Author: Jessica Marquez

Anyone who may have questioned whether Dennis Donovan, executive vice president of human resources at Home Depot, really has a seat at the table need only refer to his employment agreement to find the answer.

    As first reported last week on Workforce Man­agement’s Web site, Work­force.com, Donovan’s 2001 employment agree­ment makes him eligible for a multimillion-dollar severance package, should he decide to leave, because he no longer reports to president and CEO Robert Nardelli.

    Nardelli resigned from Home Depot January 3.

    According to Home Depot’s April 15, 2006, proxy filing, “cessation of a direct reporting relationship with Mr. Nar­delli” entitles Donovan to leave the company “for good reason” and receive “all cash compensation accrued but not paid as of the termination date and certain additional benefits, including salary and target bonus continuation for 24 months and immediate vesting of all unvested equity-based awards.”

    Consultants who reviewed the proxy statement, which includes Donovan’s past compensation, estimate that if Donovan leaves he could receive $15 million to $20 million, plus retirement benefits, stock options and compensation already earned.

    Despite this windfall, Tony Wilbert, a Home Depot spokes­man, says that for now Donovan will stay on board. “Dennis is focused on fully supporting the new chairman and CEO in his transition,” he says. Wilbert declined to elaborate. A call to Donovan’s office was not returned.

    It’s extremely unusual for an executive’s employment agreement to tie a direct reporting relationship to a specific individual, says Jack Dolmat-Connell, CEO of DolmatConnell & Partners, an executive compensation consulting firm in Waltham, Massachusetts. Sometimes contracts will allow direct reporting relationships between positions, but won’t name the people, he says.

    This shows how much Nardelli wanted Donovan to join Home Depot, analysts say. Nardelli and Donovan worked together at General Electric, where Nar­delli was president and CEO of GE Power Systems and Donovan was vice president of HR. Nardelli tapped Donovan to be Home Depot’s HR chief in 2001.

    Donovan is the third-highest-paid executive at Home Depot, making $6.6 million in 2005. He has topped Workforce Management’s yearly list of the highest-paid HR leaders in publicly traded companies for two years in a row.

    “I’m curious about Home Depot’s business reasons for tying one person to another,” Salary.com chief compensation officer Bill Coleman says.

    Coleman notes that this kind of arrangement would never have been approved by a compensation committee today, given the intense scrutiny around corporate governance.

    “That contract is six years old,” he says. “The world has changed.”

    If new Home Depot president and CEO Frank Blake, another GE alumnus, wants to keep Donovan on board, it’s possible the company may offer the HR chief even more money to stay on, Dolmat-Connell says.

    “Donovan could cut a deal,” he says. “If they want to keep him, it could cost Home Depot a lot more money.”

    That’s not going to happen, because HR was “part of the problem” at Home De­pot, says Michael Watkins, founder of consulting firm Genesis Advisors and a former Harvard Business School professor.

    Before Nardelli and Donovan came on board, Home Depot had a decentralized culture in which store managers were completely autonomous, he says. Nardelli and Donovan, however, took the corporate culture to the opposite extreme, and “they didn’t hit the right balance,” Watkins says.

    “It used to be that you had people in the stores falling all over themselves to help you because it was an entrepreneurial culture at each store, and that has been killed,” he says. “Home Depot now has to regenerate that culture, and that goes to core HR issues like creating incentives. That’s why there is no way that this guy is going to stay.”

Workforce Management, January 15, 2007, p. 1,3 — Subscribe Now!

New Year’s Resolution: Almost half of U.S. employers plan to spend more time and money on training and developing supervisors and executives next year, according to a recent survey by Novations Group, a Boston-based consultancy. The survey, which was based on responses from 2,046 HR executives, found that among 11 categories of training, supervisory/management skills and leadership/executive development ranked as the first and second most important, respectively. The survey results indicate that companies are increasingly concerned about senior-level turnover and the loss of retirement-ready baby boomers, Novations president and CEO Mike Hyter says. As a result, Novations expects more organizations to tap external trainers and training organizations to help them with these issues.

Just in Time for Tax Season: ADP Employer Services has completed its acquisition of Taxware from First Data Corp. for $125 million in cash. The purchase will broaden ADP’s services to employers to by providing them with tools to automate much of the tax return filing process. The tools can calculate taxes for employers, assign taxing jurisdictions and help companies navigate through the ever-changing tax laws. The move marks the second tax-related acquisition that the Roseland, New Jersey-based payroll and benefits administration provider has made in the past there months. In August, ADP announced that it was purchasing Mintax, which secures tax credits and economic incentives for employers.

