Author: Shari Caudron

On August 4, 185,000 United Parcel Service (UPS) employees walked off the job in a dispute over higher wages, better pay for part-time workers, pension benefits and more full-time jobs. The strike, which was orchestrated by the Teamsters, lasted 15 days, crippling the country’s package-delivery system and costing UPS more than $700 million in lost revenue. By the time it ended, Atlanta-based UPS had reluctantly agreed to convert 10,000 part-time jobs to full-time at double the hourly rate of pay.

The strike was remarkable because for the first time in nearly 20 years, the American public sided with a union, even though its walkout caused major inconveniences for the millions of people who rely on UPS for their shipping needs. In fact, according to a CNN/USA Today Gallup poll, Americans supported workers by a landslide two-to-one margin over management.

Why the change? And why now? The economy is booming; unemployment is at a 24-year low, and union membership has been in a steady decline since the late 1970s. Why would Americans in a robust job market support a labor strike at a company that they not only rely on, but where, ironically, part-time workers were compensated better than they are at most companies?

The answer is twofold. First, countless Americans have a UPS driver they’ve come to know and like. They were sympathetic to the strikers’ cause because, unlike in other labor disputes, they knew the strikers. But more important, many business watchdogs believe Americans supported the strike because the Teamsters union was able to tap into a wellspring of anger and anxiety that exists in the U.S. workplace.

“The [U.S.] population feels there’s a lot of worker exploitation going on, not only at the contingent level but also among exempt employees who are routinely expected to work more than 40 hours a week,” explains Barney Olmsted, co-director of New Ways to Work, a San Francisco-based organization that focuses on flexible employment. The feelings of exploitation are fueled by concerns over declining wages, the perception that “good” jobs (read: full-time with benefits) are disappearing, and anxiety over the nearly extinct employment contract. At a time when the stock market is soaring, many workers just don’t understand why they have yet to share in the blessings of the new economy. In essence, the UPS strikers became their representatives.

UPS, a former winner of the Personnel Journal Optimas Award (now Workforce Magazine Optimas Award) in the Vision category (1993) for a unique community internship program for managers, was already doing a lot of things right with its contingent worker staffing strategy. However, as the strike made painfully clear, employment conditions are ripe for workers to make their frustrations and demands known to companies. The lesson for all human resources professionals isn’t that they must discontinue their use of contingent workers (of which part-time workers are a subset)—flexible staffing arrangements do make sense—but that they must be fair in how they treat those workers.

Despite the good job market, worker anxiety runs deep.
In a sense, it’s sad that a company like UPS was held up as a “typical” example of an organization that exploits workers—particularly part-timers. Yes, 57 percent of the firm’s workforce works part time, but the overnight shipping business requires an abundance of manual laborers for short bursts of time. Yes, the majority of part-timers were paid significantly less than the company’s full-time workers, but UPS claims it’s because the required skill level is lower for those jobs. And yes, many of those workers remained on part-time status for years despite desperately wanting full-time work.

But the fact remains that the company’s part-timers were actually paid well above what the average part-timer makes, and many of those employees did receive benefits such as tuition assistance. “Ironically, since the strike ended we’ve been flooded with job applications because the media reported how much we paid our workers,” explained Lea Soupata, vice president of HR for UPS, only days after the strike ended.

Many believe UPS was targeted by the Teamsters not so much because it was a good example of poor employee treatment, but because a strike at UPS would bring national visibility to the issue of worker anxiety. “The union [leaders weren’t] stupid,” says David Ulrich, professor of business at the University of Michigan at Ann Arbor. “They picked the right target because they knew they could shut down the firm. They then did an excellent job of managing the press of the strike.”

The question asked by the Teamsters resonated with a great number of Americans: Why, after a six-year economic expansion that has created record corporate profits, aren’t more Americans getting a bigger piece of the pie?

The Teamsters’ assertion that workers are being taken advantage of is supported by a number of studies. According to a recent economic report in Business Week, productivity has grown by 7 percent since 1990, while wages and benefits have grown by only 1 percent in the same time period. In fact, ever since 1973, wages have fallen behind price hikes during recessions and failed to make up the loss in recoveries. Thus, paychecks have bought less at each new peak of a business cycle than at the previous high point. Furthermore, even though earnings for the lower-paid 60 percent of the workforce, the so-called bottom tier, are rising faster in 1997 than for the top 40 percent, it will take at least four more years of 1 percent real annual wage growth to restore workers’ income just to 1989 levels.

These new reports build on information Workforce (then Personnel Journal) presented in an article four years ago: “Contingent Work Force Spurs HR Planning” (July 1993) that already noted growing tensions between regular and contingent workers. In the article, Richard Belous, chief economist with the National Planning Association in Washington, D.C., (the organization that in 1989 came out with the first large-scale study of contingent workers in the United States) indicated that there was a stigma attached to the use of contingent workers and few organizations that purchase contingent work wanted to talk publicly about it or acknowledge that this was the direction the workforce was heading. In the article, Belous said, “Many corporations still view the strategy as shameful… as if they were providing something less than a real job—a McJob, as it were.”

That sentiment has shifted 180 degrees for many employers. They no longer see that using contingent workers is shameful; they see it as mandatory. But some organizations may be abusing this strategy with serious consequences.

“Some HR people have gotten lulled into a sense of complacency [about their employment practices] because of growing profits and a boom economy,” explains Rand Wilson, spokesperson for the International Brotherhood of Teamsters union. “They’ve failed to recognize who has paid the cost of those profits and who’s responsible for the wealth that has been created. This strike serves as a wake-up call.” Rand believes workers should be sharing more of the profits.

Using contingents breeds discontent.
The feelings of exploitation are particularly acute among the growing ranks of contingent workers, which now comprise 30 percent of the workforce. “Organizations overdid downsizing and they also are overdoing the ratio between core and contingent workers,” Olmsted says.

To be fair, though, the burden for this scenario isn’t solely on the employer. According to a study on flexible work called “Nonstandard Work, Substandard Jobs” released in September by the Economic Policy Institute (EPI), in Washington, D.C., 75 percent of employees voluntarily work in nonstandard work arrangements that include part-time, temporary, on-call and contract positions, because they want more flexibility or balance in their lives. But the study also indicates companies may be taking advantage of their workers’ desire for flexible work.

“The growth in nonstandard work is not inherently bad if these jobs are just as good as regular full-time jobs in terms of wages, benefits, job security and other characteristics,” explains Edie Rasell, an EPI economist and a co-author of the report. “We find, however, that typically all types of nonstandard jobs are inferior to regular full-time work. Nonstandard jobs pay less than regular full-time jobs to workers with similar characteristics, are less likely to provide health insurance or a pension, and are more likely to be of limited duration.” When you consider how rapidly nonstandard work arrangements are growing (the number of part-time workers has climbed by 5 percent since 1993, and the number of temps has jumped 27 percent) you begin to sense the detrimental financial and psychological impact of nonstandard work, regardless of whether or not these arrangements are by choice.

The increasing use of contingents fuels the anxiety that has been simmering for years due to the erosion of the employment contract. “There are plenty of people who see the growth of the contingent workforce as a trend away from a strong commitment to core employees,” says Sanford Jacoby, professor of management at UCLA and author of “Modern Manors: Welfare Capitalism Since the New Deal,” (Princeton University Press 1997). “Companies have told employees the old days are over, that there’s no such thing as lifetime employment, yet they haven’t adequately defined the new psychological contract.”

Even workers who’ve gotten the message that the employment contract has changed and who are taking responsibility for expanding their careers appear to be anxious. “The new employment contract says that to keep growing, employees have to keep moving,” says John Zweig, divisional employment manager for Apple Computer Inc., in Cupertino, California. “But it’s stressful to keep making these job changes no matter how well-paid you may be.”

Add all these factors together and it’s relatively easy to see why the U.S. public cheered on the striking UPS employees. But what does this anxiety mean for HR professionals? For one thing, it could signify the dawning of a new era of empowered and emboldened workers.

Workers direct anxiety toward their employers.
While the UPS strike served to highlight the alarming sense of workers’ anxiety, it may also prompt workers to take action as a result of that anxiety. With unemployment at record-breaking lows and skills-short companies begging for workers, the strike may give employees the added push they’ve needed to demand a little bit more in their paychecks, better job security or more generous benefits. “Dilbert’s Revenge” is what The Wall Street Journal recently called this emerging trend.

“The UPS strike is much more than a shift in mood,” explains John A. Challenger, executive vice president of Challenger, Gray & Christmas Inc., a Chicago-based outplacement consulting firm. “Since the widespread downsizing in the late 1980s, workers have been reluctant to ask for something better from employers, fearing their jobs would be in jeopardy if they did. The UPS strike signals that reluctance has come to an end.”

Highly skilled workers already are enjoying a heyday of career-growth opportunities and are using the tight labor market to force employers into granting salary increases, promotions, stock options and other perks. Those who don’t get what they want simply pack their bags and walk down the street to another company. In fact, this kind of job hopping is becoming routine among employees with coveted skills.

Even temps are finding the tight labor market beneficial in their push for higher wages and better working conditions. “In this job market, the employee holds the cards,” explains Lynn Taylor, vice president and director of research at Robert Half International, a staffing firm based in Menlo Park, California. “There’s greater incentive for employers to pay attention to their needs.”

While part-timers and other contingent workers typically don’t have the same clout with employers, unions may step in to help them with their demands for better wages and more full-time job opportunities. After decades of declining membership, organized labor is enjoying a growing vitality as seen in the recent minimum wage hike and the increasing visibility of unions on Capitol Hill.

In Silicon Valley, in particular, union officials are encouraging contract workers to take advantage of their bargaining power now, while the labor force is tight, to secure better wages and job stability in the event of an economic downturn. According to research conducted by the San Jose-based South Bay AFL-CIO Labor Council, contingent workers, including temporary, contract, part-time and self-employed people, make up between 27 percent and 40 percent of Silicon Valley’s workers.

Union organizers there plan to win public support by drawing attention to the inequities experienced by high-tech contract workers who don’t receive health or retirement benefits, let alone the stock options that have turned many of their full-time colleagues into millionaires. “We’re doing a fair amount of organizing on the basis that as goes the Silicon Valley, so goes America,” says Amy Dean, chief executive director of the South Bay AFL-CIO Labor Council.

Employees without union representation who can’t get the concessions they want from employers have yet another weapon at their disposal—the U.S. legal system. Already, part-timers have won a significant triumph inside one of this country’s most prominent companies. In July, a Federal Appeals Court ruled that Redmond, Washington-based Microsoft Corp. had wrongly excluded free-lancers hired before 1990s from its stock-option plan, an opinion that could cost the company millions of dollars.

“Courts are starting to lean toward the favor of temporary employees,” explains Chuck Straub, former HR director of the Space Systems Division of Boeing Co. in Huntington Beach, California. Straub had been in charge of the staffing strategy, including the hiring of contingent workers for the firm, until only a few months ago. Straub anticipates that if companies don’t make their contingent employment practices more equitable, an increasing number of lawsuits like the one that hit Microsoft will ensue.

He also believes that intervention by the state or federal government is probable. “There’s a real danger that a law will be written that says companies must make temporary workers permanent after a certain length of time,” he explains. In fact, the Clinton administration has already started looking into the perceived inequities between contingent and full-time employees.

Another way contingent employees can make their demands known—or at least, their frustrations felt—is through the time-tested technique known as low productivity or a work slowdown. As explained in Towers Perrin’s 1997 “Workplace Index,” a measure of employee attitudes across the country: “Over and over, our results confirm that the more employees believe their company treats them fairly, considers their interests and shares its financial success with them, the more likely they are to go that proverbial ‘extra mile.’ Perhaps even more significant, the opposite is true as well… and that, in turn, can adversely affect productivity and performance.”

Prevent worker demands from running amok by treating employees fairly.
Given that workers are now in a position to demand more from their employers, it behooves companies to take a hard look at their employment practices. If there’s a single lesson to be learned from the recent UPS strike, it’s that employees, regardless of their status, want and expect their employers to treat them fairly.

“For me, the interesting lesson for HR is that people still expect a lot from their employers and they want companies to take care of them,” explains UCLA’s Jacoby. “This is ironic given the individualistic society we live in.” But this translates into a large untapped reservoir of loyalty that companies can take advantage of simply by treating workers equitably, honestly and fairly.

Unfortunately, companies appear to have a long way to go in this endeavor, particularly when it comes to contingent workers. According to the EPI’s report, nonstandard workers are much more likely to receive low wages than their full-time colleagues. On average, women in nonstandard work arrangements earn 20 percent less than women doing the same work full time, and men earn 24 percent less. Furthermore, approximately one-fourth of all nonstandard workers don’t earn enough money to lift a family of four out of poverty. (Granted, some kinds of nonstandard workers are highly paid, including high-tech independent contractors, but these are the exception, not the rule.)

Additionally, nonstandard workers are much less likely to receive a pension or benefits. Just 23 percent of women and 16 percent of men doing nonstandard work receive either benefit. Much of the disparity between full-time employees and their nonstandard counterparts can be attributed to the fact that nonstandard workers typically are assigned substandard work.

If employers want to continue using contingent workers to keep the workplace flexible enough to adapt to changing business conditions—and it appears they do—they must start treating those workers equitably and offering them the same opportunities that are available to full-time employees.

“Many companies like nonstandard work arrangements, and the majority of workers in those positions are there by choice,” says EPI’s Rasell. “This is good. If companies want to use nonstandard workers for flexibility, there’s no reason why they shouldn’t, because workers also like the flexibility. These arrangements are only bad if companies are using nonstandard workers as a way to save money and cut labor costs.” This is when resentment builds and employees are most likely to lash out at their employers.

Kelly Murphy, founder and principal of The Avalon Group, a consulting firm based in Lake Oswego, Oregon, that helps companies efficiently use temporary labor, agrees with Rasell. “As the market tightens up, you have to look at more flexibility and fairness for part-timers because a lot of people—and companies—want this.”

Murphy suggests HR professionals take a more active role in developing strategies relating to the use of contingents. This could include the following practices:

• Setting limits for the length of time a temporary worker stays with the company
• Developing guidelines for managers on how to hire and supervise contract employees
• Regularly evaluating a part-timer’s responsibilities to make sure part time is still the best arrangement
• Evaluating—and narrowing—the gap between full-time wages and contingent work
• Overseeing all hiring within the company.

This last point is the most critical of all.

“Typically, line managers who are trying to get around a hiring freeze or head-count limitations will bring in a temporary worker and report the cost as a department expense, not as labor,” Murphy says. “HR doesn’t even know that person has been hired.”

Then the manager may start treating the temp as a regular employee, telling that person how valuable he or she is, giving regular feedback and treating the temp as a team member. Inevitably the budget gets tight again, the manager must cut costs and the person is abruptly told the temporary assignment is over. Murphy says this isn’t just unfair for the temp who was led to believe that he or she was a valuable employee, but it’s also not fair to the other full-time employees who start wondering when the ax will fall on them. “There are too many HR consequences for HR to not be directly involved in the hiring of contingent workers,” she says, including legal, productivity, communication and morale issues.

