Author: Patrick Kiger

With the onslaught of headline-grabbing scandals involving top executives in recent years–including the criminal trials in January of Enron top officers Kenneth Lay, and Jeffrey Skilling, it’s easy to become fascinated with lurid details of extravagant living and corporate looting.

    But ethics experts and anti-corruption consultants say the transgressions of white-collar criminals like Dennis Kozlowski, Bernard Ebbers and John and Timothy Rigas–all of whom have been sentenced in recent months–aren’t the real issue.

    “We’ve gotten so used to the high-profile scandals, with billion-dollar costs and executives with flashy lifestyles, that we’re missing the real point,” says Chris Bauer, a psychologist and author in Nashville, Tennessee, who gives ethics training to corporate workforces. “We’ve slipped into thinking that ethics problems are caused by a small group of corporate psychopaths. The reality is that it’s going on all the time, at all levels of companies.”

    In a 2004 study, the Association of Certified Fraud Examiners reports that the average American company loses 6 percent of its annual revenue to internal malfeasance, ranging from fraudulent financial statements to kickbacks extorted from suppliers.

    he total cost to the U.S. economy has increased by 50 percent over the past eight years, to a staggering $660 billion.

    Studies by major consulting organizations, academics and professional groups point to a far more pervasive–and costly–dilemma than the occasional crooked executive. In America’s top-driven corporate world, corruption apparently is flowing down from the executive suite into the cubicles, poisoning entire organizations with dangerous doses of bad behavior, dishonesty and a results-justify-the-means mentality.

    As companies increasingly understand the cost of shoddy values and malfeasance, however, the tide is turning.

    Computer Associates International, for example, was rocked by an accounting scandal in which the company agreed to set aside $225 million in a restitution fund and former chief executive Sanjay Kumar was indicted in 2004 on federal securities fraud and obstruction charges. (He has pleaded not guilty.)

    Since then, the Long Island, New York-based business software firm has worked to bolster its ethics, hiring Patrick Gnazzo, a veteran ethics expert with experience as a Navy litigator and executive at defense contractor United Technologies, as vice president in charge of ethics and compliance. Chief executive John Swainson, who was hired a year ago from IBM, spends a lot of time walking around the office to keep a closer eye on what is going on.

    Experts say the unethical culture festering inside too many companies started out with the quest for short-term gain, but the long-term damage can threaten corporate survival.

    While a big scandal can bring the risk of lawsuits and indictments, chronic dishonesty tends to have a corrosive effect on just about every aspect of human resources management–from recruiting to workplace morale.

    That’s why corporate America may be at the brink of an ethical revolution, built not just upon compliance with government regulations and corporate ethics codes, but upon promoting basic values. It’s a rebellion that human resources executives can lead by persuading companies to embrace change and revamp basic functions ranging from hiring to internal evaluations so that every area in the workplace promotes ethical behavior.

A pervasive–and costly–dilemma
    A study of more than 500 recent cases by ACFE revealed that while crooked top executives stole the biggest sums–on average, $900,000 per case–they were involved in a little more than 12 percent of internal wrongdoing. Thirty-four percent of corporate crimes involved managers, who on average pocketed ill-gotten proceeds of $140,000.

    In nearly 68 percent of cases, ordinary employees are in on the scam, draining $62,000 apiece from the corporate treasury.

    While allegations that executives have lied about corporate earnings to investors get the most media attention, two-thirds of the cases examined by ACFE involved the less glamorous crime of fraudulent disbursement, such as submitting phony invoices for payment or skimming revenue before it is recorded in the books.

    But it’s not only companies and their investors who get fleeced. A 2000 survey of 2,400 corporate workers by international consulting firm KPMG found that 56 percent said their companies scammed customers with deceptive sales practices, and nearly a third said that quality and safety tests of products had been altered or falsified. About the same number complained of antitrust violations or unfair competitive practices.

    The damage that dishonesty does to companies isn’t just measured in lost profits or angry shareholders, experts say. A recent Stanford University study of newly minted business school graduates in North America and Europe, for example, shows that companies with questionable ethics may be shooting themselves in the foot when it comes to attracting new talent.

    Seventy-seven percent of new MBAs said potential employers’ ethics were of critical importance to them, and 97 percent wanted to work for a company that was above reproach, even if it meant accepting a substantially smaller salary.

    Psychologist Bauer says that corrupt managers and employees tend to create silos to avoid scrutiny, thus wreaking havoc on interdepartmental teamwork and communication. Those pockets of dishonesty also harm the employee evaluation and professional development processes.

    “They’re looking to select and promote people who share their values, rather than the best people,” he says. “They want someone who’s going to play along.”

Why good people do bad things
    Contrary to the popular assumption that young people pose the highest risks, just 17 percent of corporate crooks were under 30, while nearly half were 40 or older. Tenure doesn’t increase trustworthiness, either. About three-quarters of corporate thieves had at least three years of experience, and a quarter had spent 10 or more years with the company.

    The employees who had been with the company the longest, in fact, also tended to be involved in the biggest frauds. Eighty-seven percent of those caught in illegal behavior didn’t have previous criminal records–a fact that’s likely to frustrate proponents of vigorous background checks.

    So why are these people doing wrong? While some people undoubtedly are just greedy or dishonest, research suggests that the tone set by ethically lax corporate leaders may be pushing otherwise honest people over the line.

    In the KPMG study, three-quarters of employees pointed to low morale and an atmosphere of cynicism as a major cause of ethical problems, while two-thirds said that top-driven pressure to meet unrealistic earnings goals and too-tight schedules was a cause.

    Worst of all, nearly four in 10 believed that leaders would authorize illegal or unethical conduct if they thought it was needed to meet performance goals. In an August 2004 survey by the Society for Human Resource Management, nearly one in three corporate employees viewed their management as “only mildly trustworthy” or “not at all trustworthy,” and one in four employees didn’t think that their leaders were ethical.

    At companies with ethically compromised leaders, workers’ feeling of betrayal has a corrosive effect, says James O’Toole, a research professor at the University of Southern California’s Center for Effective Organizations and author of Creating the Good Life, a book on business ethics.

    “To discover that one has been manipulated is close to the ultimate in feeling disrespected,” O’Toole says. “Nothing makes us feel so low as to learn that our superiors think so little of us that they feel free to use us to advance their own ends.”

    Some companies exacerbate the problem by having a double standard, punishing some employees for ethical infractions but looking the other way when high performers flout the rules. A 2004 study by Arizona State University researcher Joseph Bellizzi, for example, found that sales managers treated their top salesmen more leniently, even when they clearly had violated company ethics rules.

    “If the unethical behavior of the top sales performers is seen as an important requirement for sales success, the poor sales performer may feel added pressure to do whatever it takes to bring in an order–especially after observing that sales managers have been known to look the other way,” Bellizzi says.

Better values, not more rules
    The sentences meted out in September to former Tyco International executives Kozlowski and Mark Swartz are the latest among a series of high-profile cases. In the wake of so many corporate scandals, almost every company in America–98 percent, according to a 2004 survey by Deloitte & Touche, a New York based consulting firm–agrees that maintaining good ethics is crucial. But they’re less consistent when it comes to actually doing something about it.

    Deloitte found that 83 percent of companies had adopted codes of ethics and that 80 percent had a telephone hotline or some other anonymous process by which employees could report internal wrongdoing. Only 68 percent gave employees training on how to comply with the company’s ethics rules, and only 55 percent had a full- or part-time officer in charge of making sure the system worked.

    “I call it compliance confetti,” says Joel Dziengielewski, director of forensic services at KPMG, who works with companies to bolster their ethical safeguards. “You know, like those little globes that you shake up, and the bits of paper fall all over the place. Organizations find it comforting to have all these thick binders full of regulations sitting on shelves someplace.”

    Dziengielewski cites the example of an air-freight company he recently visited. “The executive in charge of HR kept telling me what a great ethics program they had,” he says. When Dziengielewski actually looked at the details, however, he found that in job evaluations, human resources probed whether hourly workers adhered to the company’s code of conduct. Amazingly, they didn’t look at compliance by salaried employees–the ones more likely to be involved in costly wrongdoing, according to experts.

    Experts say that companies need to pay less attention to rules and more attention to transforming their cultures.

    “What we’re really talking about here isn’t a law enforcement or regulatory issue,” Bauer says. “It’s a psychological issue–an absence of core values, confusion about what is the right thing to do. I see a lot of companies saying that they’re going to tighten their rules. I don’t see a lot of them saying that they’re going to work to be extremely clear about what their values are, and give people training on how those values translate into actual behavior.”

    Here’s what the consultants and academics say companies can do to build an ethically solid corporate culture:

    Convince top executives that they have to set the ethical standard. A 2003 survey of chief executives by Korn/Ferry International, a recruiting firm in Los Angeles, found that 65 percent agreed that protecting the company’s reputation was their personal responsibility.

    But there’s work to do on the other 35 percent. Research shows that it’s crucial for management not only to talk about ethics, but to keep promises to workers and behave responsibly themselves.

    A 2003 study by the Ethics Resource Center found that in companies which do all those things, only 15 percent of employees observe misconduct by others. In companies where employees believe that their leaders talk a good game but don’t actually walk the walk, the observed misconduct soared to 56 percent.

    At Memphis, Tennessee-based auto parts retailer AutoZone, for example, all the company’s officers are required to certify the quarterly and annual financial statements, so that they take personal responsibility for keeping honest books.

    Make ethics part of the training and development process. Every employee should get ethics training, but it’s crucial to do it right. Instead of focusing on compliance with the Sarbanes-Oxley law or federal securities regulations, Bauer–who has given seminars at companies such as Northwest Airlines and New York-based hotel, travel and car rental conglomerate Cendant–says employees need to spend time clarifying their own ambitions and morals before they even start thinking about how to fit in with the company’s values.