Silgan Containers isn’t slacking when it comes to giving its employees educational materials and online tools to help then plan for their retirement. But despite that, the company found that the word wasn’t getting through. Only 63 percent of the company’s 3,800 eligible employees invest in its 401(k) plans.

    There is something else, though, that’s almost as disturbing to Tony Cost, vice president of human resources. Twenty percent of the plan’s assets are invested in a stable-value fund—far too conservative an option for most employees of Silgan, where the average age is 47. The company makes cans and other food containers and is based in Woodland Hills, California.

    “I hear in the news about people retiring with $60,000 in their 401(k) plans, and I just feel that more needs to be done,” he says. That amount doesn’t even come close to being enough to cover the expenses of the average 65-year-old couple today, research conducted by Fidelity Investments shows. Out-of-pocket health care costs alone for such a couple over the course of their retirement would be roughly $200,000 today, according to Fidelity.

    Cost believes that in addition to getting employees on the right financial track, offering face-to-face advice would help his company, and other employers, attract and retain talent.

    “I think offering retirement savings advice can contribute to employees’ sense of belonging and give them a sense of security,” he says. “People who sit in my chair have to be thinking about these things as a matter of recruiting and retention.”

    And while online advice tools are helpful, Cost doesn’t think that most employees are using them. “The number of hits to our Web site is not the kind of number that makes me a happy guy,” he says. He wants to provide employees with some hand-holding so that eventually they might be more comfortable using online tools.

    Cost voices sentiments that can be found at hundreds of companies that offer 401(k)s. But until recently, there have not been many cost-effective ways for employers to offer face-to-face advice to employees who are spread out across the country. Under previous legislation, these companies couldn’t ask their 401(k) plan record keepers to provide advice. It was viewed as a potential conflict of interest, since these providers could just steer employees into their own funds.

    But the recently passed Pension Protection Act changes all that. Under the law, 401(k) plan providers can now offer advice to 401(k) plan participants under two scenarios. The first involves the Web. The second scenario allows 401(k) plan providers and money managers to offer face-to-face advice, provided that participants are charged a flat fee for it.

    Experts anticipate that the change in legislation will prompt all major 401(k) providers and money managers to begin offering face-to-face advice. Fidelity Investments has already seen an increase in calls from employers about such offerings, says Jeffrey Carney, president of Fidelity Institutional Retirement Services Co. To accommodate that demand, Fidelity refers employers to advisors through its Fidelity Retirement Income Advantage program, which it launched two years ago.

    The Boston-based financial services firm plans to further integrate its online tools to allow its representatives to assist employees, either on site through its walk-in centers or over the phone.

“The demand for face-to-face advice has always been there, but now providers have a channel to deliver it.” –-Dirk Pantone, College of Financial Planning

    One issue with the new law, however, has many money managers and 401(k) providers waiting for more guidance. And that’s the matter of fees. By forcing companies to charge a flat fee, it might be difficult for providers to make a profit from offering face-to-face advice, says Dirk Pantone, vice president of business development for the College of Financial Planning, which trains financial advisors. Traditionally, advisors charge 1 percent of the client’s investable assets, which means that they can earn more as their clients’ accounts grow.

    Despite this, Pantone estimates that all the major 401(k) record keepers will start training their call center representatives to give advice to employees. And Pantone says he is seeing an increase in interest from financial advisors in the College of Financial Planning’s six-month retirement planning course, which teaches financial advisors the ins and outs of the retirement plan market.

    The course already has 1,992 graduates this year, more than double the number of 2005 graduates.

    “The demand for face-to-face advice has always been there, but now providers have a channel to deliver it,” Pantone says.

Potential challenges
    Choosing a financial advisor for employees can be a daunting task for employers. It’s particularly challenging in the post-Enron era. That company’s flame­out, brought to a kind of closure by last month’s 24-year sentence for CEO Jeffrey Skilling, put fiduciary liability at the front of employers’ minds.

    To begin considering the choice of advisor, companies need to put together a list of reasonable candidates, says David Wolfe, a partner in the Chicago law firm of Gardner, Carton & Douglas. They need to examine the business models of each of these companies and understand how they generate revenue and apply fees, he says.

“Employers need to go about this process and monitor these advice-givers just like they would with an investment manager,” he says.

    The potential for being held accountable for the guidance given to employees is the No. 1 reason that many companies haven’t offered face-to-face advice so far, says Leslie Smith, director in the total rewards practice at Deloitte Consulting.

