Author: Site Staff

Following private industry trends, health insurance premiums will increase by an average of 7 percent next year in the health insurance program covering federal employees and retirees, according to the Office of Personnel Management, the administrator of the program.

The 7 percent increase for the Federal Employee Health Benefits Program, which covers about 8 million people, is roughly in line with rate increases that industry experts expect private-sector employers to be hit with next year. For example, Hewitt Associates Inc. is projecting that 2009 premium increases will average 6.4 percent.

Still, the federal program’s 7 percent average premium increase for 2009 is sharply higher than for this year, when premium increases averaged just more than 2 percent.

Government officials attribute next year’s cost increase in large part to greater demand for medical services, higher prescription drug costs and an aging workforce.

In all, 269 health plans will be offered in the federal program next year, though many plans are available in only certain parts of the country.

Federal employees, on average, pay 30 percent of the premium for health care coverage, with the federal government paying the remaining 70 percent.

Filed by Jerry Geisel of Business Insurance, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Congressional frustration with soaring Wall Street pay surfaced in a massive legislative package that narrowly failed in the House, 228-206, on Monday, September 29.

The 110-page bill would have authorized $700 billion for federal purchase of toxic mortgage-based securities that threaten the survival of financial firms. In an effort to build political support for its passage, several executive compensation provisions were included.

But even as proponents of the legislation warned that a failure on Wall Street could quickly dry up credit for auto, student and business loans across the country, they couldn’t assuage skeptics concerned about the biggest federal intervention in the markets since the Great Depression.

Congressional leaders worked all weekend to cobble together a bipartisan compromise following a blowup between the principal negotiators at a White House meeting on September 25. With partisan recriminations flying after the House vote setback, it’s not clear what the next step will be.

Any legislation that emerges in the future likely will contain executive compensation reform because of its bipartisan popularity.

Under the failed bill, a firm would be prohibited from offering multimillion-dollar golden-parachute severance packages to newly hired executives in its top five positions if it sold more than $300 million in securities to the government in a public auction. The company would not be allowed tax deductions for executive compensation over $500,000 and would be penalized for giving golden parachutes to fired executives.

A company that sells securities directly to the government would be barred from using golden parachutes and would be compelled to “exclude incentives for executive officers … to take unnecessary and excessive risks.” It also would have to recover bonuses or incentive compensation paid to a senior executive based on performance measures that later proved inaccurate.

One pay policy that did not make it into the final bill was a mandatory shareholder vote on executive compensation. Executive pay experts were relieved that the regulations contained in the bill did not go further.

But Don Lindner, executive compensation practice leader at WorldatWork, said that the bill would have handcuffed hiring at faltering companies by limiting pay latitude.

“They’re not going to get the best talent. They’re going to get the talent that’s willing to take the job under those conditions,” Lindner said.

As Congress continues to address the financial crisis, it should hew to the executive pay formula that it put in the failed bill, according to Mark Poerio, co-chair of the global executive compensation and employee benefits group at the law firm Paul Hastings.

“They’ve whittled them down to items that make sense,” Poerio said, citing the so-called clawback provision and limits rewarding risky behavior.

Before returning to executive pay reform, Lindner urges Congress to take a step back. Recent Securities and Exchange Commission regulations require more comprehensive and transparent disclosure about executive compensation.

“We’re not giving them a chance to work,” Lindner said.

The congressional appetite for a crackdown on exorbitant Wall Street pay was apparent at a Capitol Hill news conference on Sunday, September 28, celebrating the bailout agreement.

“The party is over,” House Speaker Nancy Pelosi, D-California, said. “The era of golden parachutes for highflying Wall Street operators is over.”

Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, hailed the curbs on C-suite remuneration.

“This will be the first time anything has been done by Congress to curtail excessive CEO compensation,” Frank said.

Poerio warned, however, that going too far with pay parameters would make the U.S. a less attractive market for high-powered executives.

“It plays on Main Street, but it still has to make sense in a global market,” Poerio said. “It’s not to say we don’t need regulations. We need to be judicious about them.”

—Mark Schoeff Jr.

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Rising inflation and the downturn in the U.S. economy are forcing Indian employers to slow hiring, freeze wages and fire underperformers to maintain profit margins.

“Efficiency and output delivery will be the core mantras at play,” said brand consultant Harish Bijoor.

The slowdown is tangible, as the number of information technology and business process outsourcing deals dropped to 78 in the first quarter of 2008 from 109 in the first quarter of 2007, according to India-based research firm Value Notes. By the second quarter of 2008, according to Value Notes CEO Arun Jethmalani, the number of deals slid to 58, down from 101 a year earlier.

