Author: Jessica Marquez

Suzanne Perry has heard the horror stories about private equity buyouts. She has read the headlines about these firms swooping in and slashing workforces and listened as fellow HR executives talked of micromanaging investors running the company with an iron fist.

    But in 2001, private equity deals were few and far between. So when Perry took the job that year as head of HR at CBS Personnel Holdings, a Cincinnati-based staffing company, just months after it was acquired by Westport, Connecticut-based private equity firm Compass Diversified Trust, she didn’t know what was ahead.

“I had never been in a situation where private equity had bought a company,” says Perry, who has been in HR for 21 years. “I didn’t really grasp the full context of what was going on.”

    Perry’s ignorance turned out to be a blessing for her career. During the past seven years, she has worked closely with the CEO and private equity investors to revamp HR reporting, compensation practices and talent management to make sure the company’s 850 employees emphasize the return on investment while maintaining CBS’ corporate culture.

    Private equity investors don’t generally embrace HR the way Compass has with Perry, observers say. However, with the current market volatility, many such investors are realizing that HR executives can be key in honing the skills of the workforce and helping them to make a profit more quickly.

“The guys driving these deals are numbers guys and they tend to be dismissive of HR, viewing it as softer and not as serious,” says Ron Bloom, a former investment banker who is now the special assistant to the president of the United Steelworkers.

    But that’s changing, particularly as recent high-profile deals—like Cerberus Capital Management’s acquisition of Chrysler Group, which was finalized in August—draw public scrutiny. The recent chaos in the subprime mortgage sector has only increased pressure on buyers to get a quick return on their investment.

“Private equity firms are just now starting to say it’s not enough to manage money and sniff out a good deal,” says Gary Rich, president of Rich Leadership, a Pound Ridge, New York-based executive development consultant. “They are looking at how effectively they are managing their workforces.”

“The typical private equity firm holds an investment for three to five years and then sells it. So at the end of the day, you don’t know what’s going to happen. I told employees the best thing we could do was position the company and themselves as strong players in the market.” —Suzanne Perry, CBS Personnel Holdings

    Even as some private equity firms slow the torrid pace of acquisitions because of the stock market’s recent swings, experts say these deals aren’t going to go away.

“There are a lot of factors, like Sarbanes-Oxley and other regulations, that are driving companies toward private equity,” says Paul Platten, vice president and global practice director of the human capital group at Watson Wyatt Worldwide. “And there is still a lot of money around to be spent.”

    The trend could prove to be a huge opportunity for HR executives who understand financials and focus on business results, experts say. But it’s not for the faint of heart, according to Mark Nadler, a partner at Oliver Wyman, a global development company and a subsidiary of Marsh & McLennan.

“The new owners will turn to HR and ask for them to help figure out where they can trim the fat within the organization,” he says. “HR can help them think through this, but also they can help investors map out a strategy beyond the budget cuts to more organizational design issues.”

    HR managers who view themselves as primarily employee advocates and little else don’t have a place in this new corporate structure, says Jo-Anne Kruse, executive vice president of human resources at Travelport, a Parsippany, New Jersey-based travel services company that was bought by private equity investor Blackstone in August 2006. Over the past year, Travelport has laid off 841 people, or 10 percent of its workforce. The company has hired 1,600 employees during the same period.

“The days of the blind employee advocate are long gone,” Kruse says. “We are here to manage cost and productivity of labor.”

Balancing act
    Striking a balance between being an employee advocate and working with new owners can prove challenging during a private equity buyout, Perry says.

    When she started as head of HR at CBS, Perry entered an organization that was still adjusting to no longer having an owner down the hall who knew most employees by name. Not surprisingly, workers turned to Perry with concerns about their jobs.

    For the first several weeks she was there, Perry didn’t know what to tell them.

“I didn’t have the answers at the time since I was still learning,” she says. “So in those first few one-on-one meetings with managers, I did a lot of listening and taking notes.”

    A couple months into her new job, Perry met with the Compass investors and got a sense of their vision. While there were no plans for layoffs, Perry didn’t want employees to have a false sense of security.

“The typical private equity firm holds an investment for three to five years and then sells it,” she says. “So at the end of the day, you don’t know what’s going to happen. I told employees the best thing we could do was position the company and themselves as strong players in the market.”

    Being honest with employees while trying to alleviate their fears is one of the hardest parts of managing a workforce during a buyout, Kruse says.

“It’s always a balancing act because you want to be upfront about the future without creating a lot of anxiety,” she says.

“The days of the blind employee advocate are long gone. We are here to manage cost and productivity of labor.” —Jo-Anne Kruse, executive vice president of human resources, Travelport

    Management at Travelport knew early on that layoffs, particularly in the technology group, were likely. Kruse decided to address that head-on. “If employees didn’t bring it up to me, I would bring it up to them,” she says.

    By being proactive and focusing on the opportunities the buyout presented for Travelport, Kruse and the other managers tried to stem employee anxiety. “This was the opportunity for us to be our own company,” she says.

    Kruse and her team prepared scripts to help managers answer employee questions. Travelport CEO Jeff Clarke addressed the potential for layoffs in his blog to employees, and executives held town hall meetings at larger corporate sites as well as small-group meetings to field questions about the buyout.

    Regardless of how much effort Kruse and her team put into the communications campaign, it was impossible to reach everyone, she says.

“We are in 145 countries, so it’s not like you can sit down in an auditorium with everyone,” she says.

    After months of planning and executing the communications campaign, Kruse was disappointed to see a July 27 front-page article in The Wall Street Journal quoting six Travelport workers discussing their surprise about being laid off.

