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Belt Tightening: Forced Vacation Is Catching On at Slumping Companies

Plus, new guidelines for earnings press releases; the dangers of workplace romance; at-will employment gets a boost; and more.
CFO Staff, CFO Magazine
July 1, 2001

BELT TIGHTENING

Go Relax. NOW.

Is it really a vacation if your boss orders you to go? And is it possible that such an order might actually foreshadow a layoff? In a "cost-cutting move" that preceded its disappointing fourth-quarter revenue prediction, Sun Microsystems Inc., in Palo Alto, Calif., told 38,000 employees to stay home during the week of the July 4th holiday, and to take the remaining days either as vacation or without pay, says spokeswoman Diane Carlini. "They have to take the days one way or the other," she says.

Adobe Systems Inc., in San Jose, Calif., also told 2,000 employees to make Independence Day a weeklong event. "Many employees typically take part of that week off anyway," explains spokeswoman Cheryl Edwards. And spokesman Randy Lane says Palo Alto­based Hewlett-Packard Co. asked, but did not require, that all 90,000 of its employees take six vacation days.

Oxymoron or not, forced vacation is all the rage as companies grapple with slumping earnings. But what's the financial benefit of making employees take paid time off? Typically, vacation is accrued as a liability as employees earn it. "The savings come from the reduction in the earned vacation liability," says HP's Lane. Adobe's Edwards says the measure is expected to save $4 million in "labor costs." But while reducing accrued liability makes the balance sheet look better, there's no effect on expenses beyond the incidental savings of closing the office.

"The only way to get a cost savings is not to pay for paid vacations," says James F. Harrington of Price-waterhouseCoopers LLP. But both Sun and HP cap the vacation time that employees can accrue, and neither allows workers to cash out unless they leave. That, of course, raises the possibility that forced vacation is a harbinger of layoffs.

"When people get laid off, generally you don't want them to have vacation accrued," notes Albert J. Meyer of investment research firm David W. Tice & Associates, in Dallas. More optimistically, Meyer says that if employees use vacation during slack periods, companies can be at full strength and will be less likely to incur overtime when business picks up.

For some companies, that's standard practice. Each July, General Motors Corp., for example, encourages salaried employees to take off while the plants are converted for the next year's car models. --Tim Reason

BALANCING ACT

In April, Financial Executives International (FEI) and the National Investor Relations Institute (NIRI) joined forces to issue guidelines for earnings press releases that they hope will establish industry best practices for these sometimes too-rosy reports. The guidelines were the result of prodding by the Securities and Exchange Commission's chief accountant, Lynn Turner, who earlier in the year had expressed displeasure with what industry insiders refer to as EBS releases--that is, "everything but the bad stuff."

Earnings press releases generally come out several weeks before 10- Qs are filed with the SEC. The releases frequently include pro forma financial results that are broader than those reported in 10-Qs, which follow the framework of generally accepted accounting principles (GAAP). The concern, especially in the investment community, is that the earlier releases often did not reconcile with GAAP.

"What the guidelines stress are press releases with a more-balanced picture of a company's condition that also reconciles its results with GAAP disclosures," says Dean Krogman, a vice president at the FEI. -- Leslie Schultz

NO IDEA: At least 70% of 401(k) plan sponsors don't know how to determine the total cost of plans, says Aon Consulting.

THE WORKPLACE 

Perk Up

Slowdown or no, CFOs may have to factor Starbucks coffee bars into their next budget if they hope to attract and retain experienced IT professionals. Office amenities--including everything from on-site day- care centers to a concierge who picks up dry cleaning for employees working late--will become important this year, says D. Jeffrey Waters, senior managing director at the New York office of real estate services firm CB Richard Ellis Inc. According to the Information Technology Association of America, by year's end, U.S. companies will face a shortage of 425,000 IT workers, in spite of the economic downturn. The rub: IT pros have the leverage to demand workplace perks. And as long as the extras are in demand, and don't eat up space needed for the core business, Waters doesn't think they'll disappear.

While some executives view workplace amenities as extravagant, Jim Eckert, director of corporate real estate and facilities management at Toledo, Ohio-based Owens Corning, sees them as a way to boost productivity. For example, workers there can use an on-site medical center, which, for minor complaints, might make a time-consuming trip to their own doctor unnecessary. Furthermore, walking trails that surround Owens Corning's urban campus provide a place for employees to meet and exchange ideas.


What's the value of amenities? The first-year cost of a coffee bar is $50,000. It costs about $150,000 to replace one employee whose total compensation package is $100,000 annually, asserts Jac Fitz-enz, founder of the Santa Clara, Calif.-based Saratoga Institute. -- Joan Urdang

LATE SHIFT

So far this year, 30% of retooled Web companies changed revenue models; 47% shifted from B2C to B2B, according to Webmergers.com.

