Author: Site Staff

As lawmakers shine a light on possible conflicts of interest among compensation consultants, large companies appear to be going out of their way to disclose more information about their relationships with these firms. In some cases, corporations are even replacing their longstanding comp consultants with independent firms.

These moves, which are being made in part to pre-empt any potentially sticky scenarios—such as shareholder lawsuits or regulatory action—have been tracked in a small sampling by the Corporate Library. The watchdog looked at the filings of nine companies—AT&T, Hewlett-Packard, Home Depot, Merck, Pfizer, Safeway, Time Warner, Verizon and Wal-Mart—and found that during the past two years, most of these companies began to disclose much more information about their compensation consultants than regulators require.

Rather than merely identifying their compensation consultants in proxy filings, the corporations are also revealing whether these advisors provide any other services to the company. Some are also outlining the fees paid to compensation consultants for their services.

“They’re going above and beyond the minimum, that’s without question,” said Paul Hodgson, senior research associate at the Corporate Library. “It shows shareholders that they’re conscious of the potential for conflicts.”

Verizon, for example, now has a formal policy on compensation consultants that prevents such firms from doing any work for the telecom company other than advising its compensation committee.

Hodgson noted that this policy comes after a 2006 New York Times report revealed that Verizon’s former compensation consultant, Hewitt Associates, also provided the company with extensive—and lucrative—benefits consulting.

In fact, Verizon recently disclosed that it had switched from using Hewitt as its compensation consultant in favor of Pearl Meyer & Partners. Safeway, too, recently changed consultants, replacing Towers Perrin with Frederick Cook & Co.

Other companies, such as Hewlett-Packard and Pfizer, also noted that their board’s compensation consultants do not perform any other work for the company. Time Warner and Merck disclosed that their compensation consultants do provide the companies with other services, but added that they now have formal policies aimed at preventing any conflicts of interest.

At the same time, Home Depot revealed that it uses Towers Perrin as its comp consultant and relies on a subsidiary of the firm, Tillinghast, for its insurance and risk management services. But Home Depot also noted that the revenue Tillinghast generates from this assignment is well below 2 percent of Towers Perrin’s total gross revenue—the threshold that Home Depot uses to determine a consultant’s independence, according to the Corporate Library.

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

An obese worker’s gastric bypass surgery is compensable under Oregon’s workers’ compensation law because the procedure was necessary to treat a job-related knee injury, an appeals court ruled Wednesday, July 30.

The ruling in SAIF Corp. and Jerry’s Specialized Sales v. Edward G. Sprague affirms a finding by the state Workers’ Compensation Board that SAIF Corp., a state-chartered workers’ comp insurer, must pay for the weight-loss surgery Edward Sprague underwent in 2001.

The ruling against SAIF and Jerry’s Specialized Sales stems from a knee injury Sprague first suffered in 1976. He reinjured the knee in 1999.

Doctors told Sprague his weight of 350 pounds would prevent successful treatment of the knee condition, so he sought workers’ comp medical benefits for the gastric procedure.

SAIF countered the claim was not compensable because the obesity was not caused by his 1976 accident. But the appeals court agreed with the comp board, which found the injury was more than a minor cause of the claimant’s need for gastric surgery and was therefore compensable.

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

A search for the new leader of the Society for Human Resource Management has continued past the organization’s self-imposed deadline of August 1 in part because SHRM is trying to land a senior HR executive—a process that is proving to be a challenge.

Sources familiar with the search say that SHRM hopes to attract a candidate with a strong business background as opposed to one who has led a professional association. High-level HR executives at Fortune 500 companies have been interviewed and at least one has withdrawn.

“My understanding is that SHRM is looking for someone with enough stature to get senior executives to join the organization,” one source said. Traditionally, SHRM has focused on the “softer aspects of HR,” but now is “trying to go in a different direction to attract more senior executives,” said the source, who declined to be identified because of an existing relationship with SHRM.

Such a move would fit SHRM’s effort to emphasize the strategic dimensions of HR and demonstrate how the function can influence the bottom line.