Sallie Larsen, vice president of HR and communications for the Systems Integration Group at TRW Inc., in Fairfax, Virginia, agrees HR must take a more active role in setting guidelines for the use of contingent workers, especially because the number of contingents is likely to continue to increase. “Here at TRW, HR knows about everyone who’s hired, regardless of his or her status.”

Soupata from UPS adds that communication is critical to treating contingent employees more fairly. “Companies have a responsibility today to educate employees about the issues surrounding their work arrangements,” she says. “HR has the responsibility for ensuring a match between employee and company expectations.” When those expectations change and employees aren’t notified is when employees start feeling like they aren’t being treated fairly. “As we discovered, you can never communicate enough,” she says.

In the end, the UPS strike serves as yet another glaring reminder of the kind of power employees have to make or break a business. What makes the UPS situation different is that it showed today’s employers how angry employees are and that if companies don’t start treating all employees—and particularly contingent workers—more equitably, workers will find a way to force the issue. Of course, HR professionals already know this. Now it’s up to HR to spread the word—and the warning.

Jack Stack, president and CEO of Springfield Remanufacturing Corp. in Springfield, Missouri, remembers the days when human resources—or rather, personnel—constituted a very small line on the general ledger. “It was an unnoticed expense,” he says, something not worthy of a great deal of attention. But with the rapid escalation of costs associated with workers’ compensation, health care, employment litigation, benefits and training, HR has burst onto the frontal lobes of executive consciousness. “Upper management now is beginning to see the need for HR to be more progressive,” Stack says, not only in preventing costs, but in making better use of the increasingly costly human asset.

Stack isn’t alone in this belief. Suddenly, it seems, CEOs in all industries are noticing that corporate performance isn’t just about savvy marketing, sound financial planning, up-to-date technology and efficient operations. Increasingly, executives are realizing success also is based on a solid understanding of the value that warm-blooded humans bring to the bottom line.

Even Chief Executive Magazine suggests that CEOs are starting to view their human resources as an investment. As stated in an article in the July/August 1996 issue: “Some executives are starting to look for ways to tap into that human potential, exploring new methods of managing, motivating and redefining the relationship between employees and the company. They’re working to treat employees not as costs, but as assets that increase in value over time.”

In sum, they’re listening to what visionary HR folks have been preaching for years now. Thanks to an unprecedented convergence of marketplace forces, CEOs now are more ready than ever to hear about the value HR can add to the bottom line.

Sounds like a time for celebration, right? Not so fast. Although CEOs are ready to buy what HR is selling, it’s up to you as HR professionals to close the deal by articulating a vision, speaking in executive bottom-line terms and making the CEO your No. 1 customer.

The time is right.
So what are the competitive pressures that are causing sleepy executives to wake up to HR? Record-low levels of unemployment, for one. The competition for skilled employees has become so fierce that companies are desperately trying to create work environments that can attract top talent and keep it there. “Today’s knowledge workers are highly mobile and they can and will sell their skills to the highest bidder,” explains James Houghton, former chairman and CEO of Corning Inc., in Corning, New York. “Talented people who are highly mobile will choose the friendliest environment possible,” he says. And who’s in charge of the corporate environment? None other than HR.

Global competition also is putting the squeeze on companies and sharpening their HR focus. “With so much competition, the market has become much more value-oriented,” says Bob Collins, CEO of GE Fanuc Automation North America Inc. in Charlottesville, Virginia. “The only way to increase value without increasing price is to find ways to improve employee productivity.” This realization—that productivity is the key to value—comes after years of painful downsizing and cost-cutting in which senior executives simply have run out of things to leverage. The only thing left is people.

Another force executives are starting to contend with is the increasingly demanding consumer population. With very little differentiation in price and quality, consumers are starting to make product choices based on the attributes of the company itself. “Companies have got to realize there’s more to success that just the product they’re making,” says Stan Sorrell, departing president of Calvert Group, a Bethesda, Maryland-based mutual-fund investment company. He believes companies must be socially responsible in all business practices, including how they treat employees. Think about it—all else being equal, who would you rather do business with? A company that values its workers or a company that underpays employees and discriminates against minorities?

Last, but certainly not least, on this list of business pressures is the one Stack mentioned: cost. Yes, HR has become one of the biggest expense items for companies, especially in service industries, and chief executives are frantically searching for ways to get a better return on their investment. This, perhaps more than anything else, is what is putting HR on the radar screen of more CEOs. “On a scale of one to 10, I’d put CEOs’ awareness of HR issues at a solid eight,” explains Mike Deblieux, president of Mike Deblieux Human Resources in Tustin, California. “Five years ago, it would’ve been a four.” Why the sudden increase? “Rising costs,” he says, “especially in the area of lawsuits.”

Roll all these marketplace factors together and you have a business climate that’s ready, indeed desperate, for HR to step to the forefront with solutions.

If you’re still not convinced the balance is tipping in favor of HR, then ask CEOs: What are your most pressing overall business problems today? Chances are, you’ll find even those are HR-related. “Health-care costs and succession planning [are major issues],” says Stack. “Performance and accountability,” says Bob O’Neill, city manager of Hampton, Virginia. In a nutshell, corporate leaders are coming to understand at a very deep level that it’s people, not technology or processes, who create profitable products and services.

But just because CEOs are beginning to understand the importance of HR doesn’t mean they’re taking an active role in pushing HR’s agenda. Nor should they. “They’re looking to HR for clues about how to leverage people better,” says Greg Hackett, president of The Hackett Group, a Hudson, Ohio-based management consulting firm. Why? Because most people who fill the top jobs in companies grew up in the old school of thought about HR. Conditioned to think about personnel as an administrative function, they’re not used to thinking about HR strategically. Even though the market is ready for CEOs to listen, it’s up to HR professionals to grab executives by the collar and make them hear the message of what HR can do.

Sell your financial value.
To capture the CEO’s attention, Donald Van Eynde, professor of management at Trinity University in San Antonio, Texas, says HR leaders have to muster up managerial courage and not be afraid to get in the face of senior executives. “HR is often seen as the entity that stops companies from doing things,” he says. The only way to change that is by understanding and addressing the strategic needs of the organization.

O’Neill agrees. “In some cases, HR folks haven’t done a good job building the relevance of HR programs to the organization, of explaining why they’re important,” he says. “If they don’t do a good job articulating why their programs can help, the fact that they have a good idea is of little significance.”

Ken Carrig, vice president of HR for Houston-based Continental Airlines, adds that HR needs to know the three factors most critical to the success of the business so that it can build programs around them. “High-level managers won’t waste their time with you if you can’t talk about the same goals,” he says.

Perhaps the best way for HR professionals to take advantage of market conditions and push their rising star even higher is to listen to their top customer-the CEOs themselves. What advice do today’s chief executives have for HR managers who are eager to reshape their organizations? Workforce talked to CEOs in companies that have transformed themselves through innovative HR practices to learn what suggestions they have for HR professionals in other companies. Their comments resonated on a single theme: The bottom line.

“It’s a question of return,” says Calvert’s Sorrell. “Go to the CEO and discuss, from a financial perspective, the impact of your programs, be it cutting turnover, reducing training costs or increasing productivity.”

Sorrell has firsthand experience with cost-saving HR programs because Calvert is widely known for its employee-friendly programs, including flextime, parental leave, free 15-minute massages, a meditation room and a program that reimburses employees for the cost of roller blades, bicycles or running shoes used to get to and from work. Since the company implemented these and other similar programs, turnover has been slashed from the industry average of 25 percent a year to less than 12 percent, saving greatly on the costs of recruitment, training and low productivity.

Evelyne Steward, senior vice president of HR at the Calvert Group, who helped initiate—and sell—many of those programs, adds this advice: “Make the CEO your most important client. Learn what issues top managers are struggling with and develop creative programs to help them.” Then, demonstrate how those programs aren’t costs, but investments that will have a measurable return.

Mike Servais, president of Acute Care Division of King of Prussia, Pennsylvania-based Universal Health Services Inc., also suggests HR executives learn and demonstrate an understanding of the business, especially the goals and needs of senior managers. “In many companies, HR people see the function as a separate entity—and not part of finding business solutions,” he says. “The only way to change that is if people in the field become more bottom-line oriented.”

At his company, which is the third-largest investor-owned health-care company in the United States, HR recently led a cultural change effort that has successfully focused the attention of its 14,000 employees on customer service. How? With a thorough understanding of the corporate goal of service excellence, HR was able to align the recruitment, hiring, compensation, discipline, training, reward and recognition processes so all employees were focused on this goal. The result has been an across-the-board improvement in customer satisfaction, lower turnover, higher employee satisfaction, increased business volume and excellent profits, he adds.

Charles Kovaleski, president and CEO of Attorneys’ Title Insurance Fund Inc. in Orlando, Florida, recently underwent a similar cultural change effort. His employee-services department-as HR is known—thoroughly revamped the application, interviewing, orientation and training process so that the company’s 800 employees understand the corporate goal of customer service from their first days on the job. The employee-services department was so successful in re-focusing employee efforts that the manager of the division recently was promoted to senior vice president and now is reporting directly to Kovaleski.

What advice does Kovaleski have for other HR managers based on his new-found appreciation for HR? “HR managers need to understand they have a lot of internal customers to satisfy,” he says. “They have to orient toward becoming strategic contributors, not inhibitors, to each of those customers.” They can do that by getting out of the office and learning about those needs, he says.

When asked what kind of advice he would share with today’s HR managers, Springfield Remanufacturing’s Stack continued to beat the financial drum. “Too many HR managers can’t read their own financial statements,” says Stack. “I recently spoke to 1,100 training professionals and asked how many of them could read a balance sheet. Not six hands went up. You can’t help provide financial security for the organization unless you know how to read the report card.”

Stack should know. His management team espouses open-book management, and the HR department provides ongoing financial education for all employees. What has the business impact been? The company’s stock value has leapfrogged from 10 cents a share 15 years ago to $33 today. Not only that, but in 15 years of business, the company has never had to borrow beyond its original credit line.

What to expect from the CEO.
In companies at which HR professionals have been successful in selling their services to the CEO, HR is finding its bosses are more than willing to support HR’s new role as strategic partner. But the way CEOs demonstrate that support varies a great deal depending on the size of the company, the industry it’s in, the competitive pressures it faces and the personal management style of the chief executive.

Tharon Greene, director of HR for the city of Hampton, Virginia, says her boss shows “incredible support for the workforce and HR.” But ask City Manager O’Neill what his support looks like on a daily basis and he’ll tell you: “I’m not sure I do support HR daily. My role is more to create an imperative for change.”

Indeed, being the visionary and champion for change is the most typical role for chief executives in this new HR-driven culture. Carrig says Continental’s CEO Gordon Bethune’s role in the company’s recent workforce turnaround was to set the goals and regularly communicate with employees.

“He understands that people issues are as important as any other business issue, including operations and finance,” Carrig says. Bethune has reinforced this several ways: by placing HR on the management team alongside the CFO, by devoting just as much time to HR issues as he does capital issues and by helping other senior managers realize how important HR is to the company’s new way of doing business.

This last activity—keeping other senior managers focused on people issues—may be one of the most vital ways CEOs can support HR. Shoshona Zuboff, a professor at the Harvard Business School, says that if corporations have any hope of developing the skills and behaviors needed to manage the new workplace, the focus has to shift from changing employees to changing managers. In other words, CEOs can and should be instrumental in redefining the purposes and priorities of the managerial hierarchy and get rid of managers who don’t support the need for new people—driven practices.

When Attorneys’ Title Insurance was ready to embark on its cultural change effort in the late 1980s, there was some reluctance and cynicism on the part of senior managers, Kovaleski says, because they didn’t want to hand over more decision-making authority to employees. “They told me, as the new CEO, ‘This isn’t how you do things.’ Those managers aren’t here anymore.”

At the very least, HR executives should expect their CEOs to provide the tools and resources to initiate cultural change efforts, especially if HR demonstrates how those efforts will release the energy, creativity and enthusiasm that now lie dormant in many organizations.

But HR has to sell itself before it can expect the CEO to come through with any form of support, be it verbal, financial or managerial. Although some CEOs inherently understand the value people bring to the bottom line—and how to harness that value—these executives are the exception rather than the rule. If HR professionals have any hope of comfortably assuming their role as strategic partners, they must take advantage of the forces that have raised CEOs’ awareness of HR issues and then sell their bottom-line solutions.

The time is right. CEOs are ready for a change. Employees are most certainly ready for a change. And HR, as the function that touches every single employee, is ideally suited to take on the challenge of reshaping America’s organizations to release the productivity of those employees. Armed with managerial courage and a boatload of bottom-line facts, HR professionals should easily be able to sell their organizations on the idea that people are the key to making a profit.

As Bob Collins, CEO of GE Fanuc, emphasizes: “This isn’t a matter of choice anymore, but a matter of how quickly you can make this change and get the changes implemented.”

In companies in which leading-edge HR practices have shown a measurable financial impact, the CEOs understand the value the function brings to the bottom line. What advice about human resources do these executives have for other CEOs? Read on.

“CEOs need to have a pretty good set of listening skills. Employees will tell you what the HR agenda should be.”
Bob O’Neill, City Manager
City of Hampton, Va.

“Stop looking at HR in the traditional manner É as the soft side of an organization. Instead, make it a part of the financial organization of the company. There should be no difference between the CFO and the HR executive. We’re all working toward the same objective.”
Jack Stack, CEO
Springfield Remanufacturing Corp.
Springfield, Mo.

“To survive, CEOs must begin to focus on people as resources in the organization.”
Mike Servais, President
Acute Care Division of Universal
Health Services Inc.
King of Prussia, Penn.

“I have a belief that human nature is extremely elastic with respect to its ability to do work. The amount of elasticity depends on the individual’s commitment to the business. When people believe in what they’re doing, see it as worthwhile, and see value from it, they’ll put their heart and soul into the work.”
Bob Collins, CEO
GE Fanuc Automation,
Charlottesville, Va.

“My impression is that human resources often gets pigeon-holed and isn’t consulted by other departments. For HR managers to help everyone in an organization, they need to understand the big picture. That’s why HR needs to be elevated to the senior management team and report directly to the CEO.”
Charles Kovaleski, President and CEO
Attorneys’ Title Insurance Fund Inc.
Orlando, Fla.

Workforce, June 1997, Vol. 76, No. 6, p. 66.

The use of mandatory employment arbitration is so new that little research has been done into the use of these procedures. To find out how companies are using and structuring these plans, Christine Ver Ploeg, Mei L. Bickner and Charles Feigenbaum recently undertook a survey of employers. Results of the survey were featured in the January 1997 issue of the Dispute Resolution Journal, published by the American Association of Arbitrators. Here are some of the highlights:

How long have the procedures existed? Approximately 85 percent of the procedures have been implemented within the last five years, and approximately 20 percent have been implemented in the last 1.5 years.

Who is covered? Approximately four out of five plans cover all unrepresented employees.

