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Planning for Benefits During a Divestiture

February 2, 2009
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Related Topics: Benefit Design and Communication, Featured Article, Compensation
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When a company spins off part of its business, making sure employees at the new entity keep their health insurance isn’t the first thing executives think about—or the second, third, fourth or maybe even 10th.

But the time does come during a divestiture when executives focus on workforce matters, including deciding things like how the new company will handle employee benefits.

Easy as it is to put off, getting started on the process sooner rather than later can make for a smoother transition for the new company as well as the one doing the divesting, according to HR executives, benefits consultants and other industry watchers.

Setting up HR for a spinoff has become a pressing issue at companies that have announced divestitures since meltdowns on Wall Street and in the retail, auto and real estate industries sent the economy into a tailspin. Experts expect to see even more divestitures in the next few months. "With the capital and credit markets what they are, a deal that started a year ago is a very different deal than today, but we’re still seeing companies spun off, " says Craig Maloney, leader of Hewitt Associates’ HRO midmarket benefits division.

When it comes to spinoffs, there’s no right way to handle benefits—only the right way for the individual company, experts say. In a worst-case scenario, the divestiture happens quickly and a parent company immediately severs all ties with its former subsidiary, leaving it up to the HR leaders at the new business to make do on their own.

That’s the exception rather than the rule, according to HR executives and benefits consultants. In many cases, a company will keep employees of the spun-off enterprise in their existing benefits program while the fledgling business’s new HR staff hunts for a provider, a transition period that can last up to 12 months.

Outsourcing benefits to specialists such as Hewitt Associates or Fidelity Investments’ Fidelity Human Resources Services is already common at Fortune 1,000 companies, and more midtier businesses are adopting the practice. There’s plenty of reason to think newly spun-off companies of either size will follow in their footsteps, especially if they’re trying to grow quickly, experts say. Spinoffs, like other companies with limited time or HR resources, would rather focus on their core business and let outsourcers deal with back-office issues such as benefits, says Phil Fersht, a research director at AMR Research, the Boston outsourcing researcher. In cases where a spinoff is doing business globally and a small HR department has to manage a workforce scattered around the world, "outsourcing is the only way to do it," Fersht says.

A divestiture can have a silver lining for the company shedding assets: an opportunity to re-examine an existing benefits program to renegotiate coverage for a newly downsized workforce or, in some cases, look for a different provider, according to the experts.

In the catbird seat
    When media conglomerate E.W. Scripps announced plans to spin off HGTV and its other cable TV and Internet properties into a separate company, HR was involved from the start. A big part of the reason was the Cincinnati-based company’s decision to pick Lisa Knutson, the company’s then-HR operations vice president, to manage both the separation and help design HR operations for the newly formed Scripps Networks Interactive.

E.W. Scripps was already looking into outsourcing some HR functions, including benefits, before the spinoff announcement. Because the company had a self-imposed deadline of nine months to complete the deal, executives decided to continue negotiating, with the understanding that E.W. Scripps would manage a benefits outsourcer relationship for both entities through December 2008. That way, Scripps Networks Interactive’s new HR staff could concentrate on designing benefits for fiscal 2009 "and not worry about getting up to speed on administering benefits for half of a year," says Knutson, who has since become E.W. Scripps’ senior vice president of HR.

The spinoff had yet to take place when E.W. Scripps selected ADP as its benefits outsourcer, leading the media company to include language in the contract to ensure any divested business units remained covered for up to 36 months after a separation.

Although it made sense for the two companies to work together during a transition period, the demographics of the existing and new companies were very different, with E.W. Scripps’ 7,000 employees generally older and closer to retirement age than Scripps Networks Interactive’s 2,000 mainly Gen X’ers and Gen Y’ers. As a result, the companies are now revamping benefits separately to better meet their individual needs. For its part, E.W. Scripps has introduced a wellness program and started offering employees a health savings account. "It gives them an option of a portable health care account when they leave the company, and it’s a lower-cost model," Knutson says. "We really encourage it, but SNI didn’t have that burning need."

Changing benefits to better fit employees’ needs is a good way to make sure they stick around after a divestiture—whether a company is large or small.

When iCIMS, a Hazlet, New Jersey, recruiting software developer, originally spun off from IT staffing business Comrise Technology some years ago, it was a startup with only a handful of workers. At the time, changing benefits wasn’t high on the company’s list of priorities. Once the company’s workforce reached critical mass, though, it made sense to revamp benefits so employees got what they wanted, says John Teehan, HR director at iCIMS. To figure out what that was, Teehan conducted anonymous online surveys and held employee focus groups. Based on the feedback he collected, iCIMS started a vision care plan and switched group life insurance providers to one that offered a higher lifetime benefits cap—$275,000 instead of $50,000. The company also switched 401(k) plans to a provider that offered its 131 employees more investment funds and financial advisor services.

Throughout the process, iCIMS has relied on the same two benefits brokers that its former parent company used. This made sense since the two private companies continue to share the same majority owner, Teehan says.

Growing companies should check in periodically with their benefits provider or broker "because as you grow you might be able to get better deals for yourself," Teehan says. "When you’ve been with a provider for a period of time, they have experience with you and a sense for what the potential expenses incurred by your employee population are" and may be willing to adjust rates accordingly.

Large companies tend to have highly customized benefits programs, but for reasons of size, time and money, it’s not always practical for a newly spun-off business to offer the same level of customization, says Hewitt Associates’ Maloney. Instead, spinoffs should focus on offering benefits that meet industry best practices, he says.

In planning benefits for a spinoff, HR should be open-minded about options and processes and urge employees who are going to be part of the new company to do likewise, says Maloney. "They may be long-tenured employees of the old company and accustomed to having things a certain way," he says, "but just because it’s new doesn’t mean it’s bad."

Workforce Management Online, February 2009 -- Register Now!

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