HR Due Diligence. Best Practices

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AUGUST 2005 VOLUME 82 NO. 8

Editor: Susan F. Sandler V.P., Group Publisher: Perry Patterson Sr. Managing Editor: Janice Prescott Managing Editor: Maggie Shaw Sr. Marketing Managr: Laraine Kelly Design: David Allikas Executive Director: David L. Foster

Inside this month
COVER STORY: HR’s Growing Role in M&A Due Diligence Now that HR is being asked to help prepare for more mergers, learn how you can add value to this critical corporate function. 3 RETENTION: Why the Turnover Threat is Real—and What to Do About It Think the staffing shortage is just a rumor? Think again—and understand where the gaps are occurring so you can start addressing the issue. 6 COMMUNICATIONS: Five Tips for Better HR Department Branding HR has its own brand—just like any other department. What’s yours, and how can you change it to attract and better serve employees? 7 HR DEPARTMENT: SHRM Predicts the Human Capital Metrics of the Future What will HR be measuring tomorrow? Find out what a panel assembled by SHRM thinks. 11 TRAINING: How to Develop the Best Training Initiatives These simple rules can help you make the most of training dollars—and time—to achieve maximum results. DEPARTMENTS 2 Legal Insights 8 HRfocus News Briefs 12 Compensation & Benefits News 15 HRfocus Calendar www.ioma.com

S T R AT E G I C H R

HR’s Growing Role in M&A Due Diligence
f you’ve been asked recently to help your organization prepare for a merger or acquisition, you’re in good company: More HR professionals are being asked to join the team that previews mergers and explores potential merger partners. This is very good news, since culture clashes and people issues often damn mergers to failure. Getting HR expertise early in the game should help more mergers to succeed. In fact, a 2004 research study by Towers Perrin showed just that. HR Rises to the Challenge: Unlocking the Value of M&A reported that when HR is involved early in the merger process, the odds increase that the merger will succeed. Understanding M&A and the HR factors that you may be called upon to investigate are important so that HR can play its role in merger success. How to do this better was discussed by Paul Falcone, director of HR, Platinum Equity Advisors (pfalcone@ platinumequity.com; 310-282-9217), at the recent Society for Human Resource Management conference in San Diego, in the session, “Forensic HR: How HR M&A Due Diligence Can Provide Strategic Insights Into Your Department’s Operational Performance.”

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THE M&A SCENE
M&A is one of the hottest HR areas right now, Falcone says, right up there with international HR and business process outsourcing. And M&A is hot in the business world, in general. Reasons for this include: Global trends. Corporate America has cash now that the economy has improved, which means there may be more global mergers ahead. Also, world trade is growing, free trade agreecontinued on page 13

TRAINING (cont’d)

for the workforce. As part of the process, Matens suggests asking: Are training and development aligned with the company’s mission and goals? Does training and development satisfy the needs of management and the employees? Has a distinction been made between the “need to know” and what’s “nice to know”? Curricula may include many of the following areas: changes in the company, job-specific training, training required by law, teamwork training, quality training, customer service, leadership, and communication. When it comes to the latter, Matens recommends that companies focus on developing listening skills in particular. Without good communication, he noted that organizations can suffer from ineffective work habits, distrust, unclear goals and directions,

bad decisionmaking, unsafe situations, poor morale, and a waste of time and money. Better communication will not only help prevent these problems, but will enhance all of your other training initiatives.

GETTING GOOD TRAINERS
Effective trainers are subject matter experts, have strong interpersonal skills, and have completed a “train the trainer” course, Matens said. They must also be prepared to train an adult audience. Adult learners seek education in three areas, he explained: Goal-oriented: Education is to accomplish a specific goal. Activity-oriented: In pursuit of a particular activity. Learner-oriented: Some want to learn for the sake of knowledge and to become more educated. Failing to understand adult learn-

ing styles can be a problem with trainers. Other challenges include failure to know the subject matter, poor presentation skills, lack of understanding of group/team dynamics, and failure to understand what motivates the employees to learn.

FOLLOW UP
As with all HR initiatives, the evaluation, follow-up, and adjustment that comes after you initiate your training program are crucial to its success. Steps in course evaluation that Matens recommends include assessing the effectiveness of: The instructor. Relevance/quality of material. Time of day of class. Length of the session. Facilities. Logistics. Most/least valuable information. Suggested improvements.

