Author: Kathleen Murray

When employee Eric Francis quit his job in 1990, MAI Systems paid little attention. Francis was one of several customer-service representatives at the Irvine, California-based computer company, and turnover in the department wasn’t unusual. Following an uneventful exit interview with human resources officials, Francis left to start a job with MAI rival, Peak Computer, also in Irvine.

It might have ended there. But when Francis’ new employer began taking away MAI’s business, management took notice. After some checking, MAI learned that Francis was using inside knowledge of MAI’s customer lists to make sales. Company officials also suspected he might be relying on MAI’s customer specification and repair manuals. Could he do that? Not according to the company’s legal department.

In March 1992, MAI sued Francis for theft of trade secrets. The company alleged that the ex-employee took manuals and other technical information that he knew to be proprietary. Francis claimed that the company routinely had left such information with customers and that he only was using knowledge about the industry. MAI ultimately got a temporary restraining order to stop him from selling to its clients, but only after losing 80 customers and spending thousands of dollars in legal fees. “This was clearly a violation that cost us,” says Elliott Stein, associate general counsel for MAI.

The plight of MAI isn’t an isolated incident—nor is it one confined to the computer business or other high-tech industries. In today’s hyper-competitive, copycat global economy, protecting such trade secrets as formulas, processes, customer lists, ideas developed at work and other intellectual property (see “Glossary of Terms”) has become a major concern for employers.

There are many reasons why. For one, today’s work force is mobile. On top of that, U.S. firms face increasingly competitive pressures as the recession lingers and budgets remain tight. At the same time, corporate downsizing and cutbacks of the past three years have unleashed a flock of professionals back into the job market. In many cases, experienced employees have had little choice but to go to work for a competitor or begin consulting in their field. If they haven’t been educated about what are protected trade secrets (and sometimes even if they have), it isn’t unusual to find them using proprietary knowledge or information from their former jobs. It’s hard to put something as intangible as a formula in someone’s head under lock and key. “The question is, what do you do with people who don’t spend an entire career with your company?” says Toni Simonetti, a communications manager for Detroit-based General Motors Co., a victim in the trade-secrets war. “How much of what they know is proprietary? How much of what’s in a person’s head belongs to them? I don’t think you’ll find an easy answer.”

Despite the difficulty, a growing number of employers—from hairstyling salons to manufacturing firms, stock brokerages to bakeries—are looking for new ways to protect what gives them an advantage, which is the possession and use of knowledge. Traditionally, this responsibility has fallen to corporate legal departments or outside attorneys. However, a handful of organizations have realized that safeguarding trade secrets goes beyond stopgap legal measures.

“It’s starting to be recognized as a classic HR problem,” says Mike Garelick, head of the compensation and human resources practice at consulting firm Towers Perrin in Chicago. He believes that HR managers can play a significant role in the protection of intellectual property. Why? The issue of safeguarding trade secrets is, at heart, a personnel issue, he maintains. “Competitive advantage is built around knowledge, and knowledge is generated by people. It’s important to manage not only the knowledge, but also the people who are creating it,” he says.

In many ways the role HR departments can play in a corporate campaign to eliminate trade-secret theft is similar to HR’s involvement with wrongful termination cases. Where the legal department handles an employee lawsuit and may explain the fine points of the law, HR personnel are responsible for making sure that an employer documented the reasons for firing an individual and handled the termination according to company policy.

The HR department also attempts to help create an environment in which employees feel that their work is valued and that they’re treated fairly. In the same vein, says Garelick, HR can ensure that employees are educated about what information is proprietary and that security measures are followed. HR staff also can follow up with employees who are departing to remind them of responsibilities and ensure that they aren’t taking information or property with them. Finally, HR can help set up the reward and compensation systems to give valuable employees the recognition for their achievements, reducing their need to look for this elsewhere.

Security begins with awareness.
First and foremost, HR personnel must familiarize themselves with their companies’ trade secrets: It’s hard to protect something if nobody knows it needs protecting. That sounds like a simple concept, but when it comes to trade secrets, it’s one many corporate managers don’t understand, says Alan Unikel, an employment attorney in Chicago and editor of the Intellectual Property Newsletter. “As a general rule, many companies don’t have a good idea of what their trade secrets are, and they don’t really recognize them,” he says. As a result, the security measures to make sure this sensitive information doesn’t fall into competitive hands are typically lax if they exist at all.

It doesn’t help that the law surrounding trade secrets is murky. Definitions of what constitutes a trade secret, or what an organization should be protecting, can vary by industry and company. Examples of trade secrets include everything from notes in the margin of an employee manual to a procedure for tying a fishing lure. As technology has raced ahead and the nature of production has changed, the law has been slow to catch up. Although as many as 39 states have adopted some form of the proposed Uniform Trade Secrets Act, there’s no federal law regulating what is and what isn’t protected. There are only general guidelines.

For instance, for something to be considered a trade secret, a company has to show that the information isn’t known in the industry, that the company has made efforts to keep it confidential and that the information provides the company some sort of competitive edge. “Many companies think something is a trade secret just because it’s confidential,” says Unikel. “It takes more than that.”

Once the human resources department has learned what formulas, customer lists, product specification or processes give it an edge, security measures often are obvious. Robert Naeve, an employment attorney who has worked on both sides of trade-secret cases, recommends to his clients that they limit access to proprietary material on a need-to-know basis. Customer lists or employee phone books can include dummy entries so that if they’re stolen they’ll be identifiable. Human resources personnel and other managers should set up access codes to computers and other data-storage areas so that only authorized persons can get into proprietary files. At Mead Data Corp., an information retrieval company in Dayton, Ohio, for example, employees are required to swipe badges to get into restricted areas. The HR department also has stringent policies about how to mark and distribute documents.

In some companies, formulas often are locked up, limited to one or two people and revealed on a need-to-know basis only. An example is Park City, Utah-based Mrs. Fields Inc., at which the purchasing of ingredients for the company’s cookies is handled separately and a special ingredients packet is sent mixed to stores so that no one can take the recipe.

Human resources professionals also should create policies about removing company property from the office. Upon termination, employees should be required to return all proprietary information and computer systems. Unikel recommends that a supervisor make up a list of what an employee has and then have the employee sign it indicating that he or she has returned everything.

Although these concepts sound basic, a surprising number of companies take chances in the security area, say attorneys. At MAI, for example, customer-service representatives did leave repair manuals with customers, so it was harder for the company to argue that this information was a trade secret. Naeve says that he advises many clients to make written manuals proprietary by marking them as such. “It’s a simple idea,” he says. “But you’d be amazed at the stuff that’s published that companies don’t label as confidential.”

