There’s waste in every organization. Waste is defined as anything that adds cost to a production process that does not add value to your product. Ignoring waste in your organization puts your business is at a competitive disadvantage.
“As an external auditor, I have the opportunity to see across the entire enterprise when I work with clients,” says Pat Ross, principal with Haskell & White LLP. “That holistic, external view of the company’s departments has helped me identify the best practices for recognizing and eliminating waste in a company’s production process. Companies that engage in waste elimination on an ongoing basis reduce costs while increasing efficiencies. Ignore waste in your production process and a more astute competitor may just beat you in today’s global marketplace.”
Smart Business spoke with Ross about how CEOs can identify the sources of production process waste and develop an action plan to eliminate them.
What are the major categories of waste in a production processes?
While many of these waste categories apply to manufacturing processes, these elements exist to some degree in all processes, so even CEOs of service companies can benefit from reviewing the list. The list was categorized by Toyota after years of research.
1. Overproduction: The tendency to produce more than what’s needed or to produce it before it is required. Companies often over-produce when they follow the ‘just in case’ manufacturing principle instead of the ‘just in time’ manufacturing practice.
2. Waiting: This occurs whenever time is not being used efficiently. Waiting happens because the material flow may be poor, the production run too long or the distances between work centers too great. It is not unusual for a product or service to spend 99 percent of its time waiting to be finished, and time is money.
3. Transporting: Any delay in the process of delivering the product or service to the customer is a nonvalued cost. More importantly, every transport event is an opportunity for damage or loss to occur and quality to deteriorate.
4. Inappropriate processing: Think of the analogy, ‘using a sledge hammer to crack a nut.’ Are you using the right tools and processes for the job and the right people?
5. Unnecessary inventory: This is often referred to as work in progress (WIP), and it is a direct result of overproduction and waiting. Reducing WIP allows other production process problems to surface.
6. Unnecessary motion: This is related to ergonomics, and it means adding additional worker motion to the manufacturing process, such as repetitious bending, stretching or reaching. Adding motion not only slows down manufacturing, it can increase workers’ compensation claims.
7. Defects: These can be internal defects found before the sale that result in scrap, rework or delays, or they can be external defects after delivery, which result in warranty claims, repairs and lost customers. As a rule, the cost of a defect increases tenfold for each production or supply chain step.
How can CEOs determine if these waste categories exist in their companies?
Brainstorming with your team is one of the best ways to uncover sources of waste in your processes. Certainly CEOs can hire outside experts, such as consultants, but I find that many times starting with the internal team is best because the people who work on the front line frequently know the sources of waste. They usually have solutions, as well. Consider offering a financial incentive or other recognition as a way to encourage employees to identify categories of manufacturing process waste.
What is the next step?
Estimate the cost to your company for each waste category you’ve identified, and estimate a time frame for reengineering the process that’s producing the waste. Prioritize which items you’ll tackle first, by selecting the top three items that will provide the greatest financial impact and where change can be achieved within six months. Then, develop an action plan to initiate improvement through elimination or reduction of your targeted waste sources.
What constitutes a good action plan for manufacturing process waste elimination?
There are best practices for drafting and executing an action plan designed to eliminate waste:
- Develop realistic and achievable action plans.
- Assign specific accountabilities and time-lines for each step in the change process and appoint a coordinator to work with those responsible for implementation of action plans.
- Conduct weekly meetings to review progress with formal presentations.
- Develop disciplinary outcomes for non-achievement of actions and benchmarks.
- Increase accountability by holding regular sessions where each team member reports on his or her individual contribution toward successful attainment of the action plan.
- Celebrate your results. Recognizing members of the team for eliminating waste will increase employee engagement and encourage them to identify other sources of waste within your organization.
PAT ROSS is a principal with Haskell & White LLP. Reach him at (949) 450-6362 or firstname.lastname@example.org.
Employers are reinventing their wellness programs into comprehensive health and productivity (H&P) programs for a very good reason improved profits. A recent study conducted by Watson Wyatt Worldwide of 355 human resources and health benefits managers at U.S. organizations with at least 1,000 employees reveals that the companies with the most effective H&P programs acheived 20 percent more revenue per employee, 16.1 percent higher market value and 57 percent higher shareholder returns.
“Companies are embracing the progress that has been made in the health and productivity space,” says Caty Furco, office practice leader, Group and Health Care, for Watson Wyatt Worldwide, San Francisco. “Companies with effective H&P programs outperform other companies. Organizations that understand the linkage between effective programs and their company’s performance are ahead of the game. We are in an era that can have a positive impact on both business and employees, and that’s exciting.”
Smart Business spoke with Furco about what constitutes an effective H&P program.
What is the current thinking regarding H&P programs?
Global competition and pressure for greater efficiency are causing employers to seek new ways to help manage benefit costs and increase worker output Increasingly, companies are looking at the health of their workers as the new growth engine to stave off health care inflation and keep employees on the job and productive.
In addition to stronger revenue per employee, companies that have a strong H&P program were more effective at managing direct benefit costs. The philosophy behind the new H&P programs is that companies need to appeal to their entire range of employees in order to drive employee engagement toward improved health and productivity.
What drives employee engagement toward health and improved productivity?
A traditional siloed approach toward employee health and productivity is out; a holistic approach is in. What this means is that employee programs that support stress reduction, a healthy work environment, support for time off, management of chronic conditions, health education, on-the-job safety, health insurance and disability coverage are no longer viewed separately they are combined and integrated into a single approach. Employees’ life experiences are not segmented, so benefits should be approached in a way that can provide the right services across the entire benefit and workplace continuum. A single access point makes it easier for employees to use the program. Creating incentives that inspire excitement and employee adoption rates are also part of the holistic approach. An integrated approach also gives the company a single data repository, so it can use the information to refine its offerings and construct effective employee incentive programs. A lack of actionable data was one of the barriers to H&P effectiveness as cited in our study, so a single data repository is a plus.
What constitutes an effective H&P program framework?
