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A Different Drug Plan

Call it my Casablanca reaction. Much like Captain Renault in that movie, I was shocked, shocked to hear of a study that found Viagra use has increased by 312 percent among men 18 to 45 years old, and that the increases probably reflect recreational rather than medical uses. Imagine that.



    Man (and woman) has sought out aphrodisiacs for centuries. Chocolate, oysters, ginseng, rhinoceros horn–if people think some ingestible will improve lovemaking, they’re going to try it.


    But there is an important difference here: The Viagra study, published in the August 5 issue of the International Journal of Impotence Research, looked at the drug’s use among more than 5 million commercially insured beneficiaries. And while no one tries to get his employer to pay for candy or Kumamotos, I’m willing to bet that your company picked up at least part of the tab for someone’s gone-wild weekend.


    It would be easy to blame party Viagra on people who misuse medications and doctors who won’t say no to pushy patients. But blame-laying won’t keep employees from going after so-called “lifestyle” drugs. They’re not cheats. But they are television-watchers and magazine-readers, and that’s what this is really about.


    Drug companies spend more than $2.5 billion a year on print and television ads, all aimed at the final consumer. The ads run virtually nonstop on cable channels and have the power to make you think you’re in the market for what’s being sold. I’ve answered yes to all the screening questions in the ads for Strattera, which is used to treat adult attention deficit disorder, and I bet nearly everyone else watching does the same thing. We can’t all be ADD-addled, but it’s easy to imagine we are, given that we live in a society where multi-tasking is the norm. A WebMD story about the Viagra study points out that the drug’s ads now feature younger spokesmen than they used to. That’s a change that viewers will pick up on: “That guy uses Viagra? But he’s my age. I wonder if I …”


    Companies are trying to counter the mesmerizing effects of TV ads. They design prescription plans that require higher copays for brand-name drugs and reward the use of less costly generics. As consumer-driven health plans take hold, employees may be even more motivated to bypass the brand-name drugs television pushes at them.


    But until those economic incentives really kick in, perhaps it’s time to fight fire with fire. Just as employers put together financial-planning programs, so could they create an educational packet that gives employees some insight into drug marketing.


    A place to start would be an explanation of generics: why they work as well as brand-name drugs, why they aren’t seen in TV ads (there’s little money in them for big pharma) and why “generic” doesn’t mean second-rate. That is what the term meant when supermarkets sold products in blue-and-white packaging with block-letter labels. When people hear “generic,” I suspect they think BEER. Or in this case, PILLS. Generics have a lousy image. They could use some, well, branding. Or at least testimonials to their first-rate qualities.


    A more radical suggestion is to include a copy of a new book, The Truth About the Drug Companies: How They Deceive Us and What to Do About It. The Wall Street Journal panned it mercilessly, but its author, Dr. Marcia Angell, is a former editor of the New England Journal of Medicine and now a lecturer at Harvard Medical School. Angell’s book is harsh medicine, and if you work for a Pfizer you might disagree–strongly–with her conclusions about how the companies operate. But at the very least, the book could help people view prescription-drug ads more critically.


    Leave the persuasive arguments solely in the hands of the pharmaceutical companies and you might have a Casablanca reaction of your own. You and your company will regret it. Maybe not today. Maybe not tomorrow. But soon, and for the rest of your life.


Workforce Management, September 2004, p. 8 — Subscribe Now!

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Casting Internet Hiring in a New Light

Imagine a recruiter who must fill a position for a customer-service representative. She has access to thousands of candidates who have sent their résumés via the Internet into a general pool. With the specific position in mind, she runs a search for all candidates who have at least two years of experience; 990 people in the pool match this criterion. The recruiter understandably doesn’t want to go through the lengthy list of applicants to fill a single job. Instead, she changes the qualification requirements to make it more difficult. She runs another search for people who have five years’ experience and a bachelor’s degree.



    From the recruiter’s standpoint, this makes perfect sense. She now has a smaller, more experienced pool of candidates to choose from. This saves time and enables the recruiter to fill positions faster, a boon to the job-seeker and the company. The trouble is, the recruiter may have unknowingly run afoul of proposed new hiring rules from the Equal Employment Opportunity Commission, warns Lisa Harpe, an industrial psychologist with the Peopleclick Research Institute. The agency’s regulations define at what point in the job-filling process people who contact a company through the Internet should be considered applicants.


    In this common scenario, Harpe says, the recruiter has already begun to decide who may and may not proceed in the hiring process. That means an employer should make sure it can establish that the criteria the recruiter used are job-related and don’t adversely affect women and minority applicants. “Who says an applicant for this position needs five years’ experience rather than two?” Harpe asks. “Once you start hiring for a specific job, you should never change the questions in the middle of the process.”


    The proposed definition, experts say, will require companies to be on guard for unexpected consequences of seemingly innocuous processes such as this. In addition, the guidelines put the onus on companies to define and justify their own hiring processes. Carol Miaskoff, assistant legal counsel with the EEOC, compares the potential changes to those spurred by the Americans with Disabilities Act. “Suddenly, companies had to define the essential functions of a job,” she says. “Until then, a lot of companies went 10 to 20 years without updating their job descriptions.”


    Many companies had hoped that the proposed definition would provide specific guidance on who should be considered applicants. Instead, the proposed guidelines raise far more questions than they answer. Rather than narrowly defining what an “applicant” is, the EEOC expects employers to assume that responsibility. Its proposed definition of a job applicant has three parts:


  • The employer has acted to fill a particular position.


  • The individual has followed the employer’s standard procedure for submitting an application.


  • The individual has indicated an interest in the particular position.


    The definition of an applicant will vary from company to company, and might even vary for different positions within the same company. The looseness of the definition, hiring experts say, requires human resources departments to closely scrutinize their internal procedures and the career ladders for positions throughout the organization so they can take a more strategic approach to hiring.


    The new guidelines bring up all sorts of new wrinkles that hiring managers must consider:


    ●Are you asking the right prescreening questions? Many employers now use a prescreening questionnaire to identify which online applicants may proceed through the hiring process. Such questionnaires, however, are subject to adverse-impact analysis to see if the prescreening questions or searches of candidate pools remove a disproportionate number of women and minorities.


    Experts say these questions should be carefully worded in light of the proposed guidelines. For example, applicants should not be asked to interpret their own expertise, such as whether they are a beginner or advanced user of Microsoft Word. Instead, they should be required to provide objective information, such as the number of years they have used Word, their certification level, or specific projects in which the application has been used.


    These safeguards seem to be common sense, but Kathy Barton, vice president of marketing at Peopleclick, notes that recruiters are sometimes enthralled by “the flashing lights of technology.” The Peopleclick software, for example, gives a recruiter the ability to add prescreening questions at any time. “But just because you can do it, that doesn’t mean you should,” Barton says. The software also has the ability to allow only selected administrators to change screening questions, a roadblock that many firms are now adopting.


    ● Are the screening criteria right for the job? A lot of organizations generally say that they want only applicants who are college graduates, even for a position such as file clerk that doesn’t demand such an education level. “You shouldn’t require a master’s degree for new applicants if half the people who currently have the job don’t have a master’s,” Harpe says.


    The reasoning for the higher criteria is simple. The company knows that the next job a file clerk grows into requires a degree. However, the new guidelines raise questions about whether companies can screen applicants for qualifications they might need for future positions. “This will require employers to think carefully about how they have their career ladders set up,” Harpe says. It raises all sorts of issues that human resources departments have not had to consider before, she notes. “They need to be really clear about what experience and qualifications they need people to come in with and what they can acquire along the way. This will require a lot of conversations and thinking about what is best for the company.”


