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Many Businesses, but One Mission

June 16, 2006
Related Topics: Corporate Culture, HR & Business Administration
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Jeremy Farmer had his work cut out for him when he joined Aon in April 2003 as senior vice president and head of human resources. With 47,000 employees in 500 offices throughout the world, the insurance and consulting company was completely decentralized.

    Aon had been growing through mergers and acquisitions for 20 years, and it was Farmer’s job to bring all of these different businesses together into one culture while maintaining the entrepreneurial mind-set that characterized each unit.

    The company had talent. Lots of it. But because it was so decentralized, upper management had no way of knowing who they should be grooming to be the future leaders. Compensation programs varied for each business line and location. Creating an "Aon culture" would mean building a performance management system and compensation program for the entire organization.

    Farmer, a U.K. native who has worked in financial services for the past 25 years, says he was up to the challenge. With a graduate degree in human resources and industrial relations from the University of Aston in Birmingham, England, he moved to the U.S. 22 years ago to work for First Chicago Bank, now Bank One.

    But just a few months after Farmer started at Aon, New York Attorney General Eliot Spitzer subpoenaed the company as part of a sweep of the insurance brokerage industry. Spitzer was investigating the company and its competitors to find out whether they were steering business to favored insurers in exchange for contingent commissions, which is incentive pay that rewards brokers for hitting volume and profit targets.

    In March 2005, Aon reached a $190 million settlement with five regulatory agencies in three states. While the company did not admit any wrongdoing or liability under the agreement, Farmer says the investigation highlighted the business need for Aon to create a culture founded on the singular goal of putting clients first.

    Today, Aon’s walls are covered with posters trumpeting the company’s various achievements, including raising $2 million for tsunami victims. And they tout the company’s values—integrity and teamwork. They’re a reminder that the company is trying to put its days of fragmented cultures and different goals behind it.

    Farmer recently spoke to Workforce Management staff writer Jessica Marquez.

    Workforce Management: What are the inherent workforce management challenges in the financial services industry?

    Jeremy Farmer: In professional services companies like Aon, there is quite a star culture. The focus on attracting and retaining talent is crucial because you are selling a service, not a product. So there is a tremendous emphasis on trying to keep the best and brightest engaged and motivated.

    It’s challenging to be able to capture their creativity and do that in a way that enables you to make a decent profit along the way. So then the challenge is in designing compensation programs that reward true stars, but also allow companies to be successful in maintaining adequate reward for shareholders.

    WM: Couldn’t there be dangerous side effects to creating a star culture?

    Farmer: Not if it is perceived to be based on performance. If you have a culture where there is a sense of entitlement, where employees think that regardless of how they are doing that they will still get paid, that starts a slippery slope. That focus on paying for performance is fine as long as you are able to do that objectively, and that’s really the culture that we are trying to build at Aon.

    WM: How is Aon creating a performance-focused culture?

    Farmer: Three years ago, it was somewhat lucky if an employee had a performance review. Some managers did it, but there was no discipline to it. Now, we have established a five-point rating system that is used globally.

    We tell all managers that we expect to see less than 10 percent of their population be star performers, or 5s (on a five-point rating scale); 20 percent in the 4 category; 50 percent in the 3s and 10 to 20 percent in the 2s and 1s. Although I kind of wonder if we need a 1 category, since these people are probably not in the right job. These percentages are guidelines, not mandates, because we want our managers to have some flexibility.

    Next year we will introduce an online element to this so we can see how the ratings fall throughout our employee population. For example, if there are a lot of 4- and 5-rated employees working for a 3-rated manager, we can examine that and see if there is greater turnover as opposed to a manager who is rated a star performer.

    The system also will identify people interested in moving so that we can see which star performers are willing to switch business lines or locations.

    WM: How are you revamping compensation to support this focus on performance?

    Farmer: Previously each business unit and geographic unit had its own compensation program that was based on the performance of that area. This meant that there was no driver for a broker in one business unit to sell a product from another, for example. We wanted to align the compensation system to incent employees to bring the whole of Aon to their customers.

    In January 2004, we introduced a pro-gram by which employees’ compensation is partially based on their business unit’s performance, partially on their geographic area’s performance and partially on Aon’s business results as a whole. The breakdown will vary for different employees at different levels.

