Category: Archive

Posted on

Technology Evolution–Not Revolution

Over the last decade, information technology has transformed human resources. It has forced executives to re-engineer business processes and to look for more efficient ways to manage the workplace. While file cabinets and paper haven’t completely disappeared, it’s clear that eHR will one day reign supreme.



    Yet, for now, many organizations are still struggling to make sense of all the tools and applications available. Putting the various pieces of a technology strategy in place remains a daunting task. The results of the 2003 Workforce Management/Findley Davies HR Technology Survey indicate that organizations are making progress, but few are close to the leading edge of innovation. The survey was conducted electronically on an independent Internet site during the month of July 2003. Respondents were encouraged to participate through invitations in Workforce Management in print and online, through the Workforce Week newsletter and e-mail invitations distributed to Findley Davies clients.


    The survey represents 266 respondents from a diverse group of industries, including agriculture and banking, communications, education and transportation. About 70 percent of these organizations have fewer than 2,000 employees, and half have fewer than 500.


    The findings below help define the state of affairs in workplace technology.


Budgets remain tight
    On the front lines of business, the bottom line has always dictated an organization’s strategy. And in today’s tech-centric world, the story is the same. Coping with a prolonged economic downturn and dwindling revenues, organizations are keeping a close eye on budgets. Findley Davies found that spending on HRMS will remain flat over the next 18 months. About 36 percent of firms indicated that they’re maintaining current budget levels, while about 24 percent are tightening the reins on spending. Meanwhile, about 24.5 percent of respondents are increasing the level of funding for HRMS.


    Not surprisingly, a peek under the hood offers a glimpse of how spending varies. While many smaller organizations invest a mere $34 per employee for an HRMS, other, larger firms are forking over nearly $1,000 per employee. Yet the companies at the high end haven’t consistently leveraged their investments, says Tedd Long, managing consultant and director of HR technology practice at Findley Davies. “Many organizations said that they expect their budgets to remain the same but plan to introduce new features such as online benefits enrollment and e-recruiting. That means that they probably have the technology in place but haven’t begun to use it.”


    Some, like the Gosford City Council in New South Wales, Australia, are placing a heavy emphasis on ROI. “If we can’t measure the return on investment, we have to ask why we’re embracing a project,” says Peter McLean, manager of organizational development. The council has 1,200 employees (the equivalent of 975 full-time workers) and a human resources budget that’s just over $1.67 million. It serves 169,000 constituents in a community about 60 miles from Sydney. The human resources department uses predictive ROI models and direct metrics to gauge the payback of information technology. That has led to some significant gains. For example, using its HRMS to boost internal recruitment led to a 451 percent ROI over two years.


“The CFO is writing the checks and HR is executing the plan. That filters into the way each views the situation and how they execute a strategy.”


    One of the biggest surprises, Long says, is that ROI and cost containment were not listed as top priorities by human resources executives. In fact, only 13 percent of respondents cited cost-cutting as a primary objective. “Many companies are looking for gains in productivity and greater efficiency in record-keeping and transactions,” he says. “Others indicated that they’re striving to make HR more strategic.” Of course, this approach doesn’t necessarily jibe with the thinking that radiates from the CFO’s office. “The CFO is writing the checks and HR is executing the plan. That filters into the way each views the situation and how they execute a strategy,” Long observes.


   Nevertheless, many human resources organizations have managed to stay within the budgeting boundaries. More than three-quarters of the survey’s respondents reported that the cost of implementing an HRMS was in line with or lower than the initial budget. Although HRMS rollouts are frequently more complex than many organizations realize up front, executives managing the projects are doing a good job of keeping them on track, says Joe Spencer, senior consultant and director of organizational planning and development at Findley Davies: “Despite an array of technical and practical issues, they’re minding the store.”


The wired enterprise
    It’s hard to believe that only a decade ago, the primary tools for communication were phone calls, faxes and in-person meetings. Getting a spread-sheet from Dallas to Detroit often meant dropping 50 pages of paper in an overnight-delivery envelope and following up with a 45-minute conversation the next day.


    No longer. Today’s enterprise is wired, and executives, managers and employees are using online communication tools to redefine both the way work gets done and how people interact. Findley Davies found that at more than half of the companies surveyed, between 75 and 100 percent of their employees have access to an intranet, the Internet and e-mail.


    Not surprisingly, large organizations boast the highest levels of high-tech communications options, while small firms have the lowest. In addition, industries such as information technology, professional services, banking and finance are leaders in online adoption. What was unexpected, Long says, is that about 40 percent of health-care organizations and nearly one-third of manufacturing firms have embraced intranets, e-mail and the Internet. Traditionally, both have lagged in terms of providing these connections to workers. “Organizations across the board now view online access as an essential tool,” Spencer adds. “Without it, they believe, they’re at a competitive disadvantage.”


    Yet the value of e-mail, intranets and the Internet varies greatly, depending on the industry and the requirements of a particular organization. For example, at Lincoln Office, a work-space design and consulting firm in Peoria, Illinois, e-mail has become an essential tool for communication, and the Internet allows the company to tie together six locations in three states, says Pamela Johnson, chief financial officer. Although the 75-employee firm shares standardized forms via an intranet, the firm is putting less emphasis on internal capabilities. “It’s often not the first place employees go for information, despite the fact that we have newsletters and forms online,” Johnson says.


    In fact, a few pockets of resistance still exist. Findley Davies found that 19.8 percent of firms surveyed have rolled out an intranet to less than 25 percent of their employees, 16.7 percent offer Internet access to less than 25 percent of their workers, and 15.1 percent lack organizational e-mail addresses for 25 percent or less of their workforce. While some organizations, particularly those with workers on assembly lines or away from desks, do not require online tools for employees, it’s clear that online communication is rippling through all corners of the modern enterprise. “It is leaving its footprint on the way organizations manage work and processes,” Long says.


“There is still a heavy reliance on paper and forms. Many organizations are taking on projects at a very deliberate pace.”


HR technology takes hold
    The process of transforming human resources execs from paper-pushers to strategic leaders is not as seamless as one might imagine. While information technology is helping to tame administrative tasks and streamline work flow, the revolution is in the nascent stages. “There is still a heavy reliance on paper and forms,” Long says. “Many organizations are taking on projects at a very deliberate pace.”


    The truth lies in the numbers: more than 81 percent of the organizations polled in the study reported that they’re still using paper for pay stubs. About 71 percent rely on paper for performance management; 65 percent for benefits enrollment; 63 percent for life-events processing; 52 percent for time and attendance and 45 percent for job postings and employee surveys.


    In addition, only a handful of organizations are using call centers. Although online tools, including intranets and the Internet, are gaining ground–particularly for job postings, time and attendance, and surveys–it will likely be years before eHR becomes a mainstream reality.