With inflation that climbed to a 16-year high of 12.63 percent in August, employers are trimming their workforces amid rising costs. Human resource outsourcing company Convergys laid off nearly 400 people after it closed one of its Mumbai centers in August.

Companies like Patni, Fidelity and 24/7 are shedding low performers and will continue to cut staff and freeze hiring, said Avinash Vashistha, chairman and CEO of Bangalore-based investment advisory firm Tholons.

“As companies expand their operations, they will have less and less people,” Bijoor said. “Added to this, companies will recruit fewer people until there is stability on the inflation front.”

With Nasscom predicting that revenue growth for the nation’s IT and BPO industries will slow to rate of 21 to 24 percent this year, companies have realized that they need to better manage their bench—a surplus of workers that employers can call on if they need to boost a project’s manpower, said Sudhin Apte, senior analyst and country head for Forrester Research in India.

Genpact, the country’s largest BPO firm, is experimenting with a work-from-home initiative for employees in its finance, legal and HR divisions to cut overhead and maximize productivity. The company is also outsourcing employee education to Indian training institute NIIT, which it says can train as many as 10,000 people next year.

“It will bring down the cost of training for us, and NIIT is more efficient at training people than we are,” said Genpact president and CEO Pramod Bhasin.

In a recent study of high attrition rates in the BPO industry, the Hay Group said employers should consider combining short- and long-term incentives, such as performance and retention bonuses and employee stock option plans.

Bangalore-based Tata Consultancy Services, India’s largest software services provider, believes it can survive by focusing on hiring strategies. Last year, 60 percent of TCS’ new hires were experienced professionals.

Now, however, to reduce salary, including bonuses and promotions for those with more than two years’ experience, the company has flipped its hiring practices, says Ajoyendra Mukherjee, vice president and head of global HR at TCS. This year, 60 percent of TCS’ new hires are trainees, while 40 percent are experienced professionals.

Indian retailers, meanwhile, are looking at how their HR management practices can become more efficient. Pantaloon India Ltd., the country’s largest publicly traded retailer, has merged the human resources and information technology systems of various business units into a common platform. With one HR and IT team, the company says it has reduced overhead by $37 million a year.

But not everyone is scrambling for ways to trim costs. Infosys Technologies believes that in an economic downturn, IT outsourcing companies that provide cost savings will need to maintain a readiness of highly qualified employees. While other companies are trimming employees, Infosys is bulking up.

The Bangalore-based company says it has not changed its recruiting and training strategy. In fact, it expects to hire 25,000 employees in 2009 and maintain current levels of employees on its bench.
 
“The employees on the bench are maintained to ensure we do not miss out on growth opportunities,” said Somnath Baishya, head of global entry-level hiring and campus relations at Infosys. “Our aim has been to build a flexible business model that helps us focus on growth at all times.”

—Zahid H. Javali, reporting from Bangalore, India

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Outside the financial sector, employment at large companies may hold up better than some expect, UBS strategists are suggesting.

Based on a survey of industry sector analysts at UBS, more than half of large companies in the Standard & Poor’s 500 stock index are not likely to reduce staff.

Companies in the energy, materials, nuclear utilities, engineering and construction sectors are even understaffed—and have aging workforces to boot. Thus, those businesses may need to hire people, UBS strategists including Thomas Doerflinger and David Bianco wrote Wednesday, September 24.

The strategists noted one important caveat: Employees of the S&P 500 companies make up only 13 percent of the American workforce, and smaller businesses may indeed be hurt by the credit crunch. Still, the strategists wrote, “to the extent analysts are correct … this is positive for profit margins because it implies companies do not have headcounts that are out of line with future revenues.”

The U.S. unemployment rate has been rising and hit 6.1 percent in August, and UBS economists expect it to reach 6.9 percent in the second quarter of next year. If unemployment were to go much higher, though, to the “harrowing highs” of 9 percent seen in the early 1970s and 10.8 percent from 1981 to 1982, they said, “this would depress GDP and severely compound the woes of the financial sector.”

Judging from the analysts’ responses to the survey, only larger companies in 15 industries—including financials, restaurants, autos, machinery, paper and tobacco—may have to downsize soon.

Other companies, those that analysts say have just the right number of employees, have already taken steps to trim the ranks. Home builders and airlines top that list.

Indeed, years of restructuring and downsizing by U.S. businesses may help mitigate unemployment during the latest economic downturn. “Corporate America is much leaner and meaner after 25 years of intense foreign competition,” Doerflinger and his associates wrote, citing higher productivity growth. That leanness is a “key difference from 1974 and 1982.”