An effective H&P strategy goes beyond simply adding more programs; it integrates prevention (at home and work), manages health and provides incentives for behavioral change. Our survey identifies that the top three elements for an effective H&P framework include: employee engagement driven through the use of incentives and communication; appropriate programs, including the use of technology; and a way to measure and continuously improve the results.
A single technology intake from a user perspective makes it easy for employees to do everything from recording a sick day to signing up for an education program; on the back end, the technology tracks utilization, membership and ROI, and provides an integrated set of data analytics. Naturally, the one constant throughout the framework is communication. The more the program is communicated, the greater the results. H&P must become part of a company’s corporate culture and new reality of how business is run.
Will an H&P program be costly?
A best-in-class H&P program does not have to be expensive to be effective. It’s important for each program to uniquely reflect the culture of the organization and its employees. Monetary incentives as low as $50 for weight reduction or smoking cessation can often catch the attention of employees, and doing something as simple as waiving co-pays on drugs used to manage chronic illnesses may be enough to encourage employees to take those drugs consistently and manage their conditions. While we can look at the results and the H&P framework used by other companies and learn from them, the best design is one uniquely tailored to that organization, and it’s not necessary to keep up with leading-edge inventions to be successful.
How quickly can CEOs expect results after installing an H&P program?
A successful H&P program will produce results over time because you are changing employee behaviors. While deploying these concepts and programs won’t necessarily produce immediate results, the numbers in the survey should be incentive enough to begin and sustain the journey.
CATY FURCO is the office practice leader for Group and Health Care Practice of Watson Wyatt Worldwide for Northern California. Reach her at email@example.com or (415)733-4309.
When Dan Pittard became president and CEO of Rubio’s Restaurants Inc., the operator of Rubio’s Fresh Mexican Grill, in August 2006, he immediately examined its business strategy and targeted market niche.
Pittard, who was brought in to fix the company’s faltering expansion efforts, first learned about the importance of strategy at Harvard Business School, and later as a partner at McKinsey & Co., where he helped consumer companies develop profitable growth plans.
Now, he needed to fix a restaurant chain that had a lot of potential, but was lacking in direction.
“I really liked the food,” Pittard says. “But I thought that the strategy was not the best strategy. Our competition is cheap, and I knew the economics of the situation. As a small company, we aren’t going to win a price war. We needed to shift our strategy.”
Initially, Rubio’s Fresh Mexican Grill appeared to be one company that was capable of growing beyond its founder-led era with ease. The company started as a single taco stand in Mission Beach, Calif., in 1983, went public in 1999 and reported net income of more than $3 million in 2004. But sometimes the best strategy for a small founder-led organization won’t continue to be the right plan to take a company through a heavy growth phase and beyond. After expanding to more than 160 locations, Rubio’s profitability waned, and subsequently, the company reported a loss for fiscal year 2005.
Enter Pittard, who besides his experience at McKinsey & Co., also had been a senior executive with Frito-Lay where he helped roll out Taco Bell products into supermarkets. He accepted the assignment and the challenge knowing that Rubio’s had more than $10 million in the bank and a board that was supportive of his ideas to shift the company’s strategy and everything that supported it.
Designing the strategy
The basis of any strategy is an idea. “To design a strategy, you have to start with a hypothesis,” Pittard says. “In this case, the hypothesis was that Rubio’s appealed to more upscale clientele who would be willing to spend more than $5 for a meal. You have to use data and conduct market research to validate your hypothesis and then set a strategy.”
Pittard purchased publicly available data and conducted market research on existing and prospective customers to validate his hypothesis.
“You want to get the best facts that you can, but usually getting all of the available data is too expensive, so you get some data and then make your decisions,” Pittard says. “That’s what you get paid for as the CEO is to use your best judgment. When Ted Turner started CNN, he bet on a hunch because there probably wasn’t enough available data to support the notion of a full-time news network. That’s often the case in entrepreneurial ventures, but if you have an established marketplace, there’s usually some data to look at.”
The data helped Pittard focus his efforts on reaching the most appropriate target market to produce a profit, but he also weighed the company’s competitive position and its economics structure in developing his strategy and validating his decision.
“As you conduct your market research, you really want to have it become clear in your mind who your customer is,” Pittard says. “Are you going to position for a cost advantage in the marketplace or with a superior product? It’s hard to do both so you have to decide. There have been very few companies that managed to position as both a value leader and a low-cost leader. Google comes to mind as an exception in the technology industry, but there are few companies that have managed to accomplish that.
“It became clear to me that we just weren’t structured to compete on price, and we had been failing trying to go down that path. Given our size, I thought we were much better structured to compete on value.”
Once you’ve selected your target market segment and defined your value proposition, you want to apply the economics to understand the amount of market share you have to garner to be profitable. In Rubio’s case, Pittard calculated a good return could be provided to shareholders if the company generates between $500 million and $1 billion in annual revenue compared to the $152.3 million it generated in fiscal 2006.
To fully understand the economics and to validate his niche-player strategy, Pittard not only looked at Rubio’s cost structure, but that of its competitors.
“You need to understand the cost structure of your competitors to successfully position yourself in the marketplace,” Pittard says. “We conducted some limited reverse engineering of everything, including our competitor’s cost structures and their products, so we could understand the cost of the ingredients. We also conducted some mystery shopping to understand who their customers are. In this case, for example, we knew that Taco Bell targets an age range of 14 to 22 and their positioning is around low cost, so our skew is toward a higher income, higher education and more health-conscious customer. Having market data and a knowledge of the competition are both essential in validating your strategy.”
Align the function to the strategy
Pittard says that after conducting research and authoring a strategy, CEOs must implement their plan. To do that successfully, he advocates aligning resources and all of the company’s functions to support the strategy.
“We added 20 people to our food and beverage department, which is the equivalent of the R&D function in most businesses,” Pittard says. “Since we wanted to position ourselves within the targeted market as a value leader, it’s important to invest in developing a product that will support the strategy.”
While spending more money on new product development, Pittard found some savings by reducing advertising costs and then realigning marketing expenditures to garner share within the targeted marketplace.