    “I give people a sheet of paper and have them make three columns,” he says. “In the first one, I have them list what they want their values to be, and then in Column 2, they list the ingredients for their ideal life–money in the bank, a flashy car, whatever. Then, in Column 3, I have them list the conflicts between Columns 1 and 2.”

    Find a way to reward good behavior, in addition to performance. One big obstacle to reforming a morally troubled corporate culture is that it’s difficult to show the bottom-line economic benefit of avoiding ethical infractions–not just for the company, but for individual employees.

    Linda Trevino, a professor of organizational behavior at Pennsylvania State University, recommends that companies make ethics a part of their performance management systems and 360-degree evaluations, so that employees would have to meet standards for behavior as well as productivity to receive raises and promotions. In addition, she advocates rewarding exemplary behavior.

    Trevino cites the example of aerospace firm Lockheed Martin. When Lockheed vice president Ron Covais pulled the company’s bid for a multimillion-dollar foreign contract rather than pay a bribe in 2001, Lockheed not only backed his actions, but the company also recognized him with a Chairman’s Award.

    Teach managers at all levels to project fairness. Deborah Kidder, a management professor at Towson University in Maryland who has studied employee misconduct, says managers can promote good behavior by communicating effectively with employees about their decisions.

    “If they can explain the reason behind a policy or action, basically give the ‘why’ part to the story, this will go a long way towards minimizing the chances of having a violated psychological contract,” she says. “The employee may still not be happy, but if they understand the rationale and believe it is reasonable, they are unlikely to take it out on the manager or the company.” Dallas-based electronics manufacturer Texas Instruments, for example, gives its managers training so that they’ll be able to answer staffers’ ethical questions, or find someone in the organization who knows the answer if they don’t.

    But such culture change is possible only when workers, managers and executives at all levels recognize that they all must be part of the solution. Trevino says that rather than trying to root out a few bad apples, “business leaders need to be asking themselves, ‘What’s in the culture that’s rotting the apple?’ “

    Psychologist Bauer agrees. “It’s extremely corrosive when you have a culture that doesn’t ask people to be ethically attuned in decision-making, where instead it’s wink, nudge, don’t ask/don’t tell, anything’s OK as long as no one gets caught.”

The term “Enron Ethics” is the new buzzword to describe companies that conspicuously do all the right things to promote good behavior–even as they secretly wallow in turpitude.

    College of William and Mary business school professor Ronald Sims, who notes the emergence of the expression in a 2003 study published in the Journal of Business Ethics, is suspicious of showy gestures such as giving employees laminated wallet-sized copies of the corporate ethics code. Such guidelines mean little, he says, if the company’s “deep culture” rewards unethical behavior.

    A case in point is Enron’s corporate code of ethics issued in July 2000, about a year and a half before revelations emerged about the company’s sale of assets to phony partnerships. Taken at face value, the Enron code seems like a textbook model for right-minded companies to emulate.

    “We want to be proud of Enron and know that it enjoys a reputation for fairness and honesty that is respected,” former chairman and chief executive Kenneth Lay wrote in the introduction. “… Enron’s reputation depends on its people, on you and me. Let’s keep that reputation high.”

    The code, which employees had to agree in writing to obey, emphasizes basic moral values rather than mere technical compliance with federal laws and securities regulations.

    “We treat others as we would like to be treated ourselves,” Enron’s then-management wrote. “We do not tolerate abusive or disrespectful treatment. Ruthlessness, callowness and dishonesty don’t belong here.”

    In particular, the document emphasizes Enron’s responsibility to serve a variety of stakeholders.

    “Relations with the company’s many publics–customers, stockholders, governments, employees, suppliers, press and bankers–will be conducted with honesty, candor and fairness,” the code says.

    The problem is that those seemingly high-minded values were a sham, designed to conceal Enron management’s true core principle of doing whatever it took to generate profits, or at least the appearance of them. Sims says it doesn’t take employees long to figure out which code to follow.

    “In the end, companies have a way of eliminating or marginalizing those who haven’t bought into the corrupt deep culture,” he says. Those who survive tend to buy into “groupthink” and accept the company’s wrongdoing as acceptable behavior, he says.

While some companies try new ways to stay competitive through bonuses and revisited benefits packages, it appears that Delphi Corp.’s chairman, Robert S. Miller, is employing a formula that has worked for him before. Critics say he helps troubled industrial companies shed billions in liabilities by forcing the federal Pension Benefit Guaranty Corp. to take over insolvent pension plans.

    With their retirement liabilities pushed off on the government, the companies are suddenly attractive acquisition targets. It’s a strategy that makes Wall Street happy but costs taxpayers billions–and sometimes leaves workers feeling betrayed.

    One of Miller’s former companies, Bethlehem Steel, is cited as a prime example. In fairness, Bethlehem was a disaster waiting to happen long before Miller took over as chairman and CEO in September 2001. He quickly ushered the struggling company into bankruptcy.

    In the era before federal pension regulation, the steel-making giant neglected to put aside enough assets for its pension fund, instead investing in modernizing its plants. In those days, companies had a lot of latitude about putting money into their pension and health plans, says John Hinshaw, a labor historian at Lebanon Valley College in Annville, Pennsylvania.

    “Bethlehem was probably only the most extreme example,” Hinshaw says. “If the company eventually failed, the retirees went down with the ship.”

    When the steel industry encountered hard times in the mid-1970s and 1980s, Bethlehem was hit with a double whammy. As the company was forced to cut its workforce from 90,000 in 1980 to 13,000 in 2002, it found itself with seven retirees for each active employee, and was $2 billion short of what it would need to pay the pension benefits owed them, Miller testified to Congress in 2002.

    In addition, the company had $3 billion a year in health care costs, most of it going to retirees and their dependents. In 2003, Bethlehem terminated retirees’ health benefits, which Miller said at the time was necessary because the bankrupt company could no longer afford them.

    Hinshaw recalls that the move stirred a lot of anger among the company’s former workers. “The way they saw it, they’d given up pay increases in order to get those benefits. They figured the benefits were permanent, not just until they no longer were cost-efficient.”

    In his congressional testimony, Miller made no secret of his expectation that the federal Pension Benefit Guaranty Corp. eventually would have to bail out Bethlehem’s retirement plan. And in December 2002, while Bethlehem was in negotiations to be acquired by the International Steel Group in Cleveland, the PBGC terminated Bethlehem’s pension plan and assumed responsibility for retirees’ benefits.

    The $3.7 billion cost to PBGC was the biggest in the agency’s history up to that time (it has since been eclipsed by the $6.6 billion hit from United Airlines’ failed pension plan). PBGC spokesman Jeffrey Speicher says the agency needed to move quickly because Bethlehem’s sale would have triggered additional early retirement benefits to employees who lost their jobs.

    “Those benefits weren’t funded or insured, and the PBGC would have ended up taking an even bigger loss,” Speicher says.

    Ultimately, Bethlehem went out of existence when ISG bought its assets for $1.5 billion in 2003.

    “I don’t think that Miller really altered Bethlehem’s trajectory,” Hinshaw says. “When you’ve got a company that had decades of inertia, you can’t expect that one man is going to come in at the last second and save it.” Or shut it down without at least some turmoil.

Workforce Management, November 7, 2005, p. 28 — Subscribe Now!

In one respect, Maj. Gen. Michael D. Rochelle is more like a chief executive than a typical two-star general. He has spent a great deal of his time on external marketing, meeting with business and community leaders throughout the nation.

    Until he was moved to another post this month, his mission was to line up private- and public-sector employers to participate in the Army’s Partnership for Youth Success program, which aims to connect recruits with companies that they might go to work for after their service ends. It also helps the military develop skills in personnel that can later be used in the civilian world.

    Rochelle met with leaders at all levels, ranging from top executives at multinational corporations and police chiefs of metropolitan departments to educators and local businessmen in smaller cities and towns. Some of the high-level meetings were arranged by Army Recruiting Command headquarters staff members at Fort Knox, Kentucky, but many were set up by commanders of local recruiting brigades or by the retired military officers whom Rochelle uses as envoys in their communities.

    In many of these meetings, Rochelle’s function had been to close a deal. His prestige and influence helped cement such arrangements, says Army Recruiting Command spokesman S. Douglas Smith. “Our local commanders know the value of being able to bring a two-star general into town,” Smith says. “That tends to really impress people.”

    In one such meeting, Rochelle persuaded a police chief from a big U.S. city to look at the larger universe of service members as potential hires, and not just at military police officers.

    “I try to discourage the police chiefs from taking the narrower view of their job needs,” he says. “The fact is that a young infantryman out in the field is going to have to deal with a whole range of situations. That experience is going to be a lot broader, probably, than a military policeman.”

    Rochelle says he’s always willing to provide advice, especially if it helps bring more participants into the program.

Workforce Management, October 24, 2005, p. 25 — Subscribe Now!

Here are lessons that private employers can learn from the Army’s recruiting efforts, synthesized from interviews with Maj. Gen. Michael D. Rochelle, information provided by the Army, and other sources.

Make sure that your recruiters have solid ethical practices
    When some Army recruiters were accused of falsifying documents for recruits and helping them cheat on entrance tests, it hurt the image of an organization that depends upon appealing to recruits’ values.

    Private employers would do well to follow Rochelle’s idea of having recruiters spend one day a year reflecting upon the culture of the organization that they’re trying to staff. During a stand-down ordered by Rochelle in May, recruiters were required to come to work and watch a videotaped message from him and then formally reaffirm their oath to the Army.

    They also participated in discussions about why personal integrity, values and ethics are important and necessary in their work.

Use the Web to communicate directly and in real time with potential employees
    For most employers, the idea of receiving résumés by e-mail and using Web sites to attract and screen potential hires is nothing new. But the Army takes it a step further, inviting visitors at its Web site into chat rooms where they can communicate with Army recruiters and ask specific questions. A private employer who leverages technology in a similar fashion can enable a handful of in-house recruiters to have personal contact with larger numbers of potential recruits across the nation.