    Nevertheless, marked differences exist. Findley Davies found that organizations with more than 5,000 employees are far more likely to use manager and employee self-service. At that point, the economies of scale make it a less expensive and more alluring proposition. Meanwhile, small to medium-sized firms are less likely to part with paper. They’re also focusing attention on core applications such as payroll and recruiting.


    Swagelok Company in Solon, Ohio, a firm that manufactures fluid system components used in industries ranging from pharmaceuticals to power generation, serves as an example. The 3,000-employee company, which had sales of $1 billion in 2002, is first automating payroll and benefits. “Employee self-service, manager self-service and work flow will come later even though they are the ‘sexier’ items,” says Bruce Battista, HRIS manager. He estimates that they could take a year or more to install. The firm is currently focusing on a new payroll system. It also is considering online recruiting and applicant tracking, time and attendance, and employee surveys further down the line.


    No less significant is the fact that many firms are still using homegrown systems. The numbers include 45 percent for job postings, 44 percent for performance management, 40 percent for applicant tracking, 38 percent for employee surveys and 34 percent for time and attendance. Couple this with the fact that more than one-third of the HRMS systems are more than four years old and thus nearing the end of their life cycle, and “there’s a good deal of opportunity for vendors,” Long observes. “There’s a prevailing philosophy, ‘If it ain’t broke, don’t fix it.’ But at a certain point companies will have to move on.”


Service administration garners attention
    Managing a mélange of systems and coping with a dizzying array of contracts and service-level agreements is no easy task. Yet in today’s environment, it is more important than ever. And HR increasingly finds itself in the hot seat. Not only must it oversee internal systems–including homegrown and vendor offerings–but it must weigh other options as well, including outsourcing and hosted services. “Organizations have more choices than ever,” Long says.


    Nevertheless, some clear trends exist. For example, payroll administration ranks at the top of outsourced HR functions, though less than 30 percent of the responding companies have embraced it. Other leading candidates for outsourcing are benefits enrollment (15.5 percent), employee surveys (14.2 percent) and e-learning (11.8 percent). Yet while outsourcing is growing in popularity, many organizations continue to eschew it. “The cost is high for many outsourced services,” notes Kathy Blankenhorn, HR generalist/compensation analyst for Texas Capital Bank in Dallas. Others, such as Lincoln Office’s Johnson, say that the limited flexibility makes it less attractive–even with reduced costs.


    In addition, hosted services haven’t yet gained widespread adoption. E-learning (5.9 percent), job postings (5.3 percent) and learning management (5.3 percent) led the way. “The ASP (Application Service Provider) model is a whole new paradigm for HR,” Long says. “It’s suddenly necessary to deal with a vendor instead of an internal IT department. That makes it a whole different ballgame and brings things like quality of service and service-level agreements into the picture.”


    Human resources is often behind the curve when it comes to establishing service-level agreements. Although Findley Davies found that nearly 90 percent of organizations using outsourcing or ASPs had SLAs in place, only about 60 percent had established non-performance penalties. Furthermore, only one-third of the penalty clauses place the vendor at significant risk for non-performance (greater than 5 percent of contract value).


    When asked about the level of satisfaction with solutions provided by vendors, approximately 60 percent of the survey’s respondents indicated that they were pleased with both the level of service and the cost/value of the solution provided. For the small minority that expressed dissatisfaction, payroll administration and time and attendance systems generated the greatest number of service complaints. On the other hand, annual benefits enrollment and life-events processing garnered more complaints about cost than service. “Despite industry horror stories and high-profile articles chronicling the failures of some implementations, most organizations are satisfied with their systems,” Long says.


    Finally, many organizations are becoming more adept at overseeing new projects and ensuring that they’re on track. In every category, the majority of companies are now able to introduce new applications within one to three months. The biggest obstacle, Findley Davies found, was the size of the organization and its workforce. However, a secondary factor was whether the organization handled the process internally or connected to an outsourcing provider or ASP. The latter group was often able to get systems operating in very short order.


Workforce Management, October 2003, pp. 43-46 — Subscribe Now!

Posted on

For Some Chief Learning Officers, One of the Goals is Job Insecurity

John Coné retired as Dell’s chief learning officer in August of 2001, but the company never replaced him. It wasn’t because the CLO position is a passing concept. It was because Coné believed that his work as the CLO was done.



    He’d been with Dell since 1995, and was given the official title of CLO in 1999, although he says that he really always worked in that capacity. His job was to define the policies and infrastructure that would make Dell a distributed learning organization where employees have access to training whenever and wherever they need it. Ultimately, that meant making learning such an inherent part of how they did their jobs that it became an unremarkable event in employees’ lives, he says.


    He achieved that goal in part by making training a necessary piece of every new-product release. “We wanted training to be a natural part of the development process,” he says. Today, new products at Dell don’t move forward unless the necessary training for the product release is in place and deployed. Since Dell comes out with thousands of new products every year, training quickly became a constant in employees’ lives.


    During his six years at the company, Coné also oversaw the organization’s vast e-learning program. His team transformed more than 90 percent of the company’s learning content to technology-based formats, putting employees in control of their own learning, 24 hours a day, seven days a week. “Learners must be in a position to make decisions about what they need to know based on job requirements, company expectations and skills assessments,” he says. “When learning is technology-based, whenever employees are ready to learn, they have access to the content.”


    Admittedly, Coné is not sure if he was successful in making learning a permanent part of the culture at Dell. The traditional measures for training success, including the number of hours people are in training, executive involvement and the percentage of payroll dedicated to learning, show that his efforts are still going strong, but it’s been only two years. “I don’t know if the ideas are deep enough in the fabric of the culture to survive long-term.”


    Whether or not he was successful, however, he believes that the ultimate goal of all CLOs should be to put themselves out of a job. “When responsibility for learning is integrated across the organization, you don’t need a CLO,” he says. “The job becomes redundant.”


What happened to the CLO
    The idea that this is a temporary role could explain the difficulty of determining how many CLOs are out there. A January 2003 article inThe Wall Street Journal (“Learning Gurus Adapt to Escape Corporate Axes”) stated that the number of CLOs in Fortune 500 companies had dropped by 20 percent since the mid-1990s, suggesting that the bad economy had caused some businesses to scrap the position. However, anecdotal evidence suggests that at many companies, the CLO position has only been established in the last three years, and that the number of CLOs in large companies actually is growing.


    Further undermining the accuracy of the data is the fact that many people who fill this role have different titles, says Steve Kerr, the CLO of Goldman Sachs since 2001. Kerr was dubbed “the first CLO” when he created the position at General Electric in 1994, but says he wasn’t the first person to fulfill the CLO duties. “There were others doing it before me, but we came up with the title,” he says, noting that initially he suggested the title chief education officer, but Jack Welch, president and CEO of GE at the time, felt that “one CEO at the company is enough.”


