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HR Magazine, July 2005 - Money Talks

By Ann Pomeroy  7/1/2005

HR Magazine, July 2005

Vol. 50, No. 7

The best employers use bonuses and other profit-sharing programs as a tangible means of showing their appreciation to the employees who drive the company’s success.

What makes a great workplace? The companies on this year’s list of the Best Small & Medium Companies to Work for in America know that it requires a mix of many elements, carefully interwoven into a successful whole that is unique to each company. Yet, while numerous factors go into creating a positive and cooperative work environment, none are likely to be effective if employees don’t feel they are respected or treated fairly—or rewarded fairly for their efforts.

That’s clear from the companies on this year’s list, many of whom offer generous salaries, bonuses, profit sharing and other financial perks that show employees they are valued and that essentially make them part owners of the business. Here’s a look at how they do it.

Creating Owners

Dick Couch, founder and CEO of Hypertherm Inc., a manufacturer of equipment for cutting metal, understands that financial rewards can show workers they are valued and can engage them in the business. In 2001, Couch put $30 million worth of company stock into an employee stock ownership program (ESOP) because he wanted to foster “excitement and commitment in the work environment and create owners out of employees,” he says.

Apparently Couch has achieved his objective. Kim Smith, corporate improvement manager, says the ESOP has “built a feeling of ‘Do what you can for the company, because it’s ours’ ” among employees.

The stock ownership program appears to benefit the bottom line as well as the employees of this organization, which ranks No. 4 on this year’s list of medium companies. Hypertherm’s HR Director Brenda Blair says there is evidence that companies with such programs are more profitable and more successful than non-ESOP companies. She cites a report published by the ESOP Association titled The ESOP Report that found that ESOP companies averaged 4 percent to 5 percent higher on productivity measures than similar non-ESOP companies.

Blair says the ESOP, which is free, can serve as a retirement program for employees who choose not to participate in the 401(k) program. “They can’t refuse it,” she says, “and they can’t take distributions until they retire or leave the company.”

In addition to its ESOP, the Hanover, N.H.-based firm also pays annual profit-sharing bonuses that have averaged 19 percent of base pay over the past five years, says Blair. Savvy employees can put all or part of their bonus in the company’s 401(k) program, which matches 25 percent of up to 6 percent of an employee’s salary. This move can give workers an additional 25 percent match—in effect, a bonus on a bonus. It also allows them to take home more money since cash placed directly into a 401(k) is tax deferred.

The company makes sure employees know of this option when the bonuses are announced each December in a letter from the CEO. Along with the bonus amount, says Smith, the letter includes a calculation of how much employees can contribute to their 401(k) plan if they choose.

“The company is experiencing incredible growth,” says Smith. “I have to believe that people are more willing to work harder and longer when necessary because they see the connection between their efforts and the company’s success.”

Run Lean, Pay Well

Tom Smigielski, president and CEO of the Pacific Service Credit Union (PSCU), a community credit union located in Walnut Creek, Calif., says his employees deserve the salaries PSCU pays, which range in the top 2 percent of comparable credit unions. “We run a very lean organization,” he says. “We have a third as many employees as other credit unions our size—one for three—but we manage because our employees are really good.”

The company’s compensation philosophy—and generous benefits package—certainly get workers’ attention. When employees were asked in a survey to identify the top five reasons to work at PSCU, they ranked salaries second and the annual bonus program fourth.

(Health insurance topped the list—which is perhaps not surprising since the company pays the full health care premium for employees and their dependents. For more information on companies with generous health plans, see “Health Payment in Full”.)

In addition to top salaries and benefits, employees at PSCU—which ranks No. 8 on this year’s list of small companies—are eligible for an organizational bonus program that can pay up to 16 percent of annual base pay when the company’s goals are met. These goals hang on the walls throughout the facility, so employees are reminded of them daily.

This year, PSCU will pay an extra bonus to employees who worked long hours on a special project—another example of how the organization rewards employees for superior service.

The credit union converted its computer system this spring, a massive undertaking that could have resulted in lost records and unhappy credit union members. Instead, says Linda Rodriquez, PSCU’s director of sales and service, the system conversion turned out to be “a nonevent.” Members barely noticed, she says, and no significant problems had surfaced when HR Magazine talked to her three weeks after the conversion was completed.

