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Cash-Balance Conversion May Add Up to Age Discrimination

The Internal Revenue Service has indicated that conversion from traditionalpension plans to another type of pension, the cash-balance plan, may result indiscrimination against older workers who have had longer terms of service intheir companies. Cash-balance plans combine the features of 401(k) plans andtraditional pension plans, and are based on a worker’s average salary over theduration of employment with the company, rather than the number of years he orshe has worked. Funds accumulate faster in early years of employment than intraditional plans, and employees have a guaranteed payout that they can take asa lump-sum payment or roll over into another benefit plan or an IRA, should theychange jobs.


This kind of portability appeals to a workforce that is increasingly moremobile. The Employee Benefits Research Institute, a nonprofit researchorganization based in Washington, D.C., reports that only 9.5% of employeesremain in the same job for 20 years or more. Cash-balance plans are consideredby some employers to be a valuable recruitment tool reflecting this trend.


Such major companies as Citigroup, Glaxo Wellcome, and American Express haveor are in the process of switching to cash-balance plans. But the IRS andseveral congressional representatives are concerned that such conversions mayrob long-term workers of the meaty accruals that, in a traditional pension plan,typically build most quickly in the years leading up to retirement. If along-term worker’s traditional pension is supplanted by a cash-balance plan,in which accrual is more evenly distributed, the loss of accelerated benefitsmay mean less accrual for an older employee (longer service) than for a youngeremployee (shorter service) — hence age discrimination. And that spells troublefor companies, who must obtain approval of pension plan changes from the IRS fortax purposes.


An internal memorandum from the IRS district director’s office inCincinnati, released by Representative Bernard Sanders (I-Vt.) on September 7,1999, requests advice from the IRS National Office in Washington D.C. on theproposed conversion of one company’s plan from a traditional defined-benefitplan to a cash-balance plan. The district director cites suspicion of violationof Section 411 of the Internal Revenue Service Code — i.e., age discrimination– because the plan’s benefit-accrual rate decreases for employees as they getolder. In addition, the plan is labeled a “backloaded interest creditplan,” “Credit interest plan” is government-speak for”cash-balance plan,” and “backloaded” means that most ofthis cash-balance plan’s accrual impermissibly credits the majority of thepension in the later years of employment, which is also against IRS guidelines.


Despite the fact that a final decision by the Washington, D.C., office of theIRS on the district director’s findings is pending, Corporate America hasfound that there’s much to debate regarding cash-balance conversions. NealSchelberg, partner, employee benefits and executive compensation group with NewYork City-based law firm Proskauer Rose LLP, explains, “[The memo] really
raises for the first time significant legal issues that are related tocash-balance conversions.” These issues include, not only the thornyquestion of tax qualification by the IRS, but the possibility of litigation bylong-term employees who feel they aren’t receiving the benefits due them.


IBM Employees Protest Conversion
Employees at Armonk, New York-based IBM are up in arms about their company’srecent conversion from a traditional pension plan to a cash-balance plan.According to a recent report in USA Today, many long-term employees at thecomputer hardware giant claim that the conversion could cause a loss of overhalf the accrual they would have received with the traditional plan. Theseoutraged employees, the report says, are forming unionization committees,decrying the new plan to the press and threatening class-action lawsuits.


However, Schelberg points out that a cash-balance plan doesn’tautomatically mean a dispute with the IRS or employees. “It’s importantnot to generalize,” he says. “Plans differ, and many of theseconversions from defined-benefit plans to cash-balance plans have receivedfavorable determinations from the IRS.” In the case of the company that wascited in the IRS memo, Schelberg notes that “the backloading issuebasically defines the problem. If an employer who’s in the midst of a conversionhas what appears to be a backloaded interest credit plan, consideration shouldbe given to changing that plan.”


And a review of a proposed cash-balance plan is definitely in order ifemployees who expected a certain benefit under a defined-benefit plan find theirfinancial expectations have adjusted downward because of a cash-balance planconversion. “The concept,” explains Schelberg, “is to mitigatethe loss for some individuals.”


Minimizing Conversion Problems
There are many ways employers can minimize or eliminate any negative effectsthat long-term employees may suffer as a result of converting to a cash-balanceplan. Companies may “grandfather” the affected employees in the oldpension plan; add additional years of service to a long-term employee’sopening balance under the cash-balance plan to acknowledge longer service;contribute to a 401(k) plan to offset loss of accrual; or provide stock optionsfor the same purpose. Such provisions can help a company comply with the IRS’requirements and prevent an appearance of discrimination.


Employee awareness during a conversion is also important. “Part of theissue is when conversions were done, employees who were being adversely affecteddidn’t understand how their benefit would be affected, or the technicalitiesof the conversion and its effect on their benefit,” says Schelberg.


Rochester, New York-based Eastman Kodak Co. will officially switch from atraditional pension plan to a cash-balance plan as of January 1, 2000. Toprepare soon-to-be converted employees for the change, Kodak provided them witha rainbow of information in various media, including a “decisionguide” personalized to each employee’s salary and benefits and detailingthe new plan versus the old plan, customizable plan software, seminars led byfinancial experts, a 24-hour hotline, a Web site with frequently askedquestions, and several company-newsletter articles. The information appearedearly in 1999 to allow employees plenty of time to consider the new plan. Kodakalso considered the advice of legal and financial consultants to steer clear ofdiscrimination. Even so, Kodak is still allowing current employees to choose forthemselves whether to stay with the old plan or go with the new. Says RitaMetras, director, total compensation, “We believe everybody will be atleast as well off, and some even better off, with the new plan. But we wanted toprovide as many options as possible.”


Schelberg adds that while employers who are converting their companies tocash-balance plans needn’t panic, they do need to be aware of the IRS’scrutiny and provide fairly for any employee who might lose out due to theconversion. “The sky isn’t falling,” he says, “but watch whereyou step.”


Impact: When converting from a traditional pension plan to a cash-balanceplan, make sure the new plan’s provisions avoid discrimination by providingequal benefits for both newer and long-term employees. Employees should knowwhat their choices are and how the conversion will affect their accruals.


Workforce, October 1999, Vol. 78, No. 10, pp. 22-24— Subscribenow!

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Brand HR Why and How to Market Your Image

First thing in the morning, you go for a run wearing Nike athletic shoes. You shower and dress for work in a Ralph Lauren jacket. You drive to the office in a new Lexus, and stop along the way for a tall, double-skinny latté at Starbucks.


These aren t mere shoes, clothes, cars and coffee we re talking about. These are brands, and chances are you ve chosen them not only because they meet your basic requirements for clothing, transportation and sustenance, but also because the brands promise a certain quality and style that you ve come to rely upon.


In an overcrowded marketplace, companies like Nike, Lexus and Ralph Lauren understand the importance of brand identity. That s why they spend millions of dollars to develop and communicate to customers who and what their brands stand for. Think about it: Marlboro stands for rugged individualism. Rolex stands for quality. And McDonald s stands for cleanliness, consistency and quick service.