SEXUAL HARASSMENT

The Love Bug Bites

Legal departments would have a much easier time if the Love Bug virus were confined to computers. But with longer hours and fewer formalities at the office, love has been blooming among employees. According to a survey by Vault.com, a career Web site, nearly 50 percent of respondents have been romantically involved with a co-worker at some point during their career. More worrisome from a legal perspective, 27.6 percent of managers said they had dated at least one subordinate, and another 23 percent said they would be willing to.

"Workplace romances are dangerous for all involved--including the employer," says Ronald E. Richman, a partner at New York­based Schulte Roth & Zabel LLP. Relationships that last can disrupt productivity and morale, he says, while those that go sour leave a company vulnerable to sexual harassment charges.

Legal experts point out that sexual harassment settlement payments are not uncommon. In fact, recent Supreme Court decisions that favor plaintiffs have caused many lower courts to scrutinize employers' demonstrated commitment to sexual harassment policies. One result of the legal crackdown: In tandem with well-defined policies, training programs, and complaint mechanisms, some companies are actually defining policies on office romances. Vault reports that 17.6 percent of employers claim to have such policies in place. While very few companies ban it altogether, some, like Wal-Mart Stores Inc., may prohibit dating between a manager and a subordinate. And well over 100 companies are using so-called love contracts, claims Jeff Tanenbaum, an attorney at Littler Mendelson, in San Francisco.

A contract sets ground rules about work behavior in light of an intraoffice relationship in order to help companies avoid suits. "It's generally used when a relationship is already in trouble and the fighting disrupts the office," says Tanenbaum. Alternatively, it might be used from the outset of a manager-subordinate relationship to prevent either party from feeling pressured to stay in the relationship.

So far, other attorneys say such contracts have not proven their worth in court, and may present thornier legal problems. "The more you try to control risk," says Richman, "the more you intrude on peoples' lives, which makes the workplace unappealing, and, in some cases, can be illegal." -- Alix Nyberg

BAD TIDINGS: 45% of U.S. firms will miss year-end revenue targets set during Q1, says the American Management Association.

SEC SCRUTINY

They'll Be Watching

You may be hearing from us," warns chief accountant Robert A. Bayless, of the Securities and Exchange Commission's division of corporation finance. Apparently, before the slowdown in initial public offerings this year, companies had a 1 in 15 chance of being reviewed. But with extra time on its hands, the SEC hopes to boost the ratio to 1 in 4. "The threat of facing an SEC investigation is real," explains Larry Rieger, worldwide managing partner of assurance services at Chicago-based Andersen. "The immediate impact is that all companies are being more careful and conservative."

Executives can expect the SEC to pay special attention to several key areas, including segment disclosure, market and credit risk, impairment losses, nonrefundable payments, derivatives and hedging activities, and intangible assets. Perhaps the biggest area under investigation is revenue recognition, specifically payment for delivery of products and services.

It's been more than 10 years since the SEC identified issuer financial statement and reporting abuses--including revenue recognition scams--as a core area of enforcement, says Paul Gerlach, a partner at Washington, D.C.-based law firm Sidley Austin Brown & Wood and former associate director of the SEC's division of enforcement. He estimates that 20 percent of the SEC's current enforcement cases are in this area. "And I don't think enforcement priorities will change because a new chairman is confirmed," he adds, referring to President Bush's appointment of Washington, D.C.- based attorney Harvey Pitt to head the SEC.

Pitt, who still needs Senate approval before taking the reins, is a partner at Fried Frank Harris Shriver & Jacobson. If confirmed, Pitt will be faced with managing an SEC investigation of Wall Street investment banks suspected of manipulating the distribution of hot dot- com IPOs in exchange for aftermarket consideration. Opponents say individual investors will lose with Pitt as the top watchdog, because he will be overseeing the industries he used to defend as a securities attorney. But associates disagree.

"Harvey is an independent thinker, and his strength is that he will use his leverage with the private sector to work out problems that cannot be solved through regulation alone," stresses Louis Thompson, president and CEO of the National Investor Relations Institute, in Washington, D.C. To further his point that Pitt is his "own man," Thompson notes that the Republican Administration's nominee was the SEC's general counsel under Democrat Jimmy Carter. --Jake Wengroff


DISCLOSURE RULE

Tabula Fuller

The Securities and Exchange Commission wants companies to present their stock option compensation plans in neat, easy-to-read tables, rather than relegate the information to a footnote. To that end, the commission released a proposed rule calling for the tabular disclosures to be included in proxy statements, when companies submit a plan for approval by shareholders, or in 10Ks in years when companies aren't seeking shareholder approval. The SEC says the proposed rule addresses the commission's concerns about the absence of full disclosure to stockholders regarding the plans, the potential diluting effects of the plans on shareholder value, and the adoption of the plans without shareholder approval.

But opponents of the proposal, including Microsoft Corp., raise several objections. Chief among them is that the rule duplicates reporting requirements imposed by the Financial Accounting Standards Board and contradicts the SEC's own efforts to streamline reporting.