Human nature also can have a way of working against security measures. As people get to know one another, for example, they may trade computer passwords, or let unauthorized persons have access to restricted areas. “The problem is that individual workers are just careless,” says James Lamont, a security consultant in Chicago. At one U.S. government agency in Washington, D.C., Lamont was able to get into an unauthorized room simply by fumbling around in his wallet, as if he were looking for an access card to open the door. An employee who saw him looking helpless unlocked the door with her card and motioned him in. “She obviously thought that I belonged there,” he says. “But I might have been there to steal something.”

As important as security is, it’s also important to strike a balance between security and getting the job done. Some companies that have the best intentions have defeated the purpose by having so much security that it hinders production, says Garelick. “Sometimes what companies do to handle trade secrets interferes with innovation and creativity,” he says.

This is precisely what happened at one large East Coast computer company with which Garelick worked. The company had extensive policies and procedures regarding trade secrets. Projects generally were broken up so that only one group knew one piece and another group knew another. By policy, communication between the groups was restricted. The result: The company was slow to develop products and slow to adapt and respond to changes in the market. Its financial performance suffered. “My suspicion is that this company had better breaks between organizational units than the CIA,” says Garelick. “Except it wasn’t as creative as it had been, and it was losing flexibility. They’d done such a good job at protecting their secrets that the secrets weren’t worth that much anymore.”

HR personnel can control use of legal agreements.
One security measure that’s becoming increasingly common doesn’t limit an employee’s access to information until he or she leaves the company. These are the legal agreements that some employers now are requiring new hires to sign. Typically called non-compete agreements or non-disclosure agreements, they’re essentially a written promise that an employee won’t use any proprietary information. “These are pretty standard,” says Bob Romanchek, a compensation consultant with Hewitt Associates in Lincolnshire, Illinois. “No matter how much communication and education you have [about trade secrets], having something in writing is important.”

General Motors began requiring its senior-level executives to sign these agreements shortly after the well-publicized case last June against the company’s former purchasing executive, J. Ignacio Lopez de Arriortua (aka Inaki Lopez). GM accused Lopez of taking millions of dollars worth of proprietary information—including cartons of confidential data about pricing and new product designs—to his new employer, German-based Volkswagen AG. GM also accused him of pushing up strategy meetings before he left so that he could gather even more data for the competitor. Lopez, who had been instrumental in repositioning the automaker, has denied the charges.

However the case eventually is resolved, attorneys say it could end up costing both companies a great deal of money. GM’s top managers and HR officials hope that the use of non-compete agreements will help prevent a recurrence of this kind of expensive headache.

The advantage of such agreements is that they provide a record that an employee has been told that information is a trade secret. Mead has been requiring certain employees to sign non-compete/ non-disclosure agreements for almost a decade. The basic agreements stipulate that the employee has a duty to the employer not to disclose trade secrets or something he or she learned at the company. The employee also is barred from doing work for a competitor while employed at the company, and sometimes for a period of years afterwards, according to Nancy Nash, legal counsel in human resources at Mead. The damage this would cause the firm and penalties for violating the agreement are included. Sometimes, for research-and-development staffers in particular, the company adds a third provision to the agreement, which bars an employee from taking and using any invention he or she created at the company for six months after the person leaves Mead for a competitor.

There are several drawbacks to agreements, however, as Nash and other attorneys readily acknowledge. First, courts in many states have found these agreements unenforceable. In some cases, it’s been determined that they can limit future employment of the worker. Often employees forget signing them, or don’t want to sign them because that may hurt their chances of getting another job in the industry.

Still, Naeve and other human resources experts agree that these agreements can act as a first line of defense. “They’re more of a threat than they are anything else,” he says.

Companies that require employees to sign non-compete agreements should be ready to explain the agreement to new hires. At Mead, new technical employees, engineers and other workers in development areas are given an orientation and educational program about trade secrets. The company also holds periodic legal forums to remind employees of the necessity to protect proprietary information.

Some organizations, such as Fluor Daniel Inc., an engineering and construction firm in Irvine, California, require employees to recertify and review the agreements on an annual basis as a reminder. Experts say that human resources also should follow up with employees at the time of termination to ensure that they remember signing the agreements. Talent Tree Professionals, for example, which like many temporary-help firms has been in trade-secret battles with former sales people who take customer lists with them, sends a letter to employees when they leave, reminding them of their obligations, says David Seaver, vice president of human resources at the Houston-based agency.

Mead’s HR staff gives employees copies of their agreements at the exit interviews and also makes sure that they understand their obligations regarding trade secrets. The departing workers also are asked to sign acknowledgement forms that state that they understand the terms of the original agreement and will be bound by it.

According to Nash, Mead only has had to pursue legal action and enforce a non-compete agreement once. That happened two years ago when someone attempted to use proprietary information about customers after he left. Because they had the documentation showing that the employee knew what information was protected, the company was able to get a temporary restraining order and a preliminary injunction to keep the ex-employee from using the trade secrets at his new job. “I think most people believe [the company] when they sign these agreements, and they don’t challenge them,” says Nash.

At the same time, Nash emphasizes that merely having an employee sign these agreements isn’t fail-safe. As MAI learned, a former employee still can do plenty of damage before any legal action can be taken.

Training provides understanding of trade secrets and protection devices.
The best insurance against trade-secret theft is to combine these agreements with a strong training and awareness program. Too often, says Unikel, this isn’t done. Most workers who take proprietary information do so inadvertently—the employees simply don’t understand that the information is protected. “Many times, we recommend that companies adopt policies, but they seem to get a low priority until the companies have a big suit like General Motors,” says Unikel.

Garelick agrees that this is an area in which too many organizations fall short. “What’s often clear when I go into companies is that some information may be important from a managerial point of view, but the organization hasn’t done a good job of communicating that to employees,” he says.

At one software company, for example, an employee who worked on updating products went to a trade association meeting and told extensive war stories to competitors and the press about the development process. He talked about what didn’t work and what did. “If you had wanted a detailed case study on [the company’s] process, you couldn’t have done any better,” Garelick says.

Later, the employee was reprimanded for his indiscretion. Because the company improperly explained to him about the importance of keeping trade secrets secret, however, he walked away thinking he had gotten in trouble simply for talking to the press. He had no idea that the information was part of what gave the company a competitive advantage.

For this reason, managers at Mead explain to their employees that talking about their work at seminars is dangerous. The company also maintains strict control over what employees are allowed to publish. This often is an issue because many of the organization’s researchers come from academia and are used to writing about their work. “We have to let them know that they can’t tell the world about their latest gee-whiz discovery because it’s a trade secret,” Nash says.