Reach out to those who influence your potential hires
    The Army learned through focus group research that 17- to 24-year-olds frequently seek advice on major life decisions and value the opinions of parents, teachers and other older adults in their lives. Thus, the service targeted its advertising campaign at those “influencers” as well as potential recruits themselves.

    A private employer, following the Army’s example, might try to influence the spouse or family members of a job candidate by arranging activities for them during an interview trip or talking to them about the desirability of the company’s locale.

Workforce Management, October 24, 2005, p. 28 — Subscribe Now!

For a moment, think of the U.S. Army not as an armed force fighting a war in Iraq, but as the nation’s largest employer of 17- to 24-year-olds. And like private companies in fields ranging from manufacturing to oil production, the Army is an organization urgently in need of new workers–but its dilemma is even more extreme.

    “I can’t think of a private employer who needs 80,000 new people a year,” says Eileen Levitt, chief executive of the HR Team, a human resources consulting company in Columbia, Maryland. “And the Army has another hiring problem: Most companies’ employees are worried about losing their jobs, not getting their heads blown off.”

    The challenge faced by the U.S. Army is an unenviable one–and why private-sector employers can learn from the Army’s approach to solving its manpower crisis.

    That situation is dire. Despite spending nearly $1.3 billion last year on the effort, the Army is well below its recruiting goals.

    The chairman of the House subcommittee on military personnel, Rep. John McHugh, R-New York, said at a hearing that the active-duty Army would likely miss its recruiting goal of 80,000 by as many as 7,000 soldiers when fiscal 2005 ended Sept. 30. The actual number turned out to be 6,627. National Guard units met only 80 percent of their goal. The Marine Corps, however, came in at 102 percent of its recruitment goal.

    Though no one dismisses the enormity of the Army’s recruiting woes, the organization is credited with developing innovative methods to close its recruiting gap, solutions that can be emulated in some form by the private sector. These programs include advertising and public outreach campaigns (the Army spent $177 million on its ad campaign last year), better education benefits and public-private partnerships that enable soldiers to move straight into new careers after their military service.

Daunting challenges
    The Army isn’t the only big employer with recruiting worries. While job creation overall has been weak to moderate over the past year, as the economy strengthens, the National Association of Manufacturers found in a recent poll that 36 percent of its members have unfilled positions because they cannot find workers with the right skills and qualifications.

    The trucking industry is short about 20,000 drivers, according to the American Trucking Association. In Houston, Genesis Crude Oil continually advertises for drivers, and pays cash bonuses to employees who refer new drivers to the company. Experienced welders are in such short supply that the Manitowoc Crane Group in Wisconsin had been compelled to offer on-site training for those interested in the job.

    A shortage of plumbers forces companies like Mr. Rooter Plumbing in Pleasant Valley, New York, to recruit talent in places such as South Africa and Venezuela, and then apply for permission for them to emigrate.

    Bigger problems may loom. Though there is considerable debate about whether a labor shortage is imminent, no one argues that employers won’t face considerable recruiting and hiring challenges in the coming years because of changing demographics, labor supply trends and other factors.

    In an A.C. Nielsen survey commissioned by Advanced Technology Services, a factory automation firm in Peoria, Illinois, a third of major U.S. manufacturers predicted that they will have to spend $100 million apiece in recruiting and training costs over the next five years to overcome worker shortages.

    But few private employers face anything quite as daunting as the Army’s recruiting challenges. Each year, the Army must recruit more new soldiers than the entire 63,000-employee workforce of a company like tele­communications giant BellSouth, or nearly as many as the 82,500 employed by aluminum products manufacturer Alcan.

    And the Army must recruit those soldiers from a fairly narrow segment of the U.S. population. Though there are more than 9 million American males in their late teens and early 20s, only one in three fit the Army’s requirements, which include a high school degree and a clean bill of physical and mental health.

    To locate qualified recruits, the Army uses extensive market research and surveys–much of it by outside contractors–and a sophisticated electronic system for identifying, evaluating and following up on leads. Television and print ads and other promotional tools direct possible recruits to a central Web site, GoArmy.com, where they can participate in chat room conversations with Army recruiters.

    “They’ve got the chance to ask any sort of question they have,” says Maj. Gen. Michael D. Rochelle, outgoing head of the Army’s Recruiting Command. “They range from what the prequalifications are to become a Green Beret to ‘Can I bring my horse to basic training?’ ” The site doesn’t use cookies or other identifying technologies, but interested visitors can opt to have a recruiter contact them, Rochelle says.

“The financial incentives, such as the college money, have to be adjuncts. … The reality is that while we have to remain at least competitive, we’re never going to be able to pay as much as the private sector.” –U.S. Army Maj. Gen. Michael D. Rochelle

    (Rochelle left the Recruitment Command this month to become head of the Army Installation Management Agency. The organization is in charge of managing U.S. Army bases worldwide. His replacement is Maj. Gen. Thomas Bostick, who served as commander of the Gulf Region Division of the U.S. Army Corps of Engineers in Iraq.)

Advertising and the Web sites generate about 750,000 potential raw leads a year, Rochelle says. Those leads are funneled to the Recruiting Command’s refinement center, which will winnow down the number to those who have an 80 percent or greater chance of becoming an enlistee, based upon studies of successful recruiting.

    “It’s clearly not a talent shortage,” Rochelle says. “There are more than enough well-qualified young men and women out there to fill the Army’s needs.”

Not about the money
    To entice those qualified candidates, the Army recently enhanced its financial package. In addition to the standard enlistment bonus of $20,000, soldiers who sign up for high-priority units, such as infantry, can receive up to $400 a month in incentive pay. College funding also has been increased, from $50,000 to $70,000 for each recruit.

    Nevertheless, “the financial incentives, such as the college money, have to be adjuncts,” Rochelle says. “We can’t get started down a slippery slope where we’re depending on money to lure people in. The reality is that while we have to remain at least competitive, we’re never going to be able to pay as much as the private sector.”

    Rochelle says attitudinal research shows that the “Millennium Generation”–the term used by demographers for people born in the mid-1980s and after–actually tends to be quite receptive to the Army’s message. “The idea that being a soldier strengthens you for today and for tomorrow, for whatever you go on to do in life, that clearly resonates with them,” he says.

    But another characteristic of “Millennials” is that they also frequently depend upon advice from parents and other adults with a prominent role in their lives. And many of those “influencers” have been dissuading young people from enlisting.

    Some influencers are motivated by fear that young people will be killed or injured in Iraq. Rochelle admits that he can’t do much to assuage public disillusionment with the conflict.

    “We’re in the middle of a prolonged war that is claiming lives of brave young Americans and causing injuries,” he says. “No one likes to see that, least of all another soldier. But that’s the reality.” As a result, he must depend upon Millennials’ sense of national duty, even if it means putting their lives on the line for a cause they have qualms about.

    In recent years, Rochelle has also focused on the influencers’ second point of resistance–the belief that other options, such as going directly to college or taking an entry-level job, offer surer routes to adult success. Rochelle developed a partnership with the Military Officers Association of America, a group of retired service members, and persuaded them to go out into their local communities to speak to influencers. He recently began setting up town hall meetings throughout the nation that may be televised or broadcast on local radio.

    “We need to take this dialogue to another level,” Rochelle says, “and tear down some of the perceptions that the media and critics have created”–that over-aggressive Army recruiters are out to exploit young people’s naiveté with promises of lavish benefits and a sugarcoated depiction of military service.

Instead, he says, it’s crucial to appeal to young people’s values–not just their sense of patriotism, but also their desire to better themselves and help their communities. For that reason, Rochelle is particularly excited about the Partnership for Youth Success program, which matches recruits with private- and public-sector employers they’d eventually like to work for and then develops their skills and guides their transition into the workforce after their service.

    “When I was commander of a recruiting battalion in New England in the 1980s, I was doing battle on a daily basis with the employers in my area, who were providing opportunities that my recruiters were competing against,” he says. “But this is a way to work together with them. You take the long-term view. Companies can’t hire everyone they may wish to hire today, so why not let us refine the product a bit and give this individual back to you in a few years–better trained, drug-free and instilled with strong values.”

    Employers participating in the program include defense and aerospace giant Lockheed Martin, tractor manufacturer John Deere, Southwest Airlines and Dell Computer. Police departments in New York, Los Angeles and other cities also participate.

Experts say military recruiting problems could cut into employers’ supply of ex-soldiers with technical and leadership skills, as well as the security clearances needed to work on government contracts.

    During his tenure, Rochelle had been determined to meet short-term recruiting goals, but acknowledged over the summer that it might not happen. Some of the Army’s recruiting shortfall has been made up by the re-enlistments of active-duty soldiers. The Army did indeed beat its goal of re-enlisting 64,000 soldiers–by 5,350.

    But the fact remains that the Army fell several thousand soldiers short of its need going into fiscal 2006. If unabated, the shortfall could result in undermanned units that are unable to perform in a crisis, experts say.

“We need more privates”
    While the Army technically is meeting its own overall goals for retention, it still has critical shortages in certain job categories, according to a May 2005 report by the Government Accountability Office, an investigative arm of Congress. The GAO found that of the various occupational specialties within the Army, about 65 percent had too many soldiers, while 35 percent of the jobs didn’t have enough qualified personnel to fill all the vacancies.

    Additionally, the Army’s personnel development system, which requires soldiers to move upward through the ranks or else leave the service, means that the Army can’t depend on older re-enlistees to fill all of its critical jobs.

    “We need more privates than we do sergeants or captains,” says Army spokesperson Maj. Elizabeth Robbins. “We’d like to keep more of our first-termers, and fewer of our second- and third-termers.”

    The shortage of new recruits has left the Army scrambling to cope. The GAO says the Army already has called up reservists and moved new recruits from its delayed-entry program into basic training earlier than scheduled.

