05 10 $12.95 US
gem y Risk isk M a na a P g R in s s es s nte r p r i s e 22 | A E g n ef i n i 32 | D
performance & recognition
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48 | How Performance Shares Fit Into Compensation Portfolios
By Craig Kams and Pamela Abreu Although performance shares play a key role in the compensation mix, compensation professionals are not as familiar with this equity vehicle as they are with stock options and restricted shares. A performance share is similar to a restricted share but is only delivered if goals are met — that is, earn it or lose it.
56 | Rethinking Broad-Based Equity: A Different Approach to LTI Grants
22 | Strategies for Assessing Compensation Risk
By Gregg Passin and Stephen J. Brown II Part of being in business is taking risks, but is there such a thing as excessive risk? And could it have contributed to the global recession? Assessing your business — or just your department — for excessive risk relating to compensation programs could mean the difference between success and failure. Find strategies for examining your risk in this story.
64 | One Company’s Approach to Career Path Success
32 | What HR Professionals Need to Know About Enterprise Risk Management
By Wade Lindenberger and Julie Adamik, CEBS, CCP, CBP Enterprise risk management is a methodical, systematic and holistic approach to addressing a variety of risks, including those related to human resources, such as talent management and succession planning, ethics and tone at the top, regulatory compliance, pay and performance alignment, and employee training and development. This article analyzes these HR risk areas.
features 42 | Defining Executive Pay for Performance
By Matt Turner Ensuring executive pay for performance is arguably the single most important responsibility of the compensation committee. Yet stakeholders’ assessment of that term may substantially differ. Developing a clear and coherent definition of pay for performance is an operational requirement for the committee. Here, read about one approach with three essential tasks.
Cover Photography: Cultura Photography
By David C. Kuhlman Publicly traded professional services firms’ struggles to attract, retain and motivate senior, nonexecutive professionals shed some light on how the dynamics of long-term incentives may need to change. The lessons to be learned can be very powerful in improving the impact of employee equity awards. Case Study
By Bob Campbell with Scott Cohen, Ph.D., and Charlene P. Allen and Susan Cromidas As the Great Recession begins to fade, organizational focus will migrate from staying afloat to making sure employees have the skills needed to move the business forward, as well as recharging employees’ commitment and sense of optimism. One industryleading firm showed employees how to aim their skill-building toward the greatest organizational impact and individual growth.
72 | The Benefits of Employee Engagement
By Mark D. Hirschfeld and F. Leigh Branham By analyzing more than 2.1 million surveys for best-places-towork contests, the authors uncovered the link between benefits and employee engagement. In this article, they describe some of their most recent findings, as well as provide a case study of one organization that has used benefits as part of its overall engagement strategy.
78 | How HR Can Help Managers Create Supportive Work-Family Climates
By Beth Heinen, Ph.D. By taking actions to relieve employees’ work and family stress, organizations can greatly benefit in areas like increased job performance. However, the effectiveness of such efforts is highly dependent on managers and direct supervisors. It is important that HR professionals understand and encourage leaders’ crucial role in influencing employees’ perceptions and experiences of organizational family friendliness.
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departments 6 | WorldatWork.org
86 | Member Resources
8 | From the Leadership
90 | Back to Basics
10 | Rules & Regulations
How to Provide Financial Education – Part I
92 | Focus on Ethics
Historic Health-Care Reform Package Becomes Law By Carrie Clark
Should Companies Have a Do-Not-Hire List?
16 | Global Forum
Are Retirement Benefits and Equity a Bad Mix? By Valerie H. Diamond
WorldatWork Management Team President Anne C. Ruddy, CCP, CPCU
About WorldatWork® The Total Rewards Association
Vice President and Chief Financial Officer Greg Nelson, CCP, CPA
WorldatWork (www.worldatwork.org) is a global human resources association focused on compensation, benefits, work-life and integrated total rewards to attract, motivate and retain a talented workforce. Founded in 1955, WorldatWork provides a network of more than 30,000 members and professionals in 75 countries with training, certification, research, conferences and community. It has offices in Scottsdale, Arizona, and Washington, D.C.
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Compensation and Benefits, General Mills ARTICLE Reviewers Anil Agarwal, The Home Depot Inc. Carol Anderson, CCP, SPHR, Orlando Health Chad Atwell, CCP, GRP, Hewitt Associates Dianne Auld, CCP, GRP, Pick n Pay Nathan Aycock, CCP, ESPN Inc. Supriya Bahri, CCP, CBP, California Institute of Technology Jacqueline Barry, CCP, Hewitt Associates Jean Bayuk, CCP, RTI International Gary Bergel, Restructuring Associates Minhas Bhojani, United Central Bank Alan Bolyard Jr., CCP, GRP, Mine Safety Appliances David Brown, CCP, CBP, Kaiser Permanente
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Michael McAnally, CCP, City of Philadelphia Maggie Mendez, CCP, Raytheon Space & Aerospace Systems Donald Nemerov Paul Owens, CCP, CBP Will Parsons, CCP, CBP, GRP, CompWiser Consulting Catherine Peffen, CCP, GRP, PHR, Marriott Vacation Club International David Pierson, Ph.D., The Pierson Group LLC Dave Roberts, CCP, CBP, GRP, SPHR, American Cancer Society Danese Simpkins MS, SPHR, Air2Web Aditya Singh, GRP, Colgate Palmolive Ltd. Sara Snoy, CCP, GRP, SPHR, SJS Consulting
The WorldatWork group of registered marks includes: WorldatWork®, workspan®, Certified Compensation Professional or CCP®, Certified Benefits Professional® or CBP, Global Remuneration Professional or GRP®, Work-Life Certified Professional or WLCP®, WorldatWork Society of Certified Professionals®, and Alliance for Work-Life Progress® or AWLP®. WorldatWork Journal, WorldatWork Press and Telework Advisory Group are part of the WorldatWork family. workspan is published 12 times a year by WorldatWork, 14040 N. Northsight Blvd., Scottsdale, AZ 85260, as a benefit to members who receive an annual subscription with their membership. Subscriptions in the United States and U.S. possessions are $100 per year; in other countries, subscriptions are $125 per year. Postmaster: Send address changes to workspan, 14040 N. Northsight Blvd., Scottsdale, AZ 85260; 480-951-9191. Canada Post (CPC) publication # 40823004. WorldatWork neither endorses any of the products, services or companies referenced in this publication nor does it attest to their quality. The views expressed in this publication are those of the authors and should not be ascribed to the officers, members or other sponsors of WorldatWork or its staff. Nothing herein is to be construed as an attempt to aid or hinder the adoption of any pending legislation, regulation or interpretive rule, or as legal, accounting, actuarial or other such professional advice. Copyright © 2010 WorldatWork. All rights reserved. WorldatWork and workspan: Registered Trademark® Marca Registrada. Printed in U.S.A. No portion of this publication may be reproduced in any form without express written permission from WorldatWork. Reprints For electronic or bulk reprints, go to www.worldatwork.org/workspan and click on “Order Reprints.” Writing for workspan To obtain information about writing for workspan, visit our Web site at www.worldatwork.org or call 480-304-6819.
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worldatwork.org connect. share. learn. Video Roundup! workspanTV Special Edition on Generation Y Buddy Hobart of Solutions 21 and co-author of Gen Y Now shares insights into attracting, motivating, retaining and understanding this generation and its growing importance in the workforce.
workspanTV Special Edition on Organizational Culture
Log on Today! www.worldatwork.org/ community We’ve redesigned our Web site to offer you a customized Online Community of people, resources and information to help you in your total rewards work. Join the Community by updating your profile and setting your preferences.
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Ann Rhoades shares her wisdom on building organizational cultures and more. Ann served as chief people officer at Southwest Airlines and held top HR positions at Promus Hotel Co. and JetBlue Airways.
workspanTV Special Edition Arte Nathan, SPHR, president and COO of Strategic Development Worldwide, former global HR director for Wynn Casinos, discusses the future of HR and pay as a cost versus an investment.
Survey Says: Confidence Rising for Sales Goals At the end of 2009, the Sales Compensation Focus quick poll found that 19 percent of respondents were confident about their salesforce achieving its revenue goal established at the start of the year. So far in 2010, 57 percent said they feel confident.
Compensation Focus E-Newsletter Quick Question Many compensation initiatives were cut, frozen or changed in 2009 with the economic downturn. With a recovery perhaps within reach, which of the following initiatives is your organization investing or reinvesting in with the most vigor? 3 6.5%
Pay for performance
None of the above (compensation initiatives are frozen right now)
Base pay increases
Variable pay/annual incentive plans
Bonuses — recruiting, referral, spot recognition, etc.
Investing equally in a combination of initiatives
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Enhancement to the Online Community: Groups
and information in the Online Community.
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Visit www.awlp.org for highlights from research papers that were finalists for the Rosabeth Moss Kanter Award for Excellence in Work-Family Research.
based on location, area of interest, level of responsibility
“The Power of Perceptions: How Perceptions Affect Work-Life Integration” summarizes five Kanter articles and addresses:
or other options.
• Cultural change initiatives • Health and wellness • Workplace flexibility.
“The Changing Face of the American Workforce” addresses: • • • •
Caring for dependents Health and wellness Financial support Paid and unpaid time off.
CONNECT WITH US Network with peers, receive news and updates, watch our videos. WorldatWork Online Community
Benchmarking sales roles by title alone? You may be comparing apples to oranges. Effective sales compensation programs require the ability to understand how critical traits of a sales role impact compensation. Participants in our survey develop custom benchmark positions by identifying key characteristics of their sales roles, such as: n Generalists versus specialists n “Hunting” new accounts versus “farming” existing accounts n Large versus small accounts n Length of sales cycle Participate in the survey that defines the difference. A new way to benchmark begins with participation in the 2010 Hewitt Sales Compensation Survey. Special workspan subscriber offer: Submit in May and receive a $100 discount. Use promo code MAY2010-W. Email us today at [email protected]
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fromtheleadership | executive committee A Healthy Workforce Goes Beyond Physical Health For the past 24 months, the focus of leaders everywhere has been to shore up the financial health of their organizations. Assuring employees and shareholders of organizational wellness has included efforts to reduce capital expenditures, build cash reserves, measure the return on investment of every initiative (no matter how small), create or modify approaches to keep key players motivated and ensure that performance management systems are helping retain critical talent.
Anne C. Ruddy, CCP, CPCU Member, 2010 WorldatWork Board of Directors President, WorldatWork
This multidimensional approach to organizational health got me thinking about how our view of employee wellness might be a bit too constricted. Is it really just about employee physical well-being or the three fitness dimensions: health, finance and dependent management? Let me explain what I mean. Since empirical evidence has confirmed the significant impact of preventive wellness initiatives on reducing health-care use, employer health insurance costs, absenteeism and the like, nearly all organizations have some level of health wellness efforts in place. These efforts run the gamut from employer-sponsored weight management information portals to full-fledged on-site health assessments. So now, most organizations have deliberately focused strategies to keep employees physically better off than before and, therefore, more productive and present. But what are we doing to help employees address the other aspects of life fitness that occupy productive work time: their personal financial situations and the family demands? During this horrific economic period, employees have also been rightsizing and downsizing their own ships to ensure survival. Many remain under water on personal debt, with little or no access to advice to help work their way into a secure future. Couple these financial challenges with the growing number of employees now responsible for aging parents and relatives and ask yourself if employees being physically present at work really means they are mentally present in their work? Or are they so distracted with other issues that companies are not getting their full attention? At WorldatWork, we are trying to help our employees address these challenges, and be less distracted at work, through a comprehensive financial wellness program. The program provides financial fundamental assessments, education and personal consulting on fundamentals like paying off a credit card balance, writing a will or improving a credit score. We are convinced that when it comes to personal financial issues that knowledge is power. Reducing our employees’ preoccupation with their finances by educating them on solutions means more engagement in their work. The same applies for managing their dependent care issues. We are working with our EAP vendor to provide basic education on the plethora of challenges facing those with parental aging issues and the variety of services and solutions that are available to help them deal with the emotional and financial burdens. With more than one-third of employees now directly responsible for an aging relative, getting employees “fit” in this area means payback in terms of attention, energy and productivity at work. As you know, WorldatWork was instrumental many years ago in expanding the common view of compensation into the holistic concept of total rewards. I’m thinking that maybe it’s time to think about a broader view of what constitutes employee wellness.
Anne C. Ruddy, CCP, CPCU
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Historic Health-Care Reform Package Becomes Law
fter a year marked by contentious debate, a process full of fits and starts, and many declarations of the death of health-care reform, on March 24, 2010, President Barack Obama signed into law the first comprehensive health-care reform legislation. In the following weeks, he signed into law a package of fixes passed through the reconciliation process that amended many of the provisions of the original law. This sweeping legislation imposes mandates on individuals to have health insurance, reforms the controversial insurer practices of rescission and denying coverage based on pre-existing conditions, and establishes state-based health insurance exchanges to make the process of buying insurance on the individual market easier and more transparent. Some of the changes go into effect immediately or within the first 12 months; others won’t be in place until 2018. But how does this new law affect employer-sponsored insurance and when do employers have to make changes?
Employer Responsibility Provisions First, there is no mandate on employers to provide health insurance to their employees, but there are various fines if no coverage or no affordable coverage 10
is offered. Employers with more than 50 employees who do not offer insurance at all and have at least one employee receive a government subsidy for buying private insurance, are assessed a fine of $2,000 per employee on their entire workforce minus the first 30 employees. Employers must include part-time employees in their total employee count on a prorated basis. Employers with more than 50 employees who offer coverage but still have employees receiving subsidies will pay a fine equaling the lesser of $3,000 per employee who receives a subsidy or $2,000 for each full-time employee. These fines will be in effect Jan. 1, 2014. For employers who have more than 50 employees who offer coverage but the employee contribution is between 8 percent and 9.8 percent of an employee’s income, the employee is eligible to receive a voucher from the employer in the amount that the employer would pay for that employee’s coverage to use to buy insurance on the open market. The employee is eligible for the voucher as long as his/her household income does not exceed 400 percent of the federal poverty level. The amount of the voucher would not be counted as taxable income, and the employee could keep the excess if he/she finds insurance that costs less than the voucher.
Carrie Clark WorldatWork
Employers offering vouchers are not liable for fines if employees receiving a voucher also receive a subsidy in the exchange system. This system is slated to be up and running in early 2014. If an employer offers coverage but it is deemed unaffordable (the employee’s contribution exceeds 9.5 percent of their income), that employee may purchase coverage through the health insurance exchange system and could be eligible for a government subsidy for that coverage. An employee could also be eligible if the employer-provided health plan has an actuarial value of less than 60 percent. Beyond these provisions, beginning in 2011, employers are required to publish the value of an employee’s health insurance on their annual Form W-2. Employers with more than 200 employees that offer a health benefits plan are also required to auto-enroll new, full-time employees into a health benefits plan (subject to any waiting period). Employers have to give employees notice that they are
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After 2014, all health insurance plans must provide coverage to nondependent adult children up to age 26 regardless of whether they have an employer offer of coverage. In addition, for tax years 2010 to 2013, small businesses can receive a tax credit of up to 35 percent of the employer’s contribution to health insurance, as long as the employer contributes at least 50 percent of the premium. doing this and the chance to opt out of any coverage. Regarding waiting periods, employers are not subject to any fines for employees in a waiting period but, beginning in 2014, there is a 90-day limit on the length of any waiting period. Beginning in 2018, an excise tax will be levied on insurance companies and plan administrators for any health coverage plans (not including standalone dental and vision plans) with annual premiums that exceed $10,200 for individuals or $27,500 for families. For retirees (ages 55 and over) and for plans that cover professions defined as high-risk, the threshold amounts are $11,850 for individual coverage and $30,950 for family coverage. The tax will be assessed at 40 percent of the 12
amount in excess of those thresholds. After 2018, these amounts will be indexed to the Consumer Price Index. As for dependent coverage, all group health insurance plans that are grandfathered under the law must offer coverage to nondependent children up to age 26 who do not have an employer offer of coverage until 2014. By the end of September, all other plans and all new plans must offer dependent coverage up to age 26 from day one. After 2014, all health insurance plans must provide coverage to nondependent adult children up to age 26 regardless of whether they have an employer offer of coverage. In addition, for tax years 2010 to 2013, small businesses can receive a tax credit of up to 35 percent of the
employer’s contribution to health insurance, as long as the employer contributes at least 50 percent of the premium. Businesses with less than 10 employees and annual wages of $25,000 or less are eligible for the full credit, and the credit phases out as employer size grows, with the credit capped at employers of 25 or more employees who have average annual wages of $50,000 or more.