“I immediately called the people I knew at the site to find out if that’s how more employees felt,” she says.

    It turned out that two of the six employees were temporary contract workers whose contracts were already up. Most employees felt that the situation was handled fairly, Kruse says.

“That was a huge relief for me personally,” she says. But the media coverage serves as a warning to all HR managers of one more issue they need to prepare for when a buyout occurs, experts say.

    Employee morale issues can draw outside attention, particularly when there is a union involved.

“Private equity firms tend to believe less in high base pay and more in bonuses based on performance.” —Paul Platten, vice president and global practice director, Watson Wyatt Worldwide

    In recent months, unions have increased their public criticism of private equity buyouts and the implications for workers. In May, the Service Employees International Union, which has 1.8 million members, launched a Web site and published a paper called “Behind the Buyouts” that discusses examples of private equity buyouts where workers lost benefits, jobs or both.

    HR executives with labor relations experience can help act as a mediator between labor and invest ors, experts say.

“If HR has a good relationship with the union, that is incredibly valuable to the new owners,” says William J. Morin, chairman and CEO of WJM Associates, a New York organizational consulting firm.

    Yucaipa Cos., Los Angeles billionaire Ron Burkle’s private equity firm, often works with unions to transform the companies it buys, and finds that HR is integral to that process, says Steve Sleigh, a principal at Yucaipa. “We get a call a week from unions asking us to look into their companies,” says Sleigh, who is also the former director of strategic resources at the International Association of Machinists. Yucaipa currently owns stakes in Wild Oats, Pathmark and SuperValu.

    When Yucaipa invests in or acquires a company, it works closely with HR to align everyone’s interests, Sleigh says.

“HR is critical in getting everyone marching in the same direction and focused on the value of job security,” he says.

Creating change
    HR also helps private equity buyers understand where to find the organization’s key talent. This is important both when the investors are doing their due diligence before they agree to buy the company and after the deal closes.

    Kruse gave presentations about the workforce management aspects of Travelport’s business for several potential buyers before Blackstone, she says. These presentations included discussion of the company’s culture, retention challenges and turnover.

    But as the number of buyers narrowed, the discussions focused on specific talent management challenges, she says. “There were more pointed discussions around the status of our talent and where there were retention issues,” she says.

    After a deal closes, investors often will turn to HR to help them understand where they can cut and whom they should retain, says Chris Hagler, national managing director of strategic services at Resources Global Professionals, an international professional services firm.

    Hagler says she didn’t play a key role in determining who needed to be laid off. “That’s really the decision of the line managers,” she says.

    However, she made sure managers followed termination compliance procedures, and in some cases contacted other local employers to inquire about openings for displaced employees.

    At Travelport, Kruse put together financial incentives to retain key employees, which is standard procedure during any transition period, experts say.

“In the past, [compensation] was much more individual-based since the owner knew everyone. Now there is more standardization, and compensation is better tied to people’s job responsibilities and objectives.” —Suzanne Perry, CBS Personnel Holdings

    It’s up to HR executives to inform the new owners which employees and executives need to be kept if the transition is going to succeed, says Law rence Costello, senior vice president of human resources at American Standard Cos., a Piscataway, New Jersey-based manufacturer, which recently announced it is selling its bath and kitchen business to Boston-based private equity firm Bain Capital Partners.

“The new buyers will want continuity, and that means putting good retention plans in place,” Costello says. “As HR, we need to help them understand what this means and how to do it.”

    Private equity investors also turn to HR to help create a new employee compensation program aimed at quickly boosting company profits, observers say. Since these companies are no longer publicly traded, they often do away with stock option programs and find something new, Watson Wyatt’s Platten says.

“Private equity firms tend to believe less in high base pay and more in bonuses based on performance,” he says. Since private equity firms often are looking to sell the company for a profit within three to five years, investors tend to favor incentive plans with short-term measures of generating cash, he says.

    At CBS, Perry helped implement a performance-based compensation program throughout the company. Previously, employee compensation was determined on an individual basis, but Perry’s new system provided a standard across the company for performance-based pay, she says.

“In the past, it was much more individual-based since the owner knew everyone,” she says. “Now there is more standardization, and compensation is better tied to people’s job responsibilities and objectives.”

    Perry says an increased focus on return on investment requires her department to do more reporting. When Perry joined Compass, investors wanted more information about the company’s health insurance plan.

“They wanted details about the vendors we were using, the brokerage fees and the plan designs as well as the details of how much employees were paying in health care at our company versus at other companies within the industry,” she says.

    Perry hired vendors to conduct compensation surveys and did a lot of networking to gather competitive data to provide the answers.

“There is always a constant question of whether we are getting the return on investment on all the processes and software we use,” she says.

    Any HR executive entering a private equity situation should be prepared to speak in terms of return on investment, Kruse says.

“The focus on ROI always comes up,” she says.

    As the markets continue their unpredictability, private equity firms will likely push harder than ever to quickly realize profit from their purchases.

    And that means that more than ever before, HR executives entering these situations might have to take a hard-nosed approach to their jobs, Perry says.

    It can be a challenging stance to take sometimes, but Perry’s attitude has helped CBS reach many of its workforce management goals. Turnover today is slightly below the industry average of 45 percent, down from the low 60s when Perry joined the company, she says.

    Seven years later, Compass has held on to CBS much longer than Perry and others anticipated, and shows no signs of selling it.

    But if things should change and Compass does decide to sell the company, Perry says the workforce is ready.

    “My goal has always been to position ourselves so that we can be valuable to a new owner,” she says. “As the HR manager, you have to be able to separate the personal and the business and look at the big picture.”