    Beth Asch, a senior economist specializing in military personnel at the Rand Corp., a think tank in a Santa Monica, California, says that if recruiting problems continue, the Army’s ability to perform its national security mission could be hindered. “Critical units will get filled, but certain units will be undermanned, and that will impact readiness,” she says.

    While Army recruiting woes present a possible national security problem, businesses should care about the situation too–and not just from a patriotic perspective. Experts say military recruiting problems could cut into employers’ supply of ex-soldiers with technical and leadership skills, as well as the security clearances needed to work on government contracts.

    “Three to five years down the road, companies could really feel a negative impact,” says Ted Daywalt, a former Navy captain who is now president and CEO of Vetjobs.com, a Web site that helps companies find former service members to fill jobs. “Companies could end up paying for a lot of the training that they now get for free because the military does it.” The resulting cost could amount to tens of thousands of dollars per new employee, he says.

During his tenure, Rochelle motivated recruiters by reminding them of the impact of their efforts. “We’re recruiting soldiers to learn our values and then take them back into the community, where they can have impacts that are almost immeasurable,” he says. “I draw the analogy with the years after World War II, when we demobilized millions of men quickly and then watched them go to college and change the country. That was like dropping a boulder in a lake.”

    Today, he says, it’s more like throwing pebbles into the water one or two at a time, but it still creates ripples.

Workforce Management, October 24, 2005, pp. 20-31 — Subscribe Now!

In early 2001, then-Unilever co-chairman Antony Burgmans visited one of the global conglomerate’s recent acquisitions, Ben & Jerry’s Homemade Inc. in South Burlington, Vermont. To his puzzlement, the Dutch business leader found the ice cream company’s employees wearing togas.  “He wasn’t familiar with the movie ‘Animal House,’ ” notes Chrystie Heimert, Ben & Jerry’s “public e-lations” director. “Apparently, they didn’t wander the halls dressed like that at Unilever.”

    In keeping with tradition, Ben & Jerry’s employees weren’t about to let their new owner’s visit pre-empt an office costume party.

    Five years later, visiting executives from Unilever, a British- and Dutch-based global giant headquartered in London and Rotterdam with 230,000 employees in 100 countries, have learned to expect togas–or pajamas, or Mardi Gras beads–from Ben & Jerry’s 520 employees.

    “We couldn’t mess with that,” says Sharyn Kolstad, human resources director for Unilever’s North American ice cream operations, which also include the Good Humor, Breyers and Klondike brands.

    Ben and Jerry’s unconventional, anti-big-business values had, after all, emerged as the company’s biggest brand asset.

    How Unilever, whose products include food, home and personal care products, made a successful union with Ben & Jerry’s is a rare story in the highly charged world of mergers and acquisitions. Researchers Mitchell Lee Marks and Philip Mirvis have found that only about 15 percent of corporate mergers achieve their financial objectives, and about half result in culture clashes.

    When Unilever acquired Ben & Jerry’s in 2000 for $326 million, employees and loyal fans feared for the maker of Cherry Garcia and Peace Pops. But instead of melding into another faceless subsidiary–the fate of many acquired companies–Kolstad notes that this integration “has been different in every respect.”

    At Ben & Jerry’s, employees haven’t lost the company’s values of social consciousness and iconoclastic ways they worked so hard to build. Unilever valued not just Ben & Jerry’s share of the gourmet ice cream market, but also its eccentric ambiance.

    As a result, Unilever allowed its acquisition to retain its distinctive identity, while the Vermont company worked to improve its focus on the bottom line.

    So far it seems to be a success. At the time of the merger, Ben and Jerry’s had $237 million in sales and earnings of $3.4 million. Under Unilever ownership from 2001 to 2004, the company increased its global sales by 37 percent, tripled its operating margins and expanded into 13 new countries.

    Though there has been pain from consolidation and downsizing, much of what Kolstad calls “the magic” of Ben & Jerry’s corporate identity has been preserved.

Not the usual acquisition
    Amy Lyman, founder and president of the San Francisco-based Great Place to Work Institute, says that too often new owners eradicate the old corporate culture. She cites the example of Fel-Pro, an automobile gasket maker in Skokie, Illinois, that once won national awards for its family-friendly workplace.

    The company was acquired in 1998 by Federal Mogul, a Southfield, Michigan, auto parts conglomerate, which soon cut out many of the benefits of the acquired company–from its daycare center to the $1,000 savings bonds and baby shoes once given to employees’ children.

    “Employees think, ‘We had some great things here. Why aren’t they looking at them?’ ” she says. “It’s as if everything they’ve accomplished is diminished.”

    M&A study author Mirvis, a psychologist and associate at Boston College’s Center for Corporate Responsibility, says: “Usually, you have the big company saying to the small one, ‘You can pretty much continue to run your own shop–except that we’re cutting your costs, reviewing your marketing plan and approving personnel decisions.’ That sucks the life out of an organization.”

    But Ben & Jerry’s largely has escaped that fate, says Mirvis, a consultant for the Vermont company in the 1980s and more recently for Unilever’s Asian food business. “It may not be quite the off-the-wall organization it once was, but it’s still light-years away from the typical business.”

    It’s hard to imagine a company less suited for integration. Founded in 1978 by Ben Cohen and Jerry Greenfield, who took a correspondence course on ice cream making and set up shop in an old gas station, Ben & Jerry’s became known for both its high-calorie confections and its unabashed left-leaning activism.

    The company donated 7.5 percent of its pretax revenue to various causes, used environmentally friendly unbleached cardboard in its pint containers, paid extra money to small family dairy farms to help keep them solvent and worked to create jobs in low-income areas.

In many mergers, “employees think, ‘We had some great things here. Why aren’t they looking at them?’ It’s as if everything they’ve accomplished is diminished.” –Amy Lyman, founder and president, Great Place to Work Institute

    “The Ben & Jerry’s culture was one of the great strengths of the business,” says Fred “Chico” Lager, who was CEO from 1988-91 and was on the board of directors until 1996. “We took a lot of pride in the alternative way we did things, and that’s what enabled us to compete with larger organizations that had more resources.”

    Ben & Jerry’s won’t reveal its voluntary turnover rate, but human resources director Susan Williams says it’s significantly lower than U.S. workers’ average of about 15 percent.

    Employees don’t just fall in love with Vermont’s small-town folksiness. At most companies, engagement is closely tied to a person’s own job satisfaction, Mirvis says. At Ben & Jerry’s, in contrast, surveys have shown that the degree of passion for the company’s social mission was most important.

    Williams says the company’s workers also value a workplace culture that flouts corporate conventions–an environment in which policies often grow out of what employees already are doing.

    “We had a nap room for years, but the idea just sort of faded away for a while,” Williams says. “Then one day somebody said, ‘Remember when we used to have a nap room?’ One of the employees set it up again in a conference room.”

    But Ben & Jerry’s also struggled with a lack of structure. In a 1994 internal survey, for example, only 29 percent of employees felt that the business ran smoothly, and just half said their supervisors were good at planning and gave them adequate feedback.

    “Ben & Jerry’s was on a trajectory toward becoming more organized, with more analysis and less inspiration,” Mirvis says. “The merger only added to that.”

Complementary flavors
    When co-founder Cohen told The Wall Street Journal in 2000 that “quirky brands don’t usually do well as part of large conglomerates,” he probably echoed the fears of many in the company. But Unilever’s offer was too lucrative for shareholders to turn down. Fortunately for Ben & Jerry’s, Unilever–which is the world’s biggest ice cream maker–isn’t the most conventional outfit, either.

    Formed from a 1930 merger between British and Dutch companies, until recently it maintained dual chairmen in both countries. Unilever didn’t want to change Ben & Jerry’s culture radically.

    “I think everyone realized from Day One that we were not buying a typical business,” Kolstad says. “If we wanted the brand to continue to grow and be vibrant, we’d have to maintain the culture that made them what they are.”

    To show its support for Ben & Jerry’s social mission, Unilever committed at least $1.1 million a year to charitable causes selected by the employees. It also made a $5 million one-time grant to the Ben & Jerry’s Foundation, a separate entity that continues to fund causes such as nonviolence training for protest groups.

    Unilever aroused some anxiety in November 2000 when it appointed Yves Couette, a veteran Unilever executive who previously had been posted in Mexico and India, as the new CEO. (Cohen publicly supported another candidate, longtime company director Pierre Ferrari.)

    But it was six months before Couette reported for work, and that gave employees time to prepare. When he arrived in January 2001, the workforce was ready for him, Williams says. They greeted the French native in berets and dark glasses and played Edith Piaf songs on the public-address system.

    In the company cafeteria, they built a replica of the Eiffel Tower from pint packages of Ben & Jerry’s ice cream. Behind the frivolity, there was an implicit message.

    “The challenge for us in the merger was to keep being who we were,” Williams says. “So we had to turn up the volume, to let them experience us.”

    That sentiment also came across when Couette sent Ben & Jerry’s employees off to a daylong meeting at a local hotel, where they went through the standard Unilever exercise of creating a “brand key.” The goal was to identify the essence of the company brand and how marketing should flow from it. Ben & Jerry’s workforce returned from an off-site meeting and presented Couette with a brand key called “Joy for the Belly and Soul,” illustrated by a diagram in the shape of an ice cream cone.

    “We were Ben & Jerry-izing their process,” Heimert says. “And to add to it, when Yves would walk around the office everybody would have the ice cream cone posted on their wall. At other companies, they probably put it in a drawer. That drove home how passionate everyone is here.”

    Couette said in 2002 that when he first heard about the deal with Ben & Jerry’s, “My first reaction was, they are out of their minds.”

    But he had no intention of fixing what wasn’t broken. He quickly established rapport with the workforce, coming to the office in casual attire and volunteering to mix the mulch at a company-sponsored project to build a local playground.