Health Insurance Exchange System The new law establishes a series of state-based health insurance exchanges, which must begin offering coverage by 2014, where insurance companies are mandated to list the insurance plans they offer, how much they cost and what they cover. The idea behind them is to establish an open marketplace where small groups and individuals can comparison shop for health insurance. The only way that employees of nonsmall business employers (defined as more than 100 employees) can participate is if their employer did not provide the coverage that meets the minimum coverage standards (defined as an actuarial value of less than 60 percent) or the coverage offered by the employer was deemed unaffordable (defined as costing more than 9.5 percent of an employee’s income). Beginning in 2017, each state is allowed to set rules for issuers of health insurance to large employers to offer those plans through the exchange system. Flexible Spending Accounts and Health Savings Accounts The new law also imposes new limits on the amount of money that can be
The timing of taxation is not simply the employee’s concern. It is also the company’s issue in countries where there is a tax withholding or reporting event.
saved in a flexible spending account (FSA). In 2013, employees can only put up to $2,500 in an FSA. This limit is indexed to cost-of-living adjustments in subsequent years in $50 increments. As for health savings accounts (HSAs), beginning Jan. 1, 2011, the penalty on distributions that are not used to pay for health-related expenditures will go from 10 percent to 20 percent. Also going into effect Jan. 1, 2011, is a ban on nontaxable reimbursements from health FSAs, HSAs and health reimbursement accounts that are used for medicine or drugs unless the medicine or drug is prescribed or is insulin.
Wellness Programs While there was a spotlight on the benefits of wellness programs throughout the yearlong health-carereform debate, there were only a few wellness provisions contained in the final law. First, the law requires the Centers for Disease Control and Prevention to study and evaluate best employer-based wellness practices and to provide an educational campaign and technical assistance to promote the 14
benefits of employer-based wellness programs. However, any recommendations, data or assessments carried out under this study cannot be used to mandate requirements for workplace wellness programs. In addition, employers are now allowed to encourage participation in workplace wellness programs by offering premium discounts or rebates of up to 30 percent, or by modifying co-pays or deductibles by the same amount. The secretary of Health and Human Services is also allowed to write regulations to allow financial incentives of up to 50 percent. Finally, the new law establishes a grant program for business with less than 100 employees who work 25 or more hours per week. From 2011 to 2015, these employers can receive a grant of up to $200,000 to cover the cost of a wellness program as long as it’s open to all employees and includes health awareness initiatives, efforts to maximize employee engagement, initiatives to change unhealthy behaviors and lifestyle choices, and supportive environment efforts.
Retiree Coverage To help ensure that everyone has access to health insurance before the health insurance exchanges are set up, the new law establishes a $5-billion temporary reinsurance program to provide reimbursement to participating employment-based plans for part of the cost of providing health benefits to retirees (age 55-64) and their families. Participating employment-based plans will be reimbursed for 80 percent of the cost of benefits provided per enrollee in excess of $15,000 and below $90,000. Plans are also required to use the funds to lower costs borne directly by participants and beneficiaries. Finally, beginning in 2013, the subsidy for employer-sponsored prescription drug plans for their Medicare Part D eligible retirees will be eliminated. Conclusion While these bills have been signed into law, the health-care-reform process is still far from over. Very soon, relevant agencies, such as the departments of Labor and Health and Human Services, will start issuing regulations called for in this legislation. For more information about what is in this law and what will be forthcoming in regulations, keep a close eye on the Public Policy home page on worldatwork.org. web extra For more information about what is in this new law, read the Web extra at www.worldatwork.org/workspan.
About the Author Carrie Clark is a member of the public policy team in WorldatWork’s Washington, D.C., office. She can be reached at [email protected]
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Are Retirement Benefits and Equity a Bad Mix? What starts out as a benefit may end up as a costly administrative burden for employees and the company.
ne of the latest trends in equity compensation is to tie the issuance of company shares under an employee stock incentive plan to an employee’s retirement. Some companies offer employees who retire an extended period to exercise vested options or allow the continued vesting of options following retirement. Other companies design their equity awards to have accelerated vesting, in part or full, if the employee is or becomes retirement-eligible. Still others allow employees who retire to vest on a prorated basis in an equity award otherwise subject to performance vesting for the time between the grant date and retirement. 16
For purposes of a stock incentive plan, most companies define retirement as meeting a certain age, such as 65, or meeting a certain number that consists of age and years of service with the company, such as age 55 plus 10 years service. Some companies define retirement as having the meaning found in a company’s deferred compensation or retirement plan. However, this approach is difficult to use when benefits are offered globally because the company likely offers different retirement benefits/plans in each country, with different definitions of retirement. Tying equity awards to retirement raises certain often-overlooked challenges when the awards are granted to employees on a global basis. Before a company considers offering such benefits, it should take the time to understand the tax, labor, securities and other legal implications of such offering on the employees and the company — as well as any administrative difficulties that such plan benefits may pose. What starts out as a benefit may end up as a costly administrative burden for employees and the company.
Tax Issues From a tax standpoint, if an employee who is retirement-eligible is automatically entitled to receive shares under an
By Valerie H. Diamond Baker & McKenzie LLP
equity incentive plan on termination of employment, then the individual may be subject to tax at the time he/she becomes retirement-eligible, even if he/she has no right to the shares until the termination of employment occurs. Why? There is no longer a risk that the employee will forfeit the shares, it’s just a question of when he/she will receive the shares. In many countries, employees will be subject to tax on an equity award once they meet the requirements for retirement (for example, meeting a certain age) if, at that moment, the employee has the right to receive the shares which is not forfeitable. In the United States, for example, an employee will be subject to FICA on a restricted stock unit (RSU) award at the moment he/she becomes retirement eligible if the grant provides for an acceleration of vesting when an employee terminates on retirement and retirement means meeting a certain age requirement. At the moment the employee becomes retirement-eligible, he/she no longer has a substantial risk that the shares will be forfeited. If the employee
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There are civil and criminal penalties that may be imposed if a company discriminates on the basis of age in violation of the local laws implementing the Directive. is retirement-eligible at grant, then he/she is subject to FICA at grant. Similarly, in Australia, China and Singapore, unless there is some additional condition that needs to be met to receive the shares, taxes are likely due on RSU awards when the employee becomes retirement-eligible if the awards provide for accelerated vesting at termination of employment. Furthermore, under the new tax rules in Australia, employees granted stock options are also likely to be subject to tax at the time they become retirement-eligible (and not at exercise of the option) because the tax authorities take the view that at that time there is no longer a real risk of forfeiture of the shares underlying the option. The timing of taxation is not simply the employee’s concern. It is also the company’s issue in countries where there is a tax withholding or reporting event. With regard to RSUs or restricted stock awards, the need to withhold taxes once the employee reaches the age of retirement, for example, is complicated by the fact that the shares are subject to restrictions, and it may not be possible to sell shares to cover the tax liability (unless the awards are designed to allow a partial vesting of shares for tax withholding 18
purposes). In Australia, where new tax rules require the company to report the income, the administrative burden of calculating the taxes is complicated by the fact that the company may need to use a statutory formula to determine the value of the award on the date the employee becomes retirement-eligible, and there is no longer a real risk that the shares will be forfeited.
Age Discrimination Issues Another legal challenge for equity programs designed to benefit employees of retirement is age discrimination legislation. In the European Union, legislation to prohibit discrimination on the basis of age was introduced through the Equal Treatment Framework Directive of 2000 (2000/78/EC) (the “Directive”). This Directive required European Union member states to legislate against age discrimination by the end of 2006. Under local laws implementing the Directive, age discrimination (even in favor of older workers) is prohibited. Discrimination may be direct (i.e., one person is treated less favorably than another person in a comparable situation on the basis of age) or indirect (i.e., a provision or practice, which appears to be neutral, is capable of taking
advantage of people of a given age, in comparison with others). Such forms of discrimination are not permitted in providing compensation or benefits to employees unless the discriminatory practice is justifiable by a legitimate objective, and the means to reach such objective are appropriate and necessary. Furthermore, there are civil and criminal penalties that may be imposed if a company discriminates on the basis of age in violation of the local laws implementing the Directive. For example, in France, discrimination is a criminal offense that exposes the legal representative of the French company to a possible three-year imprisonment and a fine of up to €45,000 (US$61,031). In addition, the French company is exposed to a fine of up to €225,000 (US$305,152) if it implements a discriminatory practice without justification. The question is whether providing employees in the European Union with a right to accelerated vesting or an extended period to exercise their stock options if they terminate employment due to retirement and retirement is tied to meeting a certain age or age/service violates the age discrimination prohibition found in the Directive. The answer is unclear. Part of the difficulty in dealing with the Directive legislation for grants of equity to employees in Europe is that the legislation is fairly new, and there is virtually no legal precedent available addressing special benefits for equity programs given to employees who reach retirement age or who meet certain age and years-of-services requirements. It is possible that a labor court would find that a “legitimate aim” exists in offering these benefits to older employees.
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Such aim might include, for example, rewarding loyalty (in the case of a service requirement) or providing an enhanced cushion for older workers who generally find it harder to obtain new employment after leaving the company. However, there is no precedent to know if these aims are legitimate ones. In the United Kingdom, the legislation implementing the Directive requires that a company not only show that the benefit has a legitimate aim, but also that the means for achieving the aim is proportionate. It is generally easier to show a legitimate aim than it is to show that the (discriminatory) means of achieving those aims is proportionate, and that there is no other (less discriminatory) alternative that would achieve the same result. Accordingly, an employment tribunal might not accept that the age and length-of-service provisions are justified in an employee stock incentive plan arrangement because it is difficult to justify why, for example, a 45 year old with 25 years of service may not benefit from the favorable vesting provision available to a 55 year old with 10 years’ experience. The risk is that the employees who terminate at age 45 with 25 years of service could claim compensation for the value of their lost equity rights or that they should benefit from the accelerated vesting. Certainly if a company is considering including provisions in an equity grant providing special benefits to employees tied to age-based retirement, the issue of discrimination needs to be fully considered. The company should give thought to whether it can justify the special treatment of these older workers without providing the same benefits to younger workers. Furthermore, the 20
company may wish to document its reasons for the special treatment for these older workers at the compensation committee level and perhaps in communications to employees. Some companies decide that it is better to not offer such special equity retirement benefits to employees in the European Union, particularly if such employees already have other retirement benefits.
Securities Law Issues Another consideration for companies wishing to tie stock benefits to retirement is whether such awards raise any securities law issues. Most countries have strict restrictions that apply to the offer of securities to individuals resident in the country. When a U.S. publicly traded company, for example, offers stock options to employees of the company and its subsidiaries outside the United States, the issuer is typically required to file a prospectus or register its shares with the local securities regulators unless an exemption to such requirements exists. Often, if the offering is limited to employees, there is a self-executing exemption that is available for the offering of the shares of the employer or a company within the employer’s company group. If a company decides to offer employees equity benefits on retirement, it should consider whether the securities law exemptions on which it currently relies to make the offer of securities will continue to be available when the shares are issued. If the benefit offered calls for vesting to continue for a period following termination due to retirement or gives a retirement‑eligible employee more time to exercise a vested option, the
company may not be able to rely on a securities law exemption applicable to offers to employees, as the individual will be a former employee at the time the shares are issued. If an employeebased securities law exemption is not available, the company must find another exemption for the share issuance, such as the private placement or sophisticated investor exemptions available for offerings of securities in Australia, New Zealand, the Philippines and other jurisdictions. In the Philippines, for example, such exemptions require a filing with the Philippines Securities Exchange Commission, so companies will need to plan ahead.
Conclusion As companies consider new ways to use equity to benefit employees, they will no doubt look at whether equity awards should be included in the mix of retirement benefits. If this is something your company is considering, it’s important to understand the global tax, labor and other legal ramifications of providing these benefits to employees before announcing changes to the equity program or modifying plan documents. Offering such programs will lead to new administrative burdens, as retirementeligible employees will need to be tracked and taxation may be tied to the moment of eligibility. However, with careful planning in advance of the rollout, the tax and legal issues discussed above may be minimized or avoided altogether. About the Author Valerie Diamond is a partner in global equity services at Baker & McKenzie and is based in San Francisco. She can be reached at www.bakernet.com/GES or 415-576-3086.
Politicians, regulators, investors, the media and even academics have focused on the role that compensation programs may have played in encouraging what is perceived as excessively risky behavior. Various legislative and regulatory actions have subsequently been put in place to mitigate risk taking for organizations — primarily in the financial sector — that received government bailouts. Yet the concern about the relationship between compensation programs and excessive risk is hardly confined to financial organizations. Late last year the U.S. Securities and Exchange
Quick look The objective of a risk assessment is not to eliminate all risk — after all, risk is inherent in successful business undertakings. Incentive plans are the component of a rewards program that is most likely to affect risk-taking behaviors, so those plans are likely to be a priority for review. The risk assessment team should identify specific risk-taker roles — jobs that have a significant influence on the financial well-being of the company.
By Gregg Passin and Stephen J. Brown II, Mercer
For a rewards
the critical issue is to determine if the rewards programs encourage risk taking to a degree that is reasonably likely to have a
materially adverse impact on the company. Commission (SEC) responded to investor concerns and issued a new rule requiring disclosure by any publicly traded company if its “compensation policies and practices create risks that are reasonably likely to have a material adverse effect on the company.” Importantly, the SEC rule is not limited to plans that cover executive officers, and extends beyond the typical purview of compensation committees. It will require educating board members about the company’s broader rewards policies and practices and how various incentive (and other) programs work. Companies therefore should employ a framework for assessing risk in compensation policies and programs, with particular emphasis on incentive plans. These risk reviews could lead to structural changes in incentive plan design, refinements to overall rewards programs, adjustments to review and approval processes, and even elimination or consolidation of incentive plans that may have proliferated throughout the company. Indeed, such risk assessment is good policy for all companies, publically traded or not. 24
That said, it’s worth noting that the objective of a risk assessment is not to eliminate all risk — after all, risk is inherent in successful business undertakings. Rather, a risk assessment for compensation policies and practices should test where the compensation plans may be driving employee behavior into areas of excessive risk that could have a significantly negative impact on company results. The benefit of doing this assessment is not just to comply with SEC disclosure requirements. By using a deliberate and focused process, a company can: • Understand the degree to which its compensation and incentive plans contribute to the level of risk in decision-making and potential for risk taking above and beyond appropriate limits in the business • Understand the relationship between risk and compensation, and the related behavioral impact • Rationalize the organization’s incentive plans, eliminating or consolidating plans and ensuring that the programs are consistent with compensation philosophy and policies
• Improve the alignment between incentive plan designs and business strategies and objectives • Establish and contribute to good governance, including understanding the total companywide investment in incentive programs • Identify opportunities for risk mitigation, such as design changes and strengthened processes around goal setting and payouts • Evaluate potential talent risks (in terms of recruitment, retention and motivation) related to possible changes in reward program designs • Minimize the potential for risktaking behaviors that may have a material adverse effect on the company’s reputation or its financial or operational performance.
The Risk Assessment Framework Business risk is broad and comes in many forms, such as financial, reputational, operational, geopolitical and strategic. For a rewards risk assessment, the critical issue is to determine if the rewards programs encourage risk taking to a degree that is reasonably likely to have a materially adverse impact on the company. The authors’ company has worked with many companies recently to evaluate their programs and has developed an overall approach that is both comprehensive and repeatable. Some key aspects of the evaluation process: Create a risk assessment team
The first step is to determine who should be involved in risk reviews. These evaluations will require a partnership between human resources, risk management, finance, legal and business partners. Risk managers, where they exist as a separate function in companies, know the key business risks that the company potentially faces and can provide valuable input to
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other team members on how compensation programs could increase those risks. HR has deep knowledge of the compensation policies and practices; these professionals understand how the plans actually work in practice and can examine the processes that might mitigate risk. Finance will understand the financial impact that compensation programs have or could have under various scenarios and will be able to advise the team on whether risks are material to the organization. Legal should sign off on the assessment approach and provide advice on whether any disclosure is required and, if so, what it should cover. All parties should help craft an approach to address circumstances that are reasonably likely to create a significant and material negative business impact, and they should be involved
in how the results are communicated to decision makers. The appropriate balance of risk and rewards can only be established by bringing in the expertise of these various groups. Consultants can provide a third-party view of riskrelated issues in incentive plan designs, deep expertise in reward plan design, scalability of resources and experience with conducting risk assessments in other organizations. Inventory existing programs
The risk assessment team should identify all rewards plans, programs and practices that exist throughout the company. Incentive plans are the component of a rewards program that are most likely to affect risk-taking behaviors, so those plans are likely to be a priority for review. However, other program elements, such as retirement
A Risk Assessment for Sales A good example of a compensation risk assessment would be one focused on the sales function, since sales associates are most often rewarded through
Identify risk-taker roles
a commission-based incentive plan. These plans are likely to warrant further
In addition to taking inventory of the programs to be reviewed, the risk assessment team should identify specific risk-taker roles. These are jobs that have a significant influence on the financial well-being of the company — and they may not always involve senior leaders with direct influence over a large portion of the company. Such roles can pertain to treasury, retirement plan investment, real estate, mergers and acquisitions, and risk management itself. The incentive plans for these jobs may be of particular importance in assessing risk.
investigation due to several factors, including uncapped earnings potential (the more the employee sells, the more he or she earns); a pay mix weighted to incentives (low fixed pay with significant incentives); and frequent payouts (monthly or quarterly incentive awards, which may be shorter than the period of potential business risk for the sold products or services). Risk could thus be material in several ways. Sales associates could be motivated to sell the wrong product or service because it generates a higher commission, to sell at a price that is not profitable to the company in order to generate more sales revenue, or to make costly concessions to close a sale. Furthermore, sales commissions could be a material cost or represent a significant percentage of profits. Therefore, risk in sales plans may be adequately mitigated by making sure that, among other measures, sales staff do not control pricing, and those who do are not covered by a commission plan; requiring approval for customer discounts or other concessions; and requiring some portion of large cash awards to be deferred or provided in a restricted equity vehicle. For more discussion of compensation risk assessment and the new SEC rules, a podcast interview with the authors, Gregg Passin and Stephen J. Brown II, is available for listening and for download at http://select.mercer.com/podcast/blurb/168374/.
plan features, could also influence employees to create (or mitigate) risks that could be material. The inventory should include compensation philosophies and incentive plan guiding principles, as well as processes for goal setting and determining if goals are met. For example, different business units may have different compensation philosophies, and some plans may permit discretion in determining final awards. The inventory should also include key risk factors so that the team can quickly identify those programs or practices that may warrant further investigation. Key risk factors might include: uncapped payouts; a single performance measure; total costs that are a significant percentage of profits or revenues; a pay mix that is heavily weighted to incentives; and performance results that trigger benefits under multiple rewards/benefits programs covering the same employees.