Conveying why trade secrets are important to the firm may be the single most important step an HR department can take, says Pat Sweeney, patent counsel for Pioneer Hi-Bred International, a Des Moines, Iowa-based biotechnology firm at which engineers seed for such plants as sorghum, sunflowers, wheat and soybeans. “If I were going to tell an HR manager what his or her role was, I would say it’s to help make employees keenly aware of the great value in trade secrets,” Sweeney says.

She should know. Two years ago, a competitor got hold of some of the company’s proprietary seed. And, although it won a $46 million settlement against the competitor, these days the organization doesn’t take any chances. Human resources managers explain to employees that their jobs are dependent on certain information remaining within the company and require them to sign non-disclosure agreements.

Also, Pioneer recently held a session for its receptionists reminding them of the importance of protecting trade secrets. The seminar, given by the company’s legal and human resources departments, covered what intellectual property is and why it’s important to the company. The reason that the company chose these employees to participate was because receptionists control the flow of people and some material in and out of the company, says Sweeney. “They could allow a non-employee into part of the system that’s sensitive, and that person could wander around at will,” she says.

According to Sweeney, the employees responded well to the seminar. One of the questions they were most curious about was how someone who was trying to appropriate information would try to do it. Pioneer was careful to be realistic in its expectations, recognizing that it was asking receptionists to be friendly and helpful and yet act as security. “That’s kind of a hard cross,” said Sweeney.

Create loyalty and retention through rewards and recognition.
Asking employees to protect a company’s trade secrets requires a payoff for them. Companies must look hard at their reward and compensation systems to see that they’re properly recognizing employees for holding up their part of the bargain. Increasingly, Garelick says, human resources personnel consult with him about such issues as how to treat, reward and retain employees—specifically because a departing worker has taken trade secrets to a new employer. “Some of the main issues surrounding trade secrets have to do with management style and management process,” he says.

Questions HR should be asking include: Are we rewarding people in a way that’s meaningful to them? Are we recognizing individual achievements? “Sometimes all it takes is a letter from the company president commending someone for a job well done to make someone feel loyalty to the company,” says John Hermann, an Irvine, California-based human resources consultant.

Often, however, it takes more than that. At Fluor, where engineers design projects, management realizes that rewarding performance goes beyond simply paying high salaries, says Mark Krause, director of human resources. “You have to build an environment in which employees clearly can see that they can have their innovativeness recognized.” For this reason, Fluor managers have instituted such forums for recognition as monthly recognition days, at which employees are verbally thanked during a department meeting; company-paid lunches; and spot-bonus programs, at which a producer is given a cash award for a particular achievement. The company also has adopted a worker-friendly atmosphere of flexible hours and generous benefits.

Creating the right environment may go beyond blanket policies for the entire company. One high-technology company with which Garelick works had one particular employee who, in addition to doing his job, was proficent with software and computers and tinkered with developing new approaches. At one point, he invented a modification to some equipment that increased productivity. To reward him, management restructured his job so that he could work on his regular duties 20 hours a week, and then they gave him a budget of $5,000 a month and told him he could spend the other 20 hours each week inventing and troubleshooting. “The company got tremendous mileage out of that,” Garelick says. “The person was motivated and did even more for the firm.”

Minnesota Mining and Manufacturing Co. (3M) is another firm that has accrued benefits from setting up alternative programs to reward and encourage innovation. At the Minneapolis-based company, known for such products as Scotch Tape™ and Post-it™ Notes, research and development employees who have ideas for new products or applications are invited to present their plans to a management committee and apply for a grant. If the projects are approved, the company gives the employees a budget and the time to work on them.

Another alternative is to give employees who work on new products stock in the company so that they may realize any gains the product brings. Employers also should look at how compensation and bonuses are structured to see that they act both as a retention device for top talent and encourage the protection of trade secrets. Romanchek of Hewitt Associates has helped several companies set up reward systems that recognize performance. Options he suggests include:

• Offering supplemental retirement agreements that condition the payment of benefits on not competing or not revealing trade secrets. The same thing can be done with severance agreements in the event of a layoff. If an employee doesn’t comply, he or she risks forfeiting his or her benefits. Stock-option plans also can be set up this way. “Restricted stock is the traditional retention device,” says Romanchek

• Rewards or bonuses for performance or innovation can be spread out during a longer period to give employees an incentive for staying with the company. GM, for example, spreads out bonuses over a three- to five-year period. If an executive leaves before the time is up, he or she may lose part of his or her compensation. The GM plan also is linked to stock so that the employee has a financial stake in the company’s performance. Bonuses can be linked to the protection of trade secrets just as they’re linked to management-by-objectives goals

• Compensation need not be based solely on output. HR might set up bonus plans to recognize the fact that someone came up with 10 new ideas. Or the company might provide a researcher with additional staff to determine whether a potential product has value. “Rewards don’t have to be focused on the success of a product,” Romanchek says. “I see no reason why you couldn’t build rewards for creativity into the process. If employees are happy somewhere, they’re less likely to be lured away solely by more money.”

Programs designed to manage careers indirectly affect trade-secret spreading.
It’s just as important for employers to pay attention to career development and show employees where they can go within the company as it is to compensate them fairly. Micron Technology Inc. in Boise, Idaho, began developing a career-development program in 1991 to better retain employees in a competitive market. The company wasn’t only concerned with losing trade secrets, but also the intellectual capital its employees had built up.

The program that HR and management developed is called “Reaching High Performance.” It helps orient new hires to the company’s corporate culture. It starts with a one-day course during which the company mission is conveyed, and new employees are encouraged to contribute immediately. Subsequent installments of the 15-hour course deal with career development and help employees map out a five-year plan. It also shows them what skills they will need to reach their goals.

The response? “People love it,” says Karen Bridges, coordinator of instructional services. “I’ve had people come up to me in the hallway and say, ‘I got this promotion because of the RHP class.'”

Although protecting trade secrets wasn’t a primary goal of the program, it did increase retention, and the firm hasn’t been involved in any trade-secret disputes.

Therein lies the challenge in defining HR’s role in protecting trade secrets. It’s difficult—if not nearly impossible—to pinpoint what programs are preventing trade secrets from getting out. Fairfield, Connecticut-based General Electric Co., for example, which had a competitor steal its diamond formula, says it’s hard to isolate programs that are specifically designed to help safeguard trade secrets. “We have ethical standards and company policies that are reviewed regularly with employees,” says GE communications director Bruce Bunch. “But we don’t have a lot of new and innovative things aimed at this particular part of behavior.”

GE does have programs that allow individuals to design their own jobs and have more responsibility in decision making. The company also offers cash and other incentives for productivity. Yet, notes Bunch, if employees want to steal, it’s hard to set up any policy to prevent that.