Workforce Management, September 24, 2007, p. 1, 16-23 — Subscribe Now!

The list of the 30 top-paid HR executives of 2006 presents a lesson that others in the field would be wise to heed: Don’t promise large severance packages that might make your company stand out from the pack.

    No one seems to have learned that lesson better than Home Depot, which paid its former head of HR, Dennis Donovan, $13 million in severance when he gave notice of his resignation late in the company’s 2006 fiscal year, which ended January 28.

    As part of his 2001 employment agreement, Donovan was eligible to leave the company and receive the severance package if he no longer reported to Robert Nardelli, who resigned as the company’s president and CEO in January.

    As a result, Donovan was the top-paid HR executive based on companies’ 2006 annual filings, making over $19 million in total compensation—more than three times the amount made by the No. 2 HR executive on the list, which was compiled for Workforce Management by Salary.com.

    Until this year, observers wouldn’t have any way of knowing about this large payment from just looking at Home Depot’s annual proxy statement. But under the new Securities and Exchange Commission rules on executive compensation disclosure, companies now have to disclose the perks and severance benefits in a separate column of their compensation tables.

    “In general it’s always risky to have termination provisions that are tied to anything other than the individual status of their jobs,” says Russell Miller, managing director at Executive Compensation Advisors, a subsidiary of Korn/Ferry International.

    The good news is that Donovan’s compensation appears to be an anomaly, says Bill Coleman, managing director of Salary.com. Overall, HR execs seem to have low base pay relative to their total cash compensation and large equity payouts—which signals that they are being paid for performance, he says.

    “This means that HR is being paid like other top management in that they get a big shot of equity,” says Charles Peck, principal researcher and program manager on compensation for the Conference Board. “It confirms their place among the executive rank.”

    Some compensation consultants were surprised to see listed the HR executives at many smaller-sized companies, like Bank of Hawaii, which has 2,695 employees, and Biogen Idec, with 3,900 employees.

    “I would expect that this list would be all Fortune 500 companies,” says Jack Dolmat-Connell, CEO of DolmatConnell & Partners, an executive compensation consulting firm in Waltham, Massachusetts.

    “It seems to mean that some smaller companies are paying a lot of money for HR and really recognize the value of this position,” he says.

    But given that the list is only based on proxy filings, which name the company’s five top-paid executives, it might just make sense that some larger companies are not on the list.

    “In many big global conglomerates, the head of HR is not going to be in the top five, because those companies have multiple presidents who are compensated more,” says Cathy Shepard, a principal at Mercer Human Resource Consulting.

    Experts also noted the number of women on this year’s list of the top-paid HR executives. Last year there were only three women on this list. This year there are seven—a jump that some optimists might say is a sign that women are moving up the corporate ranks. But given the fact that the HR profession is heavily represented by women, having only seven women in the top 30 is not heartening, Shepard says. In fact, a recent World at Work survey found that 73 percent of HR professionals are women.

    The list also demonstrates a gradual shift occurring within HR departments, Mercer principal Catherine Hartmann says. “Given the new focus on Sarbanes-Oxley and compliance, companies are starting to tap people within their finance and legal departments to fill these positions,” she says. Four of the 30 companies in this list have HR executives who also are responsible for legal and compliance areas.

    And that fact should serve as another lesson to HR, experts say. “If you want to be successful within HR, you need to have some legal or financial background,” Hartmann says. “If you don’t have it, you better go learn it.”

Workforce Management, September 10, 2007, p. 30 — Subscribe Now!

The giant inflatable rat—long a device used by unions to protest at a nonunion work site—seems to have a new colleague. This time it’s a pig.

    During the past several months, labor organizers in New York City have been introducing the “greedy pig” balloon to employers at their work sites. The 12-foot-tall balloon portrays a sneering creature decked out in a top hat and suit, chomping on a cigar.

    While the giant rat, with its sharp fangs and beady eyes, has been effective in getting people’s attention, it was time for something new, says Richard Weiss, a spokesman for Local 79 Construction and General Building Laborers, a New York union that helped design the pig a couple years ago.

    “We felt that it was time to spice it up,” he says.

    Also, there was concern among union officials that the days of the inflatable rat might be numbered, as lawsuits by employers fighting the use of the rat at their job sites began to pile up in recent years, Weiss says. The suits allege that since the rat is a well-known symbol of anti-union labor, it’s the same thing as picketing and should be restricted as such.

    Last year, the National Labor Relations Board decided not to rule on the issue of whether the inflatable rat constitutes unlawful picketing. “The case law hasn’t yet materialized, but it still could,” says Chaz Rynkieicz, a field organizer for Local 79.

    Local 79 officials worked with the owners of Big Sky Balloons and Searchlights, a Chicago-based company that manufactures all of the union balloons, to come up with the concept of the greedy pig, Rynkieicz says.

    “We wanted to create something that would look just like a mean employer,” he says. “And people seem to be able to relate to the pig better than other balloons. They say, ‘Hey, that reminds me of my boss.’ “

    So far, Big Sky Balloons and Searchlights has sold 20 greedy pig balloons, most of which are in New York City, says Peggy O’Connor, co-owner of the company.

    “It’s not quite as popular as the rat, but I assume that within the next 10 years it’s going to be all over,” she says.

    And that’s not good news for employers, who might find it tougher to get rid of the greedy pig than the inflatable rat, observers say.

    “I feel like I had more of a chance of getting rid of the rat than the pig,” says Gerald Hathaway, a partner at the law firm of Littler Mendelson. “But frankly, I would rather we see neither.”

Workforce Management, August 20, 2007, p. 4 — Subscribe Now!