    In companies that don’t have CLOs, chief knowledge officers often have similar responsibilities—to break down knowledge-sharing barriers and create learning opportunities. CEOs, directors of learning and vice presidents of education also have been known to take on those duties. In other cases, heads of learning are named CLOs but not given the power and strategic responsibility that typically go with the role.


    Whatever the title, a true CLO is the person held accountable for how learning is developed and implemented throughout an organization, says Karl Wiig, a senior consultant at Cutter Consortium, an information technology consultancy in Boston. “The CLO looks at learning with a strategic perspective and creates knowledge-sharing opportunities so that everyone benefits from the best practices within the business.” Not every company should have a CLO, he adds. Reactive companies that are focused on short-term gains such as meeting consistent quotas on established product lines but have no intention of changing the business don’t require someone in that position. However, proactive organizations that expect and plan for change, such as adding product lines, altering the sales cycle or expanding, need a CLO to make sure the workforce has the information and skills it needs to move forward. “In a proactive company it’s essential to constantly bring in new ideas and push people forward.”


    Kerr concurs. “Every organization needs ideas from the outside,” he says. Finding new concepts and sharing them with the workforce in ways that are relevant to their needs has always been one of his primary tasks, at both organizations. “The ideas have to be universally applicable or people will put up barriers,” he says. CLOs have to break down those barriers so that people can see how new concepts can work for them.


“Part of my job is to make people independent of me through self-sustaining systems. In that sense, maybe my job is to build structures that will replace me, but since business is always evolving, so does my role and the systems I build.”


    With that in mind, Kerr isn’t sure whether the CLO position should be temporary. “You can’t succeed without new ideas, so elements of the job will always be there.” But, he admits, the role of the CLO may change. “Part of my job is to make people independent of me through self-sustaining systems. In that sense, maybe my job is to build structures that will replace me, but since business is always evolving, so does my role and the systems I build.”


    He imagines that after he leaves, the role could be filled by a rotating series of retired professors who could offer objective perspectives on the business strategies of the organization. “There is value to having someone from the outside look at your methods, to tell you what’s worth bringing in and what’s worth phasing out,” he says.


Some are here to stay
    Not all CLOs see themselves as temporary fixtures. Many believe that if organizations are going to continue to evolve, they will always need a champ-ion of learning to shepherd them through that process. T. J. Elliott, the CLO of ETS, an educational services company in Princeton, New Jersey, sees himself as a permanent part of the strategic hierarchy. “Organizations that pay attention to learning and knowledge sharing have the competitive advantage,” he says. “That isn’t going to change.”


    Since he took the job in 2002, Elliott’s foremost goal has been to push learning initiatives that have a measurable financial impact. He co-designed an action learning program that resulted in ETS’s directors launching more than 40 learning projects, including a sales program that targets teachers seeking certification, which has brought the company $2 million in revenue in 2003.


    At the same time he’s creating for-ums for project leaders to meet and collaborate on their efforts. “Some of these people had never met with each other before,” he marvels. “Now they share their best-practice ideas, which benefits the whole business.”


    Similarly, Pat Crull, the CLO of Toys “R” Us, thinks her position is solid. “As long as there are strong leaders who view learning as a critical function of the business, the CLO will be relevant.” And while she agrees that a primary goal of any CLO is to make training an integral part of the culture, she doesn’t see it as a self-sustaining system. “It’s better to have a champion who can help training grow as the company grows,” she says. “The goals of the CLO may change, but the role as a leader in the business will not.”


The CLO expiration date
    Even if companies do see the role of CLO as temporary, it could be years before they determine that the position should be dumped, Coné admits. “It depends on the state of the organization. You need the infrastructure to support learning and policies that incorporate training into the business function.” He estimates that there may be only dozens of companies that have the training content established and a strong enough belief in the need for learning to survive without a CLO, and thousands more that are nowhere near ready. “It could take some companies three years, and others 20.”


    Wiig thinks CLOs will be history in 20 years. He compares the CLO transition to the Total Quality Management movement of the 1980s. Quality officers helped businesses see that excellence was everyone’s responsibility. The CLO is doing the same for learning, he says. “Eventually, learning will become a natural part of the job. When that happens, the CLO will be unnecessary.”


Workforce Management, October 2003, pp. 79-81 — Subscribe Now!

Posted on

Teaching Big Shots To Behave

Big shots make headlines. Whether they’re top-ranked executives, brilliant surgeons, powerful law firm partners or visionary entrepreneurs, when they act, news follows. And lately, the news has not been good. In the past year, ImClone’s Samuel Waksal was imprisoned for insider trading and fraud. Former Salomon Smith Barney telecom analyst Jack Grubman was fined $15 million and banned from the business for life for improper dealings.



    High-profile scandal extends beyond the office of the CEO. In workplaces across the country, a small but recognizable group of top performers are often known as much for their extreme conduct as for the business results they deliver. Their behavior, if not technically illegal, clearly crosses the boundaries of civility and business prudence set for the rest of the workplace. Yet their very prominence means they will come under greater scrutiny when their behavior crosses the line. When top execs are out of control, whoever they are, it can create not only devastating career and personal damage but also catastrophic loss to the organization itself.


    Why this conduct occurs and how it can be prevented, or at the very least stopped, are critical risk-management issues. What is needed are credible organizational structures, effective communication and a commitment to take action against offenders–no matter who they are.


    Improper conduct often is habitual. Some top performers even consider bad behavior a perk of the job. The conduct occurs and is tolerated because the offenders believe that the rules don’t apply to them. They conclude that by virtue of their contributions to the organization–the money they bring in, the power they have, the prestige they command in the industry–they’re immune to the rules that everyone else has to follow.


    The other part of the problem is that in many organizations, virtually all of the other employees, including peers, direct reports, superiors and even board members, believe it, too. Those who could and should rein in the behavior stay silent for fear of rocking the boat. They worry that the big shot will leave or won’t perform as well, or that his or her morale will deteriorate. Lower-level employees may think their complaints won’t be valued because of the leader’s power, contributions and professional status. Bad conduct is tolerated and excused for the supposed good of the business.


    But all of this is changing. A perfect example is the case of the brilliant physician who throws instruments, yells at nurses and humiliates nearly everyone in his path. Faced with numerous lawsuits, nursing shortages, staff dissatisfaction and a general lack of trust by a well-informed patient base, many hospitals and physician practices will no longer tolerate such behavior. They’re taking positive steps to change the workplace culture, measures that can be applied in virtually any business or industry.


    Changing behavior isn’t easy. It requires the right messenger, who must deliver the right message in the right way. Big shots often have big intellects to match. The irony is that what they need to learn is simple compared to the complexities involved in their jobs. What is the right message? It’s simple and direct: Don’t make sexual comments. Don’t give company secrets to friends for financial gain. Don’t use shady accounting to inflate earnings. It tells those who misbehave that their conduct is unacceptable, it jeopardizes the organization and it must change or they will be fired. It counters all challenges to the concept with this simple fact: Your career is on the line. The choice is yours.