Other HR professionals agree. However, they also emphasize that this fact shouldn’t stop employers from learning how to manage the “knowledge workers.” Although the law on what is and isn’t a trade secret still is evolving, the fact that people and the knowledge they possess are a company’s most important resource isn’t. Managers need to be taught how to handle people in flatter, leaner, more knowledge-powered organizations. And everyone is going to have to start to value intellectual capital, even if it can’t be seen on a balance sheet. That means more career development, more recognition and emphasis on what truly gives value. Happy employees are less likely to want to do a company damage.

This was illustrated in the blockbuster Jurassic Park. In the movie, a computer programmer feels he isn’t paid enough or recognized for the system he set up. So he steals the park’s trade secrets—dinosaur embryos—and sells them to a competitor. This act leads to the end of Jurassic Park and devastates the seller’s employer.

To professionals on the frontline like Pioneer’s Sweeney, it’s an apt reminder. “What’s important to remember,” she says, “is that it only takes one desensitized employee to lose a trade secret.”

In the zeal to protect their trade secrets, companies often neglect the other half of the equation: How to prevent their own employees from using proprietary data from other companies.

As the battle between Detroit-based General Motors Co. and Germany-based Volkswagen AG demonstrates, this too can be a costly issue. GM is accusing former executive Inaki Lopez of taking reams of proprietary documents and information to his new job at Volkswagen. GM claims it stands to lose millions of dollars if a competitor is allowed to benefit from this information. But Volkswagen could lose as well. If the courts determine it had knowledge that the information was proprietary, it could be fined millions of dollars.

In another case, Diametrics Medical Inc., a Minneapolis-based medical-equipment manufacturer, was forced to abort a $30 million initial public offering after Pittsburgh-based PPG Industries Inc. filed a lawsuit alleging theft of trade secrets and patent infringement. The suit accused Diametrics’ two founders, who formerly worked as a researcher and consultant to PPG, of using proprietary information to develop a new blood gas analyzer. Diametrics denied the charges, but said the accusation tainted the deal.

Alan Unikel, a Chicago-based attorney and editor of The Intellectual Property Newsletter, says that companies need to realize that misappropriating trade secrets can come back to haunt them, as they have for these companies. The best approach is for HR to deal with the issue while interviewing new employees. “You’ve got to nip it in the bud at the outset,” he says.

Typically, Unikel advises HR personnel to ask potential employees if they have any restrictive covenants barring them from competing against their current or former employer. If an employee has a copy of any such document, the recruiter should make a copy of it and pass it on quickly to the legal department before any hiring decision is made.

That’s the procedure followed by Mead Data Corp., an information retrieval company in Dayton, Ohio. At times the agreement is an issue, but it doesn’t always affect the work an employee will be doing at Mead. “You’ve got to be even-handed,” says Nancy Nash, legal counsel for the information firm’s HR department. “That way people expect you’ll do the same things to protect your own secrets.”

Talent Tree Professionals, which runs 130 temporary placement offices throughout the United States, won’t hire anyone for a full-time position who has signed a restrictive covenant or agreement. However, David Seaver, Talent Tree’s vice president of HR, notes that occasionally, rival firms will contact the company to get the agreement waived. Sometimes, a compromise can be worked out.

At Pioneer Hi-Bred International, a seedmaker in Des Moines, Iowa, a human resources representative talks with newly hired scientists to make sure that the organization isn’t inadvertently getting any proprietary information from them. “If they’ve been in academia, they may not be thinking that things need to be protected,” says Pat Sweeney, patent counsel for Pioneer. “Whoever is doing the hiring has to be aware of this kind of thing.”

Where problems often arise is when an organization is strict about its own trade secrets, but acquisitive when it comes to getting at others’ proprietary information. “A company may have a trade-secret policy and then they’ll hire someone away [from a competitor] and do exactly the thing they tell their employees not to respond to,” says Mike Garelick, head of the compensation and human resources practice at consulting firm Towers Perrin in Chicago.

Indeed, this is what hurt MAI Systems in Irvine, California, when it sued an employee for stealing trade secrets. The company said an ex-employee used knowledge of proprietary customer lists and service manuals to go after MAI customers. The employee countered that when he had come on board at MAI, management encouraged him to get customer lists from new employees.

This do-as-I-say-not-as-I-do approach sets up a “double bind for people in the organization,” Garelick says. “It requires companies to take a delicate look at the ethical considerations of how they want to operate.”

Some HR managers may shy away from helping companies protect trade secrets because they dislike all the legal mumbo jumbo. The truth is, the area isn’t as complex as it seems. Here’s a primer to help the uninitiated unravel the jargon of proprietary property.

Confidential:
Items or information that are secret and for which access is limited to certain people within an organization. Company documents often are marked confidential to denote that they’re proprietary. However, confidential information isn’t necessarily a trade secret. To be a trade secret, it also must have value to the company’s competitors. A confidential customer list, for example, wouldn’t be protected if the company’s clients were obvious to everyone else in the industry.

Copyright:
An exclusive legal right to reproduce, publish and sell the matter and form of a literary, musical or artistic work. Some companies copyright instruction manuals and training videos.

Intellectual Property:
Ideas, processes, slogans or other intangible property that are created at an organization and give it added value or an edge over competitors. In recent years, this area has stretched. When David Letterman went to CBS from NBC, for example, NBC claimed that his “Top 10 List” and “Stupid Pet Tricks” were its intellectual property because Letterman originated the ideas while working for the network. Showing how hard these types of arrangements can be to enforce, Letterman did a Top 10 List on his first CBS broadcast.

Non-compete Agreement:
A written agreement in which an employee agrees not to compete with his or her employer by working for a competitor or becoming a competitor, usually for a specified period. These agreements often are tied to pay or severance packages.

Non-disclosure Agreement:
A written agreement in which an employee agrees to keep specific information confidential during and after his or her employment, or suffer damages as specified.

Patent:
A legal right or privilege that gives an inventor the exclusive right to make, use or sell an invention for a specified period of time. Patents can be obtained on products, but often on processes as well, such as a patented process to manufacture a new drug or a toaster.

Trade Secret:
Any formulas, ideas, customer lists, documents or knowledge that are proprietary to an organization and generally not known in the industry. A company generally must make efforts to keep this information confidential and prove that the information gives it a competitive edge.

Trademark:
A registered word or device (logo) that points to origin or ownership of merchandise to which it’s applied and gives the owner the legal right to proceeds from making or selling it. In recent years, the use of trademarks has been extended to include such things as ex-Los Angeles Lakers Coach Pat Riley’s phrase “three-peat” to denote a team winning a championship three times in a row, and the decor of a Mexican restaurant, termed “trade dress” by a court that ordered it not be copied by another chain.

Portable pensions aren’t for all companies. Like any new trend, they fit in well at some companies and don’t work well at others.