Now, take a moment and think about human resources in your company as if it were a brand. What does your HR organization stand for? What have your customers come to expect from HR? When HR is mentioned, do managers picture savvy strategists, backward bureaucrats or pleasant people-pleasers?


Granted, it may sound like a bit of a stretch to think of HR as a brand to be developed. But the fact is, in many companies the HR brand is suffering from a poor image and reputation. “Rarely has human resources made a stand as to what their brand image is,” explains David Roberts, vice president of Kuczmarksi and Associates, a branding and marketing strategies company based in Chicago. “Instead of taking the time to define who they are, what they stand for and how they accomplish their mission, the HR department often does things a certain way simply because it s their job.”


Because of this attitude, the internal reputation of many HR departments is tarnished, particularly in comparison to other departments. For instance, marketing is often regarded as a high-value Mercedes, or finance might be viewed as a reliable Honda. Too often, HR is seen as a state-manufactured Yugo; it does what the customer wants—most of the time—but it isn t always reliable or fun to drive.


If you want your organization to be perceived as more strategic, more valuable, more reliable, more whatever, you need to start thinking about what customers want from you, how well you deliver it, and how to improve your overall brand image. This isn t just about fancy packaging, catchy slogans and name changes, either. Managers and employees will see right through surface-level improvements. This is about thinking like a business with a product to be developed, marketed and reliably delivered to customers who want your services.


Why should an internal function with built-in customers care about their brand identity, you ask? After all, selling HR services to employees isn t the same thing as selling khakis to teenagers, is it?


Actually, in a way it is. As companies continue to streamline and outsource non-value-added activities, HR is facing competition on many fronts from outside vendors. If corporate HR people don t work to shore up the profession s overall image and reputation, they ll increasingly lose business to companies that understand what customer service and accountability are all about.


If you have any doubt about this, just take a look at all the brand names that are eager to steal business from inside your department. Kelly Services—”Look what we do now”—would love to handle all your staffing requirements. Achieve Global—”Learning that works”—will gladly take over training and development. There are even comprehensive local HR service firms like Bewley & Associates in Denver that will gladly help you “Unload your HR worries.” For corporate HR professionals to retain their competitive edge, they must start thinking of themselves as brands to be marketed.


To help you get started, Workforce talked to some heavy hitters in the field of brand development, including companies that have worked on such notable brands as Microsoft, Coors, Rubbermaid, IBM and Whirlpool. Because brands involve image and public perception, we also talked to public-relations specialists, and media and speech consultants.


We asked these people how human resources could go about changing its brand identity from reactive to proactive, from tactical to strategic, from conservative to innovative, from “people people” to “business people,” and from a cost center to a corporate contributor to the bottom line. On the basis of their input, we ve been able to develop the following “HR Brand Development Process.” This process roughly follows the same steps that all brand name companies go through in building and enhancing their own image and reputation.


1. Identify your customer s needs and perceptions.
The first step in creating or enhancing a brand identity is to determine who your customers are, what they need and how they currently perceive you. Are your primary customers upper managers, line managers or the entire workforce? What products and services do they use from HR? What would they like from HR? Do they use any HR services from outside vendors, and if so, why? How do they perceive the internal HR department? Asking questions of your customers isn t only a way of identifying new business opportunities, but also a way to find out how to improve your current line-up of products and services.


To get truthful and useful information, it may be worthwhile to hire an outside specialist to conduct these interviews in private. Employees are more likely to state their true feelings about HR if they are guaranteed anonymity, and don t have to share their opinions in front of peers and co-workers.


It s important to start with this kind of gap analysis because, in today s companies, there are so many ideas about what HR is, explains David Redhill, executive director of global communications for Landor Associates, a global branding and design consultancy based in San Francisco.


“When one thinks of human resources, they think of training, recruitment, personal welfare, salary and bonus, the corporate environment, and a whole range of concerns which can make brand development trickier,” he says. “But this isn t an unusual branding problem. Companies often start selling one product or service and then expand into other areas. They acquire and divest other companies, get into new technology, converge into new product areas and pretty soon they ve outgrown their brand.”


Similarly, HR now encompasses so many different activities that it s hard for internal customers to know exactly what HR is all about. To begin to fix this, HR professionals must research their current brand to figure out where they stand.


2. Craft an identity based on customer needs.
Once you determine the needs and current perceptions of your existing customers, you can begin to decide how you would like the HR department to be perceived.


“All HR departments wish they could be strategic,” Roberts says. “They all want to be the Hewitt Associates HR function.” But this may not be the most appropriate goal for every HR department in every company. In some companies, internal customers may want the HR department to provide great service in all the traditional HR areas. In other companies, customers may expect HR to take responsibility for productivity growth. “You have to decide what brand identity works best for your particular culture and then work to create a mission statement and an organization that supports that identity,” Roberts says.


To get an idea of how this works in the real world, take a look at the difference between two retail clothing stores: The Gap and Nordstrom. The Gap brand is associated with cutting-edge fashion trends. Its stores look very contemporary, and are staffed by young people wearing Gap clothing. Nordstrom, by comparison, doesn t try to be on the bleeding edge of fashion. Instead, the company focuses on providing premium clothing in a nice atmosphere by helpful sales clerks. Service is Nordstrom s brand identity; cool clothing is the Gap s. “Neither one of these strategies is better than the other,” Roberts says. They are both executed well for their particular customers.


By the same token, HR professionals should take time to decide what works best for their particular customers. “Developing a brand is all about making tough decisions as to what you will and will not stand for,” Roberts explains. In your company, for example, it may make sense to outsource routine tasks such as payroll processing so that existing HR people can concentrate on more strategic issues. “To develop a solid brand identity you shouldn t be all things to all people,” he adds.


3. Develop a mission statement to guide you through the change.
Once you ve determined what your brand identity will be, take the time to craft a mission statement that ll guide you through the improvements that need to be made. This statement should define the mission of the HR function, the values and core principles the department will uphold, and the benefits to the rest of the company.


The mission statement is important because it ll help you define the future you wish to gravitate toward. “We call this ‘aspirational branding, ” Redhill explains. “The mission statement isn t empty rhetoric. Rather, it s a charter that outlines the HR pledge to the rest of the company.”


4. Clean house.
Let s suppose that, based on customer input, your HR department needs to do a better job providing customer service. Whether it s hiring employees or conducting team-building sessions, customers want you to be more responsive and, shall we say, pleasant to deal with. Because branding is about delivering a promise, you must ensure the people, practices and systems in your department all work to support the goal of customer service. “There has to be an alignment between the brand promise and what you actually deliver,” Roberts explains.


Just as The Gap doesn t hire retired men in leisure suits to sell its hip, young clothing, you shouldn t staff people who are unwilling to go the extra mile for line managers. For a brand identity to work, the systems must back it up.