Filed by Hillary Johnson of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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Congressional leaders and the Bush administration are continuing to hammer out a deal on a bill that would provide $700 billion for the purchase of bad assets from financial companies and would also include provisions designed to curb executive pay.

Proponents of the massive rescue point to the link between Wall Street and Main Street. If credit dries up because of the collapse of the former, consumers, small businesses and students around the country will suffer.

But Main Street is pushing back. Members of Congress are getting an earful from constituents who are angry about the exorbitant salaries and golden parachutes of  Wall Street titans.

In response, the final package is likely to contain a version of executive pay reforms along the lines of two Democratic proposals.

Rep. Barney Frank, D-Massachusetts and chairman of the House Financial Services Committee, and Sen. Christopher Dodd, D-Connecticut and chairman of the Senate Banking Committee, both want to limit compensation for executives who take excessive risks, implement “claw-back” procedures for companies to recoup pay based on performance measures that later turn out to be inaccurate, and limit severance payments.

Frank goes further than Dodd, according to Steve Seelig, executive compensation counsel at Watson Wyatt Worldwide in Arlington, Virginia. Frank would put an absolute prohibition on severance payments and require that companies participating in the bailout hold nonbinding shareholder say-on-pay votes regarding C-suite salaries.

It’s not clear how the final bailout legislation will look. As of late afternoon Thursday, September 25, a final agreement had not been announced. Earlier in the week, there was some question about whether companies would participate if doing so restricted their latitude in setting executive pay.

Now the White House and business groups are acknowledging executive compensation will be part of the deal.

“I think we all understand the sentiment that executives should not have a windfall based on something that was a failure,” said White House Press Secretary Dana Perino at a briefing Thursday, September 25.
 
She spoke in advance of a bipartisan meeting between President Bush, congressional leaders and the presidential nominees—Sens. John McCain, R-Arizona, and Barack Obama, D-Illinois.

The key to addressing executive pay is formulating legislation that punishes culpable executives “yet enables [companies] to attract the best and the brightest to deal with the situation,” said R. Bruce Josten, executive vice president of government affairs for the U.S. Chamber of Commerce.

Seelig cautions that previous attempts by Congress to limit executive pay have led to unintended consequences like a big increase in the use of stock options.

If severance is prohibited, for instance, companies might boost fixed pay and signing bonuses or enrich executive pensions.

“Companies that try to attract talented individuals will have to put money into something else,” Seelig said.

Many Americans are telling Congress they don’t want their tax dollars spent feathering the nests of leaders of failed financial companies.

“It’s probably the No. 1 thing we hear about [in] calls from back home,” said Rep. Brad Ellsworth, D-Indiana. “People in Indiana shouldn’t be held accountable for poor decisions made by Wall Street executives who are making millions of dollars.”

In order to educate voters about the financial bill, Ellsworth emphasizes that its impact goes beyond Wall Street to Main Street.

“It’s not just Congress bailing out four or five companies,” Ellsworth said. “This has implications in all of our homes, no matter what congressional district we’re in.”

That argument will have to prevail if congressional leaders are going to line up enough rank-and-file members like Ellsworth to approve the bill to save the financial markets.

—Mark Schoeff Jr.

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Talks between Boeing Co. and its 27,000 striking machinists are “at a standstill,” the U.S. aircraft maker’s CEO said Wednesday, September 24.

“We’re at a standstill now,” said Jim McNerney. “We’re unable to find the common ground we need to find to have the discussion we need to have to solve the problem.”

The workers are set to get their first weekly strike-pay check of $150 on Saturday, September 27. That will be the 22nd day of the strike that began Sept. 6, over machinists’ concerns that more of their work might be outsourced. The most recent machinists strike, in 2005, lasted 24 days; the one before that, in 1995, lasted 69 days.

The current strike, involving electricians, mechanics, painters and other hourly workers, has shut down production of Boeing jetliners, including the new 787, which was already delayed nearly two years. Boeing usually delivers more than 40 planes a month.

Analysts estimate that Boeing is missing about $100 million in revenue per day during the strike.

The International Association of Machinists and Aerospace Workers represents about 25,000 Boeing production workers in the Puget Sound area; 1,500 in the Portland, Ore., area; and about 750 in Wichita, Kan.

Filed by staff of Crain’s Chicago Business, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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A senior manager of a national fraud survey says tough economic times in the next three to five years will contribute to a rise in corporate fraud in coming years.

“We’ll see a marked increase in fraud,” said Blake Coppotelli, senior managing director of the business intelligence and investigations division of Kroll, a New York-based risk consulting company.

