Giving HR the Boot

A story in today’s Wall Street Journal, titled “Is It a Dream or a Drag? Companies Without HR,” focuses on several mid-sized companies that have decided to get rid of their HR departments or never even had one in the first place.

These companies include LRN, a training and consulting firm (which has also served as a source for several stories we’ve written here at the magazine). David Greenberg, LRN’s executive vice president, told the Journal that the 250-employee company did away with its HR department several years ago because “we wanted to force people issues into the middle of the business.”

The story notes that companies are jettisoning their HR function because they’re concerned it bogs down innovation and nimbleness with too many rules and too much bureaucracy — and that software can handle most of the transactional stuff. I should add that the story doesn’t cite much in the way of statistics or research to support its thesis — in fact, the only figures it cites are from a SHRM study showing that U.S. employers had a median of 1.54 HR professionals for every 100 employees in 2012, which is actually up from a low of 1.24 in 2009. Nevertheless, the anecdotes within the story are interesting and offer some food for thought.

Steve Miranda, managing director of Cornell’s Center for Advanced Human Resource Studies, notes the benefits of having HR staffers available to protect companies from running afoul of federal laws such as the FMLA. And the story cites restaurant chain Outback Steakhouse, which created its HR department in the wake of a $19 million settlement with the EEOC over a sex discrimination lawsuit.

Yet companies such as Klick Health (which has also served as a source for at least one HRE story) have forgone creating an HR department because they believe training managers and employees to handle conflicts on their own is a better approach, according to the story. CEO Leerom Segal said that instead of an HR function, Klick Health has two employees with customer-service backgrounds serve as “concierges” — it’s their jobs to ensure a “frictionless work experience” for employees.  The concierges serve as part of what the company calls its five-person “mojo team.” However, a former employee told the story’s authors that he often worried about liability when he had to discipline or terminate a direct report during his time at Klick Health.

As regular readers of HRE well know, HR — at its best — does a whole lot more than just protect its company from liability. Smart HR pros help their companies attract, retain and develop their talent — no small thing in an era where innovation matters more than ever and employee tenure is shorter than ever. This is not something a piece of software can do, no matter how beautifully designed; it’s certainly not something a lawyer can do, nor can an outside expert substitute for an insider who truly knows the organization and its people. If you’re looking for greater proof of the value HR can add, just review some recent HR Execs of the Year or our HR’s Rising Stars feature.

Marking National Equal Pay Day

In honor of National Equal Pay Day, President Obama is set to sign two executive orders later today.

According to this CBS News report, one of the executive orders will prohibit federal contractors from retaliating against employees who discuss their salaries, while the other will mandate that the Labor Department collect data on the compensation for federal contract workers, organized by race and sex.

“These executive orders continue a trend by the administration to place new requirements on the federal contracting community similar to pending federal legislation,” said Connie Bertram, head of Proskauer’s Washington-based labor and employment law practice and co-head of management-side law firm Proskauer’s Government Regulatory Compliance & Relations Group. “In February, for example, President Obama issued an Executive Order to increase the minimum wage for employees of federal contractors and subcontractors to $10.10 an hour after a bill that would have imposed such a requirement on all employers failed to pass Congress.”

And while the debate rages on whether such executive orders will ultimately move the needle in favor of equal pay, the CBS News report also noted the White House is suffering through its own pay scandal of sorts:

The White House, meanwhile, found itself defending its own pay strategies after a study by the American Enterprise Institute found that female staffers in the White House earn 12 percent less than men, on average, or 88 cents on the dollar.

White House spokesman Jay Carney noted that figure was better than the national average, but that there had been extensive efforts to ensure pay equity at the White House. Case in point, he said: the White House has both a male and female deputy chief of staff, who earn the same pay.

“Everybody at every level here at the White House is paid the same for the same work, male or female, and that is reflected at the most senior levels here, where half or more than half of the department heads are women,” Carney told reporters Monday. “When it comes to the bottom line that women who do the same work as men have to be paid the same, there is no question that that is happening here at the White House at every level.”