Employees who worked on the conversion project were promised an additional bonus, says Eleanor Leyva, PSCU’s vice president of HR. “We wanted to be sure they would stay through the completion of the project,” she says, “so the payout will be distributed in July.” In addition, exempt employees who were ineligible for overtime received extra compensation for working on weekends.

Treating People Well

Another company that believes in sharing the wealth is Keller Williams Realty International Inc., a residential real estate company based in Austin, Texas. Each year, the company shares its profits with employees. Last year, employees received a total of more than $1 million under this unique program. A complex formula based on the amount of the annual profits, the employee’s tenure and his or her salary is used to calculate the bonuses, which can be as much as 50 percent of base salary.

Sharon Gibbons, vice president of financial systems and administrative operations, says company salaries also are “top of scale,” and the company matches 100 percent of the first 4 percent of employee contributions to the 401(k) program. (For more information on generous retirement plans, see “Unmatched Retirement Plans”.)

CEO Mo Anderson says the company, which debuts this year at No. 25 on the list of small companies, realizes that “no one succeeds alone.” She believes that hiring good people and treating them well is critical to the success of this fast-growing company.

Program manager Molly Brown certainly feels well treated. Since joining Keller Williams two and a half years ago, Brown has received two profit-sharing payouts. This year her bonus amounted to $13,000, which she says is not unusual. “I’m coming up on my third [bonus period], and I count the days.”

Brown, who was only 24 when she joined the company, used her first bonus check to pay off credit card debt and the latest bonus to start a business. “Many people use their bonus payout to make a down payment on a house,” she says.

“Mo Anderson could do a lot of things with a million dollars,” says Brown. “She’s chosen to give back to the employees, and I think it’s pretty cool.”

Competing with Giants

Handango, No. 24 on the list of small companies, was founded just six years ago in Hurst, Texas, near Dallas/Fort Worth. This publisher of mobile software pays bonuses—which can be as large as 30 percent of annual salary—every six months based on company performance.

Because the 84-person company is “really small in a land of giants,” salaries are in the low to mid range of market, thus the “bonuses give motivation” to Handango’s “type A employees,” says Cathy Guthrie, senior director of HR.

Guthrie was particularly impressed by Handango’s response during the fledgling company’s second year, when it was forced to lay off a third of its staff. Even in that “bad” year, she says, the promised bonuses were paid to all qualified employees, including those who had left the company before payout time.

Bonus percentages are determined based on meeting corporate goals, department goals and individual goals, says Guthrie. The top bonus payout of 30 percent is very hard to achieve (“We say you almost have to walk on water!” says Guthrie) and requires significant effort above and beyond simply meeting all goals. However, one or two employees usually get that top payment in each payout period, she says, and 20 percent to 25 percent bonuses are not unusual if all goals are met.

In addition, employees get stock options that vest at the rate of 33 percent each year or at promotion.

Keeping Your Options Open

At companies like Genencor, a biotech firm with headquarters in the heart of Silicon Valley in Palo Alto, Calif., “stock options and equity are a big piece of employee compensation,” says Rich Ranieri, senior vice president of HR.

Losing those options became a possibility in April when Genencor, this year’s top-ranked medium company, agreed to be acquired by Danish food company Danisco. While Genencor will retain its name and function as a wholly owned subsidiary, it will no longer be publicly traded.

Ranieri, who has been involved in the acquisition process from the beginning, told Danisco that it faces a “perfect retention storm” now. With employees cashed out of their Genencor stock, they could be vulnerable to recruiters from other companies if they perceive that they have lost something that is not replaced, he says.

Ranieri, who wants to retain the company’s current positive work environment, spoke up about the stock options because “I wanted our employees and our culture to have a champion.”

His comments haven’t fallen on deaf ears.

“We have an agreement with Danisco that we will develop a phantom [internal] stock option program to replace our previous long-term incentive program,” says Ranieri. He believes Genencor’s stock option programs were responsible for “driving behavior and results,” and he wants to be sure Genencor employees have no reason to “go down the street” and take another job.