But when dealing with top-ranking corporate officials, many straightforward aspects of recruiting can become complicated—such as determining a start date.

SHRM announced in June at its annual conference in Chicago that it would name a new CEO by August 1. Despite missing that deadline, William Maroni, SHRM chief external affairs officer, said the hiring decision is not off schedule.

“SHRM’s intention has always been to complete the selection process in the early part of August,” Maroni said. “This general target remains unchanged.”

He declined to comment on the status of the search or SHRM’s selection criteria.

The hunt for a new CEO was triggered in January, when former president and CEO Susan Meisinger announced her retirement, citing the need to care for ill family members. Meisinger, who had been CEO since 2002, held a variety of roles at SHRM during her 20-year career with the organization. She left her position June 30.

SHRM is currently being led by COO China Miner Gorman, who became acting CEO on July 1. SHRM has 245,000 members and generated $105.4 million in revenue in 2007.

Mike Losey, who served as CEO of SHRM in the 1990s, said the extended search isn’t a major worry for the organization.

“I don’t see any concern,” he said. “These things take time.”

Losey said it is challenging to fill SHRM’s top spot given all the qualities desired in a candidate. These include public speaking presence, writing ability and executive skills. A deep understanding of HR issues also is key for someone who may testify before Congress.

“It’s hard to find a very, very accomplished professional person,” Losey said. “You just have to know the body of knowledge.”

For help, SHRM has turned to the executive search firm Korn/Ferry International, said Libby Sartain, a former SHRM chairwoman.

Sartain, also former head of HR at Internet firm Yahoo, said she had contacted Korn/Ferry about possibly becoming SHRM chief. As of July 31, Sartain didn’t think she was in the running.

A Korn/Ferry official who has expertise in association placements is leading the search, and a recruiter who specializes in placing HR executives also is part of the team, Sartain said.

Korn/Ferry spokeswoman Stephanie Mitchell confirmed that her company is conducting SHRM’s search. Mitchell referred other questions to SHRM chairwoman Janet Parker, who declined comment.

SHRM observers said it makes sense for the organization to tap an HR executive because the selection would underscore a strategic focus.

“I hope it means that they are looking beyond the obvious political figures and insiders and they are looking to someone who can change them significantly,” said John Sullivan, a professor of management at San Francisco State University. “It will take some convincing because SHRM has been so politically oriented as opposed to business-oriented.”

Hiring a chief executive with a corporate background will help SHRM connect better with the daily challenges that HR professionals face, said Susan Strayer, an HR consultant and author of The Right Job, Right Now.

“SHRM is most effective when they can serve as a consultant to the field rather than the representative of the field,” said Strayer, who is a SHRM member.

SHRM would gain from having “someone at the helm who’s led people and led organizations from an HR perspective,” Strayer said. “It’s much easier to consult with someone when they’ve been in your shoes.”

If SHRM is looking overseas for a CEO, it would bolster its effort to become more global, but it also would prolong the search, Sullivan said.

“It takes more time to get global people to take these positions given how weak the dollar is,” he said.

—Ed Frauenheim, Jessica Marquez and Mark Schoeff Jr.

In a year when political gridlock has halted most immigration legislation, the House overwhelmingly approved a bill Thursday, July 31, that would extend for five years a controversial government-run electronic employee verification system.

Although the measure passed 407-2 under special House rules that required at least a two-thirds majority, the final outcome doesn’t signal widespread agreement on the issue.

Many Democrats and some Republicans want to overhaul or junk E-Verify. Most Republicans and some conservative Democrats praise it for helping reduce the “jobs magnet” that fosters illegal immigration—and want to make it permanent and mandatory for all employers.

Democratic leaders and Republicans agreed that there is not enough time left in this year’s congressional session for the wider verification debate.

In the meantime, the current system, which was set to expire in November, will remain in place for five years. That’s a decrease from the original reauthorization, which called for 10 years. Congress can make changes to the program at any point within that time frame.

It’s not clear when the Senate will address the issue. A group of 12 Republican senators sent a letter to Senate Majority Leader Harry Reid, D-Nevada, on July 29 asking him to send a straightforward E-Verify reauthorization bill to the floor.

