation structure, and 75 percent of new hires choose it because of the high potential upside,” Brown notes.


The other is a hybrid that pays employees for completing each of four levels in the sales process regardless of whether a sale is made. Employees who select this plan typically migrate to the more aggressive commission-only plan after three to six months on the job, Brown says.


“Sales is all about confidence, and once they gain some confidence, they want to change to the more aggressive plan,” Brown says.


The company’s pay target for new hires at the end of their first year is $70,000 to $75,000 in cash compensation. By the third year, successful sales professionals earn $110,000 to $120,000, Brown says.


Heartland’s sales professionals earn a signing bonus and commission on every sale they make, plus a monthly residual percentage as long as they retain the customer. When sales professionals reach a pre-defined level of success, they can earn stock options through promotions and incentive programs.


“Historically, every year we have more than a dozen sales professionals who out-earn the CEO,” Brown says.


Workforce Management Online, October 2010 — Register Now!

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Companys Customized Test Goes Beyond Job Skills

Planned Cos. is hiring. The real estate services company, based in Parsippany, New Jersey, employs 1,688 workers at 330 residential and commercial properties spread throughout New Jersey, New York, Connecticut, Pennsylvania, Maryland, Virginia and Washington, D.C.


This year the company will recruit 300 new janitors, maintenance workers, concierges, doormen and security guards, with pay for janitors and concierges starting at $10 to $14 per hour.


In a high-turnover industry such as this, CEO Robert Francis wants employees who will stay on the job.


“Our clients want relationships,” he notes. “They want to see the same doorman every morning, year after year. They want to know their concierge.”


With turnover topping 100 percent at some building services companies, Francis designed a hiring process to minimize employee turnover and keep client retention rates high. Planned Cos. now sports a notable 95 percent client retention rate.


Francis is thoroughly committed to the hire-for-attitude, train-for-skills approach to candidate selection made famous by such companies as Southwest Airlines and Nordstrom. One make-or-break element in the hiring process at Planned Cos. is an attitude test that Francis created and now re-evaluates on a monthly basis.


“My goal is to have lifetime associates who care about the career they have chosen,” Francis says. “We promote from within. Doormen can go to their regional manager and ask for opportunities. One of our executive vice presidents was cleaning banks on the night shift when he was 16 years old. Some of my executives don’t have a college degree. We do not require job applicants to have a high school degree. I require the attitude degree.”


Testing the test
Francis believes that the hire-for-attitude approach has minimized turnover and helped the company achieve the consistency that keeps client retention rates high.


“Our turnover rate is 20 percent, which is spectacular for our industry,” he says.


For frontline and field employees, all recruiting is handled in house by one full-time recruiter working with the management team, operations managers and human resources. Staffing agencies handle headquarters positions that require specific skills and senior management and executive positions.


The company’s hire-for-attitude methodology is based on Nordstrom’s approach.


“It resonated with me,” Francis says. “You take inherently positive individuals and then provide the necessary training. In our work, employees need to be ‘on’ day in and day out.”


Francis rejected off-the-shelf hire-for-attitude tests.


“Working off of the Nordstrom model, I read a hundred books and then put together a test,” he recalls.


The test he devised, which he calls I PLAN, measures five qualities.


The first is demonstrated integrity, measured through a series of questions about ethical behavior. The second is passion.


“We want to see that they have a passion and have excelled in it,” Francis says. “It could be a hobby or a project where they succeeded.”


The third element—longevity—determines whether the candidate is looking for a job or a career.


“The whole purpose is to deliver consistently good people for clients who don’t want turnover,” Francis notes.


The fourth element measures positive attitude and asks candidates to describe a positive customer service experience. It also asks how the candidate’s friends would describe the candidate’s personal characteristics.


The final element of the test measures the candidate’s knowledge of tasks that are relevant to the job and the company’s mission and role. The recruiter or hiring manager administers the test face to face or by phone.


Francis constantly monitors the hiring results.


“We use a dashboard for all quits and employees fired in the month to analyze what we missed in the test and to understand good and bad hires and revisit their answers on the test,” he says. “There are patterns to responses, so we delve deeper into that.”


Modifying questions
On average, for every 15 candidates tested and interviewed, the company hires only one.


“A lot of people talk the talk, but don’t have the attitude we are looking for,” Francis says. “The 14 candidates we don’t hire will go to our competitors, and that’s fine with us. The more selective we are, the better we will be. We never lack for applicants.”


Francis believes that the company’s net promoter score (NPS), which measures customer loyalty, demonstrates the success of hiring process.


“We are in our third year of tracking NPS and we score in the high 40s and low 50s, which is very high,” he says. “We track our NPS by account, by unit and by region, and then we drill down into the people. We’ve modified some of the test questions and hiring practices as a result. We found, for example, that some our people with a military background who took over accounts were too authoritative, so we made adjustments. We also look carefully at client comments.”


Francis believes that the test and the company’s workforce management practices keep turnover well below the industry average.


“There is a misconception about my market,” he says. “It’s not necessarily a transient market. You can find the right individuals, and if they are treated with respect and they have an open line of communication with management, they are likely to stay. My industry misses the whole boat. You have to have a model for how you treat people.”


Planned Cos. does not monitor its test for disparate impact, but Francis believes that it is nondiscriminatory. Still, employers should be cautious about the legal implications of tests that include an honesty or integrity component.


“Whether the focus is on integrity or a test is a broader assessment, employers should seek legal counsel,” says William Floyd, senior partner at Best Best & Krieger in Riverside, California. “A number of legal issues are implicated.”


Massachusetts prohibits employers from using any test used to render an opinion regarding an individual’s honesty. California and Rhode Island limit the use of honesty and integrity testing in making hiring decisions. Other states place some restrictions on honesty testing, but the law is unclear in many cases.


“Tests should be vetted from a privacy standpoint and for state laws on disability that may be more restrictive than federal laws,” Floyd notes. “Employers should always consult counsel to minimize the risks.”


Workforce Management Online, March 2010 — Register Now!