5. Update your packaging.
In the world of consumer goods, few—if any—products are packaged without a distinctive logo, slogan and type of packaging. For example, a can of Coors beer looks very different from a can of Coca-Cola. These companies understand that the look and feel of their products communicate strong, albeit subtle, messages to consumers.


Does it make sense for the HR department to create its own logo and slogan? Is the look of the HR department itself important in communicating brand identity? Let s put it this way: Packaging is an extremely valuable way to communicate and reinforce what a brand is about, but it won t work unless there s substance behind it. If your HR department has made substantial improvements, then packaging can be a way of communicating those improvements to others.


According to John Recker, director of strategic brand development at Libby Perszyk Kathman, a brand identity firm based in Cincinnati, more than 80 percent of stored memory comes from the visual sense. “What you see you remember more so than any of the other senses,” says Recker, who has managed brands as diverse as Oil of Olay, Pampers and Pringles. Consumer companies understand this, and that s why they spend enormous sums developing logos with memorable type, images and color, he explains.


If you think developing a separate logo for your HR department will make it stand out and get noticed, there s no harm in it. A verbal tag line can also be an effective tool in getting your message across. But probably the most important packaging item is the HR department itself.


Emmanuel A. Smart, an image consultant and owner of Smart Expressions, a corporate-image consulting firm in Raleigh, North Carolina, suggests that HR people visit their own departments as if they were customers. “What does the body language of the person behind the desk say? How does his or her voice sound on the phone? How long would you have to wait to get service?” he asks. “Research shows that the first seven seconds is critical in making a good impression.” If you want the HR brand in your company to convey top-notch service, make sure that visitors to the department get what they need—in a hurry.


“Branding isn t just about a label, logo, name, environment or color,” Redhill adds. “It s all those things, but more to the point, a service brand—which HR is—is about people. It s about how those people act and talk and treat others.” You could spend millions of dollars redesigning your department, developing a logo and tag line and communicating the new brand identity, but if the people in HR are impossible to deal with, forget it. You ve accomplished nothing.


6. Spread the word.
Okay—so you ve determined what your brand identity is, you ve worked to create a system in which you can consistently deliver the brand s promise, and you ve packaged the department in such a way as to subtly communicate that improvements have been made. Now is the time to begin tooting your horn.


However, unlike Pizza Hut or Nike, HR doesn t have the opportunity to use paid advertising to get its message across. A better way to communicate the new brand identity is by taking advantage of tried-and-true public-relations techniques. Nicholas Kalm, senior vice president and head of the employee engagement Practice at Edelman Public Relations Worldwide in Chicago, suggests that human resources determine how it wants to be perceived, and then craft three to five key messages to support that perception.


For example, if you want human resources to be perceived as strategic, take time to quantify the strategic impact of a recent HR decision, or find an anecdote that shows how HR contributed to the strategic direction of the company. Then communicate those messages any way you can: in board meetings, through the company newsletter or by developing special “HR performance reports.” The key thing is to back up the overall message with tangible data and specific success stories. “Spin is no good unless there s substance behind it,” Kalm says.


Another tip: Be sure to use language that employees will understand. “Don t get so caught up in HR jargon or terminology that you end up losing the audience,” he warns. “Craft messages that speak to the recipient, not to you.”


7. Enhance your visibility.
Another PR technique that ll help you spread the good word about HR is to be as visible as you can—not only within your own company, but also in the larger world of human resources. “Reach out to magazines and speak at HR conferences,” suggests Kalm. This gives external validation for the brand changes you ve made internally—and sometimes that s what it takes to get managers to pay attention.


8. Keep on keeping on.
“Product branding used to be regarded as a once-every-10-years kind of thing,” says Redhill. But today, brand management is an ongoing discipline. The business world and customer marketplace is changing so rapidly that companies have to keep reviewing and revisiting and updating their brands in order to meet changing customer needs. And so it goes with HR.


As HR struggles to gain a foothold in the rapidly changing world of business, the profession must regularly subject itself to self-scrutiny and be willing to make tough choices about what it will and will not stand for. The HR brand is in transition, but with careful attention the brand can harness an identity, learn to compete with external vendors and provide what customers expect.


The trick is to remember that branding is not a paint job. You can t dress up the HR department in new colors and expect people to believe everything has changed. Branding is only convincing, credible and effective if it reflects changes in substance.


So pull out your Palm Pilot, PowerBook or Parker ball point and make a note to yourself: The brand strategy works and HR can take advantage of it.


Workforce, November 1999, Vol. 78, No. 11, pp. 30-33.


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Generation X and the Art of Reward

For all the pop-psychology surrounding Gen Xers as “slackers,” thisparticular group of mid-20 to mid-30 year-olds has finally come of age in theworkplace. Yes, it’s true. Beavis and Butthead have gone corporate. Andwhether you care to admit it or not, members of Generation X with their”whatever” attitudes will doubtless continue to play a unique role inyour company’s future.


That is, if you can manage to keep them motivated.


Their numbers alone (roughly 16 percent of the United States’ 270 millionpeople) should warrant your careful attention to the pros and cons ofemployee-incentive programs. And while we all have similar needs and desires inthe workplace, Gen Xers carry the added burden of growing up during rampantcorporate downsizing, which turned the notion of job security into one BIG joke.”Gen Xers grew up in a different world,” says Claire Raines, co-authorof “Generations at Work” (Amacom, 1999). “They have differentdefinitions for leadership and loyalty and incentive rewards. Work isn’t theNo. 1 most important thing in their lives.”


Instead, Gen Xers commit themselves to this whole notion of work/lifebalance. For example, while boomers (mid-40 to mid-50 year-olds) have gotteninto the habit of working that extra hour at the end of an eight-hour shift, GenXers tend to have someplace else to go — whether it’s to night classes or toVail for extreme snowboarding. Unless, of course, you’re willing to pay themfor the overtime. Otherwise, as long as they get the work done, what does itmatter how and where it gets done? If they do it at home, in the car or on acell phone while telecommuting, they think that’s their business, not theirsupervisor’s. At least, that’s their attitude, say some experts.


Not to stereotype an entire generation. But when it comes to rewarding andmotivating Gen Xers for good behavior, even the experts suggest you considerthis particular generation’s nontraditional attitudes about time and space,freedom and flexible work schedules. “Anything that makes work lesscorporate resonates well with a generation that feels betrayed by corporateinterests,” says Raines.


Read between the statistics
Generation X experts have noted all this already, and they’ve noted how –despite the media dubbing them slackers (as if they were too busy to do anythingmore than play computer games and watch television) — Gen Xers are typicallyself-reliant and entrepreneurial in spirit. And this puts human resourcesmanagers at a slight psychological disadvantage because motivating employees whowould rather go into business for themselves than work for someone else canbecome a major challenge.