    Getting these points across in a way that changes behavior, however, requires the right messenger. Almost invariably, big shots who misbehave have egos that may be even bigger than their intellects. Some will listen only to those with equal clout and professional standing. Frequently, that messenger is a respected peer, a superior, an individual who is viewed as credible in a different profession, or another key figure such as a corporate board member.


    I was at a meeting recently where a prominent surgeon questioned why he needed to spend his time on a discussion about behavior in the workplace. The chief of surgery, an internationally known physician, replied, “Because I’m requiring it and your career depends on it.” Not surprisingly, the surgeon’s level of interest increased dramatically.


    By their very nature, hugely successful people often assume that what happened to someone else can’t happen to them. For this reason, even though big shots may not like to listen to lawyers, it often is an attorney who is the most effective at communicating the very real personal and professional risks they could face. Sometimes court-room simulations can take the place of going to court. I’ve seen flashes of insight appear on top executives’ faces after they were asked a few direct and unrelenting questions about their conduct “under oath.” That can be far more effective than simply lecturing them about the law and its consequences.


    Ultimately, the most important way to change misbehavior is for everyone to know that the conduct won’t be tolerated no matter who is involved. Organizational leaders and sometimes even board members must be committed to taking action if necessary to protect their institutions from big shots who don’t or won’t get the message. The actions can range from blunt discussions to corrective discipline, therapeutic interventions and, if proper, a resignation or firing. Because of the seriousness of the behavior and the attendant risks, business, professional, legal and human resources representatives should be involved.


    I’ll bet if we asked some of the business hotshots we’ve heard about recently in the news if they would rather have been reined in internally than face the public consequences of their conduct, each would reply, “Why didn’t someone set me straight before all this happened?”


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.


Workforce Management, October 2003, pp. 16-18 —Subscribe Now!

Posted on

Length of Service Required for Retention Bonuses

The chart below indicates how long companies require employees to have been on the payroll before they’re eligible to (potentially) get a retention bonus.


  Not tied to length of service Total ties to length of service <90 Days 90 days — 6 months 6 months — 1 yr >1 yr
 

% of all respondents

% of those tied to length of service
Executives 79% 21% 22% 5% 19% 54%
Upper Management 80% 20% 24% 5% 16% 54%
Middle Management 81% 19% 19% 6% 19% 56%
Supervisors 82% 18% 21% 4% 21% 54%
Professional Staff 86% 14% 43% 13% 35% 9%
Sales 87% 13% 14% 0% 21% 64%
IT Staff 79% 21% 19% 8% 19% 53%
Technical Staff 78% 22% 29% 9% 14% 49%
Administrative Staff (nonexempt) 70% 30% 15% 12% 23% 50%
Part-time employees 70% 30% 29% 0% 7% 64%

Reprinted from Retention Bonus Survey, 2002, with permission from WorldatWork, 14040 N. Northsight Blvd, Scottsdale, AZ 85260; phone (877) 951-9191; fax (480) 483-8352;www.worldatwork.org. ©2002 WorldatWork. Unauthorized reproduction or distribution is strictly prohibited.


Posted on

Helping Employees Build Savings

Consultants and academics who’ve studied the pension mess say it’s vital to encourage employees to save more on their own for retirement. That would take some pressure off corporate pension plans. Unfortunately, it’s not that easy. Since the early 1980s, employers have been doing this by providing defined-contribution plans such as 401(k) accounts, in which they agree to match a portion of workers’ tax-deferred savings, says Ed Ryan, a vice president at MassMutual Retirement Services. But workers aren’t saving enough. According to a recent article in The American Prospect, the average worker’s 401(k) account has just $20,000 in it–far too little to provide for a significant portion of the income he or she will need to survive retirement.



    One big problem, experts say, is young workers–whose early contributions conceivably could grow into a comfortable nest egg–don’t understand the importance of socking away money for tomorrow when they want the immediate gratification of a new compact-disc player today. That’s something that companies might be able to mitigate, perhaps by including some financial education in new employees’ orientation programs. But another big problem is that savings options are too complicated. “There are 16 different types of tax-deferred savings plans under the federal code,” says Paul Weinstein, a senior fellow at the Progressive Policy Institute in Washington, D.C. “People don’t understand the differences between them, and so they don’t feel comfortable. And you have a 401(k) and when you switch jobs, they offer you a check for $10,000 that you’d forgotten you had. It’s tempting just to spend that money, instead of continuing to save it.”


    Weinstein would solve the problem by consolidating all those options–Roth IRAs, regular IRAs and other plans–into one simple tax-deferred vehicle, the universal pension account. When workers switch jobs, the funds in their 401(k) plans would simply roll over into their universal pension accounts, without the need to fill out cumbersome paperwork to start another retirement account. He also views the universal pension as a way to help low-income workers. “The government could help people build their savings, either by depositing $500 in a person’s account or by providing a tax credit so that they could save some of their own earnings,” he says.


Workforce Management, October 2003, p. 55 — Subscribe Now!

Posted on

New Hope for Troubled Retirement Plans

To understand the magnitude of the dilemma that scores of American businesses face in their retirement-benefits planning, im-agine that you’re the chief financial officer of a fictitious company, Rebus Inc. Like other companies across the nation, Rebus long has relied on a conventional defined-benefit plan that provides retirees with a generous monthly check, based on the average of their best earning years.


    But Rebus is finding the expense increasingly difficult to manage in tough economic times, and shareholders are unhappy about the bite that covering future pension liabilities takes out of the company’s bottom line. And younger workers, whom Rebus must attract to stay competitive, don’t find that benefit very alluring. They may be thinking of leaving to pursue career opportunities elsewhere before they rack up enough years of service to become vested. They’re more interested in Rebus’s defined-contribution plan, in which the company matches their 401(k) account contributions, so they can take their savings with them if they hop to another career opportunity elsewhere.



    How does Rebus reduce its pension-related financial woes while keeping its promise of a regular, dependable pension check to one age group of employees and offering a portable benefit to another? A few years ago, the answer might have been for Rebus to offer defined contribution only to new hires and convert its existing workforce to a cash-balance plan. Benefits essentially would be based on an employee’s salary average for his entire career. This formula would have resulted in a lower payout, and less expense for the company.


Pension complexities & hope
    The harsher economic realities of 2003 are making such decisions vastly more difficult. Today, companies that are rethinking their pension systems are faced with a world of legal uncertainty and possible financial peril. In the wake of a three-year bear market and accounting scandals at Enron and other companies that wiped out many workers’ savings, defined-contribution plans, which once seemed to be the wave of the future, now are viewed with less enthusiasm by employees. The cash-balance conversion, another corporate pension strategy that became popular in the late 1990s, is in legal limbo after a federal judge ruled in July that IBM’s cash-balance plan discriminates against older employees.