How is the agreement enforced? Approximately 75 percent of employers require new employees to participate in the plan as a condition of employment. Only half require existing employees to participate; the rest encourage but don’t require their current employees to do so. Approximately 25 percent of the plans are voluntary for both new and current employees.

Why were the arbitration procedures developed and implemented? More than 75 percent of employers cited concerns about litigation costs as their major reason for implementing their policies, and another 15 percent stated they adopted the policies to improve employee relations.

What disputes are subject to arbitration? Approximately half the plans surveyed cover most or all disputes arising out of employment. Approximately 25 percent cover termination only, and roughly 20 percent limit coverage to claims that otherwise would be litigated in court.

What are the provisions for employee representation? Ninety percent of the arbitration plans permit employees to be represented by their own advocates during arbitration.

How is the arbitrator selected? Nearly 85 percent of the plans surveyed provide for joint selection of the arbitrator.

What is the arbitrator’s authority with regard to remedy? Two-thirds of the plans don’t specifically restrict the arbitrator’s authority with regard to remedy, although a minority place some limitation on monetary damages.

Who pays the arbitrator’s fees? Approximately half of the plans call for the employers to pay arbitration fees, the other half provide for shared costs.

What has been the experience with the procedures to date? The majority of the plans have been in existence less than five years, and most of the employers surveyed had not yet arbitrated a single dispute, having resolved their cases before reaching the final stage of arbitration.

Workforce, May 1997, Vol. 76, No. 5, p. 54.

In 1994, a group of senior executives at Texaco Inc. were in a meeting discussing a class-action discrimination suit brought by nearly 1,400 black professionals and middle managers at Texaco who claimed they were denied promotions because of their race. The meeting was secretly taped by one of the participants who, after he was laid off by the company last year, handed the tapes over to the suing employees’ attorneys.

After reading transcripts of the tape, The New York Times reported that Texaco’s executives had used racial slurs—including the “n” word—and poked fun at Kwanzaa, an African-American holiday. These affronts were in addition to plotting to destroy documents demanded in the discrimination suit.

The ensuing publicity was a public relations nightmare. The Rev. Jesse Jackson called Texaco “the Mark Fuhrman of Corporate America,” a reference to the detective in the O.J. Simpson criminal case who was accused of using racial epithets. Civil rights groups including the National Urban League and the NAACP called for boycotts of Texaco gas stations. Texaco’s stock price dropped several percentage points. And federal prosecutors launched a criminal investigation into obstruction-of-justice charges. The firestorm of negative publicity was so intense the company settled the racial-discrimination case two weeks later, agreeing to pay more than $175 million over the next five years. Although the company’s new CEO, Peter Bijur, did what he could to repair the damage by acting quickly, the company’s torn reputation will probably take a long time to heal.

The diversity debacle at Texaco made fascinating reading for several weeks. But for corporate human resources executives, the incident is much more significant, because it serves as yet another glaring reminder of how HR practices can build—or destroy—a company’s bottom line. In fact, it’s one of the best case studies in recent memory to show the financial impact of diversity work —or the lack of it.

What happened at Texaco also serves as a wake-up call to every other business in the United States. Good intentions aside, it’s clear Corporate America has a long way to go in creating companies that truly value and support diversity—especially racial diversity. And although the huge financial impact of ignoring racial diversity in the workplace is, perhaps, not the best reason why companies should focus on eliminating bias at work, it’s actually the reason that’s garnering the most attention lately.

Texaco focuses attention on the need for diversity initiatives. As shocking as the Texaco fiasco appeared to laymen, few people involved with corporate diversity efforts were surprised. How could this happen? “Very easily,” says Michele Fantt Harris, former president of the Black HR Network, and assistant vice president of HR for the Association of American Medical Colleges in Washington, D.C. “The gentlemen on the tape said what they believed,” she says. “A Texaco can happen most places I know of.”

Her reaction is echoed by minorities and diversity professionals all across the country, many of whom believe deep-seated executive prejudice was bound to be exposed someday. Like the videotaped police beating of Rodney King a few years back, to scores of Americans, the Texaco tape wasn’t an isolated incident. Instead, it brought to light the harmful attitudes and behaviors that continue to exist in the world. “The only thing different about Texaco was that a tape recorder was in the room,” says Yvette A. Hyater-Adams, senior vice president of change management for CoreStates Financial Corp. in Philadelphia. “Texaco got caught.”

(Efforts by Workforce to contact the head of Texaco’s diversity effort were unsuccessful. A company representative did, however, refer us to the company’s new “comprehensive plan to ensure fairness and economic opportunity for employees and business partners.”

To be fair, there has been great progress in the diversity movement over the last several years. By 1994, 72 percent of Fortune 500 companies had started diversity initiatives, according to a survey conducted by A.T. Kearney Executive Search, a recruitment firm based in Chicago. Only a handful of companies reported having diversity programs a decade earlier. But the progress appears to be slowing down. According to another survey in 1996 by the same organization, the number of firms with diversity efforts had increased just two percentage points, to 74 percent.

“Corporate America has lost momentum over the last two to three years in the creation of new diversity programs,” says Michelle Smead, vice president and diversity practice leader at A.T. Kearney. “The reason for this needs to be explored so that CEOs can better understand how proactive handling of diversity issues can positively impact management goals and how neglect of these issues may produce tragic consequences such as those recently experienced by Texaco.”

Peter Robertson, director of EEO Services for Organization Resources Counselors (ORC) in Arlington, Virginia, agrees. Because of all the publicity surrounding California’s Proposition 209, which bans affirmative action at the state level, as well as the perceived erosion of federal equal employment opportunity (EEO) and affirmative action enforcement, he believes companies are doing even less to enforce EEO guidelines and to make the workplace a hospitable environment for women and minorities.

“I estimate only about 15 percent of companies have quality EEO and diversity programs in place,” he says. The rest are gradually dismantling their EEO functions, eroding their ability to deal with discriminatory behavior rather than eliminating the behavior altogether. Considering that charges of race discrimination still form the largest percentage of cases filed with the Equal Employment Opportunity Commission (EEOC)-more than both gender and age discrimination-the relaxed attitude toward potential racial discrimination is bound to be expensive.

Ignoring diversity is costly. Although all the negative publicity surrounding Texaco makes, on its own, a good business case for keeping the focus on diversity high, there are other bottom-line reasons why companies can’t slack off, not the least of which is the potential for increased, costly litigation. In a recent report by ORC that tracked recent large-settlement discrimination cases, racial-discrimination cases —especially those with class-action status—have won some of the largest jury awards and cash settlements. In fact, Texaco’s cash settlement of more than $140 million, combined with additional concessions valued by plaintiffs’ lawyers at $35 million-is the largest settlement ever in a racial-discrimination case.

The visibility of the Texaco case, coupled with the financial windfalls received by plaintiffs in the other recent lawsuits, will increase the willingness of those who have been treated unfairly to pursue legal action, says Taylor Cox Jr., associate professor of the University of Michigan Business School at Ann Arbor, and author of the book, “Cultural Diversity in Organizations,” (© 1993, Berrett-Koehler Publishing, San Francisco).

Robertson adds that potential plaintiffs will be helped by attorneys who are more willing to take on these lawsuits thanks to the increased potential for large damage awards, and by judges who are more likely than ever to grant certification for large-scale, class-action cases. Additionally, there are many winning plaintiffs eager to lend a hand. A report available on the World Wide Web, for example, is called: “How to Sue Your Corporate Employer for Unlawful Discrimination or Harassment and Win.” It was written by a former employee of Hughes Aircraft Systems in El Segundo, California, who claims to have won a jury award worth $86.9 million in a racial-discrimination suit.

According to Robertson, the next group of lawsuits, which is already under way, is what he calls “second-generation” discrimination suits. “The first wave of discrimination cases was based on the failure of companies to hire more women and minorities,” he says. With the hiring problem mostly solved, the next round of lawsuits is being based on the failure of companies to promote and compensate those employees at the same level as white males. In fact, this is what formed the basis of the Texaco case.

Another reason to work vigilantly against discrimination is the increased potential for public pressure and boycotts by civil rights groups. Even the threat of a boycott, as in the Texaco incident, can provide a lot of leverage for groups seeking redress for past discrimination. In 1996 alone, Avis, Mitsubishi, R.R. Donnelly and the United Dairy Farmers were targets of boycotts because of alleged racial discrimination. “The Texaco incident does have the potential to catalyze the civil rights movements into a more aggressive campaign,” says Wade Henderson, executive director of the Washington D.C.-based Leadership Conference on Civil Rights. Money, as they say, talks. And businesses increasingly will have to listen, because internal diversity awareness and fairness aren’t the only good financial reasons to focus on discrimination.

Business success may depend on good diversity relations. Even though preventing boycotts and lawsuits may be enough of a bottom-line reason for companies to shore up their diversity efforts, an even better, long-lasting and more proactive reason is that it’s for the good of the business overall. Sure, it would be nice to think companies would embrace diversity because “it’s the right thing to do.” But as the 1996 A.T. Kearney survey revealed, 74 percent of companies with diversity efforts attribute them to business, societal and/or political pressures—not basic ethical values. Given that, one of the primary business reasons to pursue diversity sensitivity is increasing the company’s ability to attract and retain customers.

Boston-based BankBoston, for example, was able to document its business case for diversity by taking a look at the financial value of certain demographic groups and thus, its need for quality banking relationships. When research conducted through Money magazine, “Marketing News,” and the book, “Multicultural Marketing,” by Marlene Rossman (© 1994, AMACOM Press, New York) put the total U.S. purchasing power of Asian Americans at $100 billion, Hispanics at $193 billion, African-Americans at $284 billion and gays and lesbians at $500 billion, it didn’t take long to convince the company’s senior executives that diversity was a sound business strategy, according to Kim Cromwell, director of workforce effectiveness. “The total purchasing power for these groups cuts across all industries,” Cromwell says, “so any company can benefit from a business strategy based on diversity.”

The bank’s decision to pursue diversity as a business strategy was further strengthened by Harvard Business School research. “We realized that diversity efforts can increase employee satisfaction,” Cromwell says, “and the Harvard Business School has been able to demonstrate a strong link between employee satisfaction, customer satisfaction and shareholder value.”

The connection between diversity and shareholder value was further established in a 1994 report by the Glass Ceiling Commission, a division of the U.S. Department of Labor established by Congress in 1991 to eliminate the barriers to advancement for women and minorities. The report found that the annualized return for the 100 companies which rated lowest in EEO issues averaged 7.9 percent, compared to 18.3 percent for the 100 companies that rated highest in their equal employment opportunities. Put another way, the stock performance of firms that were high performers on Glass Ceiling-related goals was 2.5 times higher than that of firms which invested little toward achieving such goals.

Why we’re still struggling with diversity. Given the solid business motivation for diversity, why are companies still struggling with discrimination-related issues? Why is the potential for lawsuits still rising 33 years after the passage of the Civil Rights Act? How does a Texaco incident happen in an age when 74 percent of large companies claim to be pursuing diversity initiatives?

“Because the changes companies have made have been largely cosmetic in nature,” explains Hyater-Adams. Up to this point, most diversity work has been focused solely on diversity-awareness training, she says. This raises the awareness of individual employees but does nothing to change the culture itself.

Diversity consultant Elsie Cross of Elsie Y. Cross Associates in Philadelphia agrees, adding that much of the training done to date has been superficial. “You can’t take people who’ve grown up in a prejudiced society and get rid of their beliefs and attitudes in a half-day training session,” she says. Not only that, but in seeking to address every kind of difference imaginable, including age, religion, management level and even the particular concerns of white males, much of the training has become watered down. While this may make the training more palatable to some, Cross says it takes the focus off the very real oppression that still exists for women and minorities.

In fact, by hoping that training, on its own, will be the solution to their diversity woes, companies have probably lost more ground than they’ve gained. This is because training done in the absence of any formal support for change can increase divisiveness in the workplace. Why? Not only because it raises awareness of tense issues, but also because it can increase the expectations of women and minorities, and increase fear and resistance among white men.

“Most organizations that have invested in diversity training haven’t received a proper return on their investment,” Cox says. Just look at Texaco: the company had initiated a diversity effort a year before the secret tape was made, and senior executives had attended at least one awareness session.

To make the workplace an environment that’s truly inclusive of diversity, companies must begin to think of training as a component of their diversity strategy, not the strategy itself. Hyater-Adams believes companies must now concentrate on the second stage of diversity work that she calls “integration and application.” This stage not only seeks to address what training ignored, such as management hypocrisy, but also seeks to make diversity work a business strategy. The goal, according to diversity experts, is to create a workplace in which white males, women and minorities are fully integrated and have equal access to power, promotions and opportunities.

How? There’s still no definitive, cut-and-dried formula for diversity that succeeds for every company. Even the best diversity training, programs and initiatives, although no longer in their infancy stages, certainly are still at the toddler level. However, there’s much to learn from the organizations that have successfully pursued diversity goals.

Elements of a successful diversity initiative. Although companies must customize their diversity initiatives to meet their own unique needs, diversity efforts that are perceived to be effective do share some common characteristics.

The first is top-level leadership, commitment and accountability. Companies must have a clear, unambiguous policy of diversity that comes from the very top, says BankBoston’s Cromwell. “Here, HR doesn’t own diversity,” she says. Instead, HR is a consultant to the effort.

In her company, the CEO has led the diversity charge and has assigned several senior executives to key diversity positions. A senior vice president led the effort to document the business case for diversity, for example. Not only that, but two senior executives also are assigned as sponsors for each employee resource group. These are groups formed to address the concerns of specific employee populations such as African-Americans, gays and lesbians, Hispanics and people with disabilities. To increase understanding, the senior executives assigned to these groups don’t fall into those particular classifications. Two white executives, for instance, sponsor the African-American group.

To make sure the bank’s top 200 executives understand the challenges inherent in diversity work, they’re required to attend a five-day diversity leadership conference. “This allows them to slow down, consider their own issues relative to diversity and get educated about the challenges involved,” Cromwell says. To keep the diversity discussion alive, conference attendees are encouraged to maintain contact with each other afterward. One group of attendees formed a “reading circle” in which members share information with each other on diversity topics. Conference goers also are invited to attend follow-up seminars and events, such as one held last November on cross-race mentoring.

Important as executive training is, May Snowden, executive director, diversity, at US WEST in Englewood, Colorado, thinks executives must also be personally committed to the effort. “I believe the incident at Texaco happened because executives gave their ‘buy-in’ to diversity, but not their personal commitment,” she says. In other words, they talked the talk in public but didn’t get personally involved. How should a company engender personal commitment from upper-level leaders? By holding them accountable, she says, both quantitatively and qualitatively, to setting and meeting diversity goals.

According to a recent study by New York City-based The Conference Board, as much as 25 percent of managers’ and executives’ bonus and incentive compensation is being tied to diversity objectives. “Companies want managers who aren’t only successful with profit margins, but who also can create a positive environment that values, respects and leverages all employee talents while providing fair advancement for all employees,” explains Michael Wheeler, research associate in The Conference Board’s HR/organizational effectiveness department, and author of the report. “Holding management and employees accountable for diversity-related behaviors and actions becomes a basis for creating inclusive environments.”

