Author: Jessica Marquez

Complaints about the effects of globalization usually are lodged by employees whose companies have shifted work to other countries, leaving behind fewer jobs and lower wages.

    But now another con­stituency is feeling the local effects of international workforce decision-making: American subsidiaries whose parent companies in Europe are signing off on union-organizing agreements that are binding here.

    It’s a rude awakening for businesses that have for years been staving off union campaigns, often with the aid of highly paid attorneys and consultants. But it’s a great development for people like Andy Stern, president of the Service Employees International Union.

    He says the “dawning moment” for the strategy came for him a few years ago when Sweden-based Securitas bought three U.S.-based firms–Pinkerton, Burns International Services Corp. and Loomis Fargo & Co.–within a 12-month period. Around the same time, Group 4 Securicor, a British-Danish company, bought Wacken­hut Corp., a Palm Beach Gardens, Florida-based security company.

    “All of a sudden we found ourselves needing to talk more to CEOs in Europe than in the U.S.,” he says.

    With union membership in the United States at an all-time low, labor leaders here are reaching out to their global counterparts to help work together and organize. “The slogan ‘Workers of the world unite’ can’t be a slogan,” Stern says. “It has to be a way of life if workers are going to be successful.”

    Such solidarity is already having an effect in the U.S., labor experts say.

    “The issue is that you can have a multinational company in Europe agreeing to these things and the executives at the U.S. subsidiary are planning their own labor strategies, unaware that those agreements are having a direct impact on them,” says Gerald Hathaway, a partner in the New York law firm of Littler Mendelson.

    And it’s not just parent companies that the unions are targeting in Europe, he says. In some cases they are targeting companies’ suppliers and customers there. Since the labor movement is much more a part of the social fabric in countries like Germany, where boards of companies are required to have union members, U.S. unions realize that they can accomplish more by beginning there than they can at home.

    “Unions are creating global agreements that affect all of a company’s subsidiaries,” Hathaway says. “They are being very forward-thinking.”

Global agreements
    At its Chicago convention in August, the Union Network International announced that signing global agreements with companies was going to be a big focus for the group. The network includes 900 unions with 15 million members around the world and was formed in 2000.

    “The idea behind the agreements is that multinational companies will apply certain rules of the game across all of the nations where they have facilities,” says Jim Sauber, chief of staff and research director for the Letter Carriers’ Union, a Union Network International affiliate.

    The agreements cover labor standards, the right to organize and human rights issues. In some situations, the agreements include formal neutrality clauses, which mean that the employer agrees not to campaign against a union that is trying to organize its workers.

Union Network International has a list of 100 multinational employers it will focus on. “But that doesn’t mean if you are not a big name that you will not be targeted.” –Philip Jennings, UNI

    Some of these agreements also allow unions to bypass the National Labor Relations Board certification process altogether, Hathaway says. In these situations, the multinational employers agree to allow unions to use card-check drives. If 51 percent of the company’s employees sign cards saying they want the union to represent them, the union wins representation. Unions prefer this method because it is faster.

    So far, seven companies have signed global agreements with the Union Network International: Carrefour, a Paris-based food retailer; Hennes & Mauritz of Sweden, which has its H&M stores in the U.S.; Denmark-based Falck; Internet Security Systems, based in Atlanta; Metro AG of Germany; Greek telecommunications company OTE; and Spanish telecom provider Telefonica.

    Philip Jennings, general secretary of Union Network International, says that since the right to organize is in all of the agreements, the unions can address issues that come up even without formal neutrality agreements being in place.

    Given the importance of these clauses in North America, however, UNI and other groups are focusing more on including them in their agreements, Jennings says. Fifty agreements have been signed, and another 50 are in the works, he notes.

    In several instances, U.S. unions have been able to get multinationals to sign neutrality agreements through their own outreach to unions abroad. In 2003, for example, the Graphical Communications Conference of the International Brotherhood of Teamsters began to talk to U.S. executives at Quebecor World, a Canada-based printing company with global locations, about allowing its workers in the U.S. to join the union.

    When the company responded by hiring “union busters,” consultants whose job it is to stave off unions, the group reached out to unions that represented Quebecor workers in Europe and Latin America and found they were having similar experiences, says Tim Beaty, director of global strategies for the Teamsters. “So we started working as a group to pressure them to treat workers better,” he says.

    By setting up meetings with management of Quebecor in the different countries where it had locations, the unions hoped to make the company understand that if they tried moving the jobs to other parts of the world, they would meet the same resistance, Beaty says. In May 2005, Quebecor signed a neutrality agreement that allows for the union to use secret-ballot elections to determine whether workers want unions. Under the process, if 30 percent of employees in a unit want to be organized, there will be an election within 21 days conducted by a neutral third party.

    So far, two plants with a total of 400 workers have been organized, and a number of other plants are in the process, Beaty says. Tony Ross, a Quebecor World spokes­man, says no other elections have been scheduled. He adds that before this agreement, one-third of the company’s U.S. employees were represented by a union. “Que­­becor World has always respected its U.S. employees’ right to choose or not to choose union representation,” he says.

    The tactic that the Teamsters used with Quebecor is becoming much more common, says Philip Rosen, a managing partner at Jackson Lewis, a White Plains, New York-based law firm that helps employers with union avoidance and labor relations. Companies need to be proactive in assessing their vulnerability and make sure that they have the right relationships with local government officials in the countries where they do business, he says.

“There has been a ripple effect where companies are moving jobs from country to country and continuing to lower standards of labor. … We have to stop that.” –Anna Burger, Change to Win Coalition

Company focus
    The global unions are coordinating their efforts by focusing on specific multi­national companies. Union Network International has a list of 100 multinational employers that they will focus on, Jennings says. “But that doesn’t mean if you are not a big name that you will not be targeted,” he warns.

    A number of retailers, most notably Wal-Mart, are on the Union Network International list, Jennings says. At its global summit in Chicago in August, the group laid out its plan to step up activities to get Wal-Mart to change its anti-union policies in North America and to help organize Wal-Mart workers in other parts of the world.

    The Communications Workers of America has organized company-specific committees of global union members. For example, the Vodafone committee holds quarterly conference calls at which representatives from the different countries where Vodafone has a pre- sence talk about what’s going on there, says Yvette Herrera, senior director of education and communications for CWA.

    Using an international approach to corporate campaigns can be extremely effective, says Anna Burger, chair of the Change to Win Coalition, the federation of unions that broke off from the AFL-CIO last summer.

    “There has been a ripple effect where companies are moving jobs from country to country and continuing to lower standards of labor and wages,” she says. “We have to stop that.”

    Union members say they know that there will always be some jobs that are sent offshore because it is cheaper, but the hope is that by organizing workers in those countries, they can raise the labor standards globally. “It’s not going to be a level playing field, but anytime you can increase the voice of workers and raise their wages and benefits, it helps everyone,” Herrera says.

    CWA is focusing now on organizing workers in India, where many members’ jobs are going. As part of its fact-finding in India, the union learned that some companies are moving jobs from India to China. “This is why reaching out is important,” Herrera says.

    China poses a huge challenge for the labor movement because the country does not allow organizing. “We have to find a way of working in China … because all of the companies you negotiate with are there already,” Jennings told delegates of the Union Network International Conference in August.