    None of this leads to clear answers. But while the situation may look forbidding, some pension consultants and other experts offer glimmers of hope. They say that regardless of how the cash-balance controversy ultimately plays out in the courts and possibly in Congress, improved strategies for managing defined-benefits plans may give that old concept new life. They also tout an ingenious new model that would combine some of the most desirable features of traditional pensions and defined contribution, a plan that is dependent on whether the federal government can be persuaded to make it legal.


“We’re really mortgaging our future. Somebody is going to have to support these people. If they can’t do it themselves, younger workers are going to end up paying taxes out the wazoo.”


    The present logjam over the future of pensions threatens not only companies’ financial health but also the promise of a comfortable old age that generations of American workers have come to view as a quid pro quo for leading the world in productivity. In truth, employees in the United States are facing an ominous retirement future. According to a recent article in The American Prospect, a liberal public-policy journal, just 58 percent of the nation’s private companies offer pension plans. Only 44 percent of workers presently are covered. The Prospect also reported that a disturbing 64 percent of retirees depend on federal Social Security benefits for at least half of their income. Considering that this government safety net is in long-term financial trouble and the number of Americans over 65 is projected to increase from 13 percent today to more than 20 percent in 2029, according to U.S. Census data, what lies ahead is scary, says Brent Longnecker, a Houston-area human resources consultant. “We’re really mortgaging our future. Somebody is going to have to support these people. If they can’t do it themselves, younger workers are going to end up paying taxes out the wazoo.”


    It’s vital, experts say, to preserve existing pension plans and encourage more firms to offer benefits. When cash-balance conversions appeared on the scene in the mid-1980s, Institutional Investor magazine touted them as “the wave of the future” for companies that wanted to keep providing defined benefits. Since the worth of employees’ retirement accounts was based essentially on the average career salary, companies ended up paying less than they would have with traditional formulas based on the highest-earning years near retirement. (When Delta Airlines switched to a cash-balance plan in 2002, for example, the airline projected $100 million a year in reduced costs.)


    Cash-balance plans also tended to reduce the gap between employees with differing tenures, a feature that proponents argued is fairer to younger employees who might not stay as long. Ed Ryan, a vice-president at MassMutual Retirement Services, cites another advantage: Companies could offer workers the choice of using the money to fund an annuity, with payouts based on Treasury bill rates or a similar index, or getting it in a lump sum. The latter had the advantage of taking the retirees’ long-term pension costs off the books.


    But older employees soon complained that cash-balance plans were unfair. One disgruntled IBM employee quoted in The New York Times in 1999 characterized it as “an exercise in corporate greed.” They got less money than they’d expected to receive under their old traditional plans, and they no longer were rewarded for their longevity with the company, as the old system had promised. Some companies, such as Boeing, tried to fix that problem by contributing a higher percentage of older employees’ pay to the plans. Other companies froze their existing plans and credited older employees with the amount they’d earned up until that point, while covering the rest of their careers with the new cash-balance formula. Nevertheless, more than 800 workers at dozens of companies have filed federal complaints charging that cash-balance conversions are a form of age discrimination, according to a January 2003 letter sent by 271 members of Congress to the White House.


    Adding to the confusion over the past several years, the Treasury Department and Congress have vacillated about whether cash-balance plans should be allowed under federal law. In late 2002, the Bush administration proposed new regulations that would have enabled companies to make conversions without the risk of committing age discrimination. The White House then withdrew the proposal in April after critics pointed out that the changes might have the unintentional effect of barring companies from compensating older workers for what they might lose from a conversion.


IBM employees sue
    At the end of July, cash-balance plans ran into a brick wall in federal court. In a class-action suit by IBM employees, a federal judge in Illinois ruled that IBM’s 1999 cash-balance plan–and also an interim system adopted in 1995–discriminated against older workers because its formula left them with smaller benefits than younger workers would earn in the course of their careers. The decision clearly has cast a pall over the future of cash-balance plans. Mercer Human Resource Consulting recently conducted an unscientific poll of several dozen companies that had been considering a switch to cash balance, and learned that nearly all had put their plans on hold, says Jerry Levy, a Mercer actuary and pension expert. In the meantime, some pension experts complain that the standoff in the courts and federal government over cash-balance plans is hindering innovation. Others say that regardless of how the issue eventually is decided, additional strategies may help companies to solve their pension woes, and save defined-benefit plans from extinction. “There may be be some employers who’ll want to continue with defined benefits,” says Syl Schieber, VP of research and information for the consulting firm Watson Wyatt Worldwide. “They may think it serves their interests, despite the cost, because it helps them to attract and retain the particular sort of workers they want.”


    One potential method for rescuing defined-benefits plans is to reduce the cost through better management, rather than just paring benefits. About 13 percent of corporate plan sponsors, for example, now outsource the actual management of their plans, according to research by MassMutual Retirement Services. MassMutual offers a “bundled” package of services, in which its staff handles everything from record-keeping and regulatory-compliance issues to answering employees’ pension-related questions. The firm actually hires independent managers to invest the money, so that it can oversee them without conflict-of-interest problems.


    “If you’re a company trying to manage its own plan, you might have a person who tries to keep an eye on the portfolio by looking at the quarterly reports,” says Vern Meyer, MassMutual vice president and managing director of investment strategy. “We can monitor the investment managers on a daily basis, looking at what stocks they buy, watching to spot problems or a drift from the investment philosophy.” As a result, Mass-Mutual says, its clients typically are able to reduce their administrative costs by 25 to 40 percent.


    But defined-benefits plans might be even more attractive if companies didn’t have to shoulder the entire cost. Jack VanDerhei, an instructor at Temple University’s graduate business school and research director of the fellows program at the Employee Benefit Research Institute, conducted a study in the 1980s of a dozen companies that started defined-contribution plans. He found that management was attracted primarily by the chance to utilize employees’ own pretax contributions to help finance the benefits. “I’ve always thought that if you want to keep the DB plans viable, we have to give employers the same advantage,” he says. “They ought to be able to tell employees: ‘We want to keep offering you the same generous lifetime pension that we’ve always had, but we’re going to need you to chip in something–and by the way, you’ll get a tax deduction for doing it, just like you would with a 401(k).’ “


    The American Academy of Actuaries, a professional association of business statisticians, is touting its “DB-K Plus” plan, which would combine the most desirable features of defined benefits and defined contribution in one program. Like a traditional pension, a DB-K Plus plan would offer retirees the security of a regular stipend for the rest of their lives. But instead of the company bearing the entire cost, the money that it put into the plan would be augmented by voluntary contributions from employees that would be tax deductible, in the fashion of a 401(k). The DB-K Plus could combine all that money into one pool for investment purposes, while keeping it segregated in individual accounts on the books, so that employees would have some say about how their money is invested. Employees who made bigger contributions would get more of a payoff in retirement, but all would be guaranteed at least a certain income.