    Sixty-three percent of companies that don’t offer financial advice choose not to do so because of concerns around fiduciary liability, according to Deloitte.

    That’s exactly the reason that Silgan Containers might in the end decide against offering face-to-face advice, Cost says.

    “Clearly, the fiduciary question weighs heavily on me and my colleagues,” he says. “If we take a conservative position, we won’t go forward with this idea because of the anxiety caused by the Enrons of the world. Some of us really want to help our employees, but we are hesitant to pull the trigger.”

    Such concerns didn’t stop Basic American Foods, a Walnut Creek, California-based food services company, from mandating that all of its 1,700 employees meet with a financial advisor before they enroll in one of the company’s 401(k) plans.

    “There are several benefits to offering face-to-face advice,” says Sally Smedal, treasurer and controller. First, offering financial advisors to employees helps to ensure that they will be able to retire when it’s appropriate, she says.

    “Also, I think employees feel better about themselves and better about the employer,” she says. “So they are more likely to stay with you.”

    Four years ago, Basic American was struggling to increase the participation of hourly workers in its 401(k) plan. Only 45 percent of these workers were enrolled in the plan. Basic American didn’t believe that online tools would work. The company didn’t think the Web would be the best way to reach the company’s Hispanic employees, who make up 60 percent of the workforce, Smedal says.

    Language was just part of the issue.

    “If you understand the Hispanic culture, there is a lot of mistrust of anyone managing their money for them,” Smedal says. Also, it is common in the Hispanic culture for older relatives to rely on their families to support them after they retire, so they don’t necessarily see the reason to save the money themselves, she says.

    The face-to-face sessions help Hispanic employees to realize they can trust the company’s efforts on their behalf. They also better understand that it’s important to save for retirement, whether they retire in the U.S. or go back to their home country, Smedal says.

    Basic American began requiring all new hires to meet with a representative from Charles Schwab & Co., the company’s 401(k) plan record keeper. The company had offered the face-to-face sessions since 2001, but they weren’t mandatory.

    During the sessions, Schwab’s financial planners, who speak Spanish and English, spend about 30 minutes with each employee, going over their risk profile and suggesting funds.

    The service is part of Schwab’s total 401(k) package, so there is no extra fee for Basic American to pay. But the company does have to absorb the costs of taking its hourly workers off the floor. For the first couple of years, those costs averaged $15,000 annually. But that has now leveled out to $2,000 to $3,000 a year.

    The cost seems to be worth it. The company has seen 401(k) participation among its hourly workers jump to 65 percent since it began offering the service, Smedal says.

    The company keeps close track of fees and revenue-sharing to make sure it understands how Schwab is making money from the service, she says. “We keep track of what they are netting in terms of profit to make sure it’s appropriate,” Smedal says.

Choosing the right model
    Some employers may decide to work with independent financial advisors to offer advice to employees, experts say. Doing this helps them avoid potential conflict-of-interest issues, says Mark Berg, a financial advisor with Timothy Financial Counsel in Wheaton, Illinois.

    Berg says his firm has seen a rise in demand from employers in recent years. “HR likes us because they don’t have to be concerned about conflicts of interest since we have nothing to sell,” he says.

    Timothy Financial charges $210 an hour.

    Some financial advisory firms have discussed creating financial advisory networks to accommodate large employers with employees in different locations around the country, says David Wray, president of the Profit Sharing/401(k) Council of America.

By offering advice, “employees feel better about themselves and better bout the employer. So they are more likely to stay with you.” –Sally Smedal, Basic American Foods

    But many independent financial advisors might shy away from this market because they don’t see how they can make money, says Paul Yossem, vice president of qualified plans at Wheeler/Frost, a San Diego financial advisory firm.

    That might mean that 401(k) plan providers and money managers will dominate this business, observers say. If that’s the case, companies just need to make sure they understand every aspect of the providers’ revenue-sharing agreements and fees, Wolfe says.

    Some employers may refer employees to walk-in centers, where they can go visit with a financial advisor, Smith says. But that doesn’t get rid of the potential for conflict of interest.

    Cost and Silgan’s consultant, Mercer Human Resource Consulting, continues to weigh the pros and cons of offering face-to-face advice.

    The easier route would be to just automatically enroll employees into a target-date fund, but Cost thinks that doesn’t really get employees thinking about their retirement.