“It’s a fairly simple back-of-the-envelope type of exercise to look at your return on advertising,” Pittard says. “You simply have to look at the contribution dollars you are spending and what type of lift you need to get to increase brand awareness to see if it’s cost-effective.
“In our case, because we don’t have a huge distribution of stores and because we don’t compete on price, the radio advertising we were doing didn’t make sense because we couldn’t drive enough of the right customers into our locations to justify the expense. We decided to realign our advertising dollars toward local store efforts and local marketing events. To accomplish our goals, we hired local marketing representatives who go out and call on the area businesses. This supports our strategy by taking us right into our targeted demographic, and it’s more cost-effective. We’re also building an online ordering capability, which will enhance our ability to develop the lunchtime business meeting market, which is part of our niche.”
As a way to check back on the soundness of his strategy and the execution, Pittard sets revenue benchmarks for each store and monitors the results.
“To execute a strategy, you need to set milestones for each year that measure your progress and agree as a team on the priorities,” Pittard says. “Then you make certain that the goals cascade down within the organization to all of the staff, align your functions and build on the company’s capabilities to deliver on the strategy, set benchmarks and check your progress.
“In our case, we set a goal of reaching 10 percent of sales in delivered food in each of our stores. This benchmark mirrors our progress toward increasing market share within the lunchtime meeting marketplace. I check on all the numbers each month to see how we’re progressing. You have to stay on top of the progress because if something changes you may need to adjust your strategy.”
Aligning human capital with the strategy
Another element of Pittard’s strategy is to improve Rubio’s profitability by reducing excess organizational capacity. Simply stated, the company has a corporate infrastructure to support more than 160 stores, which represents a fixed cost. More stores can be added without adding incremental costs, which will increase revenues. While some analysts have questioned his strategy and decision to expand given the company’s recent lack of profitability, Pittard maintains that it’s the right move because expansion absorbs excess capacity and drives profitability.
“If you look at our unit economics, we look very good,” Pittard says. “There’s a certain amount you have to pay to attract the caliber of general managers you need to manage the stores, and they can handle more stores. One of the changes that I’ve made is adjusting our compensation plan to better align with our strategies.”
In the past, the field management team was compensated on sales. Now, they are partially tied to sales as well as profits.
“I think that it’s best when the employees are encouraged to think like owners, and paying them like owners helps with that,” Pittard says. “Also, as a CEO, tying performance back to compensation forces you to look at the performance of your staff all across the organization and how that aligns with your strategy.”
In addition to calibrating his compensation to match his strategy, Pittard benchmarks and tracks service levels at the stores to assure that customers return frequently, and he’s developed and installed a staff training and career management program to retain front-line workers, which enhances the customer experience. Satisfied customers are repeat customers, and when they return, they increase sales and store profits through better leverage of marketing dollars and increased revenue-to-overhead ratios.
The quarterly numbers are another key indicator that Pittard can monitor to validate that his strategy, which emphasizes great taste over low price, is on target and garnering increased market share. For the third quarter, which ended Sept. 30, 2007, revenue rose 13.5 percent over the same period in the prior year to $44 million, which was the highest quarterly revenue Rubio’s has reported since going public in 1999. Net income also increased 22 percent to $732,000, from $600,000 for the same quarter last year.
“As we continue to grow with our existing infrastructure and build our capabilities toward executing our strategy, our (general and administrative expense) as a percent to sales decreases, which will improve our profitability,” Pittard says. “But no matter how good the strategy, you have to get the product right, and you have to price it right to be successful. It’s not enough to do it once. You have to make it right over and over again hundreds of time each week because at the end of the day in the customer’s mind, you’re only as good as their last visit.”
HOW TO REACH: Rubio’s Restaurants Inc., www.rubios.com
There’s a saying in business: Success comes to those who get there first. That absolutely describes the experience of visionary CEOs and entrepreneurs who have anticipated the growth in the greater Tampa Bay area, established businesses and capitalized on the region’s burgeoning prosperity. But the window of opportunity is far from closed according to Brian Keenan, president and CEO of Fifth Third Bank (Tampa Bay), and he has lots of companies supporting his conclusions.
In a June 2007 survey Moody’s rated Tampa as No. 15 on its vitality index, and in its 2006 Competitive Alternatives Study, conducted among cities with populations exceeding 1.5 million, KPMG rated Tampa as the No. 2 city in the country in terms of having the lowest cost of doing business. In order to maximize the area’s potential through expansion or relocation, CEOs must run some financial forecasts to estimate their return and know how to tap local resources to develop the models.
“Historically, Florida was known for tourism and agriculture, but now Tampa is a leader in high-tech, manufacturing and service industries,” says Keenan. “There’s a deep talent pool in Tampa Bay, but like many places, it’s sill a competitive labor market because we’ve averaged more than 11 percent job growth annually over the last six years.”
Smart Business spoke with Keenan about the greater Tampa Bay marketplace and how CEOs can position their companies for success.
What else is contributing toward Tampa Bay’s growth?
More than 80 million baby boomers will soon be retiring, and many of those retirees, who are currently residing in the Northeast and the Midwest, will head south and east into Florida, following I-75. That migration will create new markets through sheer increased population growth, and the resulting ethnic diversity growth within the region is opening up niche market opportunities. We have a very active local economic development group targeting both company expansion prospects and corporate headquarters relocation prospects within industries, such as life sciences/biomedical, microelectronics, and financial and information services. While there’s been a recent trend toward saturation in some local business sectors, such as start-up restaurants and support centers for financial services, an increase in the presence of larger companies will open doors for many small business owners to play a supporting role.
How can CEOs compete in the local labor market?
The good news is that quality of life is rated very high, and there are more than 138,000 students attending college in the greater Tampa area, many of whom represent tomorrow’s work force. While relocations to the Tampa area are still rising, there are several concerns in that area, such cost of living, taxes and insurance. The price in May 2007 of an existing three-bedroom home in Hillsborough County was $207,000, and that alone helps control wages for small business owners. However, in order to compete for talent and keep that talent on board, CEOs must establish their companies as employers-of-choice within the Tampa Bay area, and achieving that status requires competitive benefit packages.