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Special Report on Background CheckingBurden of Proof

EmploymentGroup’s December job postings included a “trial hire” for a small assembly job, paying $9 per hour, the equivalent of $17,550 a year. The Michigan staffing firm listed requirements for the position: a high school education or general equivalency diploma, small assembly experience and “no convictions.”


Virtually all of EmploymentGroup’s client companies have a blanket “no felons” policy.


“It’s about keeping the workplace safe, and about those lawsuits we all read about,” CEO Mark Lancaster says. In Michigan, a state that spends more on corrections than on higher education, smoking pot in a park or bouncing a $500 check can produce a felony conviction.


Like most employers, EmploymentGroup doesn’t have any empirical evidence that the “no convictions” policy helps keep the workplace safe. And screening vendors, who routinely claim that criminal checks reduce workplace violence, theft and fraud, don’t have any meaningful empirical evidence either. In addition, the actual probability of a negligent-hiring lawsuit—a perceived risk that often drives criminal screening practices—remains undocumented.


Employers spend billions on criminal checks and often base hiring decisions on the results without evidence of the return on the investment or the efficacy of the decisions. The absence of empirical evidence will soon become more than a question of effective screening and hiring practices.


Within the next 12 to 18 months, employers can expect to see the U.S. Equal Employment Opportunity Commission issue new guidelines that require empirical evidence for the “business necessity” defense in racial discrimination cases that arise from screening and hiring practices, according to Rod Fliegel, a partner at Littler Mendelson in San Francisco. The new guidelines are likely to upend hiring policies based on untested assumptions about criminality and workplace behaviors.


Employers stand to benefit from the new guidelines, which may bring greater clarity to what is now a legal quagmire. In addition to the new guidelines, in September 2009 the EEOC filed the first lawsuit in what experts believe will be a new series of court actions on screening and hiring practices that may help define the empirical evidence federal courts will require.


Perhaps more important, the legal scuffle over empirical evidence will continue to kick up questions about the role of criminal screening in hiring and the extent to which employers find false comfort in a relatively cheap and easy—but unproven—risk management tool while neglecting more effective measures to reduce workplace violence, theft, fraud and employment-related lawsuits. While the screening industry continues to play to employer concerns about criminality and promote criminal checks as an effective countermeasure, broader forces are challenging those assumptions.


Evidence lacking
Sensationalized headlines about workplace homicides and inflated vendor claims paint a dramatic picture of workforce criminality and criminal screening as an effective risk-reduction practice. But when the EEOC demands that employers produce empirical evidence to support hiring practices based on these claims, the screening industry will not be in a position to assist.


“Background screening can create a safer workplace,” says Theresa Preg, director of marketing development for LexisNexis Screening Solutions, also known as ChoicePoint, which runs 12 million employment-related screens a year. But the company has no empirical evidence to back up the statement.


Vendors frequently cite statistics on workplace violence but fail to note that the vast majority of incidents are not perpetrated by employees but by criminals unconnected to the workplace, clients or customers, or outsiders who have a personal relationship with an employee. They also don’t say that there is no research indicating that employees with criminal records are more likely to commit acts of workplace violence. Another common vendor claim is that employee theft causes 30 percent of all business failures. Although the number has been reiterated in marketing materials for two decades, there’s no substantiation for it.


     “I don’t know of any actual studies or evidence of a decrease in fraud or theft tied to criminal checks,” says Jason Morris, president and COO of EmployeeScreenIQ, which runs more than half a million employment screens each year. “There are no hard reports or case studies, and the National Association of Professional Background Screeners hasn’t produced any.”


To construct new guidelines for screening and hiring, the EEOC will draw from testimony given in its November 2008 hearings and from the 3rd U.S. Circuit Court of Appeals’ 2007 decision in the case of El v. SEPTA, according to Fliegel, who represents employers and screening vendors. “The EEOC will look to the hearings and El, which talked about an empirical basis for comparing an applicant with a record with an applicant without a record,” he says. “Some scholarship is now focusing on this.”


Fliegel cites the work of Shawn Bushway, a criminologist at the University at Albany, who testified at the EEOC hearings that employers have elevated criminal-history records as the “trump card” in hiring decisions, instead of using more responsible statistical risk assessments. Increasingly, employers focus less on direct job-related employment and reference checks and skills evaluations and more on criminal records and credit checks.


Bushway’s research and other significant studies also indicate that criminal checks produce numerous false positives and false negatives, which is another issue of concern for the EEOC. In addition, new studies on recidivism challenge blanket policies that impose untested time frames, such as screening records for the previous seven years or barring employment for any conviction within the past five or 10 years.


In HireRight’s 2009 survey of screening practices, employers most frequently cited workplace safety as their motivation for screening. Almost half say they screen to reduce theft and fraud. But no research suggests that criminal checks can predict an employee’s propensity for workplace violence, and there is no evidence that criminal screening reduces theft or fraud.


Most fraud perpetrators, for example, do not have a record because they are first offenders, according to the Association of Certified Fraud Examiners. In addition, U.S. retailers commonly respond to incidents of employee theft by simply firing the employee, so no criminal record is generated.


To avoid hiring unprosecuted thieves, many retailers now pay to access private member-only databases, but these databases do not represent criminal adjudications and dwell in a gray area of the law.


“This is a cutting-edge issue,” says Scott Paler, a labor and employment attorney at Seyfarth Shaw in Chicago. “These databases are a collection of individual opinions about incidents. Legal issues about using these databases in hiring decisions hinge on individual state laws.”


Proxy for discriminatiion
While pressure is mounting at the federal level, the recession has forced state governments to take a closer look at the role employers play in the revolving door of recidivism that keeps prisons full and places already stretched state budgets in even greater peril. A number of states, including New York, Massachusetts and California, are tightening restrictions on screening practices and hiring bars.


At the EEOC hearings, experts reported that recidivism drops to extremely low levels for people who have stable employment during their first year out of prison. Employers that construct hiring barriers for millions of marginal nonviolent ex-offenders will find it increasingly difficult to remain compliant with federal and state regulations.