“It may not be quite off-the-wall organization it once was, but it’s still light-years away from the typical business.” –Philip Mirvis, psychologist and associate at Boston College’s Center for Corporate Responsibility

    Pretty soon he was even emulating Cohen’s anti-corporate rhetoric, envisioning Ben and Jerry’s as “a grain of sand in the eye of Unilever.” Instead of trying to change Ben & Jerry’s organizational style and processes, Williams says, Unilever simply provided clearer structure. The CEO organized leaders of marketing, finance, human resources and public relations into a committee that mimicked the old informal hallway meetings.

    The company whimsically held a contest to come up with the committee’s tongue-in-cheek name–Managers of Mission, or “Mom,” as everyone now calls it.

    Unilever also allowed Ben & Jerry’s to pick which parts of the parent company’s human resources policies it wanted to adopt, Kolstad says. When Ben & Jerry’s did implement a Unilever program, it was free to modify it. In the case of Unilever’s standard global development evaluation for employees, for example, Ben & Jerry’s shortened the document and added the company’s social mission as one of the performance goals.

    “Unilever had a good process, but we needed to make it ours,” Williams says.

Improving the bottom line
    When Couette arrived, Heimert says that “100 people wanted to know if Unilever would maintain Ben & Jerry’s social activism. Another 50 asked about maintaining the product quality. I don’t think anybody asked about the third leg of the stool, which is making money.”

    Obviously, that had to change, but Unilever used persuasion rather than coercion. The new CEO argued that the best way to spread Ben & Jerry’s enlightened ethic throughout the business world was to make the company successful.

    Changing mind-sets wasn’t easy. The workforce, though skilled at making quality ice cream and creative at marketing it, wasn’t up to speed on boring stuff such as corporate finance. When the Burlington Free Press once noted that nobody below CEO level knew how much profit the company made on a pint of ice cream, it was taking a bit of poetic license, but not that much.

    Williams decided to give employees a remedial course in financial fundamentals. To make it fun, she hired a consultant who taught accounting and finance to employees by having them operate a lemonade stand.

    But unlike other bottom-line-conscious companies, Unilever didn’t require Ben & Jerry’s to quantify the dollars-and-cents impact of its human resources policies. Instead, Williams says, once management decides a program is needed, the only charge is to deliver it within budget.

    “I can’t say that because everyone took the lemonade-stand training we’re showing a 2 percent improvement on our profits,” Williams says. “But I don’t need to. We measure return by whether or not the company achieves its overall goals.”

    Ben & Jerry’s transition to Unilever hasn’t been pain-free, Williams says. In October 2002, the company eliminated 52 jobs, mostly at headquarters, as Unilever’s North American ice cream division consolidated some support operations. The company also announced that it would close two facilities and shift operations to a third plant that was being expanded, with a net loss of 69 jobs.

    But Unilever gave Ben & Jerry’s considerable leeway to soften the blow. The manufacturing workers, for example, were given a year’s notice and offered positions at other locations. The company sold one of its plants to another ice cream maker, which hired some employees who hadn’t wanted to move.

Learning from each other
    In late 2004, Couette returned to Unilever, where he now heads the beverage division in Rotterdam. His replacement as “chief euphoria officer,” Walt Freese, so far has made no major changes. (Freese joined Ben & Jerry’s in 2001 and was chief marketing officer from 2001-2004.)

    While Ben & Jerry’s did go through downsizing, its integration with its corporate parent also has created opportunities.

    Jobs at Ben & Jerry’s are now posted throughout the Unilever corporate empire. That gives the Vermont company access to a larger global pool of talent than it ever had as an independent. Ben & Jerry’s staffers can find out about career opportunities at other Unilever companies–though few seem to want to move.

    Meanwhile, the two companies are continuing to learn about each other.

    “I went to a corporate communications meeting in Paris, and they were surprised when I wasn’t wearing a tie-dyed T-shirt and Birkenstocks,” Heimert says. “Of course, when we go out, we dress a little more conventionally than when we’re at the office.”

    And the togas are left behind.

Workforce Management, April 2005, pp. 32-38 — Subscribe Now!

As the airline industry staggers into 2005, there’s only one way to describe its condition: gravely sick, and getting sicker.

   

    In the scary scenario envisioned by BTC, as much as 70 percent of airline capacity could be operating under bankruptcy court protection by year’s end.

    “It’s hard to imagine the situation being any more awful,” says Wayne Cascio, a professor of management at the University of Colorado at Denver. There’s no more time for Band-Aid solutions, he says. “The industry desperately needs a whole new mindset.”

    The traditional airlines’ perilous predicament has been caused, to a large degree, by economic and technological changes far beyond the scope of anything human resources policies can influence directly. Yet if the airlines are to make a turnaround, experts say, changes in their human resources strategies and practices are crucial.

    While the airlines continue to cut jobs and reduce compensation and benefits, experts says that they’re reaching the point of diminishing returns with such austerity, and must turn to improving productivity and increasing revenue to regain their health.

    For human resources, the most important part may be a struggle to revamp job classifications and work rules to enable traditional airlines to emulate the efficiency of low-cost carriers. But achieving these significant changes means winning the cooperation of workers who too often are scared, angry and distrustful.

Part of the crisis, part of the solution
    Though it’s easy to blame the airline industry’s woes on the lingering impact of the September 11 terrorist hijackings, which caused a drastic drop in air travel, the real causes are deeper and more pervasive.

    Peter P. Belobaba, a research scientist for the Global Airline Industry Program at the Massachusetts Institute of Technology, concluded in a recent conference presentation that traditional airlines’ ability to generate revenue has “virtually disintegrated,” mostly because of a marketplace altered by airline deregulation and the Internet.Business passengers are no longer willing to pay five to eight times the lowest available fare when they can easily shop for the cheapest ticket from their desks. The traditional airlines fly to many destinations via a hub-and-spoke system that offers a large number of locations and services for customers but is far less cost-efficient than the low-cost carriers’ model of flying to a limited number of popular locales. According to an analysis by the consulting firm of Booz Allen Hamilton, low-cost carriers spend seven to eight cents per seat per mile over a 500- to 600-mile trip, about half the expense that traditional carriers must bear.

    Finally, Belobaba notes, cutbacks made by money-strapped traditional carriers have eroded the differences in service quality between them and low-cost carriers. And while a 40 percent increase in jet fuel costs in 2004 hurt all carriers, the ones already struggling financially were least prepared to absorb the blow.

    But the airlines’ woes have been exacerbated by human resources’ difficulties in adjusting to and mitigating the stresses of change. Steven Appelbaum, a management professor at the John Molson School of Business at Concordia University in Montreal, and researcher Brenda Fewster audited human resources practices at 13 airlines in the United States and other countries.

    In a 2003 paper, they concluded that “with the exception of a few high-performing airlines, the industry as a whole continues to function as a traditional, top-down, division-oriented, industrial model.”

The traditional airlines have been relying on labor concessions and austerity to stanch their losses, but those measures have taken their toll. The troubled major carriers have reached the point where just making more wage and benefit cuts may not be enough to save them, Cascio says.

    “You’re reaching the point of diminishing returns when you’re not only cutting wages but taking away people’s pensions as well,” he says. “That’s when you start to see a backlash against the company.”

In addition to the massive layoffs of recent years, cuts in salary and benefits and seemingly perpetual uncertainty have done long-term damage to companies by driving thousands of veteran airline workers out of the industry altogether.

“It’s hard to imagine the situation being any more awful. There’s no more time for Band-Aid solutions. The industry desperately needs a whole new mindset.”

    Within a week of the September 11 attacks, United and American airlines announced they would each eliminate 20,000 jobs, and US Airways cut another 11,000. Since then, layoffs have continued, though at a slower pace. In October, for example, US Airways announced that it would lay off 10 percent of its 3,700 salaried and nonunion workers in an attempt to trim $45 million from its $200 million management payroll.

    In Charlotte, North Carolina, a former US Airways customer service agent is now building koi ponds for a living. In McLean, Virginia, two former Delta pilots run a home remodeling business, building rear decks and finishing basements. In New York City, a former United Airlines ramp worker is now a hospital receptionist.

    The jobs they leave often seem to be going unfilled. Avjobs.com, an employment posting site utilized by most of the major airlines and related employers, listed about 1,800 openings in a recent 90-day period.

    That’s a minuscule number of opportunities for a massive industry that employs about half a million workers in the United States. It barely begins to make up for the 110,000 airline jobs lost since 2000, when the business was at its peak.

    While airlines presumably can hire younger, less-expensive workers to fill jobs if and when the need arises, the loss of skills and experience at various levels of their organizations isn’t going to help them run more efficiently.

    Because of the erosion of wages and benefits, Cascio says that in the future airlines may have a problem that’s unprecedented in their history.

    “For years, once you got a job with an airline, you stayed there for life,” he says. “The seniority and the benefits were golden handcuffs. But if you take away those things, you take away the incentive to stick with a particular airline.”

    Ultimately, he warns, airlines may find their skilled, specialized workforces the target of recruiting raids by competitors. That may drive up airlines’ training and development costs and wreak havoc on efficiency.

What airlines can do
    Industry experts say that if the traditional airlines are going to rebound, they have to do it through improved productivity rather than wage cuts. Southwest Airlines pilots typically earn 50 percent more than the $96,000-a-year industry median cited by Salary.com. But they also fly more hours per month, and the airline comes out ahead in the end, according to the Boston Globe.

    Jody Hoffer Gittell, an assistant professor of management at Brandeis University and author of The Southwest Airlines Way: Using the Power of Relationships to Achieve High Performance, says Southwest doesn’t really think of labor as an expense. Instead, she says the airline sees its workforce as a source of information and expertise that helps lower expenses, and believes that value stems from the collaborative efforts it strives to foster.

    “It’s these strong working relationships–or relational coordination–that results in high quality and low costs, and that helps SWA achieve profitability year after year after year,” she says.

    Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School, thinks Southwest may have increasing trouble sustaining that efficiency as it moves into bigger markets and competes more directly with the traditional carriers.