Democrats want to address employment verification as part of comprehensive immigration reform that includes a path to citizenship for illegal workers. Republicans want to strengthen border security and interior enforcement first.

As part of an ongoing work-site crackdown, the Department of Homeland Security has been attempting to mandate the use of E-Verify through regulations.

The agency’s activity has been spurred by the death of comprehensive immigration reform last year in the Senate. Since then, political conflict over immigration has stymied action.

But employment verification had to move this year because of the imminent expiration of E-Verify, a mechanism that checks work eligibility against Social Security and homeland security databases. About 78,000 employers voluntarily use the system, formerly known as Basic Pilot. 

The reauthorization bill requires that the Government Accountability Office, the investigative arm of Congress, conduct two E-Verify studies. One would assess the causes of incorrect nonconfirmations of legal workers. The other would examine its effect on small businesses.

In addition, the legislation directs the homeland agency to make regular payments to the Social Security Administration to fund the costs of conducting employee checks.

Many members of Congress have expressed concerns about the efficacy of E-Verify. Their misgivings echo those of the HR Initiative for a Legal Workforce, an organization led by the Society for Human Resource Management.

The HR group criticizes E-Verify for being inefficient, prone to error and susceptible to identity theft. It cites a Social Security database error rate of 4.1 percent that could wrongfully declare millions of people ineligible for work. E-Verify backers argue that it has demonstrated an error rate of less than 1 percent.

During the House floor debate on Wednesday, July 30, Rep. Zoe Lofgren, D-California and chairwoman of the House Judiciary subcommittee on immigration, voiced skepticism about E-Verify but said that shutting it down before Congress sorts out verification policy would be wrong.

She noted that 11 bills have been introduced addressing the issue.

“There is much work still to be done,” Lofgren said. “None of us wants the current system to go away while we work to improve and get an even better system.”

The author of the E-Verify extension bill, Rep. Gabrielle Giffords, D-Arizona, has testified against the system, detailing troubles that employers have had in Arizona, one of several states where the legislature has mandated that some businesses use the system.

She vowed that E-Verify will not last the full five years. “The current employment verification system needs to be replaced or reformed,” she said. “We can do better.”

Giffords is co-sponsor of a bill written by Rep. Sam Johnson, R-Texas, that would clean up Social Security records and then replace E-Verify with a mandatory electronic verification system based upon existing child-support enforcement networks in each state. It also includes provisions for a biometric system to protect worker identity.

The HR coalition’s strong backing of that bill has drawn sharp criticism from the homeland agency and some congressional Republicans, who say SHRM wants to kill employment verification. SHRM strongly denies the accusation and asserts that it wants to establish a system that is more effective than E-Verify.

In their defense of E-Verify, Republicans made oblique references to the kerfuffle.

“I want to set the record straight,” said Rep. Lamar Smith, R-Texas and ranking member of the House Judiciary Committee. “Participating employers are happy with the Basic Pilot program. It is hard to believe that those who attack E-Verify are serious about … reducing illegal immigration.”

—Mark Schoeff Jr.

Amid a weakening economy and rising layoffs, the percentage of 401(k) plan participants who have made hardship withdrawals from their accounts jumped 21 percent during the first six months of 2008 compared with the same period last year, according to Mercer. During the same period of time, the number of new loans taken out by plan participants increased 4.5 percent.

The trend concerns retirement plan consultants because it might indicate that employees aren’t exhausting all of their options before making hardship withdrawals.

“Usually you would see people take out loans first and then go to a hardship withdrawal,” said Eric Levy, worldwide partner, retirement business leader at Mercer.

The fact that the rate of hardship withdrawals has exceeded the rate of new loans might indicate that many of these employees have maxed out their loans, and thus have to rely on hardship withdrawals, said Mike Kushner, an ERISA attorney with New York-based Curtis, Mallet-Prevost, Colt & Mosle. By law, 401(k) plan participants can take out a loan of $50,000 or 50 percent of their vested balance.