    The International Association of Machinists has made some headway in China by going through its union counterparts in Sweden, says Dennis Hitchcock, a representative in the trade and global organization of the union. The union in Sweden has a relationship with the Volvo factories in China, so the U.S. machinists try to work through them to learn what’s going on, he says.

Outlook
    Despite the conflict among the various unions in the United States, they all agree on the necessity of creating a global labor movement, members say. “In the U.S., unions are competing for members, but that’s not the case internationally,” SEIU president Stern says. “Internationally we all have a common goal,” he says.

    Barbara Shailor, executive director of the solidarity center at the AFL-CIO, agrees with Stern. “The absolute objective for the Change to Win Coalition and the AFL-CIO is the objective of the global labor movement,” she says.

    How successful the unions’ international tactics are remains to be seen. Much of the work is still in its infancy, says Rosen, the Jackson Lewis attorney. “The next couple of years are absolutely critical to the labor movement, and I think they understand that,” he says.

    Employers can start assessing their vulnerabilities, but ultimately the best way to avoid becoming a target of a global corporate campaign is to make sure employees are getting benefits and wages that are competitive in the industry, says Gary Glaser, a partner in the New York office of law firm Seyfarth Shaw.

    “This is not just about big business versus big unions,” he says. “It’s about what’s best for the employees, and the unions still need employees to want them.”

Workforce Management, January 30, 2006, p. 1, 31-334 — Subscribe Now!

A common grievance that human resources managers often share is that their companies do not appreciate how their work contributes to their firms’ bottom lines. That’s obviously not the case at Home Depot. With a $1.2 million increase in total compensation, Dennis Donovan, the company’s executive vice president of human resources, was the top-paid HR executive in 2004, up from second place in 2003.

    Donovan is also one of 10 executives who were among the 30 highest-paid human resources executives in both 2003 and 2004, according to a list compiled for Workforce Management by Aon Consulting’s eComp Database. The list, which is based on companies’ proxy filings with the Securities and Exchange Commission, shows that eight of these 10 executives saw increases in their total compensation in 2004.

    “The good news for human resources practitioners is that in every discipline their pay is moving up,” says Joe Vocino, principal consultant in Mercer Human Resource Consulting’s performance measurement and rewards practice. Particularly given the added burden of Sarbanes-Oxley, human resources executives are crucial to making sure that companies are staying in compliance, he says.

    In a recent study conducted with the Society for Human Resource Management, Mercer found that the top HR management executives with responsibilities for labor relations saw their compensation jump 12 percent last year to $240,000. “Human resources skills are definitely becoming more of a needed commodity,” Vocino says.

    The majority of the companies on the Workforce Management list are in the technology or retail industries. It makes sense that these firms are the ones that pay top dollar to their HR executives because these sectors place a strong emphasis on the importance of people and their knowledge, says Doug Friske, managing principal at Towers Perrin.

    “In both retail and technology, people are a big cost or a big part of the revenue equation,” he says. Also, many of the executives on the list have titles that include communications and compliance, which shows the direction in which human resources jobs are moving, he says.

    Human resources executives, like CEOs, are receiving more restricted stock instead of just stock options. With the recent corporate scandals and changes in accounting rules that require firms to expense their stock options as income, more companies are moving toward offering restricted stock to their top executives, says Charles Peck, compensation specialist at the Conference Board.

    “This trend toward offering more restricted stock and paring down the number of options granted to executives will continue in coming years as more companies understand that there is no risk involved with offering restricted stock,” says Jack Dolmat-Connell, president and CEO at DolmatConnell & Partners, a Waltham, Massachusetts-based compensation consulting firm.

    One trend that is unique to human resources is that the number of women among the top-paid executives has increased. Unlike in other top executive positions, the number of women among the 30 highest-paid human resources executives doubled in 2004, from three to six. “Given the high representation of women in the human resources space, this is not surprising,” says Peter Lupo, national compensation practice leader at Aon Consulting.

    Although human resources departments have taken a greater role in setting a strategic course for their companies, analysts do not expect to see the number of HR executives that are named among the five highest-paid executives at the company to increase dramatically in coming years. Out of 5,573 proxies compiled by Aon, only 195, or 3.5 percent, named human resources executives among their top five highest-paid employees. Similarly, in 2003 only 3.3 percent did so.

    With stricter regulation, general counsel and compliance executives will often take one of those top five slots, Peck says. Friske, however, believes that as more regulations are imposed on companies, the number that list their human resources executives among their top five will increase. “There are a lot of hot-button issues that human resources executives will be relied on to deal with in coming years,” he says.

Workforce Management, October 10, 2005, p. 35-38 — Subscribe Now!

Even before Jennifer Raeder knew whether her own home in New Orleans was still standing, she was on the phone urgently trying to determine how many of her company’s employees were safe. As director of human resources at Entergy, a 14,400-employee energy company, it was her responsibility to locate workers and help them get back to work.

Like most large companies with locations in the Gulf Coast, Entergy had plans for redeploying people in the event of a catastrophe. It knew how to make sure that payroll kept running and bills got paid. What it did not anticipate was the staggering number of employees whose homes would be damaged–more than 1,100.

By looking at the human resources experiences at Entergy and two other companies–Sodexho USA and McDonald’s–employers can learn how to better prepare for the workforce management challenges posed by calamitous events. As a result of Hurricane Katrina, an estimated 160,000 homes were destroyed and 900,000 people lost their jobs. Economic losses total $125 billion or more.

From getting employees resources in spite of power and phone lines being down, to the larger issues of relocating and finding them housing, human resources executives are at the command center, making sure that company employees are ready and able to return to work.

For Entergy, whose New Orleans subsidiary filed for bankruptcy on September 23, keeping its workers is crucial to its survival. The firm pegs damage from Katrina at $750 million to $1.1 billion, including $325 million to $475 million in damage in New Orleans.

“This is a job that requires 24/7 service to our customers,” says Mike Bakewell, a New Orleans native and leader of the company’s business continuity effort. “We need all the people we have.”

Communication challenges
After a hurricane it typically takes companies a few days to locate all of their employees. With Katrina, it took three weeks. In its effort to find workers, Entergy posted 800 numbers on its Web site and broadcast public service announcements on the radio asking employees to call in.

At Sodexho, a company in Gaithersburg, Maryland, that provides facilities and food services to hospitals and universities, the process of locating employees was more complicated. With 1,400 employees at 35 separate client sites, the company wasn’t sure who had evacuated. After two weeks, the firm still hadn’t heard from 430 employees.

Realizing the urgency of the situation, Peri Bridger, senior vice president of human resources for Sodexho North America, leased a plane to fly over Houston with a banner instructing employees to call its 800 number. Sodexho also placed three human resources managers and several district managers at the Astrodome to work with the Red Cross to serve food to evacuees.

“We found 110 employees, but then those people got shipped to other places,” says Peter Gerard, senior director of human resources. “The problem was you kept finding people and they would disappear again.”

Since both regular and mobile phone service was down for several days, many companies relied solely on sending text messages through their cell phones, which worked even though regular mobile phone service was down. Entergy had satellite phones, but Bakewell still struggled with getting messages to all 10,000 employees who were in the field working to restore power.