    “They’ve been successful up to this point in large part by staying out of everyone’s way,” he says. But Cappelli agrees that cutting wages isn’t the answer for the old airlines. “Basically, between wage cuts and fare cuts, they’re in a race to the bottom,” he says.

    In an article on the Booz Allen Hamilton Web site, analysts Tom Hansson, Jürgen Ringbeck and Markus Franke argue that to compete with low-cost carriers, traditional airlines should reorganize their operations and redeploy their workforces using the concept of “tailored business streams.”

    Using one process that’s sophisticated enough to deal with many types of customers is costly and inefficient, they say. Instead, airlines should simplify and automate the passenger-handling process for the bulk of their customers–“industrializing” it, in the analysts’ words–to reduce the number of worker interactions and to get people in and out of airports more quickly. Employees instead would spend more time dealing with the minority of customers with more complex trips or need for services so that they don’t slow down the entire system.

    The low-cost airlines also benefit from flexible work rules that allow workers in one specialty to be cross-trained to perform other tasks. Pilots can help with baggage if necessary; flight attendants can clean aircraft. The time saved can help aircraft get in and out of the gate more quickly, reducing airlines’ costs.

    “Work rules are the key thing in my mind that’s going to help some of these carriers,” says Steve Hendrickson, senior partner at Sabre Holdings Corp.’s airline consulting division.

    After Air Canada was forced to file bankruptcy in 2003, for example, the financially strapped airline was able to cut its maintenance costs by nearly a third through work rule changes, according to an analysis in the trade publication Airline Business. The airline renegotiated its labor agreements, reducing the number of job classifications from more than 900 to just 11.

    That allowed workers to perform a wider variety of tasks when needed. Workers also agreed to allow the company more flexibility in scheduling overtime at periods of high demand. The result was a substantial increase in productivity. Mechanics went from performing maintenance during only 45 percent of their paid hours to spending 77 percent of the time working productively.

    But with employee discontent already at the boiling point at many airlines, implementing such changes won’t be easy.

    American Airlines, which has 80,000 employees and is the world’s biggest airline, brought in a third party to help mend fences with labor, launched a movement to disclose all financial matters to unions and began encouraging workers to submit their ideas to make the airline more efficient.

    Continental Airlines, which is struggling to cut expenses by $500 million, sought savings in its field services operations, which include ticketing, gate and ramp operations, and cargo. Rather than simply dictating cuts, management met with employees and sought their suggestions on how to streamline procedures to make those operations more efficient.

    As a result, while Continental still had to trim its personnel costs by $99 million, the reductions in workers’ hourly compensation and benefits were less than they might have been.

    “In many cases, our agents identified solutions that preserved benefits that were important to them and their co-workers,” Bill Meehan, Continental’s senior vice president of airport services, says in a press release. Similarly, American Airlines, at the suggestion of its pilots, has experimented with keeping them on the same aircraft throughout the day as a timesaving measure, rather than having them switch planes.

    Last month, daily headlines spoke of new contracts and tentative agreements to deal with looming troubles with labor and bankruptcy courts. They heralded stories about Alaska Airlines’ consideration of outsourcing 500 baggage-handling jobs, of an agreement on cost cuts between United and its pilots union and of Delta’s $2.2 billion fourth-quarter loss, capping the industry’s worst financial performance ever.

    But as the airline industry staggers into the new year, a question lingers: How much sacrifice are employees willing to make? No matter what course the old-line outfits take, they’ll have to engage their employees in new ways.

    “What you need is for management and labor to be working together, not at each other’s throats, because that’s when everything starts to break down,” Cascio says. “They shouldn’t be thinking about anything but survival.”

Workforce Management, February 2005, p. 38-44 — Subscribe Now!

As director of medical-legal affairs for Kaiser Permanente in northern California, Dr. Bruce Merl sometimes observes by video monitor, with the patient’s permission, as a doctor talks with the person about a medical treatment that has not gone well. The bad news most often is the result of chance–failure to respond to a standard medication or a belated diagnosis of cancer that initially evaded tests–but sometimes it may be the result of a medical mistake. Either way, the resulting conversation is likely to be tense and painful. “The patient is worried about what’s going to happen to him, who’s going to help him get better,” Merl says. The doctors are worried, too, and not just about the possibility of a malpractice lawsuit. “Nobody comes to work thinking that they’re going to harm someone. They feel lost and scared.”

    But Merl and the Oakland, California-based HMO, which is the nation’s largest, have discovered a solution that seems to help both the injured patient and the doctor to make amends and move on from medical mishaps. And in the process, he hopes, it may also enable Kaiser Permanente to control its litigation costs. Last year, as part of its policy of disclosing information to patients, the HMO began training its 11,000 physicians how to apologize personally to patients for whatever suffering they’ve experienced, and to assure them that amends will be made if necessary. “We’re getting at the core of why people sometimes end up filing suits,” Merl says. In addition to their physical pain, “their emotional needs have to be met. They want to know that somebody understands what they’re going through.”

    Kaiser Permanente is challenging a long-standing American tradition. Business, to borrow a phrase from Love Story author Erich Segal, means never having to say you’re sorry. Human resources consultants and academics say that companies and individuals–from the rank and file to the boardroom–habitually resist admitting fault or expressing regret to anyone. But experts say that those who learn to swallow their pride and offer an apology gain an important business advantage. The right amount of contrition has been shown to significantly reduce the cost of settling lawsuits, and may even convince unhappy customers, irked business partners and/or resentful ex-employees not to sue at all. Experts say that companies willing to admit mistakes may uncover and fix problems that otherwise might have continued to fester, and avoid the stress and lost productivity that come when workers focus on covering up mistakes and misdeeds rather than achieving business objectives.

    While Kaiser Permanente and other health-care outfits seem to be leading the way, companies in other industries are trying contrition as well. In 2001, after a woman was paralyzed in an accident caused by faulty tires on a Ford Explorer, Ford attorneys offered a bedside apology to the victim. She then settled her lawsuit, reportedly for a third of the $100 million she originally had sought. “Ford might have marked a turning point,” says Thomas Hajduk, director of the Center for Business Communication at Carnegie Mellon University in Pittsburgh. “It signaled a change in management attitudes about the effectiveness of public apologies, making it easier for other companies to follow their very public lead.” In recent years, businesses such as Safeway, McDonald’s, Citigroup and Goldman Sachs have apologized to customers and investors for mistakes or a disappointing performance.

But experts caution that the art of apologizing involves more than simply getting down on the office carpet on bended knee or gritting one’s teeth and taking a few lumps. Organizations should develop corporate cultures in which taking responsibility for a mistake isn’t a fatal career move. Staffers at all levels need careful training and coaching on how to admit error in a way that satisfies the aggrieved person without increasing the company’s litigation risks. And companies must establish a mechanism for following up words of regret with tangible action to fix whatever has gone wrong.

More than just words
    Merl emphasizes that Kaiser Permanente’s policy for communicating with patients about unsuccessful treatments and medical mistakes involves far more than just apologizing. When the HMO began reevaluating how it dealt with such situations several years ago, it decided to build a multi-faceted program. In addition to several hours of communication training for doctors and other health-care professionals, it involves the creation of a new cadre of staffers known as ombuds/mediators, who go through an intense 80-hour course on communication and mediation skills. The ombuds/mediators’ job is twofold. They act as coaches for doctors, helping them to plan what they actually will say to a patient in a difficult situation. They also act as go-betweens, following up with the patient to be sure that his or her questions are being answered and needs are being met.

    Since the program began in the spring of 2003, Kaiser Permanente has moved rapidly to implement it. The HMO already has put a third of its 11,000 physicians through the communication course, and hopes to train them all within the next two years, says Merl. Already, 26 ombuds/mediators have been trained and deployed at Kaiser Permanente facilities around the country. The program costs in the vicinity of $3 million a year to operate, according to consultants who designed it and provide the training. The HMO has kept its costs low by employing consultants to train about 100 Kaiser Permanente health-care professionals to teach the communication course, and then using them to spread the knowledge to their coworkers. While Kaiser is still in the process of compiling data to measure the impact of the program, it’s likely to provide a healthy return on the modest investment, says Carole Houk, a principal with Resolve Advisors in Arlington, Virginia, who trains the ombuds/mediators. “A medical error that’s litigated typically costs $300,000, plus legal fees and insurance costs,” she says, citing insurance-industry data. “One that’s settled in mediation might cost a tenth of that. If you avoid even one lawsuit a year [at a hospital], you’ve more than paid for the cost of an ombuds/mediator.”

    But Kaiser Permanente’s commitment to dealing with mistakes is atypical, say consultants and business executives. A 2003 study by the Customer Care Alliance, a group of customer-service consulting companies in Alexandria, Virginia, found that 60 percent of people who were unhappy with service wanted an apology, but only 5 percent ever received one. Kenneth Goodman, codirector of Ethics Programs at the University of Miami, says that when businesses do bring themselves to apologize, too often they lack sincerity. “When you’re on the line with the phone company and the person tells you, ‘I’m sorry for any inconvenience,’ that’s hollow and of no particular consequence. If someone says to you, ‘I’m sorry, and here’s what I’m going to do to pay for the mistake or fix things,’ that’s a real apology.”

    Certainly, U.S. firms have a long way to go before they reach the extremes of contrition common in some Asian cultures. As the Associated Press recently reported, when Japanese broadband Internet provider Softbank inadvertently leaked the addresses and phone numbers of 4.5 million subscribers, the company president, Masayoshi Son, publicly promised to upgrade security–and punished himself with a 50 percent salary cut for six months to demonstrate the depth of his remorse.

