Weathering an Economic Downturn
Rachel Breen Everaard
July 15, 2008
Background
•
The Federal Reserve has predicted the possibility of a
“severe and protracted downturn” lasting into 2009
•
1/3 of employers are considering lower staffing levels
•
66% of organizations reported that the soaring fuel costs are
having a moderate to very high negative effect on their
business operations
•
Blue chip companies neared a so-called bear market this
month, representing a loss of 20% from last year's high
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Key Considerations
Cost Control: Taking steps to manage human capital costs
Risk management: Making sure workforce changes don’t undermine
program effectiveness, governance or fiduciary responsibilities
Talent management: Revisiting your talent management and rewards
programs to increase workforce effectiveness
Workforce optimization: Taking a hard look at workforce needs to be sure
you’ve optimized your people assets
HR effectiveness: Assessing the effectiveness of HR operations
3
People Cost Optimization Framework
HR plays a critical role in supporting organizational objectives to contain and reduce
costs – this is accomplished through four primary HR-related cost “levers”
Business Strategy
(Cost Reduction)
Execution
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Workforce
Optimization
HR Service Delivery
Optimization
Organization Restructuring
Workforce Planning
Workforce Transition
Sales Force Effectiveness
• HR Service Delivery Model
• Process Redesign
• Technology Enhancement
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•
•
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M&A/Divestiture
Operations Closure or Shut Down
Joint Venture
Other Efficiency Targets
HR Program & Plan
Management
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•
•
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Reward Cost Savings
HR Program Review
Risk Management
Vendor Management
Productivity
Enhancement
• Performance Management
• Change Management
• Training
Business Strategy
(Cost Reduction)
Execution
HR Program & Plan Management
Workforce
Optimization
HR Service Delivery
Optimization
HR Program & Plan
Management
Activities
Potential Outputs
Rewards Cost Savings
• Redesign of plans to increase efficiencies
– Plan design review
• Effective audit/management of claims
– Claims and utilization review
• Reallocation of contributions
Productivity
Enhancement
– Contribution strategies
– Compensation and benefits benchmarking
HR Program/Policy Review
– Utilization analysis
– Prioritization/alignment with HR strategy
Risk Management
– Union and Employee Relations
– Compliance
Vendor Management
– Analysis of current vendor contracts
(premiums, history, trends)
– Administration review
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• Phase-out of low-usage programs
• Redesign of programs/policies to align with HR
strategy
• Union avoidance or contract renegotiations
• Identification of compliance concerns/needs for
(OSHA, ADA, ADEA, EEOC, etc.)
• Contract negotiations for vendors (benefits,
training, recruiting, etc.)
• Vendor consolidation
Compensation Innovations
Differentiate – Identify cost-effective tactics that ensure the retention of
high performers and more aggressive reallocation away from mediocre
and poor performers
• Grant large, cliff vesting RSU grants to key contributors
• Consider multi-year cash based retention bonuses with interim payment
possibilities based on company performance
• Allow an additional week of paid time off for exceptional project delivery
Example: Built a retention program for an oil & gas client to keep technical
drilling employees on rigs. Retention bonuses were granted based on
company and individual performance and were paid over a 3 year period.
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Compensation Innovations
Be flexible – As employees are caught in cash crunches, offering short
term relief can have high value to employees with no real incremental
cost to the company
• Institute Short term choice program for one-time cash awards in lieu of equity
• Buy back underwater options for cash
• Give gas/grocery cards
• Extend 401K borrowing periods
Example: In light of record gasoline prices, one healthcare company issued
gas cards to employees to demonstrate their appreciation for the increase
in discretionary income allocated to travel.
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Compensation Innovations
Use soft dollars – The increased interest in flexible work schedules is
an opportunity for employers to reduce the need for lay-offs
• Cut back to 80% time
• Grant an additional week of time off for a 5% salary reduction
• Allow additional work-at-home days
• Offer an unpaid sabbatical with benefits continuation
Example: A steel-producer implemented a program to taper labor costs by
using a progressive scale of reduced hours or wages.
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Compensation Innovations
Understand the financial priorities – understanding which form of
capital, cash or equity is more plentiful for the company can guide
design decisions
• Pay hiring bonuses at the end of the first year
• Pay hiring bonuses in RSUs with 1 yr cliff vesting
• Delay performance bonuses with a 10% premium paid for the delay
Example: An investment bank looking to conserve cash at fiscal year-end to
pay bonuses offered key new hires significant RSU awards to attract new
talent.
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Compensation Innovations
Measure the ROI – Calculating the all-in cost of each pay program
relative to the pay delivered and discontinuing low-return forms of
compensation can free up pay dollars to boost other forms of pay
• Consider moving dollars to a more cost-effective form to increase the bottom
line If administration costs are high for one form of compensation
• Calculate costs associated with administration, operation, communication and
management time
• Reassess countless hours spent “differentiating” 3.8 vs. 4.2 salary increases.