To address the problem, he had fax machines–and generators to run them–shipped to all the staging areas where employees were working, and faxed out daily status reports updating employees about where power had been restored and what still needed to be fixed. “These people were working 14- to 16-hour days,” Bakewell says. “The least we could do was give them a sense that their work was doing something.”

McDonald’s, which had 200 restaurants and about 8,000 workers in the disaster zone, took a grass-roots approach. Two days after the hurricane hit, Steve Russell, senior vice president of human resources, set up a command center with 40 staff members in the company’s Chicago headquarters.

Russell instructed managers taking calls to encourage dislocated employees to go the nearest McDonald’s and post a sign with its 800 number. About 1,500 workers, or 19 percent, are still unaccounted for. The company assumes most have relocated to other states.

Administrative hurdles
Once employees did call in to work, often their first concern was getting paid. Because of power outages, many banks and ATMs were out of service for days. At Sodexho and McDonald’s, where many workers do not have direct deposit and often live from paycheck to paycheck, this was an urgent priority.

“Usually when something like this happens, you can just send money to the neighboring town,” Gerard says. “But in this situation, there was no place close by that wasn’t flooded.”

Gerard had three human resources directors searching the phone books for banks that could dispense the cash it needed. “We were talking about tens of thousands of dollars,” Gerard says. The issue was that most banks didn’t have power or phone service, and even if Sodexho could get someone there on the phone, the bank would have to be willing to cash its payroll checks without being able to electronically verify that the funds were there.

After 48 hours, Sodexho identified a few banks in Meridian, Mississippi, that were willing to supply the cash. Gerard and his staff also wired money to human resources managers in areas close by, like Baton Rouge, Louisiana. Many managers personally delivered the money to employees at various locations where they were staying.

McDonald’s Russell made use of a pay card arrangement through Bank One that had begun as a pilot plan a couple of years ago. The program was designed to transfer employees’ paychecks electronically to cards that the employees could use like debit cards.

“We never thought of it as something to do for an emergency situation, but it proved to be a great solution,” Russell says. McDonald’s distributed 2,000 pay cards to employees.

On top of getting paid, employees were also worried about being able to go to doctors out of state and getting refills of their medicines. Making sure that workers continued to have health care was easier than getting their paychecks to them because many health care providers lifted time restrictions on refills and allowed policyholders to go out of network without paying a penalty.

Sodexho is promising employees health care and jobs for now, but on September 16 it stopped paying employees who had not returned to work. The firm looked at what other companies were doing in terms of employee pay and then discussed what it could afford to do, given that so many of its clients’ operations were down, Gerard says.

Sodexho also is giving employees up to $2,500 in grants through a fund the company set up. McDonald’s agreed to pay employees for the two weeks following the hurricane, and has provided more than $500,000 in loans to needy employees. The amount of the loan depends on the employee’s status with the company, Russell says, declining to elaborate.

Entergy, on the other hand, is paying workers until it finds them jobs within the firm. “This was a decision we made early because we need these people to come back to work,” Bakewell says.

Race for housing
Before Bakewell and Raeder could begin focusing on finding housing for their displaced employees, they had to figure out what to do for the 10,000 Entergy employees pouring into the disaster area to restore power. By September 7, the company had set up tent cities in seven locations throughout Louisiana and Mississippi equipped with cots, food, water and medical supplies for all of its workers.

The tent city concept had always been part of the company’s disaster recovery plan, but this was the first time it had been put into action.

Sodexho’s Gerard had a similar issue. During and after the storm, three of its Louisiana hospital clients–North Shore Regional Hospital, West Jefferson Medical Center and Slidell Memorial Hospital–remained open. But many of the employees working at the facilities had either lost their homes or driven to work from places located hours away. They needed a place to stay.

Gerard paid $52,000 for seven 27- to 39-foot camper trailers that each sleep six to 10 people and have kitchen facilities. Other employees are sleeping in empty hospital rooms.

McDonald’s leased 24 two-bedroom condominiums and reserved 24 rooms in a hotel in Biloxi, Mississippi; 30 hotel rooms in Gonzalez, Louisiana; and 10 trailers in campgrounds outside of Biloxi where employees are living until they can find other housing. The company also has created a Web page featuring available jobs and rooms in the homes of McDonald’s employees.

“We have a number of employees that are offering their home to displaced workers, and we are facilitating matching them up,” Russell says.

Similarly, Sodexho is allowing employees to open their homes to displaced workers, but the company is hesitant to make it part of corporate policy. “This is unchartered territory,” Gerard says. “We wouldn’t want someone to offer their home and have something bad happen and then we have corporate liability.”

Before Gerard could start reviewing the 200 pages of notes he had on how Sodexho responded to Katrina, reports of Hurricane Rita dominated the news. This time the company was proactive. It had established an 800 number, had disseminated it to employees and was collecting contact information for storage in a single database.

Since company officials didn’t comprehend Katrina’s magnitude initially, there was a delay in getting emergency contact information to employees. But the company was able to get fact sheets out to district managers three days before Rita hit.

McDonald’s is discussing a system that could get its own hurricane damage status reports to company officials. In Katrina’s wake, it took several days for the company to get a sense of the extent of the damage to its restaurants and employees’ homes. Next time, Russell wants to have procedures in place to get such information, rather than rely on government agencies.

The rebuilding process for McDonald’s has begun, but it still has 70 restaurants closed and does not know when they will reopen. In the meantime, the company is allowing evacuees to work in any restaurant they choose, and will continue that policy until all stores are back up and running.

For Sodexho, an ongoing challenge now is relieving hospital staff. “We have employees working in severely understaffed conditions in 10-day cycles,” Gerard says. The company has leased cars so managers can carpool from nearby areas like Baton Rouge and Lafayette to relieve them.

In recent weeks, Entergy has identified internal jobs that can be filled by displaced employees and is focusing now on getting housing for them. So far the company has relocated 1,500 employees. With hundreds of thousands of customers still without power from Katrina and Rita, and no timetable for when the New Orleans office will reopen, its employees are taking it day by day.

Raeder, who is temporarily living in a furnished apartment near the company’s Clinton, Mississippi, office, recently learned that her New Orleans home is still standing. But she and many of her colleagues don’t know when they will return home.

“None of us knows the answer to that question,” says Bakewell, who is also living in temporary housing. “We’re here indefinitely, with a job that has to be done. We aren’t even at the point of asking the question about returning home.”

Workforce Management, October 10, 2005, p. 23-32 — Subscribe Now!

Having grown up in Oxford, Arkansas (pop. 192), Kathy White has firsthand experience with the strong work ethic in rural America.

    As chief information officer of Cardinal Health, a $65 billion health care provider in Dublin, Ohio, she decided to take advantage of that pool of untapped talent by setting up a summer internship program so that students at Arkansas State University, White’s alma mater, could work remotely from school.

    “It served a double purpose,” White says. “It provided these students, who were not near any large companies, with a great opportunity, while providing Cardinal Health with hard workers,” she says.

    Thus the concept for White’s next venture was born. Last summer, she launched Rural Sourcing, an information technology outsourcing company. With five locations across Arkansas and North Carolina and 35 employees, the company has more than a dozen clients, including Cardinal Health and toymaker Mattel.