Sweeping reform
    John Parks, vice president of the academy’s pension practice council, says DB-K Plus would be more affordable for companies than traditional pension plans. It would also offer numerous advantages to workers that either a traditional pension or defined-contribution plan doesn’t provide, even the opportunity to have both a separate pension and a 401(k). It would cut management’s cost of complying with regulations, he says, while simultaneously reducing the investment fees and costs that now come out of employees’ 401(k) earnings. Because the new plan would provide benefits that appeal to both younger and older workers, it could eliminate age-discrimination problems. Parks also says that “You wouldn’t have to worry about having to leave at a time when the stocks in your 401(k) are down.”


    There’s one big drawback to such a hybrid. It’s not legal under present federal regulations. The rules now require companies that offer conventional pensions and 401(k) plans to run them as completely separate entities, and don’t confer tax-deferred status on voluntary employee contributions to defined-benefits plans. “Admittedly, we’d have to rewrite a ton of laws,” says Parks, who also would have the federal Pension Benefit Guarantee Corp., which at present insures only traditional defined-benefits plans and cash-balance hybrids, cover DB-K Plus plans as well. “The PBGC probably would have to charge a higher premium for DB-K Plus plans, but even so, I think companies would still end up saving money,” he says. In any case, corporate pension plans are overdue for sweeping reform, says pension-policy expert Paul Weinstein, a senior fellow at the Washington, D.C.-based Progessive Policy Institute. “We’ve got a system that was designed for the economy of 40 years ago,” he says. “But it doesn’t work for the very different set of circumstances we have today. We need to make big changes across the board, and really rethink how we can best help people. What I’m really afraid of is that, as with the savings-and-loan crisis in the early 1990s, we’ll wait until we have a financial disaster before we do anything. It doesn’t have to be that way.”


Workforce Management, October 2003, pp. 53-56 — Subscribe Now!

Posted on

How Employees Allocate Their 401(k)s

This chart shows the average asses allocation of 401 (k) accounts, by participant age, expressed as a percentage of account balances. The data is from 2001.



Age
Cohort		 Equity
Funds		 Balanced
Funds		 Bond
Funds		 Money
Funds		 GICs3 and other Stable Value Funds Company Stock Other Unknown Totalh
20s

58.6 %


 8.7% 6.1% 5.6% 6.1% 13.8% 0.6% 0.4% 100%
30s 58.0 8.0 5.7 4.2 6.5 16.5 0.8 0.3 100
40s 51.6 8.1 6.5 4.7 9.8 18.1 0.9 0.3 100
50s 45.1 8.0 7.9 5.5 14.8 17.3 0.9 0.3 100
60s 36.2 7.8 10.7 6.3 24.0 14.0 0.8 0.2 100
All 47.7 8.0 7.6 5.2 13.6 16.8 0.8 0.3 100
Source: Tabulations from the EBRI/ICI Participant Directed Retirement Plan Data Collection Report
3 Guaranteed investment contracts
h Row percentages may not be added to 100 percent because of rounding

Reprinted with permission ofEBRI.

Posted on

The Corporate Monitor’s Recommendations for MCI

Here are some of corporate monitor Richard C. Breeden’s recommendations on corporate governance of MCI, as part of his report called “Restoring Trust.”



Committee Membership:
    The Compensation Committee shall consist of not less than three members, each of whom should be an independent director who possesses experience with compensation and human resources issues.


    Members need not be compensation or HR experts. Indeed, common sense and general business and financial skills may be quite helpful. However, the members of the committee should ideally have a modicum of experience in working with these issues in one capacity or another.


Review of Related Party Transactions:
    At least twice each year, the Compensation Committee should meet with the Director of Human Resources and the General Counsel to review


  1. compliance with the Company’s prohibitions against any related party transactions between directors or employees and their families and the Company or any of its affiliates;


  2. compliance with SEC proxy disclosure standards, and


  3. all employee complaints, disputes or issues regarding human resources or compensation issues.


Annual Review of Director of Human Resources:
    The Director of Human Resources occupies a crucial role in the Company’s governance due to the size of the Company’s workforce and the sensitivity of compensation and other human resource issues.


    The old WorldCom experienced substantial failures by the human resources department to provide adequate discipline to prevent widespread compensation issues, such as lack of linkage between pay and performance, and poorly designed incentive programs. Not less than once each year the Committee should review the performance of the Company’s Director of Human Resources.


    Such review should include consideration of the human resources department’s record during the year, particularly adhering to standards for compensation set forth in this Report.


Posted on

Pay Unchecked

Human resources didn’t need Bernard Ebbers to create an identity crisis. It already had one. Long before the former WorldCom executive became a symbol of colossal corporate excess, workforce managers were accustomed to being dismissed by critics as spineless wimps who couldn’t stand up to the chief. The Ebbers debacle has only made matters worse. Because of the role that human resources executives played in the alleged $11 billion WorldCom fraud, the entire field of workforce management suddenly has become a target of criticism from many new quarters.



    Ebbers, once a homespun Mississippi high-school coach and motel operator, led his company into bankruptcy, investigators say, using a unique pay and compensation system that made a mockery of conventional human resources standards. Today, Ebbers and five members of his management team face fraud and other criminal charges. Investigators say the downfall of WorldCom also represents a failure by human resources. Given the eye-popping compensation that some CEOs have been receiving in recent years, others say, a WorldCom was inevitable. The moral of this tale: Bad things can happen when human resources rolls over and plays dead.


    “None of us should be shocked,” says New York City compensation consultant Alan Johnson. “If you are going to manipulate a company, you have to have control over the motivational system, and compensation is a big part of the motivational system.” Looking beyond WorldCom, Johnson says that people managers need to rethink their roles. “In many cases, they have been advocates for management. That is not their job. Their job is to be an advocate for the company and the shareholder. They should have to have a little bit more backbone, a little bit more courage. The job of going forward is not necessarily for the weak of heart. I don’t think people are sympathetic anymore to the view that ‘The boss told me to do it.’ “


    Postmortems on causes of the WorldCom bankruptcy indicate that pay and compensation issues were a root problem. Ebbers dangled the carrot of millions of dollars in bonuses in front of his chief executives in the manner, as one investigator put it, of someone running a private family business. “Indeed, it was executive-compensation decisions more than anything else that seemed to lay the foundations for the fraud that ultimately transpired, and that represented the worst manifestation of WorldCom’s governance failures,” says court-appointed corporate monitor Richard C. Breeden in a bankruptcy report filed in federal court. The human resources department stood by and failed “to provide adequate discipline to prevent widespread compensation issues, such as lack of linkage between pay and performance, and poorly designed incentive programs.”