Two interest groups—life insurers and the mutual fund industry—are squaring off over which qualified default investment alternatives, or QDIAs, companies should be allowed to offer employees under the Department of Labor’s “safe harbor” provisions. Here are excerpts from the dueling comment letters submitted to the department.

From the American Council of Life Insurers:
   “Instead of creating a true ‘safe harbor’ and identifying factors that plan fiduciaries need to consider in selecting a default investment option, [the DOL’s Employee Benefits Security Administration] chose to endorse three specific types of investment products—lifecycle and target retirement date funds, balanced funds, and individual participant accounts managed by a professional investment manager. These current QDIA options do not include an investment option that is insulated from the volatility of equities, primarily focused on the preservation of principal, or that offers a guaranteed rate of return or guaranteed income during retirement. Guaranteed Products offer these critical participant protections. We believe this is an unacceptable shortcoming of the regulation.“

From the Investment Company Institute:
   “The range of options outlined in the Department’s safe harbor proposal will achieve the goals of automatic enrollment. Including stable-value funds would be inconsistent with the purpose of measures enacted in the Pension Protection Act of 2006 to facilitate automatic enrollment and enhance the utility of 401(k) plans. Research cited in [the American Council of Life Insurers’] letter in support of using stable-value funds as default investments is incomplete or misleading and ignores important policy considerations.” Click here for the full text of letter.
 

Additional Links:

Department of Labor Fact Sheet: Proposed Regulation Relating To Default Investment Alternatives Under Participant Directed Individual Account Plans

ACLI issue brief on workplace retirement issues
 

More than a year ago, HR executives at AstraZeneca Pharmaceuticals U.S. sat down to discuss what the company could do to get all 12,000 of its employees focused on driving business performance. Penny Stoker, vice president of human resources, met with Workforce Management New York bureau chief Jessica Marquez at the 2007 Conference on People Performance Management to discuss how her HR team is handling the challenges the fast-moving pharmaceutical market presents.

Workforce Management: How do you make sure the team keeps in mind the needs of the business?

Penny Stoker: One of the first things I did when I started three years ago was sit down with my team and ask them, “How many of you have been outside of HR and outside of AstraZeneca within the past 18 months?” And they all had a look on their faces like they had been found out. So I said, “OK, your goal now is to go and understand those parts of the business that you might not understand today. Get involved with those organizations.” HR is useless if it doesn’t have the core understanding of how the business works.

WM: Many consultants say that pharmaceutical companies can no longer predict the talent they will need in 10 years. They say these companies need to create a “just-in-time workforce.” Are you moving in this direction?

Stoker: [It’s] more from the perspective of how we create a workforce that is the right-size core, and then we can increase and decrease as we need it, depending on what’s going on. And it goes across the value chain. So if you look at, for example, development, we have been on-and-off users of clinical research organizations, which outsource researchers. We go up and down with them, depending on what we are working on, and we are looking to do more of that. With sales reps, we have relationships with clinical sales organizations and we use them up and down depending on what our needs are.

WM: Many other pharmaceutical companies are outsourcing their HR processes. Are you looking at this?

Stoker: We outsource when it’s appropriate. We look at it from a couple of different perspectives. First, do we have the processes in place so they can be easily replicated no matter who does it? Then we ask if it is a core process or not. Then we look at whether there are providers that can do this particular service at a level that we think is necessary.

WM: AstraZeneca recently signed a recruitment process outsourcing deal with the RightThing. Was this a hard sell for you?

Stoker: No, it really wasn’t a problem for us. First of all, I haven’t seen many internal recruitment functions that work effectively. That’s always the first thing that people want fixed. The RightThing told us that we would get better-quality candidates, faster, and get them up to speed quicker. We thought we would have a year to get through the cycle and see how it went, but the relationship paid off within the first three months.

WM: Are you considering signing an end-to-end HRO deal?

Stoker: No. I’m not convinced that the value is there yet. I think it’s still an immature market and I have enough issues without being someone else’s guinea pig.

Workforce Management, July 23, 2007, p. 8 — Subscribe Now!

Yarde Metals has a lot of perks. The metal processor and distributor’s 665 employees can catch a little shut-eye in the company’s nap room, keep their dogs in the on-site kennel or work out in the 3,000-square-foot gym.

    But those are just niceties, says Craig Yarde, the company’s founder and former president and CEO. “The real issue is how we treat people,” he says. “That’s what defines us and that’s what I hope we are known for.”

    While regulators and activists are busy pressuring corporations to open their books to the public, Southington, Connecticut-based Yarde, which was privately held until last year, has been opening up its books to employees since 1996.

    Every month, employees can watch a 20-minute DVD featuring executives and employees detailing the company’s financial status.

    And since 1996, Yarde has distributed one-third of the company’s profits to associates through its “open book management” compensation program.

    On top of that, employees can also receive annual bonuses depending on how well the company does. The two plans make up 30 percent to 55 percent of employees’ base pay.

    Companies can train managers to be kinder and more open to employees, but only those organizations that are transparent and share their profits with employees will truly gain their trust, says Dan Purushotham, an assistant professor at Central Connecticut University.

    “Opening up the books is the greatest evidence of trust,” he says.

    Yarde decided to move to this open-book management style in 1996 after realizing that most employees had no clue how much the company made in annual profits. That year had been difficult financially. Yarde’s sales were up, but the company was growing too quickly and thus didn’t generate a profit. As a result, Yarde employees, who were accustomed to receiving some type of annual bonus, didn’t get anything.

    “Everyone was upset because they thought the company was holding back,” Yarde says.