    At a time when major companies are sending thousands of jobs offshore, White believes that there is growing demand for alternatives to offshoring.

    “If a company is just looking for low costs, there are many alternatives offshore,” she says. “But if you take into consideration the total cost of working with different languages, cultures and time zones, this is another option.” Rural Sourcing’s rates range from $38 to $48 per hour, compared with $18 to $30 per hour for companies in India.

    After hearing rumblings from clients that were looking for alternatives to offshoring, Ciber, a Greenwood Village, Colorado-based systems integration provider, launched a new division, called CiberSites, to offer low-cost IT work in the United States. With centers in Tampa, Florida, and Oklahoma City, CiberSites has been in operation since January. It has 60 employees and 11 clients, two of which are Fortune 500 companies. CiberSites charges about $40 per hour.

    While Rural Sourcing’s strategy focuses more on outsourcing to rural America and CiberSites’ locations are in larger cities, both companies focus on providing low-cost alternatives to offshoring.

    Many companies do not want to offshore portions of their businesses because of data security or intellectual property concerns, CiberSites president Tim Boehm says. Two clients joined CiberSites after sending some work offshore and finding that the cost savings were not worth the hassle, he says.

    Large employers in expensive cities like New York and San Francisco have been moving call centers to rural America for years, but now many are considering moving more work there, analysts say.

    “Particularly a lot of companies that are over-invested in India are trying to diversify because they don’t want to be too dependent on one region,” says Stephanie Moore, vice president at Forrester Research.

    More large companies are considering a range of options because offshoring is such a complex process, says Frances Karamouzis, research director at Gartner. Outsourcing labor to towns in rural parts of the country is particularly attractive given that many state governments are giving tax breaks to employers who move jobs there, she says.

    Also, a number of employers are finding that the cultural complexities of working with outsourcers abroad outweigh the cost benefits, she says. “For example, in Asia when you ask someone if they can get something done in a certain timeframe, they say yes, even if the answer is no,” she says. “These contextual differences in communications can cause all sorts of problems.”

    Onshoring is particularly attractive to companies that have brands tied to the U.S., says Peter Balnaves, senior manager in the Los Angeles office of Boston Consulting Group. “These companies are willing to forgo the cost savings because they fear the political exposure associated with offshoring,” he says.

Workforce Management, September 2005, p. 16 —Subscribe Now!

T wo years ago Sprint found itself at a loss about what to do to stem rising health care costs. After aggressively trying to control the expenses through cost-sharing and changes in its benefits, the company, which has 59,000 employees, had thought it was ahead of the curve: In the previous two years, Sprint had managed to avoid $90 million in health care increases. But before there was time to celebrate, Sprint’s benefits team discovered that the company was still facing a $45 million to $50 million annual increase in health care costs if it didn’t do more.

    “If we did nothing, it would have meant that our salespeople were going to have to come up with $500 million more in revenue,” benefits manager Collier Case says. “That was significantly higher than the 12 percent growth rate for our industry.” Case knew that the only way to address the rising costs was to go to the root of the problem and get employees to adopt healthier lifestyles. It would mean taking more drastic action than just having fitness centers on company grounds, which Sprint already did. Case realized that only people who already were health-conscious would go to the gym. The trick would be to encourage other groups of employees to be healthier.

    Case and his team went to work on a wellness program, devising one in which employees would take health risk assessments, either online or on paper, and would receive follow-up calls discussing any conditions or potential risks found. To increase participation, Sprint gave every employee $45 to take the assessment. Additionally, the company raffled off 25 $500 American Express gift cards to employees and dependents who took the assessment.

    Sprint is one of a growing number of companies that are realizing that simply offering wellness programs is not enough to change employee behavior. As more CFOs and CEOs put pressure on benefits managers to reduce health care expenses, wellness programs are evolving from a nice employee perk to a tool that employers use to pare costs, says Jack London, executive director of patient advocacy at Apex Management Group, a health care consulting firm based in Las Vegas and Princeton, New Jersey.

    The problem with merely offering wellness programs is that the employees who typically participate are those who are already healthy, says Bruce Kelley, a senior consultant at Watson Wyatt Worldwide. Employees who are obese or who smoke often do not want to get a health risk assessment only to be told that they have to change their lifestyles. But these are the very employees that companies most want to reach. They are key to reducing the company’s health care costs. And that’s where the incentives come in, Kelley says.

    By offering incentives, employers hope that more of the smokers, the overweight and the chronically ill employees will participate in their wellness programs. “These programs have completely changed in nature,” Kelley says. “They now are more focused on targeting the higher-risk population and bringing effective solutions to those groups.”

    Delta last year began raffling off gift certificates and full-year paid health premiums to employees who signed up for an online health risk assessment. The effort came after the Atlanta-based airline realized that a small number of employees were driving the majority of the company’s health care costs, says Lynn Zonakis, director of health strategy and resources at Delta.

    “We saw that one-tenth of a percent of participants were responsible for 10 percent of our health care costs and that 1.4 percent was responsible for nearly 33 percent of our cost,” she says. By offering incentives for its wellness program, Delta hopes to get that small group of high-risk employees into its program as the first step in living healthier lives.

Creating incentives
    While Sprint saw 40 percent of employees sign up for a health assessment, it wants to do more to reward long-term behavioral changes, Case says. Sprint is considering offering incentives to employees who take action to address unhealthy behavior. For example, the company might give cash to employees who participate in an exercise program. Sprint hopes to save $2 in health care costs for every $1 spent on wellness by 2007.

    Zonakis agrees that providing cash to employees for taking health risk assessments won’t change behavior in the long term.

    “Just paying $100 for a health risk assessment doesn’t take it to the next step,” she says. The airline last year had its first raffle, awarding 50 $50 gift certificates and four full-year paid health premiums. In response, 6,384 of its 52,000 employees participated.

    Rather than just entering everyone who had a health risk assessment, only those participants who agreed to an analysis of the results and follow-up could participate in the raffle. Any participant whose results indicated that there was even a moderate risk of a health problem would be contacted by a nurse to discuss how they could improve their health, Zonakis says.

“The nice thing about cash incentives versus a discount is that when you do an exercise program and get cash, there is an immediate reward. That is behaviorally more motivating.” –Craig Weber, director of well-being services and clinical care initiatives at IBM

    The program cost $18,509, well below what it would have cost if the company gave $100 to each person who took a health risk assessment, she says. “By only offering incentives to those participants that allow their results to be analyzed, we feel the program is more meaningful,” she says.

    Delta’s health care costs are currently $5,208 per employee annually. The airline’s goal is to keep its cost increases below 5 percent per year. If Delta can keep health care costs flat this year, as it did last year, it might begin offering reductions in premiums to employees who sign up for the assessment, Zonakis says. She says that the company’s wellness program has helped keep health care costs down, but it’s too early to say by how much.

    Craig Weber, director of well-being services and clinical care initiatives in the Americas for IBM, says his company has decided against offering premium discounts because cash can often be a more effective motivator. IBM, which has had wellness incentives since 2003, started out offering prizes such as pedometers, books and towels to participants in its various fitness challenges.