Kroll released its annual the Kroll Global Fraud Report on September 15.

“Corporations, because of the state of the world economy,” Coppotelli said, “are going to have to get into higher-risk opportunities in order to make their bottom lines.”

Companies with high employee turnover and weak internal controls are more vulnerable to fraud, he said, while high-risk business ventures also lead to more business fraud. And the burgeoning fraud problem, he predicted, will lead to more government regulation to get a handle on it.

As that happens, Coppotelli said, company human resources departments will have to be sure they’re in compliance with internal ethics policies and external regulations to protect themselves.

Bruce Dravis, a Sacramento attorney who has written and lectured extensively on corporate governance issues, said getting a handle on corporate fraud through government regulation is typically a reaction to specific types of fraud. He points to the federal Sarbanes-Oxley Act, which was passed in reaction to the management fraud at Enron that led to the company’s collapse.

Regulations aimed at curbing specific fraud may or may not be effective, he said. “The question is, how do you know you’re asking the right questions” when forming regulations to crack down on a specific fraud, Dravis said.

“Fraud is a very difficult problem because it involves someone actively doing something bad,” he said. “Even audits don’t always detect fraud. If someone has structured fraud to avoid detection, it can be a long time before it comes to light.”

Dravis said that as long as there are crooks, there will be fraud. “Can you ever prevent run-of-the-mill fraud from occurring in all cases? I kind of doubt it,” he said.

The Kroll survey found that corporate fraud this year—mainly information theft and regulation noncompliance—continues to be on the upswing. Eighty-five percent of companies surveyed by Kroll have been hit by corporate fraud in the past three years, up from 80 percent in last year’s survey. And 90 percent of larger companies surveyed were plagued by fraud.

Meanwhile, the average company loss to fraud has increased by 22 percent, a trend blamed on the credit crunch and tough economic times. Companies on average lost $8.2 million to fraud in the past three years. That compared with a loss of $6.7 million in last year’s survey.

Industries with the most instances of fraud have been construction and natural resources. That has been blamed on higher oil prices and an industry shift to higher-risk areas.

Health care, pharmaceuticals and biotechnology saw increases in corruption and theft of stocks and assets. The travel, leisure and transportation categories reported increases in regulation noncompliance and information theft or loss.

Only two of 10 types of fraud tracked in the survey—money laundering and contracting fraud—declined from last year, but by only 1 percent each.

Regionally, the survey found less widespread fraud in North America and Western Europe and more fraud in the less economically developed areas of the Middle East and Africa.

Kroll commissioned the survey from the Economist Intelligence Unit to conduct its second global survey on fraud and its effect on business during 2008.

Some 890 senior executives were surveyed worldwide. A third of them were based in North and South America, 30 percent in Asia Pacific, more than a quarter in Europe and 11 percent in the Middle East and Africa.

Ten industries were covered, with no fewer than 50 respondents from each industry.

Sixteen percent were from the professional services industry, 13 percent from financial services and 11 percent from technology, media and telecommunications companies. Forty-two percent of the companies polled had global annual revenue of more than $1 billion.

—Mark Larson 

Treasury secretary Henry Paulson on Wednesday, September 24, told a House committee that he was open to considering limits on executive compensation in the Bush administration’s proposed $700 billion bailout package for the nation’s financial institutions.

But in a statement before the House Financial Services Committee the same day, Paulson did not explain how the provision would work.

Many lawmakers have called for limits in the compensation of executives whose companies benefit from a federal bailout. Paulson opposed the proposal as recently as Tuesday, September 23, but in opening remarks to the House panel Wednesday, Paulson said he had changed his mind.

“The American people are angry about executive compensation, and rightly so,” Paulson said. “Many of you cite this as a serious problem, and I agree. We must find a way to address this issue in this legislation without undermining the effectiveness of this program.”

Among the other legislative changes that lawmakers are seeking are those that would roll out the Treasury’s spending authority under the program in stages, with an initial authorization of $150 billion, and requiring large financial institutions to contribute premiums to a new federal agency similar to the Federal Deposit Insurance Corp. in the banking industry. The premiums could be used to help with any future bailouts.

Also Wednesday, Federal Reserve chairman Ben Bernanke warned Congress’ Joint Economic Committee of “great threats” to the U.S. financial system and economy, which required extraordinary measures.

Various money market rates continued to rise as banks shied from lending amid uncertainty about the U.S. rescue plan. But markets got some comfort from billionaire Warren Buffett’s decision this week to invest $5 billion in Goldman Sachs Group Inc., which is planning to convert into a bank holding company. Buffett described the current situation as a financial “Pearl Harbor.”