Local survey data is available to help CEOs assess their competitive position relative to benefit and retirement packages. At Fifth Third, we recognized that turnover is higher in smaller businesses, so we’ve added additional services for those clients offering banking discounts and a personal banker specifically assigned to their company who can assist with advice and financial education for the employees. Offering financial literacy programs, first-time home-buying seminars, and investment and retirement seminars has helped our clients attract and retain employees.
Is it possible to obtain financing for expansion into Tampa Bay given the current lending climate?
There are financing options available despite tighter lending policies. The credit market is tightening; the time to look for credit is not necessarily when you need it. Be proactive, get a strategy in place and plan. We are consistently helping our clients plan for tomorrow, today.
What resources will CEOs need to expand?
In addition to market-specific data, employees and expansion funds, CEOs will need vendor networks and local business relationships to help them succeed, and their financial partner should put them in touch with those resources. Tampa Bay has outstanding data capabilities, and in August 2006, Forbes ranked Tampa as the seventh most wired city in the U.S. Having a strong information technology infrastructure is another vital resource for business expansion. Certainly, I recommend that CEOs quantify expansion opportunities through ROI modelling. The data is available to assess the opportunity and many CEOs might find that launching a new business or expanding an existing one within the greater Tampa Bay area might prove to be very lucrative indeed.
BRIAN KENNAN is a president and CEO of Fifth Third Bank’s Tampa Bay Affiliate. Reach him at (813) 306-2453 or firstname.lastname@example.org.
For optimal cash management, executives must forecast cash requirements of their business plan and contemplate possible adverse business scenarios, such as the inability to meet current financial obligations or the loss of a major customer. Anticipating such threats helps CEOs prioritize expenses, objectively evaluate current business investments and explore alternate financing options, says Dan O’Connor, tax partner with Haskell & White LLP.
“I’m hearing from many of my clients that cash management is becoming more important,” O’Connor says. “If they’ve been through a recession or credit crunch before, they know it’s a time for tough decisions. But, it also provides the opportunity to reassess fundamentals and find creative ways to finance growth.”
Smart Business spoke with O’Connor about the ways that CEOs can manage cash and survive more volatile economic times.
What are the fundamentals that help increase cash flow?
Certainly, reviewing expenditures with the goal of slowing down your outgoing payments will ease cash flow problems, and it’s an opportune time to eliminate any nonessential expenses. One of the most critical exercises is preparing a cash flow budget. Predicting cash inflows and out-flows on a month-to-month, weekly or daily basis can help you foresee your business cash flow gaps or any periods when cash outflow may exceed inflow.
Also, during times when it is more difficult for your own business to secure credit, it’s important not to be too liberal in your credit policies with your customers. Review your collections policies and days outstanding and place late-paying customers on a payment schedule. Consider offering incentives for faster payment or charging interest on outstanding balances. Review credit ratings on new and existing customers to determine their creditworthiness and ask for more retainers and upfront fees to free up cash and reduce exposure to bad debt.
What are some traditional and nontraditional ways to secure financing in a tight lending market?
There are sources of cash and financing that can help you continue the growth of your business when traditional business loans are hard to come by. Here’s a short list of options:
- Line of credit: A growth company that’s profitable is the best candidate for this type of short-term loan, which can smooth out the timing of business cash flow needs. If you don’t need to make capital purchases for items such as equipment but you need to advance material and labor costs for new orders, this may work for you.
- Investment capital: If you aren’t quite eligible for a bank loan or you need more than a bank is willing to lend, consider bringing in an equity partner. By selling off an interest in the business for cash, you can continue growth, investment and profitability.
- Factoring: This is receivable-based lending where you actually sell your accounts receivable to a factor [a type of lender], which collects the money. You get only a percentage of the invoice until the principal is paid, and interest rates are higher than normal.
- Mezzanine financing: Often used in real estate transactions, this type of gap financing helps fill up the shortfall between what banks will lend and the equity required for a project. The loans will tend to be at higher interest rates and are secured by partners’ interests in the company.
What are some short-term strategies for improving cash flow through increased sales?
Certainly, when cash is tight, you want to look at reducing inventories, so offering concessions to customers can be an effective strategy. If you can’t sell the inventory, consider leasing it or offering lease-to-buy options as a way to increase cash. For example, homebuilders may not be able to sell inventory despite offering concessions, but leasing the homes will help make the loan payments, and doing so offers tax advantages.
What are some managerial strategies for surviving a cash crunch?
If you run short of cash, here are some tips to help you get through:
- Do be very transparent in your communications with employees and vendors. If you will be paying vendors more slowly, let them know when they can expect payment and how much to expect.
- Don’t put off paying taxes, including payroll taxes. You can slow down some payments, but you must pay your employees and your tax obligations on time as well as your rent and utilities. If you need certain products or services that are critical to manufacturing, you want to continue paying those vendors promptly.
- Do use your accountant as an intermediary who can help negotiate or renegotiate more favorable lending terms or larger loan amounts. Your accountant can speak to the financial strength of your business and your balance sheet and can speak in terms that will both allay lenders’ concerns and highlight your business’s potential.
DAN O’CONNOR is a tax partner with Haskell & White LLP. Reach him at (949) 450-6200 or email@example.com.
Chief executive officers no longer need to be educated on the importance of establishing global governance around compensation and benefits; the key issue now is how to design and implement an efficient global governance framework this is where many organizations are struggling.
Watson Wyatt Worldwide conducted a recent survey of 101 multinational companies focusing on global retirement governance. It indicated that, while 78 percent recognized the importance of efficiently managing their worldwide pension plans, only 39 percent had taken the initiative by establishing a global governance committee.
“Obstacles to global governance abound,” says Frazer Russell, international practice leader with Watson Wyatt Worldwide. “Having a logical step-by-step process to implement a structured framework is the most successful way of getting your hands around all of the potential issues. A successful framework brings together data, tools, policies, roles and responsibilities and approval processes in an easy to understand manner that, crucially, does not impose a large amount of bureaucracy.”