    But last year, the company decided to change its strategy and began offering a $150 cash rebate to employees who participated in one of the company’s physical activity programs. Participation rates jumped from about 10,000 employees to 100,000, Weber says. “The nice thing about cash incentives versus a discount is that when you do an exercise program and get cash, there is an immediate reward,” he says. “That is behaviorally more motivating.”

    Dell, which launched its wellness program in the fall, tied a cash incentive to plan participants’ medical expenses. Any employee or dependent who takes a health risk assessment can earn $50, which goes into a health reimbursement account. These accounts are set up by employers to reimburse employees for qualified medical expenses.

    Employees are invited into a follow-up program to address any risks or potential risks identified in the assessment. Employees who participate in those programs can earn up to $200 a year for their health reimbursement accounts.

    “We chose to offer incentives through the health reimbursement account instead of just giving them cash because we wanted to tie in the cost of healthy behavior to employees,” says Tre McCallister, manager of health and welfare programs at Dell. “Also, it was much easier from an administrative point of view.”

The stick approach
    Most managers would rather reward good behavior than punish bad behavior, but with health care costs so high, some companies have taken a harsher stance. Most notable is Weyco, an Okemos, Michigan-based health plan administrator with 200 employees. It made headlines last year when it announced that it would fire workers who were smokers. CEO Howard Weyers defends the company’s stance on smoking, noting that Weyco started out offering incentives but did not get the results it wanted. Also, Weyco gave employees months of notice before it began implementing the program, Weyers says.

    Eight years ago, long before wellness programs were fashionable, Weyco began offering a plan in which employees could earn cash for taking steps toward good health. An employee who took a health risk assessment would get $45 per month toward a health club membership. The program, which is still in effect, offers $105 per month for various healthy behaviors, including not smoking.

    But in 2003, Weyers decided that the company needed to do more to stop unhealthy behavior, particularly smoking. When he learned that there was no Michigan statute preventing an employer from banning employees’ use of tobacco, he implemented a new program: Prospective employees would have to be tested for smoking before they were hired.

    A few months later, the company banned the use of tobacco on company property. Finally, starting this year, Weyco implemented a policy requiring all employees to be tested for smoking. If they tested positive, they would lose their jobs. Four people refused to take the test and left the company.

    Weyers says that if he is going to pay for his employees’ health care, he should have the right not to hire smokers. Weyco pays $330 per participant in monthly health care costs, up from $300 a few years ago. “The fact is the incentives weren’t working,” he says. “Anybody who emphasizes health in the workplace is going to get push-back, I don’t care who it is. Some people say I used a baseball bat, but I say I used a fly swatter.”

    For now, most companies are going to continue with positive incentives, if only because it is administratively difficult for companies to ensure compliance with programs such as Weyco’s, says Delta’s Zonakis. The Weyco approach also runs counter to Delta’s culture, she says.

    Sprint has adopted a kind of negative reinforcement: It charges smokers higher health premiums than nonsmokers. On the other hand, any participant who is a nonsmoker or signs up for Sprint’s smoking-cessation program gets a 6 percent discount in health plan premiums.

    Now the company is looking at extending that program to reward other healthy behaviors. For example, Sprint could provide discounts to employees who participate in exercise programs. “We want to move beyond singling out smokers,” Case says.

Workforce Management, September 2005, pp. 66-69 —Subscribe Now!

David Ayre approaches employee communications like a marketer approaches an advertising campaign. As senior vice president of compensation and benefits at Pepsico, he focuses on getting his audience engaged, keeping the message simple and making sure employees understand what it means to them specifically.

    “Employees and executives are consumers,” he says. “It is essential to communicate to them as you would to your consumers.”

    So last year when Pepsi changed its compensation program, affecting 80,000 employees, Ayre didn’t get bogged down in the minutiae. Often, he says, companies get too focused on explaining the changes they are making to investors and regulators. “They are so focused on what their investors think that they forget the people that they are really changing the compensation for, which is the employees,” he says.

    Rules from the Financial Accounting Standards Board requiring companies to expense the cost of stock option grants are causing an increasing number of firms to switch from granting stock options to restricted stock and performance-based stock units. Given the complexities of such programs, many companies are at a loss about how to effectively communicate the changes, says Peter Chingos, senior executive compensation consultant at Mercer Human Resource Consulting.

    “When you ask them about how they rate themselves on changing their compensation programs, companies give themselves the lowest marks in communications,” he says. Making sure employees understand the business rationale behind the new program is essential particularly because companies pour millions of dollars into their compensation programs and if employees don’t understand the value of them, it’s all for nothing, Chingos says.

The Pepsi challenge
    In 2002, Pepsi, like many companies, realized it eventually would be required to expense stock options and got to work on developing a new compensation program. By the end of 2003, after conducting employee focus groups and online surveys, the company came up with a plan for adopting stock option expensing. The firm changed its U.S. broad-based option program and reallocated half of it into a 401(k) match in company stock.

    For its 3,000 managers, Pepsi replaced part of its stock option program with a cash incentive program in which executives could receive cash over a three-year period based on annual performance. On top of that, managers were also given a choice of receiving a mix of stock options and restricted stock units. The amount of restricted stock they could get depended on their performance.

    Because the new plan affected different employees differently, Ayre knew it was essential that each employee understood what the changes would mean for them and their staffs. “As much as employees told us that they wanted performance differentiation, they also wanted to understand that it was being applied equitably,” Ayre says.

“The first question you get when you talk about compensation is ‘How will it affect me?’” –Bob Toohey, vp of total rewards at Verizon

    The new program, which took effect in 2004, was announced December 2, 2003, leaving Ayre and his team 60 days to get employees up to speed on the changes. “We decided that the right decision was to move fast rather than take a year to communicate,” he says.

Talking points
    Making sure that employees understand that nothing is being taken away from them is crucial, Ayre says. This is particularly challenging for companies that switch from granting stock options to restricted stock because employees receive a smaller number of units.

    “It was difficult for people to grasp that with restricted stock they were getting the full market value of the shares-as opposed to options, when you are not,” says Jill Pfefferbaum, director of compensation at Priceline.com, which switched last year from granting stock options to giving restricted stock. Priceline developed a question-and-answer document with the help of an attorney to address this and other questions.

    Being as upfront as possible is also essential, compensation executives agree. For Wendy’s International, this meant communicating to employees that there would be upcoming changes to the company’s compensation program even before company leaders knew what exactly those changes would entail, says Lisa Turner, director of compensation. By February 2004, the company had decided it was going to replace its stock option program with something cash-based. The plan was set to debut in 2005, but the details wouldn’t be worked out until fall 2004.

    Rather than wait until the details were finalized and approved, however, the company decided to tell employees as early as possible that a change was coming, Turner says. “I think it was a matter of being transparent and letting them know things as we knew them,” she says. Throughout 2004, the company sent out communications telling employees that it was the last year they would receive stock option grants and that their current options would remain intact.

    In fall of that year, the company unveiled its new plan to its 120 top officers and held a webcast for the company’s 75 human resources managers about the changes in the program. In December, employees received a letter from Wendy’s CEO Jack Schuessler explaining the changes.