According to a cross-section study of generations at work by FORTUNEPersonnel Consultants (FPC), a national franchise network of executive searchfirms headquartered in New York City, even though there are importantsimilarities (work ethics, loyalty, work styles) among age groups that canreduce angst for HR managers, Gen Xers are much more likely than any othergeneration to leave for a more challenging job. They’re also the most likelygroup to leave a company for a higher salary and better “bennies,”such as flexible work schedules.


It’s little wonder, then, that Gen Xers tend to be financially engaged andwork-oriented, but they also want their flexibility and freedom, too. In fact,Gen Xers are gearing up for more heated professional lives. More than half saytheir jobs will be faster-paced in 10 years. A full quarter believe they’llhave their own businesses in 10 years, and another 16 percent say they’lleventually be doing consulting and freelance work.


So, in sum, human resources managers who can identify the motivationalfactors that vary by generation will be better-equipped to recruit and retainthe best candidates. “The workplace is accelerating. People are livingturbo-charged lives. It’s crucial employers know what drives employees to stayor leave,” says Ann Piacentini, director of market research strategy atScudder Kemper Investments, a New York City-based global money management firm.”The future of Gen Xers is more freelance work and telecommuting. Employersneed to accommodate the work and lifestyle changes of the younger generation inorder to retain talent. If we don’t shift to accommodate these needs, we’regoing to lose the talent we have.”


This point is worth emphasizing. Gen Xers tend to describe themselves astechno savvy, aggressive, cynical and realistic, according to “Generations@ the Millennium,” a survey conducted by Scudder Kemper Investments. Injobs, they embrace risk and prefer free agency over loyalty to a particularcorporation. And they would rather volunteer than vote. This helps build thefoundation from which HR managers can develop employee-incentive programs.


Who needs what, and why?
So the obvious “HR Insider”-type question is what do Gen Xersthemselves want by way of an incentive program that motivates productivity andgood behavior? This is a legitimately interesting question, although, given theextreme unpredictability of stereotyping a whole generation, it’s probablymore realistic to ask someone who’s been there. A member of Generation X, ifyou will.


Heather Neely is a Palo Alto, California-based consultant who specializes inthe working styles of Gen Xers, and is a member of Generation X. “Managersneed to realize we’re the first generation of workers who’ve come in afteryears of corporate downsizing,” she says. “We’re going to havedifferent expectations in the workplace. We’re not expecting long-termemployment anymore. Rather, we’re looking for daily proof that our workmatters. It’s about creating a new type of security. Of course we want to makea good living. But if managers reward performance with only money, in many waysthey’ve lost the war because we also want freedom and flexibility in theworkplace.”


John D. Willard is executive co-director of the Annapolis, Maryland-basedGeneration X Coalition Inc., and is a member of Generation X. He agrees that hisgeneration tends to focus on long-term rewards like opportunities for ownershiprather than on short-term rewards like cash bonuses. “I hear managementconsulting groups try to interpret us as greatly different from othergenerations, like we want nose rings and trips to Hawaii. But I don’t think we’remuch different,” he says. “Sure, we want good benefits. It’s justthat the older generations were content with being part of the big company. We’vehad to deal with the ups and downs of getting hired and fired more rapidly thanany other generation. If you want to motivate us, get us more involved in thedecision-making process.”


Then again, there are some needs and desires in the workplace that transcendgenerations. At the Dallas-based T.G.I. Friday’s, a chain of more than 500restaurants, the company’s top workers (whether they’re servers, cooks ordishwashers) can choose to work at any Friday’s restaurant around the world.The program not only addresses a generation’s desire to play — it alsorewards work well done.


“Don’t get me wrong,” says Willard. “Money works.Reassignment to a great location works. But these things aren’t unique to ourgeneration. It’s only by getting the buy-in with a company where we have ameaningful part of the decision-making process that we end up with a greatersense of security.”


Recognize Gen Xers
If you think about it, the so-called nontraditional attitudes that make workfeel less corporate for Gen Xers — ideas once considered arrogant or youthfulor rebellious — have become, well, mainstream. Like it or not, they’re here.Gen Xers. And they’re here to stay.


Deborah Masten is communications and human resources development director forPlano, Texas-based JCPenney. She says her company first identified the need tounderstand the differences between generations about four years ago, when storemanagers started complaining about Gen Xers who lacked a healthy work ethic.


“We couldn’t figure out how to keep them motivated,” she says.”We quickly learned by working with a consultant that you don’t lead thisgeneration by example, you lead by interaction. They want to know what’sexpected of them, and they want accurate and timely feedback.”


Gen Xers account for roughly 27 percent of the 200,000 JCPenney retail andcatalog workforce, says Masten. As a result, the need for new ways to motivatethis workforce became a priority. So the company set up a program where managerscan click an icon on their PC screen, log on using their Social Security numberand access the company’s knowledge-management system to learn more about howto motivate employees.


“For example, Gen Xers like to decide on their own how something shouldbe done,” says Masten. “So we teach managers how to allow them alittle flexibility and creativity. You want to be a resource for them, but youdon’t want to detail everything for them. We also found that by providing themwith lifelong learning opportunities and after-hours education, they’re morelikely to be engaged mentally, as well as physically. Gen Xers tend to beself-reliant. They realize the only person they can rely on is themselves, so wegive them opportunities to develop their own skill-sets.”


“Gen Xers have come of age during the most profound changes in theeconomy since the Industrial Revolution,” says Bruce Tulgan, founder of NewHaven, Connecticut-based consulting firm Rainmaker Thinking, and author of”The Manager’s Pocket Guide to Generation X” (HRD Press, 1997) and”Managing Generation X” (Capstone, 1996). “All of the forcesshaping the economy and the workplace are the forces that have shaped GenerationX. Instead of trying to get people to pay their dues and climb the corporateladder, I urge companies to get creative at managing a fluid talent pool.”


To that end, managers need to get over the misconception that Gen Xers aredisloyal and not willing to pay their dues. Doesn’t every generation clashwith the generation in power? Secondly, you have to realize that today’sworkers, in general, have more negotiating power than in the past, and the mosttalented people are going to drive a harder bargain. “If you want to retainGen Xers, you’d better be prepared to negotiate salaries and work assignmentswith them, and every day,” says Tulgan. “The days of annual pay raisesare over.”


So what can you do to motivate and retain Gen Xers? Tie rewards directly toperformance. Accelerate the timing of rewards — immediate rewards are the mosteffective. Expand your repertoire of financial rewards, and consider things likeshort pay-increase cycles. Support work/life balance by increasing employees’control over their creative space. Fill the workplace with training resourcesand give Gen Xers the remote control. And no matter what you do otherwise, theNo. 1 factor for motivating your workforce is the relationship between managerand employee, says Tulgan. “Your day-to-day coaching style needs to beprompt and fast.”