Smart Business spoke with Frazer about how companies can go about designing and implementing a global governance framework around compensation and benefits.
What are the steps for developing a global governance framework?
- Readiness assessment: The first step is to determine if your company has the infrastructure and the tools in place to support the implementation of a global governance framework. For example, if you don’t have the necessary resources (internal or external), access to good data, buy in from senior stakeholders or the capability and structure to effect changes globally, any plan you put in place is likely to fail in the execution stage.
- Baseline assessment: It is key that the current status of your existing global governance framework is understood. This can involve gathering a complete inventory of benefits and compensation provision and policies, checking for compliance and competitiveness and analyzing the current operational and investment protocols.
- Philosophy: Now that a clear idea of the starting point is known, it is simpler to develop a global compensation and benefits philosophy that defines the guiding principles shaping the subsequent objectives and strategy. The philosophy is developed based on your business vision, objectives and culture. Examples include: above-average compensation to attract top-performing employees and a desire to care for sick or injured workers, etc. A well-formulated HR strategy and, in turn, compensation and benefits strategy, supports your overall business strategy.
- Objectives: The objectives are the specific goals of the global governance framework linking your overarching philosophy to the strategy.
- Strategy: This is essentially the roadmap that defines who will be responsible to deliver the plans and programs globally. Having clearly defined, assigned and communicated roles and responsibilities is vital to implementation success and the ability to achieve ongoing compliance.
- Ongoing governance: During implementation you will have assigned roles and responsibilities for each facet of the ongoing governance cycle including: annual planning, oversight, financing, accounting, plan design, administration, communication and investment, etc. This needs to be monitored and reviewed in a planned manner.
What role should CEOs play in implementing a global compensation and benefits governance framework?
Executive sponsorship of the initiative is vital to achieving success as is a clear communication structure. We recommend adding the framework’s roles and responsibilities into each individual’s performance plan to make certain that both implementation and compliance is a priority and that expectations are clear. Last, CEOs should establish a global benefits committee and work through that group to keep track of implementation progress and ongoing compliance.
Which human capital programs make the most sense to manage globally?
One issue to consider is which compensation and benefits elements should form part of the framework. Watson Wyatt produced another survey, jointly with World at Work. From the results we can see that not all components of compensation are candidates for centralized management. Base pay, for example, can be driven at the local country, regional or global level either way, local market conditions must be closely considered. On the other hand, more than 90 percent of the companies we surveyed govern executive compensation globally, and nearly 75 percent do the same with long-term incentives.
Most of the companies surveyed require approval from global management for new equity plans, expatriate policies and for bonus plans. These are rewards that are either linked to the performance of the organization overall or are global in nature, so global consistency makes sense.
In recent years there has been an increase in global management of benefits and perquisites too. Retirement plans are governed globally for around half the companies.
There is no single solution among companies or even within industries. One thing is clear, however: the optimal balance will shift as a multinational company expands and moves into and out of local markets.
FRAZER RUSSELL is an international practice leader with Watson Wyatt Worldwide. Reach him at (415) 733-4354 or Frazer.Russell@watsonwyatt.com.
The dust is just settling after the first proxy season following the implementation of the SEC’s disclosure rules around executive compensation. The new policies demand greater candor and disclosure about executive earnings and compensation plans. If meeting the spirit and intent behind the SEC requirements wasn’t enough, now public companies must contend with meeting the final rules of IRS Section 409(A), and the Pension Protection Act, both of which take effect Jan. 1, 2008.
With the final regulations in place, companies need to revise their deferred compensation plans, including nonqualified retirement plans, before the deadline.
“Section 409(A) applies to every non-qualified retirement plan,” says Pete Neuwirth, senior consultant with the Retirement Practice at Watson Wyatt Worldwide. “All aspects of the plans are coming under review, including plan design, funding and administration.”
Smart Business spoke with Neuwirth about how CEOs can prepare for the upcoming changes in deferred compensation and nonqualified retirement plans required as a result of all the new rules.
How do the new proxy disclosure rules come into the picture when discussing the Section 409(A) requirements for nonqualified retirement plans?
The proxy filings represented the first time that we’ve seen many of these executive compensation numbers laid out in public. At Watson Wyatt, we conducted a survey of 690 proxy statements, specifically looking at the compensation that was associated with nonqualified retirement plans. In general, the pension portion of the executive compensation was equal to base pay and averaged about 10 percent of the total compensation the executive received, which also included performance-based compensation and bonuses. For some CEOs, however, the nonqualified retirement program represented a much larger component of compensation. One important component of the proxy statements is to explain the link between performance and pay for executives. This is difficult to do for a nonqualified retirement plan. Because the proxy statements must include the present value of any accumulated benefits, including deferred compensation, it brings forward the issue of explaining how performance is tied to deferred compensation and nonqualified pension plans. The proxy also requires a discussion of the rationale for adopting the retirement plan in the first place, something that most companies are not able to readily do.
What design changes to nonqualified pensions plans do you recommend to meet the new requirements?
First of all, one size does not fit all. It’s not necessarily the answer to eliminate all of your deferred compensation plans, including your nonqualified pension plans, to comply with the new rules. For example, the nonqualified plan may have been put in place for retention purposes or to augment succession planning goals by helping your company attract midcareer employees, so you still want to derive the benefits while complying with 409(A). You should think about the type of nonqualified retirement plan that will best meet your objectives and, in particular, review how your non-qualified plan dovetails with your qualified plan. You may, for example, find opportunities to achieve your goals through the qualified plan, i.e. QSERP. You may want to consider lowering your Supplemental Executive Retirement Plan formula and using total compensation in your benefit formulas as opposed to base pay only to better tie the plan to performance. Rather than throwing your SERP out the window, carefully consider the reasons for the plan and, where possible, tie the value of the plan back to performance. Doing this helps companies meet both the 409(A) and the SEC disclosure requirements.
How does 409(A) impact funding requirements?