“Automatic enrollment into target-date funds is an option,” he says. But Cost doesn’t want to do that just because everyone else is. “We want to challenge the norms and see if something else can be done,” he says.

Workforce Management, November 20, 2006, pp. 34-35 — Subscribe Now!

Jim Ellinghausen had virtually no experience working with compensation committees until he started at Pulte Homes in April 2005. In his previous roles at Frito-Lay and later at Bristol-Myers Squibb, Ellinghausen was more of an HR generalist, he says.

    So when he became se­nior vice president of HR at Pulte Homes, a Bloomfield Hills, Michigan-based home-building company with 14,100 employees, Elling­hausen knew he had a lot to learn.

    That’s why he was relieved when Bernard Reznicek, chair of Pulte’s compensation committee, invited him to dinner a week after he started his new job.

    “He knew a bit about me from our CEO but wanted to sit down and talk to me about my role working with the compensation committee,” Ellinghausen says. “He was sharing his expectations, and it helped get us all started on the right foot.”

    With the heightened scrutiny of executive compensation, the compensation committees of company boards are relying more heavily on HR executives to help them understand all of the factors in play when making their decisions. This trend poses an opportunity for HR executives to demonstrate their value to both the board and management, experts say.

    But balancing their dual role—helping compensation committees while still reporting to the CEO—can be a delicate situation.

    “It used to be that the primary relationship of HR executives was with the CEO, but now you are seeing a more direct link with the chair of the compensation committees,” says Charles Peck, principal researcher and program manager on compensation for the Conference Board. “It’s an awful lot of pressure for HR executives because they are dealing with the compensation of the most powerful people within the organization.”

    Some organizations are deflecting undue pressure by creating formal reporting lines in which the HR executive only reports to the compensation committee chair on all executive compensation issues, says Russell Miller, practice leader for Executive Compensation Advisors, a Korn/Ferry International company.

    “It’s then up to the compensation committee to determine how things are communicated to the CEO,” he says.

    If HR executives shy away from this high-profile role, they risk becoming little more than the lackeys of compensation consultants, relegated to just collecting comp data, consultants say.

    “This is one of the last few opportunities for HR executives to be in an area that is highly influential,” says Jack Dolmat-Connell, CEO of DolmatConnell & Partners, an executive com­pensation consulting firm in Wal­tham, Massachusetts. “If they don’t capitalize on it, they are going to be fully marginalized.”

Best practices
    In many companies, boards of directors and company management are working together to establish best practices to ensure that HR officers have independence when dealing with executive compensation issues.

    With the backdating scandals and the scrutiny of executive perks, companies are taking extra measures to make sure the whole process of determining executive compensation is beyond reproach, Peck says. “It has stretched the need for objectivity,” he says.

    As part of that effort, an increasing number of organizations are having their compensation committee chairs meet with candidates for top HR positions before they are hired, says Joe McCabe, managing partner at Heidrick & Struggles.

In some organizations, the HR exec reports only to the compensation committee chair. “It’s then up to the compensation committee to determine how things are communicated to the CEO.” –Russell Miller, Executive Compensation Advisors

    “I can’t tell you the last time I did a head-of-HR search where there wasn’t some sort of dialogue between the head of compensation and leading candidate for the role,” he says.

    Often the chair of the compensation committee will meet with the candidate separately from the candidate’s meeting with the CEO, McCabe says. The meetings serve a dual purpose, he says. It gives the compensation committee chair an opportunity to explain the fiduciary duties that come with the job. But more important, the discussions allow HR executives to understand what is expected of them and what challenges they may face, he says.

    “Savvy candidates want to understand what their relationship with the compensation committee is going to be,” McCabe says. Ultimately, he says, “both parties want to be sure that they have an independent relationship with each other and that it is not controlled by the CEO.”

    During that first dinner with Reznicek, Ellinghausen got a clear picture of what the compensation committee needed from him. A lot it revolved around making sure the committee received materials on time and that the committee stuck to its published agenda.

    “One of my questions to him was, ‘What’s working, and what’s not?’ ” Ellinghausen says. “As a new person at the company, I was very concerned about understanding everything from a compliance perspective. I wanted to understand all of the processes and the flow of documentation.”

    Pulte CEO Richard Dugas recognized how important this was and made establishing Ellinghausen’s role with the compensation committee one of the HR executive’s initial 90-day goals.

    Dugas also solicits feedback from Reznicek and the other members of the compensation committee on how Ellinghausen performs. This feedback is part of Ellinghausen’s annual performance review.

