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Tops of the Trade

An exclusive 2005 HRE ranking of Fortune's "Most Admired Companies" sheds new light on best HR practices and underscores the bottom-line benefits of putting people first.

Friday, December 2, 2005
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Fresh evidence of a tangible payoff for progressive human resource practices may be at hand: Companies admired by their competitors for HR prowess not only get to bask in the glow of that admiration, but also can boast higher profitability than their less-admired counterparts.

In other words, HR virtue may be its own reward, but perhaps you can take it to the bank, too.

At least, that's one implication, if not an irrefutable conclusion, of an exclusive Human Resource Executive® recalibration based on HR performance of the 23rd annual Fortune magazine's "Most Admired Companies" rankings, which was published earlier this year. Additional insights come from the horse's-mouth descriptions of the HR philosophies and practices of those companies.

The analysis also suggests industry-based patterns of HR performance. (Sneak preview: The airline industry isn't patting itself on the back, but the tech sector is fairly bursting with pride.)

All of this springs from a numbers-crunching exercise performed by the Philadelphia-based Hay Group, which has been the statistical workhorse and brains behind the Fortune rankings since 1997. The methodology, described in greater detail on page 24, boils down to this: The overall rankings are based on eight "attributes of reputation." Half of them are either directly in the HR realm (example: people management) or can reasonably be considered a consequence of good HR practices (example: innovation). Most of the rest relate to financial performance.

Business peers rate each company within their industry sector (minimum size requirement: $1.2 billion in revenue) on each attribute on a 1-to-10 scale.

Fortune's rankings are calculated simply by averaging each company's rating from the eight criteria. And the HR-oriented re-ranking is performed by only using the four HR-oriented criteria.

King of the hill: Kinder Morgan Energy Partners, with a near-perfect 9.54 rating, followed by FedEx (8.79), American Express (8.68) and Starbucks (8.63). (See top 50 companies listed on page 22.)

Although most companies that fared well under the HR-slanted ranking also scored high on the overall list, that HR filter cast a very different light on some others. For example, Wal-Mart Stores ranked No. 4 on Fortune's list. But, when HR criteria were used exclusively, it plummeted to 86th on the tally (but still comfortably in the top quartile) of 582 companies, with a 7.41 rating. Then again, Wal-Mart's industry sector in the Fortune rankings, "general merchandisers," ranked 49th on the list of 65 sectors. And within that sector, Wal-Mart was head and shoulders above its peers, with a 7.86 score on the overall rankings, towering above bottom-ranked Kmart with an anemic 4.22 rating.

Behind the Rankings

But enough about decimal-calibrated numbers. What's behind them? What are the companies on HRE's recalibrated list doing to win that adulation -- and perhaps the strong financial performance that accompanies it? Interviews with human resource leaders of six of the top 10 HR-admirable companies yield a set of philosophical themes and human resource practices that, when applied diligently over time, amount to a gourmet recipe for building a golden reputation -- at least among peers.

At the top of the list is not just a rhetorical declaration, but a sincere belief in the central role of human capital as a driving force behind organizational success. Because "our people make us successful" seems to have become a much-abused and overused claim in recent years, it's refreshing when it's associated with companies that really appear to mean it. For example, a principle at Federal Express attributed to founder Fred Smith, now reduced to the FedEx-speak acronym "PSP" (people-service-profit), is hard-wired into the operation.

"It's a recognition that our people are the ones who make us great, so we must take care of them, empower them and trust them to do what's right. That will lead to outstanding service, which will lead to customer satisfaction, which ultimately will drive and increase our profits," says Robert Bennett, the vice president of global learning, development and support for FedEx Express in Memphis, Tenn. "It doesn't stop there because profits are reinvested back into our people. It's a circle."

At Starbucks, the value-and-treat-employees-right approach -- abundantly demonstrated in, for example, the provision of health benefits and stock options for part-time employees -- is rooted in an almost religious-like faith. "We don't overanalyze this philosophy," says Dave Pace, the Seattle-based company's executive vice president for partner resources.

"You either believe in it or you don't, and we truly believe in it."