Define evaluation criteria
The next step is to evaluate the programs with the most potential to create material risk against more detailed criteria (see “A Risk Assessment for Sales”). The relevant criteria
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will be affected by the organization’s business sector, profit model and other features. For example, the criteria for financial services would differ from the criteria relevant for a manufacturing organization. Potential criteria to consider include: • Performance measures. Do these measures consider risk and the cost of capital (for example, risk-adjusted returns, economic profit, etc.)? Are the same measures used across multiple incentive plans or rewards programs covering the same groups of employees? Is there external control or approval of key inputs into the goal setting (for example, sales professionals do not set prices, or they require approval)? Do the measures reflect the full range of financial performance (growth, profit, efficiency and shareholder returns), or is there a single performance measure, such as revenue, that, if not balanced by other measures, might encourage high-risk behavior? • Funding. Is the arrangement selffunded so that the costs are always covered by the relevant business unit’s profits? If not, are there governors in place to ensure that the program is affordable? • Performance period . Is the measurement period reasonably aligned with the time horizon of the business risks? If not, are there design features, such as deferred vesting, clawbacks, holding requirements or others, that mitigate the risk of paying for performance that isn’t sustainable? • Pay mix . Does the mix of salary, annual incentives and long-term incentives ensure that employees are balancing short- and long-term interests, or does the mix encourage risk taking, such as where salary is too low or annual incentives are too large? Is the mix of cash and equity appropriate to provide a balance of business 28
financial measures and capital markets perspectives? Are retirement plans a balanced part of the rewards package, or do the programs distort management behavior and create additional incentives to take risks? For example, is incentive compensation included in the retirement benefit? • Goal setting and leverage. Are performance objectives reasonably achievable, or do significant stretch targets create a need to pursue extremely risky business opportunities? Does target setting incorporate multiple inputs (for example, historical performance, budgets, market expectations and peer performance)? Are upside opportunities capped or do they require deferral, or is there an opportunity for uncapped windfall awards? • Controls and process. Is there discretion to override a formulaic outcome that is inconsistent with overall performance or where results were obtained by actions inconsistent with business strategy? Are risk management and compliance functions evaluated and compensated independently of the business or company performance that they oversee? Is there sufficient rigor in the internal compliance and governance processes?
An Ongoing Process As part of the review process, core elements of company philosophy and compensation strategy will begin to emerge. These elements should be articulated in a concise set of guiding principles that can be used to test current and potential future incentive plan designs. Development and application of such a set of principles can help mitigate future risk concerns in compensation plans, as well as streamline future assessments, which should become an ongoing process of the company’s regular compensation review.
Indeed, as the focus on inappropriate risk taking encouraged by compensation plans grows in importance for shareholders and policymakers, companies should determine if their programs create concerns. A rigorous assessment of key compensation plan features provides the opportunity to revisit whether programs continue to support the organization’s business strategy. Editor’s Note The authors would like to acknowledge the important contributions of Brant Shelor, a principal in Mercer’s human capital business, and Will Ferguson, global segment leader for Mercer’s human capital rewards segment, in the preparation of this article.
About the Authors Gregg Passin is a principal in Mercer’s New York office. He can be reached at [email protected]
Stephen J. Brown II is a principal in Mercer’s New York office. He can be reached at [email protected]
RESOURCES PLUS For more information related to this article:
www.worldatwork.org Type in any or all of the following keywords or phrases on the search line: • Rewards strategy • Incentive pay • Compensation + risk assessment.
www.worldatwork.org/bookstore • Planning Wage and Salary Program s • Incentive Pay: Creating a Competitive Advantage • Variable Pay: A Collection of Articles from WorldatWork • Financial Overview for the HR Business Partner: How-To Series for the HR Professional.
www.worldatwork.org/education • Base Pay Administration and Pay for Performance, Compensation Certification Course: C4 • Variable Pay — Improving Performance with Variable Pay, Compensation Certification Course: C12 • Total Rewards Management, Compensation Certification Course: T1.
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What HR Professionals Need to Know About
Stories about the recent financial meltdown and failing companies continue to dominate the headlines. These failures have stakeholders asking, “Why did this happen, and how can we avoid the same fate?” The answer? By knowing and effectively managing the risks that can affect shareholder value. To that end, companies can turn to enterprise risk management (ERM), a methodical, systematic and holistic approach to addressing a variety of risks, including those related to human resources.
Quick look ERM identifies financial, operational, compliance and business/strategic risks that threaten an organization and determines ways to reduce those risks. An Ernst & Young survey noted several HR risk areas that are most critical to organizations including talent management and succession planning, and ethics and tone at the top. The most common pay compliance issue is the incorrect classification of employees as either exempt or nonexempt.
By Wade Lindenberger, Q5 Group Inc., and Julie Adamik, CCP, CBP, CEBS, Employee Benefits and Training Solutions
Creating a risk profile
is an important part of the ERM process, enabling companies to prioritize risks and determine
which ones are most critical.
The Role of ERM ERM identifies financial, operational, compliance and business/strategic risks — events that expose an organization to loss — and determines ways to reduce those risks to a level that will allow the organization to successfully operate. The board of directors, CEO and a designated chief risk officer, or CRO, typically drive the ERM effort, which involves several steps: 1. Identify risks through the creation of a risk profile. 2. Document the processes underlying each risk, often in the form of a flowchart. 3. Determine processes that mini5 mize or eliminate the impact of Frequent risks, typically known as controls. For example, accurate job descriptions can minimize the impact 4 of the risk that employees will Likely be incorrectly classified as either exempt or nonexempt. 4. Identify ways to fix poorly 3 operating controls or implement Occasional nonexistent controls. 5. Evaluate the operation of controls to determine their effectiveness. 2 Unlikely Creating a risk profile is an important part of the ERM process, enabling companies to prioritize 1 risks and determine which ones Rare are most critical. Risks are usually prioritized based on likelihood of the risk occurring and the risk’s impact (e.g., financial) once it does occur. Figure 1 shows a typical risk profile for a company with eight identified risks, labeled A through H. This figure 34
illustrates that A, F and G are high or critical risks and require immediate attention, while the other risks are not as urgent. Using a risk profile, companies can determine which resources they must commit to ensure risks are adequately addressed and how commitment of those resources will impact the company’s financial position. Figure 1:
Risk Profile Example
5 Catastrophic F
Impact Risk = Likelihood x Impact
A strong ERM program can provide several benefits to the organization, including: 1. Alignment of an organization’s strategy with its appetite for risk 2. Enhancement of the quality of key decisions made in response to threats and risks 3. Reduction of operational surprises 4. Improved compliance with key regulatory and legal requirements. Lance Ewing, vice president of risk management at Harrah’s Entertainment, sees additional benefits from ERM. “ERM helps to assure the board, senior management, regulators and the shareholders that the entity has made the commitment to identify and prioritize the risks the company faces. This allows for a better night’s rest for the CEO, the CFO and the human resources leader.”
Key Considerations in Critical HR Risk Areas HR risks are a critical element of ERM and rank among the most important risks (see Figure 2). A 2008 survey by Ernst & Young, noted five HR risk areas that are most critical: 1. Talent management and succession planning 2. Ethics and tone at the top 3. Regulatory compliance
4. Pay and performance alignment 5. Employee training and development. Talent Management and Succession Planning
For a company to successfully reach its business objectives, it has to have the right people in the right job at the right time. To keep this talent focused on corporate success requires effective management, including a systematic plan Figure 2:
HR Risk Areas
• Talent management and succession planning
• Policies and procedures/ internal controls
• Ethics and tone at the top
• Regulatory change monitoring
• Regulatory compliance
• Vendor management and sourcing
• Pay and performance alignment • Employee training and development • Financial accounting and disclosure • Labor relations
• Whistle-blowing • Globalization • HR performance metrics/ cost management • Global mobility compliance and efficiency
• Fraud • Equity/incentive compensation
Source: 2008 Ernst & Young survey, Global Human Resources (HR) Risk: From the Danger Zone to the Value Zone
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Whether it is the
fiduciary duty of administering benefits plans, supporting effective total rewards communications programs or approving a corporate succession plan,
everything starts at the top.
for replacing that talent in the future. The absence of a clear plan to select the appropriate talent, manage it and prepare to replace it can have a far-reaching impact on all stakeholders — employees, management and shareholders. Talent management begins with selection. Selecting the right person for the job increases the likelihood that the individual will remain with the organization for an optimum period of time. Poor recruiting and selection not only add to the cost associated with turnover, which can be substantial, but can also have a negative impact on the morale and productivity of other workers. Ultimately, poor selection and management of talent at the management and executive levels can lead to poor decisions that can devastate a company’s financial position and reputation. Ethics and Tone at the Top
Whether it is the fiduciary duty of administering benefits plans, supporting effective total rewards communications programs or approving a corporate succession plan, everything starts at the top. Employees throughout the organization will take their cues from observing the behavior of those who serve in senior leadership positions. If senior executives do not support the current performance management program, it is no surprise that others in the organization will follow suit. Furthermore, organizations where diversity is not apparent in senior-level positions or where harassing behavior is tolerated among the senior ranks run the risk of costly lawsuits. Such behavior can also become known in the community, especially given the explosion of social networking Web sites. Companies then run the risk of being labeled as undesirable places to work, leading to difficulty in attracting the best and brightest talent. Regulatory Compliance
HR has become increasingly regulated in recent years, adding risk for organizations, particularly in compensation 36
and benefits. The most common pay compliance issue is the incorrect classification of employees as either exempt or nonexempt. Accurate job descriptions (including essential functions required by the Americans with Disabilities Act), strong knowledge of the Fair Labor Standards Act (FLSA) of 1938 and management support of accurate classification of employees should adequately mitigate this risk. Regarding accurate job descriptions, multiple methods should be used — including interviews, questionnaires and direct observation — to ensure validity of the data provided. Note that companies often focus on compensation compliance issues and do not realize the complexity and potential risk associated with employee benefits compliance. As a result, HR professionals often do not arm themselves with the knowledge and understanding they need to ensure compliance with benefits regulations. This leads to potential violations of Employee Retirement Income Security Act, Department of Labor and Internal Revenue Service regulations that can cost the company hundreds of thousands of dollars in penalties, fines and legal fees. The relatively small cost of adequately educating the HR team about employee benefits can avoid these costly non-compliance fines and penalties. Pay and Performance Alignment
Making pay decisions for reasons other than an individual’s actual performance increases the risk of expensive discrimination lawsuits. An additional risk occurs when employees misunderstand their total rewards offering, which leads to dissatisfaction and the search for new job opportunities. Turnover resulting from such misunderstandings occurs because employees do not have adequate knowledge about their total rewards. A solid and effective communications program can mitigate this risk and provide solid payback to the company even if it only avoids a few employees’ departures.
Employee Training and Development
Providing opportunities for employees to continually grow and learn professionally contributes to reduced turnover and cost avoidance for the organization as well as to the organization’s long-term success. The alternative is a stagnant organization that is unable to adapt to the changing needs of its customers. Employee training and development is tied directly to the creation of an effective succession plan. Without training and development, it is unlikely that companies will be able to tap homegrown talent when they need it. This means they will have to search outside the organization for talent and incur higher costs.
But the reality is that generally, HR has not stepped up to the ERM plate. HR professionals can get in the ERM game by taking these five steps. 1. Get Educated
Obtain a working knowledge of ERM so you can successfully interact with others in the organization and effectively represent human resources. The best place to start is with the CRO or the group that is leading the ERM charge, typically finance. These employees should be more than happy to provide a primer on ERM and suggest further reading (see Figure 3) and related classes. Figure 3:
How You Can Get in the ERM Game So many HR-related risks have a significant impact on companies that HR professionals need to get into the ERM game. In fact, human resources is an integral part of the ERM puzzle, Ewing said. “Human resources has the most insight into employees, and from there they can identify the risks, analyze the risks, mitigate or control the risks and provide vital feedback GE-54408-PrivateMarketsAdNEW3-29:. 3/27/10 8:08 AMon Page risk awareness,” he said.
Further ERM Reading
• “Why You Should Be a Human Capital Risk Manager” by Matt Shadrick and Seymour Adler, Ph.D., workspan, October 2008 • Enterprise Risk Management — Integrated Framework Executive Summary, Committee of Sponsoring Organizations (COSO) publication, September 2004 • Global Human Resources (HR) Risk: From the Danger Zone to the Value Zone, 2008 Ernst & Young survey • “Enterprise Risk Management in Practice: Profiles of Companies Building Effective ERM Programs,” 2007 Protiviti report.
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working knowledge of ERM so you can successfully interact with others in the organization and
effectively represent human resources. 2. Perform ERM Within Your Group
You are an expert on HR risk. Once you understand the basics of ERM, you can take steps to analyze HR risks in your organization. And don’t stop there. The more you can do before approaching the organization’s ERM leaders, the better, including identifying and prioritizing risks, determining controls and figuring out where you need to shore up issues.
About the Authors Wade Lindenberger is a director and shareholder of Q5 Group Inc. in Southern California. He is a frequent contributor to workspan. He can be reached at [email protected]
or 858-455-5447, ext. 211.
Julie Adamik, CCP, CBP, CEBS, is the president of Employee Benefits Training and Solutions LLC and author of the WorldatWork book, Developing
3. Communicate With Your Group
a Strategic Benefit Plan. She also is a WorldatWork faculty member, as well as
Make sure your group is kept up to date on progress as you work through the ERM process. Also, set up regular meetings to share news and brainstorm. This will ensure everyone is invested in the process and maximize chances for success.
a member of the association’s benefits advisory board. She can be reached at
4. Ensure HR is Represented as a Key Group Within the ERM Program
Step up and volunteer to become an enthusiastic member of the ERM program team. Being proactive and demonstrating that you understand the importance of ERM and how human resources contributes to it will be a great starting point to ensure that human resources is represented as a key player within the ERM program.
RESOURCES PLUS For more information related to this article:
www.worldatwork.org Type in any or all of the following keywords or phrases on the search line: • Compensation + risk • Talent management + succession planning • ERM.
5. Make ERM Part of Your Group’s DNA
ERM is an ongoing process, not a one-time event. Make sure your group understands that. You and your team should incorporate the ERM process into your everyday activities. One way to do that is to build ERM into the performance appraisal process. The benefits of acting responsibly and managing risk as part of your basic job function are immense.
Conclusion ERM can be an effective way for an organization to minimize exposure to financial losses and costly regulatory issues. By taking the initiative and understanding the five steps to getting in the ERM game, HR professionals can play an integral part in ensuring the success of its organization’s ERM initiative. 38
• Evaluating Job Content: How-To Series for the HR Professiona l • Developing Statistical Job-Evaluation Models: How-To Series for the HR Professional • Linking Pay to Performance: How-To Series for the HR Professional • Financial Overview for the HR Business Partner: How-To Series for the HR Professional • Documenting Job Content: How-To Series for the HR Professional.
www.worldatwork.org/education • Job Analysis, Documentation and Evaluation, Compensation Certification Course: C2 • Pricing Critical Skills and Unique Positions (Competitive Market Pay), Compensation Skill-Building Seminar • Writing Effective Job Descriptions, Compensation Skill-Building Seminar • Exemption Tests in Practice, Compensation Skill-Building Seminar.
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pay for perfor
nsuring executive pay for performance arguably is the single most important responsibility of the compensation committee. Yet stakeholders’ assessment of that term may substantially differ. Even management and board members may disagree on what constitutes meaningful pay for performance, making for difficult conversations when reviewing performance, determining incentive award payouts and setting next year’s performance objectives. Moreover, it may be more difficult to sell the executive compensation program to external stakeholders in the absence of an internal consensus.