Latest Wrinkle in Employers’ Severance Policies

More of a case has been made for some much-needed and immediate reviews of employers’ severance policies.

476619387 -- money and gavelAs this story from Bloomberg lays it out, the U.S. Supreme Court just decided in favor of the Obama Administration and its Internal Revenue Service in a dispute over taxes on severance compensation, overturning a lower-court decision that could have forced the IRS to refund more than $1 billion.

In its ruling in the case of Quality Stores Inc., the court has said payments to laid-off workers are subject to Social Security and Medicare taxes under the Federal Insurance Contributions Act. In essence, the defunct company fired 3,100 workers when it closed its stores in 2001 and 2002, paid the taxes on their severance and then asked a bankruptcy judge to order the IRS to refund $1 million.

Obviously, this is a huge victory for the IRS, which has been fighting more than 2,400 refund claims from companies and their ex-employees. It’s also a huge wake-up call in the business community. As Bob Hertzberg — the lawyer representing Quality Stores before the Supreme Court — told Bloomberg: “The decision is a huge blow for employers and employees alike. In addition to the impact on Quality Stores and its former employees, this ruling has far-reaching implications for the thousands of other organizations and workers fighting for refunds.”

This news comes right on the heels of a news analysis by HRE Staff Writer Mark McGraw about a U.S. Equal Employment Opportunity Commission lawsuit against CVS Pharmacy Inc. that experts say could also shake up how companies approach severance agreements.

In that case, the EEOC is charging that CVS “conditioned the receipt of severance benefits for certain employees on an overly broad agreement set forth in five pages of small print,” and interfered with their right to file discrimination charges and/or communicate and cooperate with the EEOC, according to the suit.

As A. John Harper III, a partner in the labor and employment practice group in the Houston office of Haynes and Boone, told McGraw, the provisions in the CVS separation agreement coming under scrutiny are “common in many severance and other employment-related agreements.”

Comments he got from Robert Hale, a Boston-based partner and chair of Goodwin Procter’s labor and employment practice, are worth repeating, too:

If the EEOC wins here, that would make it difficult for employers to reach agreements that prevent former employees who accept severance pay [from making] disparaging statements or [disclosing] personnel information that many employers understandably view as confidential.”

At the very least, as this case makes its way through the courts and as the Quality Stores decision continues reverberating, employers should be closely evaluating their severance agreements. As Hale puts it,

HR should work with counsel to take a hard look at existing severance agreement forms to determine whether any steps should be taken to reduce the risk that a decision in this case would make those existing agreements more vulnerable to legal challenge.”

Want This Job? Audition For It

auditionThis month’s edition of the Harvard Business Review (subscription required) includes a profile of the hiring process at Automattic, a tech firm that’s behind the free, open-source software platform WordPress. Founder and CEO Matt Mullenweg wasn’t happy with the traditional recruiting process (resume screening, in-person interviews, taking candidates out to lunch, etc.) his company was using, he writes:

As we considered the situation, it became clear that we were being influenced by aspects of an interview — such as someone’s manner of speaking or behavior in a restaurant — that have no bearing on how a candidate will actually perform. Some people are amazing interviewees and charm everyone they talk to. But if the job isn’t going to involve charming others, their interview skills don’t predict how well they’ll do as employees. Just like work, interviews can be “performed” without real productivity.

The more he and his team thought about it, Mullenweg writes, the more they recognized that there’s no substitute for actually working alongside someone in the trenches. Thus began Automattic’s “auditions” for job candidates, in which those who’ve made it through the firm’s resume-screening process (which it retained) work for the firm on a contract basis for three to eight weeks, 10 to 20 hours per week, performing real tasks alongside the folks they’d be working with if they’re hired. Candidates (regardless of the position they’re auditioning for) are paid $25 per hour and, thanks to the firm’s highly flexible work arrangement, can work nights or weekends so they don’t have to quit their existing jobs during the audition period.