Many old-line manufacturers, for example, eschew portability because their workers still tend to stay for many years, and they don’t see any change in that pattern. Consider the case of Midland, Michigan-based Dow Chemical Co. Philip Hartliep, manager of retirement operations, compensation and benefits for the chemical firm, keeps up on the issues and trends. He wants to be sure that workers are getting the best deal when they retire, and that the company is getting the best deal for the money that it’s investing.

For the past couple of years, Hartliep has taken a critical look at the company’s defined-benefits plan. The plan provides workers with a retirement benefit based on years of service, and tends to reward long-term employees. Last year, he even went so far as to float a couple of trial balloons with company management: Would a cash-balance plan be easier to understand? If workers are going to be more mobile, should they look for something more portable?

Hartliep didn’t get too far. In fact, management shot him down. “Their belief is that changing pension plans because people are going to move around more isn’t their responsibility,” says Hartliep. “They see pension plans as a return for long service. Period.” (Dow does provide its workers with a 401(k) plan, which is portable. Employees who choose to move on may take their account balances with them.)

The pensions-for-service mentality still exists.
Dow Chemical isn’t alone in its thinking. “Many companies in large industries still expect employees to give long service,” says Harold Loeb, a consulting actuary with Buck Consultants in New York City. “Many employers still have this pensions-for-service mentality.”

Most employers are well-intentioned. Pensions emerged in an age during which employers couldn’t afford to pay employees much money and wanted to give them deferred payments for service. “To some extent, it’s a question of paternalism,” says John Turner, deputy director of the Office of Research and Economic analysis, Pension and Welfare Benefits Administration, U.S. Department of Labor.

In his book, Pension Policy for a Mobile Workforce, Turner took a look at the reasons that employers resisted pension portability. Some firms, he found, are more productive when they have stable work forces. Others need to have their workers stay so that they can recoup training costs. At some firms, it’s harder to do business if workers have long tenures. Still other companies can have work forces that leave or stay, and it doesn’t matter.

“There’s no simple conclusion or solution,” says Turner. “If you mandated one type of pension plan, it would hurt some firms and not help others.”

At the other end of the spectrum, he adds, are newer industries, such as high technology, electronics or biotechnology. Because these industries tend to attract a younger and more mobile work force, they’re more likely to have portable retirement packages. However, because these industries are so new, their pensions are likely to consist of the same thing that Dow Chemical gives departing employees: a 401(k) savings plan.

Some Silicon Valley corporations, such as Apple Computer, offer a 401(k) savings plan as the primary retirement vehicle. Part of the reason is timing. Many of these firms were formed in the ’70s. By then, there was a movement away from the traditional defined-benefit plan. Since the ’70s, nearly 80% of the new plans have been defined-contribution plans.

These companies haven’t been around long enough to make these kinds of benefits worthwhile, according to Luke Bailey, a partner in the San Francisco law firm of Greene, Radovsky, Maloney & Share. “They have a high turnover, and you aren’t going to see a defined-benefit plan,” he says.

Intel Corp. is an exception. At the Santa Clara, California-based computer firm, workers receive a 401(k). They also are enrolled in a profit-sharing plan that has a targeted benefit. The catch is that if employees don’t stay long enough with the company, they lose part of it.

Pension plans must meet your company’s needs.
The lesson is that HR managers must make their own decisions when deciding on the portability of a pension. At Washington, D.C.-based Marriott Corp., for example, there always will be a high turnover. That’s just the nature of the hotel business. Management wants to provide some retirement vehicle as an inducement for employees to stay longer, but it would be wasting its money if it set something up for 40-year veterans. Its choice: a profit-sharing 401(k) in which employees can sock away 15% of their pay before taxes.

“During the last 33 years, we’ve looked at the alternatives,” says Deborah Iwig, vice president of retirements and benefits for the hotel chain, “but then, when we look at the philosophy behind our plan, this makes sense.” That philosophy is that individuals have some responsibility for looking out for their own retirement. “We don’t owe employees a certain amount of retirement income,” says Iwig. “That isn’t our responsibility.”

Other companies also have resisted the peer pressure. San Francisco-based Pacific Gas & Electric provides both a traditional pension for years and service and a 401(k). During the past couple of years, questions have been raised about allowing employees to take both their 401(k) and their traditional pension in a lump sum when they retire. The company decided against this practice for several reasons. “In part, we’re being a bit paternalistic,” says Gary Encinas, the company’s legal counsel. “We want to ensure some safety net.”

PG&E officials also took a look at their work force recently and concluded that despite the trends about increased mobility, most of their employees remain long-term careerists. “As our work force changes, we’ll look at it again,” says Encinas. “If our employees become more mobile, the equation will change, and the [pension plan] will change.”

Portable pension plans:
Through these types of plans, employees who work at several different companies throughout their careers will have a retirement income that’s similar to the income of employees who work at the same company throughout their entire careers, provided that they are close to the same income level at retirement.

Defined-benefit plans:
These are plans through which employers pay a specific (or defined) benefit to employees at retirement. Benefits usually are determined by a formula based on the employees’ years of experience and pay levels at retirement.

Defined-contribution plans:
These are plans through which employers, and in some cases employees, make fixed (or defined) contributions. Benefits are paid out to employees at retirement. If an employee leaves the company before retirement, the earned portion of the proceeds is portable. Profit-sharing and 401(k) plans are the most common types of defined-contribution plans.

Pension Equity Plan:
This type of plan offers the security of a traditional pension plan plus portability. It’s a final-average pension plan in which benefits are tied more closely to salary at separation from the company than to years of service.

Cash-balance plans:
These plans essentially are defined-contribution plans that have cash balances that employees can take with them when they change jobs. Employees are credited with a certain amount of money each year, based on their annual pay. These contributions are compounded, based on a chosen interest rate.

Targeted-benefit plans:
Through these plans, employers come up with a benefit that they think employees should earn at retirement, based on pay levels. Using actuarial tables and certain interest-rate assumptions, the employer then backs into the amount it would have to contribute annually to accumulate the desired benefit by retirement.

Employees who leave Duracell International Inc. for other jobs have become accustomed to gathering the usual mementos when they go: nameplates, the company mug, personal files or notebooks from a training session. But these days, many departing staffers at the Bethel, Connecticut, battery manufacturer are finding it easier to pack a little something extra when they move on—their pension plans.

Duracell is one of a growing number of companies that’s redesigning and simplifying its pension plan to meet the needs of a changing work force—and part of that means making it portable. In the latest twist to pension planning, more companies today are learning that it can be advantageous to allow employees to take their retirement income when they leave and roll it over into a new employer’s savings plan or IRA.

For most employers, this represents a major shift in thinking. Formerly, the primary purpose of a pension was to retain workers and reward long-term service. Employers are finding that this equation no longer holds true. Today’s reality is that employees are more mobile and less likely to be at a company long enough to benefit from traditional pension plans. For competitive reasons—such as the need for flexible staffing to keep costs down—many businesses are less-in-clined to want employees to settle in for the long haul.