    So Yarde went out on the floor and started asking associates how much they thought the company made in profits after taxes. “The range [of answers] went up to 50 percent, whereas the reality was more like 2 to 8 percent,” he says. “That’s when I said, ‘If they think we make that much money, we might as well open up the books.’ “

    Since then, the company has been profitable every year except for 2001, when the economy dipped, Yarde says. And employee performance during that difficult year is the key metric he uses to know his open-book management approach works, he says.

    During the first half of 2001, Yarde Metals laid off some workers and cut back on its medical benefits and 401(k) match.

    “We communicated with employees that if we didn’t make a gross profit of 1.85 percent, we would default on our loan with the bank,” Yarde says.

    The company ended up hitting its numbers, and by 2002 it was able to reinstate its 401(k) match and health care benefits.

    “It was the worst year the company ever had, but everyone went beyond the call of duty to show those numbers,” Yarde says.

    Today, the company is publicly owned, and Yarde’s daughter, Tracy Yarde Smith, is president and is maintaining the culture.

    “It just makes sense,” Yarde says. “If you treat people right, you will get the most out of them.”

Workforce Management, June 25, 2007, p. 45 — Subscribe Now!

Rocky Flats, Colorado, wasn’t a place people wanted to work at in 1995. But an engineering firm’s successful project there is being cited as evidence that a corporate culture rooted in kindness and positive feedback can make companies winners in the cutthroat world of business.

    Even before deadly levels of radiation at Rocky Flats prompted an FBI raid and its shutdown in the early 1990s, the former Cold War-era nuclear weapons production facility was the target of union strikes, fierce anti-nuclear protests and intense media scrutiny. Closing Rocky Flats Plant, a multi-building, 3 million-square-foot facility atop a wind-swept plateau 20 miles west of Denver, turned out to be the easy part. The cleanup was quite another matter.

    The Department of Energy estimated it would take 70 years and cost $36 billion to clean up Rocky Flats, originally built in the early 1950s to manufacture hydrogen bombs. But a relative newcomer, Denver-based engineering and construction firm Kaiser-Hill, not only met the Energy Department’s estimates, it beat them by 60 years and came in $30 billion under budget.

    The company finished its work in 2005. It turned over the Rocky Flats site, which now is largely a wildlife refuge, to the federal Interior and Energy departments. Since completing the project, Kaiser-Hill has won three other Department of Energy contracts and is a major player among nuclear cleanup companies, says Bud Ahearn, senior vice president of CH2MHILL, Kaiser-Hill’s parent company.

    Company executives attribute their success to a corporate culture based on using positive strategies to motivate employees and then rewarding and celebrating their victories. Since 1999, CH2MHILL has spent more than $5 million to put 700 senior managers though a University of Michigan training program that focuses on a philosophy called “positive organizational scholarship,” which is based on the idea that by using positive communication, companies can demonstrate superior performance. The company, which puts 120 executives through the program each year, estimates its annual overall training budget is more than $20 million.

    CH2MHILL is one of a number of organizations that are spending training dollars on teaching managers to be kinder and more positive.

    “Companies are realizing that culture is as important as strategy and that they can’t just look at the short term anymore,” says Barbara Bilodeau, director of market research and analysis at Boston-based Bain & Co.

    Nine out of 10 executives believe that corporate culture is important today as a strategy for business success, according to a recent Bain survey. In the United States, employees rank “senior management interest in employee well-being” as the top driver for employee engagement, according to Towers Perrin.

    And companies that have focused on creating a positive corporate culture seem to have better financial performance than those that don’t, according to the San Francisco-based Great Places to Work Institute.

    When looking at stock performance from 1998 to 2006, the 100 companies on Fortune’s Best Places to Work list have outperformed the Standard & Poor’s 500 by more than 8 percentage points, according to data collected by the Great Places to Work Institute.

    “Over time there is a cumulative effect that says the 100 Best Places to Work are better financial performers than others,” institute co-founder Amy Lyman says. “All of these companies have established trust, which is the glue that helps employees work well with each other.”

    Yet skeptics are wary of the notion that creating a kinder corporate culture results in a more engaged workforce.

    “I think that you can have an engaged workforce without applying people-friendly processes,” says Bob Eichinger, CEO of Lominger International, a Minneapolis-based subsidiary of Korn/Ferry that specializes in leadership development.

    Focusing too much on kindness can result in companies with satisfied employees who aren’t engaged, he says, noting that one-third of a company’s workforce are typically low-maintenance employees who don’t look for social support in their work environment.

    “They just want to do their jobs and are motivated more by exciting opportunities than bosses who care about them,” he says.

    Even if creating a kinder workplace results in a more engaged workforce, it’s debatable whether that will create better business performance, says Phil Rosenzweig, a professor at IMD Business School in Lausanne, Switzerland, and author of The Halo Effect.

    “I’m not going to say that it’s not important to create a positive workplace and try to engage workers,” he says. “But it’s not a given that companies with an engaged workforce perform better than those that don’t. It could be argued that high-performing companies have a more engaged workforce because they are high-performing.”

    Disciples of positive organizational scholarship admit that they can’t draw a direct line from their business results back to the cultures they have created, but they still believe it’s worth the investment.

    CH2MHILL says its positive culture has allowed it to grow into the international firm it is today—with 19,000 employees, up from 10,500 in 2001, and 2006 revenue of $4.5 billion, compared with $2.3 billion in 2001. Executives say employee surveys back up the theory that company culture has been the driver of its growth.”Our employees say the top motivator to work is the challenging nature of what we do,” Ahearn says. “But the second reason they come to work is the respectful nature of the workforce. Money comes third.”

    Voluntary turnover is 9 percent, about two percentage points lower than the average of firms in Fortune’s 100 Best Companies to Work For, according to the firm.