The tasks candidates perform depends on the jobs they’re auditioning for: a customer-service candidate would interact with customers, an engineer would write code and a business-development candidate might run the numbers on a business proposal. The goal, Mullenweg writes, is to assess whether having the person work at Automattic would be a mutually beneficial relationship: The company can evaluate the candidate while the candidate evaluates Automattic.

Candidates are provided with feedback during the audition, Mullenweg writes — in some cases, if it becomes clear things aren’t working out, the company calls an end to the process as quickly as possible “out of respect for everyone’s time.” The auditions require a substantial investment of time from Automattic employees as well as candidates, he notes — in the engineering department, for example, four engineers oversee auditions for their department. The final step in the process is an interview with Mullenweg. Ninety five percent of the people who make it to that stage end up getting hired, he writes.

The extra scrutiny afforded by the auditioning process is important for Automattic because — unlike many software companies — the firm wants employees who will build long-term careers there and it needs to ensure employees will be able to handle its flexible-hours, limited-supervision work culture. About 40 percent of audition candidates are hired by the company, writes Mullenweg. The process has proven successful so far, he says: Of the 101 people hired last year, only two ended up not working out.

Although auditioning may not be ideal for every company, Mullenweg writes, it could be useful as an augmentation to a firm’s existing hiring process. It’s worth considering because so much is at stake, he writes:

Nothing you do for your company has as much impact as putting the right people around the table. The aphorism is true: You can’t manage your way out of a bad team.

Paying CEOs to Find Their Replacements

successorWant to pave the way for the organization’s next leader and light a fire under your current chief executive in the process? Rewarding your CEO for helping to find and groom a successor may be one way to go.

A recent Wall Street Journal article calls this practice the “hottest corporate fad,” citing firms including Avnet Inc., Intel Corp. and Marriott International Inc. as examples of large companies offering incentives to chief executives for their efforts in ensuring a smooth transition when they eventually turn over the organization’s reins.

Motivated at least in part by “investors’ anxiety over rocky corner office transitions,” these and other companies have taken to linking CEO performance awards to succession planning, with 16 Fortune 1000 firms disclosing such links in their latest regulatory filings, the article notes.

At the Santa Clara, Calif.-based Intel, for instance, now-former CEO Paul Otellini has received $4 million in stock and cash since January 2013 for his part in bringing along Brian Krzanich, who took over Otellini’s old post in May of last year, according to the Journal. Otellini, who has already gotten $1 million in cash, can sell half of his $3 million worth of shares this May.

Other organizations are taking a slightly different tack. Phoenix-headquartered electronic component distributor Avnet is basing chief executive Richard Hamada’s next annual raise partly on his succession planning prowess. Promoted to CEO in July 2011, the 56-year-old Hamada told the Journal he “hopes to run Avnet for a total of eight to 10 years,” but noted that he now gives detailed succession updates at every board meeting.

Board members at Marriott International believe that “continuity of management is critical,” David Rodriguez, the Bethesda, Md.-based hotel chain’s CHRO, told WSJ.  As such, CEO Arne Sorenson’s ability to secure the board’s approval of his CEO transition agenda factored into the amount of his bonus in 2012, according to Rodriguez. He estimated that roughly 10 percent of the nearly $1.95 million bonus bestowed upon Sorenson reflected such individual achievements.

The Journal article may describe the practice as a fad, but, as directors become more involved in grooming future leaders, this type of reward system “will be commonplace in a decade,” Dennis Carey, vice chairman at Los Angeles-based Korn/Ferry International, told the paper.

In fact, the number of companies taking this approach is poised to triple in the next five years, according to Patrick McGurn, special counsel for proxy advisory firm Institutional Shareholder Services Inc.

Time will tell if that prediction is on the money, but McGurn makes a compelling—not to mention concise—argument for tying a CEO’s pay to his or her role in succession planning efforts.