At both the federal and the state level, the issue centers on criminal checks and hiring bars as a proxy for employment discrimination against black men. Major studies have found that employers treat white job candidates with convictions differently from blacks with convictions. Morris is not surprised. “I’m sure it’s happening,” he says. “We always tell employers to make sure that they do the same screen with the same treatment for every candidate, but it’s happening out there.”


The 10 largest screening companies alone screen more than 40 million job candidates each year. Many invite employers to use grids or preset hiring criteria for processing criminal record results. “There are companies using a criminal check to screen all candidates and eliminate all those with a record,” Morris says.


At Administaff Inc., director of recruiting Mary Massad takes a far more measured approach. Administaff, based in Houston, is a heavyweight in the professional-employer-organization industry, with 110,000 work-site employees at 5,900 client companies. Screening candidates for client companies varies by industry and position, but Administaff counsels clients carefully about the process for making adverse hiring decisions. “We will not support a program that does not consider convictions on a case-by-case basis,” Massad says. “We do a lot of consulting with clients.”


The growing trend at the state level is to require screening and hiring bars for specific jobs, including many caregiver positions, and restrict screening and hiring bars in all others. Greater clarity in state legislation is likely to reduce the small but highly publicized number of negligent-hiring lawsuits that are filed each year, and minimize the even smaller number that center on criminal records.


New EEOC regulations demanding an evidence-based approach to screening may help hone more effective hiring practices and provide a safe harbor from negligent-hiring lawsuits. The criminal screening process now in place at many companies may be an expedient method for culling candidates, but employers with hiring bars may soon have to rely more on proven methods for mitigating risk: job-specific hiring policies, proper supervision and effective performance management.


Workforce Management, February 2010, p. 27-33 — Subscribe Now!

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Making a Case for Hiring Bars

Employers that have not already reviewed their screening and hiring policies on applicants with criminal records should do so now, according to Michael Abcarian, managing partner of the Dallas office of labor and employment law firm Fisher & Phillips. “If they don’t, they may be the next case that the courts look at in a class-action lawsuit,” he says.


Abcarian and other experts agree that the Equal Employment Opportunity Commission and the federal courts will soon require the evidence-based screening and hiring policies outlined in El v. SEPTA. The Philadelphia-based 3rd U.S. Circuit Court of Appeals ruled in favor of the employer in that case, but stated in plain terms that hiring bars for people with criminal records must be grounded in substantive research on the actual risk of recidivism.


“Employers will have to show empirical evidence that an applicant with a criminal record is more likely to engage in criminal activity than someone randomly selected from the general population,” says Abcarian. “HR executives can’t just speculate about what people might do.”


Employers who use the now common five-year, seven-year, 10-year or lifetime employment bars for people with criminal records will need to produce empirical evidence to support those demarcations, Abcarian says. “HR executives cannot set arbitrary time frames for recidivism. You need real statistics on recidivism and a real reason to exclude applicants.”


The time frames promoted by screening vendors and adopted by employers are not supported by current research on recidivism. “Employers will have to explain the secret of a five-year or a seven-year bar,” says Adam Klein, partner at Outten & Golden in New York and chairman of the firm’s class-action practice group. The firm represents individuals and classes in employment law cases.


To produce the empirical evidence required, employers will need to draw from the work of social scientists such as Alfred Blumstein and Shawn Bushway, Klein says. “Social science research tells us that it is unlikely that a criminal conviction history is relevant to a job,” Klein notes. “The EEOC will ask for recidivism research focusing on the age at the time of the conviction and the nature of the crime.”


Blumstein published a major study in 2009 that actuarially identifies the point at which an individual with a criminal record is at no greater risk of committing a crime than other individuals of the same age. “The EEOC will look at the Blumstein study because it is directly on point with the issue,” says Reggie Belcher, shareholder at Turner Padget Graham & Laney in Columbia, South Carolina, which represents management in employment lawsuits. “Employers are going to have to come off their bright-line rules.”


Klein warns employers to pay particularly close attention to hiring bars that include convictions for drug offenses. “The war on drugs led to the substantial and disproportionate conviction of blacks and Hispanics,” he says. “The EEOC guidelines will address this because of the profound disparate impact. It may impose a higher requirement for these convictions with respect to the business-necessity defense.”


In addition to reviewing their screening and hiring policies for applicants with criminal records, employers should rethink their use of credit checks, Klein says. “Credit screening is a Title VII time bomb waiting to go off.”


Workforce Management, February 2010, p. 28 — Subscribe Now!

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One Firm Finds Passive Candidates Offer a Safe Selection Process

Synaptics Inc., a touchpad technology developer, blazed through the recession with fiscal 2009 revenue up 21 percent and net income up 75 percent compared with 2008.


Based in Santa Clara, California, the company generates $900,000 in annual revenue per employee—the highest rate in the hardware industry. Maintaining such a record requires extraordinarily selective hiring. For every 10 candidates that enter the company’s extensive interviewing process, only one leaves with a job offer, and the acceptance rate is an overwhelming 92 percent.


The high levels of unemployment triggered by the recession have altered the company’s stance toward active and passive job candidates.


“We hire only the top 10 percent of performers, but just because you’re still employed doesn’t necessarily mean that you’re a top performer,” says James Harrington, vice president for global human resources. “We look at the individual case. Maybe the candidate is from a startup that just shut down. And we’ve seen a lot of acquisitions where not all of the people were absorbed.”


Not all employers have adjusted their longstanding preference for passive candidates.


Thirty million Americans are either unemployed or underemployed, but employers continue to poach those who are still on the job. In a June survey by the social networking site LinkedIn, 60 percent of employers said that passive candidates were better employees.


In a recent study by the Institute for Corporate Productivity, one-fourth of the companies reported that they recruit new talent by directly contacting their competitors’ employees. More than 40 percent said they actively source competitors’ employees in certain positions to a moderate or higher extent.


Recruiting risk-adverse passives
Companies that still recruit passive candidates find them more difficult to reach.