    “It’s one of those things that is so much a part of us that it’s impossible to measure,” says Jim Downey, corporate director of learning and organizational development. “It’s more of question of, if we took this away, what kind of company would we be?”

Overcoming mistrust
    CH2MHILL executives were clear about the challenges they faced at Rocky Flats when they won the contract. On top of the dangerous nature of the work, there was a huge sense of mistrust among the 5,000 members of the Rocky Flats workforce, says Jerry Long, who started at Rocky Flats in 1998 and became manager of engineering safety, health and quality in 2000.

    Previous contractors at the site had operated in a “command and control” style, he says. “It would have been rare for hourly employees to feel that they could go to the company president about an issue.”

    And the employees were essentially working themselves out of a job. Many of them had worked at the site for years, but when the cleanup was done, it would be closed, says CH2MHILL spokesman John Corsi.

    Despite the challenges, CH2MHILL kept the workers instead of replacing them with its own people. It was a gesture of good faith, Corsi says.

    The company, however, replaced much of Rocky Flats’ senior management and some middle management to instill a new culture.

The company opted to have executives work on the project floor with employees. “It was a way of showing that we valued our workforce and were willing to get dirty with them.” –John Corsi, spokesman, CH2MHILL

    At first, many of the changes at Rocky Flats were symbolic. The weekend after the company signed the contract for the site, it demolished a Cold War-era guard shack that employees had to pass to get to work.

    The company also tore down a building of executive offices, dubbed “mahogany row,” in the middle of the site. Executives then worked on the project floor with the employees, Corsi says.

    “It was a way of showing that we valued our workforce and were willing to get dirty with them,” he says.

    To reinforce the new culture, CH2MHILL implemented an incentive program. Both hourly and salaried employees could receive a mix of cash bonuses and units similar to performance-based stock if the project met specific goals and deadlines.

    The company set an internal stretch goal of finishing the cleanup by December 2005, even though the renewal contract, which the company signed with the Department of Energy in 2000, called for a December 2006 closing.

    “We finished in October 2005, which meant everyone got some incentive pay,” Corsi says. The company paid out more than $100 million, or 20 percent of the fee it received for the cleanup, in employee incentives.

    Within weeks of the new program being launched, there was more brainstorming between workers and managers, Long says.

    Because managers were listening to their ideas, workers started innovating on their own, Corsi says. Gary Clark, a steelworker, noticed it was taking too long for workers to take off the heavy lead gloves they used to handle plutonium. Workers would stick their hands in the gloves through holes in a large steel container called a glove box to protect themselves during the work, but taking off the gloves was difficult and they often would tear if they were removed too quickly.

    One weekend, Clark designed a new tool that would do it faster, Corsi says. Workers went from removing six gloves an hour to 27. “That guy received a bonus check on the spot,” Corsi says.

    Teams also held parties to celebrate small project wins, a key point in creating a positive culture, executives say.

    “We would have barbecues or bagel parties—something we still do today on other projects,” says Long, who is now vice president of waste feed operations at the Hanford nuclear cleanup site in Washington state. “It’s not about the food; it’s about breaking bread with the workers and showing them you care.”

Institutionalizing kindness
    In 1999, CH2MHILL realized that it didn’t have the leadership capacity to sustain the level of growth it was shooting for, Ahearn says. The company went on a search for a leadership development program that would take into account the corporate values it recognized as the core of its success, he says.

    The company found what it was looking for with the Center for Positive Organizational Scholarship at the University of Michigan’s Ross School of Business.

    “Their approach of embracing the desire to not only be the best in the world but the best for the world really spoke to the core of our culture,” Ahearn says.

    In December 2000, CH2MHILL began putting its most senior leaders though a nine-month leadership course there.

“Their approach of embracing the desire to not only be the best in the world but the best for the world really spoke to the core of our culture.”  –Bud Ahearn, senior VP, CH2MHILL, on the positive organizational scholarship method

    The course begins with a four-day program at the university, where CH2MHILL chief executive Ralph Peterson talks about the company’s strategy and culture.

    “You really get how important positive organizational scholarship is to the company when the CEO shows up and talks for four or five hours about it,” says Long, who recently attended the course.

    During the next few days, instructors—along with the company’s senior executives—teach courses incorporating the company’s strategy with key positive organizational scholarship, or POS, principles.

    The 50 students are given the results of a 360 review completed earlier. But unlike other 360 reviews, these assessments focus more on the positive traits of the employee rather than on the negative, says Kim Cameron, who is one of the founding professors of positive organizational scholarship and helps run the course.

    “For the reviews, we ask people who know the employees to discuss a time when that employee performed exceptionally well,” Cameron says. “Then we can develop a program based on how that employee can capitalize on what they do well.”

    At the end of the four-day course, participants get an assignment to complete an action learning project. “They have to do something significant that will take them out of their leadership comfort zone and apply some of the learning to an action that will help the enterprise,” CH2MHILL’s Downey says.

    The student is assisted by a sponsor and the relevant business group leader and has approximately eight months to complete the project.

    Another company that has made positive organizational scholarship a focus of its leadership development program is Grand Rapids, Michigan-based supermarket chain Meijer, which operates 180 stores with 60,000 employees throughout the Midwest.

    For Meijer, creating a kinder corporate culture is part of the key to developing talent in an industry where growth is paramount and retention is extremely difficult, says David Beach, vice president of workforce planning and development.

    Turnover in the retail industry tends to be high, and for Meijer, a family-owned chain going up against the likes of Wal-Mart, retaining talent is a key differentiator, he says.

    “We realized that we need our company to be a place where people want to work,” Beach says.