    To do this with the top senior-most executives, we decided to focus more on equity rather than cash. We created a program so that the equity senior managers receive over time will be based on how Aon performs over a three-year period. If certain earnings-per-share targets are achieved, they will receive performance-based shares. But if those targets aren’t met, they won’t.

    For managers one level down, we offer more restricted shares, which have a retentive element, and then a portion of equity that will only be worth something if the company’s overall performance is up compared to a certain metric. That metric is not as directly linked to earnings per share, but it’s similar.

    WM: Aon has offices in 120 countries and sovereignties. How do you take into account the different cultural nuances when you are creating a compensation system?

    Farmer: Obviously the base salary levels and the benefits are going to be different from country to country. Some countries will have higher social benefits at less cost, and some countries will have higher leverage in incentive compensation as a percentage of base salary.

    We take all these things into account. But we have a global philosophy that says whatever you do, we want that target to be above market. We give managers some discretion. And we rely on our local human resources teams to take our overall philosophy around compensation and drive it in where it makes sense.

    WM: Once you identify top performers, how do you make them feel part of this culture?

    Farmer: We are focusing on bringing these employees together and getting them interacting. Last year we started a four-day program with the Kellogg School of Management at Northwestern University. We bring together 70 senior executives from around the world to talk about the great problems of the day. Some of the talks are driven by Aon, and some are more academically driven.

    For midlevel managers we have a similar program, called Catalyst. This is a yearlong program that includes several sessions and 360 (degree) feedback, with the idea of grooming these employees to be senior leaders.

    These programs not only give managers the opportunity to talk with each other and with senior executives, but they also get some sort of intellectual growth. These meetings help to breed a common culture while encouraging strong performers to stay.

    WM: How do you get employees who are not top performers to feel part of this culture?

    Farmer: That’s important, because there are people who show up every day but might not want to be leaders at the company. To get them thinking about companywide performance, in 2004 we began offering an additional 401(k) match if the company does well. This creates a line of sight for these employees.

    The additional match is determined by Aon’s board each year. This year, Aon did a 2 percent additional match, contributing nearly $15 million more to those making full contributions to the 401(k). We have 15,400 participants.

    The other way we do this is through communications. Our CEO, Gregory Case, who came on board in April 2005, is a tremendous communicator. We have estimated that through webcasts and face-to-face meetings, he has touched about 15,000 to 20,000 employees.

    Often when groups of college recruits come in for their second interviews, he will come down and chat with them about it. New hires go through a Web-based orientation program to give them a sense of what Aon is about and its history.

    WM: What did Spitzer’s investigation highlight that needed to be changed about Aon’s culture?

    Farmer: While Aon was never accused of any wrongdoing, the attorney general was concerned that accepting contingent commissions was not appropriate. We agreed and stopped that practice. But in terms of culture, the investigation reinforced how important it was for us to think of our customers.

    WM: What did Aon do to make sure its employees were doing that?

    Farmer: We have a fair number of employees in sales who have historically been paid based on the first year of revenue of a transaction. We are moving away from that model in favor of rewarding employees based on profit. Now salespeople are getting rewarded out of a pool determined by the profit of the company rather than just getting a commission off of the transaction.

    For those employees where it makes sense to continue to pay them based on revenue, we are looking to do it in a way that is broader than just based on the transaction. We are looking at spreading those employees’ stream of income over the span of the relationship with a client. For example, they may get paid in three-year periods.

    What we are trying to do is to emphasize that it’s not about grabbing the juiciest apple on the tree. Again, we are trying to align our compensation with the kinds of behavior we want in our workplace.

    WM: What metrics are you using to gauge your success?

    Farmer: There are some objective measures, but I don’t think it’s all about objective measures. We look at turn-over. Currently, senior-level attrition is less than 10 percent, which we are happy with. We are looking at what kind of recruits we get. And most importantly, we look at employee feedback.

    Right now we are discussing whether to do one big global survey of employees or several smaller ones. What you don’t want to do is create a huge process so you get 15,000 surveys back that all have to be analyzed. You end up with something unwieldy that is hard to make an action plan around.

Workforce Management, June 12, 2006, p. 32-36 -- Subscribe Now!

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