Ranieri believes that Danisco understands the value of keeping this successful organization’s culture intact. The Danish firm is buying intellectual property, he says, so “why mess up a good thing?”

‘The Cherry on Top’

Another Silicon Valley company, Kyphon, is growing rapidly during its 11th year. Sales at this medical device manufacturer in 2004 were up 63 percent over the previous year, for a net of $213 million.

The company’s growth potential was one of the attractions for Steve Gerhart, who joined the company six months ago as employee development and internal communications director for HR. “You don’t see high-growth companies like this in today’s economy,” he says.

Since going public in 2002, Kyphon has offered its employees stock options and a 15 percent discount for the employee stock purchase plan. A variable incentive plan based on quarterly results vs. revenue and operating income targets is paid out each quarter to all Kyphon employees except sales staff (who have a separate sales compensation plan that includes commissions). Kyphon also pays salaries in the top 5 percent of market range. (With hundreds of medical device companies located in the Bay Area, Kyphon faces strong competition for employees.)

Sara Cromartie, executive assistant to the vice president of sales, likes the fact that “everybody contributes to the company’s progress, not just the salespeople in the field.” She knows that “if the company does well, you’re going to get something also.”

Cromartie says she feels at home at this “high-energy company. It’s a healthy climate with strong, cohesive top management,” she says. In addition, “I felt the employment package I received [when she joined the company about a year ago] was pretty generous.” Because she feels that she is treated fairly, “the [variable incentive plan] bonus is just the cherry on top,” says Cromartie.

The Qualities of Greatness

The employers on this year’s list of great companies are outstanding in many ways. If you ask their employees what’s great about working at their company, they’ll talk about the company vision, the passion and excitement they feel for their work, the climate of trust and integrity, the sense of teamwork, and the respect of employer and employees for each other. Invariably, they will also say the company treats them fairly.

You may not get a lot of details about the bonus programs or the stock options, even though the best companies have them. It’s not that money is unimportant—the bills must be paid, after all. But employees who feel fairly compensated and who have an opportunity to share in the company’s success seem to feel free to focus on the other rewarding aspects of their work.

Handango’s Guthrie voices her company’s philosophy—and that of many of this year’s winning companies—this way: “If you take care of your people, your people will take care of the company.”

Ann Pomeroy is senior writer for HR Magazine .
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 Unmatched Retirement Plans

 

It’s clear that members of this year’s list of the Best Small & Medium Companies to Work for in America want to help employees reach a financially secure retirement. In many cases, these companies go far beyond the norm—which entails offering a 50 percent 401(k) match, up to 6 percent of pay, according to the Profit Sharing/401(k) Council of America.

One of several companies that far exceed this average is Sage Products Inc. of Cary, Ill. This medical products sales and manufacturing firm—which ranks No. 3 on the list of medium companies—matches employee contributions dollar-for-dollar up to 10 percent of base salary, with 100 percent immediate vesting. Of eligible Sage employees, 95 percent participate in the plan, with an average deferral rate of 7.9 percent.

Sage focuses on this particular benefit because it’s an easy one for candidates to compare when evaluating employers. The generous match surprises applicants and is “a big draw,” says Pam Allen, director of human resources. “Many candidates, after reviewing the plan, will ask me, ‘Did I read that right?’ ”

At family-owned Ribelin Sales Inc., No. 17 on the list of small companies, Vice President and COO Ron Carlson challenged employees to find a company that beats its dollar-for-dollar match of up to 7.5 percent of salary. He even offered a bonus to the first person who found a better deal.

“Everyone was asking their friends and neighbors about their 401(k) plans,” he laughs. After a month of searching, an employee finally found a company with a better plan—some 50 miles away.

Northeast Delta Dental—a Concord, N.H.-based dental benefits provider—doesn’t offer a match on its 401(k), but it does offer a fully vested defined-contribution plan, to which it has contributed 5 percent of employees’ salaries each year since 1982. And each year Delta Dental contributes an additional percentage of salary based on the company’s profitability. Last year, the contribution amounted to another 5 percent.