Imperial reign
    Passing out huge pay packages allowed Ebbers to enjoy a “nearly imperial reign” at WorldCom, Breeden says, even though the embattled executive “did not appear to possess the experience or training to be remotely qualified for his position.” Breeden lays most of the responsibility for the bankruptcy on Ebbers, his chief executives and the company’s board of directors, who have all been replaced. “With compensation in the old WorldCom for the CEO, COO and CFO divorced completely from meaningful performance standards, compensation for these individuals became an exercise in ego gratification and personal greed,” Breeden says in the report to U.S. District Judge Jed S. Rakoff.


WorldCom bankruptcy court examiner Dick Thornburgh, a former U.S. attorney general, holds up sales commissions as an example of policies that led to the company’s downfall and also says human resources shares in the blame.

    WorldCom bankruptcy court examiner Dick Thornburgh, a former U.S. attorney general, holds up sales commissions as an example of policies that led to the company’s downfall and also says human resources shares in the blame. “At least until late 2001, the company determined compensation for its sales employees under a dizzying array of commission programs that practically invited, and in fact resulted in, fraud and abuse,” Thornburgh says. No one seemed to be paying attention, he says, “including the compensation committee, senior management or the human resources department.” Thornburgh is investigating a possible link between extraordinary levels of compensation and the employees’ participation in or knowledge of accounting fraud or other misconduct at the company.


    Ebbers and his attorney, Breeden, Thornburgh and MCI, which is the company that will rise from ashes of WorldCom, did not respond to requests for comment. In previous statements, Ebbers has denied any criminal wrongdoing.


    Until now, human resources has generally stayed out of the public debate that has sparked widespread criticism of lavish pay and compensation for CEOs and other C-level executives, letting company directors, who award the compensation, take the heat. But the costs of the WorldCom fraud are a compelling example of what can happen when human resources fails to exert rational controls over pay, allows itself to get shut out of the process or simply goes AWOL. Tens of thousands of employees lost their jobs at WorldCom. Stock held by company employees that once sold for $64 a share is now worth pennies, wiping out numerous 401(k) retirement accounts. In all, the WorldCom bankruptcy erased $200 billion in shareholder value. Three California public-employee pension funds, led by CalPERS, lost a combined $318.5 million on just one WorldCom bond issue–money invested on behalf of retirees, disabled workers, teachers and other public employees. They are suing the company and its bond underwriters.


    Even before the WorldCom events, extraordinarily high levels of compensation and benefits were being condemned as excessive. Last year, citing a growing disparity between pay for top executives and everyone else, then Federal Reserve Bank president Bill McDonough called for CEOs to take pay cuts, saying that salaries are not only inflated but also morally unjustifiable. Disclosure of a nearly $200 million compensation package for Richard A. Grasso, the top executive of the New York Stock Exchange, so shocked large pension funds and other institutional investors that they pushed for–and got–his resignation. Comparisons have been drawn between $100 million-plus compensation packages for CEOs of failing companies, such as Enron, WorldCom and Global Crossing, and the equally extravagant sums going to heads of companies that are making money but whose shareholders and pension plans are taking a drubbing because of languishing stock prices. General Electric Co., Time Warner Inc. and Tyco International, Ltd., serve as noteworthy examples.


Tighter controls
    Breeden and other critics paint a picture of an extravagant compensation system that is endemic to many large corporations. Symptoms include a weak board of directors and executives who look out for their own interests at the expense of their employees and shareholders. They often focus on short-term earnings to artificially create value for their stock options, rather than the long-term stability of the company. This produces a two-tiered compensation system with a huge gap between people at the top and those at the bottom. Breeden says that WorldCom did not happen in isolation, but was part “of a broader pattern across the industry and large U.S. corporations generally of stratospheric compensation levels.”


Many companies, as well as the Securities and Exchange Commission, are moving to tighten up corporate governance to reduce the excesses in the system.

    Many companies, as well as the Securities and Exchange Commission, are moving to tighten up corporate governance to reduce the excesses in the system. Proposals include requirements for more independent directors on corporate boards, rules changes that will give outside investors, like pension funds, a greater say in corporate affairs, and stricter controls over wholesale awards of stock options. Breeden makes 79 recommendations in his 156-page report, and says that full implementation will make MCI a model for corporate governance. Among his proposals is a yearly limit of $15 million on CEO compensation. Under the old rules, Ebbers received $408 million in loans from the company during one 18-month period, and passed out $238 million to senior officers in 2002.


    Breeden breaks new ground with calls for much tighter scrutiny of human resources directors at the company in the future. He recommends that the board’s compensation committee, dominated in the past by Ebbers, appoint three independent members who possess experience with compensation and human resources issues. Under the recommendations, the human resources director would meet with the compensation committee at least twice a year to go over legal-compliance issues and consider employee complaints about compensation. He also wants the human resources director’s job performance to be reviewed at least once a year by the committee.


    The recommendations come at a time when many within corporate America are soul-searching about appropriate levels of compensation for top executives. When it comes to setting salaries for the top brass, workforce executives are often on the sidelines. “What is interesting is that HR executives play such a small role in this,” says human resources expert David Lewin, senior associate dean of the MBA program at UCLA’s Anderson School. Lewin compares the compensation systems in many companies to a golf tournament, where the winner might take home $1 million and those farther down receive a tiny fraction of that. He makes the point that in real life, corporate officers make the rules and set the prizes by choosing the boards of directors and outside pay consultants and by controlling board agendas. “When people say pay is out of control, I say quite the opposite: it is under very tight control,” Lewin says.


    AFL-CIO official Brandon Rees has a very different perspective. He doesn’t think that involving human resources in setting top compensation levels is the answer to the problem of runaway pay. “It’s a conflict of interest for HR to be advising the board on CEO pay issues, because the HR department reports to the CEO,” Rees says. “You just can’t erase that conflict. I would be concerned about any company’s compensation committee using its own human resources department.”


    As it stands, CEO compensation often bears little relation to a company’s performance, management, industry standards or recognized formulas. Compensation is bartered and negotiated in secrecy, with numbers emerging only months later in proxy statements. Years are freely tacked on to pension formulas to speed up vesting. Lip service is given to pay being tied to performance, but when a company’s business goes bad and stocks tank, boards have been known to increase cash compensation to keep the CEOs happy. Executives receive lavish “golden hellos” on the way in and golden handshakes on the way out. A study last year by Paul Hodgson of The Corporate Library noted that a $45 million golden hello went to Gary Wendt when he became CEO of Conseco, Inc., an insurance company. His signing bonus is an extreme example of the fact that money can’t buy success. Wendt resigned in 2002, the company went into bankruptcy and its stock for a time was virtually worthless, but now is recovering.