Tulgan has identified six non-financial rewards for Gen Xers and free agentsof all ages:

  • More control over their own schedules.
  • Access to marketable skills.
  • Exposure to decision makers.
  • The chance to put their names on tangible results.
  • Clear areas of responsibility.
  • The chance for creative freedom.

“Generations at Work” authorRaines suggests creating a culture that not only focuses on what needs to getdone, but also accommodating the various ways in which people approach work.”The most important thing for human resources managers to remember is thatif you’re a boomer, these younger folks are just like you when you were inyour mid-20s to mid-30s,” she says.


Sure, it’s different from generation to generation. Boomers, for example,may like the status symbol of promotions or first-class airfare. Gen Xers mayprefer rewards less tangible but no less important to them, like free time andflexible scheduling. If one company says, “This is the schedule. Take it orleave it,” Gen Xers may just leave it.


You could call this attitude arrogant. But members of Generation X — theso-called disenchanted, disenfranchised generation — finally grew up and sought”real” jobs. And even though they feel as if they can’t rely oninstitutions to be the foundation for their success and security anymore, theystill want to hang on to something, anything. “You learn to feel like youhave to fend for yourself, and this independence goes along with our willingnessto walk away if we’re not happy in a situation,” says Tulgan.”Managers can’t manage by fear, anymore. Long-term rewards, 12-monthreviews and annual raises and bonuses are obsolete. So stop managing time andplace, and start managing people and performance.”


Workforce, November 1999, Vol. 78, No. 11, pp.44-48 — Subscribenow!

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Communicating in a Global Environment

Effective communication is the central lifeline of any organization. It’sthe vehicle for driving change, shaping expectations and rallying workers arounda core purpose and common message. When managing a geographically diverseworkforce, one that spans the world and crosses cultures, a strategiccommunication program can strengthen the organization and support its success,the lack of one can be the linchpin of organizational demise.


“Communication is the life blood of any organization today,” saysLee Hornick, president of New York City-based Business Communications Worldwideand program director of corporate communications conference planning for TheConference Board, also in New York City. “Today, you have to develop aproactive relationship. The ‘de-layering’ of the organization means thatfewer employees are responsible for more things. They need to know more, whetherthey’re out in the field or in a pharmaceutical plant, employees need to knowmore to do their jobs.”


In addition, many people can be working on the same project from differentlocations — you can have a team in London, one in New York and another inTokyo. You also have employees working at home. “Today’s organization isone without walls,” says Hornick. “Communication is even moreimportant when you’re at different locations. Everyone must have the sameorganizational and project goals.”


HR and communications experts must be aware of the role that culture plays incommunications. In other words, given all these interwoven elements, you mustensure that the messages employees receive are interpreted as intended. Mythsand misunderstood tales threaten to take your organization off course — a paththat’s especially dangerous for global organizations because culturaldifferences and technology can distort the process. Careful planning andeffective cross-cultural awareness are crucial to the bottom line. And at a timewhen rampant change happens quickly — and can affect different parts of aglobal business in different ways — you have to begin with a strategy.


Bad things happen if communications go awry
Carol Kinsey Goman, president of Berkeley, California-based KinseyConsulting Services, says no matter what your strategic message is or howskillfully your plan is constructed, stories through the grapevine createpowerful symbols that should underscore — not undercut — the corporatemessage.


For example, one German company needed to cut costs. Managers believed thecommunications regarding the rationale were adequate. However, in theircost-cutting mode, they decided not to replace an old company bus that shuttledemployees from the lowest level of a huge parking lot up to headquarters. At thesame time, executives were receiving their new cars. In Europe, executive carsare very important status symbols, and each one received a Mercedes.


“Everything else that happened around the cost-cutting — articles,speeches about ‘being in it together’ — was useless,” says Goman.”All employees remembered was that the cost-cutting hit them (their bus wasdiscontinued) and the executives got their cars. Morale (and employee supportfor cost containment) sank.”


However, there are also positive examples of corporate storytelling. When thehead of British Airlines took over a few years ago, one of the first things hedid was to go to the airport and take a flight. The first-class area was full,and the reservations staff was going to bump someone from first class.


He said, “No, no. These are people that have paid for tickets. Give mewhatever’s available.” And the only available seat was in the last rowthat didn’t even recline. He took it. This was totally different from anythingthe former CEO would ever have done. He got on board and the flight attendantwith the magazines came rushing back and said, “Well, we’ve got a fewmagazines.” He said, “Give it to the paying customers first. If there’sanything left, I’ll take it at the end.” Of course, there was nothingleft.


Says Goman, “That story went through the company in seconds. It wasrecounted over and over as if it had happened last week. What kind of messagedoes that give? Obviously, that the customer comes first.” This accentuatedall of the communications the company was doing.


While this may sound folksy and not particularly strategic, messages likethese exist in every company. You always want them to harmonize with yourstrategic goals, and if they don’t emerge naturally, solicit them. People makelegends out of this stuff, and a savvy communications or HR pro can take thesestories and weave them to fit with the plan. Just be sure senior managementactually behaves in a way that’s consistent with the vision the companyasserts.


The lesson learned here is that good planning and effective communicationstart at the top. It’s not a hard sell. More and more managers areincreasingly aware that communication is a crucial business tool. Theyunderstand that there’s value in keeping the workforce informed, and moresupport for end results when decision making takes place at every level — andthese managers want to help make that happen.


Start with a strategy
Of course, simply recounting the same information to everyone isn’tadequate. Today’s global organization demands the ability to communicate withstakeholders who have multiple business and cultural perspectives. And not onlyis the message itself important, but the tools used to communicate the messagealso call for careful consideration — and the options increase almost weekly.


More and more communicators recognize this challenge. Earlier this year,Watson Wyatt Worldwide, the International Association of Business Communicators(IABC) and the IABC Research Foundation conducted a study of more than 900organizations that represent a variety of industries, and found that:

  • 51% of high-performing organizations say they have a well-defined communication strategy.
  • 52% of senior managers support the importance of corporate communications to achieve business success.
  • 71% of senior managers actively integrate communications into overall business strategy.
  • 68% create a communications strategy to explain new programs.

According to this study, senior managers now appreciate that communicatingcorporate parables has become more critical than ever before. As companiesbecome more competitive, it becomes obvious that effective communication is anadvantage in a wide variety of areas, ranging from loyalty to buildingcredibility with the changing workforce.


“Being strategic about your communication is actually guaranteeing thatyou’re going to have some results,” says Hornick. Indeed, it isn’t agood idea simply to blast communications through the organization without beingvery focused. You need a business reason to communicate to your audience, anduse your communications as an alignment tool with the overall business plan forthe organization. What messages are important to convey? What themes do you wantto recount time after time? What vehicle do you want to use? How often?


