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“Managing Business During Turbulent Times”

November 29, 2001

Ed Curran—Moderator
Leslie Dixon (Robert W. Baird Company)
Diane Krieman (Hewitt Associates, Lincolnshire)
Ryan Harvey (Hewitt Associates, Lincolnshire)
Heiko Dorenwendt (Hewitt Associates, Lincolnshire)
Scott Law (Hewitt Associates, Lincolnshire)
Amy Cohen (Hewitt Associates, Lincolnshire)
Bob Conlon (Hewitt Associates, Lincolnshire)

Ed Curran

Today’s Hewitt teleconference is “Managing Business During Turbulent Times.” Some companies
are reacting to the volatile business environment with innovative ways to engage and focus their
employees including cost-saving alternatives, effective work place strategies, and compensation
planning. Today, you will not only hear about meeting the challenges of today’s environment, but
more importantly, how to stay focused on your most important asset, your people. Additionally,
you’re going to hear the results of the latest Hewitt research. We will hear from each of our speakers
over the next 40 minutes, and then, we will open the lines for your questions. Keep in mind that a lot
of people take part in every Hewitt teleconference including the press, at times, and we welcome
their participation and their coverage.

Now we have a number of people to make up our panel today. Our special guest today is from the
Robert W. Baird Company. Leslie Dixon is managing director of Baird and has been the director of
HR for five years and with Baird for a total of 14-1/2 years and with HR the entire time. Leslie also
has responsibilities for Baird University and Baird’s special events, travel departments, active
participation, securities industry association for HR, and worked in HR training capacities for three
other firms before joining Baird and we welcome Leslie in.

Also from Hewitt, we have Diane Krieman; a consultant in Hewitt Associates Midwest People Value
Management practice located in Lincolnshire. She partners with clients to help them develop
solutions to attract and motivate and retain employees. Prior to joining Hewitt a year ago, Diane
spent about ten years with AT&T. Diane’s clients have included United Airlines, Solo Cup
Company, and Abbott Pharmaceuticals.

Ryan Harvey has been with Hewitt for six years. He’s a corporate restructuring and change
consultant in Hewitt’s Global Services Practice located in Lincolnshire. He has responsibility for

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human resources issues associated with initial public offerings, spin-offs, start ups, mergers and
acquisitions, and other corporate restructuring. Recent clients Ryan has worked with include Alcoa,
Daimler Chrysler, General Electric, as well as Verizon.

Heiko Dorenwendt is with us. Heiko is a consultant with Hewitt’s People Value Management
practice. He has been with Hewitt for four years. His focus is providing solutions for organizations to
attract, motivate, and retain their employees. Heiko consults in areas like alignment of pay and
performance management systems, employee engagement and talent management. Some of his
clients include Discover Financial Services, Associated Bank Corp., Eli Lily, and Walgreen

Scott Law has been with Hewitt for three years. He is a design consultant in Hewitt’s People Value
Management practice. In that capacity, he works primarily on executive compensation and incentive
design projects for a variety of financial services industry clients. Recent clients Scott has worked
with include Wachovia Corporation, Bank of America, and Nationwide Insurance.

Amy Cohen is here, and she will take part in our question and answer segment later. She has been
with Hewitt for five years. Amy is an employment law consultant in Hewitt’s Lincolnshire offices.
She works with the HR Delivery practice focusing on workforce relations and compliance. Amy also
consults with the firm’s organization effectiveness, compensation, merger and acquisition, and total
health management groups. Clients she has worked with include GE Capital, United Parcel Service,
and Sony Electronics.

And finally, Bob Conlon is with us. Bob has been with Hewitt for 11 years. Bob is a manager and
consultant in Hewitt’s Midwest People Value Management practice. He specializes in the design and
implementation of business-driven human resources strategy competency, base performance
management processes, broad based employee incentive plans, and linking human resources and
business strategy. Bob’s recent clients include American Institute of CRA’s, Anheuser Busch,
Robert Baird and Company—who we’ll hear from today—Sears, and United Airlines.

Bob, you are going to get us started with an overview of today’s topic, “Managing Business in
Turbulent Times.”

Bob Conlon

Thank you everyone for being part of our teleconference today. What we recognize today, more than
ever, is that best employers will ensure that years of investment and careful positioning of their
employment contract are not squandered. And what we’re also going to find is that their
painstakingly crafted internal brand is not sacrificed through the short-term manifestation of the
recession that we find ourselves in today. Two weeks ago, we talked about focusing on the strategic
aspect of maintaining and capitalizing and developing an internal brand. Today, we hope you will
take away from this call how to actually get from the short-term to the longer-term, minimizing any
kind of consequences and costs to the long-term investments that you have made.

