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Pulling Rank to Put Recruits on a Post-service Career Path

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


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


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


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


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


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


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


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

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Lessons for Private-sector Employers

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


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


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


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


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


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


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


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

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Manpower Mission

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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


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

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


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


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


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


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


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


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


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


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


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


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


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


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


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


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

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


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


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


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


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


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


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


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


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


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


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


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

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Hewitt Change-of-control Plan Raises Eyebrows About Possible Sale

A recent Hewitt Associates filing has raised eyebrows about whether the company is contemplating a sale.


On October 7, the Lincolnshire, Illinois-based firm filed with the Securities and Exchange Commission to create a severance plan for its 24 top executives in the event of a change of control of the company. Under the plan, if these executives lose their jobs as a result of a merger or acquisition, they are each entitled to a lump-sum payment equal to two times their base pay and target annual incentive, among other things.


“What raised some questions about this is the timing,” says Bill Zinsmeister, an analyst at Piper Jaffray. Creating change-of-control severance plans is standard practice for public companies the size of Hewitt, but it’s curious that the firm waited until now to establish the plan, he says. Hewitt went public in 2002, opening it up as a possible takeover target.


Kelly Zitlow, a Hewitt spokeswoman, says the company is not considering a sale and that this provision is just standard procedure.


“We know that it is a best practice to put one in place,” she says. When asked why Hewitt didn’t create the plan when it went public three years ago, Zitlow says that management and the board of directors have been working together to prioritize post-IPO initiatives and this where the change-of-control severance plan fell.


It makes sense for Hewitt to prepare for the possibility of being acquired given that it has been a takeover target for years, analysts say. With all of the consolidation in the human resources consulting and outsourcing sector, many companies are looking at Hewitt as an ideal acquisition since it is the frontrunner in the market, says Michel Janssen, president of supplier solutions at the Everest Group.


“There is no doubt that they are a potential acquisition target, just like Exult was,” he says, referring to the outsourcing business that Hewitt itself acquired in October 2004. “But I don’t see any compelling events to make Hewitt’s management team do this.”


Janssen says that the company would have to miss its earnings estimates or lose a number of clients to spark serious acquisition talks.


Zinsmeister, however, says that given Hewitt’s suppressed stock market price, now could be a good time for acquisition discussions. The company’s stock was trading at a high of $35 per share early last year and now is around $26. “There could be an opportunity here,” he says. “It’s definitely cheaper to buy than to build.”


—Jessica Marquez

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Few Employers Set to Launch Roth 401(k)s

Most employers are taking a wait-and-see approach to launching Roth 401(k)s in January when they become available.


In contrast to regular 401(k) plans, where an employee’s wages are taxed as income when they retire, Roth 401(k)s allow employees to contribute after-tax dollars. This could be particularly attractive to workers who are just beginning their careers and who expect to pay more in taxes in the future as their income rises.


Also, unlike Roth IRAs, these vehicles are available to individuals with income over $110,000 per year and married couples with income of $160,000 or more.


Despite these advantages, however, only three out of 10 employers surveyed recently by Hewitt Associates say they are likely to offer Roth 401(k)s when they become available on January 1.


“I don’t think we need to add another level of complication until we have a much greater level of participation in our 401(k) plan,” says Cindy Ellis, benefits manager at Cadmus Communications in Richmond, Virginia. Cadmus, with 3,000 employees, has a 65 percent participation rate in its 401(k) plan. Ellis says she would wait until the majority of Cadmus’ workers were already in the regular 401(k) before adding the Roth option–unless employees demanded it.


Randy Boldt, director of global rewards at Motorola, agrees that the communications challenge is one of the reasons the company is not launching a Roth 401(k) plan in January. Another issue that gives Boldt pause is that under current law, Roth 401(k)s are scheduled to sunset in 2010 and the Treasury Department hasn’t given instructions on how to handle the accounts if that happens.


“We want to get more guidance about some of the nuts and bolts regarding these plans,” Boldt says. Since it doesn’t seem that many of its competitors are launching Roth 401(k) plans, he is not concerned that Motorola will be less competitive by waiting until the middle of next year to make a decision.