Other firms are more sanguine about the idea. "The SEC is proposing modest additional disclosures, and that's not a problem for us," says Cary Klafter, director of corporate affairs for Intel Corp., in San Jose, Calif. However, he adds, the proposal should allow companies to aggregate, or exclude, information on select plans. "Some companies have a large number of stock option plans that they've inherited from mergers," he explains. "If we had to disclose all the data for each of those plans, we'd have a large block of information that really wouldn't be very meaningful to the reader."

Still, the idea has garnered some support. "While most of the information that would go into the table is already available in one form or another," observes Brian Borders, president of the Washington, D.C.-based Association of Publicly Traded Companies, "the idea of making it available in a tabular form is a good one." -- John P. Mello Jr.

TABLE TALK

The SEC wants 10Ks to clearly display the number of securities:

WHAT'S REAL

According to MVC Associates International, 35% of U.S. firms fail to create real value (operating profit after tax after cost of capital) because they apply incorrect performance measures.

97% OF STATE AND LOCAL economic development agencies cite attracting high-tech investment as a top priority, reports KPMG.

M&A

Catch-as-Cash-Can

With the equity markets down and initial public offerings virtually nonexistent, fewer merger deals are putting stock in stocks. In the first four months of 2001, 30 percent of mergers relied solely on cash, the highest level since 1996, according to Thomson Financial Securities Data in New York. "Sellers used to be moderately indifferent about accepting equity, but when stock declines in value and becomes more volatile, equity becomes less attractive," says Brian Heckler, a partner with KPMG.

One sector that has seen a dramatic shift to cash is the traditionally stock-rich technology realm. Forty-five per-cent of deals in the sector have relied solely on cash this year, compared with 15 percent last year, reports Thomson. "The risk profile of stock is so high right now, no one is really willing to take it," says Paul Hammer, head of the technology, media, and telecommunications group at Houlihan Lokey Howard & Zukin, a Los Angeles­ based investment bank. "About the only people doing deals," he says, "are private equity shops that always use cash, or the financially stable dinosaurs that are sitting on pots of cash."

Indeed, big technology firms with sagging stock prices have been bargain hunting for strategic deals with their
cash caches. IBM Corp. sprang for Cambridge, Mass.-based Mainspring Inc., an Internet strategy consulting firm, in April with a $4 per share cash bid. The price reflected a 25 percent premium over Mainspring's trading price of $3.20, but was considered cheap because the stock traded at an average of $5.09 in the fourth quarter of 2000. In March, Eastman Kodak Co. halted its stock buyback program $200 million shy of its $2 billion target so that it could go shopping. CFO Robert Brust says he wants to be certain Kodak is ready to seize growth opportunities.

Another reason for the prevalence of cash is the nature of recent transactions, says Rick Escherich, a managing director at J.P. Morgan. He says the volume of deals involving public company subsidiaries and private companies--both of which tend to rely heavily on cash because they don't stand to gain from pooling--rose relative to deals between public companies, which are more likely to use stock. Also, cash is likely to become more popular among public companies when pooling ends this month, adds Escherich, because the accounting benefits of all- stock transactions will be diminished. -- A.N.

BREAKING GLASS

Deloitte & Touche and Deloitte Consulting have promised to double the number of women promoted to partner/director by 2005.


AT-WILL EMPLOYMENT

Turning Back the Clock

As companies mull possible midyear layoffs in response to a slowing economy, executives should take another look at an October California Supreme Court decision that handed companies an at-will employment victory.

An at-will policy allows employers to terminate workers at the company's discretion. Since the 1970s, though, legislatures and the courts have tempered such policies: Laws were passed to prevent employers from dismissing workers for discriminatory reasons (sex, race, age, and the like) or for public-policy reasons (blowing the whistle on fraud). Furthermore, as a way to dilute a company's at-will powers, the courts expanded the definition of an "implied contract."

It's in the implied contract area that the courts appear to be backpedaling. In Guz v. Bechtel, the California high court turned its back on a 12-year-old decision that established criteria for implied contracts for at-will employees. The criteria included such factors as employee longevity, raises, and favorable reviews. Essentially, the court upheld Bechtel National Inc.'s choice to cut John Guz loose due to a downturn in the company's workload. With the opinion, California joins such states as Montana, New Mexico, Nevada, and Idaho, where longevity and a policy of warning before discharge are insufficient evidence to infer an implied contract.

But some labor lawyers remain cautious about a possible resurgence of unfettered at-will employment. "There is always a risk that employees will challenge their termination if they are released for reasons not covered by a contractual provision," says Mark S. Dichter, a labor and employment attorney with Morgan, Lewis & Bockius, in Philadelphia. Marshall Bellovin, an employment attorney with Ballon Stoll Bader & Nadler, in New York, agrees, and recommends that companies remove all doubt by requiring a new hire to sign a statement that indicates he or she is an at-will worker. He also advises companies to omit any references to length of employment from offer letters. "If there's a term of years in that letter, then a CFO can get into trouble," asserts Bellovin. -- J.P.M.

P-TOWN: Purchasing-card spending, which grew by 104% in 2000, could double to $80 billion by 2002, notes Palmer and Associates.




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