“Nothing tends to focus CEOs’ attention,” he told the Journal, “like … good, swift kicks to their incentives.”

A Message Worth Repeating?

In case you missed it (apparently I did), Jack and Suzy Welch crafted a LinkedIn post last week that again spoke to the importance of HR.

188065235“HR should be every company’s ‘killer app,’ ” they wrote in the piece, titled So Many Leaders Get This Wrong.

“What could possibly be more important than who gets hired, developed, promoted or moved out the door? Business is a game, and as with all games, the team that puts the best people on the field and gets them playing together wins. It’s that simple.”

Considering this, the two noted, it’s too bad “HR rarely functions as it should” and is often relegated to the background. “If you owned the Boston Red Sox, for instance, would you hang around with the team accountant or the director of player personnel?” they ask.

They continue …

Sure, the accountant can tell you the financials. But the director of player personnel knows what it takes to win: how good each player is and where to find strong recruits to fill talent gaps. Several years ago we spoke to 5,000 HR professionals in Mexico City. At one point we asked the audience: ‘How many of you work at companies where the leader gives HR a seat at the table equal to that of the CFO?’ After an awkward silence, fewer than 50 people raised their hands. Awful!”

They then go on to propose how to fix this mess …

It all starts with the people they appoint to run HR — not kingmakers or cops but big leaguers, men and women with real stature and credibility. In fact, managers need to fill HR with a special kind of hybrid: people who are part pastor (hearing all sins and complaints without recrimination) and part parent (loving and nurturing, but giving it to you straight when you’re off track).”

Of course, these comments are right in line with others offered up by Jack and Suzy Welch in the past. In a 2004 story we ran, Jack Welch shared an anecdote similar to the one in Mexico City, pointing out that having a scorekeeper in baseball who’s more important than the director of player personnel on a team is crazy.

Also, this isn’t the first time Jack and Suzy Welch referred to HR as a “killer app.” (One reference I found dates back to 2006.)

I’m sure some of you may be scratching your heads, wondering why the two are revisiting this subject once again. But considering how many organizations have yet to adjust their thinking, I think a case could easily be made that it’s a message worth repeating. (In case you were wondering, last count, the LinkedIn piece received 163,376 eyeballs, 2,679 likes and 565 comments.)

Adding one more point of view to this discussion, Bloomberg TV interviewed former GE executive and former Home Depot CEO Robert Nardelli yesterday, asking him to share his thoughts on the couple’s piece. Nardelli, who is now founder and CEO of the investment banking firm XLR-8,  said he was in complete agreement. (No surprise there, considering he describes Jack Welch as a mentor.) Companies, he said, “will spend an inordinate amount of analysis on your physical capital, and yet it’s your human capital that brings that to life.”

Legislation to Counter ‘Ambush Election’ Rule

Last week, House and Senate Republicans announced the introduction of legislation intended to counter the National Labor Relations Board’s controversial
“ambush election rule,” the law firm Ballard Spahr recently noted in a legal alert.

(Eagle-eyed HREOnline.com readers will remember we recently covered the topic in a news analysis piece titled “Are Employers Being Ambushed?”)

The NLRB’s proposed rule, which was re-issued on Feb. 5, would significantly
reduce the time in which a union election can take place after the filing of an
election petition. Under the proposed rule, elections could take place in as few as 10
days after the filing of a petition. This would constitute a significant change
in the timing of union elections as they currently take place under the
existing regulations

In its alert, Ballard Spahr says “many employers oppose the proposed ambush election rule and believe that it undermines the rights of both workers and employers,” and to that end, Congressional Republicans have introduced two bills aimed at changing the proposed rule:

The Workforce Democracy and Fairness Act (H.R. 4320) requires at least a 35-day window between the filing of an election petition and the union election. This bill would preserve an s ability to litigate challenges to the petition and proposed unit in  pre-election hearings and would provide the NLRB adequate time to rule on any  outstanding issues.