At US WEST, for example, managers must demonstrate their personal commitment to diversity through direct involvement on committees, task forces or community groups-they can’t pass the task off to a subordinate-and they must show how their commitment is changing the demographic profile of workers in their unit, division or community. Furthermore, a portion of their compensation is tied to the achievement of diversity goals. Although there’s no set formula, appraisals drive compensation, and work with diversity contributes to a good appraisal, explains Lois Leach, company spokesperson. What are the consequences if diversity goals aren’t met? “Let’s just say there have been people whose careers didn’t fare well because of a lack of commitment to diversity,” she explains.

Next, conduct ongoing diagnostics. Companies can’t proceed with diversity unless their leaders understand issues involved with each group. Performing regular diagnostics, in the form of focus groups and employee evaluations, can help HR executives uncover these issues. “Companies must [analyze] the data by different populations,” says Cromwell. If they don’t, issues that affect certain employee populations-the lack of informal mentoring for minorities, for example-may not be noticeable when combined with other employees’ responses.

Diagnostic work helps diversity professionals understand what issues to tackle first. At UNUM Life Insurance Company of America, based in Portland, Maine, executives had trouble understanding why the company couldn’t retain minority employees. After much evaluation, they realized that although their focus on minority recruitment may have successfully attracted employees to the company, they weren’t staying long.

Why? “Because internally, we thought we had to be color blind and treat everyone alike,” explains Sandy Bishop, manager of diversity. In retrospect, she says, what the company should’ve done was recognize that real differences exist for people of color, both in terms of experience and opportunity. Ignoring those differences led the company’s minority employees to think their issues weren’t understood.

The company culture wasn’t the only problem, however. Externally, the community itself wasn’t supportive of diversity—minority employees were having a hard time finding supportive churches, social clubs and consumer services.

Putting their recruitment efforts aside, the company has spent the last six years working hard to help employees understand that differences do matter, and that people from different backgrounds have different perspectives and issues that should be addressed head on. They achieved this understanding through company-sponsored diversity-awareness training; the development of employee “affinity groups”; ongoing visibility of diversity issues in the company newsletter; and by holding employees accountable through their performance-management plans and for participation in activities that increase their diversity awareness. “For diversity to work, employees had to be accountable for pursuing their own education,” Bishop says.

Through its work with local schools, nonprofit groups and other companies, the organization also has worked to make the community more supportive of diversity. “It has taken awhile, but we believe we’ve created a culture that supports and understands differences,” Snowden says. “Now, we can begin to focus our attention on changing HR activities to reflect our diversity goals.”

Make sure there’s company support and regular evaluations. After diagnostics, make sure your company has supportive systems and practices. As Snowden suggests, companies must have a supportive culture in place before true diversity can become a goal. Training and education is an important first step in creating a supportive culture, but there comes a point when all of the company’s systems and practices must reflect the diversity effort. Companies that have made diversity an integral part of their business philosophy recruit using “nontraditional” sources, such as black and Hispanic fraternities. They ask minority employees how changes in benefits will affect them. And when designing products or creating marketing campaigns, they ask for input from a diverse range of consumers.

For instance, at CoreStates Financial Corp. every major project team, including those for reengineering and quality initiatives, are created using a cross section of employees. “We want to make sure the input of all employees is considered on major business initiatives,” says Hyater-Adams. “But more than that, we want diverse teams of employees to lead their business units.”

Finally, make sure you conduct regular evaluations. Companies must always be taking the pulse of employees to make sure that no diversity issue is overlooked. “What most companies need today is better information on minority issues,” says Robertson. This includes statistics on the workforce profile, on major lawsuits or employee complaints of discrimination, and performance data about individual managers. This information must be shared with upper-level executives on a regular basis along with all the other profit-and-loss data they receive. If Texaco’s executives had been receiving this information regularly, Robertson suggests they might never have been the target of a discrimination suit, or the ensuing negative publicity.

Of course, when it comes to diversity work, nothing is guaranteed. All a company’s best intentions and its chief executives can be thwarted by the discriminatory actions of a single manager. But if company leaders begin to approach diversity like any other major business initiative—be it safety, reengineering or self-managed teams—they’ll be in a better position to institutionalize diversity and truly encourage and embrace the different perspectives of each employee.

No doubt, the hardest part of the work will be having patience for the long road still ahead. But for HR executives, it’s work worth doing because of the strong message it sends to employees, and increasingly, to consumers. “Companies that are surviving in today’s competitive marketplace are those that have focused their attention on HR [issues],” says Robert Drago, professor of economics at the University of Wisconsin in Milwaukee. If companies can eliminate discrimination in the workplace, just think of the impact it can have on the marketplace, the bottom line and in society overall.

In the final analysis, perhaps the best way to look at this issue is the way Cross describes it: “Diversity isn’t the problem, it’s the ideal.” It’s certainly an ideal worth striving to attain—and a financial driver we can no longer ignore.

Workforce, March 1997, Vol. 76, No. 3, pp. 58-66.

Two steps forward, one step back — and a half-step sideways. Like a young colt learning to stand, the progress of human resources in Corporate America is a story of advances and setbacks, triumph and despair, celebration and frustration. For every two progressive steps taken over the years, HR professionals were forced by shortsighted managers, demanding union leaders, Capitol Hill bureaucrats and general business circumstances to retreat, just a little bit. Frustrating? That isn’t the half of it.

The year was around 1915 — a year after the outbreak of World War I. Disgruntled workers were fed up with shabby working conditions, paltry paychecks and shop foremen who hired, fired and paid workers based on criteria no more substantial than how they felt when they got out of bed that morning. Promising to relieve their misery, unions stepped in, workers went on strike and nervous executives finally got the message that better employment practices were needed. Subsequently, the personnel function was born.

Staffed by social workers, educators, early business school graduates and ministers, the personnel department was seen as a way to quell labor unrest by developing systematic ways of hiring, managing and compensating workers. Because of the war, personnel was handed yet another challenge: Keep companies staffed and productive during the lean war years.

“Personnel came about because of a crisis,” says Nelson Lichtenstein, professor of labor and business history at the University of Virginia in Charlottesville. “Because of this, from its earliest days, personnel was the door management knocked on when there was a problem to solve.”

Crisis or not, personnel managers were obviously up to the challenges they were given. By 1920, personnel departments had been created in one out of every four manufacturing firms employing more than 250 workers. In recognition of such companies’ successes, popular and academic publications started printing articles on “the new profession of handling men.” And in 1922, the first business magazine devoted solely to research on this new profession was established. It’s name? The Journal of Personnel Research (now Workforce).

Companies with personnel staff do better. Immediately after WWI, the unemployment rate soared, reaching more than 20 percent in 1921. With so few jobs to go around, workers became less demanding. Strikes declined, turnover was eliminated and there was a sharp increase in labor productivity. Thinking things were “back to normal,” most firms cut back or eliminated their personnel departments. This misguided view would prove to be a huge blunder.

In companies that retained personnel managers, their main responsibility was wresting power away from the plant foremen. This was an era of blue-collar factory work; automobile, steel and consumer goods companies dominated the scene. In the large, mass-production industries, foremen still called the shots. They hired whom they liked and fired whomever they didn’t. Punishment was frequent and pay raises arbitrary. According to Walter Licht, professor of history at the University of Pennsylvania in Philadelphia, the business practices of foremen were so unethical, “It wasn’t at all uncommon for a worker to give the foreman his first paycheck in exchange for a job and special favors at work.”

Like their predecessors a decade earlier, managers of progressive companies saw the development of personnel practices as a way to eliminate the foreman’s power and institute a sense of fairness into the system. In such companies, personnel staff worked hard to develop better recruitment procedures and hiring practices. They assessed skill needs, wrote job descriptions, catalogued jobs and standardized pay scales. They created grievance procedures and sensible rules for dismissal. Believing happy workers were the key to profitable companies, these early personnel professionals also created pension benefits, employee softball leagues, company cafeterias, stock-option plans and employee life insurance.

Companies such as Rochester, New York-based Eastman Kodak and Cincinnati-based Procter & Gamble Co. were leaders in the use of personnel practices. Thus, they tended to be more successful than firms that insisted on running their plants the “old way.” Companies with personnel departments were better at keeping employees during seasonal downturns that forced layoffs at other companies. They also were better at recruiting highly skilled workers and retaining them once they were hired.

Thanks to the efforts of the personnel department there was, for the first time, a reliable-and seemingly profitable-employment system in place in many companies. As Robert Drago, professor of economics at the University of Wisconsin in Milwaukee, explains, “The creation of personnel was a huge step forward for business.”

That is, it was a huge step forward in companies that kept personnel staff on the payroll. In companies that didn’t, which were the majority, foremen continued to prey on workers. As the country prospered, the labor shortage grew, productivity sank and workers quit in increasing numbers. Union activity soared once again. Although personnel practices promised to alleviate these problems by improving worker morale, there simply weren’t enough personnel departments to go around. (In 1927, the Journal of Personnel Research changed its name to The Personnel Journal.)

Unions hit the ground running. Although the Great Depression temporarily stopped union activity, once the economy was moving again, collective bargaining picked up steam. Unions spread like wildfire, and the number of unionized companies grew fivefold between 1933 and 1945.

Seeking to stem the spread of unionization, more and more firms started to see the advantages of having a business function charged with developing and maintaining fair employment practices. After all, what unions were asking for — good working conditions, fair wages, and hiring, firing and grievance procedures — were the kinds of things personnel departments already were successfully doing at nonunion companies. This realization, albeit a bit late, helped elevate the status and authority of the personnel department. Looking back, one has to wonder how far unions would have gone if more companies had jumped on the personnel bandwagon sooner.

Nevertheless, between 1933 and 1935, the growth of the personnel profession and the improvement of its status in the corporate hierarchy were nothing short of phenomenal. By 1935, 64 percent of large companies had personnel practices in place, twice as many as had them just five years earlier. Many personnel departments expanded in size and were placed on equal footing with other management divisions.

Thanks to the function’s growing prestige and importance, personnel professionals in the ’30s started to look beyond basic employment practices and toward more innovative ways of improving productivity. If good working conditions and reliable paychecks boosted job satisfaction, imagine what might happen if workers were asked for their opinions or given more say in business decisions.

Elton Mayo, a Harvard Business School professor, was among the first to research this link between supervision and morale. His work, which became widely known as the “Hawthorne Studies,” revealed that when employees have a say in the work being performed, they’re more likely to enjoy their jobs, work better with others and be more productive. Personnel professionals took to his findings with gusto, and the first discussions about employee empowerment, teamwork and psychological motivation followed. Unfortunately, as any HR person today knows, it took decades for these ideas to catch on. Meanwhile, HR continued to be the function looked upon to solve staffing crises. (In 1935, The Personnel Journal changed its name to Personnel Journal.)

1940s
STATS OF THE DECADE

World War II generates new marching orders. With unions now firmly part of the industrial scene, the personnel department began to divide into two functions — industrial relations and personnel. Industrial relations, which managed union contracts and worked to meet union demands, and personnel people concentrated on what they did best: keeping the workforce productive.

This challenge was never greater than it was during World War II. With scores of American men drafted into military service, the goal of personnel was to find enough bodies to keep the plants running. Fortunately, in its 25-year history, personnel had never faced a crisis it couldn’t handle. This time was no exception. Personnel professionals successfully recruited and trained thousands of women for work previously reserved for their husbands. Although some of the war-time recruitment ads seem silly by today’s standards (a drill press is not just like an egg beater) the efforts were successful.

Impressed by its ability to keep plants operating at or near full capacity, management elevated the status of personnel to an all-time high. In fact, a 1945 survey found that in seven out of eight large manufacturing firms, the personnel department was an independent unit whose head reported directly to the company’s president just like any other division.

During the war, personnel departments grew in size as well as stature, and the ratio of staff personnel to the number of employees increased as new positions were created to meet the special needs of the war-time labor force. “The department’s expansion was proof of top management’s increasing regard for personnel activities,” explains Sanford Jacoby, professor of history, management and policy studies at University of California, Los Angeles.

According to Jacoby, another interesting thing happened during the war: The human relations movement caught on. Thanks to a government-funded training program developed by a colleague of Mayo’s, foremen were being taught how to “work with people,” and “treat people as individuals.” If you think you have a hard time now with touchy-feely programs, imagine what industrial psychologists of the 1940s faced. Still, despite some initial managerial reluctance, program organizers claimed the focus on individual needs decreased employees’ dissatisfaction and boosted war-time production.

Buoyed by such successes, newly enlarged personnel departments began to focus even more on worker productivity when the war ended. For the first time, companies truly seemed to care what their employees thought. One psychologist, writing in 1948, said that managers had become “psychologically minded, ready to embrace the notion that the whole question of efficiency boils down to one thing: understanding the motivations of your employees and taking steps to satisfy them.” This insight was due largely to the work being done in the personnel profession.

1950s
STATS OF THE DECADE

The postwar economy booms. Like the music created in that decade, business in the 1950s was rock ‘n rollin’. The postwar economy was booming and veterans, armed with college degrees paid for by the GI bill, were eager to put their new educations to work. Not only did employment in the manufacturing sector grow by leaps and bounds, but so did employment in the new and growing service economy.

Everywhere, it seemed, jobs were plentiful. Companies were growing and so were the levels of management and the number of white-collar workers. In addition to recruitment, hiring and the writing of endless job descriptions, personnel took on the job of creating elaborate career ladders. Why? Because in growing companies, promotion was a relatively easy way to motivate and reward good employees.

All those promotions created yet another task for personnel: training. Whereas in the 1920s, the white-collar workforce consisted of young women who typed correspondence and bills, and filed mounds of paperwork — skills that were easily learned and replaced — the new breed of office worker was a manager who required leadership ability and managerial skills. As the champion of workforce productivity, personnel stepped up to this challenge, and training and development became a new subspecialty.

More employees and more managers naturally led to the existence of more corporate departments. In fact, the 1950s were the heyday of large multidivisional companies in the United States, and the personnel function began to mirror the hierarchies of the companies themselves. A growing discipline, personnel was even seen as one of the “hot” fields for returning GIs to enter for their next profession. With more people in personnel-and in the workforce-the procedures for recruitment, hiring, discharge, training, compensation and benefits became even more systematized. Although this bureaucracy would eventually become a burden for companies, at the time it made sense.

The growing number of people in the personnel field was accompanied by a dawning of professional conscientiousness. New professional associations were formed, other trade publications were established, and personnel managers started to talk about such things as career development, professional ethics and certification.

1960s
STATES OF THE DECADE

Facing new legislative demands. As company coffers continued to grow in the 1960s, personnel departments had the money and the staff to expand their reach. They began to look even harder at employee motivation. The human relations movement, which got off to a slow start in the 1940s, started to pick up steam. Bonus plans, employee-suggestion systems and performance-management programs were created.

“Look at personnel textbooks of the 1940s, and you’ll see chapters on wage determination, grievance systems, promotions and the relationship of a person to a job,” says Jacoby. “By the 1960s, you’ll see chapters on motivation, leadership and group dynamics. Personnel was beginning to approach management from a psychological point of view, rather than an economical one.”