“There are some active candidates for us in the market, and the same time, the recession has actually made it harder to hire passive candidates because of their fears about the uncertainty of a new position,” Harrington says.


Synaptics relies on ongoing informational interviews to keep its pipelines full and pull in risk-averse passive candidates.


“We get to know people before we need them,” Harrington says.


Synaptics hired 100 new employees in fiscal 2009 and expects to hire 50 more by July 2010. The company conducts exploratory interviews with potential candidates on an ongoing basis.


“We may not hire them until three years later,” Harrington notes. He works with a tactical plan for one to two years out and a five-year strategic plan.


Synaptics does not ask candidates for a résumé until it is well into the interview process.


“Passive candidates don’t have résumés,” Harrington notes. “At some point we want to share a candidate’s résumé with our own line organization, and we ask for it.”


Candidates go through two or three interviews, with a total of eight Synaptics employees participating.


“We hire not just for talent but for culture,” Harrington says. “We want head and heart. We want to know the candidate’s work values and personal values. We can do this because all of our managers are trained in behavior-based interviewing.”


Overcoming the risk aversion of passive candidates requires more extensive discussions to reassure them about the company’s intentions.


“Our turnover is low; we’re not a hire-and-fire organization,” Harrington says. “Candidates don’t see our actual turnover numbers, but we talk about it with them. They get to know us well.”


Harrington says that Synaptics’ employees are the best recruiters for passive candidates.


“Our secret weapon is that 36 percent of our total hires are from employee referrals,” he says. Harrington is not concerned that the company’s heavy reliance on employee referrals and social networking will lead to a lack of diversity or simply replicate the existing workforce.


“We hired from 45 companies and seven universities in 2009,” he notes.


Synaptics uses a uniform recruiting process worldwide, with some modifications based on location to take account of cultural differences. In 2009, the company expanded development centers in China, Japan and South Korea, and used social networking to help reach candidates.


“Social networks help build the pipeline, and this is a global phenomenon,” Harrington says.


Bypassing starts and stops
Ron Selewach, CEO of Human Resource Management Center Inc., based in Tampa, Florida, says that there is still a strong employer preference for passive candidates, but the preference is misplaced given the ongoing layoffs that mark the current market.


“The first people to hit the street are dispensable,” Selewach says. “But companies have cut so deeply now that they have surplused some top performers. Employers who don’t consider active candidates are missing out on top talent.”


Selewach believes that a résumé-based recruiting process is ineffective for both active and passive candidates.


“The best way to recruit passive candidates is to bypass résumé submission, onerous online application forms, phone screens, preliminary interviews and all the starts and stops in what we call ‘Mr. Toad’s Wild Ride,’ ” he says. “Passive candidates are not sufficiently motivated to tolerate all those starts and stops. They need to be recruited through a system that whips them through the vetting process. Recruiters can set in place a system or a procedure that does not ask passive candidates to present a résumé or fill out a burdensome application.”


A résumé-based recruiting process also handicaps active candidates who have experienced long stretches of unemployment. In November, the average duration of unemployment hit 28.5 weeks, compared with the previous recession’s peak of 18.5 weeks in December 2002.


“This recession has vastly increased the number of active candidates with substantial gaps in their résumé,” Selewach notes. “Employers need to examine the gaps, but résumés rarely provide an explanation of the breaks.”


“Recruiting methods need to change,” Selewach says. “The current method is focused on who can write the best résumé, not who can perform the job. Résumés look at what the person did in the past and force companies to read between the lines about whether the person has specific skills.”


Selewach suggests that employers should replace résumés and cumbersome online applications with automated interviewing systems based on questions that reveal critical skills for the job.


“Employers can create a career site that uses artificial intelligence to interview candidates for specific jobs and handle a large number of candidates very quickly,” he says. “We have systems that allow employers to focus on interviewing for job-specific questions, but many employers are still unwilling to give up résumés.”


Selewach believes that it may take a whole new generation of recruiters, hiring managers and human resources professionals to ditch résumés and move to more efficient methods for evaluating candidates. “But a first step is to move the résumé to the back of the process rather than keeping it in the gatekeeper position,” he says.

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R&D Sent to China

Companies such as IBM, Microsoft and Nokia outsource chunks of their research and development and product development work to Symbio, a global product development firm with seven R&D centers in Finland and Sweden and five offshore development centers in mainland China, Taiwan and Bangladesh.


One thousand of Symbio’s 1,400 employees work at three development centers in China, the new world powerhouse for R&D spending and talent.


With its software development engineers in China handling the bulk of the work, Symbio cuts time-to-market for its clients by as much as 25 percent and product engineering costs by as much as 75 percent. “For our clients, costs are a priority, but agility and time-to-market are also key,” says Jacob Hsu, Symbio’s CEO, now based in Beijing. Hsu was educated at the University of Pennsylvania’s Wharton School of Business.


To ensure a steady flow of top talent with company-specific skills, Symbio partners with a major university at each of its three development centers in China.


“Every year, we select 100 top juniors at each university, work with the university to design a curriculum and then move those students into paid internships at Symbio in their senior year,” Hsu explains.


Hsu is unconcerned about reports of wage inflation in China topping 6 percent.


“Whether you are in China or any location, controlling wage inflation comes down to managing your talent pipeline,” he says. “To control costs, we must manage our employees to increase the value of their skills.”


In addition to its training programs for students, the company maintains an internal program that offers 108 different courses for existing employees.


The world spends more than $1.1 trillion a year on R&D, with corporations accounting for 62 percent of the total, according to Booz & Co. Among the top 1,000 global corporate R&D spenders, nine out of 10 conduct R&D activities in multiple locations offshore, with the majority spending more than half of their R&D budget outside their home country. Booz’s 2009 study found that companies spending more of their R&D budget in low-cost locations perform substantially better in sales and market capitalization growth. China is now the single largest net recipient of R&D offshore spending.


Companies commonly lower their R&D labor costs by 40 to 60 percent by offshoring to the developing economies, according to the Boston Consulting Group. Salaries for associate engineers in India average $4,400 per year, compared with $53,400 per year for newly minted engineers in North America or Europe, Boston Consulting Group notes.