“Companies are taking a hard look at whether their current plans meet their objectives,” says Mike Wright, who’s a partner specializing in retirement planning at Lincolnshire, Illinois-based Hewitt Associates.

Adds Anthony R. Martin, national director of the defined-contribution practice for Coopers & Lybrand in Chicago, “The old retirement philosophy doesn’t work anymore. Originally, companies offered pension plans because they wanted people to be productive and not have to worry about security. But that was when they stayed at one job. Now they don’t anymore. Consequently, the trendsetters are looking at portability.”

In 1988, for example, The Equitable Life Insurance Company in New York City redesigned its pension plan after discovering through a review of its actuarial assumptions that only 8% of its employees were expected to retire with the company. At the time, the company was offering a retirement package that was designed to reward long-term employees who left the company only after age 55. Given what the company saw happening in the future, this didn’t make sense. Consequently, The Equitable adopted a more portable pension plan, which also saved the company a significant amount of money. “We realized that the turnover had accelerated,” says Robert Sjogren, the company’s vice president of employee benefits. “It didn’t seem as if it was going to get any better.”

Similarly in 1989, Wendy’s International, in Dublin, Ohio, restructured its pension plan, in part to give its key employees—store managers—better retirement benefits. Through informal surveys, management had identified these employees as key to the bottom-line success of the company. If the company could improve the retention rate of these employees even by a year or two, it would help improve productivity and the efficiency of Wendy’s operations.

At the same time, management didn’t want to kid itself or its employees by coming up with a long-term retirement package. “Most of our managers won’t retire here,” says Lisa Jones, director of employee benefits at Wendy’s. “Telling a 21-year-old, ‘You have a benefit that equals 50% of your earnings at 65’ isn’t going to mean much.”

The pension plan that Wendy’s settled on was a cash-balance plan that resembled a 401(k), in that employees could contribute part of their pay and receive a match from the company. The idea was to reward service on a real-time basis. “We decided that we weren’t going to be able to provide [their] entire retirement income,” says Jones, “but we’ll make sure that [they] get [their] piece from Wendy’s.”

It’s this type of thinking that’s propelling companies to implement portable pension plans. Although the definition of portability varies, a typical plan works like this: Suppose that employee 1 and employee 2 work as engineers for the ABC Co. Employee 1 puts in 35 years of work at ABC. Employee 2 puts in 15 years at ABC and 20 years at four other companies. In a truly portable system, employee 1 and employee 2 would earn approximately the same pension when they retired, provided that they were close to the same income level. Because of the way in which most pension plans currently are set up, employee 2 probably will have a substantially lower retirement income because he has worked for several employers.

Still, for many HR departments, discussions of portability represent nothing short of a revolution. Indeed, some old-line manufacturing companies, such as Midland, Michigan-based Dow Chemical Co., see little benefit in rewarding workers who have short tenures with the company (see “For Some Companies, Portable Pension Plans Aren’t Practical,” below). Meanwhile, other firms take the approach that portable pension plans are the wave of the future, and they don’t want to be left behind.

Employers who opt for portability are finding that they have several choices. The alternatives include:

• 401(k) and cash-balance plans
• Pensions that rely more on age and final pay than tenure
• Other hybrids of defined-benefit or defined-contribution plans.

Which type of portable plan a company selects seems to depend on its particular work force, needs and objectives.

For example, Duracell selected a portable cash-balance plan because it wanted to create a plan that was equitable and easy to understand. New York City-based RJR Nabisco, on the other hand, adopted a Pension Equity Plan developed by The Wyatt Company. The plan rewards good performers, even if they don’t retire with the organization or joined the organization in mid-career. Lincolnshire, Illinois-based Komatsu Dresser Industries Inc. wanted to create a plan that employees understood and could take with them. That’s why the company changed its defined-benefit plan to a targeted-benefit plan, into which the company makes regular contributions. These companies are at the forefront of the move toward portability.

Pensions have evolved toward portability.
Historically, companies set up pension plans to provide security for workers upon their retirement. Under a traditional defined-benefit plan, an employer will pay a specific (or defined) benefit to employees at retirement. Benefits usually are determined by a formula based on the employees’ years of experience and pay levels at retirement. Employees contribute the amounts necessary to provide the benefit to a trust fund and bear the risk for providing the guaranteed level of benefits. Because these plans are designed to reward long-term employees, benefits typically accrue slowly during an employee’s early years and accumulate rapidly near retirement.

In recent years, more companies have turned to defined-contribution plans. This is caused in part by the complexity of administering defined-benefit plans and in response to a work force that has become more mobile and less likely to benefit from traditional plans.

In defined-contribution plans, employers and, in some cases, employees make fixed (or defined) contributions. Employers must keep individual accounts for participants, who typically can invest contributions in one or more funds offered under the plan. If an employee leaves the company before retirement, the earned portion of the proceeds is portable and can be rolled over into another plan or an IRA. Profit-sharing and 401(k) savings plans are perhaps the most common types of defined-contribution plans.

According to Eric Lofgren, a consulting actuary with The Wyatt Company in New York City, who helped RJR Nabisco redesign its pension plan, one drawback of these plans is that they’re tied more closely to investment returns than to job performance. Fast-trackers will have less of their pay replaced upon retirement than they would under a traditional pension plan. As a result, several hybrids have sprung up to address the shortcomings in these plans. “Everyone agrees that some sort of pension portability ought to be done,” Wright says. “No one agrees on how it should be done.”

Cash-balance plans, such as the one adopted by Duracell, are designed to strike a balance between the portability of defined-contribution plans and the financial security for employees of defined-benefit plans. They’re essentially defined-benefit plans that have cash balances and that employees can take with them when they change jobs. The balances are unfunded until the employee leaves the organization.

Here’s how these plans typically work: An employee is credited with a certain amount of money each year, based on his or her annual pay. These contributions are compounded, based on a chosen interest rate—such as the rate for five-year treasury bills.

One drawback of these plans is their administration. Because individual account balances must be maintained, the record keeping can be burdensome and expensive. Additionally, it can be difficult to comply with IRS regulations. Several companies, however, have been pleased with these vehicles. “What’s driving these plans is a desire to retain younger employees,” explains Luke Bailey, a partner with the San Francisco law firm of Greene, Radovsky, Maloney & Share.

Perhaps the newest alternative to pension plans is the Pension Equity Plan. RJR Nabisco was the first organization to have adopted this type of pension plan. C & G Holdings, which is located in Oak Brook, Illinois, is implementing the plan for its salaried employees this month. Three other companies are in the process of adopting such a pension plan.

