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Controversial Counsel

Experts sound off about the well-publicized Wal-Mart memo that offered a tough-minded, if not novel, strategies to cut health-care costs.

Friday, December 2, 2005
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In October, Wal-Mart Watch, a nonprofit group allied with labor unions, obtained and published an internal communication from Wal-Mart Executive Vice President of Benefits Susan Chambers, addressed to the company's board of directors. The lengthy memo addressed the rising costs of health care, and suggested the company's benefits programs might be redesigned to attract a "healthier, more productive workforce."

Among the moves proposed: making greater use of part-time workers; lowering life-insurance payouts; cutting 401(k) contributions; attracting younger, healthier workers by offering education benefits and savings on healthy foods; raising health-care premiums (with the goal of getting employees to drop coverage of their spouses); and discouraging less-fit people from seeking jobs by adding more physical activity to some job duties.

The memo, developed with the help of mega-consultancy McKinsey & Co., acknowledged the retailer has an image problem regarding health care (less than 45 percent of its workers receive company health insurance), but it also noted the cost-cutting plan could save the company more than $1 billion by 2011.

Chambers wrote that "the cost of an associate with seven years of tenure is almost 55 percent more than the cost of an associate with one year of tenure, yet there is no difference in his or her productivity. Moreover, because we pay an associate more in salary and benefits as his or her tenure increases, we are pricing that associate out of the labor market, increasing the likelihood that he or she will stay with Wal-Mart."

She also observed that Wal-Mart workers "are getting sicker than the national population, particularly in obesity-related diseases," including diabetes and coronary artery disease. She suggested increasing the number of in-store medical clinics.

"Every business in America is facing the harsh reality of skyrocketing health-care costs," the company said in a statement, following the memo's release. "They're having conversations in their board rooms just like we're having in ours."

Experts within the HR practice have had a wide range of reactions. To get a sampling, we checked in with some notable human resource gurus for their thoughts about what's right and what's wrong with the Wal-Mart memo.

Madelyn P. Jennings, a principal of the Cabot Advisory Group and former senior vice president of personnel at Gannett Co. Inc.

The memo produced two reactions on my part.

First, it proposes some good ideas which should be pursued, or should already have been pursued. Evidence that Wal-Mart's associates are "getting sicker than the national population, particularly with obesity-related diseases" and that they "overutilize emergency room and hospital services" suggests that a major education program and the introduction of health clinics in stores are good, albeit overdue, ideas. Equally of value is the proposal that Wal-Mart become more engaged in the health-care debate, particularly on the subject of affordability. With 1.33 million employees, it wields huge power.

Second, reducing incentives for longer-service, older, full-time employees may cost Wal-Mart any good will it might have generated from its new medical program. As baby boomers age, giving preference to younger, shorter-service employees is problematic.

Every company I know is trying to manage benefit costs through consumer-health programs, health-savings plans, program modifications, employee-premium adjustments and the like. But devaluing a seven-year tenured employee because he or she costs 55 percent more than the employee with one year of service and, on top of that, recommending modifying all jobs to include some physical activity is no way to run a business.

If you carry the logic in the memo to its illogical conclusion, the ideal employee would be a 25-year-old, extremely healthy athlete with very short service and no plans to make Wal-Mart a career. Setting aside questions about ERISA, employment laws and ADA issues, is this the way to build pride, competence and a culture of fairness? In other words, is this a way to build a great business?

Peter Cappelli, George W. Taylor professor of management and director of the Center for Human Resources at the University of Pennsylvania's Wharton School and author of The New Deal at Work: Managing the Market-Driven Workforce and Harvard Business Review on Finding & Keeping the Best People.

The recent leak represents something of a tipping point in the world of business.

In earlier decades, corporations anxiously watched to see which companies were adding what new benefit to their employees' compensation, feeling the need to keep up in order to be perceived as good corporate citizens. Now, of course, the exact opposite is the case as companies watch each other to see how much pay rates will be cut and which benefits will be taken away.

Wal-Mart's case is different only in the sense that it is not directed at current employees but at future hires. Rising health-care costs have forced up labor costs across the economy without providing any obvious new benefit to workers, and one could argue, as Wal-Mart does, that its effort is simply directed at making the best use of its health-care expenditures.

On the other hand, Wal-Mart is not facing any particular competitive threat from health-care costs. Unlike U.S. manufacturers, it is not competing with low-wage Chinese or Indian companies, and its level of health-care expenditure per employee appears to be less than that of its competitors. What is driving Wal-Mart is what has always driven it, simply the need to squeeze its costs relentlessly in order to continue its business strategy of making money through low, low prices.