Bob Hunkeler, vice president of investments at International Paper Co. in Stamford, Connecticut, had similar concerns when he first started looking into Roth 401(k)s. But he now is starting to warm to the concept. “On further review, there are some nice features about it,” he says.


For one, Hunkeler anticipates that offering a Roth 401(k) will cost the company little or no money. “If we do it, it will probably be sometime next year,” he says.


Currently, International Paper has 60,000 plan participants and automatically enrolls employees into its regular 401(k) plan. Hunkeler is weighing whether that would continue if the company launched a Roth 401(k).


“This is a tough one because you could argue that automatically enrolling employees into a Roth 401(k) makes the most sense, since the employees you are automatically enrolling tend to be younger people,” he says.


But given the uncertain fate of Roth 401(k)s, Hunkeler thinks his company will continue to automatically enroll employees into its regular 401(k) if it adds the Roth plan.


“There is just more certainty there,” he says.—Jessica Marquez

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Dear Workforce How Do We Deal With a Lax and Incompetent CFO

Dear Fed Up:



Your sincere intention to help the business is the key point here. Remain focused on that and leave out less-relevant issues–especially ones of a personal nature.

Ideally, you would first meet with the CFO to address the issues directly. If you feel that meeting with the CFO would be truly counterproductive–aside from your own anxiety about confronting the issues–you may want to discuss the matter directly with the president/COO. In either case, let the person know that you need to meet in private about a very important matter.

Here are some guidelines for managing the meeting. These can be adapted, depending on whom you end up meeting with:

1) Express appreciation to the person for meeting with you. Let him know the conversation is difficult for you, albeit necessary.

2) Describe what has been going on using specific examples in nonjudgmental language.

3) Describe the business impact of this situation (how it has affected other employees, heightened the company’s legal exposure, increased costs, reduced profitability, hindered production, prevented essential communications and so on).

4) Describe what is likely to happen if the situation persists. Also point out how things could improve if the matter is dealt with and corrected.

5) Ask the person to react to what you have said. Also, be sure to listen to the response.

6) Make a specific request to correct the problem, should top management fail to do so.

7) Make the choices clear. You may present several options, such as having your president:

  • Confront the CFO with the need to change behavior.
  • Move the CFO to another position.
  • Take away certain responsibilities from the CFO.
  • Remove the CFO from the organization, if necessary.

8) Ask your president what he or she intends to do.

9) Regardless of his decision, thank him/her for hearing you out and considering the situation. Offer your support in making the solution work.

Resolving this problem will go a long way toward building employee commitment to the business. Allowing it to continue perpetuates the frustration you already experience. It is important that your president/COO understands this.

SOURCE: Kevin Herring,Ascent Management Consulting Ltd., Oro Valley, Arizona, Jan. 13, 2004.

LEARN MORE:Charge Managers With Inspiring Loyalty

The information contained in this article is intended to provide useful information on the topic covered, but should not be construed as legal advice or a legal opinion. Also remember that state laws may differ from the federal law.

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Opting Out of Stock Options

Mandatory expensing and aggressive shareholders are bearing down on companies with broad-based employee stock option plans. Since 2003, 58 percent of employers have reduced the number of employees who are eligible for stock option grants, and 61 percent have cut the number of shares granted, according to a new survey of 258 companies from Mercer Human Resource Consulting.


    “Long-term equity plans are declining, in large part because of the new expensing requirement for stock options, and are not being replaced dollar-for-dollar,” says Steven Gross, Mercer’s rewards practice leader.


    Nearly 15 million U.S. employees hold stock options, according to a survey conducted by the National Opinion Research Center of the University of Chicago. Broad-based programs are most prevalent in the tech sector but are also commonly used in the communications, finance and manufacturing industries. Among public companies with 500 or more employees, 23.4 percent use broad stock option plans.


    Companies must now include the fair value of their stock option grants in their income statements under Financial Accounting Standards 123(R), beginning with the first reporting period after June 15, 2005, for public companies and December 15, 2005, for private companies.