P H (LL S T R A T E G I CAY R O c o n(tc’o n f r o m p a g e 1 ) d t’d)
ments make it easier to transport goods, and mergers can help with entering emerging markets, cutting costs, and gaining competitive advantages. Economics. Publicly traded companies are under pressure to raise earnings. If they can’t do it from inside the company, they may seek to acquire companies to boost their earnings. Technology. The Internet and technology advancements have brought about the offshoring of white collar jobs and made merging with competitors easier. U.S. demographic shifts. A labor shortage, courtesy of the “baby bust” generation, means there will be an enormous lack of qualified workers. M&A activity can be a fast and efficient way to build a workforce. Falcone is at the forefront of these trends since he works for a private equity M&A firm; formerly, he was head of HR for Paramount Studios. He chose to move to his current company so he could expand his M&A knowledge. organizations undergo when they decide to merge: Stage 1: Pre-deal. Finding compatible business ventures and partners. Stage 2: Due diligence. Ensuring the deal is sound, and setting the initial integration strategy. This can take any-

HOW MERGERS HAPPEN
Falcone described what he called the M&A life cycle, or the stages that

Future issues:
The Custom Approach to Retirement Savings Advice: How It Can Help Your Employees to Save How Are Consumer-Driven Health Plans Working So Far? Phased Retirement: A Way to Solve Staffing Shortages and Maintain Your Company’s Intellectual Capital Strategies for Dealing With the Most Difficult People You Encounter at Work A Union Organization Trend You’ll Want to Watch for This Year Your Employee Handbook: Time Bomb or Savior? How to Recognize the Difference

HRFOCUS / AUGUST 2005

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S T R AT E G I C H R ( c o n t ’ d )

Guidelines for HR Due Diligence
HR professionals should explore several areas during due diligence, according to Paul Falcone, director of HR, Platinum Equity Advisors, in his session, “Forensic HR: How HR M&A Due Diligence Can Provide Strategic Insights Into Your Department’s Operational Performance,” at the SHRM conference in San Diego. These include: 1. General organizational structure:
Organization chart for the entire target company. Number/type of employees by department. Directors, officers, committees, and their duties. Data on key employees, including deferred comp, incentive bonuses, etc. Balance and alignment of the organization. discrimination claims. Be aware of restrictions under the ADEA (affecting layoffs of workers over the age of 40) and the Worker Adjustment and Retraining Notification Act (mass layoffs or plant closings), and how these may come into play in the potential merger. Collective bargaining laws. If the acquired company is unionized, then the acquirer will want assurance that the target company is in compliance with all collective bargaining relations outlined in the National Labor Relations Act and other applicable laws. Related issues that can arise include: If the acquirer and target both have unions, does the bargaining unit of the target company fold into the acquiror’s bargaining unit, or does it remain free-standing? If the acquirer has a union but the target does not, should the target’s employees automatically be enrolled in the acquiring company’s collective bargaining unit?

2. Documents for review:
Fixed-term employment contracts in the U.S., and severance agreements. Affirmative action plans. Collective bargaining agreements, employee handbooks, and policy and procedure manuals. Employee bulletins for the last two years. Training programs for the last two years. Consultants and other outside services used.

2. Benefits:
Costs of benefits as a percentage of payroll should be investigated, including benefits program costs for three groups: — Active employees: full-time, part-time, expatriate, temporary contract, and union workers. — Inactive employees: disabled, on leave, and those eligible for other post-termination benefits. — Retirees: pension plans, health plans, and life insurance. Health plan review: — Current costs of active programs for the acquired population. — Commitments to future cost increases. — Exposure to cost escalation due to medical inflation and utilization trends. — Plan compliance with regulatory requirements, such as ERISA or Pension Benefit Guaranty Corp. filings or premiums. Documents to review. Obtain copies of: — Contracts with all benefits providers. — All Form 5500 filings. — Annuity contracts. — Current trust statements. — Fiduciary insurance and bonds. — Frozen plans. — Summary plan descriptions/plan documents. — Vesting schedules.

3. Management and office personnel:
Rating and evaluation of all staff with managerial responsibility. Lines of succession. Methods and rates of compensation. Key employee insurance. Planned retirements. Physical arrangement and adequacy of offices.

4. Non-exempt factory labor:
Union contract status. Present labor climate and history of past difficulties. Methods of hiring and discharge. Job classification and rates. Working conditions.

Areas of “micro” or practical focus by HR: 1. Detect possible exposure to the acquirer under employment law:
Post acquisition employment litigation. Discrimination, harassment, unsafe work environments, denial of benefits, breach of employment contract, wage and hour, and wrongful termination are all key areas. Since the average U.S. employment litigation settlement is $300,000, you definitely want to try to head off problems with such matters. OSHA. Ergonomics, safety records, workers’ comp accident rates, “sweat shop” conditions in overseas manufacturing plans, and even OSHA’s extension of authority to the homes of telecommuters should be explored. Wage and hour laws. Minimum wage, family and medical leave, overtime, and exempt status. Pension plan funding. Under-funded versus over-funded pension plans, plan terminations, plan mergers, severance agreements, and treatment of pension beneficiaries at the time of sale. “Fully funded” plans now may trigger unanticipated liabilities in the future due to salary escalation and the acquiring company’s changes in actuarial assumptions. Workforce reduction laws. To avoid lawsuits about discrimination in layoffs, acquirors typically offer affected employees extra compensation in exchange for a release/waiver of any

3. Compensation. Consider compensation as a percentage of revenues.
Documents to review: — Grades, titles, ranges, and position descriptions. — Current salary structure and wage scale hierarchy. — Executive compensation. — Long-term incentive plans/stock option plans. — Sales commission pay structures. — Compensatory time practices. — Overtime records.