Yet, as time would tell, this psychological orientation would prove to have economic benefits. Roger Putnam, a retired HR executive who entered the profession in 1958, recalls a time in the mid-1960s when the personnel department at Minneapolis-based Dayton Hudson Corp. in Minneapolis, where he worked first, proposed a performance-management system.

“Until the mid-1960s, there was no such thing as merit-based pay. Employees were given raises based solely on seniority,” he says. “We had quite a time convincing managers who had grown up under the old system that employees would be more productive if we rewarded their performance as opposed to their longevity.” It took awhile, Putnam says, but within approximately five years, Dayton-Hudson’s retail stores started showing more profit, it was easier for the company to attract and retain better employees, and talented workers were being promoted to management positions sooner.

But just as these forward-thinking ideas were gaining a toe-hold, personnel was called once again to put out fires. The fire this time? Women’s liberation. In an effort to make the workplace and career ladders more accessible to women, companies revised job qualifications and hiring procedures. They began to offer more in-house training and development programs. They also started to provide tuition reimbursement to help female employees achieve their goals.

But women weren’t the only concern. The passage of the Civil Rights Act of 1964 was making companies extremely sensitive to their treatment of all minority workers. “Personnel managers became concerned with diffusing racial and cultural tensions,” says University of Virginia’s Lichtenstein. “They began to focus more on compliance issues.” Specialists (read: lawyers) were needed not only to decipher the new legislation, but also to help create new workplace policies.

Diverted once again from discussions about productivity and motivation, personnel managers began to question their overall mission. Should the department now be staffed by lawyers?

1970s
STATS OF THE DECADE

Workers revolt. Concerns over the legalities of the employment relationship continued to grow in the 1970s, thanks to the passage of the Occupational Safety and Health Act of 1970 (OSHA) and the Employee Retirement Income Security Act of 1974 (ERISA) in the early part of the decade. As government increasingly tied the hands of business with legislation, more legal specialists were needed in personnel than ever before.

But at the same time personnel was grappling with its own problems, a deep-seated worker unrest was brewing in American companies. Personnel managers got a wake-up call in 1974 when a study that year revealed 75 percent of workers didn’t like their jobs. Why? Because the great bureaucracies created during the 1950s to manage workers were now starting to stifle them. Armed with more education than any preceding generation, employees in the ’70s weren’t content to work in restrictive job categories any longer. They wanted to see results from their work, and they wanted more challenge and opportunity than their narrow job descriptions allowed.

In hindsight, this sentiment isn’t surprising. During the 1930s, employees were clamoring for jobs that provided dignity, security and stability. The whole workplace over the next 30 years was designed to accommodate those needs. But once the economy expanded and the level of worker education grew, security was no longer a key issue. Employees now wanted jobs that were interesting and used their talents.

The problem couldn’t have come at a worse time for American industry. During the 1970s, the rest of the world had caught up to America in terms of its goods-producing abilities. U.S. companies were now facing competition from overseas, and they needed workers to be more productive than ever. Instead, what they got were more strikes, absenteeism, apathy and increasing drug use on the job. Employees started job hopping. The entire labor market became more mobile.

“Organizations that had reputations for having good management practices were being raided by other companies looking for quality employees,” says Putnam. “Those companies soon discovered, however, that they couldn’t keep good employees without better employment practices of their own.”

Desperate for a solution to continual turnover and low productivity, executives started to pay attention to the personnel managers who had claimed for years that employees were people with individual needs and wants, and that the quality of people in an organization can have a direct impact on the bottom line. Ironically, the Civil Rights Movement, which initially took personnel’s attention

away from such human relations issues, also is what sensitized managers to them.

“The Civil Rights Movement, which really took hold in the ’70s, forced companies to deal with attitudes and behaviors,” says Jack Loza, a semi-retired HR executive who entered the profession in 1963. “Suddenly, personnel wasn’t just about hiring, compensation and training. It was also about learning to value the contributions of individuals, regardless of their race or gender.”

Thanks to this shift in thinking, executives began to realize that productivity and employee issues shouldn’t take a back seat to crisis management; that perhaps job design, employee satisfaction and morale were just as important as hiring, benefits, compliance and all the other fire-fighting activities conducted by personnel over the years. Personnel had proven its ability to react to crises. Now it was time for the profession to become more proactive.

In the late 1970s, in an effort to put worker needs in the forefront-and hopefully boost corporate productivity-the term personnel was discarded, and in many companies the function became known as human resources. Finally, the folks in HR were being given the green light to institute the kind of programs and policies they had been experimenting with for years.

Downsizing becomes all too common. As they entered the 1980s, HR professionals were optimistic about the function’s changing role. Findings from the Hawthorne Studies of the 1930s were taken out, dusted off and fashioned into programs designed to boost job satisfaction. Companies began implementing quality circles, task forces, team-building and other employee-involvement programs. Although some of the new workplace models were patterned after the Japanese style of management, many of them had their roots in the United States years earlier.

Encouraged by early successes, American executives started to agree not only with HR’s notion that workers had ideas about how to improve work, but that asking employees for those ideas could actually improve on-the-job fulfillment and productivity. Employee attitude surveys, once an anomaly, started to become commonplace.

Technology also entered HR’s domain in the ’80s, allowing HR professionals to focus less on administrative work (that had become a burden as a result of all the legislation that had come before and continued to come) and more on strategic issues. Thanks to increasingly sophisticated human resources information and communications systems, HR was getting a better handle on its resources, and thus, the effectiveness of its programs. With more attention being focused on the human resources in an organization, the link between HR and the bottom line was becoming clearer.

Unfortunately, old patterns die hard. Just as worker empowerment and technology were becoming commonplace,

HR was forced once again to turn its attention to what seemed to be more pressing matters. The issue this time? Downsizing. Companies had become bloated beyond effectiveness and the only way to compete in the expanding global marketplace was to cut costs and boost productivity. Because labor costs form the largest part of corporate overhead, many companies found the only way to cut costs would be to cut bodies.

This created a thorny dilemma for HR professionals. How could they possibly increase productivity and encourage greater commitment from employees, while at the same time eliminating jobs? Initially, HR people got busy helping employees who were leaving companies and searching for other work. But soon, it became apparent that the employee-involvement programs they shelved at the start of the downsizing crisis actually held the solution to their dilemma.

With the ranks of middle managers virtually eliminated from the workplace, who better to ask for solutions to vexing business problems than employees themselves? Excited, HR started to see the light. If employees were given a say in how work was performed, jobs would become more interesting and employee satisfaction would rise. If employees were put into teams, better decisions would be made overall and workers would feel a stronger sense of community, commitment and responsibility. Although employment involvement and work redesign efforts would require changes in the way companies recruited, hired, trained, compensated and rewarded workers, HR was up to the challenge. The profession was coming into its own.

Sure, there were other HR issues to deal with during the ’80s, some of which included AIDS, sexual harassment, work/family issues and diversity. But with the focus now firmly on employees, getting support for these programs was much easier.

By the late 1980s, human resources was getting more attention from top management than ever before-and for good reason. Corporate America now was firmly entrenched in the technology age and many other sources of competitive advantage had been eliminated. With the same access to capital, raw materials, technology and markets, the only thing that distinguished the

competitive capabilities of one company from another was the quality-and performance-of its workforce. The relationship between the human resources function and profitability could no longer be ignored.

“In the late 1980s, the HR function as a part of progressive management had arrived,” says Professor Drago. Vice presidents of HR were not only sitting in on business strategy sessions, but being listened to and heard. The good ideas of HR were being encouraged, not only because the external climate was right for it, but because HR was ready. The function had diligently been preparing for this role for years.

1990s
STATS OF THE DECADE

• Primary concern: Workforce changes and shortages
• Perception of employees: Employees need more flexibility in all work areas
• HR activities: HR planning, employee rights, training, flexible benefits, computerization, etc.

On the eve of the 21st Century. It’s been more than a decade now since companies first started to grapple with the issues of downsizing, productivity and global competition. Companies that have survived this unstable era are those that have concentrated on developing cutting-edge HR practices. Take a look at winners of the Malcolm Baldrige National Quality Award — such as Motorola, Federal Express, and The Ritz-Carlton Hotel Co. — and you’ll see the impact high-caliber HR policies can have on quality and the bottom line. These companies, and their HR professionals, are successfully changing the priorities of business from the inside out.

Although the importance of the personnel function has alternately increased and decreased over the past 75 years, it’s clear there has been an overall trend toward recognizing and encouraging the contributions employees make to the bottom line.

HR may have been born out of crisis, but its persistence and long-range thinking is what has allowed the function to thrive. Like a long-distance runner going for Olympic gold, HR has had to prepare patiently for years — often unsupported and often all alone. But today, everyone celebrates and shares in HR’s victory. American business is transforming itself because of the simple change in thinking that was driven by HR: People matter. As a result, HR has truly become the most important business function in Corporate America. Congratulations!

Workforce, January 1997, Vol. 76. No. 1, pp. 72-81

Donna M. Dell is a woman on a mission. Armed with a juris doctorate and extensive experience in employment law, that mission is to prevent employees—or rather, former employees—from suing ABM Industries Inc., the San Francisco-based facilities services contractor where she serves as vice president and director of human resources.

Her tactics don’t include sweet-talking former employees or promising them hush money and Caribbean vacations if they agree not to sue. Instead, she works diligently to make sure her company’s management practices are downright lawyer-proof.

Far from paranoid, Dell has good reason to be concerned. Over the last several years, record numbers of workers have lost their jobs due to economic restructuring. According to the latest American Management Association (AMA) survey, approximately 7.7 percent of the workforce was affected in 1995 by layoffs conducted by 51 percent of American corporations. Out of work, scared and uncertain about the prospects of future employment, some terminated employees are lashing out at their former employers by slapping expensive lawsuits on them. Even after finding a new job, some former employees may still go after their former employers. While some of the cases have merit, many are thinly veiled attempts by vengeful employees to get even with the companies that hurt them. Moreover, with laws allowing for large damage awards, there now are plenty of plaintiffs’ attorneys willing to take these cases to court.

“Ninety percent of the 600 claims, charges and cases we have open were filed following a termination,” Dell says. “These days, the word termination is synonymous with the word lawsuit.”

What all this means is that any company involved in a downsizing, layoff, restructuring—or any other move in which employees might be terminated or mistreated—better be mindful of the way they treat those employees. Even lawsuits that employers win can cost a lot of money and damage the corporate reputation.

A survey of 450 top HR executives and in-house lawyers conducted by Jackson, Lewis, Schnitzler & Krupman, one of the nation’s leading employment law firms, confirms the increase in lawsuits. Three out of five human resources people responding to the firm’s 1995 survey said their companies are being sued by an employee, an increase of 10 percent over the last two years. “Our practice has grown by 35 percent in the past year because of the increase in litigation,” says management lawyer Martin Payson of the firm’s White Plains, New York office.

“It’s highly unusual to have a reduction in force that involves more than 50 employees that doesn’t involve at least one lawsuit,” adds Elizabeth du Fresne, a management lawyer with Steel, Hector & Davis located in Miami. All together, one out of every five lawsuits nationwide is filed by a current or former employee, making employment law one of the fastest growing areas of litigation.

Employees bent on suing their employers strike out—often successfully—at companies of all shapes and sizes. Consider these examples: A former manager of a securities brokerage firm, who alleged he was demoted because of his age and fired when he complained, was awarded $765,000 in damages by arbitrators. A female executive was awarded more than $105,000 for breach of contract after she was terminated by the drug manufacturer for which she had worked for only nine months. And a former employee who was fired from a worldwide health and beauty aid manufacturer is using four paragraphs in the company handbook as grounds for a $3.2 million wrongful termination suit. The only characteristics shared by defendants in these cases is that they fired someone.

Are all post-termination lawsuits bogus? Of course not. “Out of every 10 claims brought, I believe four are legitimate and two are in the gray area,” says du Fresne. “Four of them, however, are filed by outright opportunists—those people who are looking to make a buck.”

Robert Fitzpatrick, a Washington D.C.-based lawyer with Fitzpatrick & Verstegen who has practiced employment law on both sides of the fence for more than 28 years, agrees. “There’s always a small percentage of cases in which the person was blatantly and egregiously wronged; discriminated against on the basis of race, age, sex, disability; whatever. Those are the cases a judge and jury ought to hear. But that’s not how the system works now. It’s just everybody trying to rip off some money whenever he or she gets offended. The situation is significantly worse now than it was even two years ago.”

Mistreating employees can make your company vulnerable.
With increasing litigiousness in the country in general, it’s not surprising the biggest increase in litigation comes in the area of employment law, according to du Fresne. After all, the workplace is where people spend the majority of their time. But the increase in litigation also can be directly tied to increased layoffs.

Furthermore, many of these people lose their prime earning years, including specialized skills that don’t transfer easily to new jobs. In a climate in which the guarantee of finding other work no longer exists, the willingness to explore whether or not something unfair happened is greater because of economic necessity.

The breakdown in loyalty between employers and employees only adds fuel to the fire. “Employees are more willing to [take action] because they think they have nothing to lose,” says Joseph Ortego, senior partner with Rivkin, Radler & Kremer in Uniondale, New York. “In a sense, suing after discharge is an attempt to increase the severance package.”

Another factor contributing to the increase in lawsuits is the fact that employees have become much more educated about their rights, ironically through management training courses provided by their employers. Many companies, for example, see an increase in sexual harassment cases after conducting sexual harassment awareness courses.

Workers bent on revenge now know more than ever about the laws available to assist them. These include: Title VII of the Civil Rights Act of 1964, which prohibits discrimination on the basis of race, religion, sex and national origin; the Age Discrimination in Employment Act (ADEA) of 1967, which protects workers who are at least 40 years old; the Americans with Disabilities Act of 1990, which outlaws discrimination against people who are disabled; and the Civil Rights Act of 1991 which provides for financial damages in employment-discrimination cases. “These days, almost everybody falls under some protected class,” says Ortego. The only people without a statute are white men under the age of 40, and even they can sue on basis of discrimination due to national origin.

Clearly, employees have plenty of legislative protection behind them. But in reviewing the arsenal of federal laws, legal experts agree nothing has fueled the onslaught of workplace litigation more than the Civil Rights Act of 1991 (CRA ’91). Before 1991, a plaintiff in an employment-discrimination case appeared before a judge, not a jury. If the plaintiff won, he or she was entitled to reinstatement with back pay and perhaps front pay, plus attorney’s fees and costs. It was basically a make-whole remedy. With no provision for damages, there was little potential to recover serious money. Because of this, the odds of a plaintiff bringing a lawsuit were diminished by the unavailability of lawyers willing to take the cases.

Thanks to CRA ’91, plaintiffs in employment-discrimination cases now are given the right to a jury trial, and juries are notoriously sympathetic to people who’ve lost their jobs. “Jurors look at the plaintiff and think, ‘That could be me,'” Ortego says. Because juries feel sorry for the person, plaintiffs typically prevail more often than the companies they sue.