    ● Have backdoor hires been eliminated? Sham Sao, global vice president of marketing and business development for Deploy Solutions, has seen this problem in the retail environment. Many retailers have job-seekers apply through on-site kiosks, especially for hourly positions. Legal problems can arise when individual store managers go through the back door and hire employees while bypassing the system. As a result, Sao says, many companies have begun activating safeguards in their software that require managers to have applicants go through the online kiosks before the paperwork to hire a new employee can even be issued.


    ● Should you centralize the Internet hiring process? Harpe recommends that only one or two administrative people be put in charge of the technology. Companies should also have a written policy for managers to follow in having questions developed and approved.


    ● Can you stop taking paper résumés? The proposed guidelines apply solely to online hiring and recruiting. However, experts believe that some companies will not want the complication of dealing with two different definitions, so they will simply switch to an electronic process and do away with paper applications. This could reintroduce the issue of the digital divide if such action shuts off certain demographic groups who do not have access to the Internet. As a result, Harpe says, employers may have to provide alternative forms of access to job-seekers such as on-site kiosks and telephone systems.


    Marie Radcliffe, manager of EEO compliance at Pitney Bowes, expects to only have to do some fine-tuning of hiring practices once the regulations are finalized. For instance, the company currently runs generic ads for sales representatives, but the final regulations might require that such details as the location of each job be included.


    Right now, Radcliffe says, companies should be comparing their process with the proposed regulations to assess the manpower and financial impact of the changes. “It wouldn’t be wise use of anyone’s resources to implement significant changes before the regulations are finalized—which may require reversals of those same changes,” she says. But these are issues that every hiring manager who uses the Internet should be thinking about now.


Workforce Management, September 2004, pp. 72-76 — Subscribe Now!

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Expense-Reporting Program Nets Big Savings

Like other companies that had gone global through acquisitions and internal growth, the Walt Disney Co. found itself facing the new millennium trying to tie together widely different business groups. The problem of linking its movie division, television networks, theme parks and resorts was particularly acute in managing a workforce spread out over 42 countries, using 10 languages. At one point, 15 major human resources systems were being used by various parts of the company, generating 400,000 expense reports annually, according to company data.



    So when Disney corporate decided to pull together all of its legacy systems and organize under a project called Operation Tomorrowland, human resources, along with finance, got top priority. Since its launch in 2001, the 31-month project, built by software giant SAP, has generated savings for Disney of $100 million and counting.


    One of the ripest areas for savings proved to be expense reporting, which involved roughly 50,000 of the company’s 112,000-member workforce. The company found itself with 23 different travel policies tailored to individual companies and operating units. Under the new system, everything is consolidated and put online. So far, the company has cut expense-reporting costs by $16 million a year. The new setup allows everyone at Disney to use the same credit-card system. By paying for hotels, car rentals, meals and other expenses–about $290 million a year–through one credit-card company, the entertainment giant can hold up payment until just before the due date, thus creating huge cash-flow benefits.


   The new system is Web-based. Travel authorization is done online, and there is a 24-hour turnaround time so that airline tickets can be purchased immediately upon authorization to take advantage of the best possible fares. If the traveler submits an expense for something that isn’t authorized, such as use of a telephone during a flight, the offender gets a message.


    “We have tolerances built into the system,” Keith Brisack, Disney’s worldwide manager for travel management, told a SAP convention audience of software vendors and clients. “If they go over that tolerance, the employee does get a message saying: ‘You have exceeded a reasonable amount for this expense item.’ “


    Some paper receipts, such as hotel bills, are still required. But they go through an imaging system and are bar-coded, with the bar coding attached to the digitized expense report. The paper is then thrown away, saving storage space. “As an employee submitting an expense report, there are all these receipts I don’t have to submit–it’s a dream,” Brisack told the group of about 75 technology wonks.


Workforce Management, September 2004, p. 38 — Subscribe Now!

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Shopper’s Special

W hen Trader Joe’s, the quirky specialty grocer from Southern California, goes shopping for new employees, it looks for more than generic clerks. While retail experience is a plus, what really impresses managers is a helpful, friendly attitude. Job postings suggest that prospective employees should be ambitious and possess qualities that might apply equally to a cruise ship crew: outgoing, engaging, upbeat, fun-loving and adventurous.



    Mark Mallinger, director of the MBA program at Pepperdine University, has studied Trader Joe’s. He recalls a conversation with the company’s former CEO, John Shields, about how managers interviewing job applicants watch for character clues. “John Shields told me that in the first interview, if they [the applicants] don’t smile within the first 30 seconds, they are gone.”


    The trademark smiling stock clerks and cashiers decked out in Hawaiian shirts can now be found in Trader Joe’s stores from the West Coast to New England. And more are on the way. From its humble beginnings as a regional hybrid convenience store, Trader Joe’s has grown into a $3-billion-a-year national chain with 217 stores. It is adding 8 to 25 stores a year, all stocked with an eclectic selection of bargain gourmet-style foods, wines and health-food supplements. Analysts who study Trader Joe’s management system tend to focus on the many ways the company makes money by saving money–using private labels instead of name brands for nearly every product in its stores, dealing directly with producers to cut out middlemen, renting cheap real estate in existing neighborhood shopping centers, and keeping stores small. A typical Trader Joe’s covers 10,000 square feet, a fifth the size of a modern full-service supermarket, and carries a tenth as many items.


    But there’s another secret to Trader Joe’s success: the upbeat employees who wander the aisles, eager to chat about the latest Brie or the newest flavor of hummus. “Probably the most important thing they do is generate a very engaging experience between the customer and the employee,” says Bill Bishop, president of Willard Bishop Consulting in Barrington, Illinois. Bishop and several other consultants and analysts say the upbeat, informal interaction sets Trader Joe’s apart from the rest of the grocery industry and serves as a powerful marketing tool.


    But the glue that holds the system together is generous compensation. Job postings indicate that part-time clerks earn from $8 to $12 an hour. Full-time employees, who typically work 47.5 hours a week, earn an average $40,150 in the first year, according to the company’s postings. That equals $16 an hour, well above the $12 average pay in the retail industry, according to the latest Bureau of Labor Statistics figures. These employees also earn an average annual bonus of $950 and $6,300 in retirement-plan contributions as well. It adds up to an average total package of $47,000 a year.


    For assistant store managers, the average compensation package works out to $94,000 a year. Store managers get an average compensation package of $132,000, an amount that one analyst put on a par with what the manager of a giant Wal-Mart might make running a store that probably grosses six or seven times what a Trader Joe’s takes in.


    How can such small stores afford such big salaries? The answer is that the cheerful and helpful clerks also know how to move groceries, which boosts margins. Trader Joe’s total sales at about 200 stores works out to approximately $15 million per store. With an average 10,000 square feet per store, that means each store generates an average $1,500 in sales per square foot. Compare that to Whole Foods, the profitable organic-food chain that offers some similar products but typically at higher prices. Whole Foods generates about $750 per square foot in sales, about half the Trader Joe’s rate.


    Trader Joe’s differs from Whole Foods and other grocers in another way. Its stock is constantly changing as its buyers travel the globe looking for new and interesting products that can be brought back, packaged and sold profitably at a relatively low price. To make sure that workers keep up with the stock, stores hold weekly tastings for employees to sample the latest goods. “After the store closed, we would try everything from the wine to frozen pizza to candy,” says Melody Derloshon, a former Trader Joe’s stock clerk who worked in a Northern California store. “It was like a buffet table.” Workers also get a 10 percent store discount, which serves as both an added bonus and an inducement to keep employees acquainted with the products. Trader Joe’s workers give the impression that they enjoy being at the stores, which suggests to customers that they should get with it and have some fun, too. “The people who work in our stores are the front line, the first customer contact,” says Trader Joe’s spokeswoman Pat St. John. “They are the soul of Trader Joe’s.”