    Under the new program, all of the company’s 200 directors were added into the management stock incentive plan, which had switched from stock options to restricted stock in 2004. Also, the company increased the bonus targets for all managers who had participated in the stock incentive program. Finally, Wendy’s created a broad-based cash incentive plan for full-time employees who were not managers to replace the stock option program.

    American Express, which changed its compensation program in 2003 and again this year to be more performance-based, found that it was effective to communicate to senior management first and have them talk to their staffs about changes, says Maggie Gagliardi, senior vice president of global compensation and benefits. “The more people you can get behind the issue helps and makes it more of a partnership and engagement model,” she says.

    By holding meetings with senior management and senior human resources staff about the changes and then having them communicate that to employees, Gagliardi says the company had more people who understood the issues and could anticipate the questions. “We could have just done a webcast, but it would not have been as effective,” she says.

Tapping technology
    Pepsi, on the other hand, decided to use technology to get its message across because it believes it’s more effective to go straight to the employee, Ayre says. The company sent out an e-mail from CEO Steven Reinemund explaining the strategy behind the changes, along with a brochure that got into the details. Employees were prompted to go to the company’s password-protected Web site, where they could see their current holdings, and choose how they wanted to set their grant mix between restricted stock and stock options. By the deadline for the changes on February 22, 2004, 80 percent of employees had made their choice, and the rest were defaulted into a 50/50 mix of restricted stock and stock options.

    Ayre followed up with some hand-holding. He spent the next several months visiting about 900 executives in 13 different locations around the world explaining the changes and fielding questions. Being able to talk to Ayre, who had played such a crucial role in developing the new compensation program, helped a lot of the executives to really understand the program, he says.

    Even that outreach, he says, wasn’t enough. “I realized that even though I was meeting all of these people, I wasn’t getting to everyone. And so we decided we needed to create a way for the people who knew the program best to communicate to employees.”

    Pepsi created a Web site that featured a video of each head of business, who discussed how that division performed over the previous year. That was followed with a video of Ayre discussing the changes in compensation program and showing how it would play out over a 10-year timetable. Ninety-six percent of Pepsi’s employees who qualified for the program watched the 16-minute presentation. “It was the most effective way of communicating the program,” Ayre says. “It showed how the employees at various levels would fare under the new program over 10 years. That created a huge level of transparency and motivation.”

    Bob Toohey, vice president of total rewards at Verizon, agrees that personalizing broadcasts can be very effective. When Verizon changed its compensation program from stock options to restricted stock and performance-based stock options last year, Toohey did a live webcast with head of human resources Marc Reed to walk executives through the changes. During the broadcast, the company e-mailed personal statements to each of the 2,800 executives who would fall under the new plan spelling out how it would affect them. “The first question you get when you talk about compensation is ‘How will it affect me?’ ” he says. “After the broadcast, they checked their e-mail and had all of their information in front of them.”

Lessons learned
    Wendy’s Turner says her advice to companies making changes to their compensation is to view the communications effort as a long-term process. “We plan to do communications quarterly to let employees know how their business units are performing compared to their goals,” she says. “It helps set expectations on a good or bad year.”

    Following up with communications is particularly important when you switch to restricted stock so that employees understand their choices when the stock vests. “A year from now, they are going to all forget what they hear,” Pfefferbaum says.

    Ayre advises companies that are going through these changes to spend as much time figuring out their communications strategies as they do on the design of the program. “Communication doesn’t have to be expensive, but it does require thought and energy,” he says.

Workforce Management, September 2005, pp. 71-73 —Subscribe Now!

As the 25th anniversary of the 401(k) approaches in January, plan creator Ted Benna has a lot of concerns.

    Benna, now COO of Malvern Benefits Corp., a 401(k) plan administrator, designed the first such plan for the Johnson Cos. in 1981 to give employees the ability to save money on their own. But as 77 million baby boomers begin to retire, he worries that many of them will not have enough income during their retirement.

    “Making sure the retirees can manage their money into an income stream is going to be a forever issue,” he says.

    Ninety-five percent of employees take lump-sum distributions from their 401(k) accounts when they retire. Instead, employers should educate workers about the benefits of sweeping their savings into an annuity and taking out money over a course of several years to make sure it lasts, says Dallas Salisbury, president of the Employee Benefit Research Institute.

    Unfortunately, most companies are so focused on bottom lines, they aren’t thinking of the long-term effects of retirees running out of money, he says. “Companies have to move away from worrying about what the Wall Street analysts think about them this quarter to doing things to protect their market 10 to 20 years from now,” he says.

“If you give participants a choice, they will take lump sums every time.” –Michael Weddell, retirement consultant at Watson Wyatt Worldwide

    IBM addressed this issue by introducing an online service developed by Hueler Cos., based in Eden Prairie, Minnesota. The service allows employees to plug in their information and receive price quotes for fixed annuities. Benna predicts that more companies will follow IBM’s lead. “When big companies do something, others tend to follow,” he says.

    Motorola and BHP Billiton, an Australian mining resources company, are starting to discuss adding annuity options to their menus. Motorola’s concern about offering an annuity is that employees will think that the company is recommending that they use it and thus could be held liable if an employee loses money in the long run, says Randy Boldt, director of global rewards.

    BHP is addressing the retirement income issues through quarterly educational sessions, says Dan Helman, team leader, retirement services. The sessions include an explanation of what annuities are, but not recommendations of specific products.

    The debate on Social Security reform and the changing demographics of the workforce are bringing this issue onto the radar of employers, but it’s still not a pressing issue for employees. “If you give participants a choice, they will take lump sums every time,” says Michael Weddell, a retirement consultant at Watson Wyatt Worldwide.

    Providers will have to overcome the stigma that comes with the notion of annuities as being high-cost, bad investments, Hueler Cos. president Kelli Hueler says. ” ‘Annuities’ is a very confusing and scary word.”

Workforce Management, August 2005, p. 53 —Subscribe Now!

Dan Helman, team leader of retirement services of BHP Billiton’s North American operations, knew that the change he was making to the company’s 401(k) plan would be perceived by some as risky, but he felt certain that it was the right thing to do.

    Starting last fall, the mining resources company began automatically enrolling its 1,800 salaried employees into a managed account program. Under the plan, workers paid Financial Engines, a San Mateo, California, financial advice provider, to invest and oversee their 401(k)s for them. The fees for the advice were automatically deducted from the employees’ 401(k) accounts unless they opted out of the feature.

    “Many companies are nervous about doing this because the Labor Department hasn’t given its blessing that automatically enrolling employees into a managed account program is all right,” says Alicia Munnell, director of the Center for Retirement Research at Boston College. “If something goes wrong, they don’t have that sanctioned official blessing that they aren’t responsible.”

    A growing number of employers with 401(k) plans, such as J.C. Penney and Motorola, have begun offering managed account programs to accommodate employees’ desire to have someone else choose and manage their investments for them. However, only a handful have done what BHP did by making managed accounts the default investment for automatic enrollment.

GOING AUTOMATIC More than half of employees surveyed by the Employee Benefit Research Institute and Mathew Greenwald & Associates and they would be somewhat or very likely to stay in a 401(k) plan if automatically enrolled.