Contrition-resistant companies
    Why are companies and individuals so reluctant to say they’re sorry? Some point to an American culture that has long sent mixed signals about the virtue of contrition. In a 2000 article for Missouri Lawyers Weekly, for example, St. Louis attorney and mediator Paula Young cited classic movie westerns such as She Wore a Yellow Ribbon, in which a grizzled cavalry veteran, portrayed by John Wayne, admonishes younger officers to “never apologize–it’s a sign of weakness.” Other experts say that fear of lawsuits or possible harm to careers also deters people from owning up to mistakes or poor performance. Kenneth Cloke, an attorney and mediator who is director of the Center for Dispute Resolution in Santa Monica, California, argues that intractability simply may be a strand in corporate DNA. “The nature of most business organizations is that they’re set up to diffuse responsibility,” he says. “The higher you go up the corporate ladder, the more of an inclination there is to deny responsibility, and push the blame off onto someone else.”

    But organizations that have dared to use apologies often have avoided potentially serious problems, or at least reduced their impact. Most notably, corporate contrition can be a major factor in reducing companies’ litigation costs. Daniel O’Connell, Northwest regional coordinator for the Bayer Institute for Health Care Communication, designed the model for Kaiser Permanente’s communication training. He says studies in the United States and Great Britain have consistently shown that 70 percent of patients sue primarily because they’re frustrated by hospitals’ and doctors’ behavior.

    A 1994 study by University of Michigan legal scholars Russell Korobkin and Chris Guthrie found that only 12 percent of plaintiffs rejected a pretrial settlement proposal accompanied by an apology, compared to the 30 percent who turned down an offer sans contrition. After paying $1.5 million in damages from malpractice lawsuits in 1986, the Veterans Administration Medical Center in Lexington, Kentucky, instituted a new policy of promptly disclosing mistakes to patients and apologizing for them. A follow-up study, published in the Annals of Internal Medicine in 1999, showed that the hospital had reduced its average annual settlement costs to just $190,000.

    Margret McBride, co-author with Ken Blanchard of the 2003 book The One Minute Apology, says that learning to apologize can help a company avoid drains on its productivity and morale. “When you have a place where people are afraid to admit that they’ve screwed up, you’re creating a toxic environment. You can end up with an Enron, where people spend so much time shredding and deleting and trying to keep their lies straight that they don’t have time to get their work done. “

Apology as part of the culture
    Atlanta-based attorney and consultant Stephen Paskoff, who trains corporate staffs in ethical behavior, says it’s crucial for top management to lead the way in taking responsibility for mistakes and shortcomings, and offering apologies if necessary. “Apologies can be a powerful tool for conflict resolution, but only if they’re part of a cultural change,” he says. “You need your corporate leaders to say, ‘If we make mistakes, we fix them. If someone says there’s a problem, you need to listen to what they have to say. And if you have a problem, you need to bring it up, because we’ll listen.’”

    But it’s not enough just to convince people that it’s OK to admit they’re sorry. For contrition to be effective, companies have to create an institutional framework and protocol for giving apologies. Companies can set the right tone by utilizing contrition as a tool to solve both internal disputes and complaints by customers or business partners, McBride says. In her experience, it’s sometimes difficult to get managers to buy into the concept because they’re worried about appearing weak to subordinates if they admit mistakes. “They’ll insist they don’t have anything they need to apologize for,” she says. “I tell them that they should ask their staff about that. They’re usually surprised by what they hear because the truth is that everybody keeps a tally sheet for the boss.”

    When an apology is due, it’s critical that it be delivered by the right person, says Bayer Institute researcher O’Connell. The timing and stature of the messenger, he says, have to be proportional to the harm suffered. “If a young nurse makes a minor mistake with medication but the person doesn’t actually get hurt, it may be okay for her just to apologize right then and there,” he says. “If someone is at all harmed, though, you want the chief of nursing to come in and apologize. And if the injury is really serious, you want the CEO.”

    Consultants generally agree that an effective apology includes certain key ingredients:

    Sincere regret that the person suffered harm. “Every conversation should start with, ‘I’m so sorry that you’re going through this,’ ” says Houk. It’s vital to show an understanding of the pain, hardship and, most likely, fear that the person is experiencing. O’Connell advises doctors to imagine themselves as, say, the mother of a toddler who came into a hospital with the flu and ended up with spinal meningitis. “If you can visualize the feelings that a person is experiencing, you’re better able to communicate with him or her,” he says.

    Information. People appreciate a clear, honest explanation of why something went wrong, says O’Connell. Evasiveness, in contrast, can be disastrous. “Imagine that you’ve been on a plane that had a near miss, and the pilot gave the passengers some vague mumbo jumbo that you couldn’t figure out. Then later on, you’re walking by the pilots’ lounge, and you overhear the guy telling his buddies that it really happened because he made a mistake. You’re going to think, ‘That SOB lied to me. He thinks I’m a moron.’ The error then becomes a self-esteem issue–you’re angry and hurt, and you’re not going to let him get away with it. We don’t want that to happen.”

    Corrective action. If the harm is the result of a mistake or a flaw in the system, promise that everything possible will be done to fix the problem. “People want an assurance that the same thing is not going to happen to someone else,” says Houk. “It helps give meaning to what they’re going through.”

    Restoration. It’s important to promise to help the victim recover and, if appropriate, to provide compensation for harm that can’t be remedied–though specific details of a settlement should be left to the company’s lawyers or outside insurers, O’Connell says. The conversation should communicate the desire to make a person whole again, and not the impression that money is being thrown at a problem to make it go away. Hospitals, for example, may be able to assuage some of patients’ feelings of being wronged–and possibly avoid litigation–if they offer to provide follow-up care and needed items such as wheelchairs or medical devices.

Avoiding legal pitfalls
    Although the use of apologies has been shown to reduce lawsuits and litigation costs, companies still have to be cautious about the possible legal consequences of saying they’re sorry. Although the federal courts and least a half dozen states restrict recipients of apologies from using them as evidence in lawsuits, loopholes remain. In California, for example, an apology that contains a clear admission of negligence–or substantiates a plaintiff’s accusations–can be used against the person or company that expressed regret. That’s why attorney and ethics trainer Stephen Paskoff says apologies should be carefully crafted. “You’ve got to be sincere, but not admit liability,” he says. “So you say that you’re sorry for what happened, not that you’re sorry for having violated the law.”

    But it’s possible to give an apology that satisfies an aggrieved party without conceding liability, experts say, because most people really are looking for something besides legal vindication. “People don’t want you to confess or to grovel or to make gratuitous mea culpas,” says attorney and mediator Kenneth Cloke. “What they want is empathy. They want you to show that you understand what you’ve done to them, and to show genuine remorse. What they don’t want is for you to try to weasel out of it. “

    While Kaiser Permanente is still in the process of compiling data, Merl believes that it ultimately will validate the program’s effectiveness at reducing the sort of patient complaints that lead to litigation. Although he can’t give details because of medical confidentiality, Merl says, “We’ve had situations in which someone has been injured, but the patient and the doctor have been able to heal the relationship, and the patient is willing to continue being treated by the same doctor.”

Workforce Management, October 2004, pp. 57-62 — Subscribe Now!

The French city of Toulouse is known both for the distinctively rosy glow of its brick and tile Renaissance and 16th- and 17th-century architecture and for the multinational companies–American names such as StorageTek and Motorola–that have helped turn the community into an aerospace and electronics boomtown for 21st-century Europe. Last spring, however, Toulouse’s picturesque streets were filled not with tourists but with thousands of workers, protesting proposed reforms to the nation’s troubled public pension system. The aggrieved employees directed their ire not just at the French government but also at any private employers that dared think about asking older workers to stay on the job into their 60s to make corporate pensions more affordable. “They exploit us, they fire us!” the marchers chanted, according to an Associated Press account. “It’s up to management to pay our pensions!”

    Over the last few years, such demonstrations have erupted across Europe, with similarly angry crowds shutting down airports and train stations in Milan, and retirees massing at Berlin’s Brandenburg Gate to wave union flags and blow whistles in protest. Beneath the bombast, there’s fear and uncertainty. For generations, workers across Europe have counted on retirement benefits far more lavish than what Americans have generally received, stipends that sometimes matched a large portion of–or even actually exceeded–their working wages. In addition, they’ve become accustomed to retiring by age 60, far earlier than Americans. Governments provided most of the benefits, financing them out of hefty payroll taxes that Europeans have come to expect as part of the social contract.

    For years, neither the public nor the private sector worried much about the cost. But all that is changing. Thanks to low birthrates and intense opposition to immigration, the European population is aging even more rapidly than that of the United States, and the ratio of taxpaying workers to retirees is shrinking. Many countries worry that they will be unable to cover the cost of supporting the elderly. But elected officials also fear the public wrath triggered by austerity measures such as cutting benefits or raising the retirement age.

    Instead, governments across Europe are looking increasingly to private employers, including U.S.-based multinationals, to assume more responsibility for retirement benefits–and pick up more of the cost. Pension and human resources consultants in the United States and Europe warn that for American companies, the demographic time bomb on the other side of the Atlantic may have serious financial consequences, increasing labor costs to the point where it may be difficult to do business at all in some countries. As the multinationals grapple with the pension woes of an aging Europe, they’ll face challenges even more complicated and daunting than those caused by the graying of America. U.S. companies already are hindered by a mishmash of varying retirement regulations across Europe, which necessitate setting up separate funds and offering different benefits from country to country. Additionally, they must overcome significant cultural barriers, such as convincing employees to wait longer before retiring and to save on their own to finance benefits that they traditionally got from the government. The experts, unfortunately, don’t offer any easy solutions, but they say that a carefully planned strategy for change may help minimize the pain.

Multinationals pay attention
    Of the more than two dozen U.S.-based multinationals contacted by Workforce Management, none were willing to discuss the problems they might face from the European public-pension crisis. “We don’t speculate about what we might do in any of our business areas, and benefit plans is clearly one of those areas where speculation is not appropriate,” ExxonMobil spokeswoman Sandra C. Duhe wrote in an e-mail message. Others simply deny that there is a problem at all. “Our people don’t characterize what’s happening in Europe as a crisis,” says Ford Motor Co. spokeswoman Marcey Evans. Most were unwilling to divulge anything more than the most general details of how they navigate the continent’s bewildering maze of tax and pension regulations, which vary significantly from country to country. “For our German workforce, we adopted the same benefits offered by other companies that do business in Germany,” says Oliver Neumann, a spokesman for farm equipment manufacturer Deere & Co., whose Mannheim plant is the largest manufacturer of tractors in that country.