A lot of the participants who are making hardship withdrawals could be terminated employees. Such employees can make hardship withdrawals, but can’t take out loans, Levy notes.

This trend could also be a sign that 401(k) plan administrators aren’t doing a good job of making sure that participants have maxed out their loans before making hardship withdrawals, said Don Stone, president of Plan Sponsor Advisors, a Chicago-based consultant.

“I am not sure all of the vendors are tracking this and that employers are paying attention to it,” he said.

The increase in hardship withdrawal requests from plan participants has likely put a burden on many plan administrators, Kushner said.

“It’s a sizable burden,” he said, noting that administrators have to interpret plan documents, make sure the rules are being applied uniformly and that participants don’t have other assets readily available. “There are a number of things that might not have been tracked as tightly as they should have been in the past because it didn’t come up as often,” he said.

To ensure that these transactions are being handled correctly, employers need to stay in touch with their administrators and double check any requests for hardship withdrawals, experts say.

While the number of hardship withdrawals has jumped, it still represents only a small percentage of the plan participant population, Levy noted. Two percent of plan participants have made hardship withdrawals, according to Mercer.

Employers might also want to do additional education and counseling on the implications of hardship withdrawals, Levy said.

For example, if plan participants make withdrawals before they are 59½, they will have to pay income taxes and a 10 percent penalty within the next year.

Depending on how much money they are taking out, that sum could push the employee into a higher tax bracket, Levy said.

—Jessica Marquez

Legislation nearing final approval by Massachusetts lawmakers imposes new assessments on insurers and hospitals to help fund part of the state’s health care reform law, but it spares employers—at least for now—from making bigger contributions.

Massachusetts Gov. Deval Patrick said this month that he intended to propose tightening an existing rule—known as “Fair Share”—that requires employers with at least 11 full-time employees in the state to pass one of two tests to avoid an annual assessment of $295 per employee.

Revenue from that assessment, which has been running about $7 million a year, is used help fund the Commonwealth Care program. That program, which was created by the state’s 2006 health care coverage reform law, subsidizes health insurance premiums for roughly 175,000 previously uninsured lower-income state residents.

If the tightening of the rule didn’t generate $38 million in revenue, Patrick had proposed that legislators give a state agency authority to raise the $295 assessment to a level it projected that would meet that target.

However, the state’s House and Senate declined to include the governor’s proposal in budget legislation they approved this week. Legislators, though, did adopt proposals that levy assessments of $33 million on health insurers and $20 million on hospitals, and a proposal to divert $35 million from an employer-paid fund that pays health insurance premiums for the unemployed. Those funds would be used to help support Commonwealth Care.

A final version of the bill could be approved Thursday, July 31.

Business lobbyists warn, though, that the issue is not over. That is because they expect Patrick to propose a tightening of the fair share test through regulation.

Under the current rule, an employer is exempt from the annual assessment if at least 25 percent of full-time employees are enrolled in its group health insurance plans.

If that primary test is not met, employers that pass a secondary test—by paying at least 33 percent of the premium for individual coverage for employees within 90 days of their starting work—are exempt from the assessment.

Patrick has proposed that employers be required to pass both tests to be exempt from the $295 assessment, a change that would result in more employers, such as those in high-turnover industries that impose long waiting periods before new employees are eligible for coverage, being forced to pay, business groups say.

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

The president of leading contingent staffing firm Kelly Services Inc. says he foresees difficult times for the remainder of 2008.

“The second quarter was a rough one,” said Kelly Services president and CEO Carl Camden during an earnings conference call last week.

“Overall demand for labor in the U.S., already weak, has worsened since we last reported to you, and demand for temporary staff is declining at an even faster rate.”

Kelly’s U.S. commercial business has seen declining revenue for the past seven quarters, Camden said.

The length of the declines is outpacing the six quarters of declines Kelly saw during the recession of 2001, he said, although current declines have not been as large on a percentage basis.

“There is no doubt the economy has worsened in the last three months, and that difficulties experienced in the U.S. and [the U.K.] are now being experienced elsewhere,” Camden said.