    Fearful of being gobbled up by competitors, the company is famously tight-lipped about its business practices and how it wins the souls of its employees. St. John declined to elaborate beyond saying it’s no accident that Trader Joe’s employees are the way they are. But interviews with former employees, analysts and consultants and a careful reading of company job-recruitment postings reveal an outline of the Trader Joe’s business model.


it’s not just the brie:
“The people who work in our stores are the front line, the first customer contact. They are the soul of Trader Joe’s.”


    The essence is standard business management: a carefully crafted system of hiring, training and performance reviews, backed with competitive wages and benefits. But how those elements play out at Trader Joe’s is in many ways a distinct departure from the rest of the grocery business and in some ways a little wacky, like a cross between a religious cult and a merchant ship. For example, full-time employees are called novitiates, while managers are called first mates and captains.


    The system was born of necessity. Founder Joe Coulombe launched a small convenience-store chain in Southern California in 1958 called Pronto Markets. Then came the 1960s and the arrival of the powerful 7-Eleven chain. Coulombe realized that he had to change or get run over, so he went upscale, swapping soda pop and chips for wine and cheese, and he tried to improve business by talking up his goods and encouraging his workers to do the same. The combination clicked and evolved into a business that specialized in gourmet items that Coulombe would find in his travels and stock in his stores, where his workers would cheerfully tout the products to customers. He changed the company name to Trader Joe’s, sold out to German grocery magnate Theo Albrecht and retired. There have been two CEOs since then, both drawn from the retail industry, who refined and developed Coulombe’s system, then spread it throughout the country.


    Today, Trader Joe’s strives to hire employees who understand the importance of a sunny disposition and appreciate the company’s products. The company’s job postings use exclamation points to tip off applicants about the need for enthusiasm. One recent Internet posting began like this: “Trader Joe’s is looking for part-time Crew Members in Darien, Connecticut, to work in our unique grocery store! Come be a part of the excitement! If you like people, are ambitious and adventuresome, enjoy smiling, and have a strong sense of values, Trader Joe’s may be for you.”


    Derloshon recalls that her job interview was “very informal, like a casual conversation. They wanted to know why I wanted the job, what could I bring to the store, am I familiar with the products.” She says she was never aware of a smile test, although she could sense that the manager was probing for more than retail experience. “They definitely take a second look at a person who has good eye contact and is upbeat.” Derloshon certainly qualifies, ending her voice-mail message with “and have an absolutely fabulous day.”


    Derloshon was one of Trader Joe’s part-time workers, who account for 75 percent of the company’s workforce. Applicants for full-time positions are more thoroughly vetted. The job application requires a cover letter that must include descriptions of a favorite Trader Joe’s product and the store where the applicant typically shops. The message: if you aren’t familiar with Trader Joe’s and can’t make a convincing pitch for what’s good about the stores and the products inside, Trader Joe’s isn’t interested in you.


    Managers are never hired from outside the company, which ensures that supervisors know and understand the Trader Joe’s system before they are given authority. Prospective managers go through a series of training programs, including a stint at what the company calls Trader Joe’s University. It is their job to teach new part-timers the Trader Joe’s methodology. While managers are reviewed annually, part-time employees are reviewed every three months, an unusually frequent rate of evaluation. Retail consultants say they know of few other major companies that provide feedback that often, particularly when so many employees work part-time. John Dantico, a principal with The HR Group in Northbrook, Illinois, estimates that up to 80 percent of companies using performance reviews require them only once a year, and that perhaps one or two out of a hundred might use them four times a year.


    The nature of the evaluations is also unusual. Categories in the one-page evaluation forms include standard objective measures such as punctuality and thoroughness. Other more subjective assessments include “is always friendly,” “creates a genuine fun shopping experience,” “engages customers when running the register,” “greets and asks customers if they need assistance while on the floor,” “educates self about product features and shares with customers” and “promotes high morale in the store.” Each category has a score of one to five. If an employee has a cumulative score below three, she doesn’t get a raise, says a former part-time cashier at a Trader Joe’s in Northern California.


    In 2000, Trader Joe’s hired Mallinger to measure how well the company’s culture was accepted and carried out by its workers. He had students mail out 150 questionnaires to the company’s employees in the San Fernando Valley, located north of downtown Los Angeles. To his surprise, he got 142 back–a far higher rate of return than expected for such a request. Mallinger believes that this is a reflection of employee dedication to the company. While he can’t discuss details of his findings, Mallinger says the results affirmed that workers understood the Trader Joe’s culture and their role in carrying it on. “Our conclusion was that, yeah, for the most part they got it.”


    Part of the motivation for employees to stay with the company is the prospect of advancement, which is very real as the company grows rapidly. But that could quickly change. “If growth were to slow, and they now had too many very well trained, very experienced or high-paid people and no place to put them, then you’d have a problem,” Dantico says. “People would get frustrated and leave.” For now, Trader Joe’s future looks promising.


   George Whalin, president and CEO of Retail Management Consultants in San Marcos, California, has been a fan of Trader Joe’s for years. He shops at a local Trader Joe’s and frequently mentions the company in his talks to retailers. At one recent conference in Phoenix, he brought bottles of wine from Trader Joe’s to use as props and, while there, visited a local store. “It was the same, this sort of family atmosphere, everybody talking to the cashier, everybody talking to each other.”


Workforce Management, September 2004, pp. 51-54 — Subscribe Now!

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More Companies Restore 401(k) Matches

With the economy showing signs of improvement, some of the employers that had cut their 401(k) matching contributions have begun restoring them. Although the total number of companies that eliminated the match was relatively small, it included many high-profile firms in the automotive, energy, financial, high-tech and media sectors.



    Employers often perceive their match as a profit-sharing mechanism that can justifiably be reduced or eliminated in difficult times, say observers. And employees, while not pleased with the cuts, generally regarded them as preferable to certain alternatives, such as layoffs.


    Nevertheless, companies generally cut their matches reluctantly and have been happy to restore them, they say. “I think a lot of the companies think of the match as something they’re not necessarily obligated to do, but altruistically [it’s] something they feel they should do,” says Paul Bracaglia, a partner with the human resources services unit of PricewaterhouseCoopers in Philadelphia. “I do think that companies that have cut their match have done it begrudgingly, and I don’t think they saw it as an easy way to reduce expenses.”


    Houston-based El Paso Corp., which originally cut its match in March 2003, when it faced liquidity problems, fully restored its program as of July 1, according to a spokeswoman for the energy company. Other companies that have either fully or partially restored 401(k) matches that were cut in recent years include Brooks Automation Inc., Charles Schwab Corp., DaimlerChrysler Corp., Delphi Corp., Ford Motor Co., Lincoln Electric Co., St. Thomas Health Services and Textron Inc.


    In addition, both CMS Energy Corp. and U.S. News & World Report have announced plans to reintroduce their matches in January. And General Motors Corp., which started out with an 80 cent match for every $1 contributed by employees, made two cuts beginning in March 2001. Ultimately, GM cut the match to 20 cents for every $1 contributed by employees. The Detroit-based automaker then increased the match in January 2003 to 50 cents, where it has remained since, according to a company spokesman.


    Some companies are still making cuts, though. For instance, Pewaukee, Wisconsin-based CIB Marine Bancshares Inc. eliminated its match earlier this year, a spokeswoman says. According to a 2003 survey by Hewitt Associates Inc., only 5 percent of the roughly 500 large companies surveyed eliminated or reduced their 401(k) matches.


    “If you look at the companies that cut the match, they tend to be companies who were in cyclical industries, or companies that were entering bankruptcy,” says Michael Weddell, a retirement consultant in the Southfield, Michigan, office of Watson Wyatt Worldwide, While some of these companies are now restoring their matches, “they’re being kind of cautious about it,” he says. “They want to impress investors that they’ve really restored the company to financial health before they turn around and start to increase their benefits costs again,” Weddell says.