    Pension and human resources consultants working in Europe who are privy to the inner workings of U.S. multinationals there tell a different story. “We’re sort of in the deer-in-the-headlights stage right now,” says Stacy Apter, an international pension consultant for PricewaterhouseCoopers. While the cost of providing for older workers will rise in the United States, she says, U.S. companies already have mature pension plans with some built-up assets. “In America, a 40-year-old may have been saving money since he or she started working. In Europe, you’re not going to see that. Instead, you’re playing catch-up. Not only do you have to fund the pensions for all these 40-year-olds, but you have less time to do it because they retire earlier than in the United States.”

    Apter is reluctant to predict precisely how much costs for companies may rise, but she says the worst-case scenario is that it may become too expensive to do business in some countries. “Something really has to happen with this issue. We can’t afford to ignore it any longer.”

    Consultants and academics say that European governments are unlikely to let their pension systems fail. But neither are they likely to reduce benefits as drastically as funding shortfalls might seem to require, they say. Some countries, such as Italy, have tried to reduce the stress by increasing the retirement age and switching to defined-contribution systems, and have found themselves in a public firestorm. “By doing all this dancing around and delaying changes, when you finally have to announce austerity benefits, people tend to blow up and get into the streets,” says Watson Wyatt vice president Sylvester Schieber, who co-authored a 2004 study on aging workforces by the World Economic Forum, an international group of business and government leaders.

    “The union movement feels they’ve spent the last century negotiating these benefits, and they don’t want to give them up.”

no european unity: “If you have employees in 12 European countries, you’ve got to have 12 different retirement funds, each with its own meetings for executives to attend, documentation and administrative requirements.”

    Instead, the experts say, a more likely outcome is that European governments will require private employers, which already pay as much as a third of workers’ public pension taxes in some countries, to pick up an increasing amount of retirement coverage. There’s already at least one fairly successful model: the United Kingdom, which began reducing reliance on public pensions in the 1980s. Today, 80 percent of British workers have private pension coverage, an even higher proportion than the 61 percent in the United States, according to the World Economic Forum-Watson Wyatt study. One crucial aspect of solving the pension crisis in Europe, almost everyone agrees, is getting workers to save more for their own retirement. At a typical big U.S. company, 401(k) retirement accounts provide a little more than half of employees’ retirement income, according to a 2004 Hewitt Associates study. A 1999 study by the German Institute for Retirement Provisions, in contrast, found that only 10 percent of workers in Germany and the Netherlands were saving their own money for retirement, compared to 42 percent of workers in the United States. In France, less than 1 percent of the nation’s 26 million workers have signed up for retirement-savings accounts, Business Week recently reported.

    European countries are starting to give tax breaks to workers who save for retirement, but they’re slow to grasp all the nuances, says Tim Reay, a principal based in the London branch of the U.S.-based consulting firm Hewitt Associates. “In Spain, for example, employees can have a 401(k)-type retirement account, but they can’t direct their own investments. The feeling is that if Fred and Joe both have the same job, it’s unfair that one of them should have less money in his account at retirement because he wasn’t as smart an investor.”

    Multinationals face other difficult hurdles in increasing their retirement coverage. For years, European employers have been required to base private pension funds in the same country as the workers who’ll be collecting benefits from them, Reay says. “Basically, if you have employees in 12 European countries, you’ve got to have 12 different retirement funds, each with its own meetings for executives to attend, documentation and administrative requirements.” (IBM has about 16 billion euros in 20 different retirement funds scattered across Europe, according to a recent article in the London Sunday Times.)

    The EU is moving over the next few years to allow assets to be consolidated into pan-European corporate funds, which may save multinationals tens of millions of dollars. But differences in tax codes and regulations in various countries will still make the job of administering benefits maddeningly complex. Ruud Kistemaker, a Netherlands-based international benefits manager for Aon Consulting Worldwide, notes that in his country, companies in traditional industries such as construction are compelled to make contributions in behalf of workers to industry-wide pension funds–but companies in new technological fields may not be.

Blame it on Bismarck
    Unfortunately, multinationals probably won’t get real relief from European pension woes until the European Union develops a uniform public pension system, says Olivia Mitchell, a professor and executive director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania’s Wharton School of Business. “It sort of defeats the whole purpose of the EU because you can’t really have a free flow of capital and labor across Europe when you have different tax laws and retirement benefits.” European employees already are sometimes reluctant to accept transfers across borders, consultants say, for fear of disrupting benefits dependent on years of working in a country. A 1999 Mercer Human Resource Consulting firm study of U.S. multinationals operating in Europe showed that 83 percent found cross-border transfers to be a difficult personnel issue.

    The roots of the European pension problem go all the way back to the late 19th century, when German Chancellor Otto von Bismarck had the idea of paying people who were too old to work a stipend for living expenses–not out of benevolence, but to dissipate growing public support for socialist political parties and trade unions. Bismarck’s old-age pension had an ingenious catch: a worker had to reach age 74, well beyond the typical life expectancy at the time, before the government had to ante up. In the generations that followed, European politicians showed considerably more largesse, continually expanding benefits.

    “It reached a point where in Greece, until a decade ago, you actually would come out with 102 percent of your salary in retirement,” says Reay.

    Because they predate the European Union, public pension systems vary tremendously from nation to nation across the continent, according to a survey of European systems compiled by Mercer, a global firm. An Italian middle manager, for example, will get 55 percent of salary after 35 to 37 years of service, paid for by a 37 percent payroll tax–28 percent out of the employee’s pocket, 9 percent from the company. A person with the same job and base salary in Austria gets only 44 percent of his salary, for which both the employee and the employer pay a 17.65 percent levy. In France, retirees get both a government pension and a stipend from an industry-wide retirement fund to which employers are required by law to contribute. In both Spain and Belgium, employers pay 35 percent to support employees’ pensions, but in Spain, the employee contributes just 3 percent of his or her salary, while in Belgium, the personal tax is four times as high.

    Additionally, in the 1970s, governments began to lower the retirement age, in an attempt to create more openings for unemployment-plagued younger workers. Nearly half of all Americans between the ages of 60 and 64 are still working, but only 22 percent of Germans are still on the job and less than 15 percent of French workers are still earning salaries, according to the World Economic Forum-Watson Wyatt study. “If you go into businesses in France, you’ll see hardly anybody working who’s older than 55,” Reay says.

    But cracks began to develop in the retirement utopia in the 1990s. Birthrates declined in European countries. In Italy, for example, women on average have just 1.2 children, compared to 2.0 in the United States. And with European countries reluctant to allow immigration to boost their workforces, the continent’s population has aged even more rapidly than that of the United States. In a 2002 paper, Peter Peterson, chairman of the Blackstone Group, a New York-based investment firm, calculated that by 2030, the percentage of the U.S. population over 65 will match the present proportion of older people in Florida, around 18 percent. Germany, in contrast, will achieve “Floridization” by 2006.

    European public pensions, like Social Security in the United States, are predominantly pay-as-you-go systems financed by continual contributions from younger workers and their employers, which means that increasingly less money will go into the funds and more will be coming out. According to United Nations statistics cited in the World Economic Forum-Watson Wyatt report, the ratio of workers to retirees in Italy will fall from an already low 2:1 to 1:1 over the next several decades, which could push the public pension systems to the brink of insolvency.

    But there are things companies can do to minimize their financial and organizational pain while awaiting European pension reform, Reay says:

●Take a pension inventory. Reay says a company’s first step should be to compile a complete database of all its retirement plans throughout Europe (and elsewhere in the world, for that matter). Many companies still don’t keep a close watch on all their offshore pension obligations, he says, because they may not be considered material under accounting rules.

●Devise a unified, cross-border pension strategy. What does the company hope to gain from its pension program? Is competing for talent the top priority, or is it the need to convince its older, most experienced European workers to remain on the job longer? After that, a company should look at all its European plans and see how well they fit the strategy. In doing that, Reay says, it’s crucial to factor in the nature of the business in Europe. “If you’re in, say, the oil or pharmaceutical industry, where people tend to move around the world a lot and identify with the company more than the country, you really have to look at your global competitors [as the benchmark],” he says. “In the auto industry, in contrast, your workers tend to be from the country where the plant is located, and stay there for their entire working lives.”

● Don’t try to make one size fit all. A company can’t simply duplicate its U.S. pension practices in Europe. For one thing, the necessary changes may not even be legal in some countries. Additionally, Reay says, the perception that a plan is being imposed from on high won’t sit well with European employees.

● Invest in changing European workers’ attitude toward saving. Reay says experience has shown that tax breaks aren’t sufficient motivation for European employees to participate in company-sponsored retirement-savings plans. “Europeans just aren’t that familiar with the concept of having to take care of themselves in retirement,” he says. “They’ve always assumed that the state would look after them.” Instead, he says, companies may have to front-load their employee savings plan with more generous incentives than they would in the United States. A company might create retirement-savings accounts for employees, for example, and contribute the equivalent of 5 percent of their pay, in addition to matching the employees’ contributions.

    If established U.S.-based multinationals don’t find a way to deal with pension woes in Western European countries, they risk getting hit with a double whammy, says Mark Sullivan, head of international consulting at Mercer Human Resource Consulting in London. In addition to having to pick up more of the cost of workers’ retirement, established companies run the risk of being squeezed by competitors that have set up shop in the former communist countries that have joined the European Union. Not only have countries such as Poland already gone through the pain of scaling back their state pension systems, but they have an added, albeit grisly, advantage. “Life expectancies aren’t as high there,” he says, “so they’re providing for shorter retirements.”

Workforce Management, September 2004, p. 43-48 — Subscribe Now!