    “One of my objectives each year is my effectiveness with the compensation committee through the eyes of the committee,” Ellinghausen says.

    Including the compensation committee in the performance reviews of HR executives is a practice that all companies should adopt, but less than 20 percent do, says David Swinford, a senior managing director at Pearl Meyer & Partners, which works with Pulte’s compensation committee and Ellinghausen.

    “I think that as people see this happening more and boards of directors share ideas, we will see this trend increase,” he says.

Information source
    For his part, Ellinghausen spends much of his time working with his staff to help Pulte’s compensation committee stay ahead of trends and understand upcoming regulations. “We send them articles and other types of information and are constantly trying to educate them,” he says.

    Ellinghausen works closely with Swinford of Pearl Meyer to make sure Swinford understands the cultural nuances of the company, such as how performance goals are set, where the talent is and where there are shortages. “We know who the people are who create the most value,” he says. “I don’t know that any consultant will ever have that level of insight. They are looking at the numbers, but they don’t have intimate knowledge of our talent and what we are doing.”

    Unlike many companies, Pulte often looks outside its industry for senior talent, Ellinghausen says. That means that Pulte can’t just look at what other home-building companies pay their top executives to determine what it should do, he says.

    Swinford agrees that as a compensation consultant, he relies heavily on HR executives to explain the nuances of the organization. “If I am charged with developing incentive plans for three or four levels of management, I can design a plan, but I know nothing about the people, and HR knows that.”

    Outside of being the expert on organizational culture for the consultant, HR executives who really want to get the compensation committee’s attention need to stay on top of the regulations that could affect the committee’s decisions, consultants say.

    A few executives have developed “source books” for their compensation committees, which provide historical data of executive compensation at the company, Dolmat-Connell says. Putting data in this format can be extremely helpful, particularly for boards that do not use compensation consultants, he says.

    HR executives can also prove their value by helping to manage the salary expectations of top executives, says Ira Kay, director of the compensation practice at Watson Wyatt Worldwide.

    If a CEO expects a big bump in compensation, “the HR person can say, ‘I don’t think the committee is leaning in that direction,’ ” Kay says. “There is no mechanism for the chair of the compensation committee to do that because it’s such a formal relationship.”

    Ellinghausen is grateful that he came into a company where the CEO gives him room to work independently with the compensation committee. But not all companies run so smoothly, consultants say.

    In those cases, it’s crucial for the HR executive to be proactive, reaching out to the compensation chair and understanding how the committee operates, Ellinghausen says.

    “HR executives need to get to the compensation committees early and understand their governance processes and information flow,” he says. “I have got to believe that most HR folks understand that this part of their role and they may need to initiate that relationship.”

Workforce Management, November 6, 2006, p. 1, 35-37 — Subscribe Now!

 

    WM: In June, Johnson & Johnson announced the $16.6 billion acquisition of Pfizer’s consumer health care business. How early on did you get involved in the deal?

    Foster-Cheek: Clearly [I’m involved] on the due diligence side. Even though I am head of HR, I am also on the executive committee as a corporate officer. As we consider large-scale acquisitions the size of Pfizer, I would be involved in the upfront work before we make the decision to acquire the company. That early work around the financial analysis and valuation is work that occurs within the executive committee.

    Further down, I sit on the steering committee for the Pfizer consumer health care acquisition. The steering committee has accountability for the high-level future organizational design and really ensuring that integration runs well. I have an HR leader for the consumer business of Johnson & Johnson who oversees the acquisition in terms of the organizational design.

    WM: At what point do you start assessing talent before an acquisition?

    Foster-Cheek: Immediately. That is part of the assessment of the acquisition. We think about things like “Does this give us access to growth markets that we aren’t currently in? What is the reputation in the marketplace of the talent of the organization?” And you can do that by looking at the business performance of the talent. I think about what is going to be required to run the future organization, and that is something I do with the HR leaders of the business.

    With the Pfizer business, I have a little bit of insight, since I worked at Pfizer for 13 years. Part of the valuation is the talent we are going to get. Literally from the minute we ink the deal, we do as much as we can under Federal Trade Commission rules, since we are still competitors until the deal closes. We use any public information that we have access to and use that to do early integration planning.

    WM: How important is that?

    Foster-Cheek: We do so many acquisitions, and our historic growth has been through acquisitions. This Pfizer acquisition will be the largest in our history. You need to have your HR professionals in from the very beginning because that is how you know you are putting together processes to allow the organization to function properly.

Workforce Management, October 23, 2006, p. 21 — Subscribe Now!