Bennies and the Jettison

Eager to offset increases in the cost of healthcare benefits, employers are dumping non-essential benefits. Plus: PeopleSoft spurns sweetened bid, Fed to lower overnight rate, and employers dumping high salaries.

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Most CFOs are well aware of the rise in health-care costs. Double-digit increases in medical policy premiums over the past two years have forced many companies to pass some of the costs on to workers. The usual suspects: higher co-pays, higher deductibles, higher prescription payments.

But if it sounds like everything’s going up, consider this: soaring healthcare benefit costs has some employers taking down other benefits. In a survey of 584 human resource executives conducted by the Society for Human Resource Management (SHRM), respondents revealed a clear trend towards ditching non-essential worker benefits — all in an effort to offset bloated medical coverage costs.

Indeed, about one in four survey participants who said their companies have experienced a rise in healthcare benefits costs (and that was about 92 percent of those taking the poll) indicated that their employers have decreased benefits in other areas in 2003. For example, some respondents said their companies have eliminated new hire referral bonuses. Others said their employees have dumped executive and non-executive signing bonuses.

In addition, the study revealed that 10 percent fewer surveyed companies offered matching charitable contributions and spot bonuses this year. The percentage of companies offering flextime fell to 55 percent, down from 64 percent in 2002.

Companies are dropping more lavish perks as well. Only 22 percent of the respondents said their employers now provide executive club memberships. Last year, 33 percent offered that nicety. Dry cleaning services, concierge services, employer-sponsored personal shopping discounts and massage therapy services also saw slight decreases from 2002.

Other employee benefits on the employer hit-list: professional memberships (dropped to 85 from 89 percent), organized sponsored sports teams (fell to 32 percent from 39 percent), and career counseling programs (down to 24 percent from 29 percent).

In some cases, plan sponsors appear to be taking a remarkably short-sighted approach to reining in benefit costs — particularly medical benefit costs. The percentage of companies in the survey offering well baby programs fell to 42 from 57 percent. Likewise, prenatal programs fell to 27 percent, down from 44 percent a year ago.

The survey did show, however, that other types of preventative programs are catching on with employers. More respondents this year said their companies offer smoking cessation programs, fitness center subsidy programs, and weight loss programs. Indeed, as CFO.com reported on Friday (“Companies Looking to Trim Fat”), a growing number of corporate executives now see obesity as the number one health issue facing workers.

Duck Season, Rabbit Season: PeopleSoft/Oracle Still Spinning

Late last week, the board of directors at ERP software vendor PeopleSoft, Inc. rejected Oracle Corporation’s revised offer to purchase all the shares of that company. Oracle had originally launched a bid of $16 per PeopleSoft share, then boosted the offer to $19.50 after conferring with PeopleSoft shareholders. The deal is valued at $6.3 billion.

In rejecting the bid, PeopleSoft CEO Craig Conway — a former Oracle employee — seemed to be charting a different tack than he took in his initial rebuke of the $16 per share offer (“It’s atrocious bad behavior from an atrociously bad company.”) This go-round, Conway argued that the Oracle bid would not likely receive regulatory approval. “[The offer] is highly conditional, faces significant regulatory delays and uncertainty, and threatens serious damage to our business,” Conway stated in a press release.

Last week, PeopleSoft went on the offensive, running full page ads in major financial newspapers decrying the Oracle takeover bid. Oracle CEO Larry Ellison fired back, issuing a statement accusing PeopleSoft of spreading misinformation about Oracle’s intentions. “PeopleSoft executives are traveling around telling customers that we will ‘kill’ PeopleSoft’s products and force them to move to Oracle’s applications,” Ellison asserted. “These are lies and scare tactics.”

Whatever the tactics, it appears PeopleSoft’s shareholders will be the big winner in the Silicon Valley dust-up. Since the Redwood Shores, Calif.-based Oracle first launched its hostile bid on June 6, the price of PeopleSoft common has gone from about $15 per share to $17.40. The Oracle $19.50 offer amounts to about a 30 percent premium over the PeopleSoft share price prior to the announcement of the hostile takeover bid.

And despite his attacks on Oracle, Conway’s foot-dragging may simply be designed to drive up the offer price. In his statement on Friday, the PeopleSoft CEO stated: “Oracle’s offer undervalues the Company and is not in the best interest of PeopleSoft stockholders.” Conway stands to make $1 million — twice his base salary — plus bonuses if PeopleSoft is taken over.

