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Retention on the Brink

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.

October 30, 2000
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Related Topics: Downsizing, Retention
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It wasn’t too long ago that MicroStrategy was a high-flying company.

TheVienna, Virginia-based outfit, a 10-year-old producer of information systemsthat enable businesses to fine-tune their decision-making, had healthy profitsand a market capitalization of $25 billion. But the company’s innovativesoftware products were only part of its success. MicroStrategy was famed forrecruiting the best and the brightest for its 2,000-plus workforce, and itspared no expense to lure top talent.

It spent $5 million each year to conductteam-building exercises on a cruise ship in the Caribbean, and threw anotherannual bash for which it flew its employees’ friends and family intoWashington, 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 tocut them."

In March, MicroStrategy suddenly found itself in a crisis. The companydisclosed that because of accounting problems, it would have to restate earningsfor the previous several years. In a single day, the company lost 66 percent ofits 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 torescind 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; thecompany gave them a generous severance package that included $10,000 worth ofMicroStrategy stock from founder and chief executive Michael Saylor’s ownholdings, and many were quickly snapped up by recruiters for other high-techcompanies.

As MicroStrategy scrambled to come up with interim financing and torebuild its credibility with investors, the company had to confront yet anotherproblem. How would it keep from losing its remaining employees, thehard-to-replace technical, sales, and managerial talent that the company wouldneed to reverse its fortunes?

A corporate crisis can serve to expose weaknesses in retention policies.

Unfortunately, MicroStrategy’s dilemma is one that troubled companiesincreasingly face. Businesses left staggering from a serious body blow --whether it’s a plunging stock price, a high-level corporate scandal, or theloss of major clients -- now have to worry about a second blow that could finishthem off. Just when they’re at their most desperate, they often must contendwith the prospect of mass departures of employees, whose skills and energy areessential to the company’s survival.

A talent exodus can be crippling to a troubled company, and that doesn’tapply just to dot-coms. Retailers, for example, have been plagued by the problemfor years. When Federated Department Stores, the then-parent of Bloomingdale’sand other store chains, found itself in financial trouble in the early 1990s, itlost 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 assetsreportedly reduced the division’s price by $100 million. After troubledretailer Montgomery Ward filed for Chapter 11 in 1997, for example, nearly 30percent 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 off,’" explainsBruce Tulgan of Rainmaker Thinking, a Connecticut-based consulting firm."But in today’s fluid, free-agent employment marketplace, they no longerget to do that. Instead, when things get rough, management has to worry aboutlosing the best people, who are likely to say, ‘Thanks, but I can sell myskills to someone else.’ When they start fleeing, what is a short-termfinancial crisis can evolve into a long-term downturn."

When a company is on the brink of disaster, retention isn’t an easy problemto solve. A corporate crisis can serve to expose -- and exacerbate -- weaknessesin the retention policies that a company has followed during good times. Simplytrying to fix those problems in a hurry won’t do the trick. Beyond that, someretention tactics that work in good times -- such as the liberal granting ofstock options -- may not only fail but also actually put a company in even worseshape.

There is always hope. Companies can and do retain employees, even in theworst of times. But as top consultants explain, a company on the brink usuallyneeds a bold, aggressive new strategy for keeping its talent base intact.

Itmeans establishing new lines of communication with employees, and communicatingwith a directness and candor that some top managers may find a bituncomfortable. And it may mean trying new, unconventional compensation schemesthat 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 1998study, Right Management Consultants looked at 829 U.S. and Canadian companiesgoing through cutbacks, acquisitions, and other difficult situations. Rightfound that almost half of the companies enticed essential employees into stayingwith financial incentives. The bonuses typically ranged from 26 percent of basepay for supervisory and technical staff to 47 percent for executives. In betterthan 9 out of 10 instances, the bonuses were in cash. In return, 59 percent ofthe companies required employees to sign agreements to stay for a specific timeperiod.

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

But such a strategy can be costly. Federated responded to its retention woeswith a $26 million, two-year plan that paid 300 of its key managers andexecutives bonuses of 20 to 30 percent. Ultimately, the company survived andre-emerged from Chapter 11 as a viable concern. Similarly, America West Airlinesworkers and management shared $13 million in bonuses after the company’sthree-year Chapter 11 case ended in 1994.

Only when the survival strategy is clear should management take a hard look at the company's workforce.

Unfortunately, many companies in a crisis may find themselves unable toafford that sort of plan. An even bigger shock may come to habituallycash-strapped dot-coms, which may be accustomed in good times to building theirretention strategies around potentially lucrative stock options that takeseveral years to vest. As long as a company’s fortunes are rising, equity is apotent lure to staffers.