    Karen Field, Washington-based director of compensation and benefits with KPMG, estimates that about a quarter of her clients that cut their match have since reinstated it, although the rest are discussing it. Some employers consider it a bonus, and have the attitude, “if times are good, I’m going to give you something; if times are bad, I’m not going to give you something,” Field says. Bracaglia says he has not seen any movement yet back to restoring the employer match, “but I’ve seen many (companies) talk about it.”


    Companies that are considering such moves know their employees’ perception is that the economy is doing better, “and they’re fearful if they don’t reinstate the match, it’s going to create some bad will,” Bracaglia says. Furthermore, “it’s a competitive posture,” he says. Employers are worried that if they do not restore their match, it could put them at a competitive disadvantage in terms of recruiting and retaining employees.


    Brooks Automation, which is in the semiconductor industry, cut its match with the understanding that once it was through with a restructuring program and the economic downturn ended, “then we would restore it at some point,” says director of investor relations Mark Chung. “We told our employees that it was not a permanent thing.” Once the economic environment improved, “We were able to return that 401(k) match to our employees, and, hopefully, going forward we can maintain that,” he says.


Employee reactions
    Observers say employees generally took the cuts in stride. Employees’ attitude “depended on the circumstances,” Weddell says. In the automotive sector, for instance, “companies have already done a pretty good job of getting employees to buy into the fact that their compensation is going to vary when they’re in a recession,” he says. They have a history of suspending the match in poor times but rewarding employees in good times, he says.


    When Brooks Automation of Chelmsford, Massachusetts, suspended its match, “there were a lot of bad things going on at the time, including layoffs,” at other companies, Chung says. “I think the majority of the employees understood the reasons why we were doing it. They didn’t necessarily have to be happy with it, but I think they understood the reason.”


    When Saint Thomas Health Services in Nashville, Tennessee, suspended its match last year, “there was a certain amount of skepticism in some camps. The folks that tended to be negative were negative,” says Glenn Carnathan, senior vice president and chief human resources officer. Others, though, recognized that the health care system, which was created by the merger of two systems a couple of years earlier, faced some financial challenges to meet its targets, he says.


    As part of a new retirement program, beginning January 1, St. Thomas increased its match to 50 percent for the first 4 percent of employees’ salary, up from the 35 percent on the first 5 percent that it offered before the match was suspended. It has also switched from cliff vesting, in which an employee becomes fully vested in a plan after a certain period of time, to immediate eligibility and vesting, Carnathan says.


    “I don’t think there were any surprises” on the part of employees when Tech Data Corp cut its match in 2002, says Leslie Reagin, director of compensation, benefits and employee services for the Clearwater, Florida, company. It was one of the alternatives other companies used as well to avoid reducing head count, she says.


    However, cutting the match may have some unintended consequences. Susan Alford, an Atlanta-based senior VP with Aon Consulting, says there are indications that employees, who already fail to save enough to begin with, respond to employer match cuts by reducing their own contributions. The issue is “all wrapped up into just getting employees to save in general,” she says. “If there’s no longer the enticement to give up to 6 percent, they drop down to 3 percent, or whatever it takes to do the match. And if there’s no match, they may drop out entirely,” she says.


What’s to come?
    Observers differ about how employers are likely to treat their 401(k) matches over the next few years.


    Weddell, of Watson Wyatt, says that companies are likely to reintroduce matches gradually. “We’re going to see some match increases going forward, but I think it’s not going to be a sudden thing.” Companies “just want to make sure they can afford it,” he says. However, Field of KPMG says the matching contributions have come back more quickly than she had expected. Companies need it “as way of coaxing people to come to the company,” she says.


    “The willingness of the company to be generous with company contributions to their 401(k) plans is very much proportional to their need to attract, retain and motivate high-quality workers,” says David Wray, president of the Chicago-based Profit Sharing/ 401(k) Council of America. “I believe we’re moving toward a labor shortage, and the companies’ thinking processes are beginning to switch” from making cutbacks to finding ways to retain good people, Wray says. As a result, “I think the future’s pretty bright for company support of 401(k) plans.”


    But that may depend on the economy. “The lesson that we learned is that this is not a fixed commitment, generally, and that I wouldn’t be surprised to see the matches varying over the business cycle,” says Alicia Munnell, director of the Center for Retirement Research at Boston College.


    Changes in some employers’ approach to retirement benefits also could play a role. Lori Lucas, defined contribution consultant at Hewitt Associates, notes that some plan sponsors are phasing out their retiree medical and defined benefit plans, or switching to cash balance or other plans. They will look to their 401(k) plans to ensure their employees have an adequate retirement income, she says.


    “The trend is likely to be that plan sponsors will consider the match much more viable going forward,” she says. “It’s going to be a much harder decision to reduce the match .”


This story originally appeared in Business Insurance, a sister publication of Workforce Management.

Workforce Management, September 2004, pp. 68-71 — Subscribe Now!

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Recruiting for Paradise Honolulu Police Department Sees Payoff from Branding Blitz

For decades, the chiefs of the Honolulu Police Department have talked about “ohana.” The Hawaiian word for family, a central facet of Hawaiian culture, ohana has long been a reason why officers joined and stayed with the force.



    “We treat everyone like family,” says Glen Kajiyama, the department’s acting chief until Boisse P. Correa was sworn in August 27 . “Even though Honolulu is the 12th-largest city [in the United States], we try to spread that culture and appeal to people who want to be part of that.”


    But in the late 1990s, the police family found itself facing a crisis that in the coming years might hit private-sector employers in the mainland United States, where many companies have a large percentage of employees in their 50s and 60s. Currently, 164 of Honolulu’s 2,000 officers are eligible for retirement. Likewise, in the United States as a whole, the Census Bureau says, the percentage of people between 60 and 64 years of age will increase 51 percent between 2000 and 2010. Large numbers of baby boomers, according to the Bureau of Labor Statistics, will start retiring in 2008, possibly causing labor shortages in some industries.


    Threatening its long-term stability as well as the safety of Honolulu’s residents, which number about 900,000 in the combined city/county, more than 100 officers left for other police departments between 1998 and 2003. This was significant for a force of about 2,000. Scores more were fast approaching retirement age. And after September 11, 2001, the department had to compete for recruits with fast-growing federal law-enforcement agencies.


    Meanwhile, the demand for officers on the beat remained high. According to FBI data, Honolulu sees little violent crime but higher rates of property crime than other cities its size. In 2002, the city had twice the national rate of car thefts per 100,000 people and above-average rates of burglary and larceny.


    In response, the department’s leaders crafted a massive recruiting campaign built around its family-style culture, an effort that also sought to change how young people thought about police work and one that reached well beyond Hawaii. The campaign took recruiters from the parking lots of college sporting events to heavily publicized recruiting events in Portland, Oregon.


“Never compromise”
    Human resources experts say the department’s actions, especially the decision to build the campaign around ohana, paved the way for its success. Lisa Samuelson is vice president of the communications firm Parker LePla in Seattle. “Candidates are drawn to companies that havestrong brands,” Samuelson says. “Something about yourbrand promise sparks their interest and gives their head and heart reasons for liking your company.”


    For the Honolulu PD, it was necessary to walk a fine line: expand the pool of potential hires without diluting the quality of the recruiting class. “We had to do something, but we would never compromise our standards,” says Kajiyama. The department takes just 3 percent of the applicants into its training class and then sees some attrition during that six-month program. “We knew we had to accelerate our hiring or we would be in trouble as time went on,” he says.


    Though the city has boosted pay for police officers with a contract that builds in 4 percent raises for each of the next four years, it still lags other departments. While Honolulu recruits earn less than $36,000 a year to start, the same position pays around $52,000 in San Francisco, according to Major Dave Kajihiro, who oversees the recruitment program.


    Recognizing that Generations X andY offered a limited recruiting pool to start with, the police department began to modify its message to would-be officers, emphasizing the public-service aspect over what Kajihiro calls the “rough and tumble” of police work.