The Pension Equity Plan offers employees the security of a traditional plan plus portability. Unlike the cash-balance plan, the Pension Equity Plan is a final-average plan with benefits tied more closely to salary at separation from the company.

The plan works like this: Each year, an employee is credited with a percentage of income based on his or her age. The older the employee is, the larger the percentage. To determine the individual’s lump-sum entitlement, these percentages are added up and multiplied by the employee’s final average pay.

For example, suppose that a participant retires at age 65 with 20 years of service at a final average salary of $50,000. During a 20-year career, the employee accrued lump-sum credits of 220%. These credits are applied to the $50,000 in final average pay. An excess 55% of the credits are applied to pay above the threshold ($20,000 in this example). The final distribution to the worker equals $126,500. This arguably could be converted into a retirement income of 25% to 30% of pay.

The Wyatt Company and RJR Nabisco say that this plan treats all groups of employees equitably. It also doesn’t punish fast-trackers and mid-career hires, because it’s age-weighted and based on pay, not tenure.

A third alternative is the targeted-benefit plan, adopted by Komatsu Dresser last year. This plan is a defined-contribution plan that’s designed to resemble a defined-benefit plan. The targeted-benefit plan often works well in organizations that have traditional work forces that are accustomed to a defined-benefit plan.

Here’s how this type of plan works: The employer comes up with a benefit that it believes its workers should earn at retirement, based on their pay levels and years of service. Using actuarial tables and certain interest-rate assumptions, the employer then backs into the amount it would have to contribute annually to accumulate the benefit by retirement.

The advantages of this plan are:

• The employer knows what its contribution must be.
• Employees have the certainty that their pension is being funded.

Additionally, the plan can avoid the regulatory requirements for defined-benefit plans. One drawback is that employers must maintain individual account balances.

A portable pension plan positions RJR Nabisco to attract qualified employees.
For RJR Nabisco, the road to a more portable pension plan began in 1991. As Vice President of Benefits Gerald Angowitz explains, that’s when the company began taking a hard look at its current pension coverage. Its goal was to make sure that it was positioned properly to attract and retain the most-qualified employees in what was shaping up to be a very diverse work force in the 1990s and beyond. After the merger between R.J. Reynolds Tobacco and Nabisco Foods Group, the company continued to look for ways to streamline its entire operation.

At the time, the company had two pension plans and two very different work forces. R.J. Reynolds Tobacco had an older work force that included many career employees. Management always had received positive feedback from employees on its pension plan. It was a defined-benefit plan that provided little buildup of value in the early years, but offered retirement income at 65 that was a percentage of final average pay.

At the other end of the spectrum was the Nabisco Foods Group, which tended to have younger, more mobile workers. Although Nabisco’s salaried employees had a cash-balance plan that was designed for a mobile work force, record keeping and administrative costs were steep. Another problem was that not all of the employees were mobile. Many workers had been there for 20 or more years. Management worried that it was rewarding some underperformers because the benefit was linked to career average pay as opposed to final pay. In addition, the cash-balance plan wasn’t as attractive to mid-career hires—the people who had the expertise and experience that the company hoped to woo.

To come up with a new plan design, the organization created two working groups—one for the tobacco company and one for Nabisco. Each team comprised six employees from the human resources department. The groups met every three weeks or so, usually with one of the firm’s outside pension consultants.

Their mandate was clear-cut: devise a pension plan that would suit their needs best. After meeting for six months, the groups came up with their recommendations. In the end, neither group voted to keep its existing pension. “There were really enough flaws in both plans to warrant making a change,” says Angowitz. “We also wanted to create something new. The feeling was that if we didn’t, employees on the plan that wasn’t chosen would feel that they were losing something.”

The plan that both groups agreed on and put into effect on January 1 of this year turned out to be what Angowitz considers a combination of the best features of both: the Pension Equity Plan. It provides for a lump-sum benefit for each worker based on age-weighted percentages.

From the organization’s viewpoint, there are several benefits to the new pension plan. Because the actual payout is based on final average pay, it seems to management to be more tied to performance. Also, the old Nabisco plan had rewarded slow-trackers more than it did fast-trackers. Under the new plan, the two groups of workers will receive comparable benefits. Because the payout is based on final average pay and an age credit, mid-career hires will have time to accumulate a better pension than they did under the old plan. The new plan also provides portability by allowing employees to take the benefit with them when they leave. Under the old plan, employees had to wait until they retired to access the funds, and they were penalized for early departures.

Another benefit of the Pension Equity Plan is the simplification of the work that benefits-department staffers must do to prove to the federal government that the plan doesn’t discriminate in favor of more highly paid employees. Under the old plans, staffers had to calculate benefits for employees who had many different positions. Now Angowitz and the company’s actuaries say that they’ll be able to prove that the plan is fair by explaining the formula.

Angowitz says that the new plan has been a success. From the organization’s standpoint, it’s already working as a recruitment tool. Mid-career hires have commented to him and to other managers on the generosity of the plan, which is simple to switch to from another company’s pension plan.

Angowitz expects to wring some savings from decreased administration, and the time-benefits staffers will save time because the plan is simpler to explain. Employees have told the benefits department that they like being able to find out how much money they have accrued in their pensions so far. “There’s no question now that they understand how this plan works,” Angowitz explains. He already has noticed a reduction in calls to the benefits office.

A targeted-benefit plan streamlines the pension plan.
When benefits manager Patricia Hanrahan helped introduce a new pension plan at Komatsu Dresser last fall, she was unsure how employees would accept it, but she had to do something.

Like many U.S. corporations, the heavy-equipment manufacturer has spent the last couple of years streamlining its operations. But until recently, its pension plan escaped any attempts at modernization. The traditional, defined-benefit plan had grown unwieldy and cumbersome, mostly because of a series of mergers. Each time that Komatsu Dresser (formerly part of International Harvester) changed ownership, it inherited a new pension plan. At the same time, employees were grandfathered in by provisions of the old pension. Calculating benefits for even one employee involved looking back through all the pension agreements.

“We were always getting complaints that employees didn’t understand the plan,” says Hanrahan. In addition to performing the manual computations required to arrive at estimates, benefits personnel had to show that the plan didn’t discriminate and make filings with the government.

Given the state of manufacturing, employees also were growing increasingly nervous about their jobs and pensions, Hanrahan remembers. “The whole thing was confusing to employees, and they were worried,” she says. At the time, Komatsu Dresser was in the process of laying off some employees. With so many companies going out of business and so many newspaper reports about underfunded pension plans, many employees were afraid that they might lose their pensions. Although Komatsu Dresser’s pension isn’t underfunded, the organization wanted to stop rumors before they started.