Hsu is actively exploring locations for new centers in China but has little appetite for moving into other emerging markets.


“There is still so much room for growth in China, with an incredible upside for workforce expansion and plenty of scale, especially in Tier II cities,” he notes. “We have to stay cost-effective, but we have to tap into the best engineers and experts and they are only in certain locations,” Hsu says.


Increasingly, those locations are in China and India—the preferred sites for offshore R&D. The emerging markets already account for two-thirds of the global engineering talent pool, and that share is rapidly growing, Boston Consulting Group says.


Workforce Management, December 14, 2009, p. 27 — Subscribe Now!

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Recruiters Use of Criminal and Credit Checks Colliding With Legislative Constraints

Explosive growth in the background screening industry during the past decade has generated near-universal adoption of criminal checks and a steady rise in credit checks for all U.S. job candidates.


In some industries, recruiters are using criminal and credit screening as a quick and easy method for culling the ever-larger pile of applications. But this growing reliance on screening is on a collision course with new legislative restrictions, legal challenges and mounting evidence that such results are poor predictors of behavior and performance.


Even employers that limit the types of screening results that will lead to adverse hiring decisions may violate federal law. On October 1, the Equal Employment Opportunity Commission filed a discrimination lawsuit against Freeman Cos., a nationwide convention and corporate events marketing company.


Since at least 2001, Freeman has rejected job applicants based on their credit history and if they have had various types of criminal charges or convictions, the suit claims. The EEOC says these exclusionary practices are not job-related or justified by business necessity.


In March, the EEOC settled a lawsuit against Franke Foodservice Systems, which refused to hire a black applicant who disclosed a felony conviction on his application even though the company hired a white applicant a year earlier who made a similar disclosure. A spate of EEOC and private lawsuits are pending against other companies for unlawfully denying employment to people with criminal records or bad credit histories.


EEOC hearings on screening practices in November 2008 included expert testimony that the results are not good predictors of employee behavior or performance. In addition to greater EEOC scrutiny of criminal record screening practices, a growing number of states now prohibit or limit pre-employment arrest inquiries.


One in five U.S. adults now have a criminal record that would show up on a routine pre-employment background check, according to estimates based on Bureau of Justice data.


“Everyone checks for criminality for all jobs,” says Robert Pickell, vice president for customer solutions at HireRight, a background screening provider based in Irvine, California.


HireRight’s 2009 survey results confirm this, with 93 percent of employers reporting that they run criminality checks, up from 85 percent in 2008.


“Criminality usually leads to adverse actions,” Pickell notes.


HireRight surveyed 1,411 employers of all sizes from more than 15 industries. The survey found that 84 percent of employers conduct comprehensive screening before the first day of work; 8 percent screen immediately after the start.


The HireRight survey found that 42 percent of employers check credit histories, up from 36 percent in 2008, but legislators are increasingly challenging the use of credit checks in pre-employment screening. In the second quarter of 2009, U.S. consumer loan and credit card delinquencies rose to their highest level in 35 years, according to American Bankers Association.


Congress is considering a bill that would prevent employers from using credit reports in their hiring or promotion decisions. In June, Hawaii joined Washington state in limiting the use of credit checks in pre-employment screening; bans or restrictions also are under consideration in Michigan, Ohio, Connecticut, Missouri, New York and Texas. A California bill that restricts credit checks in pre-employment screening cleared the state Legislature in 2008 and 2009, only to be vetoed twice by Gov. Arnold Schwarzenegger.


Adverse actions
For 53 percent of employers, screening results adversely affect the hiring decision in 4 percent or less of the cases, according to the HireRight survey. Ten percent of employers report that adverse actions occur in 10 to 15 percent of the screens.


“This is often around issues in the verification area, plus criminality,” Pickell reports.


At the other end of the adverse-action spectrum, 10 percent of employers report that screening adversely affects the hiring decision in a staggering 50 percent or more of the cases.


“The 50 percent-or-more adverse-action group is probably in industries where you have low-skilled hourly workers and low job requirements,” Pickell says. “Employers are interested in quickly filling positions and conduct screening across a broad population.”


In these industries, he notes, recruiters may put large numbers of candidates though a less stringent recruiting process with minimal criteria and then use screening to narrow the group. In addition, adverse selection may be at work.


“People with problems in their background will go to the jobs and industries where they think employers will be less stringent—for example, retail employers, staffing companies and small employers,” Pickell says.


Legal challenges to screening practices may increase as more employers extend screening to their existing employees. The HireRight survey found that 16 percent of employers now screen their existing employees on an ongoing basis, up from 12 percent in 2008.


“The number of employers screening existing employees is absolutely increasing,” Pickell says. “Previously, it occurred only in specific industries, but now it is definitely becoming more broad-based across all industries.”


Pickell reports a wide variety of practices for screening existing employees, but generally sees employers using a set period of two to three years after the start date, or every three years across the employee base. Ongoing screening for existing employees commonly includes criminality checks and drug testing, but omits education and past employment verifications that were completed at the time of hiring.


Among all employers surveyed by HireRight, 71 percent report that their organization conducts screening to “reduce risk to the organization”; 68 percent say the purpose is to “ensure a safer workplace.” Pickell believes that the risk reduction motivation stems less from the fear of negligent hiring lawsuits and more from direct business concerns.


“The industry talks about negligent hiring because of large-dollar lawsuits, but a far bigger factor for employers is loss prevention, preventing fraud and productivity issues,” he notes.


Scrutiny of screening practices may also grow as new technologies make screening more pervasive and intrusive. A new free iPhone application allows users to conduct background screening on any person if the user inputs basic personal information. New technologies imported from anti-terrorism and police interrogation programs are now available to private-sector employers.


Suspect Detection Systems Ltd., an Israeli security company, is now marketing its Cogito “hostile intent” detection technology to employers.


“Any company that is already using polygraph tests can use this technology,” says CEO Shabtai Shoval. He believes that critical infrastructure and finance companies may adopt the biometric screening technology.


