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N o company would argue, at least not publicly, that the Securities and Exchange Commission proposal to require increased disclosure of executive compensation is a bad idea.

    But many executives and compensation experts are concerned that the proposal, which is in a 60-day comment period after being unveiled by SEC Chairman Christopher Cox on January 17, could create more questions than answers.

   One of the most controversial provisions in the proposal, expected to become a rule by year’s end, would require companies to disclose a total compensation number for the four highest-paid executive officers. Companies question whether this number would really be meaningful given that it includes projected values for stock options, retirement payouts and other compensation, such as severance pay.

    There are other pieces of the proposal, which comes in at 370 pages, that companies are expected to protest. One is a requirement to disclose perquisites in excess of $10,000, down from $50,000 currently. There is a mandate to disclose compensation of as many as three nonexecutive employees who are more highly paid than the lowest-paid named executive officer. Then there is the addition of the new “Compensation Discussion and Analysis” section, where companies would have to explain what kind of metrics they used to determine compensation.

    “This proposal is a move in the right direction, but it has just overreached in some areas,” says Jerry Carter, senior vice president of human resources at International Paper, a Memphis, Tennessee-based paper manufacturer with 82,000 employees globally. “In some areas it will just add cost, and not necessarily produce better companies.”

    Compensation experts predict that the proposals could increase the amount of time and money that companies devote to disclosing compensation by 50 percent to 100 percent for at least the first year.

    “These proposals are a radical revision of the existing framework,” says Mark Borges, a principal at Mercer Human Resource Consulting and former special counsel in the SEC’s division of corporate finance. “Next year’s proxies on executive pay are going to look pretty different.”

The numbers challenge
   The main concern that companies and experts have about coming up with a total compensation figure is that it will be misleading because it will require companies to put an exact dollar value on projected future benefits, such as retirement benefits.

    This seems like a fruitless exercise, particularly with change-of-control benefits, which may never take effect, says Allison McBride, director of executive compensation at International Paper. Gener- ally, International Paper’s compensation committee calculates its change-of-control figures once every three years, rather than once a year, because it is costly to bring in actuaries to figure them out.

    It might be more useful if the SEC required companies to set their own caps on change-of-control agreements rather than have to report figures every year, says Mims Maynard Zabri­skie, an attorney and partner in the Phila­delphia office of Morgan Lewis & Bockius.

    Also, by projecting values of benefits like pensions and severance, companies will end up reporting final compensation numbers that are much bigger than they are in reality.

    “People are worried about mixing many aspects of current compensation with prospective compensation,” says David Swinford, senior managing director of New York executive compensation consulting firm Pearl Meyer & Partners.

    This could result in higher executive compensation levels overall as companies see inflated numbers reported by one company and follow suit, says Charles Peck, principal researcher and program manager on compensation for the Conference Board.

    Since many companies rely on benchmarking studies of their industry to determine their executives’ compensation, this is a real concern, he says.

    Instead of benchmarking to their industries to determine executive pay, these companies need to make sure their compensation decisions are better aligned with executive and company performance, Peck says.

    Many companies and consultants are also concerned that the proposal’s requirement for companies to report the value of stock options at the time of grant as well as at the time of the filing could result in double counting by companies.

    “It’s a little tricky,” says Peggy Foran, senior vice president of corporate governance at Pfizer. “People just have to realize that often they want this to be simple, and it’s going to be a little more difficult now when you get into stock options and such.” Despite the complexities, Pfizer is planning to incorporate some of the proposal’s requirements in this year’s proxies, Foran says.

Perquisite problems
   Another benefit that companies might shift away from as a result of the proposal is offering perquisites. Many executives and experts argue that the SEC is going too far by lowering the threshold of perquisites that need to be disclosed from $50,000 to $10,000. “When you look at the total scope of executive pay, $10,000 is nothing,” says Robbi Fox, a consultant at Hewitt Associates.

    Experts expect that many companies will protest this requirement because it is too time-consuming to catalog. Further, only a few companies offer such extravagant perquisites.

    Then there is the issue of how to value the perks. “For corporate jets, many companies work out the value to the cost of first class, but that figure is really much less than the cost to the company,” says Bruce Ellig, who was head of human resources at Pfizer for 25 years and is the author of The Complete Guide to Executive Compensation.