“It wouldn’t be surprising if conditions continued to be difficult throughout 2008 and perhaps longer.”

The Troy, Michigan-based staffing firm reported net income of $10.5 million, or 30 cents a share, on revenue of $1.45 billion for the quarter ended June 29.

That compares with net income of $15.3 million, or 42 cents a share, on revenue of $1.42 billion for the same quarter last year.

For the six-month period, Kelly reported net income of $18.7 million, or 54 cents a share, on revenue of $2.84 billion. That compares with net income of $27.2 million, or 74 cents a share, on revenue of $2.76 billion during the first half of 2007.

Given the continued economic uncertainty, Camden said Kelly would not provide quarterly earnings guidance.

In the conference call, the company appeared to attribute the decline in margin in part to cost-cutting not keeping pace with revenue declines in the U.S. and declines in gross profit margin in some other areas.

Declines were led by a 21 percent drop in operating earnings year over year for Kelly’s Americas commercials business. The segment represents about 45 percent of Kelly’s total business, Camden said.

The firm’s professional and technical business in the U.S. was flat year over year and down 3 percent from the first quarter, when adjusted for the Easter week, which fell in the second quarter last year and in the first quarter of this year, he said.

General economic conditions worsened during the quarter in Europe, especially in England and to a lesser extent in Western Europe, Camden said, leading to a 7 percent decline in Kelly’s revenue there during the quarter.

But some areas are still seeing growth, including France, where Kelly’s revenue increased 4 percent during the quarter, and Eastern Europe, where Kelly’s revenue spiked 33 percent, led by strong performance in Russia, Camden said.

Revenue for Kelly’s outsourcing and consulting group, which represents about 4 percent of total revenue, increased nearly 60 percent for the quarter, year over year, to $61 million.

Kelly Services plans to retain its focus on the group’s higher-margin, fee-based business that capitalizes on corporate outsourcing of human resource functions while expanding its professional and technical business, improving its operating margins and diversifying geographically, Camden said.

In mid-July, Kelly said it had entered an agreement to acquire the shares of the Portuguese subsidiaries of Amsterdam, Netherlands-based Randstad Holding N.V. for an undisclosed amount.

Kelly said it expects the deal, which is subject to approval from the European Commission, to close during the third quarter of this year.

The market for staffing firms is not favorable right now and faces “a pretty significant headwind,” given that it is cyclical, said Tobey Sommer, a director in the equities research department of SunTrust Robinson Humphrey, which said in a disclaimer that it also provides investment banking services and other services for Kelly.

The agency has a neutral rating on Kelly’s stock, Sommer said.

Kelly’s fee-based outsourcing and consulting business “is one of a few bright spots right now” for both Kelly and the staffing industry as a whole, he said.

“There appears to be an opportunity there, [and] Kelly may have an edge in competing for that stuff because their strategy has been for years to focus on the largest customers around the globe.”

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

Two government agencies will work together more closely to strengthen oversight and regulation of retirement-savings products, according to an agreement signed Tuesday, July 29.

The Department of Labor and the Securities and Exchange Commission signed a document that permanently establishes the information-sharing arrangement that they have been developing over a number of years.

According to the memorandum of understanding, staff from the labor agency’s Employee Benefits Security Administration and the SEC will meet regularly to discuss industry trends and regulations. Each agency will grant the other access to nonpublic enforcement information under their purview.

The Labor Department regulates 401(k) and other types of retirement plans, and the SEC monitors brokerages, investment firms and mutual funds.

The agencies must increase their cooperation to keep pace with quickly evolving financial markets, said SEC Chairman Christopher Cox.

“Our markets are becoming more integrated,” Cox said at a Washington press conference.

Bolstering oversight is becoming urgent as companies replace defined-benefit plans with defined-contribution products that require employees to navigate markets on their own.

“Things have matured to the point that this is an important step to take today,” Cox said. “This will be a great, great thing for American investors.”

Appearing alongside Cox, Secretary of Labor Elaine Chao emphasized the importance of protecting nearly $2.3 trillion in defined-contribution assets invested by about 65 million workers.