“It’s a new concept and instrument, so the legalities are still unclear,” he says.


What is clear is a growing legislative and regulatory backlash against screening practices that are not tied to demonstrable risk and business necessity. Recruiters who indiscriminately use criminal and credit screenings to cut applicants fuel the increasingly widespread calls for greater regulation and leave their employers open to costly legal challenges.

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Strategic Workforce Planning in an Uncertain World

If anyone knows where the economy is headed, it’s likely to be Hugh Courtney. He holds a Ph.D. in economics from the Massachusetts Institute of Technology, was formerly global strategy practice leader at McKinsey & Co. and is one of the world’s leading business strategy experts. But here is his conclusion about the recession that struck worldwide in the final quarter of 2008: “The length and impact of the current economic downturn is absolutely uncertain,” he says.


That uncertainty poses a problem for the truism commonly used to define the goal of strategic workforce planning: the ability to put the right people in the right place at the right time. “People tend to be overconfident in their ability to predict those ‘rights,’ so they are systematically surprised,” says Courtney, who is now a professor of the practice of strategy and associate dean of executive programs at the University of Maryland’s Robert H. Smith School of Business. “The people who are making those ‘right’ decisions need to face and take seriously the uncertainties their organizations face.”


The financial crisis has undercut what Courtney describes as a common bias toward thinking that most business decisions occur at relatively low levels of uncertainty. At these low levels, there is a clear, single view of the future, or a limited set of possible future outcomes, one of which will occur. Under these conditions, forecasting data out along defined trajectories and conducting talent-gap analysis may provide adequate workforce planning.


But for the most important decisions, Courtney says, executives are actually working at much higher levels of uncertainty, with a range of possible future outcomes or unbounded possible outcomes. Effective workforce planning can occur at these higher levels of uncertainty, but when conditions are so in flux, forecasting and talent-gap analysis are useless.


Now that the financial crisis has brought greater clarity about the levels of uncertainty that surround most business decisions, the goals for strategic workforce planning have been recast to include the ability to think rigorously about the seemingly improbable and the unknown. Some companies are now developing the discipline for that thinking as the next step in strategic workforce planning.


Beyond gap analysis
At high levels of uncertainty, companies can use systematic scenario planning that looks at bounding the range of possible outcomes and the corresponding human capital needs of the organization. “This approach outlines the ‘no regrets’ actions and constructs a hiring plan that signals movement toward those scenarios,” Courtney notes.


Even at the highest levels of uncertainty, strategic workforce planning can frame discussions about past structural changes and the profound workforce shifts and new human capital challenges that flowed from them. “Previous financial meltdowns have had a discernible impact on human capital,” Courtney says. “Where did the people go and why? How were they retrained? There is usually some anchor you can hold on to.”


Aetna Inc. is looking for an anchor. Over the past year, strategic workforce planning at Aetna has focused on expanding the range of thinking about possible futures and their workforce implications. The company, based in Hartford, Connecticut, reported revenues of $31.6 billion in 2008 and employs 35,462 workers.


To launch its strategic workforce program, Aetna tapped Aruspex, the strategic workforce planning solutions provider, and in July 2007 hired away from a competitor company Melissa Cummings, an MBA with no prior human resources experience.


“It is hugely valuable to come into human resources from the outside because you can lead the conversation about how to get the business to play with workforce planning,” Cummings says. “A cross-functional business background really helps.”


From the outset, strategic workforce planning at Aetna moved beyond data gathering and gap analysis. “Analytics has thrown a veil over what passes for workforce planning,” Cummings says. “Data is about what happened in the past. Forecasting is a static vision of the future. We take data and forecasts and build on them with ‘what ifs’ to create a richer vision. That’s the qualitative piece that the enterprise needs.”


In February 2008, Aetna launched a series of daylong strategic workforce planning sessions, each attended by different groups of 15 to 20 business leaders. Seven sessions have been completed. Each session begins with an environmental scan that covers dozens of labor supply and demand factors, including global economic and political issues marked by very high levels of uncertainty.


“We filter our thinking through the environmental scan,” Cummings reports. “Which factors will have the greatest impact on the business and which carry the highest levels of uncertainty, and how high or low might they go?”


The business leaders prioritize the factors and outline the big themes. “The most compelling development at this point is that you see a couple of key buckets, and one is the economy, which shapes labor pools, the business model and, at the macro level, how much business might be gained or lost,” Cummings says.


The participants then construct a simple matrix, with one axis for factors that are out of the company’s control, such as the economy, and a second axis for factors within its control, such as how the company positions itself geographically. The participants look at alternative scenarios and outcomes for the four quadrants, and then break into four subgroups, with one group assigned to each quadrant.


“One quadrant will look like utopia and one will represent the worst gloom and doom,” Cummings says. “For the gloom-and-doom quadrant, we can then ask: Are we working toward prevention? Are we mitigating the risks that we see?”


The four quadrant groups generate reports. “We talk about the themes in each quadrant and that helps us look at possible future needs,” Cummings says. “Once you get there, it’s easier to see the goals and build an action plan.”


‘No regrets’ planning
Recent surveys confirm that companies are using the current crisis to upgrade their workforce. “We know from research on business cycle management that many firms use a downturn to be very aggressive in acquiring talent,” Courtney says.


Under current conditions, however, fairly high levels of uncertainty form the context for decisions about talent acquisition. “For workforce planning, companies are now facing multiple possible scenarios, any of which carries the need to develop bench strength,” Courtney says.


Given these conditions, Courtney advises companies to ask: What are the “no regrets” moves that we could take no matter what the range of outcomes? “This forces decisions about who to hire and when to make the hire, and what will happen if you don’t,” he notes.


Courtney will not speculate widely about the human capital changes that might arise from the current crisis. “Beyond the obvious near-term unemployment and retraining issues, too much depends on how long it lasts and whether it is a cyclical or a structural change,” he says.