Example: If it’s costing $50 per year per employee to deliver stock worth
$50, move $75 to the bonus pool and bolster the opportunity for
differentiation and flexibility while improving ROI, with $25 dropping to the
bottom line.
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Additional HR Program & Plan Management Considerations
The following are the programs/plans we will consider in implementing rewards cost reduction
Retirement Plan Management
• Pension plan design, funding
• Pension surplus management (severance and/or
SERP shift)
• Balance sheet impact & analysis
• Plan rationalization / alternative plan design
• Asset/Liability matching
• Pay Increase through retirement plan
• Retiree Health and welfare benefits
• Vendor fees
• Early retirement window
Health & Welfare Plans
• Alternative plan design / rationalization
• Claims & utilization review
• Contribution strategies
• Cost-effective plan information distribution
• Medical Savings Accounts
• Defined Contribution designs
• Managed Care carve-outs
• Integrated Disability Management
• Absence Management (Sick, STD, LTD, WC)
• Retiree Medical Risk-Sharing
Compensation
• Incentive and bonus plan design
• Golden parachutes (280g)
• SERP Shift
• Pay increases through pension plans
• Performance counseling
401(K) Plan Management
• Accelerated deductions
• Deductible ESOP dividends
• Fee optimization
• Predictable/attractive substitute for pension plan
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Business Strategy
(Cost Reduction)
Execution
Workforce Optimization
Workforce
Optimization
HR Service Delivery
Optimization
HR Program & Plan
Management
Activities
Potential Outputs
Organization Restructuring
• Efficiencies in organization structure
– Organization design
• Position elimination
– Workforce assessment and redeployment
• Job redesign
Workforce Planning
– Analysis of current workforce Analysis of
current and future workforce
demand/supply
– Gap analysis to determine actions to meet
future workforce needs
Workforce Transition Strategies
Productivity
Enhancement
• Analysis of workforce composition
(demographics, location, employee/contractor
mix, skills, etc.)
• Identification critical talent requirements
• Action plan to meet future talent needs
• Identification of retention drivers, strategies
– Retention of critical talent
• Voluntary reduction in force
– Early retirement options
• Severance management
– Severance and/or SERP
Sales Force Effectiveness
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• Aligned performance measures and incentives
Workforce Planning
Workforce Planning: Global Technology Company
Business Driver
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Changing business strategy (acquisitions, expansions into Asia, onshore vs. offshore)
drove need for integrating workforce planning into business and financial planning
process
Solution
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•
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Analyze/conduct workforce diagnostics, workforce assessment, and workforce modeling
Develop workforce planning process, tools and templates to align with business and
financial planning
Develop a scorecard of metrics to measure workforce planning success
Outcomes
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Defined workforce competency model and labor cost model
Consolidated R&D centers based on current and future workforce needs
Right mix of onshore vs. offshore labor
Reduced “single point of failure” dependencies
Business Strategy
(Cost Reduction)
Execution
HR Service Delivery Optimization
Workforce
Optimization
HR Service Delivery
Optimization
Activities
Potential Outputs
HR Service Delivery Model
• Redesign of HR structure
HR Program & Plan
Management
– Centralization vs. de-centralization
• Redesign of HR roles/responsibilities
– Shared Services
• Examination of outsourcing
arrangements/contracts, trends
– Outsource/offshore
Productivity
Enhancement
– Benchmark vs. industry/market
Process Redesign
– Review efficiency of process (workarounds, approval levels, automation)
• Eliminate unnecessary processes
• Eliminate non-core HR reporting
• Re-allocate focus toward low-cost solutions
– Review effectiveness of process (manager
input, employee survey results, alignment
with HR strategy)
Technology Enhancement
– Rationalize disparate systems
– Scale existing investments
– Identify areas for Self-Service
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• Automation of current costs for communicating,
distributing, reporting, and collecting
information
• Identification of hidden costs (maintenance
costs, work-arounds, labor intensity vs.