Pace's views are echoed by Joseph Castellano, vice president of HR for Anheuser-Busch Cos. in St. Louis. The company weighed in at No. 8 on the HR recalibrated list in close proximity to the other top 10. "We do understand there's a human capital value, and even if you can't put a dollar amount on it, it's there anyway. We've always known and appreciated it, and invested in it," Castellano says.

The story's the same at American Express, where the valuing of employees was demonstrated by its decision to hang on to people through employee-recognition programs, satisfaction surveys and similar efforts when the company, particularly its travel services division, took a beating after 9/11. American Express' "Blue Box Values," (including "respect for people . . . we value our people, encourage their development and reward their performance") are enshrined at the company, says Kevin Cox, the company's executive vice president of human resources.

But HR executives at companies on HRE's top-50 list stress the importance of institutional accountability mechanisms to ensure the "Blue Box Values" and their equivalents are actually being adhered to. Trust, but verify. At Starbucks, for example, Pace has a group that's responsible for "mission review" -- i.e., giving the corporate mission statement a reality check. This group reviews hundreds of comments and questions a month, Pace says.

At the top of the list of Starbucks' guiding principles: "Provide a great work environment and treat each other with respect and dignity."

A comment from an employee may point to a behavior or activity that appears out of keeping with its guiding principles. When that happens, Starbucks promises "the relevant manager" will respond to the individual who raised the matter within two weeks and will seek to address it.

Pace also keeps an eye on all the traditional HR "dashboard" success indicators -- turnover ("it varies somewhere around 70 percent or 75 percent; that's incredibly low for this industry"), employee engagement and satisfaction surveys ("our scores put us in the top 10 world-class category"). "These are the kinds of mechanical metrics that a lot of people do to validate their position," Pace says.

At acronym-happy FedEx, accountability comes through the "SFA [survey-feedback-action] program," says Bennett. The annual anonymous online employee survey has been conducted for two decades, shedding valuable light on the company's management and practices.

"The results are used to develop action plans at each manager level," Bennett explains.

In one case, for instance, the process led to an overhaul of training programs for front-line managers to include more ongoing instruction, a much-needed supplement to the original one-shot new-manager boot camp.

In another, the "SFA scores" of one geographic district were rock bottom, "which were an indication that there were opportunities there for improvement," Bennett says. The resulting "HR intervention" led to a dramatic turnaround in the district's scores the following year.

Egalitarian Spirit

At the root of the basic treat-employees-right impulse at some of the companies on the recalibrated list isn't noblesse oblige (the French phrase describing the belief that the wealthy and privileged are obliged to help those less fortunate), but an egalitarian spirit. It seems to emanate from the psyches of company founders. Pace talks about a "philosophical grounding" rooted in vivid childhood experiences of Howard Schultz, the 52-year-old founder of Starbucks who grew up in a working-class neighborhood of Brooklyn. His father became disabled at a young age and the family lived on edge financially for lack of adequate insurance coverage.

"Howard has said he made a personal commitment to create a company that his father never had a chance to work for." Ergo, health coverage for part-timers first offered in 1988. Stock options followed when the company went public in 1992.

"People say, 'It's easy for you guys to do; you're a successful, profitable company,'" Pace says. "But the company wasn't profitable in 1988. We don't take care of our partners because we're successful. We're successful because we take care of our partners."

Given the nature of its business (i.e., global retail), Starbucks presumably can only be helped by a reputation for progressive employment practices. But its approach isn't unique to companies with products to sell directly to the public. Take CHS, a 5,000-employee wholesaler of food, grain and energy products headquartered near Minneapolis. The $11 billion Fortune 500 company is principally owned by farm co-ops, although some of its shares trade on Nasdaq.

Tom Traub, CHS' vice president of HR, defines the company's human resource philosophy by what it isn't -- a "star system." Rather, CHS' "team-oriented approach" is reflected in "how we select employees, how we reward employees and how we structure the organization," he says. For example, bonuses are heavily weighted toward "team," not individual, performance. The wellspring of all this: "A strong agricultural background company with a good Midwestern work ethic," Traub says.

"I've worked for other companies, and the spirit of caring here, the social responsibility element, is pretty special."

Another like-minded and highly admired enterprise outside of the retail realm is Kinder Morgan Energy Partners. The 8-year-old pipeline company's industry sector and headquarters location (Houston), with its traditional freewheeling capitalist traditions, would seem to be about as close culturally to CHS as cowboys to choir boys. Yet it, too, appears to harbor egalitarians in high places.