Filed by Doug Halonen and Isabelle Clary of Pensions & Investments, a sister publication of Workforce Management.

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Although government officials are rushing to provide retention bonuses to keep key employees at Fannie Mae and Freddie Mac, it might not be enough.

On September 7, the Federal Reserve announced that it was taking over the two mortgage finance companies to prevent them from collapsing. To ensure that key employees stayed with the agencies, the Federal Housing Finance Agency, which is overseeing the two companies, is developing a retention plan that includes bonuses.

Retention bonuses are a good place to start, but it’s a tactic that is easily replicated, says Richard Smith, senior vice president at Sibson Consulting, a New York-based consulting firm. “If the bo¬nuses are really good, it’s just a matter of time before other employers come to these employees with the same offer,” he says.

Fannie Mae and Freddie Mac should create long-term incentive plans that provide employees with cash or stock if they meet three- or five-year performance goals, he says.

Observers note that the two companies have differentiated themselves by offering competitive benefits and perks.

For example, both offer backup dependent-care services and adoption reimbursement. Freddie Mac has an on-site fitness center and concierge ser- vices, and Fannie Mae offers seminars on work/life issues and paid time off for employees to do volunteer work, their Web sites say.

Such benefits and perks are going to be more important for the companies going forward, experts say.

“Companies shouldn’t underestimate the value of the total rewards package, which consists of benefits, work/life balance, and training and development,” says Jim Stoeckmann, compensation practice leader for WorldatWork. “If they cut back on those programs, it sends a message to people that they are not valued as much as they were in the past.”

Stress is the top reason that people leave their employers, according to Watson Wyatt Worldwide. And it’s likely that the 4,700 employees at Fannie Mae and 5,000 employees at Freddie Mac are feeling stress about the transition, says Jamie Hale, practice leader of workforce planning at Watson Wyatt.

“If as employers they can do anything to alleviate some of that stress by continuing to emphasize work/life balance, then that would help them retain people,” she says.

Shawn Flaherty, a spokeswoman for Freddie Mac, says as of now, there are no plans to change benefits or perks.

“The director of the Federal Housing Finance Authority and our new CEO told us that they feel that keeping talent at Freddie Mac is a priority,” she says.

Fannie Mae spokeswoman Amy Bo¬nitatibus declined to comment. Stefanie Mullin, a spokeswoman for the FHFA, didn’t respond to e-mail requests for comment by press time.

Fannie Mae and Freddie Mac need to tell employees about the opportunities the transition presents, says Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School of Business.

“These businesses aren’t going to fail,” he says. “The restructuring is going to create some likely opportunities for advancement for many employees, and it’s up to the companies to get those messages across.”

—Jessica Marquez

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It takes a lot to scare workers into making sudden changes to their 401(k) plans, yet droves of participants moved their retirement assets around last week as the volatile equity markets became too much for many to stomach.

Participants in 401(k) plans fled from equity funds and moved investments into safer fixed-income investments last week as manic market conditions and an uncertain economy rattled many workers, said Pam Hess, director of retirement research at Hewitt Associates.

The firm, whose 401(k) index tracks the activity of 1.5 million plan participants, estimates that these workers moved at least $411 million out of equity investments and into fixed-income funds over the course of several days. In particular, stable-value funds saw inflows of about $320 million last week.

The Hewitt index represents a fraction of the overall 401(k) participant population, which the Department of Labor now puts at roughly 65 million workers. Yet, if the Hewitt index is used as a proxy for how 401(k) participants behaved, then nationwide, all participants would have moved a combined $18 billion out of equity funds and into fixed-income vehicles last week.

“By and large, most participants didn’t panic and stayed put,” said Hess. “But on a couple of occasions last week, transfer activity was much higher than usual.”

And how. On Thursday, September 18, before the federal government unveiled plans for its $700 billion financial industry bailout, more than three times the usual amount of money moved around in 401(k) plans, as every form of equity fund experienced outflows. The Hewitt index registered last Thursday as the second most active day of the year for participants.

The most active was Jan. 22, when the Fed cut interest rates by 75 basis points and the Dow Jones dropped more than 500 points.

Thursday wasn’t the only day last week when 401(k) participants were skittish. Workers transferred 401(k) assets at about three times their usual rate, according to Hewitt, as the Lehman Brothers bankruptcy filing September 15—and the threat of AIG’s demise—prompted participants to trim their large-cap equity funds and company stock holdings.

Filed by Mark Bruno of Financial Week, a sister publication of Workforce Management. To comment, e-mail editors@workforce.com.

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