    Cisco Systems fought expensing long and hard and has no intention of changing its long-standing policy of providing stock options for every employee, but it will cut back on the number of options awarded. “In November, we have to go to shareholders for additional shares, and we’ll be limited by the level of dilution they are willing to incur, and by expensing,” says Kate DCamp, senior vice president for human resources.


    Cisco will not introduce new vehicles to replace the value lost when the number of options is reduced. “But we will make sure that we have a competitive total offering,” DCamp notes. ” ‘Competitive’ is the watchword here, not ‘The same as it might have been in a different scenario.’ Years ago, if you worked for Cisco, you received stock and it split a number of times and rose dramatically and you made a lot of money. But that was then, and this is now.”


    Cisco granted 195 million option shares to employees for fiscal year 2005, mostly merit-based, with a small portion for new hires. The company used the Black-Scholes valuation method for expensing in its October statement, but it is still pressing for acceptance of an alternative market-based valuation model.


    A 2005 survey of 340 companies by Deloitte found that 75 percent have already reduced or are reducing the number of options granted. The survey also found that 8 percent of public companies are eliminating their employee stock purchase programs and another 51 percent will reduce the employee discount. Almost 30 percent plan to use the safe harbor provision that limits discounts to 5 percent but allows companies to avoid any expense recognition.


    Deloitte’s study also found that 91 percent of companies have made no change in options eligibility for top management.


    “Most U.S. companies are continuing to use options, but for executives only,” DCamp says. “The problem is that inventions are carried out by employees, not executives.”


    With Asian nations quickly moving toward equity-based compensation, DCamp believes that the decline in stock option grants among U.S. companies will have long-term negative effects on their global competitive position.


Workforce Management, October 24, 2005, p. 36 — Subscribe Now!

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The New Way to Pay

In high-energy silicon valley, Kate DCamp, vice president for human resources at Cisco Systems, is busy reworking the company’s compensation system. She is reinstating the merit budget, pulling money out of incentives and putting it back into base salaries, and bracing for the smaller pool of employee stock options that shareholders are likely to approve at their November meeting.


    Across the country in sleepy Columbus, Georgia, Casey Graves, 2nd vice president for human resources at Aflac Inc., is also reshaping his company’s compensation system. He is holding down base salaries and merit increases but pumping money into bonus payments and launching new short-term incentive plans.


    Both DCamp and Graves are working toward highly aggressive growth goals. At Cisco, revenue per employee jumped 27 percent to $690,000 last year, and the company is now pushing for $1 million per employee, unprecedented in the industry. Aflac plans to double its revenue within five years, with a minimal increase in headcount.


    To achieve these goals, DCamp and Graves are shifting the balance between fixed and variable pay, but in opposite directions.


    Compensation design is in flux. Cisco and Aflac represent the new focus on achieving extraordinary growth and productivity while controlling labor costs, but they also demonstrate that companies are forging very different approaches to this common goal. Standard practices have splintered into highly customized and constantly changing compensation programs, designed to boost output within the confines of flat salary budgets.


Room to move
    The context for this experimentation is the flexibility provided by relatively soft labor markets and diminished employee expectations. Cisco’s 27,000 U.S. employees haven’t seen a merit increase since 2001, but the company still receives 70,000 applications a year for relatively few positions and maintains a low voluntary turnover rate of 4.6 percent.


    Aflac keeps base salaries for most of its employees at or below market and sets its annual salary budget close to the national average, which has barely covered inflation since the 2001 recession. But it still attracts almost 100 candidates for every job opening and sports a 30 percent increase in policies in effect per employee over the past four years.


    “Softer labor markets have played a role in our recent thinking,” DCamp says. “We’ve found that we’ve been very competitive without a broad merit budget. We had small amounts of money for promotions and adjustments for specific skill groups that were in short supply, but that was all based on the market, and we’re not seeing market wages moving.”


    DCamp’s perceptions are accurate. Real wages remain below their pre-recession levels across almost all industries, and salary-increase budgets are almost a full percentage point below the 4.4 percent average recorded for 2001 despite the full-blown recovery in profits.