The Employee Privacy Protection Act (H.R. 4321) would enable employees to choose in writing what type of personal contact information the employer is required to provide to the union after the processing of a representation petition. This package of legislation would nullify the NLRB’s proposed ambush election rule.

Stay tuned as this legal picture continues to develop…

Different Views of Retirement

88366557 -- retirement optionsTwo somewhat divergent reports on retirement vehicles crossed my desk this past week — underscoring the differences in demographics and philosophies that seem to be a part of the overall retirement picture.

One, a release from Towers Watson, shows sharp improvement in the financial health of America’s 100 largest pension plans and even possible pension de-risking ahead should this improved financial picture continue.

This is great news for pension plans, probably the best we’ve seen since the Great Recession. As Dave Suchsland, senior consultant at Towers Watson, says:

The rising stock market, combined with higher interest rates for the first time in five years, pushed funding levels significantly higher. This is good news for employers, as stronger pension fund balance sheets will reduce required cash contributions in the near term while lower pension costs will improve corporate earnings.”

More specifically, the analysis of year-end corporate disclosures found the pension deficits for these largest pension sponsors among U.S. publicly traded organizations fell 57 percent, from $295.5 billion at year-end 2012 to $125.9 billion at year-end 2013, a decrease of $169.6 billion. As the release puts it:

The pension deficit for these companies hasn’t been this small since 2007, when plans had a surplus of $82.3 billion. Meantime, the overall average funded status jumped 13 percentage points, from 78 percent at the end of 2012 to 91 percent at the end of 2013. That is the best funding level since the end of 2007, when the average stood at 103 percent. Additionally, the number of plan sponsors with fully funded plans surged from five at the end of 2012 to 22 at the end of 2013. At the end of 2007, half of these 100 plans were fully funded.”

In the words of Alan Glickstein, senior retirement consultant at Towers Watson, these improved funding levels — combined with recent increases in Pension Benefit Guaranty Corp. premiums and a newly released Society of Actuaries mortality study — ”will make de-risking actions very attractive in 2014.”

Then there’s this, a white paper from Buck Consultants showing younger workers — specifically millennials — prefer defined-contribution plans — specifically 401(k) and 403(b) plans — given their predisposition for mobility.

Here are some of the things Buck says employers should consider as they design the kinds of retirement plans that will attract and retain millennials (born early 1980s to early 2000s):

  • Attractive web portal that is easy to use and navigate. Millennials pride themselves on being tech-savvy and are used to state-of-the art retail websites, so websites should have links to frequently asked questions or pop-up windows with additional information.
  • Automatic enrollment with an escalating contribution feature. This is an important feature for millennials who tend to act later rather than sooner, and may not take the time for the thoughtful analysis needed for retirement planning.
  • Make it an outcome-based plan. Millennials will appreciate a DC plan that comes “fully loaded” with pre- and post-retirement features, helping individuals better prepare for retirement.
  • ROTH savings option. Millennials will likely be in a higher tax bracket as they approach retirement age. Showing the benefits of ROTH savings should improve overall satisfaction with the plan.

While pension plans are clearly not on the fast track to extinction we anticipated not that long ago, clearly worth noting in Buck’s piece is the importance of recognizing who you’re serving with what retirement vehicle.

Just my humble — hopefully not-too-convoluted — observation.

An Eye to the Future

As I’m sure many of you are aware, HRE has published a fair share of stories on the need for HR leaders to pay closer attention to their own talent pipeline.

159252853In light of this, I’d like to once again call your attention to an initiative introduced by the National Academy of Human Resources a number of years ago aimed at raising future leaders in the profession: The NAHR Ram Charan HR Essay competition, which is now open to undergraduate and graduate students majoring in HR, industrial/labor relations or related fields.  In addition to the priceless prestige that goes with being selected a winner, award recipients also receive handsome cash prizes of $20,000, $10,000 and $5,000. The deadline for submissions is Aug. 1.

This year’s topic ….