Most organizations meet quarterly or annually to assess their communicationplans and create new ones. Individuals at the table should include senior-levelindividuals who deal with communications: the head of HR, corporatecommunications, marketing, MIS, finance, senior operations people, and otherswith perspectives that reflect all regions of the company, so you can get inputabout the viability of the plan.


Once you have the group assembled, but before you begin a particularcampaign, conduct an audit. Look for the strengths and weaknesses of yourexisting communication program and the opportunities and threats facing them.Then align that strategy with business goals.


“Make a list with statistics from a facilitated discussion with thesenior people responsible for constructing the plan. You may also want toinclude senior plant managers or business unit managers, as well asclients,” says Angela Sinickas, senior communication consultant at theOrange County office of William M. Mercer Inc. An expert in research measurementand strategy, she looks at how well the messages are getting through, howeffective the channels are, how well the needs of various stakeholders are beingmet, and how effectively the infrastructure is used to reach the stakeholders.


Areas in which information is lacking are the places where you’ll want tostart doing more formal research. “It really does help to get across-section of input as to the current level of awareness of companycommunications before you develop the plan. You have to get it approved by thesepeople because you’ll need their support down the road.”


Next is the quantifiable research. For example, alignment with company goalsis the most important aspect of a communication plan. You can calculate yourplan’s effectiveness by creating another list that takes the mission statementor company goals, and count how much content in the key channels ofcommunication were linked to those organizational values. Measure the number ofpages or variety of methods used to give the issue or item visibility. See whichareas receive the most press, and you’ll discover which organizationalobjectives you’re supporting and which ones you’re ignoring. When you seesomething that’s been given limited attention, you can intentionally increasecoverage.


Using this process, one large insurance firm discovered that it had donenothing regarding its actuarial group for a year. Since this group was key tothe organization, the communications-planning team decided they needed a fewstories to highlight the important role actuarials played in the firm.”This gives you a chance to provide a balanced picture of what theorganization is about,” explains Sinickas. Knowing the stories you want toconvey is the first challenge. Identifying if the individuals in yourorganization’s offices around the world will understand and make use of thosemessages is the second.


Cultural implications can make or break effectiveness
In a global environment, where you must reach people across various languagesand cultures, there are infinite possibilities as to the channels you use tocommunicate corporate information. “A good strategic plan takes intoconsideration what medium you use to deliver the message,” says DouglasStuart, director of training and client services at Northbrook, Illinois-basedIOR, a global, cross-cultural management firm. “Is it written? Is itverbal? Is it going to be face-to-face?” Also, the typical methods tocommunicate (face to face, print, video, telephone, intranet, Internet ande-mail) take on added meaning when you’re deciding how to deliver a messageglobally. One issue is infrastructure, and another is culture.


Some cultures respond more positively to technology and written messages thanothers. For example, says Stuart, Asian and Latin cultures regard relationshipsvery highly. They respond much more favorably to personal forms ofcommunication. Therefore, personal ways of relating information — such asmeetings, gatherings and personal phone calls — are preferable when you’recommunicating to those cultures. When that’s not possible, it’s best to tryto use front-line managers to field questions and maintain a sense of personalconnectedness.


However, speed often is the determinant. “A huge issue that globalcompanies face is they don’t want one part of the firm to feel like theyreceive communication after-the-fact.” Says Goman of Kinsey Consulting.”There’s a great deal of thought, for example, about when to break thework about a merger or downsizing. Timing is key.” Technology has allowedus to get the word to 5,000 people around the world instantaneously — but howare you sure that the worker in Singapore receives the message the same way as aworker in Chicago?


For starters, it’s important to retain a local communication supervisor whocan help translate (literally and culturally) the meaning and nuance of thecontact. In addition, local HR people are crucial sources of information andsupport.


“For example, if you are communicating an initiative that stronglyimpacts a particular country, HR in that country has a big stake in whatever ishappening,” says Shirley Fishman, principal and director of internationalhuman resources at the Toronto office of Arthur Anderson LLP. “Therelationships that are in place prior to a massive communications program willhelp you identify stakeholders and their perceptions of the issues you’retrying to communicate.”


Using as many communication tools as possible will heighten the likelihood ofunderstanding. “If you’re not communicating adequately with youremployees in a consistent manner,” says Fishman, “they’ll make uptheir own stuff.” To prevent this, some companies have a rumor-mill site ontheir intranet to flush out what’s being said. They try to correct it withaccurate information.


Roll out the plan
Schneider Electric is a global firm based in France, with North Americanheadquarters in Palatine, Illinois. It takes a strong, proactive stance onstrategic communications. “It’s important, especially in a globalcorporate culture, to be able to align resources with corporate strategy,”says Peggy Gann, vice president, human resources and administration atSchneider. “The message has to be consistent from the CEO to HR tocorporate communications to front-line supervisors. If you don’t have thatkind of communication, you’ll have local strategies that will continue and maywell be juxtaposed to the overall plan. It can delay new products to market,delay execution and distribution. You’ll confuse the customer because localunits will retain their spin.”


Once Schneider has the plan in place, the company then focuses on worldwidedistribution through the typical variety of channels to reach its 61,000employees. The firm uses print media in the form of newsletters and magazines,face-to-face communication — sessions in which the CEO meets with large groupsof employees — video broadcasts, fax broadcasts, direct-mail pieces, e-mail andthe company intranet site.


Their struggle with infrastructure was no different from other global firms,where local units and different countries have different kinds of technology.”You really have to create an infrastructure link of technology that allowsall of you to talk with one another,” says Gann. They chose to purchase24,000 copies of Lotus NotesÂź as the standard technology software for thecompany. “It was a huge investment, but we knew we had to be sure we couldtalk to our people all over the world,” says Gann.


One of the first things Schneider Electric does when it rolls out its designis to work with senior management. They talk through the messages they want tosend to employees, decide which audiences match what type of delivery mechanism.”We decide which messages we want our employees and customers to be awareof, then we develop the format and put together an annual plan that reflects themessage — where it will be delivered, when, and how it will bereinforced.”


The company also puts together “talking points” for line managersand supervisors who’ll be asked many of the questions regarding both thestrategic and tactical issues. For example, these points may focus onemployee-retention issues. Managers could learn that the company had the lowestturnover it’s had in three years; that it had trained 8,000 people theprevious year or spent 2 percent of the sales dollars in training. These pointsallow managers to talk with groups of people in a more knowledgeable way.


The front-line worker is much more knowledgeable than ever before because ofthese communications tools. And front-line supervisors actually have morecredibility than other people within the organization because they work withtheir teams. The better informed they are about certain issues, the morecredibility they have when they communicate to their direct reports.


Assess the delivery’s success
Schneider Electric is also conscientious about assessing its success. Thecompany conducts an annual employee-satisfaction survey, in which it asksseveral questions about corporate communication. The poll drives the annualcommunications plan because they use the results to determine what tactics needto be applied to get the messages across.