Quick look It may be more difficult to sell the executive compensation program to external stakeholders in the absence of an internal consensus on the definition of pay for performance.
Executive incentive compensation is best viewed as a tool of business strategy execution, from which incentive plan measures directly flow. In theory, everything is about total shareholder return (TSR). In practice, however, the definition of performance must balance several practical considerations.
By Matt Turner, Pearl Meyer & Partners
Does your company’s executive compensation package establish a clear link between pay, strategy, and performance?
It follows that developing a clear and coherent definition of pay for performance is an operational requirement for the committee, and as such, compensation professionals working with external consultants and the management team are charged with supporting the committee’s responsibilities. This article suggests an effective approach grounded in three essential tasks: 1) validating the measures used in the incentive compensation framework, 2) agreeing on a definition of performance and 3) establishing performance goals grounded in multiple perspectives and context.
Validate the Measures Too often, the performance measures used in incentive plans are taken for granted. They may be the same basic metrics used for the past several years, or those utilized by most industry peers. Both factors may support the continued use of existing measures, but are far from sufficient. Executive incentive compensation is best viewed as a tool of business strategy execution, from which incentive plan measures directly flow. For example, a company may have historically found that the use of return on net assets (RONA) in an annual incentive plan correlated well with shareholder value. However, the recent introduction of new manufacturing technologies and product innovations may require that the company make significant new investments to stay competitive. If the company’s asset base is relatively old, those new capital investments will drive down RONA in the short run. As a result, the continued use of RONA as the annual incentive plan metric would create a conflict of interest for management. (Doing the right thing for the company would mean taking money out of their own pockets.) In such a scenario, it may be more appropriate to shift the plan’s performance focus to cash returns (i.e., measure profits and asset values before depreciation charges) or simply focus on operating profit for at least a few years to avoid sending management the wrong signals about investment in the business. Incentive measures also should be linked in a demonstrable way to shareholder value, meaning that improved performance against the incentive plan measures should be reflected in improved stock performance. There are numerous ways to test that linkage, including regression and time-series analysis, which offer insight into the strength of the linkage, as well as the appropriate timeframe for measuring performance using a particular financial measure. For example, operating income growth
among a company’s peers may exhibit a weak relationship to shareholder value over a one-year period. The observed relationship may significantly improve, however, when growth is measured over a three-year period. Such a finding may suggest that there is a lot of “noise” around the performance assessment in a single year. In this case, overreliance on operating income in an annual incentive plan could result in over- or underfunding the incentive pool relative to the intuitive judgment of the committee or management. While the plan design may allow for pool adjustment, it is preferable that the company minimize the need for such ex post decisions.
Define Performance Once an organization has validated the measures, it is important to construct a working definition of performance as applied to pay for performance — a task that is more difficult than it seems. For example, assume a company has TSR (stock price appreciation plus dividends) of 50 percent over a three-year period. If the S&P 500 is up 70 percent, but the company’s peer group is only up 30 percent, is 50 percent really “good” performance? Would the compensation committee be happy to make an above-target incentive payment? Let’s further assume that the company’s top-line growth was above the industry average, but earnings growth was below average. The performance picture is unclear and requires several judgments. Thus, the task of evaluating overall performance is clearly not an academic exercise. In theory, everything is about TSR. In practice, however, the definition of performance must balance several practical considerations: • How much of the performance definition should be based on pure, absolute TSR? Should relative TSR also be considered and, if so, relative to what (e.g., a broad index or a peer group)? • How much should be based on financial performance and over what timeframe? How should growth and returns be balanced? • What role should nonstock price, nonfinancial performance measures play (e.g., customer experience, innovation, strategic initiatives, leadership assessment)? • Is there a role for discretionary assessment? Ultimately, the compensation committee and management should agree on a “performance definition” that reflects a practical balance and acknowledges that: • Sometimes it is necessary to reward management for decisions that can be expected to lead to value, even if they ultimately do not have the desired outcomes.
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• Management has a different risk profile and investment time horizon compared to outside shareholders. • Not all senior executive performance can be reduced to a small set of quantitative measures. The compensation committee should pressure-test the performance definition against many future performance scenarios to ensure it is reasonably comfortable with the predicted payfor-performance results. Anticipate unusual outcomes and performance combinations like strong financial returns, weak top-line growth and seemingly strong absolute TSR that is weak relative to peers. The more effort that is put into defining and refining the performance definition, the less likely it is that the committee ends up with buyer’s remorse when incentives ultimately are paid out.
Establish Grounded Performance Goals With performance measures validated and a working definition of performance agreed upon, the remaining task is the calibration of performance to pay: What level of performance warrants a target level payout? What level of performance would the committee deem truly superior and worthy of maximum payouts or top quartile actual pay? Conversely, what level of performance represents a minimum, or threshold, below which no incentive should be paid? Traditionally, financial performance goals were a function of the planning or budget process, with plan performance taken to be at target (threshold and superior performance might be a simple plus or minus 10 percent or 20 percent around a target level). However, such an approach is no longer adequate, especially if a compensation committee wants a grounded and defensible set of 46
performance goals. What is needed is a multiperspective approach. Traditional planning and budgeting can be thought of as providing a bottom-up perspective that reflects the company’s view of what is doable over the upcoming performance period. But the committee should also take into account recent experience, such as historical performance and industry or peer company performance. Moreover, the committee should consider forward-looking expectations of performance. Analyst assessments of the company can be helpful in understanding how management’s planned performance might be received by investors. The committee may go a step further and consider economic modeling, such as discounted cash flow or economic value added (EVA) models of the company’s prevailing share price, to infer financial performance expectations. Committees can triangulate the various perspectives to arrive at a preliminary set of performance objectives. These preliminary objectives can be further scrutinized through an understanding of profit- and value-sharing relationships and affordability assessment. For example, for a company in a troubled economic period, a compensation committee (preliminarily) determines that it may be willing to pay at threshold, target and maximum for pretax earnings of $9 million, $12 million and $16 million, respectively. In our example, however, the incentive pool would be $1 million, $4 million and $8 million, respectively. The committee may not be comfortable with a profit-sharing relationship of 25 percent at target and 33 percent at maximum. At this point, the committee may circle back and seek a practical compromise between performance expectations and incentive affordability.
Conclusion Gaining real agreement on the meaning of pay for performance will require a significant commitment of time and effort on the part of management and the compensation committee. For management, it is increasingly important that this effort be conducted as an integrated effort of human resources and finance. However, the investment in time and effort will pay off in terms of better mutual understanding and more productive year-end discussions regarding incentive determination and goal-setting, as well as a coherent story for external stakeholders. About the Author Matt Turner is a managing director in the Chicago office of Pearl Meyer & Partners. He can be reached at [email protected]
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How Performance Shares Fit Into
These days, companies can choose from a host of equity vehicles and designs, which at times can seem overwhelming. A well-designed equity program allows a company to attract, motivate and retain key talent while aligning management’s interests with shareholders and balancing risk and reward. A company can best achieve this through using more than one equity vehicle and integrating a blend of vehicles, such as stock options, restricted shares and performance shares. A stock option allows management to participate in incremental value above a set price, but is perceived to
A performance share generally is only perceived to have value if the performance metric/milestone is met as a result of its earn-it-or-lose-it characteristic. There are many considerations related to designing performance shares, including the goals, the performance period, the vesting period and the timeframe of the program. Companies can get past the fear of downside by guaranteeing for the first year a minimum number of performance shares if performance metrics are not met.
By Craig Kams and Pamela Abreu, Skyworks Solutions Inc.
The value of a restricted share fluctuates with the price of the stock
and, as a result of its underlying value, is perceived to have value as long as the stock is liquid and trades at some price above zero. have no value when the stock is below that price. The value of a restricted share, on the other hand, fluctuates with the price of the stock and, as a result of its underlying value, is perceived to have value as long as the stock is liquid and trades at some price above zero. A performance share, meanwhile, is similar to a restricted share but is only delivered if goals are met and therefore generally is only perceived to have value if the performance metric/milestone is met as a result of its earn-it-or-lose-it characteristic.
Of these three vehicles, performance shares appear to have the least familiarity among compensation practitioners, and therefore are typically absent from the mix. However, they have a key role.
Why Use a Mix of Equity Vehicles? For many years stock options were the equity vehicle of choice. However, in 2005, companies became subject to SFAS 123(R), which put equity plans on a level playing field from an accounting perspective. A migration began to occur (although not fully) to other vehicles, including full-value vehicles such as restricted shares and, on a less prevalent basis, performance shares. While many companies still use stock options as their primary equity vehicle, as they are easy to communicate and understand, stock options have some disadvantages, including minimal retentive value and irreversible accounting expense (see Figure 1 on page 52). Note that although a number of companies have introduced Hate Having Your restricted shares, some critics have Picture Taken? labeled that approach as “pay for a There are other ways to get pulse,” as many plans are generally your hands on a limited-edition workspan T-shirt. How about designed so participants receive responding to the latest Focus shares regardless of performance.
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What Are Performance Shares? Performance shares are full-value shares that vest upon the attainment of pre-established performance goals. If the goals are met, the awards are
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if designed appropriately, are considered by investors and institutions to be shareholder friendly, as the awards align the objectives of participants and shareholders. paid in the form of company stock, and the participant owes ordinary income on the fair market value of the shares issued. (Note that many companies withhold shares to cover the tax liability, resulting in fewer shares delivered to the employee, so that the employee does not have to cover the tax liability with cash.) Employers are eligible for a tax deduction at the time the shares are issued to the participant. If the goals are not met within the defined performance period, the shares expire, and the participant does not receive the shares. Shareholder and employee reaction to performance shares is mixed based on design. For example, while the shares can link performance to crucial business drivers, they can also Figure 1:
Stock Option Disadvantages
• Options have the potential to be under water, resulting in minimal retentive value. • Companies rely on valuation models like Black-Scholes to determine the accounting expense, which is a projection, yet the expense for options is irreversible. • Options can be criticized as incenting short-term gains at the expense of long-term value creation. • Tax deductions can be misaligned.
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result in a complex design that decreases focus on long-term performance (see Figure 2).
Why Performance Shares? Performance shares, if designed appropriately, are considered by investors and institutions to be shareholder friendly, as the awards align the objectives of participants and shareholders. Unlike stock options that have been criticized by some as incenting short-term thinking, the value of performance shares fluctuates with the stock price and, combined with ownership requirements, creates a tangible incentive to increase company value over the long term. Furthermore, performance shares can be designed to be truly performance-based so there is increased risk and reward. There is upside for exceeding goals but downside for not achieving them. The shares also allow a company to zone in on one or more key goals for participants to rally around. Another advantage to performance shares is accounting treatment. With stock options, the accounting expense is fixed at the time of grant. The most common method of determining the accounting expense is Black-Scholes, which assigns a projected value that may never be recognized. With performance shares, however, the expense, which is fixed at the time of grant, is taken over the performance period as long as performance is probable enough to begin recognizing expense. In addition, as long as the metric is not based on any stock market-based metric (such as stock price), there is the ability to reverse the expense recognized if the performance criteria are not met. This is particularly attractive in situations where the market environment significantly changes and goals become unachievable, as companies can let the performance period run out (shares expire) and reverse the expense.
Another accounting benefit is there is no impact to earnings per share until the performance condition is satisfied and shares are actually earned and issued. Also, unlike options that have a disconnect from a company tax perspective of when the value is recognized and when the company recognizes the tax deduction, the tax impact for performance shares for both the participant and the employer occurs when the shares are earned and figure 2:
issued. Another tax benefit resides under Section 162(m), which limits a company’s annual tax deduction to $1 million for nonqualified compensation paid to officers who are reported in the proxy. Similar to options (but unlike restricted shares), performance shares, if structured appropriately, qualify as performance-based compensation under Section 162(m) as qualified compensation, which means this deduction limit does not apply.
Performance Share Pros and Cons
• Creates a strong performance link to critical business drivers (may be stock price or financial goals)
• Requires long-term goal setting, which may be difficult to do in a volatile market
• Minimizes unproductive dilution (awards are dilutive only if goals are achieved and shares are issued)
• Increases administration from a goal tracking and accounting perspective
• Requires fewer shares than option awards to deliver competitive value.
• Results in a design which, if too complex, could lessen employee focus on long-term performance.
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Companies can get past the fear of downside by guaranteeing for the first year a minimum number of performance shares if performance metrics are not met. Performance Share Considerations Introducing Performance Shares There are many considerations related to designing perforinto your Organization mance shares, including the goals, the performance period, Many companies are hesitant to use performance shares the vesting period and the timeframe of the program. as a result of either discomfort with a new vehicle or fear Goals. Some programs use financial or nonfinancial of the downside. Companies can get past the discomfort metrics, while others use project milestones. Metrics should by gradually introducing performance shares into the be set that do not duplicate a company’s short-term incenorganization. Some companies like to start by introducing tive plan, but complement it. Examples include earnings per performance shares to a small group as a pilot program share (EPS) targets, performance against a peer index or (such as to executives or a few project teams) to develop long-term operating goals. Be careful not to select a metric comfort around the vehicle and then roll it out more that is difficult to understand, track or quantify, such as, in broadly (see Figure 3). some industries, market share. Companies can get past the fear of downside by guaranPerformance period. The performance period, which is the teeing for the first year a minimum number of performance period in which performance is being evaluated and which shares if performance metrics are not met. This allows the determines the shares to be earned, can be a period of time upside for above-market performance but limits the downside (e.g., a fiscal year) or multiple periods of time (e.g., a few mile- of delivering below market value for underperformance. Be stones to be met within certain periods within the fiscal year). careful, though, as the amount guaranteed will not count as Vesting period. Some companies design their plans to qualified compensation under Section 162(m). Also, note that determine the amount of shares earned at the end of the at the executive level, the guarantee becomes more palatable performance period, which then vest for a period thereafter, to shareholders if coupled with ownership requirements. after which time they are issued (typically a shorter perforBoth these strategies allow management to become familiar mance period with additional vesting thereafter). Other with the vehicle. companies have any earned shares vest at the end of the performance period, Figure 3: One Company’s Evolution to Performance Shares at which time the shares are issued (typically a longer performance period Year 1 Year 2 Year 3 Year 4 Year 5 with no additional vesting). Options Options Options Options Options Timeframe of the program. RSAs RSAs RSAs PS (Execs +) For programs that are designed PS (Teams) PS (Teams) PS (Teams) PS (Execs) with milestones, companies should be conscious of the end date, as by the end date, if performance is not Remove Expose to Introduce guarantee achieved, the shares expire. Companies full-value Pilot PSAs PSAs with a and expand shares guarantee should therefore set the end date participation out slightly further than what they Restricted Stock Awards (could use as an alternative to restricted stock units (RSUs)) initially anticipate to allow for unexPerformance Shares pected events, but not too far out to be unreasonable. 1
Conclusion RESOURCES PLUS There is a caution of using performance shares as the For more information related to this article: sole equity vehicle, particularly if the metric is stock price. In an economic environment (like the one we have recently www.worldatwork.org experienced) where stock price performance is not necesType in any or all of the following keywords or phrases on the search line: sarily correlated with company performance, performance • Performance shares shares could expire despite outperformance relative to • Stock options peers, participants could receive no equity delivery for the • Performance goals. period and, unlike with options, there is no opportunity www.worldatwork.org/bookstore • Administering Stock Option Plans: A How-To Guide to wait out the cycle. This could result in below market for the HR Professional retention value on key talent. Some companies have • Executive Compensation: An Introduction to Practice & Theor y addressed this by restructuring their performance shares • Stock Option Alternatives, Second Edition — FASB and AJCA Update from absolute metrics (company stock price targets) to • Understanding Executive Compensation: A Practical Guide for Decision Makers. relative metrics (peer stock price index), which, as long as it is clearly disclosed, is generally accepted by shareholders www.worldatwork.org/education • Determining Pay For Executives (Competitive Market Pay), and Risk Metrics/ISS (an institutional shareholder advisory Compensation Skill-Building Seminar group that influences shareholder votes). But there is risk in • Advanced Concepts in Executive Compensation, Compensation Skill-Building Seminar putting all your incentives in one basket. • Fundamentals of Equity-Based Rewards, The best programs are designed with a portfolio approach, Compensation Skill-Building Seminar. which integrates vehicles like a blend of stock options, restricted shares and performance shares. This allows the leverage of stock options and greater shares on the upside, delivering above-market value for above-market performance. On the downside, this design delivers below-market value for below-market performance. In sum, performance shares can be a shareholder-friendly equity Dallas-Ft. Worth area professionals - increase your earning power by expanding vehicle that aligns participants’ your total rewards knowledge! The North Texas Compensation Assocation offers interests with shareholder interests. unique opportunities to: While there is more risk, there is also • Expand your professional knowledge at We look forward to meeting potential for more reward. Although NTCA events featuring industry experts and greeting all WAW conference attendees! performance share programs are not • Network with your peers as prevalent as stock options or Come visit us for • Secure special member pricing at WorldatWork certiﬁcation courses refreshments & give-aways restricted shares, programs that and events at the conference are properly designed can be a very • Post a job or ﬁnd a new career through Monday night at Booth 419. our website and Linked In network powerful motivator.