But even more importantly, the act entitles plaintiffs to compensatory and punitive damages, as well as back pay and legal fees. Although the awards are capped at $300,000 for companies with more than 500 employees, by adding tort claims such as slander and negligence, plaintiffs’ lawyers can override the caps. Suddenly, there’s a financial incentive not only for former employees to sue, but also for plaintiffs’ attorneys to take on these cases.

“That economic incentive goes to the plaintiff, but much more so to the bar,” says du Fresne, who practiced as a plaintiff’s lawyer until she switched to the management side 10 years ago. “It has changed the whole field of labor law. When I graduated from law school in 1966, labor lawyers who worked for plaintiffs were do-gooders who did this work because they felt it was right, just and the American way. They made very little money from it. But today, every personal injury lawyer has a couple of labor cases because it’s one more way that, on a contingency basis, they can take a bite out of good-sized award. This is now much less a field that lawyers go into to do good and much more of a field that people get into to make money.”

To thrive, lawyers representing discrimination claimants need not hit a punitive damages jackpot, however. The mere threat of a lawsuit, even just a letter on legal stationery, can be enough to persuade companies to settle. “I get a lot of demand letters from attorneys,” says Dell of ABM Industries Inc. “I respond by laying out the facts of the case. If it’s not a good case, they’ll go away because they can’t afford to lose. But if they file suit, it will end up costing us something.”

As easy as lawyer-bashing may be, however, plaintiffs share at least part of the blame for slapping employers with cases that have no merit. You see, instituting an action is so easy, a matter of filling out a form, that vengeful employees can get the courts to put muscle in their grudges by acting as their own attorneys.

“Almost 50 percent of all civil cases filed in federal court here in Washington, D.C. are filed by pro se plaintiffs—in other words, people filing without an attorney’s representation,” says Fitzpatrick, who serves on the federal court’s pro se committee. “A significant number of these are employment cases and almost 100 percent of those have absolutely no merit whatsoever. Not only are judges extremely angry at being overloaded with so much junk, but the junk cases hurt the meritorious ones.”

Older employees are the most threatening.
So what plan of attack do most plaintiffs take? In what areas are companies that are laying off employees vulnerable? Under what statute are claims most likely to be filed? According to the EEOC, over half of all cases filed with the agency are based on claims of wrongful termination. Although this doesn’t violate a statute in and of itself, it’s an issue for which employees can receive damages. According to George Rutherglen, a law professor at the University of Virginia School of Law, based in Charlottesville, Virginia, “The increase in claims of discriminatory discharge to about 86 percent of all charges filed with the EEOC has made all of employment-discrimination law look more like the law of wrongful discharge.”

While the EEOC doesn’t track the type and number of lawsuits that are eventually filed, attorneys believe the biggest increase is coming in the area of age discrimination. Why? Because companies are laying off a disproportionate number of workers who are over age 40. According to the AMA downsizing survey, over half of all layoffs are among supervisory, middle management and professional/technical workers. The survey states, “Although middle managers make up between five and eight percent of the American workforce, they typically constitute between 15 and 20 percent of those who lose their jobs.”

A major multinational company in Florida, for example, recently experienced a significant business setback. Losses in one division were expected to exceed $4 million. The executives decided they could either: a) spin off the division and lay off half of the employees; or b) rightsize the company and hopefully save more jobs in the process. Upon deciding to rightsize, they laid off 1,800 employees out of a 4,500-person workforce. Today, the company is facing a class-action suit on the basis of age discrimination because 1,000 of the terminated employees were over the age of 40. The cost of defense to date has been $680,000, and the company still is a long way from trial.

This example isn’t an isolated incident. Age discrimination has proven to be a successful and profitable plan of attack. According to the Journal of Legal Studies, claims under the ADEA primarily are brought by white males who hold relatively high-status and high-paying jobs. By alleging discriminatory discharge, these plaintiffs recover money judgments 2 1/2 times higher than plaintiffs in Title VII cases, and over four times higher than plaintiffs suing under the Equal Pay Act.

Furthermore, plaintiffs who bring claims only under the ADEA and whose recovery is reported in court records receive more than seven times as much as plaintiffs who do not bring ADEA claims—$83,600 vs. $11,500. This is because salaries of the typical plaintiffs are almost twice as high as the salaries of plaintiffs in other cases. Because back pay is the principal component of monetary awards in employment-discrimination cases, salaries are correlated with recoveries.

“In the case of one active, physically fit 58-year old, I requested and was awarded future damages through age 70,” writes the plaintiff’s attorney Ellen Simon Sacks in Trial Magazine.

Get out your checkbooks.
As you’ve probably gathered by now, lawsuits are a very expensive HR issue—so expensive, in fact, that they’ve given rise to a whole new form of business insurance called employment practices liability coverage. (Please see “Employment Practices Liability” on this page.) What makes these cases so expensive?

First, there’s the cost of defense. According to Nick Conca, vice president and claims counsel for Reliance National, an insurance company based in New York City, the cost of defending an employee lawsuit through trial, including attorneys’ fees and expenses, typically ranges from $100,000 to $250,000. These costs, along with the fact that plaintiffs tend to prevail in jury trials, make many companies eager to settle lawsuits as soon as possible. But even settlement can be an expensive road to hoe.

Respondents to the Jackson, Lewis, Schnitzler & Krupman survey claimed that in one out of every five resolved cases, the fired employees each collected more than $100,000 from his or her former employer. Data from Reliance National supports this figure. “It isn’t unusual for the average cost of settlement in a wrongful-termination/age-discrimination case to be in the mid-six-figure range,” Conca says.

Still, the cost of defense and any potential judgments, as well as all the potential for negative publicity, makes settlement an attractive option. “I hate to say this because I don’t want to encourage the plaintiff’s bar,” says Dell of ABM Industries Inc., “but we’re often compelled to settle because the cost of litigation is so high. For us, the average cost to take a case to the eve of trial is $70,000. Once in trial, that amount reaches six figures.”

Is your company vulnerable?
These days, the only companies that aren’t vulnerable to lawsuits filed by terminated employees are companies that haven’t terminated anybody. In today’s climate, anybody who has handed out a pink slip for any reason may in turn be handed a summons.

Are you breathing a sigh of relief because you conducted a downsizing 10 months ago and haven’t heard from the lawyers? Don’t be too hasty. Employees who file discrimination charges must exhaust their administrative remedies at the state and federal levels and this takes time. Employees have up to within 300 days of termination to file charges with the EEOC, for example. Then, after waiting for the EEOC to issue a charge, the employee has 90 days to file suit. This means companies can fire someone and be hit with a lawsuit well over a year later.

Although companies of all sizes from all industries are vulnerable to suits, there are patterns among companies that are sued from which HR people can learn. Despite what you might think, smaller companies are sued more frequently than larger companies. This is because smaller companies don’t have the same financial or legal resources to prevent or fight a suit as bigger companies. Moreover, larger companies typically are better at risk management, troubleshooting and thorough reduction-in-force (RIF) planning.

Many companies also are sued simply because they fail to treat departing employees with respect. “Employees are more likely to sue if they’re treated poorly on the way out,” says Stuart Bompey, a partner with Orrick, Herrington and Sutcliffe in New York City. “If they’re humiliated in front of co-workers, for example, or treated like they aren’t trustworthy, [they may go to court].”

Companies that make layoff decisions solely for economic reasons also find themselves in hot water, especially if they fail to look at the demographics of the workers who’ve been laid off. “This gets a lot of companies into trouble,” explains Adrienne Fechter, a plaintiff’s lawyer with Fechter & Dickson P.A., in Tampa, Florida. “RIFs are usually done for economic reasons, and the costliest parts of overhead are salaries and benefits. The most expensive workers, therefore, tend to be older workers who’ve been with the company a long time, and women and men with children. When companies allow these costs to determine who goes, they leave themselves open for discrimination suits.”

Not only that, but by using these criteria, companies usually end up getting rid of the most experienced and valuable employees. “My advice to employers is this: Don’t believe the short-term economic solution is in your long-term best interest,” says Fechter.

What should HR managers do to minimize the possibility of lawsuits? Get advice from management lawyers—and plaintiff’s attorneys, if they’ll talk to you—on how to protect the company. Make sure the people who are being laid off, for example, aren’t disproportionately part of a protected class. Provide training to managers on how to handle terminations and other sensitive situations appropriately. Document your actions and the reasons for them. “It’s difficult to get past what looks like a well-designed RIF,” Fechter says. “If only one person out of 500 workers comes forward and the company has documented the downsizing, it’s unlikely the jury will return a plaintiff’s verdict.”

Last, but certainly not least, remember your employees are human beings. No matter what the circumstances—terminations or otherwise—everyone wants to be treated with dignity and respect. “My daddy killed himself at age 56 after losing a job,” says du Fresne. “Although I represent management, I don’t take any of these cases casually. Companies can’t treat their workers as numbers. They must have empathy for the human condition.”

Forget the high-priced consultants, the so-called pundits and the nasty back-and-forth finger pointing by physicians, HMOs and insurance companies. To really find out the state of corporate health-care benefits, ask an employee like Bill Keeley, a 43-year-old manager at a Fortune 200 company who suffered a stroke on March 13.

Like a teacher monitoring various stages of a term paper, Keeley graded each step of his four-week treatment and recovery process. The letters on his medical report card range from an “A-” for hospital admission and precertification to a “D-” for disability case management. A former 16-year HR veteran, Keeley sums up his ordeal this way: “Although we’ve come a long way in the management of medical benefits, we clearly have more room for improvement.”

Although Keeley is just one person in one company evaluating one medical incident, his comments accurately reflect the overall state of corporate health-care benefits. We’re ahead in cost controls. But, despite what you hear-medical costs are still rising at nearly four times the inflation rate. We need to do more. Fortunately, HR managers at America’s larger employers are leading a market-based reform effort that’s attacking the health-care system in four ways-by:

1. Challenging providers to continue lowering costs.
2. Rating providers with quality measures.
3. Comparing quality with cost to gauge plan value-and demanding more quality and value for its money.
4. Reducing unnecessary demand on health-care services through a process called demand management.

These efforts will likely result in better, cheaper care for all employees.

Competitive pressure and coalitions fight spiraling costs.
You’re probably thinking that companies already have a handle on rising costs, especially considering a three-year trend of moderate medical cost increases. For the year ending in June, health-care costs for businesses rose only 0.01%, the lowest medical inflation rate in 13 years of tracking, according to the U.S. Department of Labor. This sounds like cause for celebration, but note the wording: cost of health care for businesses.

Here’s what’s happening: Costs to employers have leveled out largely because they’ve been shifting vast numbers of employees into less-expensive managed-care plans. In 1995, almost 73% of all covered employees were in some form of managed care, up from 63% a year earlier. This increase corresponds with a sharp decline in the availability of more-expensive indemnity plans, from 90% of employers offering them in 1990 to only 59% in 1995. Corporate costs have also steadied, because companies are asking employees to pay more in deductibles and monthly premiums. By sharing the costs with the medical users, companies save money.

But just because a company saves money through managed-care plans and cost shifting doesn’t mean the excess expenses have been wrung out of the system. In Southern California, which caught onto the managed-care trend early, employees are feeling the crunch-even if their employers aren’t-and experts predict workers will face increasing costs over the next five years, according to a Los Angeles Times report. In the nation overall, the report continues, employees’ health-care costs increased at least $5.5 billion in the past seven years, as employers passed many costs on to them.

And a study by Sedgwick Noble Lowndes, an international employee-benefits consulting firm based in Memphis, Tennessee, shows that the average projected cost increase of medical plans in 1996 is close to 11% for everything from HMOs to traditional indemnity plans. So, while employer costs have evened out, plan costs are still rising.

Although this increase was lower than expected, it’s still the kind of double-digit shock many employers thought they’d ended. Costs continue to rise because the drivers of medical inflation are the same as they’ve always been: increasing use of sophisticated technology, an aging population, excessive or unnecessary usage and cost shifting from the government to the private sector.

“Employers should not be lulled into a false sense of security by the news that the projected rate of increase for most health plans has dropped for the third year in a row,” explains Jack Doerr, national group benefits practice leader for Sedgwick Noble Lowndes. “These rates are still as much as four times the general rate of inflation.” The crucial point: While managed-care plans and cost shifting do reduce employer costs, the decrease is likely to be short-lived unless the plans themselves become more efficient.

Large employers have become savvy to this and are using competitive pressure to force medical plans to keep costs down. Xerox Corp., for example, which offers several health plans to workers, encourages them to choose the most cost-effective plan by subsidizing these plans at a higher rate. The less the company pays, the less employees pay in co-insurance.

By letting employees choose among competing health plans, Xerox and other large companies are keeping the pressure on plans to lower costs. When a plan gets too expensive, employees avoid it and the company eventually drops it. “Because we don’t have any more money to give them, they have to find ways to do more with less,” explains Helen Darling, manager of health-care strategy and programs at the Stamford, Connecticut-based company.

Another way companies are forcing plans and providers to become more cost-efficient is by joining together in purchasing coalitions that use their size to leverage volume discounts. One such coalition is the Minnesota Business Health Care Action Group, an alliance of 24 self-funded employers that represents about 250,000 employees and their dependents. By working together and negotiating fees directly with HMOs, hospitals and physicians, the alliance has held local health-care providers accountable for costs as well as practices.

Until recently, purchasing alliances like the one in Minnesota have been regional in nature. But employers now are banding together in national coalitions that can exert even more pressure on providers. An example is the two-year-old National HMO Purchasing Cooperative that comprises 10 large employers, including American Express Co., Merrill Lynch and Company, IBM, ITT Corp., Marriott International and Sears. Currently, the coalition is evaluating and soliciting bids from approximately 200 HMOs, which together will provide an estimated $1 billion worth of health services to 600,000 employees at approximately 27 U.S. worksites.

The focus of these coalitions isn’t just cost, however. It’s also quality. After years of cost cutting, cost shifting and cost sharing, employers have finally realized the only way to achieve long-term cost reductions is by improving the efficiency and quality of care. As the new mantra of health-benefits planners goes: Better medicine is cheaper medicine.

Quality measures help gauge a plan’s success.
The epiphany-that it’s OK to rate providers as they would any other vendor-has come just in time for many companies. Employees have become skeptical-if not downright fearful-of managed care, believing that some managed-care companies withhold necessary treatment to save money. “Because of vastly different levels of plan performance, the employees’ fear is not unjustified,” explains Tom Beauregard, a principal with Hewitt Associates in Rowayton, Connecticut. The best way to allay that fear and improve the quality of medical care overall is by pressuring providers to improve their own effectiveness. After all, you can’t impact what you can’t measure.

Dr. David Friend, global director of Watson Wyatt’s health-care consulting practice, agrees. “Too many employers still look only at the three Cs: costs, controls and clerks,” he says. “They need to move from comparing costs to assessing value; from controlling patient access to measuring patient outcomes; and from focusing on the amount of clerical services to evaluating the quality of clinical services.”