Performance Management – A Very Real Issue for Employers and Employees.  Students are asked to identify a new way to measure and improve employee performance that is efficient, effective, and will be embraced by employees because they view it as a fair system that is helpful to them in their career.  The new process must be measurable for effectiveness, contributions to the success of the organization, and reassure management that the right people are being rewarded.”

If you know of anyone who might be interested in participating in this competition, please pass on the above link.

And if you’d like to get a sense of some of the original research and thinking that resulted from last year’s competition, check out the first, second and third place winning entries, submitted by Tiffany Scheff and Josie Trine of Cornell University’s ILR School; Joseph Redlitz of Rutgers University, and Indranil Dey of the Asian Institute of Management in the Philippines, respectively. Their topic: “How are electronic technology and social media affecting the employment relationship between employers and employees; and the roles, responsibilities and contributions of HR organizations?”

I suspect those of you who do will walk away feeling a bit better about the profession’s future.

Will Employers Stop Offering Health Benefits?

Ezekiel Emanuel (an oncology doctor, professor of ethics at Penn and brother of Chicago mayor Rahm Emanuel) was one of the architects of the Affordable Care Act — which, as we all know, mandates that employers with at least 50 full-time-equivalent employees provide health insurance. So it’s a bit surprising to learn that Emanuel has just written a new book in which he predicts that, as a result of the ACA, most employers in the United States will have stopped offering health benefits to their employees by 2025.

Why will companies stop offering health benefits? Because, Emanuel argues in the book — Reinventing American Health Care: How the Affordable Care Act Will Improve Our Terribly Complex, Blatantly Unjust, Outrageously Expensive, Grossly Inefficient, Error Prone System (how’s that for a title?) — the online insurance exchanges will provide employers with a viable alternative for doing so. Now, after you’ve picked yourself up off the floor from laughing so hard at the idea of Healthcare.gov being described as a “viable alternative” (although many of its worst bugs appear to have been fixed), note that Emanuel does acknowledge the botched rollout of the federal online exchange and some of the state ones, yet he describes others (such as Connecticut’s state exchange) that are working well. If all of the exchanges are fixed to the point that consumers can obtain health insurance by spending only 30 minutes or so enrolling, he says, then companies will indeed have a viable alternative to the expense and administrative hassles of providing benefits and can instead simply give their employees money to go out and purchase benefits on their own. The ACA’s excise taxes on high-cost health plans scheduled for 2018 are yet another incentive to get out of the health-benefits game, says Emanuel.

Private exchanges, which are essentially a defined-contribution approach to health benefits, have certainly sparked a lot of interest among employers lately. As many as 33 percent of respondents said private health exchanges would be their preferred approach to managing health care in the next three to five years, up from 5 percent now, according to Aon Hewitt’s Health Care Survey of more than 1,230 employers covering in excess of 10 million employees (Aon happens to be one of the vendors that offers a private exchange; others include Towers Watson, Buck Consultants and many smaller vendors). Brian Poger, CEO of consulting firm Benefitter, said at the just-concluded Health & Benefits Leadership Conference in Las Vegas that for many employees — especially low-wage workers with families – the health coverage available on public exchanges might be a better deal than that provided by their employers, considering that many have cut back or eliminated coverage for spouses and families.

Jettisoning traditional health benefits has yet to become a major trend among U.S. employers: Accenture estimated that 1 million employees enrolled in private exchanges last year, a tiny percentage of the nation’s workforce (although it also estimated that number could grow to 40 million by 2018). There is also the risk that employees on private exchanges will “buy down” — that is, purchase less-costly plans that may ultimately leave them with less coverage and worse health outcomes than traditional health plans, which tend to have “marginal” price differences, Mike Thompson, healthcare practice leader at PwC, told me last year. Companies that switch to private exchanges may also risk breaking the linkage between benefits and wellness, he said.

The expression “paradigm shift” is an overused cliché, but it’s clear we’re in one now when it comes to health benefits. Rest assured we’ll continue to cover this area closely.