4 Problems at the Intersection of Finance and HR

They are two of the most visible departments in corporations even though neither directly produces revenue, but does require expenditures -- Finance and HR. Historically, they have been at odds neither particularly caring about the worries of the other despite being inextricably linked. This occurs in many ways, but I'm going to focus on four in the order that they seem to arise:

1. Recruiting
2. Cost control and stability
3. Retention
4. Workforce transition

Of course there are many more, but I have some thoughts that link all four of these together. In 2019, that's not always easy as there are constant pushes in Congress to tell employers how much they must pay, which benefits they must provide, and at what costs. How then does one company differentiate itself from another?

To the extent possible, every employer today seems to offer teleworking, flexible work hours, and paid time off banks. While they once were, those are no longer differentiators. After the Affordable Care Act took effect, the health plans at Company X started to look a lot like the health plans at Company Y.

I have a different idea and while I am probably biased by my consulting focus, I am also biased by research that I read. Employees are worried about retiring someday. They are worried about whether they will have enough money or even if they have any way of knowing if they will have enough money. They are worried about outliving their wealth (or lack thereof). They are worried about having the means to support their health in retirement.

I know -- you think I have veered horribly from my original thesis. We're coming back.

Today, most good-sized companies have 401(k) plans and in an awful lot of those cases, they are safe harbor plans. They are an expectation, so having one does not help you the employer in recruiting. While once they had pizzazz, today they are routine. 

Cost stability seems a given, but it's not. Common benchmarks for the success of a 401(k) plan including the percentage of employees that participate at various levels. You score better if your employees do participate and at higher levels. But, that costs more money.

If there's nothing about that program that sets you apart, it doesn't help you to retain your employees. And, as we all have learned, the cost of unwanted turnover is massive often exceeding a year's salary. In other words, if you lose a desirable employee earning $100,000 per year, it is estimated that the total true cost of replacing her is about $100,000. That would have paid for a lot of years of retirement plan costs for her.

There will come a time, however, that our desirable employee thinks it's time to retire. But, she's not certain if she is able. And, even if she works out that she is able, retirement is so sudden. One day, she's getting up and working all nine to five and the next, she has to fill that void. Wouldn't it be great to be able to transition her into retirement gradually while she transitions her skills and knowledge to her replacement?

You need a differentiator. You need something different, exciting, and better. You need to be the kid on the block that everyone else envies. 

You would be the envy of all the others if you won at recruiting, kept your costs level (as a percentage of payroll) and on budget, retained key employees, and had a vehicle that allows for that smooth transition.

I had a conversation with a key hiring executive earlier this month. He said he cannot get mid-career people to come to his organization from [and he mentioned another peer organization]. He was exasperated. He said, "We're better and everyone knows it, but their best people won't come over." I asked him why. He said, "It's that pension and I can't get one put in here." I asked him to tell me more and he explained it as one of those new-fangled cash balance plans with guaranteed return of principal -- i.e., no investment risk for participants, professionally managed assets, the ability to receive 401(k) rollovers, and the option to take a lump sum or various annuity options at retirement. He said that it's the "talk of the town over there" and that even though it seems mundane when you first hear about it, it's their differentiator and it wins for them.

We talked for a while. He wants one. He wants one for himself and he wants one to be as special as his competitor. He wants to be envied too. We talked more.

Stay tuned for their new market-based cash balance plan ... maybe. He and I hope that maybe becomes reality.

Care is in Order in HR

In the corporate world, human resources is often the ugly stepsister. It's a department that spends money rather than making it, always has someone annoyed at it and is rarely viewed as an asset to the company. You may choose to disagree with those assertions, but that's not what this piece is about.

Just the other day, I wrote about being clear in your documents. Today, I move along the spectrum from clarity to care.

My motivation for writing this is a Supreme Court case fashioned as Yates v United States. It's not a case that relates to human resources. It's not a case that relates to anything that most HR departments ever even think about.

It's about fishing. Yes, you read that right. Mr. Yates is a commercial fisherman. And, in that role, Mr. Yates has some people who work for him. Mr. Yates and his workers were caught with undersized grouper and were ordered to leave them in the boat as evidence. Mr. Yates ordered his men to throw the grouper back in the water and they did. Mr. Yates was charged with a crime.

Of course he was, you might think. He and his workers were violating federal law by catching undersized grouper.

Hold on. That's not what he was charged with violating. Mr. Yates was charged with violating the Sarbanes-Oxley Act (SOX or SarbOx). You remember SOX. It was passed in 2002 to help the federal government to combat underhanded business practices such as those that were found at Enron. But, in this case, Mr. Yates was accused of the destruction of "any record, document, or tangible object" for the purpose of obstructing a federal investigation. Had he been found guilty and lost his appeal(s), he could have had to serve 20 years in a federal penitentiary.