The Pleasanton, Calif.-based PeopleSoft, which is continuing with its recently announced merger with rival J.D. Edwards, will release its second-quarter operating results in the next few weeks. Industry watchers say if those results are less-than-stellar, institutional investors might put pressure on PeopleSoft’s board to reconsider Oracle’s bid.

(Editor’s note: To learn more about Oracle’s bid for PeopleSoft — and what it means for the ERP industry — read “Why Oracle Spammed PeopleSoft.”)

Incoming: Another Fed Rate Cut

Members of the Federal Reserve Bank are meeting today to discuss the possibility of lowering the federal funds rate — again. The federal funds rate, which is the interest banks charge other banks for overnight loans, currently stands at 1.25 percent.

The fed funds futures markets are already pricing in a 25 basis point cut in the rate. According to Reuters, traders are factoring in about a 60 percent chance that Alan Greenspan & Co. will unveil a 50 basis point reduction on Wednesday, as the Fed finishes up its two-day meeting.

Based on Greenspan’s recent comments, members of the Federal reserve remain concerned about deflation. Deflation has already plunged Japan into 13 years of economic recession, and a report in The Wall Street Journal indicated that Germany now appears to be entering a period of deflation.

If the Federal Reserve acts again, it will mark the twelfth cut in the Fed funds rate since Jan. 2001. A cut of 25 basis points or more would reduce the fed funds rate to it lowest level since the Eisenhower administration.

In theory, the Fed could lower the funds rate to zero. But according to a report from Reuters, many analysts don’t believe Greenspan would go lower than a 0.5 percent rate. Below that, Fed-watchers say, money-market mutual funds would have difficulties covering operating expenses and still paying a return to fund-holders.

High Pay, High Anxiety

Here’s another ugly side-effect of the jobless recovery: workers who make good salaries are often the first ones to get the ax.

According to a story in USA Today, well-paid employees present inviting targets to budget-conscious employers. What’s more, highly compensated workers who lose their jobs are having a tough time finding employment in the same pay range.

Marc Lewis, president of the North American operations of executive search firm Morgan Howard, told the paper that laid-off workers who earned $75,000 to $125,000 have little chance of duplicating their salaries. “You can take a bright young person out of college and get the same thing,” he explained.

The paper noted that staffing services are reporting an increase in demand from corporate clients looking to replace lost workers. And according to a June survey by the American Staffing Association, staffing firms employed 11.7 percent more workers in the first quarter than in the same period in 2002. Subtext: corporates are replacing on-staff workers with temps.

Recent court cases involving Nestle U.S.A. Inc. and Capital One Financial Corp. have focused attention on the issue of age discrimination in the workplace. Those cases, however, involved employees who say they were either passed over for promotion or fired because of their age — not salary.

But given that older workers tend to make more money than younger ones, it’s only a matter of time before a company gets hit with a lawsuit claiming that the purging of higher salaried employees is a form of age discrimination.

Short Takes

  • In early July, management at Rite Aid Corp. will mail out checks totaling almost $140 million. According to a report from the Associated Press, the checks will go to current and former shareholders of the scandal-plagued drug store chain operator. The checks are the first installment of a class-action lawsuit settled in 1999. In a recent SEC filing, Rite Aid management indicated it has spent more than $120 million to re-audit previous financial statements and provide legal defenses for former CEO Martin Grass (and other executives). On June 17, Grass plead guilty to federal conspiracy charges.
  • Late last week, the SEC announced it had selected Susan G. Markel as chief accountant of the Division of Enforcement. Markel, who joined the commission in 1994, has worked on a number of the SEC’s important accounting investigations, including the probes of Cendant, WorldCom, and Xerox. She succeeds Charles Niemeier, who was appointed in late 2002 as a member of the Public Company Accounting Oversight Board (PCAOB). Niemeier made some news last week when he reportedly told a group of journalists that the American Institute of Certified Public Accountants has “made some big blunders. They are actually viewed as contributing to what’s happened today.” The PCAOB was established last year to regulate the accounting industry, which has been under attack following a string of corporate bookkeeping scandals.
  • Congress sent H.S. 658 to President Bush for signing this week. The bill, which was passed by the House and Senate last week, authorizes the SEC to hire accountants under the excepted service authority, rather than the federal competitive service process. Translation? the commission would be able to hire accountants, economists and securities compliance examiners in a matter of weeks, instead of months. “The passage of this legislation will allow the SEC to more quickly hire and assimilate the many new employees needed to fulfill the corporate governance reforms of the Sarbanes-Oxley Act…” commission Chairman William Donaldson said. The SEC, which is looking to add more than 800 attorneys, accountants, economists and examiners to its staff, already hires lawyers under the faster setup.

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