    If this requirement is part of the final rule, many companies will have to evaluate how disclosing such perquisites may affect the corporate culture, attorney Zabriskie says.

It’s one thing to quietly shower extravagances on the people in the executive suite, but when it’s out in the open, there could be a bitter backlash. “It could create a culture where employees feel they can use the company dollars and time for their personal use,” she says. Call it the little guy’s perquisite.

    Companies shouldn’t just assume, however, that if this requirement comes to pass they will have to drop all perquisites. “Some perks are justified,” says Mark Reilly, a partner at 3C-Compensation Consulting Consortium in Chicago. “Many companies have corporate jets to save their executives time as they travel all over the world. Now they will just have to explain that.”

    Companies, however, do have to look at the perquisites they offer in light of their whole executive compensation packages, says Swinford at Pearl Meyer & Partners. “I think it’s going to be very hard to argue that an executive with a $750,000 salary who is making half a million dollars in other benefits needs $14,000 paid toward a club membership,” he says.

Other employees
   Many executives and experts were surprised to see the section of the proposal that would require companies to disclose compensation of as many as three employees whose compensation was higher than the lowest-paid named executive. Although the proposal would only require that companies provide the titles, not the names, of these employees, companies are worried that by divulging this information they are highlighting their top performers to the competition.

    “These are not people who are in management,” says Carter at International Paper. “Most likely it would be a sales executive who had a great year and is reaping the rewards for it.”

    This requirement could be particularly onerous for financial services companies, like investment banking firms, which could have many employees that make more in commissions than top executives, observers say.

    At many companies, the compensation committees don’t even handle the compensation of these employees because they are not management, says Ronald Mueller, a partner in the securities group at Gibson Dunn in Washington, D.C. It will mean hunting down that compensation information from elsewhere in the organization.

Discussion and analysis
   The proposal’s requirement of a discussion and analysis section that explains the performance metrics companies use to determine compensation has worried many employers. They view it as the SEC forcing them to give away competitive information.

    “The final rule will have to weigh a fine balance between giving people metrics and not disclosing proprietary information,” Mercer’s Borges says.

    It’s possible to do both, says Foran at Pfizer. “You can talk about certain metrics without getting too specific,” she says.

    This requirement might actually be a good performance management tool for executives. They’ll be better able to see that this amount of effort yields that amount of compensation, says Zabriskie, the attorney.

    Still, companies are worried that requiring them to discuss the thinking behind their compensation packages may open them up to more liability.

    “There is always the possibility that something you say or didn’t say could trigger litigation,” says Larry Ribstein, a law professor at the University of Illinois College of Law.

    Also, since this discussion section would be part of an SEC filing, it would require the signatures of the CEO and the CFO, who often are not involved with the compensation committee discussions. “This is definitely going to be an issue brought up in the comment period,” Hewitt’s Fox says.

    Regardless of their misgivings, organizations need to start reviewing their compensation packages and figuring out what they will need to do to comply with the new rules, experts say.

    “Companies need to start doing mock proxy statements and see how their plans will read under the proposed rules,” 3C’s Reilly says.

    This means companies that were going to give more stock options to executives next year or bigger severance pay may want to rethink that, or at least be prepared to explain why they did it, says Steven Hall, managing director of Steven Hall & Partners, a compensation consulting firm in New York.

    “The SEC has done companies a bit of a favor by doing this in the first few days of the new year,” he says. “Right now every company has been put on notice.”

Workforce Management, February 13, 2006, p. 1, 41-44 —Subscribe Now!

Women are more likely to participate in their retirement plans than men are, according to a study conducted by the Employee Benefit Research Institute. While the overall results of the study show that men actually participate more than women do in their retirement plans, the reverse is true when looking at men and women in similar income levels, says Craig Copeland, senior research associate.

    “Overall it has been well known that men have been more likely to participate than women, but this is largely due the fact that women have been in lower-paying jobs and are more likely to work part time, which accounts for their lower rates of participation,” he says. “As women are in the workforce longer, this trend is shifting.”

