Retention On The Brink - human resource management

When your company is teetering on the precipice, its hope of survival may be HR's ability to identify and retain key employees. There's more to it than just cash and stock options.

It wasn't too long ago that MicroStrategy was a high-flying company. The Vienna, Virginia-based outfit, a 10-year-old producer of information systems that enable businesses to fine-tune their decision-making, had healthy profits and a market capitalization of $25 billion. But the company's innovative software products were only part of its success. MicroStrategy was famed for recruiting the best and the brightest for its 2,000-plus workforce, and it spared no expense to lure top talent. It spent $5 million each year to conduct team-building exercises on a cruise ship in the Caribbean, and threw another annual bash for which it flew its employees' friends and family into Washington, D.C., for a dinner and comedy concert by Dana Carvey.

"We had all these beautiful retention programs," Vince Gabriele, MicroStrategy's director of staffing, recalls wistfully. 'Then we had to cut them."

In March, MicroStrategy suddenly found itself in a crisis. The company disclosed that because of accounting problems, it would have to restate earnings for the previous several years. In a single day, the company lost 66 percent of its market value, and over several months its stock plunged from the vicinity of $300 per share down to below $30. For the first time, the company was forced to rescind job offers to new hires and to lay off 10 percent of its workforce. The laid-off workers, for the most part, didn't have that tough a time; the company gave them a generous severance package that included S 10,000 worth of MicroStrategy stock from founder and chief executive Michael Saylor's own holdings, and many were quickly snapped up by recruiters for other high-tech companies. As MicroStrategy scrambled to come up with interim financing and to rebuild its credibility with investors, the company had to confront yet another problem. How would it keep from losing its remaining employees, the hard-to-replace techn ical, sales, and managerial talent that the company would need to reverse its fortunes?

Unfortunately, MicroStrategy's dilemma is one that troubled companies increasingly face. Businesses left staggering from a serious body blow--whether it's a plunging stock price, a high-level corporate scandal, or the loss of major clients--now have to worry about a second blow that could finish them off. Just when they're at their most desperate, they often must contend with the prospect of mass departures of employees, whose skills and energy are essential to the company's survival.

A talent exodus can be crippling to a troubled company, and that doesn't apply just to dot-coms. Retailers, for example, have been plagued by the problem for years. When Federated Department Stores, the then-parent of Bloomingdale's and other store chains, found itself in financial trouble in the early 1990s, it lost 25 percent of its workforce in the company's Gold Circle division alone. When that part of the company was put up for sale, the loss of human assets reportedly reduced the division's price by $100 million. After troubled retailer Montgomery Ward filed for Chapter ii in 1997, for example, nearly 30 percent of its managers and virtually its entire sales staff resigned.

"When a company's financial fortunes suffer, management used to think, 'We'll keep the best people, and lay everyone else oft"' explains Bruce Tulgan of Rainmaker Thinking, a Connecticut-based consulting firm. "But in today's fluid, free-agent employment marketplace, they no longer get to do that. Instead, when things get rough, management has to worry about losing the best people, who are likely to say, 'Thanks, but I can sell my skills to someone else.' When they start fleeing, what is a short-term financial crisis can evolve into a long-term downturn."

When a company is on the brink of disaster, retention isn't an easy problem to solve. A corporate crisis can serve to expose--and exacerbate--weaknesses in the retention policies that a company has followed during good times. Simply trying to fix those problems in a hurry won't do the trick. Beyond that, some retention tactics that work in good times--such as the liberal granting of stock options--may not only fail but also actually put a company in even worse shape.

There is always hope. Companies can and do retain employees, even in the worst of times. But as top consultants explain, a company on the brink usually needs a bold, aggressive new strategy for keeping its talent base intact. It means establishing new lines of communication with employees, and communicating with a directness and candor that some top managers may find a bit uncomfortable. And it may mean trying new, unconventional compensation schemes that not only cajole staffers to stay but also give them more responsibility-- and a greater reward--for the company's short-term performance.

Companies in trouble often resort to buying employees' loyalty. In a 1998 study, Right Management Consultants looked at 829 US. and Canadian companies going through cutbacks, acquisitions, and other difficult situations. Right found that almost half of the companies enticed essential employees into staying with financial incentives. The bonuses typically ranged from 26 percent of base pay for supervisory and technical staff to 47 percent for executives. In better than 9 out of 10 instances, the bonuses were in cash. In return, 59 percent of the companies required employees to sign agreements to stay for a specific time period.

Generous staying-on bonuses, to be sure, can be a powerful method for achieving retention, at least in the short term. Right Management found that the companies that used such payouts were able to retain 90 percent of their supervisory and technical employees, said senior vice president Terry Szwec.