But when a company suffers a jolt, the value of those options can drasticallydecrease, making them worthless as an inducement. Piling more options of dubiousvalue on top of the existing ones isn’t going to do the trick. And optionawards can be hazardous to an ailing company, because they tend to dilute thevalue of a company’s already depressed stock -- a move that can make outsideinvestors 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 areunderwater," he explains, "a progressive board of directors might say,‘We’re going to redo them at $5.’" That gives employees not just anincentive to stay, he explains, but also an even bigger stake in reviving thecompany’s fortunes.

While compensation almost invariably is a key part of crisis retentionstrategies, Tulgan, Szwec, and other consultants caution that a troubled companyhas to do more than just spread a lot of cash and options around. A companyneeds employees not only to stay but also to perform, and in far more dauntingcircumstances than they have in the past. That’s why the experts advise that acompany’s executives and the human resources manager develop a carefullyfocused plan.

The first thing a company’s leaders must do, according to Tulgan, is take along, hard look at themselves and the company. "They need to ask, ‘Are wegoing 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 reallyhard analysis of what is wrong with the company, and develop a strategic planfor rebuilding its value."

Only when the survival strategy is clear, consultants caution, shouldmanagement turn to the next step -- taking a hard look at the company’sworkforce. But instead of the conventional approach -- looking for staff cutsthat can be made -- management first has to flip the equation around. Whichstaff members have talents or proven abilities that are critical to keeping thecompany alive and making a turnaround?

"They have to figure out who are the talent that they need, and focus onthat," Tulgan says. "Rather than just hoping that those people willstay, they need to preemptively take control of who’s leaving and who’snot."

To retain those critical employees in today’s fluid job market, the expertsadvise an aggressive campaign -- essentially, re-recruiting company staffersalmost as if they were new hires. The retention interviews should be carefullyscripted, with management focusing on specific, tangible selling points thatwill induce the employee to stay.

Not all of those selling points should be economic. "Our research showsthere are six reasons why people commit to an organization in the firstplace," explains Tom Casey, leader for the talent management group at UnifiNetwork, a unit of PricewaterhouseCoopers. "The first is the opportunity tolearn. Compensation is only number two. The third is career potential. Fourth iswho is managing a person; 60 percent of the people in our data set say they’dbe willing to leave a job to follow a good mentor. Fifth comes the reputation ofthe 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 andignore everything else, you may be able to keep them for the short term, but youwon’t be able to sustain things for any period of time."

Instead, Casey advises, management should focus on offering valuableemployees an individually tailored package of inducements. "You can’tjust walk in and say, ‘This crisis is a great opportunity for you,’ "he says. "You need to deal in specific scenarios." For example, inexchange 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 theemployee meets certain specific goals.

Tulgan goes a step further, and advocates doing away with across-the-boardcrisis retention bonuses, and instead offering richer rewards based onperformance goals. "It may be tidier from an administrative standpoint tojust 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. Ithink what you should do instead is buy performance, what I call ‘purchasingagent-style compensation.’ You give the staff member a project that you needto accomplish to keep the company going, and negotiate the reward for it."

Such deals, he says, can be highly individualized. "Basically, what you’relooking for is, ‘We want you to be part of the plan -- what do we need to doto convince you to stay?’ The answer may be, ‘I want X dollars,’ or it maybe, ‘I’ll do it if I can come to the office on Tuesdays and Thursdays, andwork the rest of the time from home.’ Or it may be, ‘When the stock pricehits 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 managersalready are quietly doing such individualized, performance-oriented deals on apiecemeal basis, using discretionary funds from big projects. Right Management’sTerry Szwec thinks it’s a concept that could benefit troubled companiesdesperately in need of results to show Wall Street.

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

Accomplishing that, the experts say, may require a company to drasticallyoverhaul its internal communications strategy. As Tulgan notes, "Gone isthe day when you could have secret meetings on the top floor, and keep employeesin the dark about what’s going wrong. All they have to do is go to someirritating anti-company Web site, and they’ll find out everything you didn’twant them to know."

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

Vince Gabriele says that MicroStrategy, although it’s still in the processof developing a formal plan to provide retention incentives, has alreadyratcheted up its internal communication efforts to aid in theworkforce-preserving process.

The company’s human resources department helpedexecutives devise a plan that included monthly company-wide conference calls, inwhich CEO Michael Saylor and other corporate officers brief employees on thelatest 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," Gabrieleexplains. "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 retentionstandpoint, MicroStrategy’s communication efforts seem to be paying off.Before its downturn, the company had an annual staff turnover rate of 10percent, 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 ourcorporate vision," he explains.

Workforce, November2000, Vol. 79, No. 11, pp. 58-65 -- Subscribenow!


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