    When Cisco reinstates its merit budget to raise base pay in the second half of 2006, it will fall within the modest projected average increases reported by the major surveys. Employers are planning increases averaging 3.6 percent for 2006, barely topping the forecasts for inflation, according to a recent survey by Mercer Human Resource Consulting of 1,350 employers with 13 million workers.


    “Flat salary budgets will continue as long as the markets are weak,” says Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania’s Wharton School. “We are nowhere near full employment. In addition, there is a relentless drive to push costs out of the system.”


    The slight decline in unemployment this year has not stimulated wage growth. “Labor markets are picking up, so we would naturally expect to see budgets that reflect this change in supply and demand, but salary budgets are not reflecting it,” notes Steven Gross, leader of the rewards practice at Mercer.


“We want performance pay vehicles that are business-driven and reward specific behaviors on an immediate basis, perhaps once a month, as a variable additive.”
–Casey Graves, 2nd vice president for human resources at Aflac

    Mercer found that 22 percent of employers increased incentive pay eligibility and opportunity over the past three years, while 7 percent decreased them. “Companies are reticent about increasing fixed costs, so they’re shifting money to a variable basis,” Gross says. “But it’s moving into less formal programs such as spot awards and sign-on bonuses and into pockets of the workforce instead of across whole populations.”


    For short-term incentives such as spot cash and project awards, less than 20 percent of the employees receive some payout, he notes.


Rebalancing base pay
    Although the standard practice for companies looking for lower fixed labor costs and higher productivity is to move more money into variable pay, Cisco has discovered that it may have too much pay at risk.


    “We just shifted about 5 percent out of incentive pay and put it into base salaries at most levels in the company,” DCamp says. “Our hiring experience and employee surveys over the past few years indicate that we have more pay at risk relative to the market than we want to. Also, employees have expressed that base pay is a principal concern.”


    DCamp continues to remake compensation to fit the growth goals of a company where labor represents 64 percent of total costs and competitive pressures keep pushing against profits. The Internet networking leader reported net sales of $24.8 billion for fiscal year 2005, up 12.5 percent from 2004, but issued subdued guidance for the current quarter.


    Cisco monitors compensation at large, successful firms in its industry and across industries where it shares a labor pool for executives, sales and technical talent. “We position ourselves to be at the 65th percentile for base pay in that market and at the 75th percentile for total cash,” DCamp says. “For total compensation, including stock, we are the top payer if the company performs well, and we have no problem with that.”


    But with software engineer salaries at Cisco running $102,000 a year and administrative assistants earning $51,000, Cisco keeps a tight rein on headcount. DCamp controls labor costs by closely monitoring value added per employee and staffing levels relative to competitor companies.


    “Cisco tends to have fewer employees than some competitors in our revenue category, partly because we’re selective about the businesses we serve in and don’t try to do everything ourselves,” she says. “We focus on the areas where we can truly add value, which gives us good profitability and a smaller employee population than firms that try to do too much.”


    Cisco also diligently maintains the intangible portion of its rewards package. “We know that people stay at Cisco because of the culture,” DCamp says. “Pay is important in attracting people–there’s no doubt about that–and if you let your pay slip off market, you will have unwanted turnover. But at Cisco, you get to work with smart people on interesting projects, and in every function you get to be closer to the customer than you do in almost any other company.”


Within this setting of lower budgets, the most successful companies
are shifting the pay mix to create
the optimal balance of fixed and variable compensation for retaining specific employee groups and
meeting growth goals.

Boosting variable pay
    Like Cisco, Aflac is redesigning compensation to pursue aggressive growth at lower costs, but the similarities between the two companies end there. While Cisco scrambles under close shareholder scrutiny in the highly volatile tech industry, Aflac is calmly issuing guidance for 2007. And while Cisco is shifting its pay mix to increase the fixed portion, Aflac is keeping fixed costs well down and adding more variable pay.


    Aflac draws from national markets for critical IT talent but staffs most positions in Columbus from the local area, where unemployment is well above 6 percent, and rising. Still, Aflac’s rapid growth exerts some pressure to maintain competitive compensation levels. The insurance giant collects $14 billion a year in revenue, with an enviable 10 percent growth rate.


