Sunday, July 16, 2006

Blast From the Past: Stupid Compensation Plans

Fred Whittlesey
Compensation Venture Group, Inc.

I was doing an online search for things related to my name (one has to monitor that sort of thing) and found a link to an article in titled "No Pink Cadillacs Here" from June 2000 regarding Mercury Computer Systems' giving Porsche Boxsters to "nearly two dozen" top executives. This was a result of the CEO's idea that they would earn these cars if they could "turbocharge the stock price" - the price tripled from January 1999 and they got the cars.

My none-too-subtle quote that the writer cited was: "I have a file labeled 'stupid compensation plans,' and this is going in it," says Fred Whittlesey, a principal at Compensation and Performance Management Inc., in Newport Beach, Calif. He thinks the executives' stock options are ample reward. "If I were a shareholder, I'd be upset," he adds. (CPM was the independent compensation consulting firm I founded and operated from 1991 through 2000.)

Of course, the CFO of Mercury - G. Mead Wyman - took issue with my comment, saying "When you look at our total budget for recruitment and retention, $250,000 a year for two years is not out of line with the things we do," he says. He was referring to the cost of the Boxsters. I was referring to the fact that this was a huge waste of what he says was the $250,000 cost for the stupid compensation plan.

Fair enough. So what happened since then? Mercury's stock price ranged between $11.50 and $13.50 (split-adjusted to current) during January 1999. By June of 2000, when the Boxster Bonus was given, it had indeed tripled. Where is it now? It closed yesterday at $13.60. The CEO, Mr. Bertelli, is still the CEO despite having created no sustained value for shareholders over the time period we're discussing here. Mr. Wyman retired in April 2002 when the stock price was still trading around $30. Nice timing.

So, while I started to have second thoughts about my quote, I have concluded that a Stupid Compensation Plans file is as important now as it was then and I was indeed right about Mercury Computer Systems and their Boxsters.

In a time when executives are expected to buy and hold their company's stock I should disclose that I purchased a Porsche 968 (in some respects the higher-end predecessor of the Boxster) in 1994 and still own that car today, holding it through booms and busts because I believe in its value (but really because I love to drive it). I wonder whatever happened to those Mercury Boxsters? We know what happened to the shareholders who bought Mercury stock in June 2000.

Wednesday, July 05, 2006

Financial Solutions for HR

Fred Whittlesey
Compensation Venture Group, Inc.

I think many were taken aback by my three-part infomercial published and distributed at the SHRM Conference. In it, I suggested that HR continues to overlook the need for financially-oriented business-based solutions as the field continues to get waylaid into concepts like "work-life" and such.

Not being a soccer (sorry, "football") fan, I have paid scant attention to the World Cup. Before you conclude that I just did a random change of topic from the preceding paragraph, read on. I probably wouldn't have noticed the blurb in the 03 July 2006 issue of Business Week, with a photo of face-painted, flag-waving fans, had they not printed this in red ink: "Companies pay a premium of 2% to 4% of an employee's salary. In return, the policy covers the cost of an AWOL worker's salary for up to two days..."

Following my reading of this article I Googled around and learned that World Cup-related absenteeism is apparently a worldwide HR issue (decidedly more pronounced outside the US than inside) and that there has been a fair amount of thinking and writing about how to address this thorny HR issue. How should HR deal with the possibility that 15% to 20% of the workforce - or more! - may no-show on a day when the home country team is playing? And if that turns into a two-day no-show due to those employees having watched the game in a local pub and suffered the morning-after consequences? This is HR's concern.

The solutions proffered range from wide-screen TVs in the workplace (Why is it better that the employee comes to work and then spends their time watching a soccer, sorry, football game? That one baffles me.) to other solutions including communication meetings with managers and employees to emphasize the importance of coming to work; arranging for flexible schedules so fans can watch the game and come to work earlier or later; ensuring good communication with non-fans so they don't feel slighted; and so on. The usual fluffy HR stuff.

The Business Week article reports that Dutch insurance broker SEZ developed a financial solution to this. (Apparently this is a severe problem in the Netherlands.) After all, it's not a "people problem" that people don't come to work, it's a financial problem. If the people don't come, they use a sick day, or a vacation day, or lose a day's pay. If we were to treat them like adults instead of schoolchildren, we would allow them that choice and hope they gave advance notice. The financial problem is that the company then has to hire a temp for a day or two, at roughly twice the price, or suffer the profit impact of the missing employee.

SEZ developed an insurance policy that allows the company to pay the premium of 2% to 4% of salary and in the event of a "loss" (loss of employee attendance) the policy pays enough for a temp (or that amount could presumably be applied to cover the lost profit). This was first offered about four weeks ago according to Business Week.

The result? About 600 employers purchased a policy.

While some employers are buying TVs so that employees can be paid to work while watching the soccer, sorry, football game others have hedged using a financial product and left the "work-life" nonsense behind. The employers maintain their profitability, the employee takes the day off to watch the game, and everybody wins. No HR needed. How about that?