Learn & Earn
About the Authors
• Learn more about what NTCA can do for you at www.ntcassoc.org.
Craig Kams is senior director, compensation and benefits, at Skyworks Solutions Inc. in Massachusetts. He can be reached at [email protected]
Pamela Abreu is manager, global equity plans, at Skyworks Solutions Inc. She can be reached at [email protected]
Rethinking Broad-Based Equity:
Our world has changed in the past decade, so much so that it is helpful to revisit some of our thinking on broad-based equity. We saw the dot-com boom place incredible pressure on retention, organizations moved from being fairly predictable make-and-sell conglomerates to nimble, ever-shifting, service-oriented enterprises, and the ’90s-era thinking about being borderless,
There are lessons to be learned that can be very powerful in improving the impact of employee equity awards.
Public Professional Services Firms Defined Public professional services firms are just what they sound like: professional (usually consulting) firms that have elected to float their equity in
A Different Approach to LTI Grants global and alliance-driven quietly became a reality. At the same time, the same basic assumptions and practices to how we offer (or do not offer) equity opportunities are often applied to employees other than named executive officers (NEOs). Much of the author’s experience with a growing segment of the business community — professional services firms that now trade publicly — suggests a new way of thinking about employee equity awards. These firms’ struggles to attract, retain and motivate senior, nonexecutive professionals shed some light on how the dynamics of long-term incentives (LTIs) need to change. In fact, parts of almost any organization have at least a portion that looks increasingly like theirs do: pockets of high-impact employees with many career alternatives who we want and need to stay and who add critical value.
the public markets instead of remain private. There are many well-known examples: Accenture, FTI Consulting, Navigant Consulting and Huron Consulting Group in the general consulting world, and Towers Watson and Hewitt Associates in the HR space.
Quick look Where resources are scarce, really knowing who is contributing value and how can make all the difference. In many cases, getting people aligned with what you’re trying to accomplish and then aligning pay makes pay go further and, incidentally, raises the exit price competitors will have to pay to poach talent. There is little evidence, even after all these years, that giving down-the-line employees equity grants changes the way employees think about their jobs or how to do them.
By David C. Kuhlman, Axiom Consulting Partners workspan 05/10
The basic assumptions companies apply to broad-based LTI grants are essentially unchanged for the past 20 years. The essential nature of these firms is that business success is driven by a cadre of highly seasoned professionals who are often independent-minded and very aware of their employment options. They are often marketers, business developers and executors all wrapped into one. In many ways, they closely resemble the consulting or service organizations many companies have. They also share important characteristics with research and development organizations, legal departments (particularly litigation or intellectual property lawyers), supply chain experts and other groups of high-impact individuals. Indeed, many of these internal professionals came from and often cycle back to the more “pure form” organizations (e.g., internal staff attorneys coming from outside law firms). When a professional services firm is public, it faces a particular compensation challenge. Its senior professionals aren’t executives exactly, and they are certainly not NEOs. On the other hand, they almost inevitably make less in annual cash pay than they could in a private firm. Some of it has to go to shareholders in the form of profit that would otherwise be split among the partners of a private firm. The trade-off for this is usually equity. At the same time, shareholder advocacy groups and NEO equity awards place real pressure on the amount available. As a result, these companies find themselves having to carefully manage and differentially allocate equity awards for maximum 58
impact on retention, motivation and, as needed, attraction.
Assumptions About Broad-Based Equity So what are the possible implications? Companies have to ask themselves whether they’re spreading a scarce resource to people who in many cases don’t fully value it or whose behavior won’t be changed or impacted, as well as whether the organization’s economic efficiency will only slightly improve. Maybe historic assumptions are still right, but there’s enough accumulated evidence to suggest that companies may need to think about things differently. The basic assumptions companies apply to broad-based LTI grants are essentially unchanged for the past 20 years. Consider PepsiCo Inc. and others’ first forays into broad-based equity grants in the ’90s, for example. Wide swaths of employees received stock options in the belief that it would cause them to behave more like owners. However, the movement of capital markets and accumulated experience caused this practice to fall out of common use, at least until the dot-com boom. Although practices have ebbed and flowed, there are just a few basic ideas that have remained constant, including: • Granting LTIs to employees will help them think like owners. However, there is little evidence, even after all these years, that giving down-the-line employees equity grants changes the
way employees think about their jobs or how to do them. These grants can certainly affect the way they think about their company, but their jobs? Without a better linkage between jobs, talent and strategy at a basic level, companies must ask themselves whether LTI grants to these people are far less effective. • Wealth creation enables retention by raising the “walkaway cost” of leaving unvested LTIs on the table. While this is mathematically true, most employees apply an often substantial “time discount” to their expected LTI earnings, often far more than the time value of money would suggest. This also varies substantially with market momentum but in some strange ways since bull markets increase the expected value but also, in many cases, increase the cash-out rate of employee LTIs. Pro-rata vesting can help moderate these swings, but the “time discount” remains: Employees usually do not value LTIs as a retention vehicle to nearly the degree their companies want them to. • Equity compensation is an efficient way to deliver a cash-equivalent amount of compensation. The costvalue efficiency of nonexecutive LTI grants has largely disappeared. The Financial Accounting Standards Board (FASB) has done its job well: The cost of delivering $1 of LTIs versus $1 in cash has basically become roughly equal. Certainly under the new rules, there are some small benefits in timing and cost flexibility, but those benefits are often offset by the “time discount” employees apply (see previous point). Simply put, it now costs nearly $1 to deliver $1 worth of compensation that employees almost invariably value at less than $1. However, cash LTIs for employees rather than equity seems to moderate this effect, but this, of course, limits
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the “market lift” that successful performance can give to equity. • Employees have come to expect LTIs. In the end, LTI grants to nonexecutives only have real impact cumulatively, over time. Granting $20,000 in four-year restricted stock to someone making $120,000 a year looks small (i.e., “I get $5,000 a year from now? Only if I stay? Subject to what the markets are doing at the time? Gee, thanks.”) However, four years from now, with more than $20,000 in accumulated vesting taking place, the numbers start to look material. The problem is that the movement of talent, individuals’ career horizon with their current employer and the risk of layoff make thinking four-plus years out frankly laughable for many. • All employees are important to delivering on the company’s strategy. While this is true, a rigorous analysis linking the work that individuals are doing to strategy usually reveals that different functions and different jobs have a disproportionate impact on achieving the strategy. This difference in impact often isn’t proportionate to salary grade, making salary grade-driven LTI award schedules questionable. The world has changed around us, putting pressure on whether these really should be the governing assumptions for nonexecutive LTI grant practices.
are scarce, really knowing who is contributing value and how can make all the difference. • The exit price is usually more important than what compensation surveys say. Exit price refers to the amount of money it takes to induce someone to exit the organization, compared to the prevailing rate in the market. An important consideration is that the “bid price” for talent based on surveys frequently understates the “ask price” of individuals when they’re getting hired away. This point of view certainly needs to take into account less tangible things like work quality, career potential and the like, but in the end, focusing on key value creators will pay for itself in motivation and retention, even if it means “overpaying” what the compensation surveys suggest. This is obviously an imprecise, moving target, but an important perspective nonetheless. • Impact players value impact… often to the exclusion of other things. We have found giving individuals a clear understanding and ability to improve organization performance is perhaps the most powerful motivator an organization has at its disposal. In many cases, getting people aligned with what you’re trying to accomplish and then aligning pay makes pay go further and, incidentally, raises the Figure 1:
Lessons Learned There are some important lessons learned from the world of public professional services firms that can have tremendous impact on the effectiveness and efficiency of equity compensation. They include: • Companies need a deep understanding of employees’ impact. These businesses are people-intensive but, to be blunt, not all senior contributors are impact players. Where resources 60
exit price competitors will have to pay to poach talent. • There is often not enough stock to go around. Shareholder advocacy groups impose dilution caps, and there are many competing interests, including NEOs. Dilution caps used by shareholder advocacy groups are often too constraining. High-impact nonexecutives can be attracted and retained by filling the gap with private-company alternatives (such as consulting firms), but that has to be done effectively in small amounts every year. Also, note that this relentless treadmill often puts executive compensation practices and impact player rewards at odds, but the real underlying issue is often that outside forces leave the company with not enough stock to go around. Public professional services firms face these issues most acutely, but any organization with a mix of NEOs and high-impact nonexecutives can face the same challenges. In fact, the challenges above become even more difficult when contrasted with the conventional wisdom about employee LTI plans.
Different Ways to Think About Broad-Based LTI Grants So, how can this insight be applied to broad-based equity grants? (See Figure 1.) These are several important lessons:
Testing Old Thinking/New Thinking
Old Views of Broad-Based LTI
New Views of Broad-Based LTI
Do you generally grant LTIs to employees following uniform guidelines by salary or organizational level?
Are grants substantially higher for groups with a closer alignment to strategy achievement?
Is there an assumption that LTIs will make employees “think/act like owners”?
Can individuals closely match their responsibilities and goals to strategy?
Do individuals within the same group at the same level generally get the same award?
Are awards to individuals differentiated based on impact?
Is the competitive analysis used the same for all work groups/departments?
Does your competitive analysis for high-impact groups take into account both public and private competitors?
Create Performance Management Programs That Work Attraction and retention troubles may be at bay due to the most recent economic crisis, but there is still a strong business case for integrating rewards and talent management programs. Organizations that apply an integrated approach in this area have an advantage in attracting, engaging and retaining the talent they need to succeed in their markets — and financially outperform their peers. The key to success is how well the program is implemented and executed. In this collection of articles, thought leaders provide ideas and concepts on how to create performance management programs that work. An effective performance management program is HR’s best opportunity to influence positive business results, and for that reason should be a priority for the entire human resources team.
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• Start with linking to strategy. There is no substitute for a deep understanding of which jobs, roles and people play a pivotal part in delivering on the organization’s strategy. Holding aside the (enormous) side benefit in value creation, this is the first, best road map to understanding where applying scarce equity grants will have the greatest impact. • Focus on the employees who are creating value. In a service-based economy, one of the main competitors for talent is in fact smaller, flatter and often private businesses. The dot-com frenzy, while abated, taught us all that. Innovation-driven companies like Apple or marketingsavvy organizations like Procter & Gamble (P&G) are built on individuals and groups well trained and focused on the unique way their organization creates value. These skills are coveted not just by Microsoft or Unilever but are well-recognized and valued by the individuals themselves. They are well aware of their flexibility, both to join competitors and to go out on their own or in small groups. How many brand marketing consultancies has P&G spawned? How many former Apple employees Steps You Can Take to Start Rethinking Broad-Based Equity Practices Figure 2:
1. Analyze work, people and strategy to create a clear link. This is the surest guidepost for finding impact players. 2. Revise LTI award guidelines to specifically target impact players and impact groups. 3. Consider program redesign for employee LTIs (vs. NEO LTIs) to capture more specific, milestone-related and value creation-oriented measures. 4. Assess ongoing share requirements over time rather than year over year. This will create a better sense/ability to allocate awards thoughtfully and on an annual basis.
are now key players in startups? Explicitly using LTIs to recognize and reward these contributions makes it more reasonable for highimpact employees to stay than to build something on their own or with others. This can become even more critical if the LTI is customized for the group’s specific strategic impact, mirroring a startup. • LTIs should be more differentiated and continuous. Although nobody can exactly determine an individual’s exit price, companies are generally pretty good at identifying where they have risk. Greater differentiation in the LTIs given (politically challenging, to be sure) and annual grants will result in impact players accumulating a substantial stake, thereby hedging a company’s bets against the employees’ exit price. Deferred cash compensation can also be helpful in creating a stream of awards and gains. • Determine LTI grant requirements and fight for the necessary resources. One working hypothesis is that current dilution guidelines propagated by shareholder advocacy groups are too constraining, particularly in people-intensive businesses. Although narrowing participation may reduce the problem, many organizations will find their ability to gain parity with comparable private cash payers continually impaired. In the end, a thoughtful strategy for nonexecutive LTI grants will pay off in value to shareholders, and this case needs to be put to the markets aggressively. Obviously this approach has some challenging implications. First, it means that whole swaths of the organization that used to be eligible for LTIs no longer will be. More than likely, these employees will be upper middle management staffers in lower-impact functions. Second, average grant sizes will increase, albeit to fewer people.
However, in the end, thinking differently about the underlying drivers of LTI grants to nonexecutives will pay off in terms of performance, motivation and retention where it matters most. (See Figure 2.)
Conclusion Equity grants will continue to be a valuable tool for attracting, retaining and motivating nonexecutives. However, in a more competitive world where key staff is critical to strategy achievement and shareholder scrutiny makes equity resources scarce, a more focused, value-driven approach can make all the difference. The leading edge of this change can be seen in public professional firms, but these lessons can be learned by all. About the Author David C. Kuhlman is a partner at Axiom Consulting Partners in New York. He can be reached at [email protected]
RESOURCES PLUS For more information related to this article:
www.worldatwork.org Type in any or all of the following keywords or phrases on the search line: • Broad-based equity • Long-term incentive plans • Dilution • Equity grants.
www.worldatwork.org/bookstore • Administering Stock Option Plans: A How-To Guide for the HR Professional • Stock Option Alternatives, Second Edition — FASB and AJCA Update • Understanding Executive Compensation: A Practical Guide for Decision Makers • Executive Compensation: An Introduction to Practice & Theory.
www.worldatwork.org/education • Determining Pay For Executives (Competitive Market Pay), Compensation Skill-Building Seminar • Advanced Concepts in Executive Compensation, Compensation Skill-Building Seminar • Fundamentals of Equity-Based Rewards, Compensation Skill-Building Seminar.
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As organizations continue to navigate the recession and look toward the recovery, they will need to do everything they can — likely with limited resources — to strengthen employees’ focus on the skills needed to propel businesses forward, as well as recharge employees’ commitment and sense of optimism. Getting these priorities right will allow organizations to boost competitiveness and keep — as well as attract — great talent. In a 2008 Hewitt Associates and Human Capital Institute study involving 700 senior talent leaders, titled The State of Talent Management: Today’s Challenges, Tomorrow’s Opportunities, only 48 percent of survey respondents said employees have a clear picture of skills they should build to support business growth.
Organizations report that their attempts to revitalize career messages have had mixed results, failing to show employees how to grow in ways valuable to the business and themselves. Key steps for success include: confirm business-critical capability areas; set proficiency levels and performance measures; and create time/growth progression maps. What’s almost always missing in career systems are easily understood depictions of the go-forward opportunities for skills growth the company can offer and will value and support.
By Bob Campbell with Scott Cohen, Ph.D., Hewitt Associates, and Charlene P. Allen and Susan Cromidas, CDM workspan 05/10
This makes practical career paths that guide growth toward future-critical capabilities more important than ever. Constructed in smart new ways, career paths can play a pivotal role in an organization’s total talent management strategy, providing employees with clear messages about how to grow skills and succeed in step with the firm. To have this impact, career paths need to be constructed and conveyed in very different ways than traditional career development approaches, which tend to depict linear stair-step job sequences and don’t always reflect today’s need for dynamic, real-world pictures of progression. This article shares how one industry-leading firm, CDM, took an innovative approach to career paths, showing employees how to aim their skill-building toward the greatest organizational impact and individual growth. What the company has learned and accomplished along the way is especially instructive now to help organizations spark spirit, energy and prospects for success, as well as renew a focus on competitive advantage.
Background — CDM Founded in 1947, CDM is a consulting, engineering, construction and operations firm in Cambridge, Mass., with more than 4,500 employees in more than 100 global offices. In addition to providing sustainable, integrated solutions for water, the environment, transportation, energy and facilities around the world, CDM is equally committed to being the employer of choice for the best people in its industry. The firm places great emphasis on attracting and cultivating a workforce that shares a commitment to its core values and is dedicated to personal and professional growth. Central to achieving this is providing a clear picture of the skills needed to maintain 66
CDM’s competitive advantage and provide rewarding career opportunities. Several years ago, in response to an employee engagement survey that identified a need for more career planning tools and resources, CDM partnered with Hewitt Associates to build a set of clear, real-world career paths for employees that delineate skills needed for advancement while inspiring growth and professional development.