Okay, so you just know that I am going to tell you that SCOTUS voted 9-0 to throw this case out. Wrong. The vote was 5-4 with Justice Kagan joining the utlra-conservative wing of the Court on the side that felt that Mr. Yates should, in fact, suffer the consequences of SarbOx). (By the way, you should all consider reading Kagan's dissent as it is the first one that I have seen that references Dr. Seuss.)

So, what's my point?

We all need to take care. Congress especially should take care, It is often their loose wording of the bills that they pass that causes this sort of unintended consequence.

But, perhaps more than other corporate functions, HR needs to take care. HR and its programs tends to be subject to lots of laws that either were never intended for HR or had a small component that was that was embedded in a much larger law. When the latter occurs, that benefits or compensation or workplace practice component tends to be drafted very quickly by people who may not have particular experience in that area.

Nobody can keep up with all of this stuff. But, plaintiff's bar seems to look for unusual wording in statute that can be applied in ways that would appear to have never been intended by the drafters.

So, I give a word (several actually) to the wise. No matter how sound your practices appear to be, it may wise to consider how they could be twisted and misconstrued to violate something. Can someone argue discrimination on the basis of age, gender, race, ethnicity, religion, sexual orientation, or anything else because of your well-intentioned policies? As strange as it seems, the prudent approach may be to work backwards. Start by assuming that your policies violate everything possible and work backwards to prove that they don't.

And don't forget to read about the application of One Fish, Two Fish, Red Fish, Blue Fish to Sarbanes-Oxley.

Preparing to be Competitive

Think back 30 or 35 years, or more if you like. To steal a term from Thomas Friedman, the world wasn't so flat then. There weren't as many global companies. The internet was thought to be a pipe dream of some MIT researchers. E-mail didn't exist for most of us. Fax machines existed, but most of us had never seen one. In short, we lived in a different world with a different economy.

The employment deal -- the written or unwritten agreements between employer and employee -- was very different as well. The concept of employees paying for benefits with pre-tax dollars was just coming into existence. As a result, most benefits were provided by the employer. Of course, there were fewer benefits, but many would argue that the ones we had were better.

In a fairly typical situation where an employee was starting a job with a large employer, here were some of the key components of the deal:

• base pay
• maybe a bonus, but base was certainly king
• a pension plan designed so that the employee would spend his career with that company and have the opportunity to take normal retirement at age 65 or perhaps an earlier retirement as early as age 55
• health care benefits for the employee and his family, paid by the employer
• office visits
• hospital care
• major medical
• vacation time
• sick time
• retiree medical benefits similar to those for active employees so that employees who retired early could live their retirements fairly worry-free

The world changed. Companies started to provide more and different benefits. They also started to charge employees for those benefits. And, in fact, the rate of increase in the employee cost of those benefits often increased far more rapidly than their pay. Companies began to understand the long-term commitment and cost of retiree medical plans. They started to go away. Similarly with pension plans, companies found that employees all wanted their 401(k) plans, but many of them just didn't get their pension plans.

And, the world continued to change. The newer age employee wanted different benefits. And, other companies provided for a far different deal. Take the auto industry, for example. When I was a kid, if your parents bought a car, they bought from GM, Ford, Chrysler, or American Motors, or maybe one of those funny looking Volkswagen Beetles. For the most part, they bought American. Global competition didn't really exist yet. So, those four American companies largely were competing with each other. Now, we have cars coming into the US from lots of different countries. Companies headquartered in those countries may pay less and provide fewer benefits. How do the US companies compete? Among other things, they have to consider lowering the cost of producing a car which means lowering the employee rewards structure.

Lots of industries that lead the economy now didn't even exist around 1980. Microsoft had been around for five years, but few people new of it. Apple was similar, although some of the geekier families had invested in the Apple II or its ill-fated brother, the Apple III, but most of the country just looked at it as a passing fad. How about Google? It wasn't even a dream. 

So, when companies were designing or re-designing rewards programs in 1980, they didn't care about what Microsoft or Apple or Google were doing, but what GM was doing may have made a difference.

Fast forward to 2012. If you are in corporate HR, or if even if you just work for a company that provides pay and benefits, you probably know something about your company's rewards program. Perhaps it works well today, perhaps it doesn't. 

But, will it work tomorrow?

We see lots of surveys. Heads of HR always want to know what their competitor companies have? How much are they providing? How much are they spending? Perhaps they want to be near the median, or a little above, or a little below. 

Shouldn't the questions really look more like this?

• Who will our competitors be in 5-10 years?
• What will they be providing in 5-10 years?
• What will it take to compete for talent in 5-10 years?
• Will attraction be important?
• Will retention be important?

If you were analyzing a large company and that company didn't have a long-range plan, you would laugh at it. The CEO has one. The COO has one. Surely, the CFO has financial forecasts of at least the next five years. Does the head of HR?

Sadly, the answer is probably not. And, it would not surprise me if maybe without knowing it, this is one reason that Finance often looks askance at HR.

So, HR people, isn't it time to look into the future to see what the winning HR strategies might be. Your employees of the future would tell you "just saying."