    The company takes a very conservative approach to base salaries. The most common position, call center customer service specialist II, earns $24,755 in annual base pay. “You won’t see us coming in at above market,” says Graves, who oversees compensation for Aflac’s 4,100 U.S. employees. Instead, the company ensures high retention with lush benefits and drives performance by moving money into incentive plans that leave fixed costs low.


    The cornerstone of its variable pay is a year-end profit-sharing bonus for all employees that has paid out at or above target for each of the past 14 years and creates a clear hiring advantage. The company increased its profit-sharing targets for nonmanagerial employees and supervisors in 2004 and for managers in 2005. In February, while other employers were ditching their equity-based incentive plans, Aflac added stock option grants for all employees, tiered by job position, with three-year cliff vesting for greater retention.


    The firm buttresses these substantial performance incentives with short-term programs that include spot cash awards of $500 to $750 for a significant project. The company is now exploring new short-term incentives for meeting project milestones and productivity goals.


    “We are discussing additional incentives based on productivity measures such as the number of claims processed,” Graves says. “We want performance pay vehicles that are business-driven and reward specific behaviors on an immediate basis, perhaps once a month, as a variable additive. The discussion of new performance-based pay plans is taking place in the context of our revenue growth goals. Any areas of pain we may have, such as lagging behind on claims, are woven into the discussions of performance pay improvements.”


    Aflac’s retention-oriented benefits plan includes all basic benefits plus a defined-benefit pension and retiree health benefits for the entire employee population, an employee stock purchase plan, college tuition for employees’ children and grandchildren, and on-site child care and health clinics. For the most common nonexempt jobs paying in the mid-$20,000 range, the value of the benefits package contributes 26 percent of total compensation.


Stirring the mix
    While Aflac’s merit increases range up to 7 percent, with incentives adding to the meaningful differentiation between high and low performers, most companies are still operating without substantial amounts of performance-based pay. Mercer found that employers are using average increases of 4.9 percent for their strongest performers, 3.2 percent for average performers and 1 percent for the lowest performers.


    “Pay for performance is not being executed on a sustained basis,” Gross says. “Especially when budgets are flat, it’s too hard for managers to push the differential higher. So instead they are turning to one-off programs such as spot cash awards, with small base pay increases.”


    With the new short-term incentives producing relatively small awards, long-term incentives declining and salary-increase budgets losing ground against inflation, there’s not much money on the table for recruitment, retention and performance gains. Across the board, companies are holding labor costs down. Within this setting of lower budgets, the most successful companies are shifting the pay mix to create the optimal balance of fixed and variable compensation for retaining specific employee groups and meeting growth goals.


    At Cisco, this means reducing incentives to fund base pay increases. At Aflac, it means suppressing fixed costs and channeling the money into productivity-based incentives. In both cases, workforce management executives are tapping the flexibility offered by slack labor markets to experiment with the right compensation mix, and working in a far more nuanced reality than standard practices allow.


 


Workforce Management, October 24, 2005, pp. 33-40 — Subscribe Now!

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Playing Hardball on 401(k)s

Two weeks ago, aerospace giant Lockheed Martin Corp. made a decision that is getting all too common: The company replaced its traditional defined-benefit pension plan with a 401(k) defined-contribution plan for any new and rehired employees who begin work in 2006.


    The reason is simple. Lockheed’s pension plan has grown to $23 billion. Not only is the size of its pension obligation staggering–it is one of the largest in the U.S.–but the company’s ever increasing cost of funding the plan is a major concern to investors.


    Lockheed hires 10,000 new workers annually, and CFO Chris Kubasik told The Wall Street Journal that “10 to 15 years out, the savings from the new plan could be $125 to $150 million a year.” The company will still contribute 3 percent to 6 percent of a worker’s salary into the new plan, but the responsibility for how to manage and invest this money falls squarely on the employee.


    That’s one of the big benefits of a defined-contribution plan–freedom of choice. Workers are free to choose how much they want to contribute and what specific investments they want to put their money into. It’s a great system, in theory, but only if employees take the time to make sensible decisions. Unfortunately, many don’t.