Source: Employee Benefit Research Institute and Mathew Greenwalds & Associates’ 2005 Retirement Confidence Survey

    The main concern that employers have is that these programs come with added costs. On average, managed account programs cost 0.15 percent to 0.3 percent. Those expenses, which are paid by the employee, are added to the expenses an employee already pays with a 401(k) account. So if an employee pays 1 percent in 401(k) account expenses, that employee could pay up to 1.3 percent for the managed account.

    Motorola, which began offering managed accounts last year through Financial Engines, has decided for now against automatically enrolling employees into its managed account program because of the added costs. “If we did it, we would enroll them into a managed account and make the first 90 days free,” says Randy Boldt, director of global rewards at Motorola. “The employee would get three notices to make sure they were aware of it.”

    Laurel Cochennet, a retirement consultant at Mercer Human Resource Consulting, says that more companies will follow in BHP’s footsteps once the fees for managed accounts go down. “As it becomes a more established service and usage goes up, I am hopeful that the providers will be able to reduce the fees,” she says

    But Helman is convinced that the extra expenses are worth it because employees are getting professional money management expertise. He says that offering managed accounts is a way of providing 401(k) plan participants with the same kind of professional financial management that they may get through a defined-benefit plan, but in a much more transparent way.

    To make sure that its employees understood the process, BHP held face-to-face meetings and put out communications about the program and its fees, which total about 0.1 percent to 0.5 percent, depending on the amount of money in the employee’s account. The bigger the account, the lower the fees, he says.

    Helman says that using managed accounts as the default option actually makes the investment process clearer than the default option most companies are using: the lifecycle fund. Such funds rebalance the assets into more conservative investment choices as the employee approaches retirement.

    “With lifecycle funds, people don’t understand or get to see the process in the way they do with managed accounts,” Helman says.

    Also, many employees don’t invest in lifecycle funds properly, Boldt says. They only serve their intended purpose if employees invest their entire 401(k)s into them. A recent Hewitt Associates study, however, showed that only 13.2 percent of employees invest in a single lifecycle fund.

    Still, not everyone agrees that managed accounts are the solution. “The problem with managed accounts is that the fees tend to only be worth it if you are getting a lot of feedback from the employees,” says Michael Weddell, a retirement consultant at Watson Wyatt Worldwide. He says that companies need to get such information as the employees’ age and planned retirement date to really make managed accounts achieve their best result. “If you don’t get that, you are going to have a hard time explaining why these are better than the less expensive lifestyle funds,” Weddell says.

Workforce Management, August 2005, p. 52 —Subscribe Now!

S ome companies are beginning to doubt the value of stock options as a compensation tool, and it’s easy to see why. There has been a spate of lawsuits involving company stock, brought by employees who believed they were misled about how well the stock was performing. Meanwhile, new accounting rules will require firms to expense stock options on their income statements beginning in their next fiscal year.

    But if a new program by JPMorgan catches on, options could regain some of their cachet.

    Giving company stock options to employees was a prevalent compensation and retention strategy in the ’90s, particularly at technology companies. But after three years of bear markets, more than 50 percent of employees found themselves with options that were “underwater”—their value was less than the exercise price.

    Microsoft was one company to experience this. “Human resources executives were getting calls from employees saying, ‘My options may vest, but they are going to be worthless,’ ” says Robert Barbetti, managing director at JPMorgan Private Bank.

    The technology company decided to stop offering stock options in favor of giving restricted stock, which are grants of shares that vest at the end of a given period if an employee remains on staff. This allowed employees to earn actual shares of Microsoft stock over time, rather than just the option to purchase stock at a set price. But that didn’t help the employees who still had options that were underwater.

    That’s where JPMorgan came in. The investment bank offered to buy the employees’ underwater stock options through a transferable stock option program so that it could use the options as another trading tool in its hedging strategy. With the deal, JPMorgan could trade each option it bought with a separate trade in the stock market that both hedges the bet and gives the bank a margin of profit. “We don’t necessarily care if stock goes up or down, just that it does go up or down,” says David Seaman, a managing director at JPMorgan.

    The move would allow employees to sell a third of their shares upfront and then the rest after two years. The price the employee would get would depend on the maturity of the options. “This was part of a retention strategy,” Seaman says.

Protecting shareholders
    To avoid hurting shareholders of Microsoft by potentially diluting the value of the stock, the company truncated the maturity of the options sold to employees. While this meant that Microsoft employees sold the options for below the potential full market value, the shorter maturity period also reduced the potential for dilution of company stock.

    “Microsoft wanted to design this in a way that it split up the benefit between the employees and the shareholders,” Seaman says. Employees were still able to get cash for options that could be worthless, depending on how the stock performs in the future, he says.

    For example, if an employee was granted options at $33 a share with an expiration of five years and the stock was now at $26 a share, the employee could sell the options to JPMorgan for $4.59 a share. “The majority of employees feel that options are not worth the theoretical value in the first place,” Seaman says.

    Fifty-one percent of the 36,539 eligible employees participated in the program. “Employees said, ‘I would rather get cash even if it’s truncated in value,’ ” Seaman says. JPMorgan is pitching its transferable stock option program as an initiative that companies could implement on an ongoing basis. “This is good for companies that want to stay with options,” Seaman says.

    Microsoft is not the only company to have conducted a one-time transferable stock option program. Comcast made a similar move in September 2004. When the company acquired AT&T Broadband in 2002, former holders of AT&T employee stock options had their options converted into Comcast options. Sixty-three thousand of these options owners were not employees of Comcast, and so the company wanted to give them the ability to cash out and sell their options to JPMorgan.

    The program was designed to help reduce the administrative burden associated with managing the options, Seaman says. “The company was spending millions to maintain these accounts,” he says.

    Unlike Microsoft, Comcast allowed those options owners to cash out immediately and did not truncate the value of the options. Twenty-six percent of owners accepted the offer.

An ongoing incentive?
    Although Comcast and Microsoft chose to do one-time transferable stock option programs, JPMorgan believes that companies could offer these programs on a quarterly basis and use them as an ongoing retention tool, similar to a profit-sharing program.

    “This could provide an ongoing form of compensation,” Seaman says. All growing companies go through periods when their stock is underwater, and a transferable stock option program could enable these firms to continue to compensate employees during those times, he says.

    Observers are skeptical whether such a program would make sense for most companies. “Most compensation plans don’t allow for this kind of move, which means you have to create a business plan behind it,” says Rick Beal, division practice leader for compensation at Watson Wyatt Worldwide. Beal says he is skeptical about whether most boards of directors and compensation committees would see the business value of such a program versus offering restricted stock. Also, companies would have to watch out for what kind of message that enacting such a program would send to the public. They are essentially saying that they do not believe their stock will continue to go up, says Paula Todd, managing principal at Towers Perrin.

    But Seaman says that there is no difference between employees selling their shares for cash and exercising their options, which they usually do as soon as they are vested. While a one-time program like Microsoft’s might only make sense for companies whose stock is underwater, offering transferable stock options on an ongoing basis would make sense for a wide array of companies.

    “Growth companies know that half the time their options are underwater,” he says. So if companies have to expense the theoretical value of the options over time, it makes sense to deliver that value of the option to the employee, Seaman says.

    For companies getting ready to expense their options in the next few months, the program offers definite advantages, says George Paulin, president and CEO of Frederic W. Cook & Co., a compensation consulting firm. One of the big gripes that companies have about expensing stock options is they are listing an expense that they are not necessarily realizing.