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Somewhat ironically for a most-admired company, Kinder Morgan likes to keep a low profile. Its HR leader, Jim Street, was willing to answer a few questions about HR practices, but only in written responses to submitted questions. "All Kinder Morgan employees are shareholders and are eligible for bonuses, which are distributed only if the company meets its earnings targets, which are published at the beginning of the year," Street explains.

No Perks, No SERPs

Executives aren't worshiped at Kinder Morgan. The company has a pay cap of $200,000, and offers "no perks, no planes, no sports tickets, no first-class air tickets, no SERPs (supplemental executive retirement plans) or deferred compensation plans," Street says.

Another hallmark of the recalibrated most-admired companies, which may flow naturally from the other themes, is a belief in straight talk with employees, or "transparency in communications," as Street puts it. "We are very open with our employees about all topics and work hard to keep communications going." For example, corporate financial performance targets are very clearly articulated to employees. The company tells them at the beginning of the year the specific earnings-per-share target Kinder Morgan must achieve in order for employees to earn bonuses.

Fortune Brands, the $7 billion diversified consumer products company based in Lincolnshire, Ill., has taken pains in recent years to "reach out and touch our employees better, communicate with them better," says Rosalyn Wesley, director of corporate HR.

"Our leadership is close to the ground; [leaders] don't exist in ivory towers isolated from the people. They are accessible, pragmatic and down to earth."

Although the company has invested heavily in information technology to facilitate communication with employees, "no technology can take the place of good old-fashioned respect for the people, hearing them, listening to their ideas -- ideas that are not only shared, but acted upon," Wesley says.

At Anheuser-Busch, that same listening to employees means sometimes getting an earful. Formal employee communication sessions, covering everything from the mundane to corporate strategic topics, typically trigger "very candid questions and feedback that give us a good sense of how things are going" at individual plant sites, says Castellano. "I probably did 30 meetings myself around the country this year."

In addition, the company's open-door policy encourages employees with questions or complaints "to come in and get it on the table. Many of our managers hold regular 'no-agenda' meetings for smaller groups . . . . We encourage them to scream at us, to scream at each other, within the 'family.' We think that's healthy."

Another way to make it easier for employees to know what's going on at some of the most-admired firms is by avoiding complexities and confusion in benefits and HR programs. "We don't get too fancy," says Castellano in reference to Anheuser-Busch's compensation philosophy. "It's pretty meat-and-potatoes."

The Profitability Factor

A final common thread between these companies isn't a theory, practice or tradition around HR. It's purely financial, and it's called profitability.

Virtually all of the top 10 companies on the HR-adjusted most-admired list were in the top one-third of their Fortune 500 peers when ranked by 10-year growth in earnings-per-share, as well as total return to shareholders.

A decade is a reasonable period of time to judge profitability; potential one-hit wonders are excluded from the field.

But is profitability the chicken or the golden egg? Starbucks, as noted earlier, subscribes to the egg theory: The company's financial success is the product of its admired HR policies, and not the other way around.

Mark Royal, a senior consultant with Hay Group Insight, the Hay Group's employee and customer research division, who plays a leading role with Fortune's most-admired rankings, acknowledges the logic isn't iron-clad.

The rankings are based on the individual company's reputation with regard to each underlying attribute, not a concrete metric. And nine out of the top 10 companies most highly admired for their HR-oriented "attributes of reputation" were also top ranked within their industry sector when all eight criteria were number-crunched.

"The relationship between reputation and performance involves a two-headed arrow," Royal says. "On the one hand, we tend to admire companies that are [financially] successful."

On the other hand, "I think that, in a lot of ways, the reputation of a company [including its HR practices] can cycle back and impact its financial performance.

"What is it that drives a company's ability to attract and retain talent? A good piece of that is the reputation the company enjoys in the labor market. All of us want to play for winners," he says.

Still, reputation isn't a perpetual-motion machine; over time, it has to be rooted in tangible success. A company might coast along on fuzzy good looks for a few years, but the "halo effect" doesn't last forever, according to Royal.

Company reputation ratings -- whether in human resources or other areas of an organization -- ultimately do "track with company events," Royal says.

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