automation)
Case Study: Insurance Company
Business Driver
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Redesign retained HR and ensure change readiness as part of an overall service
delivery remodel that includes HR outsourcing. Support generalist transition toward
business partner
Solution
• Helped client collect customer input about business requirements for HR
• Activity-based costing survey and design of generalist and Staffing roles
• On-going communication, training, and readiness assistance
• Coordination of outsourcing with overall HR strategy and service delivery
Outcomes
• Successful implementation of service delivery model and outsourcing
• Reallocation of retained HR headcount to emphasize business impact
• Effective communication and stakeholder readiness to use new processes
• Implementation to achieve targeted savings in business case
• Enhanced strategic capabilities for HR reporting, consulting, planning
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Business Strategy
(Cost Reduction)
Execution
Productivity Enhancement
Workforce
Optimization
HR Service Delivery
Optimization
HR Program & Plan
Management
Activities
Potential Outputs
Performance Management
• Incentives aligned with behaviors
– Performance-based incentives
– Pay-at-risk
Productivity
Enhancement
• Measurement of improvement/success against
business goals
– Balanced scorecard
Change Management
• Lower employee absences levels
– Employee absence mitigation / incentives
• Self-directed work teams
– Waste minimization
• Employee feedback mechanisms
– Continuous improvement culture
– Effective communication
Training
– Training strategies, development and
delivery
– Competency management and
development
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• Training programs to enhance employee
development
• Increase in training effectiveness and efficiency
Rewards
Rewards and Recognition to Retain High Performers: Healthcare Organization
Business Driver
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Healthcare system had a paper-based performance management process that was not
consistent among all the hospitals within the system
The system wanted to implement pay for performance to differentiate between high and
low performers
Solution
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•
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Implemented a web-based performance management tool
Redesigned job descriptions system-wide
Developed a new performance management evaluation process, forms, and ratings
Outcomes
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•
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Aligned expectations for job standards based on common job descriptions across the
system
Focus on pay for performance tied to individual goal setting process
Cost Reduction Value Examples
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Workforce Optimization Cost Savings
• Salary and benefits savings from reduction-in-force
• Severance Solution savings
– Eliminates FICA taxes – both employee and employer
– Coordinates and offsets severance payments with State
Unemployment Insurance (SUI) benefits
– Coordinates severance payments with new employment income
by stopping severance payments upon new employment
• Early retirement option savings
• Effective execution of talent development directly contributes
to increased organizational effectiveness and profitability,
leading up to as much as 15.4% advantage in total
shareholder return*
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* Corporate Leadership Council
Severance Solution® Potential Savings
• Assume 1,000 employees displaced with average severance of
$20,000 per worker and State UI of 30% of salary
• Assume another job is found, on average, 80%* of the way
through the severance period
Number displaced
1,000 per year
Severance spend
$20.0 million
1. FICA tax savings (5%)
$1.0 million
2. SUI integration savings (25%)
$5.0 million
3. New employment savings
(20%)
$4.0 million
Total savings
$10.0 million per
year
* National average (according to Bureau of Labor Statistics) is approximately
75%. If 75% assumed, savings would be greater.
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HR Service Delivery Cost Savings
• Process and technology redesign can lead to significant cost
savings
– Typical HR transformation savings range from 10 – 20% of total
HR operating cost
• Creating and delivering a competitive employment value
proposition allows an organization to increase its access to
candidates on the labor market by more than 50% and
improve the commitment of current employees by up to 29%*
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Productivity Enhancement Cost Savings
• Effective execution of talent development directly
contributes to increased organizational effectiveness and
profitability, leading up to as much as 15.4% advantage in
total shareholder return*
• By refocusing performance management efforts on the
strategies with highest impact, organizations can improve
employee performance by up to 50%*
• Employee absenteeism costs organizations an average of
$660 per employee in direct payroll costs. A 1% reduction in
an 8% absence rate for an employer with 20,000 hourly
workers and an average annual salary of $40,000 per
worker can equate to $6.5 million in savings per year**
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* Corporate Leadership Council
** 2005 CCH Unscheduled Absence Survey
Next Steps
1.
Understand the key financial objectives for the upcoming year and
beyond
2.
Identify critical roles, knowledge/skills, and metrics based on business
strategy, required skills, and criticality of knowledge
3.
Conduct a rewards program gap assessment against future needs and
“best in class” practices in a downturn
4.
Build a comprehensive plan for action with supporting business case
5.
Decide on which initiatives to pursue first
6.
Build a plan for gaining/sustaining organization support for action
7.
Develop an evaluation strategy with metrics and scorecards to assess
effectiveness
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Rachel Breen Everaard
Director, Human Capital Management
Rachel is a Director in the Houston office. Her specific
areas of focus include HR transformation, organizational
change and communications, HR strategy, and
compensation. She has worked in numerous industries,
particularly focusing in Energy and Healthcare.
Clients/Experiences
• Audubon Institute
• ConocoPhillips
• MD Anderson
• BJC Healthcare
• Devon Energy
• BMC Software
• Integris Health
• Motiva
Enterprises
• Champion
Technologies
• Jewish Hospital
• Perot Systems
• EnerVest
• Pilgrim’s Pride
• Christus Healthcare
• Rehab Care
Experience
Education and Achievements
• Prior to joining Buck, Rachel served as a Manager in
Deloitte Consulting’s Human Capital Practice focusing
on change management and HR strategy work
• MBA in Management and Finance, Tulane University
• In addition, she worked for ExxonMobil in Employee
Communications and for Towers Perrin in the Strategy
and Organization practice
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• BA in Economics, Tulane University
• Professional in Human Resources, SHRM