While, historically, there’s been no formal way to fund nonqualified plans, executives want some type of security for their retirement funds. That security has generally been achieved by funding nonqualified plans through a ‘rabbi’ trust or allowing executives early access to their benefits through in-service distributions with a small reduction, or ‘haircut,’ applied. (The name comes from the first IRS private letter ruling approving such a trust, obtained by a synagogue on behalf of a rabbi.)
Unfortunately, 409(A) sharply curtails your ability to get at funds even if a haircut is applied. Rabbi trusts, however, are still viable. While securing against a ‘change of heart,’ rabbi trust assets are still accessible by creditors in the event of bankruptcy. Also, because earnings on trust assets are subject to income tax, many companies place the trust assets backing executive’s deferred compensation into Corporate Owned Life Insurance (COLI). This funding strategy provides positive tax consequences and security for the executive, but results in increased frictional costs and a lack of liquidity.
How does 409(A) change plan administration?
Certainly 409(A) has complicated plan administration considerably. In the past, the administration of nonqualified pension plans has tracked closely with requirements for 401(k) plans. You may want to consider outsourcing the plan administration since the complexity of 409(A) will require someone on the staff to be very attentive to the requirements and, given the number of people covered by the plans, it may not make financial sense to keep administration in house.
PETE NEUWIRTH is a senior consultant in the Retirement Practice for Watson Wyatt Worldwide. Reach him at (713) 733-4139 or firstname.lastname@example.org.
The mention of the debt collections industry frequently conjures up images of dark, smoke-filled rooms occupied by employees who utilize tough-guy tactics to demand payment from delinquent consumers over the telephone. But industry boiler rooms represent a bygone era for young, data-savvy leaders like J. Brandon Black, president and CEO of Encore Capital Group Inc.
Black relied heavily on increased employee productivity to initially turn Encore Capital Group around after assuming the position of chief operating officer in May 2000. Since 2000, he has continued to drive the company to new heights by attaining a revenue growth rate of nearly 40 percent from 2001 to 2006 and net income of $24 million in 2006 on revenue of $255 million. Along the way, those numbers also earned Black a promotion to the CEO role in October 2005.
“When I started in 2000, the company was close to bankruptcy, and we were losing almost $23 million,” Black says. “I had a mandate to make the company profitable in 90 days because in 91 days, we would be in default. I hadn’t done something like this before, but I learned to just trust my instincts. I think that sometimes when you’re a leader you can get too emotionally attached to the business to see the solutions, and that’s what had happened here. Sometimes when the plane is out of control and falling toward the ground, you just don’t think to change the pilot.”
Black became the pilot who managed to pull up on the company’s throttle just before it crashed and burned. Since then, he’s continued to grow revenue and net income by attracting a new breed of employee, harnessing the power of performance-based compensation to drive employee productivity and learning to anticipate problems before they occur. Most important, he says that he’s learned to avoid the trap of letting his emotional attachment to the enterprise keep him from conducting timely and objective evaluations of his team’s performance even when the numbers are good.
Don’t let up
With only 90 days to turn the company around, there was no time to spare. Black says that he initially looked at the big uses of cash and the return for those expenditures to take speedy, cost-cutting measures.
“In most companies, there are five to 10 meaningful places where cash is spent,” Black says. “Generally, salaries and benefits are one of those biggest areas of cash expenditures, so I looked at the return we were getting for our investment. I looked at the three different sites where we were running our collections operations and each had a different return. I think we fell into that typical 80-20 rule. We were getting 80 percent of our return from a few sites and collections teams. Then, I looked at how the employees at each site were spending their time and the return for their efforts. Because each site handles different client portfolios, it helped me rank the portfolios and the teams according to profitability. We had a number of places where we had efforts but no results.”
The evaluation helped Black make his first tough leadership decision. To stop the bleeding, he needed to downsize the company from three offices to two, and he would have to get the same or better results with 400 employees instead of 500. The financial improvements afforded by employee productivity gains proved to be a winning strategy not only during the turnaround but when applied continuously.
“One of the biggest lessons I’ve learned as a CEO is to continue to employ the same review strategies and the same level of energy toward productivity improvement in good times and in bad times,” Black says. “I think during that initial 90-day period I was extremely focused and disciplined, but during good times, you have a tendency to let up and not be as disciplined. In order to sustain growth, you have to be consistently focused and disciplined.”
After the first few years on the job, Black says that he found himself falling into the complacency trap and not managing with the same level of intensity that brought him success in the early years. As a remedy, Black initiated an ongoing site and team review process that is strictly focused on productivity and continuous improvement.
Black conducts a robust planning cycle four times per year with his management staff diving down into the detailed returns for each account’s portfolio and each collections team. In particular, he measures activity levels and the corresponding results generated by each team across the company, looking to extract the best practices and assure continuous improvement companywide.
“To drive productivity you have to focus on it, and that’s what our planning process is all about,” Black says. “It would be like the CEO of a door manufacturing company taking his management staff aside for the express purpose of focusing on what will help them manufacture doors more quickly. I’ve learned not to just look at each collection unit’s results in a silo but to compare the results of the various collections teams against each other horizontally across the enterprise. That best practice has helped me optimize productivity throughout the company because now we’re more team-focused, and we work to continuously improve all of the collections teams. When I get down into the detail and compare the units, I can ask why one group may be achieving better results than another, and we can make adjustments.”
Black acquired much of his expertise in modern collections strategies during his previous tenure at Capital One. Like so many industries, profitability in the collections business is commensurate with the cost of the labor relative to the results achieved. So maximizing employee efficiency through properly aligned incentives is vital to making money.
“I don’t generate any money in this company. It’s all about the people on the phones,” Black says. “I’ve aligned everyone’s incentives with the company’s performance goals, starting with the CEO and going five levels down because everyone has to be rowing the boat in the same direction or else it will sink. Before our variable compensation was function-specific, and it was not aligned to overall company or team goals. Since we’ve taken this step, our results have improved dramatically.”
