Weathering an Economic Downturn Rachel Breen Everaard July 15, 2008

Weathering an Economic Downturn

Rachel Breen EveraardJuly 15, 2008

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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

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People Cost Optimization Framework

Business Strategy (Cost Reduction)

Execution


Execution

HR Program & PlanManagement


HR Service Delivery Optimization


• Organization Restructuring• Workforce Planning• Workforce Transition• Sales Force Effectiveness

Workforce OptimizationWorkforce

Optimization

HR plays a critical role in supporting organizational objectives to contain and reduce costs – this is accomplished through four primary HR-related cost “levers”

Productivity EnhancementProductivity

Enhancement

• HR Service Delivery Model• Process Redesign• Technology Enhancement

• Reward Cost Savings• HR Program Review• Risk Management• Vendor Management

• Performance Management• Change Management• Training

• M&A/Divestiture• Operations Closure or Shut Down• Joint Venture• Other Efficiency Targets

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HR Program & Plan ManagementBusiness Strategy (Cost Reduction)

Execution


Execution






OptimizationProductivity

EnhancementProductivity

Enhancement

Activities Potential Outputs

Rewards Cost Savings

– Plan design review

– Claims and utilization review

– Contribution strategies

– Compensation and benefits benchmarking

• Redesign of plans to increase efficiencies

• Effective audit/management of claims

• Reallocation of contributions

HR Program/Policy Review

– Utilization analysis

– Prioritization/alignment with HR strategy

• Phase-out of low-usage programs

• Redesign of programs/policies to align with HR strategy

Risk Management

– Union and Employee Relations

– Compliance

• Union avoidance or contract renegotiations

• Identification of compliance concerns/needs for (OSHA, ADA, ADEA, EEOC, etc.)

Vendor Management

– Analysis of current vendor contracts (premiums, history, trends)

– Administration review

• Contract negotiations for vendors (benefits, training, recruiting, etc.)

• Vendor consolidation

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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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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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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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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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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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Workforce OptimizationBusiness Strategy (Cost Reduction)

Execution


Execution








Enhancement


Organization Restructuring

– Organization design

– Workforce assessment and redeployment

• Efficiencies in organization structure

• Position elimination

• 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

• Analysis of workforce composition (demographics, location, employee/contractor mix, skills, etc.)

• Identification critical talent requirements

• Action plan to meet future talent needs

Workforce Transition Strategies

– Retention of critical talent

– Early retirement options

– Severance and/or SERP

• Identification of retention drivers, strategies

• Voluntary reduction in force

• Severance management

Sales Force Effectiveness • Aligned performance measures and incentives

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Workforce Planning: Global Technology Company

Business Driver

• Changing business strategy (acquisitions, expansions into Asia, onshore vs. offshore) drove need for integrating workforce planning into business and financial planning process

Solution

• 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

• 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

Workforce Planning

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HR Service Delivery OptimizationBusiness Strategy (Cost Reduction)

Execution


Execution








Enhancement


HR Service Delivery Model

– Centralization vs. de-centralization

– Shared Services

– Outsource/offshore

– Benchmark vs. industry/market

• Redesign of HR structure

• Redesign of HR roles/responsibilities

• Examination of outsourcing arrangements/contracts, trends

Process Redesign

– Review efficiency of process (work-arounds, approval levels, automation)

– Review effectiveness of process (manager input, employee survey results, alignment with HR strategy)

• Eliminate unnecessary processes

• Eliminate non-core HR reporting

• Re-allocate focus toward low-cost solutions

Technology Enhancement

– Rationalize disparate systems

– Scale existing investments

– Identify areas for Self-Service

• Automation of current costs for communicating, distributing, reporting, and collecting information

• Identification of hidden costs (maintenance costs, work-arounds, labor intensity vs. automation)

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Case Study: Insurance Company

Business Driver

• 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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Productivity EnhancementBusiness Strategy (Cost Reduction)

Execution


Execution








Enhancement


Performance Management

– Performance-based incentives

– Pay-at-risk

– Balanced scorecard

• Incentives aligned with behaviors

• Measurement of improvement/success against business goals

Change Management

– Employee absence mitigation / incentives

– Waste minimization

– Continuous improvement culture

– Effective communication

• Lower employee absences levels

• Self-directed work teams

• Employee feedback mechanisms

Training

– Training strategies, development and delivery

– Competency management and development

• Training programs to enhance employee development

• Increase in training effectiveness and efficiency

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Rewards and Recognition to Retain High Performers: Healthcare Organization

Business Driver

• 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

• Implemented a web-based performance management tool • Redesigned job descriptions system-wide• Developed a new performance management evaluation process, forms, and ratings

Outcomes

• Aligned expectations for job standards based on common job descriptions across the system

• Focus on pay for performance tied to individual goal setting process

Rewards

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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*

* Corporate Leadership Council

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• 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

Severance Solution® Potential Savings

* 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**

* Corporate Leadership Council** 2005 CCH Unscheduled Absence Survey

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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 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

• BJC Healthcare

• BMC Software

• Champion Technologies

• Christus Healthcare

• ConocoPhillips

• Devon Energy

• Integris Health

• Jewish Hospital

• EnerVest

• MD Anderson

• Motiva Enterprises

• Perot Systems

• Pilgrim’s Pride

• 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

• In addition, she worked for ExxonMobil in Employee Communications and for Towers Perrin in the Strategy and Organization practice

• MBA in Management and Finance, Tulane University

• BA in Economics, Tulane University

• Professional in Human Resources, SHRM

Rachel Breen EveraardDirector, Human Capital Management

Documents

Weathering an Economic Downturn Rachel Breen Everaard July 15, 2008