The organization also holds forums, in which team executives meet withemployees to discuss and flesh out some of the issues identified in the poll.They conduct the surveys in January, which gives time to analyze them and usethe information in the budgeting process, which flows into the communicationplanning process.


Another way to appraise if stakeholders are receiving the right message is toconstruct teams as Goman suggests. Create a communication-advisory team whosesole purpose is to comment on communications. In a global organization, shecreates a group with a few representatives from each country. Find out who theinformal decision makers are, and put them on your team. Each time the companybegins a major communication, such as a speech or special initiative, she sendsout an e-mail to solicit their reactions.


The workforce has changed, and consequently, communications have changed,too. Stories that circulate must be consistent with your corporate culture andvision if communication efforts are to succeed. Global organizations have towork especially hard to develop a strategy that’ll deliver the right messageto other regions of the world. If you don’t understand how to communicate witha diverse group of employees, they won’t understand what you’re trying totell them.


Workforce, November 1999, Vol. 78, No. 11, pp.50-56 — Subscribenow!

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Minimize Liability By Implementing Policies

While employers benefit from the use of a contingent workforce, they must evaluate risks, and structure their policies to minimize legal liability.


Hiring
Employers should consider “leasing” workers through a temporary service, or by dealing with independent contractors. From the outset, establish the relationship as a contingent one, rather than as an employer-employee relationship.


A temp service can recruit, select and refer a worker. When a worker is “leased” from an service, the service provides the pay and benefits to the worker. The decision to retain workers from such a service bolsters the employer’s decision to classify a worker as an independent contractor.


In addition, it’s wise, when possible, to retain workers from a temporary service that maintains a high amount of control over the day-to-day work of its employees. The more control the service retains, the less likely it is that a worker will be seen as a common-law employee of the leasing employer.


Companies also have the option of retaining independent contractors that aren’t “leased” from services, but be sure to contract with each potential worker on an individual basis, conduct background checks and secure and retain documentation to prove independent contractor status.


Training
Companies should educate their managers about the type of relationship that should be maintained with contingent workers.


Each manager should be informed of the factors considered by the court in the Microsoft case to determine independent contractor status and should structure his or her relationships with independent contractors or contingent employees with those factors in mind.


Managers should remain cognizant of the amount of control they exercise over the work performed by contingent workers. Managers should be informed that if a temporary worker has been retained for a specific project, they shouldn’t be kept on once the project is completed. Rather, they should be rehired for a new project or as a regular employee.


Policies/Procedures
Company policies and procedures should carefully distinguish the rights and obligations of contingent workers, the limits of those rights and obligations and their differences from the rights and obligations of regular employees. Pension plan documents should reflect that leased workers are not included in the definition of an employee and are not entitled to such benefits.


Vacation, health and other benefit programs should explicitly exclude independent contractors or contingent employees from eligibility.


Policies should also provide that the employer retains the discretion to interpret the plan provisions and benefits, and that such decisions are left to the employer’s sole discretion.


Communicate
Workers must be informed of their status. Clear guidelines should be established that detail workers’ rights and obligations. Guidelines should also specify the type of project that a contingent worker has been hired for and the length of the project. Those guidelines must be strictly followed by the employer throughout the working relationship.


Workforce, November 1999, Vol. 78, No. 11, pp. 64-65.


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Areas of State Employment Law to Watch For

Employers should always familiarize themselves with their state laws before taking any employment action. Following are eight particular areas that employers should be aware of:


  1. Sexual Orientation. More than 20 states have laws that protect employees from being discriminated against or harassed on the job due to their sexual orientation.


  2. Marital Status. Nearly 30 states specifically prohibit employment discrimination based upon marital status. Many employers interpret “marital status” to mean whether a person is single, married or divorced. However, marital status also includes a person’s spouse. Thus, in these states an employer cannot discriminate against an employee due to such factors because they are married to someone of a different race, or even if their spouse works for a competitor.


  3. Smoking. Smokers are protected against employment discrimination in more than 15 states (many of these states fall in or near the “Tobacco Belt”). Even though smokers may have to abide by building codes and work rules when on the job, if they decide to smoke off the job premises, in those states where they are protected, it is entirely their right to do so, free of employment discrimination or harassment.


  4. Political Affiliation. The boss is a Democrat and refuses to hire Republicans. Legal? Not in nearly half of the United States. In such states, an employee is protected against discrimination based upon political views and affiliations. Of course, there can be vagaries within this as well. Consider Arizona: you are protected against employment discrimination based upon political affiliation … unless of course you are a Communist (TRUE!).


  5. Genetic Coding. How can an employer discriminate against an employee based upon genetic coding? Genetic testing can provide insights into the likelihood that a person may later develop certain types of diseases. While an employer may want to hold down healthcare costs, discrimination on the basis of genetic coding is illegal in more than 10 states. Some states are even more particular. For example, North Carolina only prohibits employment discrimination based upon genetic traits for sickle cell or hemoglobin C.


  6. Criminal History. Bob has an arrest record. Therefore, you decide not to hire him. Fair? Not in most states. Arrest records generally cannot be used as the basis for employment discrimination. Under the law, an individual is “innocent until proven guilty.” An arrest record is thereby different from conviction records. In a few states, even conviction records cannot be used as the basis for employment discrimination, unless the employer can show that the area of conviction is directly related to having an adverse impact to the job under consideration.


  7. Age. On a national basis, employees are protected from employment discrimination based upon age if over the age of 40. Many states have age discrimination employment laws as well. Therefore, as long as an employee is under the age of 40, age can be used as the basis for employment decisions … correct? No. Many states are interpreting their own age discrimination laws to protect anyone over the age of 18.


  8. Federal Laws. Many state laws are based upon federal laws, reinforcing employment protection on the aforementioned characteristics of age (if over 40), gender, religion, pregnancy, race or national origin. However, while certain minimum employee levels apply on a federal level, typically mandating a minimum of 15 employees before federal law applies, many states lower this threshold to as low as 2 or 3. Ah, county and city laws. Even more laws to consider—but that’s a topic for another column.

SOURCE: Corpedia Training Technologies, Mesa, AZ, October 13, 1999.

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Can An Employer Force Employees To Use Comp Time

Background: The Fair Labor Standards Act (FLSA) allows the use of compensatory time off, or “comp time,” in lieu of overtime compensation for employees of a state, political subdivision of a state, or an interstate government agency. Comp time must be issued at a rate of not less than one and one-half hours for each hour of overtime worked. Employees who have accrued comp time must be allowed to use it within a reasonable period of time, unless to do so would unduly disrupt the employer’s business operations.


Issue: What if employees fail to use their comp time? Can a public employer compel employees to use the comp time after a certain number of hours have been accumulated?