    Meijer has added a five-day course on positive organizational scholarship to its leadership program, which includes five other leadership seminars.

    So far, nine of the company’s 27 vice presidents have gone through the program and Meijer expects all 27 to complete it by the end of 2008.

    Like CH2MHILL, Meijer can’t say that its focus on creating kinder leaders has resulted in better financial performance. But turnover is below industry average and 70 percent of promotions are internal, Beach says.

    “I can’t say that by following this idea we are moving the needle on business performance. But I don’t know how you could argue that creating a positive culture doesn’t move the needle and just create a better work environment,” says Dan Shaheen, vice president of flagship stores, who has taken the courses.

Challenges
    Because of a lack of metrics and short-term results, organizations often have trouble getting results-based managers to devote time to creating a positive culture, observers say.

    “It can be difficult to get managers who are very focused on getting their jobs done to see the value in stopping and taking a few minutes to talk to employees when they walk into their offices just to chat,” says Kevin Cashman, president and CEO of LeaderSource, a Minneapolis-based leadership consultancy and subsidiary of Korn/Ferry.

To compete with the likes of Wal-Mart, retaining talent is vital. “We realized that we need our company to be a place where people want to work.” –David Beach, VP of workforce planning and development, Meijer

    Shaheen admits that this was a challenge for him in the beginning. One of the basics that Shaheen learned when he attended the University of Michigan’s course on positive organizational scholarship was how to use personal management interviews as a tool to engage employees.

    “It was about the need to sit down with your immediate staff one-on-one to catch up with them and set expectations and move on,” he says. “The course said it would save me time, but I was skeptical.”

    Shaheen was accustomed to holding weekly staff meetings with his five direct reports and wasn’t convinced that meeting with each one individually would save time.

    But in the end, Shaheen found that he and his team accomplished more in the individual meetings than they did in the staff meetings. “It causes people to think about what they are going to talk about with you, and so there are less tangents and interruptions,” he says. “And the staff really values that face time.”

    Without hard metrics, however, many experts are skeptical that a rush of companies will embrace the notion of spending money on developing a positive and kinder organization.

    “These positive workplace models pop up whenever the economy starts to tank,” says Peter Cappelli, professor of management at the University of Pennsylvania’s Wharton School of Business. “But then the labor market improves and it turns around. No one is worrying about the long term.”

    A number of companies that don’t subscribe to this philosophy do very well, observers say. “Jack Welch is not necessarily a nice person, but people want to work for him,” Eichinger says. People want to work at companies like General Electric or a high-stress Wall Street firm because they have a challenging environment with vision, not because they’re are necessarily kind folks, he says.

    Executives at CH2MHILL, however, say they are in it for the long term. The company just held its 22nd course in positive organizational scholarship and recently added a program for new senior hires.

    “The fact is that this has been our culture for 60 years. But positive organizational scholarship just helps us to understand it,” Ahearn says. “It’s impossible to make a direct tie between it and business performance, but when it’s happening, we feel it.” wƒm

Workforce Management, June 25, 2007, p. 40-49 — Subscribe Now!

WANTED: Candidates for nursing jobs. Must have worked in emergency situations. Previous medical training a bonus.

    It’s a profile that might seem difficult to fill, but officials in Michigan and New York discovered that they didn’t have to look very hard to find a group potential hires already suited up and ready to go.

    In the months that followed the September 11 terrorist attacks, Margie Clark, nursing careers department chair at Lansing Community College, remembers watching the images on television of reservists and active-duty military personnel responding to assist victims in New York and Washington.

    “I remember thinking how they have a lot of the same skills needed by nurses,” she says.

    On the East Coast, Mari Moriarty, manager of college relations at the Visiting Service of New York, a not-for-profit home health care agency with 11,750 workers, was thinking the same thing about New York firefighters.

    Her husband, Edward, was one of a number of firefighters who decided to retire after the terrorist attacks. He went back to school to get a nursing degree. It got Moriarty thinking about the recruiting potential in the departments. New York City firefighters can retire after 20 years, meaning that many of them, like her husband, were finding themselves in their 40s and looking for something else to do, she says.

    In early 2003, Moriarty held a series recruiting workshops that targeted New York firefighters and police. Often the workshops were standing room only. One brought in more than 200 participants, Moriarty says.

    One of the challenges with the recruiting initiative, however, is funding for the career changers. Unlike military personnel or displaced autoworkers, police and firefighters do not receive funding from the state or their employers for further education, Moriarty says. While they receive pensions, they don’t get money specifically for educational purposes.

    To address this, Moriarty and her team try to direct candidates to lower-price nursing programs at local schools like the City University of New York, she says.

    It’s still too early to say how successful the recruiting program is, since many of the firefighters are going to school part time while they continue to work. Completing an education that way can take years, Moriarty says.

    “Firefighters and police are scattered across all the nursing programs in the city,” she says. Today, the Visiting Service for New York employs 10 former police and firefighters, up from five such nurses four years ago.

    In Michigan, Clark has drafted a proposal to create a “bridge program” that would provide additional training to military medics to allow them to become registered nurses.

    Because of the war in Iraq, the number of returning veterans will increase in coming years, and this seems like a great opportunity for health care providers to recruit them, she says.

    “So many of these individuals come back with high skills but not many opportunities for high-paying jobs,” Clark says.

    Under Clark’s proposal, military bases across the country could be used as classrooms for military personnel with medical skills to receive training for nursing careers.

    “This is very doable,” she says. “But we need some funding to do it.” Clark is in the process of identifying funding opportunities for the proposal.

    Moriarty and Clark hope their initiatives will ignite the kind of creative thinking that they believe is necessary for the health care profession to address the nursing shortage.