    To find the physically fit young people, it targeted sporting events. Because Hawaii has no professional sports teams, college and even high-school sports draw large crowds. The department brought its recruiting van and occasionally some of its high-tech equipment to University of Hawaii football games and beach volleyball tournaments. Announcements during the games would direct those interested to the recruiting officers on-site.


    Another part of the effort involved recruiting forays to the mainland, especially the Portland, Oregon, area. Advertising campaigns would begin weeks in advance, highlighting the culture of the department and appealing to individuals with any ties to the island, such as military personnel who may have been stationed on Hawaii. The efforts paid off, with the first two recruiting days drawing scores of people from as far away as New York and Florida. Meanwhile, a dozen officers who left the department for Portland have returned after that city’s department was downsized following budget cuts.


    The department spent about $60,000 over the course of a year from its own budget on advertising and other media, including television buys. It also used federal grants to underwrite the off-island trips.


    Chief Kajiyama says the decision to dedicate funds to the recruiting effort was an easy one, even though the money spent could have been used to pay for a new cop. “We saw it as a necessary investment,” he says. “It would have been a bigger regret if we’d never tried than if we tried and it didn’t work.”


Honest up front
    The campaign is constantly being evaluated and tweaked. For instance, a centerpiece of the early drive was to appeal to people for whom the public-service aspect of police work was more important. “We wanted to appeal to people who were considering teaching or some other kind of public service,” says Kajihiro. “We realize we may have gone too far to that softer side, and we’re emphasizing the rough-and-tumble aspects more.”


    The department has also learned that explaining the downside of the job–such as the sky-high cost of living in Hawaii–to recruits and their spouses helps keep more recruits in the program to the end. The police department would rather be honest with candidates up front than surprise them later and have them quit; historically, about 30 percent of recruits drop out of the training within the first few months.


    Because the training program lasts more than half a year, the department is only now beginning to see the fruits of its labors. The department currently has 256 vacancies, but 174 recruits in various stages of training. That leaves a net uniform vacancy of 82. By comparison, the vacancy number was as high as 350 officers less than five years ago, according to Kajiyama. The additional officers will help the department cut down on overtime and extra duty shifts, reducing overall salary costs, especially in the long run, as younger officers replace those who may be putting off retirement until the department is fully staffed.


    “We intend to put more officers out in the field, out on the street,” Kajiyama says. “When we do that, we’ll know it’s been worth the effort.”

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Pension Pain for Multinationals

The French city of Toulouse is known both for the distinctively rosy glow of its brick and tile Renaissance and 16th- and 17th-century architecture and for the multinational companies–American names such as StorageTek and Motorola–that have helped turn the community into an aerospace and electronics boomtown for 21st-century Europe. Last spring, however, Toulouse’s picturesque streets were filled not with tourists but with thousands of workers, protesting proposed reforms to the nation’s troubled public pension system. The aggrieved employees directed their ire not just at the French government but also at any private employers that dared think about asking older workers to stay on the job into their 60s to make corporate pensions more affordable. “They exploit us, they fire us!” the marchers chanted, according to an Associated Press account. “It’s up to management to pay our pensions!”



    Over the last few years, such demonstrations have erupted across Europe, with similarly angry crowds shutting down airports and train stations in Milan, and retirees massing at Berlin’s Brandenburg Gate to wave union flags and blow whistles in protest. Beneath the bombast, there’s fear and uncertainty. For generations, workers across Europe have counted on retirement benefits far more lavish than what Americans have generally received, stipends that sometimes matched a large portion of–or even actually exceeded–their working wages. In addition, they’ve become accustomed to retiring by age 60, far earlier than Americans. Governments provided most of the benefits, financing them out of hefty payroll taxes that Europeans have come to expect as part of the social contract.


    For years, neither the public nor the private sector worried much about the cost. But all that is changing. Thanks to low birthrates and intense opposition to immigration, the European population is aging even more rapidly than that of the United States, and the ratio of taxpaying workers to retirees is shrinking. Many countries worry that they will be unable to cover the cost of supporting the elderly. But elected officials also fear the public wrath triggered by austerity measures such as cutting benefits or raising the retirement age.


    Instead, governments across Europe are looking increasingly to private employers, including U.S.-based multinationals, to assume more responsibility for retirement benefits–and pick up more of the cost. Pension and human resources consultants in the United States and Europe warn that for American companies, the demographic time bomb on the other side of the Atlantic may have serious financial consequences, increasing labor costs to the point where it may be difficult to do business at all in some countries. As the multinationals grapple with the pension woes of an aging Europe, they’ll face challenges even more complicated and daunting than those caused by the graying of America. U.S. companies already are hindered by a mishmash of varying retirement regulations across Europe, which necessitate setting up separate funds and offering different benefits from country to country. Additionally, they must overcome significant cultural barriers, such as convincing employees to wait longer before retiring and to save on their own to finance benefits that they traditionally got from the government. The experts, unfortunately, don’t offer any easy solutions, but they say that a carefully planned strategy for change may help minimize the pain.


Multinationals pay attention
    Of the more than two dozen U.S.-based multinationals contacted by Workforce Management, none were willing to discuss the problems they might face from the European public-pension crisis. “We don’t speculate about what we might do in any of our business areas, and benefit plans is clearly one of those areas where speculation is not appropriate,” ExxonMobil spokeswoman Sandra C. Duhe wrote in an e-mail message. Others simply deny that there is a problem at all. “Our people don’t characterize what’s happening in Europe as a crisis,” says Ford Motor Co. spokeswoman Marcey Evans. Most were unwilling to divulge anything more than the most general details of how they navigate the continent’s bewildering maze of tax and pension regulations, which vary significantly from country to country. “For our German workforce, we adopted the same benefits offered by other companies that do business in Germany,” says Oliver Neumann, a spokesman for farm equipment manufacturer Deere & Co., whose Mannheim plant is the largest manufacturer of tractors in that country.


    Pension and human resources consultants working in Europe who are privy to the inner workings of U.S. multinationals there tell a different story. “We’re sort of in the deer-in-the-headlights stage right now,” says Stacy Apter, an international pension consultant for PricewaterhouseCoopers. While the cost of providing for older workers will rise in the United States, she says, U.S. companies already have mature pension plans with some built-up assets. “In America, a 40-year-old may have been saving money since he or she started working. In Europe, you’re not going to see that. Instead, you’re playing catch-up. Not only do you have to fund the pensions for all these 40-year-olds, but you have less time to do it because they retire earlier than in the United States.”


    Apter is reluctant to predict precisely how much costs for companies may rise, but she says the worst-case scenario is that it may become too expensive to do business in some countries. “Something really has to happen with this issue. We can’t afford to ignore it any longer.”


    Consultants and academics say that European governments are unlikely to let their pension systems fail. But neither are they likely to reduce benefits as drastically as funding shortfalls might seem to require, they say. Some countries, such as Italy, have tried to reduce the stress by increasing the retirement age and switching to defined-contribution systems, and have found themselves in a public firestorm. “By doing all this dancing around and delaying changes, when you finally have to announce austerity benefits, people tend to blow up and get into the streets,” says Watson Wyatt vice president Sylvester Schieber, who co-authored a 2004 study on aging workforces by the World Economic Forum, an international group of business and government leaders.


    “The union movement feels they’ve spent the last century negotiating these benefits, and they don’t want to give them up.”


no european unity:
“If you have employees in 12 European countries, you’ve got to have 12 different retirement funds, each with
its own meetings for executives to attend, documentation and administrative requirements.”