Five Key Criteria Principles Powering the New Approach
CDM knew the corporate career development landscape was littered with unfulfilled promises. Across industries and job types, organizations report that their attempts to revitalize career messages and tools have had mixed results, failing to show employees how to grow in ways valuable to the business and themselves. The team identified five core criteria for success: • Accelerate guided growth. The team realized that, if approached in the right way, career paths could achieve two important objectives at once: 1) provide energizing pictures of career growth options so achievers could see
in CDM clear routes to future success, and 2) show how these opportunities hinge on building specific capabilities that the firm’s business strategy will increasingly require to fuel competitive strength and growth. • Be practical and straightforward. Career paths would need to provide pragmatic, real-world information and examples that are assembled and illustrated in quick-to-grasp ways, directionally correct vs. exhaustively precise, and useable by managers and employees to facilitate meaningful career development discussions and planning. • Be replicable firmwide. The approach to career paths would need to be universally applicable across CDM. This would reinforce talent management concepts and vocabulary shared by all disciplines. It would also provide route maps to cross-develop and cross-deploy employees, equipping them for increasingly global cross-discipline projects and giving them a rich picture of the array of CDM-wide opportunities. • Be part of a total talent system. Building a career structure
Figure 1: A Framework for Gauging Growth — Representative Foundation, Practice and Mastery Definitions
Foundation Possesses and continues to build basic knowledge and experiences; handles assigned work to contribute to discrete portions of total solutions; applies working knowledge of guidelines and standards to anticipate problems, provide workable solutions and execute work; asks about and begins to learn about broader/deeper dimensions of the topic and its interrelationships with other key content areas. Practice Experience-based understanding of this topic enables sound recommendations and approaches, and assessment of priorities; performs independent work of substantive complexity in this area; participates in and initiates collaboration among key staff in this area — from cross-function to cross-organization — to deliver the best solutions; develops strategy and approach for moderate to complex projects; recommends and develops improvements to guidelines and standards. Mastery Applies a comprehensive grasp of the topic to direct and advance all aspects of work; develops strategy and approach for the organization’s most complex issues in this area; creates advancements that contribute to standards of the practice; institutionalizes cross-organization approaches, protocols and knowledge-sharing; recognizes companywide resource to others involved in this area; provides guidance and review and develops guidelines and standards.
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disconnected from other talent management processes/resources would immediately diminish the structure’s relevance and usefulness. The career structure had to be linked to CDM’s internal university for access to training, to performance management to synchronize capability areas key to both current performance and future prospects, and to job classification/grade/title structures to anchor career paths with existing success markers. • Legitimize “success in place.” Career paths are needed to reinforce excellence in one’s current job as the primary vehicle for career success, with materials and messages focused on getting strong results in one’s current role, as well as showing ways to have increasing impact and value for the firm, with or without promotions.
Forging New Paths Solving for Career Opportunity
Building a career structure disconnected from other talent management processes/ resources would immediately diminish the structure’s relevance and usefullness.
and Business Strength
To meet these five criteria and create career paths as real tools for staff and business growth, it made sense to start with one discipline cluster within CDM as a pilot. From that, the team could assess its value and leverage the approach to other discipline clusters in a phased strategy. The engineers and scientists cluster — the largest population within CDM — was the logical starting place. Figure 2:
Essential for this and all career paths to follow was a sponsor at the executive leadership level, as well as in-depth participation by senior managers. Also, buy-in and input from engineers and scientists at all levels of the organization would be a prerequisite for accuracy and adoption of the career path. Key stakeholders were engaged as functional expert teams, an executive sounding
board and “red teams” to reality-test the new approach and critique work products for real-world CDM relevance and usability. And because the prototype career path would have to be replicable firmwide to create a universal career system (see criterion three), these groups also provided perspectives on how to build a career path tailored to engineers and scientists yet applicable to disciplines across the firm. Applying the most straightforward approach was critical to success. Key steps included: 1. Confirm business-critical capability areas. 2. Set proficiency levels and performance measures. 3. Create time/growth progression maps. 4. Link to training and other talent processes. 5. Align grades, titles and other areas’ structures.
Confirm business-critical capability areas
To satisfy the first criterion, the career path needed to be grounded in the capabilities critical to achieving CDM’s mission and goals. This focus on business-critical capabilities helped employees see practical progression paths important for the business through which they could succeed. Detailed sets of competency definitions wouldn’t provide this type of simple, cohesive picture of performance.
Sharpening the Picture of Performance — Capturing What Counts
Performance Profiles Specify Performance Expectations in “3-D”
Behaviors Needed to Succeed
What employees need to DISPLAY — the behaviors constituting an effective approach to work
Skills and Know-How Key to the Role
What employees need to DO — the actions and the decisions the work involves
Results and Outputs
What employees need to DELIVER — the measurable outcomes and outputs expected
More granular by design, competencies are great tools for in-depth coaching and accurate hiring, and that’s important. But like prisms, they refract performance into so many facets that they can’t provide the kind of focused snapshot of business-critical capabilities employees could aim for and acquire. The team knew that the capability areas — once defined — could be underpinned by sets of job-based competencies, which serve as the learning/coaching tools for building strength in each capability area. The team began by asking leaders and discipline experts questions like, “What must CDM be great at for us to continue to lead today and in the future?” Through high-energy, exploratory discussions, a set of key capability areas (see the six column headings in Figure 3 on page 70) emerged as the first step in a cohesive game plan for growth.
Set proficiency levels and performance measures
Delineating levels and measures of know-how is key to a career progression process, but this step often devolves into an exercise to wordsmith subtly nuanced skill/ output differences, composing them in an attempt to justify and explain predetermined levels. The result often sounds like this: “Level one, client-aware; level two, very clientaware; level three, extremely client aware.” CDM rejected this, instead pushing to recognize and describe only the real-world, plainly stated vs. academically described meaningful differences in performance — capturing and spotlighting the important, recognizable levels of output and contribution that performers demonstrate and coaches can help people recognize and reach.
Two important ideas helped CDM identify proficiency levels and measures highly useful to employees. The first was to apply three broad, universally applicable capability levels — foundation, practice and mastery — as an organizing structure for people’s thinking and assessment of current performance and future readiness criteria. Rather than “gates” to clear, these are reference points for comparing one’s skill attainment to the requirements of current and prospective job needs. The definitions are the jump-off point for technical, discipline-specific definitions and metrics illustrating career path skill progression. (See Figure 1 on page 66.) The second idea was a new way to depict a job’s key requirements, to capture what matters to performance in a way that puts the essential expectations out front in a format that’s easy
to understand and discuss. Called “3D” role profiles or performance profiles, they’re a clear snapshot of what an effective performer in the job needs to display (behavioral competencies such as judgment, teamwork), do (technical proficiencies, know-how, duties) and deliver (measurable results/outputs). This 3D view of performance quickly captures what matters most in a way that works for employees and coaches in fast-moving business operations. (See Figure 2 on page 68.)
growth the company can offer and will value and support. What if the path could give employees in each job/ function a graphical depiction of how CDM needed most people in a certain discipline cluster to grow over time? With CDM’s cultural tenet of practical innovation guiding its work, the team generated and tested a number of ideas, and the result was unique visual/verbal descriptions of career possibilities that demystify growth opportunities without promising promotions, illustrated in the example that follows. To assemble these, the team started with the six business-critical capability areas and their real-world progression/performance levels, identified in steps one and two. Then, senior employees and expert practitioners in the pilot group were convened
Create time/growth progression maps
Even with clear proficiency and performance metrics, what’s almost always missing in career systems are easily understood depictions of the go-forward opportunities for skills Figure 3:
to outline and reach consensus on how — over time and through successive levels — the firm will need most engineers and scientists to grow and expand their involvement in, mastery of and reliance on those six essential capabilities. This enabled the team to illustrate vertical time-and-growth progression maps in which the bottom of the graphic represents the start of one’s career, with foundationlevel skills and impact principally in doing technical work. The relative width of the columns corresponding to each capability area then shift as time, proficiencies and roles advance upward, reflecting the opportunities likely available and, simultaneously, CDM’s projected requirements of most engineers and scientists in this area.
Conveying Business-Based Career Opportunities
Mapping Importance of Capabilities Over Time Job Grades/Levels (Designation Process)
Strategic market leader, technical services manager, practice leader, group leader, office leader, quality manager, lead practitioner, senior program manager (PM4), program manager (PM3), senior project manager (PM2), project manager (PM1)
Mastery (grades 8-10)
Practice (grades 7-8)
Group leader, subdiscipline leader, senior project manager (PM2), project manager (PM1)
Foundation (minimum grade 6)
Technical specialist, task manager, project engineer/scientist, task leader
Doing Technical Work
Managing Projects and Tasks
Managing Technical Professionals
Technical Sales and Marketing
Mentoring and Staff Development
Contribution to Firm’s Stature
Linking to training and other talent processes
For the new career paths to be real resources for action, they must have explicit accessible connections to the firm’s learning and performance management systems, as well as to external professional development resources. The design team has made great progress on this linkage, and work continues as new and upgraded systems are added.
Align grades, titles and other areas’ structures
All career paths require “relative positioning” against other benchmarks staff look to for evidence of success. So it was important to level-set and anchor the career path against existing grade, level, title and reward structures, and with other job/family/path structures by identifying and illustrating the “on ramps and off ramps” between them. In fact, movement between career paths is allowed and encouraged. Career paths at CDM will always be dynamic and evolving as the firm grows and expands service offerings. The intent of the career path is to be a road map rather than an answer key. Instead of creating an exhaustively precise map, which was impractical and could convey the false certainty and cumbersome detail often found in career path systems, the team aimed for these data (and resulting materials) to be directionally representative. The team also took a “three parts current reality, one part aspiration” approach to guide job experts to consider what’s possible and important now so these tools will ring true today, tempered by a view of emerging capability needs so the career system aims people toward CDM’s future competitiveness. The ultimate goal was to create “coaching-friendly” tools — providing talking points and other supporting
materials that managers find easy to use to engage employees in career development conversations. Now managers can easily show employees how they can expand their impact and help move the business forward.
Benefits Realized So Far CDM has since replicated the following steps for three key areas of the business, with a number of important outcomes for the firm: • A steady increase in employee engagement scores, specifically, in perceptions of career opportunity • Significant jumps in scores in understanding career possibilities and in managers helping set solid development goals after tying the career paths to a new performance process • High involvement of employees to innovate and enhance the paths; for example, new “foundation level” courses and new tutorials on applying the new career path to day-to-day work and career goals, which feature selected CDMers telling their career stories to illustrate possible progression • Creation of two additional career paths addressing administrative and construction disciplines built around the fundamentals of the technical career path • A strong differentiating factor on college campuses — many new employees state that the career paths were one of the reasons they selected CDM. Conclusion CDM has created career paths to reflect the full range of opportunities for growth and success available to employees in their current jobs as well as in other roles, and to signal to everyone the business-critical capabilities that will strengthen and so be increasingly valuable to the firm. This was important before the economic
events of the past year, and is even more important now for helping current employees sustain a positive perspective and focus on what counts and for attracting more of the best talent to help build competitive advantage and momentum as the company moves from recession into recovery. About the Authors Bob Campbell is a principal and Scott Cohen, Ph.D., is a senior consultant at Hewitt Associates in Waltham, Mass. They can be reached at 781-891-8600.
Charlene P. Allen is a senior vice president of human resources at CDM. She can be reached at [email protected]
Susan Cromidas is a manager of corporate communications at CDM. She can be reached at [email protected]
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The Benefits of
Employee benefits have always been critical to
attract and retain employees. Whether it’s health insurance that covers an employee and family or retirement offerings like 401(k) plans, employees value benefits as a significant piece of their overall total rewards package from an employer. Yet, as recently as just three years ago, in general, employees might have stayed for the benefits, but were not particularly inclined to give more effort because of a comprehensive and affordable benefits package, according to Towers Perrin’s Global Workforce Survey 2007 and reported by Employee Benefits online. Based on recent research conducted by the authors, there is now reason to believe things have changed.
Quick look In 2008, survey items related to employee benefits had risen dramatically as a predictor of overall employee engagement compared to 2004.
Many companies are realizing that employee engagement is about something bigger than just benefits — it’s about employee well-being.
By Mark D. Hirschfeld, SilverStone Group, and F. Leigh Branham, Keeping the People
Losses in savings, brought on by the current economic situation, have caused great concern for most employees, particularly those nearing retirement.
e g a g E n
More than ever, keeping our employees engaged is imperative to our business success. What trends are you seeing to increase employee engagement?
Survey Says For the past five years, the authors have analyzed employee engagement survey data compiled by Quantum Workplace. Each year, Quantum collects employee feedback from more than 1 million employees across the United States and the United Kingdom, representing more than 5,000 employers in 2009 alone that entered local “best-places-to-work” competitions in 44 U.S cities. More than 2.1 million surveys were analyzed from 12,000 employers since 2004. One of the researchers’ goals was to determine which of the 37 survey items correlates most highly with overall employee engagement scores. In other words, which survey items best predict what it takes to create a great workplace? Figure 1 shows the two benefits-related statements from the survey showing significant differences in the average scores on these items between the top 1 percent of companies that have won best-place-to-work competitions and the thousands of nonwinning companies. What is somewhat surprising is that the survey items in Figure 1 rose from being ranked in the bottom half of the second quartile in 2004 to the top quartile in 2008 as a predictor of overall employee engagement. How Benefits Impact Engagement While benefits are always important, they may become most important during tumultuous times. What explains the marked change in priority during Figure 1: Differences In Perceptions of Winning and NonWinning Best-Places-to-Work Employers
4.6 4.5 4.4
4.3 4.0 We have benefits not typically available at other organizations
My benefits meet my (and my family’s) needs well
Benefits play an increasingly important role in the mix that makes employees want to give back their best discretionary efforts. the past few years? Many factors are likely contributors, but two are especially pertinent: 1) During the past 10 years, employees have had to pay more for health care, and those cost increases have generally exceeded any gains in income, and 2) losses in savings, brought on by the current economic situation, have caused great concern for most employees, particularly those nearing retirement. According to a 2009 WorldatWork/Watson Wyatt study, 41 percent of employees “believe that pay and benefits changes made by their employers in the past year have had a negative effect on work quality and customer service”— business outcomes that can be directly linked to employee engagement. The authors recently facilitated a focus group discussion with a client’s employees, and when the topic turned to benefits and employee engagement, one employee offered this explanation, which was echoed by her colleagues: “Last year I performed well and got a merit-based increase that was above cost of living. But increases in our health-care premiums cancelled that out. In the eyes of the company I’m a better performer, but because of increased healthcare costs I have less to show for it.” With this perspective, one can better understand the increasingly important role benefits play in employee perceptions of what constitutes an engaging work environment. Employees now see the direct impact in their paychecks and retirement plan statements. To be sure, employees still value what have always been the hallmarks of an engaging workplace: a great manager, senior leaders they can trust and opportunities to grow and develop. But benefits now appear to play an increasingly important role in the mix that makes
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employees want to give back their best discretionary efforts. Generosity of benefits and services that contribute to employee well-being are now providing a baseline indicator of caring that increases most employees’ willingness to reciprocate. Some of the common themes from best-place-to-work surveys the authors analyzed reveal how engagement is increased or decreased by the approach an employer takes to benefits: • Employees are comparing how their benefits stack up in the marketplace.
• An emphasis on wellness is increasingly important to a growing number of employees. • Retirement is on the minds of employees more than ever. • Employees can see through companies that aren’t “walking the talk.” • Efforts to maintain employee benefits may be particularly important in difficult economic times. • It’s not all about “dollars and cents” benefits. A flexible workplace is increasingly seen as another important benefit.
The Importance of Communication Effectively communicating the value of employee benefits is critical as well, cited by 67 percent of companies as a key to increasing employee engagement, according to the March 2010 Accor Services Future of Benefits Communication Survey. What many companies are realizing is that employee engagement is about something bigger than just benefits — it’s about employee well-being, which the authors’ research has identified as one of the six universal drivers
Vertex Pharmaceuticals Uses Benefits to Build Engagement One company that is using employee benefits wellness as a signature strategy to build a more engaged workforce is Vertex Pharmaceuticals in Cambridge, Mass.
Evidence that the company’s wellness initiatives are working include very low absenteeism and the company’s overall health-care costs staying at or below market. Proof of increased engagement can also be found in comments, such as the following one from an employee who attended
Named one of the best places to work in Boston in 2008, Vertex
the company’s “College Coach” program: “This solidifies
is a global biotechnology company committed to the discovery
that Vertex Pharmaceuticals has a real understanding of
and development of breakthrough small-molecule drugs for
employees’ well-being and it shows commitment.”
serious diseases. The company, which has 1,700 employees,
The company’s commitment to employee wellbeing shows
has among the highest scores in the United States on employee
in not just in the benefits themselves, but in the way they are
well-being. Vertex has a self-insured medical plan, and chooses
put in place. “We try to keep our fingers on the pulse of what
benefits that provide employees with choice, flexibility, financial
employees need,” says Lisa Kelly-Croswell, Vertex senior vice
protection against catastrophic loss or hardship, and health
president of human resources. “We have introduced several
and financial wellness. The basic benefits platform divides
new benefits just in the last three years. We used to offer three
offerings into standard, nonstandard and voluntary (which are
weeks’ vacation and four weeks after five years. In an execu-
100-percent employee-paid), and two more “unique benefits
tive meeting a couple of years ago, I suggested we go to four
and wellness.” Among those unique benefits are the following:
weeks from day one of employment, and our CEO said ‘Sure...