About 90 percent of Encore Capital Group’s work force has a variable compensation plan and 25 percent, mostly the management team, has equity incentives in the form of restricted stock and stock options. Black has realigned the agents’ pay to reflect both individual and team bonus opportunities, which meshes with his team-focused business model, and it isn’t unusual for top collectors to make six-figure incomes. Black says that paying top dollar is important because good collectors, like most good employees, can find work opportunities anywhere.
Black says that he achieves buy-in from the agents for implementing new collections techniques or agreeing to a new compensation plan by protecting them from financial loss in case the new process or compensation plan doesn’t work out as expected.
“Not everything works in any business,” Black says. “I’ve learned that in order to retain top collectors, you can’t get into the production workers’ pockets. If we change something in a comp plan, we’ll run both the new and the old plan in parallel for a while, and we’ll pay based upon the greater payout between the two plans so people are encouraged to step across the line and try new concepts. In a production-oriented environment, you can’t change comp plans too often because anybody only has so much change quotient, and you have to respect your relationship with that worker because it’s like an informal social contract.”
Black points to Encore Capital Group’s voluntary average annual employee turnover of 25 percent versus an industry average of 100 percent as proof that he’s on target with his compensation plans and philosophies.
In addition to redesigned financial incentive plans, much of Encore Capital Group’s improved productivity has resulted from Black’s initiative to train collections agents to review all of the available data on a consumer before deciding on a situation-specific collections strategy. The agent also decides how long he or she will work the account before referring the case for litigation, so in this case, increased worker effectiveness and decision-making translates to profitability.
Conducting data analysis and making crucial business decisions such as these on the fly are a far cry from merely reading a script over the phone, so in many cases, upscaling the work force was vital in order to achieve Black’s vision of increasing worker productivity as a means of increasing company profits.
“When I got here, I embarked on the process of bringing in workers and new managers based upon their intellectual capabilities with no collections experience because success was commensurate with being smarter than the competition,” Black says. “It was hard to attract people to this old-school business, so you have to start in a hole and work your way out. I start by dispelling the traditional notion of the collections business and appealing to a prospective candidate’s sense of opportunity.”
Black says that he’s upscaled the company’s talent by hiring most of the company’s mid-level and senior-level managers during his tenure and favors using a series of interviews that put the candidate face to face with peers, managers and subordinates as a way of getting a behavioral read on the candidate as well as assessing the candidate’s ability to adapt to the industry. Referrals are a major source of new agents, but many of the new managers have been sourced from unrelated fields. Black says that exposing potential high-caliber employees to other Encore Capital employees who have made a successful jump to the industry appeals to the candidate’s desire to achieve similar goals.
Anticipation sustains growth
“I think one of the mistakes that I made, which I’ve learned from, is that in order to sustain growth, you can never think too far ahead,” Black says. “Since I’ve been here, after initially scaling back, we’ve increased our number of collections sites up to five, including one in India. You have to anticipate the increased demand for people that accompanies growth, so you can conduct proactive hiring.
“You also have to be realistic about everyone’s ability to continue to rise up to the increased expectations by asking yourself and your management team if anybody appears to be stretched too thin or can’t keep up with the pace of the growth. I’ve learned that anticipating potential cracks in your operation and filling them before they blow open is the key to sustaining growth.”
Black says that an outgrowth of his revelation is that he now devotes more time to forward-looking activities and conducts weekly leadership meetings with his 35- to 40-member management team reviewing strategies and people issues related to growth. The team continually forecasts forward at six-, 12- and 24-month intervals, which Black says puts it in a proactive planning mode and eventually reduces the amount of time that managers spend putting out fires. It also means that Black has had to learn to be open to hearing about potential problems.
“One of the things that was brought to my attention as a barrier to anticipating problems was a communications issue in the company,” Black says. “People said they were afraid to fail, and consequently, they didn’t want to tell me or other members of the senior management team about potential problems, and they also said that oftentimes if they did tell me, they thought I wasn’t listening. So I acknowledged the issue, partnered with a firm to help break down those communications barriers and went through outside communications coaching along with our top 35 to 40 managers. Now, I spend a great deal of my time in informal sessions with employees, and I try to willingly listen and give people the benefit of the doubt. I think I approach those situations completely differently now.”
Black says that potential cracks in the company’s infrastructure also come to light during the staff evaluation segment that is conducted as part of the firm’s quarterly planning cycle reviews. It’s also during those same staff evaluations that he’s reminded that growth not only results from anticipating problems but from using emotional intelligence in tough situations, as well.
“As I compare the productivity of the different collection teams, I can see that 50 percent of the time, the people on the lagging team just can’t keep up with the increased complexities of the job and the rapid growth, and the other 50 percent of the time, the team falls behind for other reasons that we can work on,” Black says. “Then I think about how that person stuck with us during the hard times in 2000 and realize that I’m in the trap of being emotionally tied to the business and that it’s my responsibility to make those tough calls when they’re necessary.”
HOW TO REACH: Encore Capital Group Inc., www.encorecapitalgroup.com
Many CEOs are aware that achieving Sarbanes-Oxley (SOX) compliance means they must consider the interrelated nature of accounting and information technology internal controls.
However, if CEOs take a deeper dive into the compliance pool, they may find that the company’s policies and procedures, which are meticulously described on paper, don’t actually mirror the firm’s IT control processes that are enforced by the system.
Lee Barken, IT practice leader for Haskell & White LLP, says that user access controls are just one area that might need a review. As an example, Barken says that sometimes when he inquires about the company’s purchase authorization limit for employees, he discovers that the IT system will accept purchase requests for far greater amounts than what is specified in the company policy.
With no carry-through of the company’s policies into the IT control systems, a breakdown in controls can occur. User access controls are just one area that CEOs should be aware of when it comes to tightening internal control processes.
“CEOs can no longer just focus on dollars and cents at audit time,” says Barken. “They must also think about zeros and ones when they set up and review their internal controls.”
Smart Business spoke with Barken about the steps CEOs should take to avoid weak IT control processes and audit problems.
How can CEOs assure that company policies are reflected in the IT system and control processes?