    Instead, the experts say, a more likely outcome is that European governments will require private employers, which already pay as much as a third of workers’ public pension taxes in some countries, to pick up an increasing amount of retirement coverage. There’s already at least one fairly successful model: the United Kingdom, which began reducing reliance on public pensions in the 1980s. Today, 80 percent of British workers have private pension coverage, an even higher proportion than the 61 percent in the United States, according to the World Economic Forum-Watson Wyatt study. One crucial aspect of solving the pension crisis in Europe, almost everyone agrees, is getting workers to save more for their own retirement. At a typical big U.S. company, 401(k) retirement accounts provide a little more than half of employees’ retirement income, according to a 2004 Hewitt Associates study. A 1999 study by the German Institute for Retirement Provisions, in contrast, found that only 10 percent of workers in Germany and the Netherlands were saving their own money for retirement, compared to 42 percent of workers in the United States. In France, less than 1 percent of the nation’s 26 million workers have signed up for retirement-savings accounts, Business Week recently reported.


    European countries are starting to give tax breaks to workers who save for retirement, but they’re slow to grasp all the nuances, says Tim Reay, a principal based in the London branch of the U.S.-based consulting firm Hewitt Associates. “In Spain, for example, employees can have a 401(k)-type retirement account, but they can’t direct their own investments. The feeling is that if Fred and Joe both have the same job, it’s unfair that one of them should have less money in his account at retirement because he wasn’t as smart an investor.”


    Multinationals face other difficult hurdles in increasing their retirement coverage. For years, European employers have been required to base private pension funds in the same country as the workers who’ll be collecting benefits from them, Reay says. “Basically, if you have employees in 12 European countries, you’ve got to have 12 different retirement funds, each with its own meetings for executives to attend, documentation and administrative requirements.” (IBM has about 16 billion euros in 20 different retirement funds scattered across Europe, according to a recent article in the London Sunday Times.)


    The EU is moving over the next few years to allow assets to be consolidated into pan-European corporate funds, which may save multinationals tens of millions of dollars. But differences in tax codes and regulations in various countries will still make the job of administering benefits maddeningly complex. Ruud Kistemaker, a Netherlands-based international benefits manager for Aon Consulting Worldwide, notes that in his country, companies in traditional industries such as construction are compelled to make contributions in behalf of workers to industry-wide pension funds–but companies in new technological fields may not be.


Blame it on Bismarck
    Unfortunately, multinationals probably won’t get real relief from European pension woes until the European Union develops a uniform public pension system, says Olivia Mitchell, a professor and executive director of the Boettner Center for Pensions and Retirement Research at the University of Pennsylvania’s Wharton School of Business. “It sort of defeats the whole purpose of the EU because you can’t really have a free flow of capital and labor across Europe when you have different tax laws and retirement benefits.” European employees already are sometimes reluctant to accept transfers across borders, consultants say, for fear of disrupting benefits dependent on years of working in a country. A 1999 Mercer Human Resource Consulting firm study of U.S. multinationals operating in Europe showed that 83 percent found cross-border transfers to be a difficult personnel issue.


    The roots of the European pension problem go all the way back to the late 19th century, when German Chancellor Otto von Bismarck had the idea of paying people who were too old to work a stipend for living expenses–not out of benevolence, but to dissipate growing public support for socialist political parties and trade unions. Bismarck’s old-age pension had an ingenious catch: a worker had to reach age 74, well beyond the typical life expectancy at the time, before the government had to ante up. In the generations that followed, European politicians showed considerably more largesse, continually expanding benefits.


    “It reached a point where in Greece, until a decade ago, you actually would come out with 102 percent of your salary in retirement,” says Reay.


    Because they predate the European Union, public pension systems vary tremendously from nation to nation across the continent, according to a survey of European systems compiled by Mercer, a global firm. An Italian middle manager, for example, will get 55 percent of salary after 35 to 37 years of service, paid for by a 37 percent payroll tax–28 percent out of the employee’s pocket, 9 percent from the company. A person with the same job and base salary in Austria gets only 44 percent of his salary, for which both the employee and the employer pay a 17.65 percent levy. In France, retirees get both a government pension and a stipend from an industry-wide retirement fund to which employers are required by law to contribute. In both Spain and Belgium, employers pay 35 percent to support employees’ pensions, but in Spain, the employee contributes just 3 percent of his or her salary, while in Belgium, the personal tax is four times as high.


    Additionally, in the 1970s, governments began to lower the retirement age, in an attempt to create more openings for unemployment-plagued younger workers. Nearly half of all Americans between the ages of 60 and 64 are still working, but only 22 percent of Germans are still on the job and less than 15 percent of French workers are still earning salaries, according to the World Economic Forum-Watson Wyatt study. “If you go into businesses in France, you’ll see hardly anybody working who’s older than 55,” Reay says.


    But cracks began to develop in the retirement utopia in the 1990s. Birthrates declined in European countries. In Italy, for example, women on average have just 1.2 children, compared to 2.0 in the United States. And with European countries reluctant to allow immigration to boost their workforces, the continent’s population has aged even more rapidly than that of the United States. In a 2002 paper, Peter Peterson, chairman of the Blackstone Group, a New York-based investment firm, calculated that by 2030, the percentage of the U.S. population over 65 will match the present proportion of older people in Florida, around 18 percent. Germany, in contrast, will achieve “Floridization” by 2006.


    European public pensions, like Social Security in the United States, are predominantly pay-as-you-go systems financed by continual contributions from younger workers and their employers, which means that increasingly less money will go into the funds and more will be coming out. According to United Nations statistics cited in the World Economic Forum-Watson Wyatt report, the ratio of workers to retirees in Italy will fall from an already low 2:1 to 1:1 over the next several decades, which could push the public pension systems to the brink of insolvency.


    But there are things companies can do to minimize their financial and organizational pain while awaiting European pension reform, Reay says:


●Take a pension inventory. Reay says a company’s first step should be to compile a complete database of all its retirement plans throughout Europe (and elsewhere in the world, for that matter). Many companies still don’t keep a close watch on all their offshore pension obligations, he says, because they may not be considered material under accounting rules.


●Devise a unified, cross-border pension strategy. What does the company hope to gain from its pension program? Is competing for talent the top priority, or is it the need to convince its older, most experienced European workers to remain on the job longer? After that, a company should look at all its European plans and see how well they fit the strategy. In doing that, Reay says, it’s crucial to factor in the nature of the business in Europe. “If you’re in, say, the oil or pharmaceutical industry, where people tend to move around the world a lot and identify with the company more than the country, you really have to look at your global competitors [as the benchmark],” he says. “In the auto industry, in contrast, your workers tend to be from the country where the plant is located, and stay there for their entire working lives.”


● Don’t try to make one size fit all. A company can’t simply duplicate its U.S. pension practices in Europe. For one thing, the necessary changes may not even be legal in some countries. Additionally, Reay says, the perception that a plan is being imposed from on high won’t sit well with European employees.


● Invest in changing European workers’ attitude toward saving. Reay says experience has shown that tax breaks aren’t sufficient motivation for European employees to participate in company-sponsored retirement-savings plans. “Europeans just aren’t that familiar with the concept of having to take care of themselves in retirement,” he says. “They’ve always assumed that the state would look after them.” Instead, he says, companies may have to front-load their employee savings plan with more generous incentives than they would in the United States. A company might create retirement-savings accounts for employees, for example, and contribute the equivalent of 5 percent of their pay, in addition to matching the employees’ contributions.


    If established U.S.-based multinationals don’t find a way to deal with pension woes in Western European countries, they risk getting hit with a double whammy, says Mark Sullivan, head of international consulting at Mercer Human Resource Consulting in London. In addition to having to pick up more of the cost of workers’ retirement, established companies run the risk of being squeezed by competitors that have set up shop in the former communist countries that have joined the European Union. Not only have countries such as Poland already gone through the pain of scaling back their state pension systems, but they have an added, albeit grisly, advantage. “Life expectancies aren’t as high there,” he says, “so they’re providing for shorter retirements.”


Workforce Management, September 2004, p. 43-48 — Subscribe Now!