Sweet deals attacked
    As criticism of CEO compensation escalates, executives like Jeffrey Immelt, CEO and chairman of the board at General Electric Co., are finding themselves targets. No sooner had Immelt gotten the seat warm as CEO than the $22.9 million in cash, stock and options he earned during 2002 was being questioned. The man he replaced, Jack Welch, had become one of the richest individuals in America while at GE’s helm and retired with a $100 million-plus platinum handshake package. Now, here was Immelt, pulling down his own princely sum, even as GE stock languished at prices about 20 percent below what it had been worth when he took the job two years earlier. That was good enough for Immelt to make the AFL-CIO’s Executive Paywatch list, which profiles a cluster of corporations that have questionable investment and pension practices.


    In Immelt’s case, the union says it was alarmed at the disparity between pensions for General Electric’s top executives and those for regular employees. GE has a two-tier retirement system–one for senior executives and one that is less generous and more restrictive for lower-level employees, the union says. Another issue is the depressed stock price, down to nearly half of its value during Welch’s last year, because the GE employees’ 401(k) plan is heavily invested in company stock. Heat from shareholders and the concern of Immelt and the GE board are producing changes in compensation rules.


    Gary Sheffer, a spokesman for GE, defends Immelt’s salary: “The board determined that that level of pay was appropriate for someone who leads a global organization of 313,000 employees and generates $140 billion plus in revenues.” Sheffer also says that under new corporate-governance rules, Immelt has more restrictive guidelines covering stock options. Last year, he put 75 percent of his cash compensation back into company stock and pledged to hold the stock as long as he is chairman. The value of future stock grants will also be based in part on GE’s performance in the stock market.


    Earlier this year, BusinessWeek, which publishes an annual list of America’s highest-paid executives, reported a decline in the $100-million compensation club for 2002. In 2001, seven executives made more than $100 million, led by Oracle Corp. CEO Lawrence J. Ellison, $706.1 million; Jozef Straus, chief of JDS Uniphase, $150.8 million; Howard Solomon, Forest Laboratories, $148.5 million and Richard Fairbank, Capital One Financial, $142.2 million. In 2002, it was a smaller group: Alfred Lerner of MBNA took in nearly $195 million, while Jeffrey Barbakow, chief executive officer of Tenet Healthcare received $116.6 million. In 2002, BusinessWeek reported, pay packages declined 33 percent to an average of $7.4 million.


Tip-off to other problems
    Critics say that lavish compensation programs, because they often are tied to loose control by corporate boards, can be a tip-off to much bigger problems, as was the case with WorldCom, Tyco and Enron. “Compensation tends to be a fairly useful window that gives you a lot of clues about how boards are operating and aligning their interests,” says Ted White, director of the corporate-governance program at CalPERS, a public-employee pension system with assets of $149 billion. Companies that experience the largest layoffs, report the most underfunded pension funds and receive the biggest tax breaks also are among those paying the highest rates of executive compensation, according to a study published in August by the Institute for Policy Studies. The study also notes that the disparity between pay at the top and earnings of production workers remained well above historic levels. In 1982, the CEO pay gap was 42 to 1, whereas in 2002 it stood at 282 to 1. If the average annual pay of production workers had risen at the same rate since 1990 as it has for CEOs, their 2002 annual earnings would have been $68,057 instead of $26,267, the study says.


    Bruce Ellig, retired corporate vice president of employee resources at Pfizer, Inc., and long active in the Society for Human Resource Management, says that human resources managers “could make a very big contribution” in all this. But he adds that many human resources managers are way behind, and must become broadly knowledgeable in accounting and finance, Securities and Exchange Commission requirements and tax laws before they can bust into the top corporate tier where CEO compensation issues are decided. “If they had HR people who were smart enough and good enough to handle touchy issues, I don’t think a lot of this would have happened,” says Ellig, author ofThe Complete Guide to Executive Compensation.


    Other say changes are occurring already. Tony Lee, editor of CareerJournal.com, says human resources professionals have taken great strides in playing a bigger role. “Their voice is being heard more than in the past,” he says.


    With so much at stake, consultant Alan Johnson says, human resources executives ought to be far more involved in the salary process than they are now. “They should play a bigger role absolutely than they have played to date,” he says. “A lot of people didn’t distinguish themselves in the WorldCom failure. Human resources was certainly part of that. We have been too forgiving of people with too little courage.”


Workforce Management, October 2003, p. 28-33 — Subscribe Now!

Posted on

A Shock to the System

Compensation consultant Jeffrey Christian knows a thing or two about breathtakingly enormous CEO compensation packages and the public heat that they inspire. He helped put together the nearly $70 million “golden hello” that CEO Carly Fiorina received in 2000 for her first year with Hewlett-Packard Co. So when he expresses shock at the $187.5 million compensation package bestowed on former New York Stock Exchange CEO Richard Grasso by a generous NYSE board of directors, it’s fair to assume that the issue of soaring CEO paychecks is reaching yet another milestone.



    In the case of Fiorina, Christian, chairman of Christian and Timbers, can at least point to HP’s huge revenue growth under the CEO. Even if HP’s stock continues to languish, Fiorina has certainly led the company to dramatic growth. On the other hand, Grasso headed a private company and got the big money from companies he was responsible for regulating. If his compensation package was based on performance, it wasn’t clear what standards were being used as a measure, he says.


    “I was dumbfounded,” Christian says, asserting that he thinks Grasso performed his job exceedingly well. Still, he adds, “I was amazed that it could happen.”


    Christian says that Grasso, who was forced to resign in September, is just the latest domino to fall in a chain that stretches back to top executives at MCI, WorldCom, Enron and Global Crossing. A common thread, he says, is what he calls “the smoke and mirrors technique of creating wealth,” meaning that Lotto-sized pay-outs often develop with no rational explanation tying them to performance or other measurable criteria. He predicts that the era of lavish compensation packages and loose board standards is coming to an end. “If you try it, you will be caught,” he says. “That is the message that is out there.”


    Another sign of change is the triumphant march through the NYSE of state treasurers and officials of large pension funds, like the California Public Employees Retirement System, representing combined investment assets of more than $586 billion. Chief investment officers in California, New York and North Carolina demanded that Grasso be fired when the compensation package was disclosed. They are credited with forcing Grasso’s exit.


    It was only last June that Tom Wamberg, chairman and CEO of Clark Consulting, along with other executives from his company, joined Grasso to ring the NYSE’s opening bell. “If you asked four or five months ago whether he would have been forced out I would have said no,” says Wamberg, who still thinks highly of Grasso. But like Christian, he believes a watershed has been reached. Finally, there was the unprecedented spectacle of the big pension funds and state treasurers conducting triumphant press conferences in New York following Grasso’s resignation.


    “They smelled blood,” Wamberg says. “CalPERS and the large managers are swinging a bigger bat these days.” Wamberg adds that much of the NYSE’s problem stems from the sudden, shocking disclosure of Grasso’s pay package. “What I am taking away from this, and what we are counseling our clients on, is disclosure, disclosure, disclosure.”


Workforce Management, October 2003, p. 32 — Subscribe Now!