But such a strategy can be costly. Federated responded to its retention woes with a $26 million, two-year plan that paid 300 of its key managers and executives bonuses of 20 to 30 percent. Ultimately, the company survived and re-emerged from Chapter 11 as a viable concern. Similarly, America West Airlines workers and management shared $13 million in bonuses after the company's three-year Chapter 11 case ended in 1994.

Unfortunately, many companies in a crisis may find themselves unable to afford that sort of plan. An even bigger shock may come to habitually cash-strapped dot-coms, which may be accustomed in good times to building their retention strategies around potentially lucrative stock options that take several years to vest. As long as a company's fortunes are rising, equity is a potent lure to staffers. But when a company suffers a jolt, the value of those options can drastically decrease, making them worthless as an inducement. Piling more options of dubious value on top of the existing ones isn't going to do the trick. And option awards can be hazardous to an ailing company, because they tend to dilute the value of a company's already depressed stock--a move that can make outside investors unhappy.

Instead, Szwec advises adjusting the exercise price downward on employees' existing options, so that their value again becomes a lucrative incentive. "If the share value is sinking and $15-a-share options are underwater," he explains, "a progressive board of directors might say, 'We're going to redo them at $5.' "That gives employees not just an incentive to stay, he explains, but also an even bigger stake in reviving the company's fortunes.

While compensation almost invariably is a key part of crisis retention strategies, Tulgan, Szwec, and other consultants caution that a troubled company has to do more than just spread a lot of cash and options around. A company needs employees not only to stay but also to perform, and in far more daunting circumstances than they have in the past. That's why the experts advise that a company's executives and the human resources manager develop a carefully focused plan.

The first thing a company's leaders must do, according to Tulgan, is take a long, hard look at themselves and the company. "They need to ask, 'Are we going to stay and stick it out? Are we really committed?' "he explains. "Once they've decided the answer is 'yes,' they need to do a really hard analysis of what is wrong with the company, and develop a strategic plan for rebuilding its value."

Only when the survival strategy is clear, consultants caution, should management turn to the next step--taking a hard look at the company's workforce. But instead of the conventional approach--looking for staff cuts that can be made--management first has to flip the equation around. Which staff members have talents or proven abilities that are critical to keeping the company alive and making a turnaround? "They have to figure out who are the talent that they need, and focus on that," Tulgan says. "Rather than just hoping that those people will stay, they need to preemptively rake control of who's leaving and who's not."

To retain those critical employees in today's fluid job market, the experts advise an aggressive campaign--essentially, re-recruiting company staffers almost as if they were new hires. The retention interviews should be carefully scripted, with management focusing on specific, tangible selling points that will induce the employee to stay.

Not all of those selling points should be economic. "Our research shows there are six reasons why people commit to an organization in the first place," explains Tom Casey, leader for the talent management group at Unifi Network, a unit of PricewaterhouseCoopers. "The first is the opportunity to learn. Compensation is only number two. The third is career potential. Fourth is who is managing a person; 60 percent of the people in our data set say they'd be willing to leave a job to follow a good mentor. Fifth comes the reputation of the organization. Sixth are the benefits, such as health coverage. The priorities shift a bit when you're in a period of disequilibrium, so you may need to zero in on a few things--career opportunity, compensation, and staying close to people. But if you try to retain talent with money and ignore everything else, you may be able to keep them for the short term, but you won't be able to sustain things for any period of time."

Instead, Casey advises, management should focus on offering valuable employees an individually tailored package of inducements. "You can't just walk in and say, 'This crisis is a great opportunity for you,'" he says. "You need to deal in specific scenarios." For example, in exchange for a promise to stay, an employee might be offered a financial bonus, plus the promise of a promotion to, say, vice president of marketing, if the employee meets certain specific goals.

Tulgan goes a step further, and advocates doing away with across-the-board crisis retention bonuses, and instead offering richer rewards based on performance goals. "It may be tidier from an administrative standpoint to just pay everyone to stay, but it's terribly inefficient in economic terms, because the deal isn't related to the ultimate value of a person's work. I think what you should do instead is buy performance, what I call 'purchasing agent-style compensation. 'You give the staff member a project that you need to accomplish to keep the company going, and negotiate the reward for it."

Such deals, he says, can be highly individualized. "Basically, what you're looking for is, 'We want you to be part of the plan--what do we need to do to convince you to stay?' The answer may be, 'I want X dollars,' or it may be, 'I'll do it if I can come to the office on Tuesdays and Thursdays, and work the rest of the time from home.' Or it may be, 'When the stock price hits X, I want a bonus, or the ability to come back and renegotiate a new deal,'"

That all may seem pretty radical, but Tulgan notes that corporate managers already are quietly doing such individualized, performance-oriented deals on a piecemeal basis, using discretionary funds from big projects. Right Management's Terry Szwec thinks it's a concept that could benefit troubled companies desperately in need of results to show Wall Street.