Now’s the time that discipline matters more than ever. And we will talk today about several issues
surrounding the fundamentals including issues on compensation, workforce planning, and some
strategies surrounding the survivor issues after reductions in force. We’ll also talk about some

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specific issues surrounding cost-saving alternatives and some activities that we have underway, to
allow companies to unearth savings in their organizations.

What I’d like to do right now is to turn this over to Heiko Dorenwendt and Scott Law, to speak to
some of the compensation-related issues.

Heiko Dorenwendt

Thanks, Bob. Compensation expenses are truly one of the largest expenses for some companies, even
the largest expense line item today, that can range somewhere from 20 to 80 percent as a percentage
of total expenses. And naturally, in these times, companies, many companies, are considering their
compensation expenses as an avenue for cost savings. Shortly after September 11, we conducted a
follow-up survey to Hewitt Associates 2001 salary increase survey, and the results from that survey
show that 35 percent of the 660 participating companies, have reduced or eliminated the 2002 salary
increase budgets. Plus, many more companies indicated that they are holding off a little bit, waiting
for the last quarter, the fourth quarter results, before they make any rash decisions. Now, what does it
mean? What things should you consider if you’re in that position and considering some changes to
your salary increase budgets? Six key issues that deserve some consideration in this content. Who
would be affected by this? Does it apply to all employees or only some groups? Would it only apply
to some lines of business or is it differentiated by performance or does it only apply to a certain level
of employees like management or executives? Would this be only a U.S. initiative or a global
initiative? That is the second key issue here. If this is a global initiative, what are the implications?
Are there salary increase guarantees in some countries that you have to adhere to and that should be
considered. Third, what is your current pay position relative to market? Are you above market? Are
you at market? Or, are you below market and what would be the impact of any changes to your 2002
salary increase budgets? Fourth, what exactly are projected cost savings that you could realize and is
it worth the effort of changing salary increase budgets globally or the U.S. only.

The next thing, what would you communicate to employees? How would you communicate to
employees? And how will employees react to such a change in the salary increase budgets? And the
last thing, which is probably one of the most important in this context, what are the needs of your key
employees? Are you at risk of losing some of your key talent to competition if you make these
changes? How will your key employees be rewarded in the future? These are certainly some
dimensions that are very critical if you are considering changes to make to your base salary

Now two months have gone by since September and we decided to poll our clients again in another
follow-up survey, and the results from this survey showed very clearly many more companies have
now decided to make some changes to their base pay programs. About two-thirds of the companies
that participated in the surveys have either reduced their merit budgets, frozen salaries, and some
have even cut salaries in the last few months. Is this the only alternative? We want to show you some
alternatives, creative alternatives, that you can consider for your organization instead of just reducing
salary increase budgets or foregoing salary increases for 2002. For example, if your first priority is to
slow down the growth of your compensation expenses and realize some long-term cost savings, you
might decide to reduce your merit budgets and reallocate those extra funds to offer a special one-time
bonus for your key talent and high performers. Or, your company might choose to pay the 2002
salary increases as a lump-sum payment instead of as an increase to base salaries. Conversely, if your
company is more concerned about short-term cash flow, deferred merit increases, that means you are

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not administering salary increases every 12 months, but deferring it another 6 or 12 months, you
could grant extra stock options in lieu of merit increases. Also, leverage existing nonmonetary
recognition programs such as cash incentives and stock options and with that, I would like to turn it
over to Scott.

Thank you, Heiko. I am Scott Law. The first thing I would like to focus on is how changes in the
economic climate might impact a company’s approach to their annual incentive programs.

In our experience, when there are sudden changes in the business environment, companies often
question how much flexibility should they exercise in determining their annual bonus awards. In our
view, companies really can best handle the situation or that decision by evaluating the performance
of the company and their individuals prior to that unusual event. In other words, companies or
individuals that are performing at or near their targeted performance levels, we think there is
probably some merit to showing some flexibility in how you reward those individuals and/or
business units. In contrast, companies or individuals that are performing well below the targeted
performance levels prior to that event, we think there should be less flexibility shown there and
probably reward those folks based on actual results.