❚❚ Investment education ❚❚ Backup child care (“Parents in a Pinch”) ❚❚ Elder-care services ❚❚ 12 weeks of paid maternity leave ❚❚ Two weeks of paid paternity leave ❚❚ Long-term care insurance ❚❚ Discount pet insurance ❚❚ Four weeks of paid vacation ❚❚ Child-care subsidy
workspan 05/10 03/10
❚❚ Employee stock purchase plan ❚❚ Annual financial and health fairs ❚❚ Discount mortgage programs ❚❚ On-site mammograms ❚❚ Meeting-free days ❚❚ Education advisory services for parents of college-bound children (“College Coach”) ❚❚ Educational seminar, first aid, CPR training ❚❚ Lunch-time walking programs
❚❚ Health food options in vending machines and cafeteria ❚❚ Wellness weeks with on-site annual screenings ❚❚ EAP program
let’s do it!’ It was surprisingly easy to get the policy changed. We had a focus group to gauge employee reaction, which was extremely positive, then announced the new policy two weeks later at an all-employee meeting. We even added another week for employees who hit the five-year mark.”
❚❚ Discount and reimbursement program — gym membership, weight loss and nutrition
programs. In fact, the specifics of what Vertex
❚❚ Online personal health assessment
made a commitment to create a great workplace
Not every employer can offer all of these offers may not even fit the needs of every employer. But what’s clear is that Vertex has and is using benefits as a key element of its strategy — a principle we can all apply.
of employee engagement. Concern for employee well-being encompasses the employer’s sensitivity to the personal lives of workers and concern for helping them sustain their health and well-being through reasonable work demands, flexibility and preventive health practices.
Conclusion The link between negative business consequences of poor health practices and low employee engagement and the resulting business consequences is just beginning to be realized. According to a recent study conducted by Towers Watson and the National Business Group on Health, more employers are beginning to see the relationship between workers’ poor health habits and employee disengagement. More than half of employers surveyed indicate that this is their biggest obstacle to a healthier workforce. It takes more than just benefits to keep employees engaged. But it is
apparent from the previous benefitsrelated comments that employees are weighing the give-get calculus that is central to employee engagement. In times like these, when many employers are giving less and taking away more, the employers that remain committed to giving a variety of valued benefits appear to be reaping the benefits — keeping their employees engaged in extraordinary times.
About the Authors Mark D. Hirschfeld is a principal at SilverStone Group in Omaha, Neb. He can be reached at [email protected]
or 402-964-5403. F. Leigh Branham is the founder of Keeping the People in Overland Park, Kan. He can be reached at [email protected]
or 913-620-4645. Hirschfeld and Branham are co-authors of the book, Re-Engage: How America’s Best Places to Work Inspire Extra Effort in Extraordinary Times.
RESOURCES PLUS For more information related to this article:
www.worldatwork.org Type in any or all of the following keywords or phrases on the search line: • Employee engagement • Employee benefits • Employee communication.
www.worldatwork.org/bookstore • Employee Benefits Basics: How-To Series for the HR Professional • Designing Employee Health Management Programs: How-To Series for the HR Professional • Making the Case for Consumer-Driven Health Plans: How-To Series for the HR Professional • Developing a Strategic Benefits Program: How-To Series for the HR Professional.
www.worldatwork.org/education • Regulatory Environments for Benefits Programs, Benefits Certification Course: B1 • Health and Welfare Plans — Plan Types and Administration, Benefits Certification Course: B3 • Health and Welfare Plans — Strategic Planning and Design, Benefits Certification Course: B3A.
How HR Can Help Managers Create
Family Climates Employees, as well as workplace best practices, are demanding more flexible schedules and other accommodations to balance work and family duties. Simultaneously, work pressures are increasing due to a more global economy, increased communications technologies (e.g., BlackBerrys), an increased pace of innovation and the customer service focus of the United States. All of these factors have placed difficult burdens on managers to balance the needs of employees with the demands of the 24/7 economy. It is well-established by work and family researchers (e.g., the Alfred P. Sloan Work and Family Research Network) that by taking actions to relieve employees’ work and family stress, organizations can greatly benefit in areas like increased job performance. Specifically, research has shown that employees in a family-friendly environment are more likely to experience: • Lower levels of conflict between their work and family lives • Lower levels of stress and strain
A supportive work-family climate is one in which supervisors and other organizational leaders understand and support that a person’s family is his/her first priority. In a flexible environment, employees are able to structure their own work, including their work schedule, workplace and tasks. To create a fully supportive work-family climate, leaders need to provide emotional and logistical support, and model healthy multirole behavior.
By Beth Heinen, Ph.D., ICF International
A supportive work-family climate
promotes integration, inviting employees’ family lives to be visible in the organization. • Fewer intentions to leave the organization • Higher levels of job satisfaction • Higher levels of commitment to the organization • Higher levels of performance. Therefore, it is beneficial — both to the organization and to individual employees — that organizations provide a supportive work environment for employees. The effective use of policies, however, depends mostly on managers and direct supervisors. Managers and supervisors set the climate for use of policies. They have the ability to lend support, use discretion and convey norms, all of which influence the extent to which employees feel comfortable using family-friendly work arrangements and learn to use them in a way that enhances organizational effectiveness. It is important that HR professionals understand and encourage the crucial role of leadership in influencing employees’ perceptions and experiences of organizational family-friendliness.
Leadership’s Establishment of Work-Family Climates A work-family climate refers to the supportiveness of an organization or organizational workgroup of employees’ abilities to balance their work and family lives. There are multiple ways in which managers and supervisors establish and convey a supportive or 80
unsupportive work-family climate. Supervisors relay norms, which, in an unsupportive work-family climate, include the expectation that employees prioritize work above their families or put pressure on employees to work long hours, including nights and weekends. A supportive work-family climate is one in which supervisors and other organizational leaders understand and support that a person’s family is his/her first priority, even above the employee’s work and the organization. Another way in which supervisors portray the work-family climate is through reactions to policy use. Some leaders may believe that employees who use policies — like telework or maternity/paternity leave — are not as interested in advancement and are less committed to the organization, and thus may indirectly penalize these employees for using work-life benefits by giving them “lesser” work assignments (e.g., boring work tasks) or not giving them certain opportunities. So, although policies are put in place to support and help a worker balance his/her work and family lives, when an organization’s work-family climate discourages employees from using these policies, the policies’ purpose and supportiveness are undermined. A third way in which supervisors and other organizational leaders can communicate and establish a work-family climate is through their flexibility.
In a flexible environment, employees are able to structure their own work, including their work schedule, workplace and tasks. Also, a flexible environment allows employees to take time off for unexpected nonwork responsibilities, such as a sick child. This flexibility may include organizational policies of paid leave and flexible schedules, but goes beyond these policies to also include manager and colleague acceptance of flexibility — as well as willingness to pitch in when necessary. Lastly, leaders communicate the workfamily climate through segmenting or integrating. Leaders who value segmentation discourage employees from discussing their nonwork lives in the workplace. A supportive work-family climate promotes integration, inviting employees’ family lives to be visible in the organization.
How Leaders Set the Tone for Work-Family Climates Leaders are the main organizational agents that create a supportive workfamily climate for employees. Through interactions with their employees and through the way they handle their own work-family balance, leaders provide information to employees about what is acceptable and what is not when handling the balance between work and family. To create a fully supportive work-family climate, leaders need to provide emotional and
logistical support to their employees, and they need to model healthy multirole behavior. Leaders can offer emotional support by providing respect, understanding and sensitivity when employees are discussing family-related issues. Additionally, leaders can show concern for the way work responsibilities affect family and allow employees to use family-friendly policies without any negative career ramifications. All of these actions help employees feel that they are cared for, that their feelings are being considered and that they are comfortable communicating with leaders when support is needed. Leaders can also provide logistical support by allowing for flexibility in schedule, location and the way in which employees perform work tasks. In some circumstances, leaders may even provide resources (e.g., more time) or services to assist employees with work to allow them to better manage their dual responsibilities. Lastly, leaders serve as role models in the way they manage their own work and family duties. People learn through observation, so when leaders provide examples of healthy strategies and behaviors to successfully balance their work and family lives, employees are able to learn those approaches and apply them to their own lives. Additionally, leader behavior communicates appropriate ways to act in the workplace, so employees who view leaders taking actions to balance their work and family lives feel more able to enact strategies to manage their own competing responsibilities.
Ways Human Resources Can Inspire More Supportive Leaders Although many leaders understand the benefits of a family-friendly work environment, there are sometimes generational workforce differences and
other factors that make some leaders uncertain and uncomfortable with the flexibility that comes with a supportive work-family climate. HR professionals can encourage leaders to embrace flexibility in the following ways: • Make the business case. Show leaders the research and specific organizational examples on how flexibility and a supportive work-family climate are good for business. (See “Resources: Business Case for Flexibility and a Supportive Work-Family Climate” at www.worldatwork.org/workspan.) • Have meetups . Meet with leaders in small groups and help them understand how important these leadership behaviors are to desired work and employee outcomes (e.g., reduced turnover, increased loyalty, improved performance). • Pilot flexible work arrangements. Find some supervisors who are
willing to move forward and work with them to allow specific flexible options on a limited basis. HR professionals can help managers decide which arrangement(s) to offer, set goals for each arrangement and identify how to measure success. Use these examples to provide success stories within the organization to other, more skeptical managers. • Provide training. Manager training on how to create a supportive workfamily climate should be mandatory. This training can help mitigate some fears of flexibility, as well as provide real examples of how to physically implement these strategies within the manager’s work units (e.g., how and when it is appropriate to provide logistical support). This training should encourage leaders to practice flexibility themselves. Research has shown that the majority of
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Any new initiatives have the potential for bumps. Evaluating how well familyfriendly actions are working will allow HR and leaders to address any setbacks.
supportive work-family climate helps organizations reduce intentions for employees to leave the organization, increase employees’ levels of commitment to the organization, and improve individual and organizational work performance. Thus, it is a win-win situation for employees and organizations that are able to successfully implement a supportive work-family climate.
web extra For a list of resources to help support the business case for a flexible and supportive work family climate, log on to www.worldatwork.org/workspan.
About the Author Beth Heinen, Ph.D., is a senior associate at ICF
employees, including leaders and older workers, desire flexibility. • Offer incentives for change. Incentives are a good motivator, especially for leaders who have trouble initiating the first few family-friendly actions. Some incentives that HR representatives can implement include measuring flexibility and family-supportive behaviors on performance evaluations, giving cash bonuses (e.g., a percentage of cost savings due to improved productivity or reduced turnover), or publicly acknowledging supervisors who are doing particularly well in establishing a supportive work-family climate. • Provide support. Supervisors may have questions, concerns or challenges that can inhibit them from moving forward in providing actions necessary for a supportive workfamily climate unless they have a way to answer their questions and remedy their concerns/challenges. HR can provide direct support to leaders and potentially set up peersupport groups where supervisors can swap success stories and ways to overcome obstacles. 82
• Evaluate success. Any new initiatives have the potential for bumps or areas for learning along the way. Evaluating how well family-friendly actions are working — through means like employee satisfaction surveys, one-on-one manager interviews, or tracking performance and turnover levels — will allow HR and leaders to address any setbacks experienced, as well as provide learning experiences and tips for other managers in moving forward. Additionally, positive feedback will further encourage a supportive work-family climate.
Conclusion When HR works with organizational leaders to exhibit family-friendly behaviors along with concrete work expectations, organizations can be very effective in creating a supportive workfamily climate, which is beneficial to employees and organizations. Specifically, a supportive work-family climate can help employees decrease their levels of conflict between their work and family lives, reduce their levels of stress and strain, and increase feelings of job satisfaction. Simultaneously, a
International. She can be reached at [email protected]
com or 314-918-0373.
RESOURCES PLUS For more information related to this article:
www.worldatwork.org Type in any or all of the following keywords or phrases on the search line: • Workplace flexibility • Family + friendly • Work-life balance.
www.worldatwork.org/bookstore • Workplace Flexibility: Innovation in Action • Innovative Excellence: Leading Ideas in Work-Life Programs • Work-Life Effectiveness: Bottom-Line Strategies for Today’s Workplace • Telework: A Critical Component of Your Total Rewards Strategy.
www.worldatwork.org/education • Introduction to Work-Life Effectiveness — Successful Work-Life Programs to Attract, Motivate and Retain Employees, Work-Life Certification Course: W1 • The Flexible Workplace — Strategies for Your Organization, Work-Life Certification Course: W2 • Health and Wellness Programs — Creating a Positive Business Impact, Work-Life Certification Course: W3 • Organizational Culture Change — A Work-Life Perspective, Work-Life Certification Course: W4.
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Deloitte Consulting LLP www.deloitte.com
Employee Benefit News www.benefitnews.com Empowered Benefits LLC www.mpowerbenefits.com Enwisen Inc. www.enwisen.com Equilar Inc. www.equilar.com ERI Economic Research Institute www.erieri.com FlexPaths LLC www.flexpaths.com Free & Clear www.freeclear.com FRS Equity Strategies www.frsequitystrategies.com Gartner www.gartner.com Genworth www.genworth.com GiftCertificates.com www.giftcertificates.com Global Equity Organization www.globalequity.org Halogen Software www.halogensoftware.com Harris, Rothenberg International www.hriworld.com Hay Group www.haygroup.com HCR Software Solutions www.hcrsoftware.com Healthx www.healthx.com Hewitt Associates www.hewittassociates.com
HR Certification Institute www.hrci.org HRmarketer.com www.hrmarketer.com HR Value LLC www.4hrv.com HRVendors.com www.hrvendors.com HTH Worldwide www.hthworldwide.com Human Resource Executive Magazine www.hreonline.com I Love Rewards www.iloverewards.com iHouse www.ihouse.com InComm www.incomm.com Innovative Rx Strategies LLC www.innovativerxstrategies.com JourneyWell www.journeywell.com Lands’ End Gift Card giftcard.landsend.com LaserBeam Software www.laserbeamsoftware.com Legal Access Plans LLC www.legalaccessplans.com Liberty Mutual Group www.libertymutual.com LifeCare Inc. www.lifecare.com Lincoln Financial Network www.lfg.com Longnecker & Associates www.longnecker.com
Hinda Incentives www.hinda.com
Luther Appliance and Furniture Sales www.luthersales.com
Home Instead Senior Care www.homeinstead.com
Main Data Group maindatagroup.com
Regal Entertainment Group www.corporateboxoffice.com
MarketPay Associates www.marketpay.com
REI Corporate Sales www.rei.com/cgs
Retirement Made Simpler www.retirementmadesimpler.org
Scholarship Management Services www.scholarshipmanagement.org
MHN Inc. www.mhn.com Michael C. Fina www.michaelcfina.com Milliman www.milliman.com MTM Recognition www.mtmrecognition.com
Sears Gift Card www.sears.com/corpgiftcards Sibson Consulting, a Division of Segal www.sibson.com SilkRoad technology www.silkroad.com
U.S. Dept. of Labor, Bureau of Labor Statistics www.bls.gov Varicent Software www.varicent.com VPI Pet Insurance www.vpipetinsurance.com VSP Vision Care www.vsp.com
WMS and Company Inc. www.wms-wms.com Workforce Management www.workforce.com WorkLife Innovations www.nurturhealth.com Workplace Options www.workplaceoptions.com
WalkStyles Inc. www.walkstyles.com
Workscape Inc. www.workscape.com
Western Compensation & Benefits Consultants www.wcbc.ca
WFD Consulting www.wfd.com
Willis Group www.willis.com
ZS Associates www.zsassociates.com
In This Issue
Sittercity Inc. www.sittercity.com
Alliant Credit Union www.alliantcreditunion.org
Social Security Administration www.ssa.gov
AXA Private Markets www.axaprivatemarkets.com
Society for Human Resource Management www.shrm.org
Bank of America Merrill Lynch www.benefitplans.baml.com
Softscape Inc. www.softscape.com
Best Buy Gift Card Incentives www.bestbuy.com
North Texas Compensation Association www.ntcaassoc.org
National Gift Card www.ngc-group.com Nationwide Better Health www.nwbetterhealth.com
NorthgateArinso www.northgatearinso.com NuView Systems Inc. www.nuviewinc.com O.C. Tanner www.octanner.com ORC Worldwide www.orcworldwide.com P+W Software www.pwsoftware.com PayScale Inc. www.payscale.com Pearl Meyer & Partners www.pearlmeyer.com Peopleclick Authoria www.peopleclickauthoria.com PerfectSoftware www.perfectsoftware.com PeriscopeIQ www.periscopeiq.com Personal Best www.personalbest.com
Spiralinks www.spl.com StepStone Solutions www.stepstonesolutions.com Stewart Daly Inc. www.stewartdaly.com SuccessFactors www.successfactors.com Suddath Relocation Systems www.suddath.com Synygy Inc. www.synygy.com Taleo Corp. www.taleo.com Teachers College Columbia University, Executive Education in Organization Development www.tc.columbia.edu/leadchange The Home Depot — Gift Cards www.homedepotgiftcard.com The Learning Experience www.thelearningexperience.com
Pet Assure Inc. www.petassure.com
The TharpeRobbins Company Inc. www.corporategifts.com
Towers Watson www.towerswatson.com
Prompt Inc. www.promptinc.com
Transition Services Inc. www.tsisolution.com
Purchasing Power LLC www.purchasingpower.com
Trion Group www.triongroup.net
Quest Diagnostics www.questdiagnostics.com
UMB Bank www.umb.com
Buck Consultants www.buckconsultants.com Circles www.circles.com
Compdata Surveys www.compdatasurveys.com E*Trade Financial www.etrade.com
ERI — Economic Research Institute www.erieri.com Gartner www.gartner.com
Hewitt Associates www.hewittassociates.com
I Love Rewards www.iloverewards.com
MarketPay Associates www.marketpay.com
North Texas Compensation Association www.ntcaaoc.org
NuView Systems Inc. www.nuviewinc.com
ORC Worldwide www.orcworldwide.com
Sibson Consulting, a Division of Segal www.sibson.com
Society for Human Resource Management www.shrm.org
The Home Depot www.homedepotgiftcard.com
The Learning Experience www.thelearningexperience.com
Towers Watson www.towerswatson.com
VPI Pet Insurance www.vpipetinsurance.com
workspan 05/10 04/10 workspan
2010 Work-Life Rising Star
on investment in work-life. “I continue to
Since the first class of Work-Life Rising
Stars was introduced in 2007, they have
of the research
contributed to the work-life and total
that shows that
rewards community in significant ways.
work-life and espe-
Developing books and professional
cially flexible work
resources (including the recent Flexible
arrangements are a key
Rightsizing vs. Layoffs Cost/Benefit
piece of any employee engagement effort
Analysis Tool available at www.awlp.org),
while also helping an organization address
driving strategy, creating networking oppor-
tardiness, job satisfaction and turnover.”
tunities and sharing their experiences with others, Rising Stars represent the future of
Work-life programs at IUPUI range from
helping employees and students exercise during the day to giving them knowledge to
A committee of experienced work-life profes-
buy a home, to managing personal finances
Congratulations Work-Life People and Programs!
sionals, including previous Rising Stars,
or becoming adoptive parents or volunteers.
selected this year’s honoree for her work as
“For employees and students, work-life
a driving force for work-life initiatives. This
provides the tools needed to be productive,
year’s recipient is Maggie Stimming.
and in the community, it makes the organiza-
WorldatWork Premier Member Resources
connect. share. learn.