At Digital Federal Credit Union (DFCU) in Marlborough, Mass., the company match is 100 percent, up to 6 percent of salary on a five-year vesting schedule. And to ensure that employees invest wisely, the organization provides free one-on-one consultations with Salomon Smith Barney representatives.

In addition, DFCU, which is No. 13 on the list of medium companies, budgets $650,000 to make an annual age-weighted contribution to employees’ 401(k) plans. “The older you are, the bigger piece of the pie you receive,” explains Donna Russo, vice president of human resources. “The minimum contribution is $100, and it can go up to $20,000.”

The 401(k) plan at Spokane Teachers Credit Union in Liberty Lake, Wash., boasts 100 percent enrollment because participation is mandatory—with at least a 2 percent deferral rate. The credit union, which debuts on the list of medium companies at No. 7, matches dollar-for-dollar up to 5 percent—with no vesting schedule.

“Half of new hires come from referrals, and we hear that the 401(k) plan is trumpeted by existing employees and one of the reasons candidates want to interview with us,” says spokeswoman Susan Cerutti-Jensen. On the other end, she adds, exiting employees say “the hardest part of the decision to leave the credit union is giving up the generous 401(k) plan.”

A sentiment, no doubt, shared by employees at all these companies.

—Adrienne Fox

 

 Health Payment in Full

 

Like employers everywhere, Tom Smigielski, president of Pacific Service Credit Union (PSCU), wants to recruit and retain the most-productive workers. And apparently he’s succeeding: Turnover at PSCU is typically less than half the industry average of 30 percent. Among the inducements that keep employees on the job is the health plan—with premiums paid in full for employees and their dependents.

It’s a rare benefit. As employers increasingly shift rising health costs to employees, full payment of premiums is declining. In fact, it fell from 34.1 percent of workers in 1992 to 28.7 percent in 2003, according to the Center for Economic and Policy Research. Holdouts against that trend are 20 of the 50 companies honored on this year’s list of the Best Small & Medium Companies to Work for in America. The 20 companies pay the full health premium for covered employees—and six companies, including PSCU, pay the full premium for dependents as well.

Such generosity costs PSCU about $10,500 for individual coverage and $16,300 for a family per employee per year. But it pays off, Smigielski says, because it helps hold down recruiting costs and related employment expenses.

Paying all premiums is “definitely” a recruiting advantage, says Josh Winans, PHR, who has been involved in health benefits at Graniterock, a Watsonville, Calif., engineering and construction products firm. Recruiting manager Traci Commons of Johnston McLamb, an information technology consulting firm in Chantilly, Va., says the benefit, worth up to $5,000 to each employee per year, can make the difference “when you’re on the cusp” with a job candidate.

Other companies that cite similar pluses include BMW Financial Services, with headquarters in Woodcliff Lake, N.J. (see “Driven to Excel: BMW Financial Services” on page 64), and VML Inc., a marketing and advertising firm in Kansas City, Mo. The benefit is something the company feels it should provide in return for everyone’s hard work, says Kristi Veitch, partner and HR director at VML.

For some companies, paying in full is a family matter. It began at Ultimate Software in Weston, Fla., 15 years ago when an employee in the new startup company had no access to health coverage, says Vivian Maza, senior vice president of people. CEO Scott Scherr, she says, decided to pay for coverage for everyone. Suggestions to cut company expenses by shifting premium costs to employees go nowhere, she adds, because leaders feel it’s “not worth affecting our culture” to do so. “We’ll cut other places.”

Linda Miller, senior vice president for marketing, says that because the company produces HR-oriented software and thus understands HR’s employee-centered focus, “we believe the more respect you show employees,” the more productive and customer-oriented they are.

For Ron Johnston, an owner of Johnston McLamb, it’s not just a recruiting advantage but also a personal issue. “One of the reasons I started the company in 1991,” he says, “was to get health insurance for my family, which included a profoundly handicapped daughter with cerebral palsy.” Although he “wanted to be an independent computer consultant,” he switched gears when he couldn’t get a family policy on his own, and he “formed the company to grow it quickly” so he could obtain a group policy.

—Terence F. Shea