But what does quality care look like? How do companies assess the quality of the plans they purchase? Although the quality movement is still in its infancy, companies are starting to get answers. One way to ensure health plans meet basic quality standards is by checking to see if plans are accredited by the National Committee for Quality Assurance (NCQA), a Washington, D.C.-based nonprofit organization. The NCQA evaluates health plans on 60 measures, including things such as whether an HMO’s physicians are board-certified, whether women in the plan are allowed routine Pap smears and how efficient the medical-records process is. Although it’s a rough assessment focused more on procedures than results, more companies are requiring NCQA accreditation from HMOs seeking their business.

Some companies take it a step further by looking at the actual criteria used by the NCQA to evaluate health plans. Instead of simply relying on the organization’s stamp of approval, HR professionals look at individual performance measures reported by the plans to see if they meet the needs of their employee population. Currently, approximately 59% of employers with 10,000 or more employees use these criteria when choosing plans.

Recognizing the vast employer demand for quality data, the NCQA is updating and expanding its performance measures. When complete, the new measures-known as HEDIS, for Health-plan Employer Data and Information Set-will give companies specific information in eight areas:

• Effectiveness of care
• Access/availability of care
• Patient satisfaction
• Patient education
• Plan descriptive information
• Cost
• Stability of health plan
• Use of services.

“We expect more employers to use these tools as they become better understood,” says Dr. Mary Jane England, president of the Washington Business Group on Health (WBGH).

According to a study conducted by WBGH and Watson Wyatt Worldwide, an international management consulting firm in Washington, D.C., more companies plan to adopt value-based measures. For instance, 82% of the largest employers expect to use disease-specific outcomes measures in the next two years, in addition to the 19% of employers already doing so.

Comparing quality with cost determines total plan value.
As valuable as the NCQA measures are, they currently don’t encompass the relationship between health-plan performance and cost. When added together, quality and cost are what really determine a plan’s value. To aid comparison, consulting companies like Hewitt Associates and New York City-based Towers Perrin are working with employers to compile quality and cost information that can be shared with employees to allow smarter, value-based purchasing decisions (see “Looking for Quality Information?”; left).

Take Rohm and Haas Co., for example. The Philadelphia-based chemical manufacturer battled 20% annual increases in medical costs for several years. Recognizing that HMOs were the “best buy around,” 95% of its 8,000 employees (representing 20,000 covered lives) have been shifted into some form of managed-care plan-up from 5% just six years ago. Although the strategy was successful in cutting costs, benefits managers at the company started to question whether cheaper care was really better care.

“It began to bother us that [most] employees were in plans that restricted access,” explains Pat Coyle, director of benefits and workforce strategies. “This, combined with the fact that we were seeing a lot in the press about how HMOs don’t provide the same level of quality [as indemnity plans] got us wondering about how we could assess the overall delivery of care.”

Two years ago, Rohm and Haas, working with Hewitt Associates LLC, a Lincolnshire, Illinois-based consulting firm, embarked on a comprehensive research effort designed to uncover those plans with the highest value. The first step was to survey employees to determine how they felt about their HMOs. They were asked: How long did you have to wait for an appointment? How clean was the office? Were the providers responsive to your needs? “We took a look at the things employees notice,” Coyle says. Believing that recommendations from co-workers can do a lot to allay fears about managed care and improve the perceived value, Rohm and Haas shares all results with employees during the open enrollment process. The first year it shared these numbers with employees, enrollment in high-quality plans jumped 30%. And, enrollment in HMOs overall has increased 13% since the survey ended.

The second step was to analyze the cost, demographics, geography and design of each of the company’s 30 managed-care plans to see if they were paying rates commensurate with the needs of the workforce. If a plan charged the company a community rate, for example, but Rohm and Haas employees at a particular location were younger, with a less-rich plan and in a less-costly geographic area, the company negotiated discounts. “We essentially used the same data used by underwriters to challenge the cost structure,” Coyle explains. Instead of relying on the plan to accurately quote a rate, Hewitt Associates compared the price charged with the services needed to determine actual value. During the first year, the company saved $500,000 in plan costs by renegotiating prices. “This was easily enough to justify the cost of Hewitt doing the work,” she adds.

Rohm and Haas is now at work on the third phase of its research effort: compiling a Quality of Clinical Care Index. Using the NCQA’s HEDIS measures, the company is analyzing carefully the performance of each health plan to determine where there might be room for quality improvements. If women don’t get mammograms at the expected rate, for example, or if childhood immunizations are lower than average, the company shares that information with the HMOs and asks for improvements. “We’ll give each plan an opportunity to improve its performance,” Coyle says, “and then we’ll share results with employees. If [the plan doesn’t] come through, we’ll drop it.”

Like Rohm and Haas, White Plains, New York-based NYNEX Corp. compares cost with quality and reports findings to employees. NYNEX takes a health-plan “scorecard” that measures health-plan quality, overlays it with results from an employee-satisfaction survey, and then compares those data with evaluations of economic efficiency. The composite results reveal which plans have the highest financial value, quality and satisfaction. By sharing this information with employees, the company can steer employees into “best practice” plans that not only save the company money, but also satisfy employees.

Companies like NYNEX and Rohm and Haas can gauge quality thanks to better technology and tracking systems. But don’t be misled: Measuring quality is still in the formative stages. Health care remains difficult to measure and analyze, and outcomes analysis remains relatively primitive. Furthermore, employer efforts to measure quality are hamstrung by the fact that the government, which pays for 30% to 40% of all health care in the United States, does little to promote value.

“Still, we’re light years ahead of where we were two years ago,” Doerr says. Given that health care operates in a competitive marketplace, what employers end up with in terms of quality will depend largely upon what they demand.

Demand management reins in overutilization.
Another weapon being used in employers’ war against health costs is a strategy called demand management. According to Michael Scofield, chief epidemiologist with Actuarial Sciences Associates Inc., an employee-benefits consulting subsidiary of AT&T based in Somerset, New Jersey, demand management can cut costs by reducing unnecessary use of medical resources. How? By addressing the nonmedical drivers of benefit utilization.

“Demand is driven by more than the objective severity of an illness,” he explains. How people respond to an illness and the resources they use are influenced by the care they receive, their perceptions of how sick they are, how well they cope with pain and stress, how well they adhere to treatment plans, what they gain from being well and what they gain from being sick. A person with lower back pain, for example, who hates his or her job but has good benefits and a good relationship with his or her physician, may be able to get the physician to prescribe an extended period of home recovery.

Demand management seeks to reduce the gap between the health care needed and the health benefits utilized. Contrary to popular belief, it’s not primarily a prevention or wellness strategy. “Wellness programs are more concerned with reducing the incidence of disease by reducing modifiable risk factors,” Scofield says. “However, the severity of a person’s illness is only a modest predictor of the amount of medical and indemnity benefits that are used.” Although demand-management programs may include early detection and patient-education strategies, the overall intent is to reduce utilization, not illness.

Demand management also takes into account the whole picture of health costs, including lost productivity. Companies using demand management must make sure treatment plans are appropriate, that they’re adhered to and that employees are back on the job as soon as possible.

Typically, demand-management programs start out in a focused area like disability management. At Stamford, Connecticut-based Champion International, for example, a total disability management program is being developed. When complete, it will unite all facets of the company’s health benefits, including wellness, workers’ comp, short- and long-term disability, medical benefits, and health and family services into “one seamless delivery system,” explains Victor Paganucci, total disability management project manager.

The intent is for all departments to work together to make sure injured workers receive appropriate care and support so that they’re back on the job as soon as possible. By integrating the health resources, Champion removes communication barriers that allow employees to “fall through the cracks.” For example, an injured employee may be able to work in a limited capacity-but the treating physician, unaware of the onsite physical therapist, might keep that person off the job longer than necessary.

To be successful, Champion must integrate data from each department to track employees through the system and to monitor the overall costs. This way, workers’ comp professionals can’t fool themselves into thinking costs have been reduced just by transferring cases to long-term disability-where an employee may still be under treatment and off work. “By looking at the overall costs, we can find ways to reduce the costs stemming from unnecessary utilization and get people back on the job sooner,” Paganucci says.

Early indicators suggest that Champion can save on the $40 million a year it currently pays in direct disability costs and on the $60 million per year it pays in “soft costs,” such as lost productivity and recruitment of temporary employees.

For companies interested in implementing demand-management programs, Scofield suggests these strategies:

• Early detection:
  Screenings for cervical and breast cancer for women have the clearest cost benefit. Leave blood pressure, cholesterol and other cancer screenings to an employee’s physician. Demand management seeks to avoid payment for services that aren’t absolutely necessary.
• Information and education:
  Give employees written information on how to determine when self-care is appropriate. A recent study of 15,800 employees at 22 California companies found that self-care education reduced utilization by 7% to 17%, depending on the insurer and the type of coverage.
• Benefit design:
  Emphasize quality and accessibility of medical care, and avoid trying to control demand by creating financial barriers to certain services such as mental health.
• Employee Assistance Programs (EAPs):
  Encourage employees to use the EAP. It can help avoid more expensive mental-health costs later.
• Disability management:
  Use duration guidelines and clinical-practice protocols to promote good treatment with safe and timely return to work.
• Provider incentives:
  Create incentives for providers, third-party administrators and case-management vendors to establish demand-management strategies.

Although demand management is still young, the pioneers’ savings indicate it’s a viable option for companies-indeed, a necessary one for true cost savings.

What to expect in the future.
With employers now focusing on lowering costs, increasing quality and reducing unnecessary demand, what can we expect in the near future? Bruce Taylor, director of health-care management at GTE Corp. in Stamford, Connecticut, believes that although cost control and demand management will remain important, the crucial piece of the cost-saving puzzle will be improving quality-rating providers and pushing for better value.

“We have to keep the pressure on the delivery system to improve the quality of health plans,” he says. GTE does this by maintaining a staff of five health-care specialists who monitor the quality of each of the company’s 135 HMOs. These individuals not only compile employee-satisfaction ratings on each plan, but also regularly review procedures, examine medical records and quiz physicians. By compiling quality data, the 300,000-plus employee company can more easily compare one plan to another. Plans that perform poorly are then pressured to improve. “Our statistics show that plans rated with the highest quality and employee satisfaction actually do have the lowest cost,” Taylor says.

As GTE’s experience suggests, if employers keep up the pressure, medical quality must improve. But if costs don’t drop, they’re at least more likely to remain steady. However, smaller companies have to get on the bandwagon as well. Although companies that aren’t self-insured can’t exert pressure directly on providers, they can ask plans for the same quality information that’s available to larger employers. “This sends a message to insurance companies and managed-care organizations that they must change how they do business,” says Rick Elliott, head of employee-benefit services with Johnson and Higgins, an insurance brokerage and insurance consulting firm based in New York City.

But you must look beyond quality. Because of intense competition, many health plans are merging, hoping their combined size can deliver care more efficiently while capturing more business. From a cost and efficiency standpoint, consolidations may make sense. But from an employee-relations perspective, any change in plans, providers and procedures can be disruptive. Because of this, Beauregard suggests that companies evaluate a plan’s total membership relative to market share, its disenrollment and membership growth rates, and the plan’s medical-loss ratio. This information, which more plans make available thanks to the NCQA, provides a good indication of whether a plan is financially stable or a likely target for takeover.

What all this means is that when it comes to the struggle over health-care benefits, there’s really no end in sight. But, there’s light on the horizon. Competition is finally forcing the health-care system to produce quality care at reasonable costs. Given that we’re talking about medical care, the term “reasonable” is used loosely. But experts agree the days of 20% annual increases are behind us.

As long as employers continue to vigilantly demand proof of higher quality, providers will do their best to provide it. Perhaps someday soon, stroke patients like Bill Keeley will be able to give all phases of the medical delivery system a resounding “A+.” It’s certainly not too much to hope for.

The production floor at Honeywell’s Commercial Aviation Systems division in Phoenix is the kind of place you’d expect to hear employees chatting about their families, last weekend’s golf game or the latest Batman flick.

Nowadays, however, these assembly-line workers can be heard discussing such weighty matters as operating profit, economic value added and working capital. They chat easily about business goals and financial performance. In fact, all employees at the division have business objectives top of mind like never before.

The change in focus is due to the creation of an incentive compensation plan that links incentive pay with business results. Now, for the first time in the division’s history, a percentage of each employee’s yearly pay is based on the achievement of annual company objectives. If results fall short of expectations, so do employees’ paychecks.

Normally when companies implement this kind of risk-sharing plan employees are skeptical. Money is an emotional topic, after all. But Honeywell’s incentive program met with little resistance because it was the employees themselves, through a group of volunteers called the Participative Pay Team, who decided how the plan would work. In 1994, the first year of the incentive program’s existence, the division beat its profit expectations by more than 10%. The program continued focusing employees on business goals in 1995—so successfully, they hit what Honeywell calls “the maximum performance range.”

Employee involvement is crucial.
Honeywell’s Commercial Aviation Systems division employs 5,500 people in the design and manufacture of state-of-the-art avionics systems.

In an effort to boost division performance, Honeywell also has spent a great deal of time defining and measuring the behaviors and outcomes expected from individual employees. In the process of making these changes, Honeywell’s leadership realized the compensation plan was also in need of an overhaul. The old way of rewarding people was simply no longer working.

“There was a mismatch of messages,” explains Eileen N. Ward, senior human resources consultant. On one hand, division heads were telling employees to focus on cost reduction and measurable productivity improvements—to perform, perform, perform, in other words. Yet the company still was granting pay raises based not on performance, but on an employee’s progression in a job range. The longer employees stayed with the company, the more they were paid, regardless of whether they achieved company objectives. For the new performance-based strategy to work, the incentive compensation system would have to get in line.

Upon deciding to remodel compensation, Honeywell’s HR professionals could have sat down and devised a new incentive strategy on their own. But that too would have been out of sync with the division’s new participative management style. The only acceptable way to fix the incentive plan was to let employees do it.

In 1993, the Participative Pay Team was formed, and employees eagerly responded to HR’s call for volunteers. Twenty-five employees, both exempt and nonexempt, were chosen to serve on the team. There were secretaries and machine shop workers, as well as engineers and department managers.

What motivated so many employees to volunteer for the effort? Team member Greg Wilkins, a nonexempt employee who has worked in a variety of jobs for Honeywell over the last 11 years, put it this way: “It got my interest because they were going to be doing something to my pay.”

The first order of business was for HR to educate members of the pay team about the ins and outs of compensation and why incentive pay needed to be aligned with company goals. All team members attended a 2 1/2-day training session that covered the basics of compensation, including an overview of compensation trends at Honeywell, in the electronics industry and at other companies.

Armed with this basic knowledge, the team members then were assigned to additional research on their own. Some team members attended conferences hosted by the American Compensation Association. Others conducted literature searches for current articles on compensation trends or reported on books about new pay systems. Many team members also were involved in telephone- and site-based benchmarking efforts with companies both inside and outside their industry. Furthermore, to get even more worker input, team members also conducted regular employee focus groups.

Team members spent about six months getting up to speed on compensation issues, devoting approximately 20 hours a month to the effort. Because the time spent took away from workers’ regular job duties, the company leadership saw to it that their individual managers understood the importance of the participative pay program and supported the employee’s involvement.