“We want to enhance retirement security,” Chao said. “Having our agencies work together goes toward that goal.”

J. Mark Iwry, who was responsible for overseeing regulation of the private pension system as a Treasury Department official from 1995 to 2001, applauded the DOL-SEC partnership.

“Good government that helps sustain confidence in the retirement system involves a continual process of breaking down the silos that tend to build up around different government agencies,” said Iwry, a nonresident senior fellow at the Brookings Institution in Washington and a principal of the Retirement Security Project.

A recent example of a combined Labor-SEC activity was an alert about 401(k) debit cards. Investors were warned that if they borrow and spend from their retirement accounts, they will have to repay the money by a certain deadline or be hit with taxes and penalties.

That kind of effort is needed more than ever with the growing popularity of defined-contribution plans, Iwry said.

“As 401(k)s and IRAs account for an increasing share of retirement savings, it is increasingly imperative for American savers to get adequate disclosure and user-friendly information,” he said.

Last week, the Labor Department issued a regulation requiring greater transparency from 401(k)-type plans to participants regarding investment returns, fees and expenses.

—Mark Schoeff Jr.

The full Senate this week may consider mental health care benefits parity legislation as part of a broader tax bill, but prospects for that bill are uncertain, lobbyists say.

Senate Finance Committee Chairman Max Baucus, D-Montana, attached the parity provisions—drawn from an informal agreement between congressional negotiators who worked out differences between House- and Senate-approved parity measures—to the tax bill, S.B. 3335.

Like earlier parity measures cleared by the House and Senate, the parity provisions in the tax bill would require group health care plans to provide the same coverage for mental disorders as they do for other medical conditions.

That would be a big change from current law, which bars discriminatory annual and lifetime dollar limits on mental health care coverage but allows discrimination in other ways, such as letting plans pay only 50 percent of mental health care expenses while they cover 80 percent of expenses for treatment of other medical problems.

However, business lobbyists said the tax bill—for reasons unrelated to the parity provisions—is unlikely to get the 60 votes needed to stop Senate floor debate on it, effectively delaying a final vote on the bill. Lobbyists said the measure, which among other things extends numerous expiring Tax Code provisions, is likely to be considered again when the Senate returns in September after the congressional August recess.

A tax extender bill earlier approved by the House does not include provisions for mental health benefits parity.

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

The growth in health care costs paid by employers is expected to level off in 2009 after five years of deceleration, a report from PricewaterhouseCoopers’ Health Research Institute predicts.

Based on a survey of more than 500 employer and health plans providing coverage to 11 million lives, New York-based PricewaterhouseCoopers found that medical costs will increase by 9.6 percent on average next year, compared with an average of 9.9 percent this year.

Improved medical management and a focus on prevention and wellness are among the tools that employers are using to slow down the growth in health care costs, according to the report, “Behind the Numbers: Medical Cost Trends for 2009,” which was released Thursday, July 24.

Two-thirds of employers contract with disease management programs that focus on reducing and eliminating hospitalization, the report found. In addition, two-thirds of employers have adopted wellness programs, nearly half of which say they are somewhat effective at reducing costs.

Generic substitution of prescription drugs also continues to reduce health care costs for employers, according to the PricewaterhouseCoopers report. However, this benefit is likely to diminish, since fewer brand-name drugs are going off patent in 2009, the researchers said.

Although the rate of increase in health care costs is being tempered somewhat, PricewaterhouseCoopers found that two major factors continue to contribute to employers’ growing medical tab: new construction in the health care industry and cost-shifting from the uninsured.

In particular, the health care industry is in an era of booming construction in response to increasing consumer demand, PricewaterhouseCoopers reported. Moreover, if there is a recession in 2009, the health care industry could grow even more. During previous recessionary periods, health care has increased its portion of the gross domestic product and medical prices have risen faster than other prices, PricewaterhouseCoopers said.

In addition, one of every four dollars spent by private payers is making up for decreasing government financing to Medicare and Medicaid, the report found.

A copy of the complete report can be found at www.pwc.com.

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