    The study shows that among all wage and salary workers ages 21 to 64, a slightly smaller percentage of women (47 percent) participate in their retirement plans than men (49 percent). But among all full-time, full-year workers, the study shows that 58 percent of women participate in their retirement plans, compared with 55 percent of men.

    Similarly, the study shows that within each earnings level, the proportion of women participating in their retirement plans is higher than for men.

As the new president and CEO of Washington Group International, Steve Hanks recalls 2001 as the year he was buried in financials. He had the monumental task of getting the Boise, Idaho-based engineering, construction and management services company out of bankruptcy and turning it into a profitable business.

    “People didn’t know if we were going to make it or not,” he recalls.

    Then he heard that Wash­ington Group had been awarded two contracts–each worth more than $500 million. He was speechless. He immediately got on a plane to thank the clients in person, but also to ask why they had chosen Washington Group when there had been so many other good bidders whose future was so much more certain.

    “I will never forget what they said to me,” Hanks says. “They told me ‘We didn’t hire Washington Group because of its balance sheet; we selected you because of your people.’ “

    That was the genesis of Washington Group’s top-rated, $50 million-a-year employee development program–no small chunk of change given that the company’s annual after-tax income at that time had never exceeded $46 million.

    In the past two years, the company has spent more than $103 million developing workers. Since 2002, its net income per employee has jumped 60 percent. And for 2005 the company expects, based on third-quarter guidance, to report net income of $55 million to $60 million, exceeding its goal of 10 percent compound annual growth, Hanks says. Ninety-five percent of its customers are repeat clients. The firm has seen job applicants jump from 2,000 a month to 5,000. And in 2005, Washington Group was named one of the top 20 U.S. companies for leaders by Hewitt Associates, joining the ranks of General Electric and Johnson & Johnson.

    Washington Group’s investment in employee development shows how recruiting and retaining top talent are crucial for success in an industry faced with an aging workforce, increased competition for skilled employees and an unprecedented demand for work. Because many of the company’s 25,800 employees–including 2,330 in other countries–work in hazardous conditions, such as handling nuclear waste or working in hostile territories like Iraq, the firm has to do more than the average employer to retain and develop its workforce.

    In the past 28 years, Hanks has seen firsthand what good mentoring can do for an employee. In 1978 he joined Morrison Knudsen, which later was acquired by Washington Group, as a law clerk. Today, the 55-year-old top executive is involved in every day-to-day aspect of employee development, from going over coursework to monitoring attendance and reviewing participants’ feedback, says Larry Myers, senior vice president of human resources. Other CEOs talk about how people are important for the business, but Hanks actually gets it, Myers says.

The Washington way
    In 2001, the company was hit hard by several factors, Myers says. The number of engineering school graduates had plummeted 18 percent since 1985 as students opted to study hotter topics like computer science. At the same time, Washington Group was facing an imminent worker shortage, with 25 percent of its workforce becoming eligible for retirement in the next five to 10 years.

    Hanks and Myers realized that employee development had to be a core part of the corporate culture. Until then, Washington Group was an amalgam of about 20 companies, assembled through a string of acquisitions over past decades, each with its own policies and procedures and nothing binding them together, Myers says.

    Their first priority was to create a standard annual performance review for all salaried workers. Until then, the different companies each had their own review process at year’s end, but those discussions were often ineffective and rushed, Myers says. Under the new program, managers review 10 percent of their staff each month from January through October, leaving some time at the end of the year to catch up. Myers and Hanks shifted the focus of the reviews to future goals rather than past performance.

    As part of the process, each year the company’s top seven executives visit all of Washington Group’s business heads, give them reviews and get a list of their top performers and find out what they’re doing to develop those people. Hanks then takes the findings to the board of directors, explaining in detail what each business head is doing to develop talent and rating how well they are doing it.

    To make executives accountable, last year Hanks began basing 30 percent of managers’ annual incentive compensation on their talent development efforts. Incentive compensation, which applies to 130 executives and 270 managers, makes up 15 percent to 50 percent of a top employee’s base pay.