    “It’s crucial to be inventive and do whatever we can to get people interested in our profession,” Moriarty says.

Workforce Management, May 7, 2007, p. 20 — Subscribe Now!

Everywhere employers turn, they find controversy over 401(k) fees. On Capitol Hill, Congress is considering amending securities laws to make 401(k) plan fees more transparent for participants. The Department of Labor is considering new regulations that would require plan sponsors to improve the expense information they disclose in their Form 500 401(k) annual reports.

    Meanwhile, a St. Louis-based law firm has filed a slew of class-action lawsuits during the past several months, claiming that, among other things, employers violated pension laws by allowing 401(k) participants to be overcharged by the managers of the plans.

    The suits, filed by the firm Schlichter, Bogard & Denton, name ABB, Bechtel Group, Boeing, Northrop Grumman, Lockheed Martin, Boeing, General Dynamics, United Technologies, Caterpillar, Exelon, International Paper and Kraft Foods.

    The crux of the issue is that no one knows what 401(k) plan sponsors are paying in fees, says Don Stone, president of Plan Sponsor Advisors, a Chicago-based 401(k) consultant. It’s up to employers to get in front of the issue and act now to make sure they know what they are paying and why they are paying it, experts say.

    This entails working with independent third parties to get a sense of how their plan’s fees compare with other plans of their size, making sure they negotiate for the lowest fees possible and understanding all aspects of the fees that they and their 401(k) participants are paying to the companies administering their plans.

    “The problem with the industry is that the way revenue is generated for the vendors doesn’t relate to the costs of providing the services,” Stone says. “The cost to provide services has grown at a rate of 3 to 4 percent a year, while revenue for the vendors is 6 to 8 percent annually.”

    But 401(k) administrators often don’t even recognize this discrepancy because they don’t know what they are charging, or where their revenues are coming from, he says.

    This is particularly true with revenue-sharing agreements. In the agreements, investment managers in 401(k) plans share with the 401(k) plan administrator the money they make from investment management fees that are charged to participants.

    Stone recalls one instance where he spoke to a client’s 401(k) plan administrator who said that the company was receiving only five basis points in revenue sharing from an investment manager.

    The investment manager, however, told Stone that it was paying 40 basis points, which meant that participants were paying an extra 35 basis points and the record keeper wasn’t even aware of this.

    Such examples don’t mean that 401(k) plan administrators are intentionally trying to deceive plan sponsors, Stone says. Often these companies are so big and the fee arrangements so varied and complex that they simply can’t keep track of them.

    “And the problem for employers is that often they don’t know what questions to ask to get to the bottom of all of this,” he says.

Taking the right steps
    Once a plan sponsor figures out what fees it is paying, the question becomes whether those fees are reasonable, says David Wolfe, a partner in the benefits practice of Drinker Biddle & Reath.

    This requires companies to first figure out what services the fees cover, and then to figure out how the fees they are paying compare with other plans of the same size, structure and scope, he says.

    “Ultimately what you are trying to determine is whether you are getting a reasonable deal based on your asset size and level of service,” Wolfe says.

    Employers should monitor the fees they pay at least every year, he says. “A year ago I might have told employers to do this every two years, but the industry is changing so much now I think these discussions should happen annually,” Wolfe says.

    The National Futures Association, a Chicago-based organization for the futures industry with 249 employees and a $51 million 401(k) plan, reviews its fees semiannually, says Michael Crowley, the association’s associate general counsel.

    On top of this, the company has a third-party advisor, PFE Group, continuously monitor fees “to make sure nothing unusual happens,” Crowley says.

    PFE keeps track of all fees paid by the 401(k) participants as well as by the National Futures Association. These fees include investment management fees, distribution and marketing fees, record keeping fees and fees related to auditing and legal expenses, says Wayne Bogosian, president of PFE, which is based in Scarborough, Massachusetts.

    “Plan sponsors should have a list of fees being paid, with clarification of whether they are paying it or the participants are paying it,” Bogosian says.

Getting ready for regulation
    While the Department of Labor’s pending regulation will focus on plan sponsors disclosing to the agency the fees they pay, Congress is more concerned with employers disclosing these fees to 401(k) plan participants.

    But disclosing 401(k) fees has sparked controversy among certain industry groups because there is concern that by disclosing all of the fees, it might cause some employees not to participate in the plan.

    “We do not want a 401(k) participant to use fee disclosure as an excuse not to save in the plan,” says David Wray, president of the 401(k)/Profit Sharing Council of America.

    The National Futures Association discloses what the plan pays in expenses altogether, but does not provide a dollar amount of what the average participant pays, Crowley says.

    “I think the easiest thing to do is tell participants, ‘This is how much it costs to run the plan,’ ” he says.

    Disclosing what the average participant pays in a dollar amount could be misleading when seen out of context, Crowley says. For example, in 2006 the average participant paid $946 annually in 401(k) expenses. But the average account balance at the NFA is $132,000.

    “That context is important,” Crowley says.

    If the new regulations require employers to disclose in dollars what participants are paying in 401(k) expenses, the association will make sure to do a lot of education on what these expenses entail.

    For $946 a year, the association’s plan participants are not only getting a wide array of investment options, online tools and services, but they also have access to investment advice through Charles Schwab & Co.’s GuidedChoice platform, Crowley says.

    But before figuring out how plan sponsors will disclose fees to 401(k) participants, these companies need to start figuring out the fees they are paying, Stone says.

    “You can’t go wrong with disclosing information now to employees—unless you haven’t done your homework,” Stone says. “You may want to clean your house before you have people live in it.”