    “People spend more time choosing a TV than choosing their 401(k) investments,” says Jeffrey Miller, president, Mercer HR Services. And, he adds, there are 20 million workers who could be contributing to a 401(k) plan who aren’t. “What are they going to do at retirement?” he asks.


    Miller, who spoke at this month’s West Coast Defined Contribution/401(k) Conference sponsored by Pensions & Investments and Workforce Management, thinks that companies with 401(k) plans need to be a lot more aggressive in getting workers to face the fact that their retirement is coming and they need to be ready for it. To back up his argument, he cited two sobering statistics: 1) That 48 percent of employees are not confident they know how much money they need for retirement; and 2) that three of four workers ages 55 to 64 have less than $60,000 saved for their 20 to 25 years of retirement.


    To Miller, there is only one answer to this problem–auto enrollment, where management makes the decision to automatically enroll workers in the company’s 401(k) plan unless the employee specifically requests to opt out of it. “Selling a 401(k) to workers as a choice does a disservice,” he said.


    He lists five steps that companies with 401(k) plans should take to help workers get ready for retirement:


  • Automatically enroll every employee in the company’s 401(k) plan, forcing them to opt out if they don’t want to participate. “And we need to put a box on the (opt-out) forms saying ‘I choose not to retire,’ ” Miller says.


  • Enroll every participant at a 7.5 percent contribution level. Miller notes that in Australia, the system automatically enrolls workers at a 9 percent contribution level. “They are either better at math, or better at confronting reality,” Miller says.


  • Make sure that every participant is mapped into a diversified, age-based investment.


  • Make sure that every participant gets a 2.5 percent auto-deferral increase annually.


  • See that every participant has a professional investment adviser available for retirement.


    If this sounds tough, it is. Miller recommends 401(k) hardball because he believes that top management must be more aggressive in helping workers plan for retirement–especially since more companies are following the Lockheed example and pushing their workforce out of traditional pensions and into 401(k) plans.


    “It’s not easy,” he says. “Saving for retirement is one of the hardest things you’ll ever do.


    “It’s not a choice,” he says, “it’s a requirement. Savings doesn’t just happen. The message to your employees needs to be simple: Save more.”


Workforce Management, October 24, 2005, p. 58 — Subscribe Now!

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Dangerous Currents in Offshored Knowledge Work

Some observers warn that even if sending higher-level “knowledge” work to countries such as India and China is a good strategy for some companies, it also could harm the United States’ middle class, its tech leadership and even the health of U.S.-based businesses themselves.



    Enlisting outside firms in places like India and Russia can make U.S.-based researchers more effective, says Eugene Kublanov, vice president of neoIT, a management consulting firm specializing in offshore outsourcing. But if the arrangement is managed poorly, he says, it endangers retention efforts in America because key U.S. employees might begin to doubt their future in the firm.


    What’s more, sending too much R&D work to a foreign partner raises the specter of “hollowing out” a business, whereby its creative power erodes, Kublanov argues. “If innovation is core to your company,” he says, “you have to be careful with even the pieces of R&D you send out.”


    While business executives and some economists defend offshoring as being vital to companies and good for the overall global economy, some analysts argue that trade with Asian nations is done on terms unfair to the United States, thanks to undervalued foreign currencies that make U.S. workers less competitive.


    Also of concern to some U.S. officials is the possibility that technological advances by China–resulting in part from American companies’ R&D activities there–could have military implications.


    Then there are questions about the feasibility of tapping foreign engineers for high-level work. A recent report from consulting firm McKinsey & Co. found that while there are twice as many experienced university graduates in low-wage countries as in high-wage countries, “only a fraction of this total labor pool is actually suitable to work for a multinational company’s offshore operations.”


    Among the factors that reduce the potential talent supply in low-wage nations: language abilities and “overall quality of the educational system and its ability to convey practical skills,” according to McKinsey.


    Worker advocates have been the most vocal opponents of offshoring. Marcus Courtney, president of the Washington Alliance of Technology Workers, a Seattle-based labor group, argues that shipping high-level tasks offshore threatens the financial security of U.S. workers and their communities. “The consequence of relentless outsourcing is the driving down of living standards,” he says.