Answer: “Yes,” says the federal appeals court in San Francisco. Employers and employees should reach agreements concerning the use and preservation of comp time, the legislative history and interpretive regulations suggest. However, where there has been no agreement, nothing in the FLSA prohibits public employers from requiring employees to use comp time after they have accumulated a certain number of compensatory hours.


The FLSA does not grant employees absolute discretion over the use of accrued comp time; nothing in the legislative history of the FLSA indicates that comp time is a property right, noted the court. Therefore, a public employer was not violating the FLSA when it compelled employees to use their comp time.


SOURCE: Collins v. Lobdell (9thCir 1999) 139 LC 33,937; Fair Labor Standards Act, Section 7.


Source: CCH Incorporated is a leading provider of information and software for human resources, legal, accounting, health-care and small-business professionals. CCH offers human resource management, payroll, employment, benefits, and worker-safety products and publications in print, CD, online and via the Internet. For more information and other updates on the latest HR news, check our Web site at http://hr.cch.com.


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.


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Before an Interview, Make Sure Candidates Have Been to Your Web Site

When conducting a job interview, do you ask the candidate what he or she learned about your company from the visit to your Web site they conducted in preparation?


Here are some advantages of using this line of questioning:


  • You’ll learn how what image your company is projecting, and whether that image is the one you want possible applicants to have of your firm.
  • You’ll learn how much research a candidate has done in preparation for the interview.
  • You’ll learn how the candidate thinks. Take an instance in which you worked in HR for Saturn, and you asked a candidate how she would change the Saturn site. A candidate could answer: “It’s interesting that you offer your customers an opportunity to build their own Saturn. What I’d do however, is ask them a little more about themselves first. How big their family is, what their safety concerns are, how low they’re trying to keep their insurance rates, etc. Then I’d the use the Web site to help them build the car, making suggestions for them …”
  • You’ll learn about the candidate’s knowledge/interest level about your industry. A candidate could answer: “I was really impressed with your Saturn Web site. But what they’re doing at Chrysler is pretty interesting too …”
  • You’ll get an idea whether the candidate generally the sees a “big picture,” the little details, or both (of course, the type of person you’re looking for will likely vary from job to job). A big-picture candidate answer: “You’re obviously doing a great job of selling the Saturn concept online. I got the impression this was a car I wanted …” A detail-person answer: “I was impressed with your site. It was really easy to find the address of my local dealer. You might want to add in the e-mail address of that dealer.”

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Give Job Hunters As Much Information in Your Ads as Possible

When posting jobs online, try to provide a good deal of information, rather than one sentence and a phone number.


In a recent survey of nearly 400 people who have sought a job online in the past year, the features they most desire were “job listings containing detailed information” (93%) and “providing relevant results to my job search” (92%).


If you provide enough solid information for seekers, you’ll screen out those who aren’t interested; screen out the unqualified; and have a better chance to “sell” your company (even if the seeker isn’t interested, they’re still a consumer).


SOURCE: Survey conducted by Cyber Dialogue and sponsored by CareerMosaic, New York, October 4, 1999.

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Pay Attention If You’re Considering Conversion to Cash Balance

Is your organization among the growing number of those considering conversion of a traditional defined benefit pension plan to a cash balance pension plan? If so, be advised that political pressures against these plans continue to build.


Agencies increase scrutiny.
Increasing concern about the fairness of cash balance plans has prompted both the Internal Revenue Service (IRS) and the Equal Employment Opportunity Commission (EEOC) to take a closer look at whether such plans violate tax and age discrimination laws. Several bills are pending in Congress to regulate cash balance plans, and both sides of the controversy expressed their views at a September 21 hearing before the Senate Health, Education, Labor and Pensions Committee.


IRS: Specific cash balance plans may fail to qualify.
The IRS instructed division chiefs on September 15 to request technical advice for any open determination or examination cases regarding the effect on the plan’s qualified status of conversion of a traditional defined benefit plan formula to a cash balance formula. To date, the IRS has made no specific statements indicating that cash balance plans as a whole violate the law. However, in at least two cases the IRS has expressed the view that specific cash balance plans may fail to qualify for tax purposes.


EEOC: Do cash balance plans result in age bias?
Meanwhile EEOC’s Ida L. Castro announced on September 20 the creation of a national EEOC team of experts to focus on the legality of employer conversions to cash balance pension plans. “Whether or not cash-balance pension plans discriminate against employees covered by the Age Discrimination in Employment Act (ADEA) is a question that I am determined to explore fully,” said Ms. Castro.


Why the concern?
The crux of the debate is whether older workers, who are closer to retirement, are unlawfully discriminated against when employers convert from traditional defined benefit pension plans to cash balance pension plans. Experts estimate that in a conversion an employee who is five to ten years away from retirement may lose 20 to 50 percent of the expected age 65 benefit.


This is because traditional defined benefit plans calculate an employee’s benefits by using the number of years of an employee’s service and the employee’s final average pay, giving workers a dramatic increase in the value of their benefits as they near retirement. But cash balance plans offer a more constant rate of return, making them attractive to younger, more mobile workers. In a conversion, some workers may experience “wear away” and receive no benefits for a number of years.


Industry association defends cash balance plans.
The ERISA Industry Committee (ERIC), a trade association representing large employers, says that cash balance plans don’t violate the ADEA just because benefits accrue more rapidly in a cash balance plan during an employee’s initial years of employment.


This “frontloading” of benefits is due to IRS rulings, they say, and not an intent to discriminate on the basis of age. They stress that each individual in a cash balance plan receives the same percentage of compensation pay credit (except for those plans that provide higher credits to older workers) and that the rate at which interest credits are calculated also is uniform.


“It’s interesting that for many years traditional final average pay defined benefit plans have been criticized for concentrating benefits among those employees who were able to remain with one employer for their entire working careers,” said ERIC President Mark Ugoretz.


What’s the solution?
One answer is to allow employees who are five to ten years away from retirement to receive the greater of what he or she will receive under the new cash balance plan or what he or she would have received under the traditional defined benefit plan.


Other ways to ease the effects of a conversion include enhancing the opening account balance of employees who are five to ten years away from retirement, or enhancing the annual pay credits or interest credits of those employees.


Legislative proposals.
Congress is also looking for solutions. Rep. Bernard Sanders (Ind-Vt) and Sen. Tom Harkin (D-Iowa) have both sponsored bills that would forbid wear away. The Sanders bill would also required increased disclosure and impose potentially heavy penalties on companies that do not allow their employees to remain in the old plan upon converting to a cash balance plan. The Clinton administration supports increased disclosure; it would require companies with 100 or more employees to notify their employees of plan changes and, upon request, provide details about how benefits will change.


Source: CCH Incorporated is a leading provider of information and software for human resources, legal, accounting, health care and small business professionals. CCH offers human resource management, payroll, employment, benefits, and worker safety products and publications in print, CD, online and via the Internet. For more information and other updates on the latest HR news, check our Web site at http://hr.cch.com.


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.