Developing the ranks
    A key focus of Washington Group’s employee development program is training in management skills such as controlling costs and time management. Having a pool of employees with these skills can save money and time, says Mark Stone, vice president at We Power, a Milwaukee subsi­diary of Wisconsin Energy and a Washington Group client.

    In 2002, We Power contracted Washington Group to build two natural gas plants. The companies set target prices for each plant. If the construction of the plant was less than the target, the companies shared the savings. If it was more, they shared the costs. The model requires a high level of teamwork to make sure that things get done on time and under budget.

    During construction of the first plant, Stone saw instances where people were not working as a team. Rather than keep the scaffolding up for weeks to let each subcontractor do its job, for example, each team would take the scaffolding down after one task and the next group would have to reconstruct it.

    “We realized that if we repeated the same type of situation on the second plant that we were both going to lose money,” Stone says.

    In response, Washington Group reorganized its team, bringing in employees who showed expertise in team-building and weeding out workers who did not. By having a pool of employees trained in project management and team-building skills that could jump into the project, Washington Group stands out from its competitors, Stone says. As a result, he estimates that We Power will see cost savings of at least $10 million on the construction of the second plant.

    Getting more than technical training also builds loyalty among employees, says Noe Hernandez-Saenz, a Washington Group project manager based in Mexico City. In his last year at Universidad Autonoma de Coahuila in Saltillo, located in northeast Mex­ico, Hernandez-Saenz worked part time for Morrison Knudsen on a construction project. After graduation, his project manager recommended him for a yearlong training program in which he worked on the construction of six auto plants and was able to see each stage of the project.

    “You can be in a classroom and see a graph of the factors to consider during a project, but until you are out there dealing with real people, you just don’t fully understand,” Hernandez-Saenz says.

Creating leaders
    Several times a year, 20 to 30 managers like Hernandez-Saenz are invited to the company’s Leaders Forum, a weeklong series of meetings at Washington Group’s Boise headquarters. Executives present real-life business scenarios that the company is facing and ask attendees to break into teams and come up with solutions.

    Last year, participants were presented with a proposal to acquire a business in Romania. Attendees had to present their ideas to the executive review committee, just as they would in real life. Hernandez-Saenz says the experience gave him an understanding of how things work at the top of the company, and helped him to see all the variables involved in making a high-level decision, such as the political ramifications. At one point, the committee asked his team if they had reached out to the unions and government about their proposal. It was a question that hadn’t even occurred to them.

    So far, 350 employees have attended the Leaders Forum, which is held several times a year.

    During the next step, Washington Group offers the Leadership Excellence in Performance program, a yearlong initiative for managers who are chosen to work with executive mentors from different business units. With the help of their mentors, participants design an action plan for themselves.

    Hernandez-Saenz wants to develop his financial knowledge and presentation skills. He is working with his mentor to create a financial plan for another business unit and present it to a group of financial executives. At 30, Hernandez-Saenz admits the task is daunting. Still, he says he can’t believe the opportunity. “If you had told me four years ago that this is what I would be doing, I would have laughed in your face.”

    Chief executive Hanks hopes all of his employees will experience that sense of awe at Washington Group. His biggest challenge is keeping leaders focused on the individual development of employees. That’s why he and Myers have not implemented employee-development metrics. “We don’t want people getting too caught up in statistics,” he says.

    That’s a risky approach, particularly given how much money the company is spending, says Glen Miller, a consultant with Performance Essentials in Har­leys­ville, Pennsylvania, who worked with Wash­ington Group in the late ’90s on employee development. Miller thinks the company should do more to track whether employees are using the skills they are being taught.

    Paul Chinowsky, a professor of civil engineering at the University of Colorado in Boulder, raises another concern: He wonders whether the company can maintain this level of commitment, noting that employee development typically is the first thing to get the ax at the slightest market downturn.

    Hanks says that’s not going to happen, and he’s not the least bit concerned about budget cuts. “We are a constant learning organization,” he says.

    Nor is Hanks worried that he’ll develop such highly skilled employees, they will be poached by the competition. “As my friend Gary Michaels [former CEO of Albertson’s] once said, ‘The bigger fear is that if we don’t train our employees, they will stay.’ ”

Workforce Management, February 13, 2006, p. 1, 24-30 — Subscribe Now!