    With this program, however, the expense they would list on their income statements wouldn’t be theoretical, he says. “Now those are real expenses, and not just the intrinsic value of them.”

Mixing incentives

The most popular long-term incentive instrument is stock options, with 41 percent of firms surveyed offering stock options only, while 42 percent of firms have chosen to use restricted stock, performance-based long-term incentive packages or a combination of awards. Shifting away from a stock-options-only plan, firms have adopted varied approaches to delivering long-term incentive compensation.

Source: 2005 DC&P Tech 00 Executive Compensation Study, by DolmatConnell  & Partners

Workforce Management, August 2005, pp. 76-77 —Subscribe Now!

Turnover is an issue that all managers have to deal with, but in the retail industry it’s an epidemic. Given that the jobs are often low-paying part-time positions that are usually filled by high school or college students, retention is almost impossible in certain retail businesses.

    This makes training a particularly tough challenge, says Mike Donahue, who knows the issue all too well. Donahue was once a manager of a Nike store. Every few months one employee would leave and another would start, and Donahue would have to start the training process all over again. “The intellectual capital resides only with senior people at the store, but eventually those people leave too,” he says.

    Seven years after his stint as a manager, Donahue, who is in charge of e-learning at Nike, was asked to design an online training program that the company could offer to employees in its own stores as well as at other retailers that sell its products. He knew that he and his team would have to design a program that would convey a lot of information quickly, but also would be easy to digest.

    “We knew that we did a great job of advertising and that we could drive people into the stores, but ultimately the person that is talking to the customer is a 16- to 22-year-old kid,” he says. “We wanted them to have a better dialogue with the consumer.”

    Nike faced a challenge that a number of retailers today are confronting as they adopt e-learning: Many of these companies face more than 100 percent turnover in their stores, and to train their staffs in a classroom setting is just not cost-effective or even possible for retailers that have stores scattered throughout the country, says Claire Schooley, senior industry analyst at Forrester Research.

    E-learning became a buzzword in human resources departments four years ago, but retailers only recently began installing the high-speed Internet connections needed to run such programs. Fifty percent to 60 percent of retailers have broadband or are installing it, according to research firm Gartner Inc.

    For retailers with a turnover problem, creating a training program that the average retail associate absorbs quickly can make a significant difference to the company’s bottom line, says Bruce Carocci, senior vice president of marketing and sales at Via Training, a Portland, Oregon-based e-learning company. “If my average associate stays on for six months but the regular training cycle takes four months, that is an issue,” he says. “But with e-learning, if I can get team up and running in six weeks, that makes them much more productive.”

The Nike experience
    With that mind, Donahue and his team knew they wanted their program to deliver information in short increments to make it easy for associates to take in–and keep them out on the floor.

    “We were throwing out ideas, and someone suggested that we needed to come up with something edgy, something underground,” Donahue says. That’s when the idea for the Sports Knowledge Underground was born.

    It was by pure coincidence that the acronym for the new program, SKU, also stands for the retail term “stock keeping unit,” Donahue says.

    The layout for Sports Knowledge Underground resembles a subway map, with different stations representing different training themes. For example, Apparel Union Station branches off into the apparel technologies line, the running products line and the Nike Pro products line. The Cleated Footwear Station offers paths to football, whereas the Central Station offers such broad lines as customer skills.

    Each segment is three to seven minutes long and gives the associate the basic knowledge they need about various products. As new products are introduced each season, the training is updated and Nike customizes the program for each retailer if requested. Associates are quizzed at the end of the training and asked for feedback, which gets routed back to Donahue and his team. “If we get feedback that something is confusing, we can go back and change it immediately,” Donahue says.

    Nike ran a pilot of the program in its own stores but now has Sports Knowledge Underground running at external retailers too, reaching about 20,000 associates. Donahue expects that number to quadruple in the next few months as the company continues to place the program in more stores.

    Already Nike has seen results. Stores that have implemented Sports Knowledge Underground have seen a 4 percent to 5 percent increase in sales. “The bottom line is if you can move the needle on the sales floor, it’s worth it,” Donahue says.

Setting standards
    For Nike, one of the most appealing aspects of introducing e-learning is that it sets a standard of learning for diverse workforces. The culture of one store may be vastly different from the next, Donahue says. “One of the problems that a lot of organizations face is that training is usually not a centralized activity,” says Peter McStravick, senior research analyst in learning services at IDC.

    That was one of the primary reasons that Cingular Wireless decided to launch a broad-based e-learning program in its stores when it acquired AT&T Wireless last year. “One of the key strategies for the business was to present a unified front for customers to minimize confusion,” says Rob Lauber, executive director of learning services at Cingular.

    Cingular had e-learning in its stores previously, but now it wanted to use the program to make sure that all of its employees, including those brought in from AT&T, followed the same procedures. “If you were a former AT&T customer and you walked into a legacy Cingular store and wanted a particular service, the training would explain how an associate should address it,” Lauber says.

    Cingular, however, had a unique challenge. For regulatory reasons, it could not go into the AT&T stores or talk to AT&T store managers about the e-learning until the merger was completed. That didn’t happen until October 26. The launch date for the “common services experience” was November 14. That gave the company 19 days to get all 19,000 associates up and running.

    Lauber and his team decided on mixing face-to-face training with e-learning. Two hundred trainers were sent out to the stores to communicate the culture and business strategy behind the new company. For more product and customer-scenario training, Cingular worked with IBM to develop the e-learning program. “It makes sense to use face-to-face contact to explain culture and leadership and things that set the tone for the employee and the environment,” says Susan Varnadoe, learning and development partner at IBM Business Consulting Services.

    To gauge the success of the training, managers quizzed their associates on the programs and the company is conducting pulse surveys of employees to make sure they feel they have the tools they need. Ultimately, Lauber says, the company looks at its business outcome to determine the success of the program. In the first quarter, Cingular saw a net increase in subscribers of nearly 1.4 million.

The future is mobile
    As technology develops, many major companies, such as Wal-Mart, are discussing how store employees could use mobile technology for training. Specifically, there are prototypes for using product scanners as educational devices, allowing an employee to scan a product and call up information about it.

    “Today a lot of learning makes associates go back to learning terminals, and that reduces the time they have on the floors,” says Susan Oliver, senior VP of human resources at Wal-Mart. “We are looking for avenues that would allow us to use the scanner as a form of learning so that you are putting learning in bite-sized segments.”

    Although retailers are eager to bring hand-held learning devices to their sales floors, just when that might become a reality remains to be seen.

    “In a year this will be all over the place,” Varnadoe predicts.

    But Ranjani Iyengar, director of learning and performance management systems at Hewitt Associates, thinks that timeline is ambitious. “There are still issues with content integration and the mainframes within retailers,” she says. “I think it’s going to be a long time before mobile technology is there.”

    Whenever stores begin implementing mobile technology, Nike will be prepared. The company developed its Sports Knowledge Underground program so that it could easily translate to hand-held devices, Donahue says. “When the retailers are ready, we will be ready,” he says.

Workforce Management, August 2005, pp. 74-75 —Subscribe Now!