Senior Work-Life Consultant
tion stand out as one that is progressive and Maggie Stimming Indiana University Purdue University
attractive to prospective employees.”
With different employee segments including
Work-Life Innovative Excellence Award
full-time faculty, adjunct faculty, graduate
The Work-Life Innovative Excellence Award
assistants, full-time staff and part-time
is the highest honor bestowed by AWLP,
staff, IUPUI’s work-life program focuses on
going to organizations that developed
inclusiveness and providing high-quality,
work-life programs that changed the work-
practical information and programming.
place culture and enriched employees’ lives
while remaining true to business objectives. Stimming acknowledged that universi-
ties sometimes get the reputation for
Organization: Clerk & Comptroller,
hierarchical structures and siloing the
Palm Beach County
populations of faculty, staff and students.
Program: “We’re All in This Together”
“I have been driven to do what I can to
change that culture because inclusiveness
In June 2009, the Clerk & Comptroller of
matters to me.” She also acknowledged a
Palm Beach County, Fla., was forced to lay
challenge of convincing some of the return
off employees and reduce its budget. In
At the heart of the transition program was the intent to foster a sense of empowerment and connection, and to create a more contented and productive team. shops, the management team encouraged
than 70 percent indicated they felt they
All in This Together,” a three-phase transition
remaining employees to voice their concerns
must place their career ahead of having a
program targeting separating long-tenure,
and comments. Employees also had a post-
family in order to remain competitive within
new and remaining employees.
layoff adjustment period to adapt to new
the field. While women reported a variety
work routines. With a series of informative
of reasons for leaving naval service, most indicated their perceived or actual inability
At the heart of the transition
to integrate work and life, including family
Palm Beach County respected
program was the intent to foster
planning. In 2007, the Navy conducted an
employees’ needs to fully under-
a sense of empowerment and
executive education session dedicated to
stand what was happening at the
connection, and to create a more
improving low retention rates of Millennial
legislative level and why decisions
contented and productive team.
talent in critical operational sectors. The
were made. The communications
By anticipating, respecting and
session, using data from several years of
department delivered the clerk’s
addressing their needs, employees
junior personnel surveys and focus groups,
messages and updates using a variety of
could continue to be proud of the orga-
revealed that despite generous financial
tools: e-mails, intranet, staff meetings and
nization and the resources provided to
and education incentives, Millennial talent
one-on-one discussions. Communications
cited the lack of work-life balance as a
focused on diminishing rumors and panic,
barrier to remaining with the Navy.
and maintaining productivity and a sense
Organization: U.S. Navy
of pride in working while treating sepa-
Program: Task Force Life/Work
There has been a cultural shift in the
rating employees fairly and with respect.
With the changing demographics of the
Navy’s recognition of the value of work-
Employees were encouraged to submit
workforce, a shrinking labor market and a
life programs as a strategic imperative for
cost-reducing ideas, which resulted
decreasing propensity for military service,
long-term retention. While the TFLW team
in more than $1 million in savings and
the Navy must make every effort to not
focused on organizational change through
saved many jobs. The programs allowed
only successfully attract minority and
large-scale initiatives such as maternity
employees to understand the reasons
female talent, but also to retain them for
and paternity leave, advanced education
for the operational changes and to feel
the duration of a military career. This stra-
benefits and alternative work schedule
connected to the solution.
tegic imperative has dramatically shaped
programs, the chief personnel officer also
organizational culture and program change
encouraged leadership to look for ways
The HR staff developed a series of work-
management, including the creation of Task
to positively influence work-life balance
shops dedicated to transitioning separating
Force Life/Work (TFLW), with the mission
within its sphere of influence. Several new
employees into their new lives. In less than
to promote work-life balance and provide
divisional programs were developed:
three weeks and with a limited budget, HR
perspectives on recruiting and retaining
a four-day-workweek program, a family-
planned, published and executed the work-
call program where employees were given
shops. Workshops provided tips on how to
permission to report to work two hours
write or update a résumé, interview skills,
The Navy has retained less than 20 percent
later than usual to spend more time with
networking resources, retirement and finan-
of women officers in operational fields,
their families in the morning once a week,
cial needs, and health care-related benefits.
and enlisted female retention lags behind
and a more robust telework program that
They concluded with a job fair staffed by
their male counterparts. In a 2006 survey of
leveraged new technologies developed by
local employers. Before and after the work-
women within the aviation community, more
the division. In turn, the TFLW team was
response, the clerk’s office initiated “We’re
able to capitalize on the success of these
with Hands on Nashville to build a program
divisional programs by endorsing them as
that matches employee skills to nonprofit
best practices throughout the organization.
volunteer needs. The CFC program has supported about 2,500 corporate office
Organization: HCA Inc.
employees in their community engagement.
The mission of HCA — “the care and improvement of human life” — is reflected
Another New Specialty Designation Coming Soon
in the health-care provider’s approach The WorldatWork Society of Certified
community. In 2005, HCA introduced
Professionals has grown dramatically in one
choice and a new volunteerism component
year; 2009 blew away records in the four
to the program under the name Caring
existing designations. The Society recently
for the Community (CFC). In 2009, the
introduced a new specialty designation, the
three concepts of employee giving to the
Certified Sales Compensation Professional
community, volunteerism and corporate
(CSCP). Since this designation launched in
giving were united to provide employees
March, the Society has certified more than
a mechanism to support their favorite
20 professionals for their mastery of sales
community agency with their time, talent
compensation planning, design and adminis-
and treasure. HCA encourages volun-
tration. The CSCP falls under a new category
teerism during work hours by providing
of specialty designation, which only requires
CFC volunteer leave hours. Each full-time
one test and doesn’t have the traditional
employee is allocated 24 CFC volunteer
certification courses associated with the
leave hours. A $500 grant is available
tests. The Society of Certified Professionals
when an employee has logged 25 hours
will be introducing a Certified Executive
in support of one agency in one year. The
Compensation Professional (CECP) designa-
annual employee giving campaign featured
tion later in 2010. Look for the CECP this
a company match of up to $750 to a local
fall to distinguish yourself in the high-stakes
charity of the employee’s choice.
executive rewards area.
This program is complemented by HCA’s
Get more details at
board service and skilled volunteerism
to supporting the middle Tennessee
Program: Caring for the Community
WorldatWork Premier Member Resources
connect. share. learn.
approaches. The corporate office provides annual board member training to inter-
ested employees, assists employees in
ABOUT THE AUTHOR
finding board service opportunities, and
Erin Ryan is a contributing editor to workspan’s
makes available a $500 board service
Member Resources and can be reached at
matching grant. In 2009, HCA partnered
of employers look for
when recruiting HR professionals.
WorldatWork Now Offers Scholarships Training & Certification for CCP®, CBP, GRP® and WLCP™ To encourage professional development in compensation, benefits, and work-life, WorldatWork is launching a new scholarship program. The one-year scholarship package includes a WorldatWork Premier membership, access to e-learning courses, scholarship materials and all related exam fees. The scholarship is open to all HR practitioners (members and nonmembers) around the world who need financial assistance, and who are committed to the profession. Candidates must have at least two years of HR experience. Scholarships will be awarded on a rolling basis throughout the year. Visit www.worldatwork.org/scholarship for eligibility criteria and application terms and conditions.
Certified Compensation Professional® | Certified Benefits Professional® | Global Remuneration Professiona | Work-Life Certified Professional™ | Certified Compensation Professional® | Certified Benefits Profes sional® | Global Remuneration Professional | Work-Life Certified Professional™ | Certified Compensatio Professional® | Certified Benefits Professional® | Global Remuneration Professional | Work-Life Certifie Professional™ | Certified Compensation Professional® | Certified Benefits Professional® | Global Remu neration Professional | Work-Life Certified Professional™ | Certified Compensation Professional® | Certifie Benefits Professional® | Global Remuneration Professional | Work-Life Certified Professional™ | Certifie Compensation Professional® | Certified Benefits Professional® | Global Remuneration Professional | Work ® Professional | Certified Benefits Professional® Life Certified Professional™ | Certified CompensationCCP CECPCBP CBPWLCP WLCP CCP GRP GRP CSCP CSCP Global Remuneration | Work-Life Certified Professional™ | Certified Compensation Professional® | Certifie Benefits Professional® | Global Remuneration | Work-Life Certified Professional™ | Certified Compensatio Apply Today! www.worldatwork.org/scholarship | 877-951-9191 Professional® | Certified Benefits Professional® | Global Remuneration | Work-Life Certified Professional™ Certified Compensation Professional® | Certified Benefits Professional® | Global Remuneration | Work-Lif Certified Professional™ | Certified Compensation Professional® | Certified Benefits Professional® | Globa ®®
How to Provide Financial Education – Part I Financial stress is making it harder for employees to do their job, thereby impeding productivity. Employees who are physically, emotionally and financially stressed are less able to contribute to the workplace, and are more apt to experience burnout and reduced morale. Studies have shown that employer-provided financial education programs increase employee engagement levels, and lead to increased employee morale and higher employee productivity levels.
roviding financial support can arm employees with the necessary information to make informed decisions about personal finances, and save the employee time and money by providing them with access to experts in the field and providers that offer negotiated discounted services. Financial education programs offer information on topics like asset allocation, diversification and the risk-reward continuum. Financial education focuses on building basic money-management skills that lead to an understanding of banking, finance, savings and the importance of good credit. These tools can help an individual save enough money to do anything from buying a first home to building a retirement nest egg. There are four generally accepted financial education delivery methods. 90
1. Meetings. In focused meetings, a knowledgeable speaker discusses concepts, defines terms and provides attendees with usable advice. Workshops and seminars can cover a variety of topics, and be delivered in different lengths and by different quality instructors. Some financial topics that can be included in a broad-based financial education program include: –– Preretirement planning and retirement planning –– Money management basics (credit, debt, credit cards, rules of managing money, financial planning basics, investment basics, etc.) –– Risk management (wealth protection concepts; insurance and self-insurance for health, home, auto, liability, life, workers’ compensation and other special needs) –– Education planning and funding –– Investment basics –– Estate planning (wealth transfer given life circumstances, death, divorce, special situations) –– Tax planning. 2. Online tools. The Internet is an efficient way to provide information, including financial planning tools. Some of these services are free (e.g., Web sites from financial service providers, including 401(k) vendors and nonprofit organizations). Other online services are made available by employers for their employees’ exclusive use, including the ability
to ask questions via e-mail or to chat online with a financial adviser. These vendors may charge a fee to the employer for making their higher-level content available. 3. Toll-free help line. Financial help lines are available for everyday or one-time use, usually associated with some benefits-related event. 4. One-on-one counseling. One-onone counseling is often considered the most valuable and effective education method. Counseling can take many forms, from a 15- to 30-minute chat to a 60-minute comprehensive discussion. There are three very important criteria to a successful financial education program. The most effective education programs will: • Teach employees the skills they need to plan their finances • Provide employees with the tools to crunch the numbers and develop quantitative answers to financial questions • Provide an environment where employees are motivated to act. Part Two of Back to Basics will continue the discussion by defining and discussing financial advice, specifically investment education and advice, and financial planning. About the Author Lenny Sanicola, CCP, CBP, GRP, CEBS, SPHR, is a benefits practice leader at WorldatWork. He can be reached at [email protected]
Back to Basics is intended to provide entry-level information on issues relevant to comp ens ation, benefits and the work experience. Though factual in nature, nothing herein is to be construed as legal, accounting, actuarial or other such professional advice.
Searching for a Standout in the Crowd? We Can Help! No matter what your specific staffing situation, look no further than the WorldatWork Career Center. With a database of more than 1,100 highly qualified HR professionals, and 47% holding a certification, you can have confidence that Career Center is a great resource for finding the best talent for your organization. Our goal is to bring the best talent to you in the quickest possible way.
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Should Companies Have a Do-Not-Hire List? Dilemma My VP of HR and I were recently at lunch with a vendor (we paid our own way!) when the vendor mentioned that he was having trouble with one of his IT folks. “The guy is smart enough, but he can’t manage people,” was the gist of the comment. The VP of HR immediately said, “What’s his name?” The vendor said the name and then asked why he was interested in the name. That’s when the VP said something that I hadn’t heard before: “We run an IT department here in town and I just want to make sure he is on our do-not-hire list.” I had never heard of such a thing and was stunned that he publicly said we have one. Is this common?
Michelle Andolsek, Compensation Specialist, St. Mary’s Good Samaritan Inc. I don’t believe in such a list. Here is why: I think that all employers should make their own judgments about every candidate. If the person in question happened to apply at your organization, what if he were very well qualified for the position for which you were hiring? Just because that person is not working out at another place of business does not mean that he will not work out at yours. That being said, I do believe it is very acceptable to take the opinions of others (in this example, the vendor), especially those of past employers, into account when making a hiring decision. In fact, 92
this is the main purpose of reference checks. But to me, completely blacklisting someone without knowing all of the details just does not seem fair.
Scott Boynton, CCP, Human Resources, Compensation, Cbeyond The vendor’s apparently unsolicited comments about one of its employees exposes the vendor to a potential complaint of defamation. The vendor probably did not have the privilege to say what was said, the opinion may or may not be defensible, and the IT employee may be damaged at some future date. While what the vendor said may not have in fact been defamatory (if actually true or at least an honest opinion), the actions have opened the vendor up to possible future litigation. It was definitely poor judgment on the part of the vendor to discuss an employee’s performance in this setting, and it was even worse to reveal the name of the employee. Although it does not appear that your VP did anything illegal, the VP should not have asked for a name or mentioned the do-not-hire list. Doing so has potentially aided possible future litigation against the vendor, which may damage the business relationship. Paula Dawson-Lewis, Senior Compensation Analyst, Herman Miller Inc. Ouch, the response from your VP of HR was a no-no. Although I am sure
that he felt very comfortable having that discussion with your vendor in such an intimate setting, it was totally inappropriate. The vendor mentioned that the employee was smart, but did not have good management skills. A more appropriate response from your VP of HR, if one had to be given, should have been to inquire if the employee was a new manager and, if so, what if any management training the company provides to its new managers. Just because this IT employee may not be a good manager does not mean that he would not be eligible for hire in your company in a nonmanagement position. In fact, he may be an excellent employee who produces quality work, but may not be cut out to be management material at all. This is a situation where the employer and employee have to have some discussions about the pros and cons regarding the employee’s skills and abilities and decide in what capacity the employee could best serve the company. Would you like to respond to the next dilemma? E-mail your response to [email protected]
Focus on Ethics appears regularly on this page to present a real-life dilemma faced by total rewards professionals. Please submit dilemmas via e-mail to: [email protected]
WorldatWork reserves the right to edit submissions for length and content. All dilemmas submitted will be anonymously attributed. Opinions expressed are those of the individual resp ondents, not WorldatWork. Nothing herein is to be construed as legal, accounting, actuarial or other such professional advice.
e m o
t. W r o th th o o B 13
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