But negotiating commitments from crucial employees and inducing them to stay with added compensation and other benefits are only part of the battle. Once a troubled company retains employees, it must make a concerted, ongoing effort to keep them on the job and performing effectively. Management has to get crucial employees to have faith in the company, and to keep that faith, even through the continued rough moments that almost inevitably will occur as the company fights its way back into the black.

Accomplishing that, the experts say, may require a company to drastically overhaul its internal communications strategy. As Tulgan notes, "Gone is the day when you could have secret meetings on the top floor, and keep employees in the dark about what's going wrong. All they have to do is go to some irritating anti-company Web site, and they'll find out everything you didn't want them to know."

Instead, troubled companies can achieve more control over the situation by pre-empting the gossip, and providing their employees with reliable sources of information. "You really have to tell people what is going on," advises Roger Herman of the Greensboro, North Carolina-based consulting firm The Herman Group. "That means the bad as well as the good. You can't play games." He advocates holding workshops in which employees are offered advice on how to read and understand the company's public filings, so that bad numbers don't take on a more ominous meaning than they deserve.

Vince Gabriele says that MicroStrategy, although it's still in the process of developing a formal plan to provide retention incentives, has already ratcheted up its internal communication efforts to aid in the workforce-preserving process. The company's human resources department helped executives devise a plan that included monthly company-wide conference calls, in which CEO Michael Saylor and other corporate officers brief employees on the latest developments in MicroStrategy's struggle back into the black. Employees, in turn, can ask questions of Saylor and his team.

"We've found that open communication is very important," Gabriele explains. "Our people are smart enough that they can accept some bad news, as long as they know what is going on. So our approach is, if we've got news, even if it's not great news, fine. Let's get it out." From a retention standpoint, MicroStrategy's communication efforts seem to be paying off. Before its downturn, the company had an annual staff turnover rate of 10 percent, about half of the software industry average, according to Gabriele. Since then, the company's turnover rate has increased, but only to 19 percent, still a healthy number. "We've got people who still believe in our corporate vision," he explains.

Patrick J. Kiger is a freelance writer based in the Washington, D.C. area.

Retention Strategies

* Before plotting a retention strategy, a company's leaders need to develop a plan for turning the company around, and decide whether they're willing to stay and do what it takes to achieve it.

* Instead of first looking to make cutbacks, identify the employee "talent" essential to making the turnaround plan work.

* Aggressively "re-recruit" essential talent. Explain their role in the comeback plan and how they specifically stand to benefit, both financially and in their careers, from the company's survival.

* Negotiate individually tailored incentives for employees who stay.

* Don't try to buy retention success. Offer a combination of cash and stock compensation, career opportunities, and flexible working arrangements.

* Try "purchasing agent-style" compensation, in which employees are rewarded for achieving specific goals crucial to the company's success.

* Set up an effective internal communication program to make sure that employees get reliable, up-to-date news from executives about the company's turnaround progress. Take advantage of teleconferencing, intranet Webcasts, and other communications technology.

Calculating the Cost of Employee Turnover

According to a 1996 study by the University of Wisconsin-Cooperative Education's Center for Economic Development, 75 percent of the demand for new employees is just to replace workers who have left the company. In this worksheet, you can see the costs involved. The calculations are addition, except for subtracting costs saved by vacancy. Visit www.uwex.edu/ces/cced/publicat/turn.html for an online version of this tool. Also, click on www.workforce.com/retention to assess your retention practices and view more than 80 retention articles, tips, and case studies.

Separation Costs:

Cost of exit interviewer's time $

+ cost of terminating employee's time $

+ cost of administrative functions related to termination $

+ separation pay $

+ increase in unemployment tax $

Vacancy Costs:

Cost of additional overtime $

+ cost of additional temporary help $

- wages and benefits saved due to vacancy $

Replacement Costs:

Preemployment administrative expenses $

+ cost of attracting applicants $

+ cost of entrance interviews $

+ testing costs $

+ staff costs $

+ travel and moving expenses $

+ postemployment information-gathering and dissemination costs $

+ costs of postemployment medical exams $

Training Costs:

Cost of informational literature $

+ formal training costs $

+ informal training costs $

Performance Differential:

Differential in performance costs/benefits $

Total turnover costs per employee $

Source: William P. Pinkovitz, Joseph Moskal and Gary Green, adapted from formulas developed by Wayne Cascio in Costing Human Resources, PWS-Kent, 1991

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