The new participative pay program is “risky.”
Upon its formation, the team was charged with determining who would participate in the incentive program, how the plan would work, how it would be funded and how incentive pay would link with overall business goals and the executive compensation plan. The HR department provided no guidelines as to how the plan should work. Instead, it was up to team members to make recommendations to the company’s executive leadership.

The team’s only ongoing link with the HR department was Ward, who served as team leader. Although John Hillins, vice president of benefits, compensation and employee information systems at the company’s corporate headquarters in Minneapolis, provided some of the initial training, the corporate HR department also took a hands-off approach. “They called us when they needed us,” he says.

The end result of the team effort was a self-funded gainsharing program introduced in 1994. It has two prongs: First, the program places a percentage of each employee’s pay at risk pending the achievement of business goals linked to Honeywell’s profitability. Second, employees also have the opportunity to earn more than their annual salary when the company has an exceptionally good year. Both payouts are made annually based on overall performance of the division.

Here’s how the plan works: As a self-funded plan, a portion of the available merit budget used for pay raises is set aside each year to fund the risk-sharing amount. While most of the money is still used for merit raises, a percentage is put “at risk” based on business performance. If the amount available for merit spending is 3.5% of the salary budget, for example, 1% is set aside for the risk pool. If the division meets at least 80% of its annual financial objectives, then employees will receive 1% of their base pay in a lump-sum payout. If the division fails to meet objectives, nobody receives a payout, and the money remains in the risk pool. The amount set aside for risk-sharing will peak at 3.5% of an employee’s salary at risk.

Under the new incentive plan, employees also can receive an additional sum called a success-sharing amount. This is awarded to all employees when the division exceeds its business goals. In 1998, when the program is completely phased in, employees will have the potential to receive 5% more than their base pay by exceeding business goals by 20% or more. The 5% success share, combined with the 3.5% risk-sharing amount, means that in a good year, employees can receive up to 8.5% more than their base salary.

The program is linked to the executive compensation program so that employees and executives are working toward comparable targets, with each receiving rewards based on achieving them. According to Ward, the incentive program was designed this way in order to:

• Emphasize the direct stake all employees have in the continued success of the business
• Emphasize the importance of executives and employees working toward similar business goals
• Recognize and reward employees’ impact on major improvement opportunities
• Improve employee understanding of the division’s financial performance
• Support the culture of teamwork, employee involvement and participation.

Team members are key in communication.
Because the concept of participative pay was new to Honeywell, when the company launched the program, a lot of employee communication had to take place—not only about the incentive plan, but about overall organizational goals and how employees could have an impact on them. Here again, the Participative Pay Team took a lead role.

Members conducted two-hour orientation courses for employees to provide an overview of the participative pay program and the measurements needed to receive a payout.

The communication effort was supported by the HR department, which produced two publications about the new plan. According to Ward, one was a comic book that showed two employees having a dialogue about the new pay system, and the other was a typical HR document explaining the incentive pay structure. These were distributed in the orien tation course.

Because the incentive program uses high-level financial measurements, Honeywell also has had to educate its workforce on business fundamentals. It developed a course called Business Basics to provide general information on business goals and objectives, as well as specific information on how to calculate the three measures used to determine company performance: profit, working capital and economic value added (post-tax operating profit reduced by cost of capital multiplied by the division’s investment). Conducted by Participative Pay Team members, the course also helps participants understand how their individual jobs impact company performance.

The biggest challenge in explaining the program to employees was communicating the concept of risk sharing. “Employees didn’t like the risk-share piece,” she explains. “We defended it by saying that they couldn’t very well share in the success of the company if they didn’t also share some of the risks. It underscores the partnership message.” The other challenge was breaking the entitlement mentality of employees who were accustomed to receiving a standard raise every year.

The fact that the program was designed by employees for employees went a long way toward overcoming both challenges and creating the buy-in necessary to make the program a success. As team member Wilkins explains: “We had to have some reasonable justification for every decision we made because we had to face the people we work with every day.”

Two years into the program, it appears the incentive pay plan is doing what it’s supposed to – focusing employees on bottom-line business objectives. Although it’s difficult to isolate the pay program from some of the company’s other quality initiatives, Donald Schwanz, vice president and general manager of the Air Transport Systems unit, says he believes employees have much more knowledge about the business from a financial standpoint. “The pay program has focused employees on business goals,” he says. “They see a distinct tie between what they do and the health of the business in general, and they’re making better decisions as a result.”

In 1994, the first full year the program was in place, goals for profit and economic value added were exceeded by 10%. In 1995, the workforce reached all its goals—employees received the full 3.5% of their salaries from the risk pool. That’s $1,225 for an employee earning $35,000 a year.

To what does Honeywell attribute its success? Several things, Ward says, including extensive employee education and leadership support. But most critical was the employee involvement. “The team members not only gave the program good visibility in the workplace, they provided a richness of input that HR couldn’t have obtained on its own.”

Now that the plan has been in place for two years, the focus of the Participative Pay Team has shifted. Today, the team’s primary role is to work with the finance department to monitor the books. They also attend monthly progress reports, conducted by the executive leadership for the entire workforce, to ensure what the leaders tell employees is in line with the financial statements. “The crux of their role is to provide a ‘trust’ message to the workforce,” Ward explains. “In other words, to look at the books and validate what’s being reported by management.”

The team also continues to search for ways to get a better line of sight between individual jobs and overall company performance—because in the end, the participative pay plan is not really about money. As Vice President Hillins explains: “This isn’t really a compensation program. It’s a communication program.” Honeywell just uses the paycheck to get everyone’s attention.

The weary group of corporate vice presidents shuffled into the conference room for yet another emergency strategy session. The reason? Same as it was the last three times this happened: Competition is up, contracts are down and costs must be cut—now. But this time, the desperate CEO at the head of the table adds another request. “Can you please do something about the morale around here?” he pleads. “I know times are tough, but if we don’t find some way to perk up these people we’ll never turn this place around.”

How right he is. When employees share that indefinable sense of spirit, enthusiasm and pride called morale, they’re more than willing to help companies achieve their goals. Problem is, many organizations suffer from low morale because employees don’t have the vaguest idea what those goals are to begin with. If you’re searching for ways to elevate the spirit of your workers—and who isn’t?—give them something to believe in, provide hope for the future and lead them there.

Focus on growth.
Nothing saps esprit de corps quicker than an absence of positive objectives. “Most companies today are focused on restructuring, reorganizing and reengineering,” explains Robert Tomasko, management consultant with Arthur D. Little in Washington, D.C. Because these programs are designed to fix problems, the problems become the focus of the employees’ attention. They start worrying more about how the pie is going to be sliced rather than on how the business will grow. They become protective, fearful and eventually, demoralized. According to Tomasko, what more companies should be doing, and aren’t, is focusing on growth. “This gives employees a sense of purpose and a way to look beyond problems and toward new opportunities,” he says, “both of which help boost morale.”

Now some people will tell you high morale is the result of the way you treat people. But that’s not enough. Companies can’t just strive to make workers feel good without also communicating a sense of purpose. Without clear objectives, even well-cared-for employees will feel disappointed in their efforts. It’s the corporate equivalent of being all dressed up with no place to go.

Anaheim, California-based Odetics, a manufacturer of data management products, is a case in point. Recognized in the book, “The 100 Best Companies to Work for in America” by Robert Levering and Milton Moskowitz, Odetics scored high marks for being a fun employer—a characteristic that hints at sustained high morale. But CEO Joel Slutzky says, “We’ve earned a reputation as a fun company, but like any company, morale depends on what’s happening with the business at any given time. We’re not immune from highs and lows.”

Give them a flag to follow.
Odetics faced its first real morale challenge in early 1994 when one of its key customers bought a competitor. Overnight, the customer disappeared, taking 40% of one division’s sales and 10% of overall company sales with it. For the first time in Odetic’s history, layoffs were inevitable and its 600 employees were noticeably anxious. This was the first layoff. Would it be the last? “The way we were able to minimize employees’ fears was by developing a solid strategic plan based on growing the company,” Slutzky says. The plan was very specific, outlining the number of new customers Odetics was aiming for as well as setting a goal for revenue. The emphasis wasn’t on plugging leaks, but on building a stronger, better company.

The growth plan wasn’t developed in a vacuum. Employee meetings, hosted by Slutzky and the company’s HR managers, were held to discuss business challenges and gain employee input. Several suggestions were forthcoming, including one to cut the company’s training budget in order to save a few jobs. It wasn’t implemented, for good reason. At the time, Odetics had just begun implementing a companywide training program to give employees tools to help them with continuous quality improvement. “We told employees training was part of our strategic plan,” Slutzky says. “That we couldn’t grow the company without teaching employees about new technologies and without giving them new ways to improve our processes and cut time to market.” By tying all strategic decisions back to the growth plan, Odetics was able to keep employees focused on the future.

To reinforce this growth message, every time a contract is signed with a new customer, the good news is announced on the company’s public address system. Furthermore, earnings are charted in the company newspaper. “Success builds success,” Slutzky says.

In 1995, Odetics had two outstanding quarters in a row and by December, a successful third quarter appeared likely. Slutzky is gearing up to congratulate employees for Odetics’ successful turn-around. His focus on growth hasn’t diminished, however. His current challenge to employees is something he calls the 10/100 plan. “My goal is to get the stock price back to $10, which dropped to $4 when we lost the key customer last year, and to get annual revenue to $100 million.”

By making the growth goal specific and simple, Slutzky has been able to focus employees on the future and help them celebrate measurable results—both of which help boost morale. “We didn’t need a survey to know people were distraught over last year’s layoff,” he says. “But today, you can feel the excitement as you walk in the door.

“Yes, we’re a fun company to work for,” he adds, “but we pay attention to business first. If we were all madcaps and merry clowns, this company wouldn’t last a day. High morale comes as a result of knowing what you’re in business to do.”

Conversely, Bruce Court, vice president of mergers and acquisitions for Development Dimensions International in Pittsburgh, says nothing negatively impacts morale (which he defines as the cheerfulness of an organization) like the fear of the unknown. “You see this very clearly after a merger,” he says. In almost all cases, four things are likely to happen: turnover increases while productivity, quality and morale decrease.

Court cites the case of a pharmaceutical company that owned two medical equipment manufacturers in the same state. The honchos at corporate headquarters thought it made sound economic sense to put the two companies together in a sort of “arranged marriage.” The result was disastrous. Morale at the newly joined company went down the tubes because employees, who understood the goals of their original companies, had no idea what the merger was designed to do. “There was no sense of purpose, direction or guidance,” Court says. And people left the new company in droves. Exit interviews revealed that departing employees shared the same lament. “They told us: ‘We need a flag to follow.'”

Cultivate good leaders.
So why is it so hard for companies to communicate goals to employees? Isn’t that a routine part of doing business? Maybe so, but Court believes too many managers still hold on to the notion that information is power. “Executives may have a clear sense of purpose but there’s a black hole in middle management where key messages get in but never get communicated to the next link in the chain.” Even if they want to communicate, he adds, a lot of managers don’t have the necessary skills to do so.

“Leaders are definitely the key to keeping employees focused,” agrees Mary Schoenborn, acting HR manager for Great Plains Software Inc., in Fargo, North Dakota. At her company, leaders are so focused on the goal that they’ve generated 13 years of consecutive growth in the highly competitive financial software industry. “Programs designed to boost morale are great, but it’s the individual managers who keep the team strong,” she says. “They’re the ones who can individualize goals for employees.” Her company believes so strongly in management as the key to high morale that all managers receive extensive training in communication skills, especially in how to listen to employees and put their suggestions into action.

Hal Rosenbluth, CEO of Rosenbluth International, a travel services company in Philadelphia, believes listening to employees is key. For example, he has gained quite a reputation in management circles for the ideas presented in his book, “The Customer Comes Second.” His premise is that by caring, valuing, empowering and motivating employees, morale stays high and customer satisfaction can’t help but follow.

Pam Schmidt agrees. When she took over as director of membership and customer services for the Alexandria, Virginia-based American Society for Training and Development (ASTD) in 1993, she was greeted with a group of 20 employees she describes as scared, cynical, beaten down and unwilling to experiment. Sick leave was up, motivation was down. “I spent three months just listening to employees [talk] about what they felt the problems were,” she says.

Listening to employees benefits customers.
In the process, she discovered that the department, which provides services such as fulfilling publication requests for ASTD members, hadn’t changed its processes in 50 years even though membership had grown exponentially. Furthermore, the computer and telephone technology used by employees wasn’t able to keep up with increasing call volume. Members who didn’t hang up out of sheer frustration were put on interminable hold. By the time employees picked up most calls, members were irate and employees took the brunt of it.

It was obvious to Schmidt that new technology and processes were needed to turn the department around. So after listening to employees, she set a goal to eliminate distractions and disruptions to the customer-service process. “I wrote the plan and I worked the plan,” Schmidt says. “As cynical as employees were, they wanted something to believe in.”

With a concrete plan for process improvement in place, employees had something to work toward. They provided suggestions for technical improvements. They searched for more efficient ways to handle membership requests. And as each suggestion was implemented, they started to believe working conditions and customer satisfaction really could improve, which they did. In 1994, 16% of callers to ASTD’s customer-service center hung up in frustration. By August 1995, that number had been slashed to 5.6%. With each achievement, trust in the department increased and so did employee morale.

Can you quantify morale?
Today, there’s still some angst among ASTD employees because the change process isn’t over. But Schmidt says they’re much more willing to jump in and try to fix the problem. An even better indicator, she says, is that employees now laugh during weekly meetings. To what single thing does she attribute the turnaround? “We had a plan and the focus was external.”

Schmidt’s experience shows what a positive effect morale can have on customer satisfaction. But is there any way to quantify the overall bottom-line impact of high morale? Tomasko doesn’t think so. “It’s hard to make a strong case between employee morale and economic performance because some organizations have done great things without high morale,” he says. This may be true, but these companies probably didn’t do those great things for long.

Carol B. Rosebrough, general manager of Cox Communications Inc., a cable company with 13 franchises around Williamsport, Pennsylvania, believes high morale can be quantified, and she has done so. When Rosebrough assumed her current position in 1988, she inherited a workforce of 38 employees who’d spent years working in dismal working conditions with outdated tools and resources. Their lack of spirit had driven customer satisfaction to an all-time low. Over the years, by listening to employee complaints and gradually implementing their suggestions, Rosebrough has seen morale steadily improve. How does that translate to the bottom line? “Dollar for dollar, we increased cash flow by 55% between 1989 and 1994,” she says, “and revenue has jumped almost 42%.”

If your company is focused on growth and you listen to—and implement—employee ideas about how to achieve that growth, you can’t help but experience similar successes. In the end, when it comes to morale there are only two ways to go: gimmicks or growth. Gimmicks are those slap-happy motivational programs wherein a high-energy speaker comes in and whips employees into a frenzy of good feelings. Unfortunately, these programs are like aspirin: They only make the pain go away for a few hours. To make truly lasting changes in morale, you must find a way to release employees from the negativity that constricts them. And the best way to do that is by giving them that flag to follow.