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A Few Years Late, Portals Gain Ground

As one of the original designers of what would become the world’s largest virtual doorway, Michael Marfise, vice president of product and program management for Workscape Inc., says he faced a daunting task at General Motors Corp. The software communication system had expanded with widely differing and independent pieces. Divisions like manufacturing and marketing had their own Web sites, intranets and internal portals. “They must have had a couple of hundred different, independent sites,” he says. “The result was that the No. 1 place employees went for company information was the public media. They would read about it in the newspaper.”



    Workscape and its partner in the GM project, Sun Microsystems Inc., set out to change that by building a centralized electronic single point-of-entry, a virtual front door, or portal, for all of the company’s 275,000 employees in the United States. These days–three years after the launch of GM’s portal, called MySocrates–as many as 120,000 GM workers a day enter through the portal and onto its Web pages, with human resources getting much of the traffic. Along the way, the technology has saved GM millions of dollars, the company says, and won awards for cutting-edge technology for itself, Workscape and Sun.


    Given all that success, it’s natural to think the rest of the world would be quick to follow. That didn’t happen. Web portals designed specifically for internal corporate communications, particularly in finance and human resources, have been growing in fits and starts over the last few years as major components of workforce-management strategies. Portal development experienced a surge in 2000 and 2001, with the GM project being one of the largest. Then the economy cooled, and along with it investment in technology.


    But that is changing. Watson Wyatt reports that there is a surge in corporate spending on employee portals and intranet systems, driven by the growing economy. A META Group trend report shows that 46 percent of the companies it surveyed spent more on portals in 2003 than they had in the previous year, with strong spending predicted for the next three years. Those findings were borne out in interviews with some of the leading players in the field–PeopleSoft, Authoria, SAP, Softscape and Workscape.


    “Investments in these products were definitely put on the back burner for a while,” says Christopher Faust, vice president of global strategy for Softscape. “Human resources executives are now seeing that portals are a strategic piece of their human capital management systems.”


    Tod Loofbourrow, president and chief executive officer at Authoria Inc., a fast-growing technology company with a human resources focus, says the company had a “huge second quarter.” Interest in the firm’s employee adviser and manager adviser products, which can be accessed through portals, is particularly strong, he says. The employee adviser answers workers’ questions about a variety of issues such as health benefits. A pregnant employee might message the system that she is having a baby and ask for advice. She will get back a list of steps to take to access available services and benefits.


    Defining a portal can be difficult. The term is often used interchangeably with corporate intranet. The most highly evolved portals, like the one at GM, represent a significant upgrade over intranets, which often have an impersonal bulletin-board or storage-room feel to them. Intranets dispense the same general information to all employees, from senior managers down to entry-level clerical workers, a one-size-fits-all approach. They are places where someone can order up an expense form or check out health-care providers but may not be able to get the kind of personalized information available through a portal.


    With a single sign-on, advanced portals know who you are and often what you want or need to know before you know it. The new systems are about ease and speed and in certain ways mimic commercial portals like Yahoo. They are tailored to individual employees. Among the bells and whistles are real-time information flow that goes in both directions and a screen full of helpful services, including internal company communications, employees’ personnel records, access to training programs, job-performance rankings, benefits updates and personalized plug-ins to search engines.


    Some of the push for portal development is coming from a much savvier generation of employees, many of whom grew up with the Web and sign on to commercial portals like Yahoo and Amazon as easily as their parents open a newspaper. “Companies are realizing that in order to retain and attract the younger generation, they have got to provide an online environment that is not in the dark ages,” says analyst Michael Rudnick, national intranet and portal practice leader at Watson Wyatt. He says that widely used portals like Yahoo and Amazon have spoiled people. “People complain that when they go on their corporate intranet, it doesn’t work like Yahoo. They get frustrated.”


“Human resources executives are
now seeing that portals are a
strategic piece of their human capital management systems.”


    Despite the upsurge in interest, many companies are sitting on portal software–often purchased as part of a much bigger technology package–but haven’t been willing to spend the money to develop the employee gateways.


    A white paper released last year by Plumtree Software, one of the big players in Web-based communication products, estimates that 40 percent of portals are empty. The costs of launching a portal often come in high multiples of the investment in the actual software because of the hours charged by the programmers and technicians required to develop and maintain it. For that reason, reliable numbers on the cost of the systems are hard to come by. List prices, themselves often subject to deep discounts, tell only part of the story.


    Wellpoint Health Networks Inc., which has added employees in big gulps as it grew through acquisitions, is one of the companies that decided to take on the added investment of developing a portal as part of their employee self-service software. Wellpoint is in the process of going live with a company-wide portal that could provide the same point of access to its 20,000 employees.


    Wellpoint estimates that it has spent about $8.5 million with its chief software vendor, PeopleSoft, over a period of years, constantly updating its employee self-service and intranet system. As the company grew from 6,000 employees to 12,000 to 20,000 by buying Blue Cross systems across the United States, the process of accessing important information became cumbersome, even comical, says Chuck Moore, staff vice president of human resources at Wellpoint. Information was available, but often confusingly so.


   Moore sees portals as a natural part of the evolution of employee self-service technology. The track record established by Wellpoint’s technology improvements forms a sound basis for continued investment. By going to an essentially paperless pay system based on self-service, the company saves $1.17 per employee per paycheck, or more than $600,000 a year, Moore says. Wellpoint used to pay outside vendors $20 a head for handling open enrollment on its health insurance. With the PeopleSoft system, it went in-house and also will save an estimated $600,000 this year alone. The biggest savings may have come in the area of retention. The company used to have embarrassingly high turnover rates. These days, the software system enables the company to stay on top of employee problems and needs so effectively that the turnover rate has fallen by half. Moore estimates the savings, based on recruitment, training and other hiring costs, to be around $65 million.


    As the employee self-service and intranet systems developed, the volume of information became so great that it could be hard for employees to find what they were looking for, Moore says. “With a portal, we can tell if the person accessing the information is a supervisor or not, union or not, exempt or not,” he says. “It knows who you are and what you can or can’t do.” Information, or access to information, can be dispensed in a much more focused way.


    Consider GM’s portal. Once connected to MySocrates, GM employees and managers can use simple point-and-click keyboard commands to link up to a vast array of information. Relatively simple things such as keeping up with pay records, merit awards and the latest statement from the CEO are available, as well as far more sophisticated tasks like using a pension calculator to work through various retirement scenarios. When the company changed its retirement formula not too long ago in an effort to reduce its workforce, its pension calculator enabled eligible employees to model various scenarios online rather than have to call GM’s benefits-processing center. Employees performed more than 90,000 calculations online. It saved processing costs and sped up decision-making, allowing GM to hit its goals sooner.


    Coming up with hard numbers to produce a return on investment high enough to satisfy CEOs remains a problem for portal developers. Executives sigh when the issue arises. Once a portal is plugged in, advocates say, it’s hard to go back. “It’s like the phone system,” Moore says. “Does a phone system pay for itself? Take it away and see what happens.”


Workforce Management, September 2004, p. 57-58 — Subscribe Now!

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Good-Bye to the Golden Age of Options

The golden age of stock options is over. Just ask Russell Posner. As senior director of corporate compensation at Merck & Co., Posner oversees the $22.5 billion global pharmaceutical company’s executive and stock-based pay programs. For the past year and a half, he has grappled with how to comply with imminent accounting-rules changes mandating that public companies expense stock options and yet still provide a competitive long-term equity compensation program for executives and other employees.



    Rules from the Financial Accounting Standards Board requiring companies to recognize the cost of stock-option grants on their financial statements aren’t due until the end of the year and won’t take effect until 2005 or later. But Merck didn’t wait. Since spring 2003, Posner’s department has polled employees, proposed a new plan that includes restricted stock and performance-based stock as well as options, implemented changes, and spread the word to employees through e-mail memos and face-to-face seminars.