4. Employee data (compliance agreements). This includes EEOC/OFCCP affirmative action plans, Form I-9s, and OSHA records. 5. International considerations. If your organization is exploring an international merger or acquisition, know that many countries have specific requirements about terminations. These could include contractual notice periods, statutory or enhanced severance packages, pay-in-lieu of notices, similar notice requirements to those under WARN in the U.S., and acquired rights (where employees may claim a right to a bonus or salary increase after receiving three consecutive years’ worth of salary increases and/or seniority bonuses).

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HRFOCUS / AUGUST 2005

where from less than three months (most likely) to more than a year. Stage 3: Integration planning. Defining the blueprint for all aspects of the merged entities. This usually takes place 30 to 100 days after the decision to proceed. Types of integration: Limited (“light touch”). The acquirer sees the acquired company as an addition to its portfolio, so the target company usually retains its management team and employees are barely affected. Dominant company. Two competing companies become a single, larger organization. Mutual/best of both. “Merger of equals,” though this is usually a euphemism for a dominant firm acquisition. Transformation to a new company. Takes mutual/best of both companies to a higher level, specifically combining leading-edge technologies and other functional capabilities into the new company’s practices. Stage 4: Implementation. Executing the merger integration plan and measuring and reporting process. Historically, HR only becomes involved at the third stage or later. Now, HR is being invited to get involved earlier—at the due diligence phase.

topics to explore. The many areas of exploration not only bring HR issues to the fore in due diligence, but provide a real opportunity for the entire HR department to become involved and demonstrate value, Falcone said. “This is great stuff to delegate to your staff.”

BEST PRACTICES
As with most areas of HR today, best practices and metrics to assess the information you are exploring will be very helpful in making an accurate assessment about the potential merger target. Falcone said that it’s important for HR professionals performing M&A work to understand these areas:

Matching headcount to the profit and loss statement. Industry standard wages and benefits. Typical turnover rates in the industry. Employment practices and the structure of reward plans. The cost of contingent labor and the percentage of contractors and temps. Benefit costs as a percentage of payroll. Payroll costs as a percentage of operating income. Average pay per employee. Post-employment benefits obligations, such as retiree health and life insurance.

HRfocus CALENDAR
Recruiting, Interviewing, and Selecting Employees, Chicago, Aug. 8-10; San Francisco, Aug. 15-17; New York City, Sept. 19-21; Atlanta, Oct. 5-7; Washington, D.C., Oct. 31-Nov. 2. Contact: American Management Association, 800-2629699; www.amanet.org Expatriate Compensation: From Concept to Delivery, New York City, Aug. 10-11; Silicon Valley, Sept. 26-27. Contact: ORC Worldwide, 212-852-0379; e-mail: [email protected]; www. orcworldwide.com Fundamentals of Human Resource Management, Chicago, Aug. 15-19. Contact: American Management Assn., 800-2629699; fax: 518-891-0638; e-mail: [email protected]; www. amanet.org Leadership Development for Human Resource Professionals, Colorado Springs, Aug. 15-19 and Oct. 24-28. Contact: Center for Creative Leadership, Attn: Client Services, 336-545-2810 (refer to code SHRM); fax: 336-282-3284; www.ccl.org/registration HR Metrics: Adding Greater Value and Impact in Your Organization, Orlando, Sept. 12-13. Contact: Human Resource Planning Society, 212-490-6387; e-mail: [email protected]; www.hrps.org How to Build, Communicate, and Execute a Total Rewards Program, Washington, D.C., Sept. 12-14; San Francisco, Oct. 35. Contact: American Management Association, 800-262-9699; www.amanet. org Retaining the Best and the Brightest, San Francisco, Sept. 15-16; Atlanta, Oct. 1011; New York City, Nov. 10-11. Contact: American Management Association, 800-262-9699; www.amanet. org Avoiding the Legal Pitfalls of EEO, FMLA, and ADA, Chicago, Sept. 19-20; San Francisco, Oct. 3-4. Contact: American Management Association, 800-262-9699; www.amanet.org Strategic Human Resources Planning, New York City, Sept. 19-20 and Nov. 14-15. Contact: Cornell University ILR School. Fax: 212-340-2890; www.ilr.cornell.edu/ mgmtprog Human Resources Outsourcing Conference, Chicago, Sept. 19-21. Contact: The Conference Board, 212-339-0345; fax: 212836-9740; www.conference-board.org
HRFOCUS / AUGUST 2005

DUE DILIGENCE, DEFINED
The primary goal of due diligence, Falcone explained, is to validate and justify the potential merger. It includes determining whether the acquiring company is paying the “right” price for the target company, based on a number of financial and business factors that are explored. The strength of the target company’s finances are explored, and the acquiring company must learn about the potential liabilities that it would acquire along with the assets. There are also a number of HR factors that are included in due diligence—or should be. Falcone outlined key areas that you should incorporate, if possible, since certain information may not always be available in the process. The sidebar, “Guidelines for HR Due Diligence,” will provide a number of

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