He does see a long-term shift toward greater government regulation that will reach well beyond financial services. “This means that companies will need different skill sets in middle and upper management positions, with more employees skilled in managing regulations and standard-setting,” he says. “This is not just a cyclical issue to get us though the downturn, but more of a structural change.”


In many companies, strategic workforce planning executives are asked to outline the workforce implications for business scenarios already constructed by top leadership. “But some business scenarios are highly contingent on human resources issues,” Courtney notes.


“For example, McKinsey & Co. always starts with its ability to attract and train the best people, and its business scenarios flow from there,” Courtney reports. “That’s an extreme example. But in a variety of industries, we need to avoid spreadsheet answers and take a more strategic workforce planning approach that looks at competitive advantage. In the best of all worlds, human resources executives are members of the team that is creating the business scenarios.”


At Aetna, Cummings is still working to align the workforce planning process with enterprise planning. The company’s strategic plan reaches out three years and is largely set in June of each year. “The planning function has connected to the workforce planning session output,” she says. “The most important step is to hook into finance.”


When Aetna’s finance function issued numbers for 2009 headcount reductions at the end of 2008, Cummings reviewed the data. “We modeled out the numbers that finance gave us,” she says. “That was an insightful exercise that fostered partnering with finance and thinking about alternatives for how the reductions could occur.”


Still in its early stages of development and operating with a limited staff, the strategic workforce planning process at Aetna is nonetheless pushing past gap analysis to create a more comprehensive plan.


“We’ve laid the tracks for thinking about the challenges we face,” Cummings says. “The process is based on a methodology designed to create some clarity. In the end, it takes us to a further level of insight and builds connectedness and a common vision. It’s the story and the dialog that get you to the future.”


Recasting strategic workforce planning to accommodate higher levels of uncertainty is not a temporary response to unprecedented conditions, however. Courtney makes it clear that the only thing that has changed since the 2008 market crash is our perception of risks and uncertainties that were already there.

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Adjusting for the Downturn

The downturn has not triggered a radical change in the workforce planning process at Spherion, which sits at the center of the highly cyclical staffing industry, but it may. “We are re-evaluating the frequency of the cycle,” says John Heins, senior vice president and chief human resources officer. “We are not looking at a total resetting of the economy, but that may be a discussion for a later date.”


The downturn has altered labor market demographics, however, and that requires modifications in workforce planning. “The focus for years has been on the talent gap created by retiring baby boomers, but now that has changed and the workforce is bunching up,” Heins notes. “The mechanics of supply and demand have shifted on the supply side because the boomers are not exiting. Our workforce planning will be recalibrating all workforce models to accommodate these changes.”


Based in Fort Lauderdale, Florida, with $2.2 billion in 2008 revenue and 300,000 employees, Spherion performed well until the final quarter of 2008, when the staffing industry took a sharp hit. In past downturns, client companies in more recession-proof industries helped balance out demand.


“The main difference now is that all industries are in a downturn, so we can’t level off the impact in terms of our client mix,” Heins notes. “The point is to be able to respond to client needs and then size our company appropriately, and to ensure that we retain the most talented people and exit the low performers.”


Strategic workforce planning at Spherion identifies best- and worst-case scenarios and creates plans for the workforce that match those scenarios. “We look at historical trends in the staffing industry, which has a five- to seven-year cycle,” Heins says. “We know that unemployment sits in the valley for a few months and our demand arrives back six months before demand recovers in other industries. We look at what a recovery model may look like and what the jobs will look like.”


The workforce planning process at Spherion sits in the company’s four business divisions, with 10 employees in each division dedicated to forecasting and planning over a three-year horizon, and then rolls up to the COO. “This is where it should be because it is a business-driven process,” Heins says. “HR manages the process of resizing the organization.”


At the other end of the cyclicality spectrum sits Entergy Corp., the fourth-largest utility and the second-largest nuclear power operator in the U.S., with 14,300 employees and $13 billion in 2008 revenue. The company is based in New Orleans. Entergy’s workforce planners are still looking at the same relatively tight labor markets that have preoccupied the utility industry for years.


Entergy has not adjusted its workforce planning program since the financial crisis. “We are watching retirements now and getting feedback from the units and line managers,” says Mark Antoine, strategic workforce planning manager. “They are finding little impact.” With a pension plan, a 401(k) plan and a phased retirement program in place, employees at Entergy are less likely than many employees to modify their retirement plans because of the downturn.

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A Nation Under TARP AFLAC’s Ahead of the Game

Congress is considering rolling out to all public corporations the executive compensation restrictions that now apply only to companies receiving assistance under the Troubled Asset Relief Program. Current proposals include mandatory say-on-pay provisions, which give shareholders an advisory vote on executive pay.


But little will change at Aflac, the Columbus, Georgia-based insurer, where the board and the CEO have taken a series of pre-emptive measures that include many of the executive pay controls now captured in legislative proposals.


Three years ago, long before the executive pay controversy reached its current crescendo, Aflac became the first U.S. company to institute say on pay.


In February 2007, it implemented a clawback policy allowing Aflac to recover an executive’s compensation under certain circumstances. Then last November, CEO Daniel Amos gave up the severance pay provisions in his contract; and in February, with Aflac’s share price falling, he announced that he would forgo his 2008 bonus of $2.8 million.


Audrey Tillman, executive vice president of corporate services, who leads human resources at Aflac, is sanguine about the consequences of mandatory say on pay for all companies. “If an organization has true pay for performance, there’s no reason to be anxious about say on pay,” she says. It gives you a pulse about what shareholders think, and all HR executives should want to know that.”


Or maybe not. At many companies, say on pay will land in the laps of some extremely angry shareholders. Aflac launched say on pay at a time when its share price was rising and investor relations were strong. Its say-on-pay provision and the CEO’s self-policing actions have generated a flurry of positive press reports. Even with the pay changes in place, the CEO’s total compensation package remains very attractive and the company faces a far lower risk of losing its executive talent than most.