    The outcome: this year, Merck switched 4,000 of 55,000 employees worldwide previously eligible for stock options to the new program. Another 1,100 will make the jump in 2005, and more after that. Merck isn’t expensing options yet, and officials at the company, which is located in Whitehouse Station, New Jersey, haven’t publicly stated what effect the revamped program has had on earnings. But employees have embraced it. “We have employees asking to be included,” Posner says.


    For years, options were the long-term incentive of choice for everything from Internet start-ups to established old-industry conglomerates. But they aren’t the carrots they once were, and not just because of accounting changes. For the past few years, options at many companies have been underwater–grant prices exceeding what the stock currently trades for–making them a less attractive job perk. Options have also come under fire from shareholders, whose holdings have been diluted as companies issued more shares to fund present and future employee grants.


    As a result, companies are shying away from options. Many are curbing the amounts they grant, or limiting who is eligible, or both. Employees could see their yearly options reduced as much as 40 percent, according to a recent survey by Mercer Human Resource Consulting. “Companies are making tougher calls; they’re going to really target their A players,” says Russell Miller, a Mercer senior executive compensation consultant in New York.


    Lower-level employees will bear the brunt of the cuts, according to a July survey from Mellon Financial, which polled 108 companies with a median size of $1.1 billion. “When they look to cut costs, where’s the first place they’re going to look? Not at the top-five [officer] level, but across the rank and file,” says Ted Buyniski, a principal with Mellon’s compensation consulting practice in Boston.


    What works for one company isn’t necessarily the best for another, Buyniski says. “Because of the way the expensing rules are structured, every company has to look at their costs in the context of their business versus their industry or sector,” he says. Whatever they choose, the transition is keeping corporate compensation departments on their toes. Compensation directors should be analyzing what the cost of continuing an existing program would be, and what they could do to deliver a comparable perceived value at a lower cost, or whether their programs are already structured to do that, Buyniski says. “The storm is coming, and they need to make sure their people stay dry.”


“Companies are making tougher
calls; they’re going to really target their A players.”


    In place of options, some companies are offering other equity compensation, such as restricted stock units, which are grants of shares that vest at the end of a given period if an employee remains on staff. Employers are also adding performance-based shares, grants that vest only if the company meets certain performance targets over a given period. In 2004, for example, Eastman Kodak Co. is granting so-called “leadership stock” to 800 executives that will pay out in 2007 if the company hits certain earnings-per-share numbers in 2006.


    Other companies are steering away from equity incentives altogether, giving employees salary increases or bonuses, or larger contributions to a 401(k) program. In December 2003, Pepsico Inc. overhauled its long-term compensation program when it began expensing options. As part of the redo, Pepsi cut by approximately 50 percent the number of stock options it issues to employees under its 15-year-old PowerShare program in order to fund a new 401(k) plan match of Pepsi stock. At the same time, Pepsi cut stock grants to executives in order to fund a new long-term cash bonus for them, and said it would give managers the choice of receiving grants as options or restricted-stock units. In fiscal 2003, before the changes took effect, Pepsi reported that options cost $510 million, or about 20 cents a share, the equivalent of 10 percent of the company’s $2.05-per-share earnings for the year.


    Managers at Merck began reviewing its long-term incentive program in early 2003 by putting together an ad hoc committee of executives from the legal, finance, tax, employee stock administration, human resources and communications departments to work with Posner and the compensation group. Their directive: come up with a new program to keep Merck’s share-based pay level with that of pharmaceutical-industry competitors and other companies its size, keep employees happy and minimize costs when the time comes to expense options.


    The group’s first step was an online poll of 26,000 U.S. employees on long-term incentives: Did they like options? Were there other things they’d rather have? In all, 12,000 employees responded to the fall 2003 survey, a number Posner calls “very high.” At the time, several of Merck’s most recent options grants were underwater, and poll data showed strong support for adding other equity incentives. The ad hoc committee complied. They restructured the long-term compensation plan so that beginning in 2004, Merck’s top 200 executives globally would be eligible to receive a mix of options, performance-based shares pegged to growth over a three-year period, and restricted stock units, also with a three-year vesting period, with one given for every three previously granted options. A lower tier of 3,800 U.S. managers who previously were eligible for options only would be eligible for a mix of 75 percent options and 25 percent RSUs.


    Merck didn’t need shareholder approval for the changes, which were covered under an existing omnibus stock plan. But the company’s board was required to sign off, which it did in late 2003, after clearing it with an outside compensation consultant.


    Because public companies are already required to expense performance-based shares and RSUs, the change wasn’t cost-free, though Merck hasn’t publicly disclosed the expenses on earnings. “There’s an impact on our bottom line, but we made it because we thought it was the right thing to do,” Posner says.


    Merck initially communicated the changes to all 4,000 employees through a series of documents e-mailed in early 2004. The company followed up by holding approximately 100 town hall meetings at its facilities around the country. Seminars were run by an outside financial-advisory firm because “they could bring expertise to the table, and were viewed as objective in the information they provided,” Posner says. The two-hour seminars included a formal presentation and Q&A sessions where the consultants and Merck compensation department officials fielded questions.


    Today, Posner is preparing to roll out the new compensation program to 1,100 Merck managers outside the United States, a task that had to wait until the company cleared legal and regulatory hurdles in some 90 countries. After that, the compensation team will begin weighing which of the company’s remaining 50,000 employees who are eligible to receive options will be next.


    Not all companies are dropping options and replacing them with something else. One company that unapologetically cut options without adding another type of benefit is Sears, Roebuck and Co. In January, Sears announced an overhaul meant to put it on a par with Wal-Mart and other rivals. Beginning in 2005, Sears will phase out its pension plan, reduce bonuses, increase pay for hourly workers and drastically cut options. Previously, all of Sears’ 17,000 salaried employees were eligible to receive options. Starting next year, only 2,500 employees at the director level or above will be eligible, says Chris Brathwaite, a Sears spokesman. “Most retail companies do not make annual stock-option grants to all salaried associates,” Brathwaite says. “To succeed and grow, we needed to be more competitive.”


    But at other companies, the appeal of stock options hasn’t dimmed, despite industry trends. Costco Wholesale Corp. grants options to about 1,200 store managers and buyers annually or biannually. That didn’t change even after the $42 billion warehouse retailer began expensing options in 2002. The Issaquah, Washington, company estimated that in fiscal 2003, expensing options decreased pre-tax income by 1 percent.


    If Costco were to modify anything, it would be to add RSUs or performance-based shares to options, but not to cut the number of managers eligible to receive them, says Richard Galanti, Costco chief financial officer. “Historically, senior management’s philosophy has been that having some skin in the game is positive,” Galanti says.


Workforce Management, September 2004, pp. 64-67 — Subscribe Now!

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Board Pay Rising With Risk

Regulators have placed more stringent requirements on members of corporate boards of directors than ever before. In return, members’ pay is rising.


The median retainer for board members rose from $35,000 in 2003 to $40,000 in 2004, according to Hewitt Associates, which surveyed more than 170 U.S. companies.


The makeup of this board pay is changing: Restricted stock is hot and stock options are not. Board members are paid in options at 59 percent of companies, compared to 68 percent in 2003. Restricted stock is used 34 percent of the time, up from 27 percent.


In addition to dealing with vigilant regulation, board members are working more. Edward Archer, managing director at the compensation-consulting firm Pearl Meyer & Partners, tells CFO magazine that board members are dealing with “more responsibility, more time and a lot more pressure.” He estimates that “an average director of a top 200 company (largest 200 U.S. industrial and service companies) spends one-third more time on the job now than he or she spent two years earlier.”


Sibson Consulting says that the regulatory changes affecting boards are keeping quite a few workforce-management executives awake at night. It is telling clients that they can attempt to keep board pay in check by playing up the positive benefits–beyond just money–of being on a board. These include the opportunity to make contacts; the chance to make a difference in the world; and the opportunity to increase one’s knowledge and skills.