So why is the Wal-Mart story a tipping point? Because it makes clear that the largest company in the United States now thinks of labor costs exactly as it does any other cost of business: How can we pay as little as possible within the law and still get what we need?

Dr. John Sullivan, author of Rethinking Strategic HR: HR's Role in Building a Performance Culture, professor of management at San Francisco State University and principal of drjohnsullivan.com.

If HR is to be a true "business partner," it must consistently try to increase the productivity of the workforce and the profitability of the firm. Chambers is doing exactly that by informing the board of directors about the employee costs and productivity issues she has identified. She has done her due diligence by running the range of possible solutions by the CFO, legal, the vice president of HR and a world-famous management consulting firm [McKinsey & Co.] prior to presenting them.

Incidentally, the most important thing she has discovered from an HR perspective is that, as employee tenure increases, productivity does not. She is educating the board about the fact that the primary mission of HR, which is to increase worker productivity (or output versus costs), is not being met.

As any good HR leader should, she is giving the board a wide range of options to choose from and simply continuing the company's longtime effort to balance costs, productivity and employee needs.

The memo element that "offers employees more physical activity" could certainly have been worded better, but it's important to realize that there are numerous organizations, including the military, the airlines, sports teams and almost all health-care providers, that routinely strive to hire "healthier workers."

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I would also argue that given the number of organizations that are targeting Wal-Mart, Chambers should have been more "PR" savvy and involved PR earlier in the process. Overall, what she has done makes her an "HR hero" in my book. She is representing the company by pointing out possible ways that the organization can cut costs, attract better workers and increase productivity. Isn't that what being a business partner in HR is all about?

Bruce R. Ellig, former corporate vice president at Pfizer Inc. and author of Executive Compensation: A Total Pay Perspective, The Evolution of Employee Pay and Benefits in the United States.

Because of the need to control increasing benefit costs and respond to the public pressure of providing adequate medical benefits, the introduction of health-savings accounts is a logical answer. But are the workers paid enough to set aside the money? Participation in the existing 401(k) plan should give a clue.

De-emphasizing the 401(k) plan to provide moneys for medical benefits seems appropriate, given the satisfaction/importance rating of these two benefits, but it is unfortunate that doing so will add to the national issue of inadequate savings for retirement. Then again, Wal-Mart probably considers retirement a "tomorrow" problem while health-care is a "today" issue.

Attracting and retaining a healthier workforce needs more reinforcement with financial incentives (perhaps greater discounts on merchandise beyond healthy foods) for smoking cessation, weight control and simple annual physicals.

The other proposed changes are "catch-ups" to prevalent practices in many companies (i.e., flexible benefits, on-site medical facilities and 401(k) matches based on employee contribution).

Fred K. Foulkes, director of the Human Resources Policy Institute and professor of organizational behavior at Boston University School of Management, and author of Creating More Meaningful Work and Strategic Human Resources Management: A Guide for Effective Practice.

I cannot believe that the company believes that a Wal-Mart employee with one year of service is just as productive as one with seven years of service. There has to be something wrong either with the measures used (sales per labor hour) or the way the company selects, trains or manages its associates. If Wal-Mart knows that a seven-year veteran is no more productive than an employee with just one year of service, this would seem to imply that Wal-Mart employees are like commodities or machines. Is this true for all of Wal-Mart's employees? Pharmacists? Experts on tires? If I were a Wal-Mart employee, this assertion would not please me. If I were one of Wal-Mart's competitors, I would use this information to try to recruit Wal-Mart employees with one or two years of Wal-Mart experience.

While it is sensible to offer a consumer-driven health plan, it is not wise, in my view, to, at least initially, make it the only choice. If there is one thing we know, it is that most employees prefer choice with respect to health plans.

While it is silly to suggest that "all jobs include some physical activity," it is wise to think broadly about health care, including disease management programs, smoking cessation programs and the role of diet and exercise. Putting health clinics in stores would be good for employees as well as for customers.

Given Wal-Mart's concerns, I am surprised the memo did not recommend that Wal-Mart just hire Christian Scientists! More seriously, Wal-Mart needs to think more strategically, it seems to me, with respect to recruiting and selection, training and career development, as well as about compensation and employee benefits. There is a growing body of research-based HR knowledge that can inform the practice of human resources management. Business-oriented HR professionals who are listened to can play important roles in long-term business success.

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