But most companies that now face the imminent prospect of instituting similar executive pay changes are not so well positioned. In fact, new legislative and regulatory restrictions are unfolding at the precise moment when executive pay plans have already lost much of their motivational and retention value. Boards and the HR executives who support them are struggling to restore that motivational and retention power with market forces and the regulatory environment clearly aligned against them.


The legislative wave
The American Recovery and Reinvestment Act of 2009, signed into law February 17, codified pay restrictions for the more than 400 companies receiving TARP funds.


“The TARP model for say on pay will become law this year,” says Steven Van Putten, Watson Wyatt Worldwide’s East region executive compensation director. “More frightening is that other TARP provisions will be applied to all companies.”


In addition to say on pay, TARP-like clawback provisions and severance pay restrictions are on the table. And the deep cuts in the tax deductions for executive compensation at TARP companies may soon affect all corporations.


“With TARP, we have a glimpse into the future of how government is prioritizing executive pay issues,” says Irv Becker, national practice leader for the executive compensation practice at Hay Group, Philadelphia. He believes that say-on-pay legislation is inevitable and that severance pay restrictions may follow. Mandatory clawback provisions are under consideration, but Becker believes that Congress may not act because so many companies are now adopting clawbacks in response to shareholder pressure.


Becker says the government is more likely to use the tax code rather than pay caps to suppress executive compensation. “The general direction is to use deductibility to inflict more pain,” he notes. “Government will push the burden back to compensation committees and shareholders.”


The American Recovery and Reinvestment Act cut the long-standing Internal Revenue Code 162(m) $1 million deduction for non-performance-based compensation to $500,000 for all compensation at TARP companies. Van Putten believes Congress may now apply the $500,000 limit to all companies and broaden the types of compensation brought under the deduction limit.


Becker believes the government may retain the $1 million deduction for non-TARP companies but apply it to all compensation, eliminating the distinction between performance-based and non-performance-based components.


TARP restrictions on severance are also likely to appear. “Historically, the government had only limited severance in a change-of-control situation, but for the first time, it has now broadened it beyond change in control for TARP companies, and may extend the limits to all companies,” Becker says. “Also, it may limit deductibility for severance, including severance unrelated to a change in control, which would be very significant.”


All of these possible changes could set off a scramble to adjust compensation and account for those adjustments in next year’s proxy statements. And if say on pay becomes law, those statements will draw even greater levels of scrutiny.


Aflac, which reported revenue of $16.6 billion for 2008, has already done the work. The company’s proxy statement provides 12 pages of tables detailing every aspect of executive compensation, supported by an additional 12 pages of compensation discussion and analysis, prepared by the finance function, the compensation committee and Mercer, Aflac’s compensation consulting firm.


Tillman attends the compensation committee meetings to assist and provide documentation. At the company’s May 2008 shareholder meeting, with say on pay in place, 93 percent of shareholders voted in favor of the company’s executive compensation practices.


Compensation experts note that the simple up-or-down advisory vote offers no information on which elements of the compensation package shareholders approve or disapprove of. A yes vote may make the board reluctant to institute the necessary changes going forward. Some governance experts are concerned that say on pay opens the door to shareholder intervention in a wide range of board decisions about issues that remain beyond the purview of most investors.


Tillman is undeterred. “Some shareholders can’t understand complex executive pay packages, and some will vote emotionally based on their own circumstances, but the large institutional shareholders can understand executive pay packages, and the board and the CEO should be aware of their perceptions,” she says. “We want to have our approach validated.”


Tillman met with Amos before he announced that he would refuse his 2008 bonus, but the company made no formal statement to employees. “They know our CEO and know that he is sensitive to sentiments around the country,” Tillman says.


Aflac has not instituted layoffs, but it cut the merit pool from its traditional annual 3.5 percent increase to 3 percent for 2009. “We have a very conservative philosophy on hiring and merit increases, and that’s paying off now,” Tillman says.


All employees receive a profit-sharing bonus that has paid out for 14 consecutive years. The company has not modified the traditional components for 2009, but is now reviewing targets.


Preserving motivation, retention
As of October 17, before the full effects of the crisis unfolded, 90.3 percent of Fortune 500 CEOs held underwater stock options, and the median year-to-date value of aggregate option holdings for Fortune 500 CEOs was down 63 percent, according to Equilar.


“The downturn has gutted stock prices, so equity programs no longer provide proper motivational and retention value at many companies,” Van Putten says. “In addition, there are new questions about how to set performance metrics and goals in an uncertain environment.”


With public and shareholder scrutiny and legislative actions focused on the components of executive compensation that are not performance based, HR executives will need to support boards that are now moving quickly to revise executive severance, perks and supplemental executive retirement plans. “This goes a long way to addressing critics,” Van Putten notes.


At the same time, boards and HR executives are working to redesign executive pay programs to restore the retention and motivational power of performance-based plans. “It’s all about increasing the probability that plans will pay out,” Van Putten says. “Otherwise, it’s too de-motivating. Every company is exploring how to handle the fact that equities are not performing. Some are considering exchanging underwater options, but this approach is not gaining traction at midsize and large companies because of the potential for shareholder criticism.”


If an option exchange is not feasible, the board can replenish shares in the program. “Boards will look to get new share plans approved to reload executives,” Van Putten says.


The payout problem is also drawing attention to performance metrics and goals. “Companies are revisiting earnings-based metrics and putting greater emphasis on cash flow or return on investment or return on capital, which say more about preserving the company’s value,” Van Putten notes. Another move under way entails increasing the line of sight by moving to division- or unit-based goals for annual incentives.


In addition to assisting the board with redesigning executive pay, HR executives must ensure that the modifications are aligned with broader changes in the workplace.


“HR executives can be sensitive about layoffs, morale and how executive pay is perceived internally,” Van Putten says. “Cuts should always start at the top. Begin by eliminating bonuses or paying them out in restricted stock. Eliminate salary increases at the top and then work your way down.”


With market forces slashing executive pay and legislative and regulatory actions for further reductions now pending, redesigning compensation to support its motivational and retention power is likely to be an ongoing process for many months to come.


Workforce Management, April 20, 2009, p. 1, 14-19 — Subscribe Now!