First, check your software configurations and run numerous tests of the system to see if the company’s policies match the system. For example, if you have a company policy that only allows certain users the authority to approve purchases up to $100,000, log in as one of those users and see if the system will let you approve a purchase order for $100,001.
Second, make sure all of your control processes and your tests are thoroughly documented. Many chief information officers do a lot of things right, but they fail to document, and inquiry alone does not constitute a test of a control process. When the auditors arrive, they will want to see evidence that is documented.
Last, role-play some of the worst-case scenarios to make certain you’ll be ready come audit time. For example, what happens if our CIO wins the lottery and disappears to a Caribbean island? Do we have policies and procedures documented? Will we have the proper documentation of the control tests and the results to provide the auditors?
Is testing and documentation of the company’s data backup system required for an audit?
Having a clearly defined data backup policy is a vital control process because data loss can happen at any time, without warning, as a result of anything from a power loss to a natural disaster or even a simple mistake like someone accidentally deleting the wrong file. We learned a number of these lessons following Katrina and Sept. 11, so now auditors ask companies to provide evidence that the company will be able to continue after an unplanned service interruption.
Data should be frequently backed up and the tapes should be stored off-premises as part of the control process. While the tapes are awaiting transfer, they should be stored in a secure and fire-resistant location. Keep a log that documents when backups are made and transferred and, on occasion, run a test of the restore process and document the results to demonstrate that you can restore the company to operating mode quickly. If you are storing tapes off-site, be certain to encrypt them, especially if they contain sensitive information, such as social security numbers or credit card information.
What type of network security documentation should be maintained for audit purposes?
Devices called firewalls control what information is allowed in and out of the company through the network. Firewall parameters should be established and tested in accordance with the company policies and procedures around information security.
With more wireless access to networks, how should control processes be established and documented for audit purposes?
Our traditional methods for securing the company’s buildings and the information they house, like door locks and security cards, all go out the window when companies add wireless access to their networks. Think of encryption as the keys and access cards to your wireless network. Create a company policy about who can access the information and make certain that the data is properly encrypted with the appropriate encryption for wireless networks.
LEE BARKEN is the IT practice leader for Haskell & White LLP. Reach him at (949) 450-6200 or email@example.com.
Target date retirement funds emerged on the scene as investment vehicles about 10 years ago. Widely popular among 401(k) plan participants, the plans are designed to make retirement investing easier for those who lack the time or the expertise to manage their own retirement fund investments.
The plans are designed to provide a “plug and play” scenario for investors who begin by initially selecting their projected retirement date and then continually fund the account over the course of their career. The plan relies on a glide path investment strategy, which gradually rebalances the portfolio comprised of cash, bonds and stocks toward a more conservative investment allocation as the time for retirement nears. Despite the fund’s low maintenance philosophy, each target date fund has a different allocation model, and plan participants still need coaching and communication from plan sponsors to avoid making mistakes when investing, says Michael Ford, senior investment consultant with Watson Wyatt Investment Consulting, a subsidiary of Watson Wyatt Worldwide.
“As we study 401(k) participant behavior, aside from not saving enough for retirement, participants often fail to take enough risk, or they take too much risk with their fund choices,” says Ford. “In the case of target date retirement funds, a frequent participant mistake results from altering the asset allocation model by investing in more than one fund. All of these mistakes may cause 401(k) participants to be financially unprepared for retirement.”
Smart Business spoke with Ford about how CEOs can help employees invest wisely in target date retirement funds.
What is the most common investment mistake made by employees when investing in target date retirement funds?
The funds are designed to be all-inclusive investments. Frequently, plan participants become accustomed to spreading their investments among many different investment vehicles, like mutual funds, so naturally they are inclined to do the same thing with target date retirement funds. However, in this case, investing across multiple funds alters the glide path investment strategy, which, in turn, might cause plan participants to miss their financial retirement goals. It’s really not designed to be a mix-and-match investment concept.
How do retirement date funds fit into a plan sponsor’s full suite of investment options for employees?
It’s important to recognize that one size does not fit all when it comes to assisting employees with retirement planning. Each employee has a different risk tolerance, financial circumstance and level of investment savvy. We advocate structuring investment options into three tiers, with each tier appealing to different segments of the employee population.
- Tier one Target Date Retirement Funds: this tier is designed for participants who don't want to make asset allocation decisions and would rather have someone else do it for them.
- Tier two Core Options: this tier is designed for participants who want to make their own asset allocation decisions from a set list of investment options.
- Tier three Brokerage Window: designed for the small percentage of sophisticated investors who want maximum choice in their investments.
How can CEOs and plan sponsors help employees manage their retirement funds more effectively?
Communication and consultation with employees is absolutely vital. Plan sponsors should provide tools to participants that help them assess their risk tolerance and investment knowledge. If they are a tier one investor, it is important to communicate that this is a stand-alone investment option, not to be mixed with assets from the other tiers.
Plan sponsors should communicate with participants initially upon enrollment and then at least every six months about the nature of target date retirement funds and the investment strategy behind them. At Watson Wyatt, we recommend varying the communication method from print materials to in-person meetings to accommodate the needs of a diverse employee base.
What is the role of the plan sponsor’s record keeper in safeguarding employees?
Plan sponsors should coordinate safeguarding efforts with their record keeper to prevent tier one participants from mixing their allocations among other tier one funds or crossing their investments into the other tiers. Some record keepers are able to put safeguards in place that will not allow participants to mix asset allocations, so keep this in mind as you establish your selection criteria for record keepers.
With more and more employees taking on the responsibility of financially securing their own retirement, employers need to assist them by providing tools and the proper oversight of plan record keepers. Used properly, target date retirement funds can provide a majority of plan participants with a highly effective investment solution to help them save for their retirement
MICHAEL FORD is a senior investment consultant for Watson Wyatt Investment Consulting, a subsidiary of Watson Wyatt Worldwide. He is a seasoned professional with 23 years of extensive and diverse experience in the investment field. Reach him at (818) 623-4500 or firstname.lastname@example.org.