At benefits meetings, the employees started asking questions. Why couldn’t they have more information about their pensions? Why couldn’t they get their pensions in a lump sum when they left? Were the pensions stable?

“I kept thinking that there has to be a better way to do this,” says Hanrahan. The question was how? Back in 1988, the company had implemented a 401(k) savings plan that appeared to be working well. Employees liked the idea of being able to see their balances. Hanrahan wanted to develop something similar—something that would become a substantial benefit by retirement age but wouldn’t be a defined-benefit plan.

The solution was a targeted-benefit plan. This hybrid of a cash-balance plan essentially works like a 401(k), only it’s entirely company-funded. Employees receive a credit annually that builds to a certain target benefit at retirement. The company has the advantage of knowing its liability on a real-time basis.

For Hanrahan, the plan means fewer calls to her office from frustrated employees, because it’s simple. It’s also portable, which met another HR goal. After five years, employees can take the payout in a lump sum and roll it over into a new pension plan or IRA. “When they quit or retire, they can take the money and run,” says Hanrahan. “It’s the kind of thing they could take to an investment advisor and say, ‘Here’s how much I have; what should I do with it?'”

The plan was designed for Komatsu Dresser’s 1,300 salaried employees. The biggest challenge, says Hanrahan, was switching the older employees over to the new plan. No employees actually lost their deferred benefits, but they did have them frozen to age 65. Everyone cashed out of Komatsu Dresser’s plan. They received a lump sum, which they could roll over into a 401(k) or the new target-benefit plan. Although all employees were enrolled in the new plan automatically, very few put their funds from the early retirement plan into it. Instead, they opted for the more familiar 401(k).

There was enough conflict along the way to make Hanrahan wonder if the plan would work. After the company started notifying employees about the new plan in September, a handful of workers who thought that the company was taking advantage of them when the other plan terminated wrote to the IRS. Hanrahan disputes the charge, but says that she can’t discuss the matter while the complaints are pending.

At the moment, she’s looking at part two of her push for portability. By early 1994, she hopes to spin responsibility for investing money in the plan off to the employees. Komatsu Dresser already has set up an investment committee, composed of the top financial officers of the corporation, to select investment vehicles for the plan. The idea is to give employees more selection than the standard family of mutual funds. Her biggest challenge now is finding an independent financial expert to educate employees about investments.

In the meantime, Hanrahan says, it’s too early to know how the new pension plan is going over. “My guess is that once we get the first quarterly reports out, employees should start coming around. Hopefully, then we can put the trauma behind us,” she says.

A cash-balance plan helps unify the work force.
When Duracell began looking for a new kind of pension plan, it initially was looking for simplicity and equity, more than portability. Duracell recently had been through a leveraged buyout. Company chairman Bob Kidder emphasized that the workers were a part of a new company, and that he wanted a unified company.

Part of that meant eliminating the class distinctions that came from having two separate pension plans at the battery manufacturer. The plan for salaried workers was a defined-benefit plan that was calculated on final average pay and years of service. The hourly plan also was a defined-benefit plan, except that the payout was based on a less-generous formula and on career wages. The company had grandfather clauses from more than three previous pension plans. This turned the computing of the final values into a major undertaking. Benefits workers had to find out how many other plans the employee had participated in and then use each of those formulas as well as their current plan formula.

“Some of these were four and five levels deep,” explains David Lutterbach, director of benefits and human resources systems for Duracell. “As a result, nobody was ever in a position to know what their pensions were worth because the computations were so complex.” To help with both recruiting and retention, the company wanted to create a pension that was portable and equitable, and offered some value to all the employees. “A final, average pay plan is hard for younger employees to understand,” says Lutterbach. “We knew that we needed to recognize that not everyone has been with us for 30 years. We started thinking that maybe our plan shouldn’t be so skewed.”

Another inducement to change the plan was the 1986 Tax Reform Act, which was making it more complicated to prove that a plan wasn’t discriminating in favor of more highly paid employees. The new regulations were pushing companies to close the gap between pensions for hourly and salaried employees. Lutterbach remembers Sec. 89, the overturned measure that pushed for equity in welfare plans, and wouldn’t be surprised to see the government do the same in the future with pensions.

Before the government made any new mandates, Duracell had wanted to even out the situation. Previously, the plan for salaried workers had higher benefit differentials. Lutterbach didn’t think that the company could justify these inequities anymore. Although the employees hadn’t complained, the benefits department was starting to get questions from workers about why some employees’ benefits were higher than other workers’ benefits. Skilled mechanics, who were hourly, would have lower pensions than salaried secretaries.

Another significant factor was employee perception. Although the existing pensions usually provided a better benefit, employees perceived the supplemental 401(k) savings plan as being more generous. Yet Duracell’s cost for both pensions was roughly the same. In Lutterbach’s opinion, they were shelling out money for a better pension, but this gesture and the expense were wasted because the employees didn’t understand it.

“In the first five years, there was a lot more to communicate about the 401(k),” he says, because employees took part in investing and saw the savings accumulate in statements. Meanwhile, in the company’s other pension plan, in which employees couldn’t see the buildup, “the first five years were nothing to beat our chests about,” says Lutterbach.

The company chose a cash-balance plan. That way, employees could watch their accounts build up, and they could take them with them if they left the company.

Initially, says Lutterbach, response to the plan was lukewarm. Employees suspected that the change might have been a cost-cutting move. A small group of older employees were affected by grandfather clauses from the former pensions. The majority of employees had their pension amounts converted into lump sums and transferred, to become the beginning balance in their new accounts. However, as soon as workers started getting their statements, Lutterbach says that reactions became more enthusiastic. “Once they actually could see the funds building, they started to see that the pension was worth something,” he says.

The new plan actually ended up costing Duracell slightly more in dollars, primarily because hourly workers had been added to the plan. The company was able to offset the increase for hourly workers somewhat by scaling back salaried benefits and reducing benefits for new hires. Contributions are on an aggregate basis, not by what Duracell contributes to the individual accounts. Any differences between what the company earns on investments and the rate used to credit participant accounts can be used to offset further contributions.

Lutterbach also expects the new plan to pay off in the future in terms of recruiting and retaining employees. “Having a unified work force is always going to cost more, but our main goal was to treat people in a fair fashion,” he says.

No matter what benefits an organization offers its employees, there’s no guarantee that workers will stay. The fact is, the work force has become more mobile. Chances are good that mobility only will increase with time. Even if workers choose to leave Duracell, Lutterbach says that the company’s new pension plan is serving its purpose in terms of motivating and attracting the employees that Duracell needs to remain competitive. If companies are going to spend the money on a pension plan, he explains, “it’s important that employees understand what they’re getting and can see where the money is coming from.”

Kathleen A. Murray is a free-lance writer based in Corona del Mar, California.