Another key issue that companies have to deal within trying circumstances centers on managing the
employees’ reaction to anticipated cuts in annual bonus payouts. We think that companies can
manage that reaction best by adhering to a few key principles. The first thing is that you want to
continue to reward your top performers proportionately higher or better than those that are
performing at lower levels for obvious reasons. The next thing is that if you go ahead and decide to
cut bonuses, or there will be lower bonuses in the coming year, you want to share the pain across the
organization. In other words, you don’t want to exempt one group from a bonus cut and in particular,
you don’t want to exempt the senior leadership from a bonus cut. We really think that is key for
sustaining employee engagement and retention of some of your top performers.

Some sensible actions that companies can take to keep their top management and top performers is
one, we talked about establishing special bonus pools where you would reward maybe the top
15 percent of performers. For companies that are in a cash crunch, you may want to consider
deferring payouts in the crisis year. Perhaps rewarding folks as opposed to cash-based rewards,
maybe looking at rewarding them using stock options. And finally, we talked about some of the
criteria that we might use to make discretionary adjustments to the bonus plan performance targets in
view of our worsening climate.

Next, I want to cover some topics that focus on equity-based compensation. We have all known that
over the last decade stock prices have risen dramatically and in connection with that, the popularity
of stock options has grown tremendously. I mean, we are seeing extending options globally and
further down into their organizations to broader and broader employee segments.

I think that practice was manageable as long as stock prices continued to rise. But now, since stock
prices really over the last 18 months have started to decline, we are starting to see some impact on
companies’ ability to manage dilution. Specifically, what I am talking about are Fortune 100
companies would usually look at annual run rates somewhere between one and two percent. By now,
just to make it a competitive or a comparable level of inequity grant to their employee forces, we are
looking at for those companies, run rates that are approaching three percent, which is really a
dramatic impact. So, the impact of this is as companies are approaching 2002, many companies are
feeling sort of handcuffed by these dilution impact considerations. And we suggest the following.

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One, is that I think it is important to hold the line on dilution. We don’t want to get into a vicious
cycle that can emerge if you were to essentially continue to grant the same value of options. Number
two, we think it is important, or an alternative would be to grant the same number of options, but not
necessarily the same economic value. Here it might be important to convince employees that they are
actually getting a better deal because they are able to take advantage of a lower stock price. Third,
you might want to take a look at the annual grant that you are making to employees, but spread that
out over the course of the year. So, you are increasing the frequency of the grant, perhaps on a
quarterly or semi-annual basis. That way, you are dollar cost averaging your grant.

And finally, you might want to grant restricted shares, which have less diluted impact than options.
But I think it is important to consider that if you were to grant restricted shares to put some longer-
term vesting on that and perhaps use cliff vesting as opposed to an incremental sort of vesting
schedule to provide some more of a tension hook.

Another result of stock prices trading at or near their lowest levels is that many employees have stock
option holdings that are under water. Employees are increasingly pressuring their companies to
restructure their existing option holdings, and we think that this merits some discussion.

The first point is, and we think this merits some discussion, we think there are a lot of practical
considerations and reasons against repricing options. The first is that it creates an accounting
expense. Second, is that it is very controversial with shareholders. And third, the stock may not have
bottomed out so if you reprice the existing options that are under water and the stock price declines,
you may find your position not really solved. Finally, the stock may also quickly rebound. In other
words, the under water stock options a week or a month from now may no longer be under water.

Since we don’t really view stock option repricing as an adventitious strategy, you need to look at
some sensible alternatives and those would include making a special off cycle grant of options. Here,
employees would keep their existing under water options, but they would get new options at a lower
exercise price. Second, you could accelerate the timing of the option grant. Again, employees would
keep their under water options, but the company would move up the timing of the annual stock
option grant to again capture the advantage of a lower stock price. Third, you could exchange under
water options for an equivalent value of restricted stock. And finally, you could cancel the existing
under water options and reissue new options six months later. It is important to do it six months later
so that you avoid an accounting charge.

Now, I am going to turn the conversation back to Bob Conlon who is going to discuss some
workforce planning issues and strategies.

Bob Conlon

First, I just want to do some level setting around the issue of workforce planning and what we mean
by workforce planning. And what we are referring to the process of accessing current talent supply in
relation to the future talent demand, and developing strategies and actions to address the gaps
between the two. Now, given the slowing economy, what economists are calling an official
recession, and combined with the events of September 11 , the word layoffs comes to mind as a
workforce planning action that many companies have either contemplated or have undertaken. Now,
certainly layoffs may be necessary in some instances and we have seen countless numbers of them in
the press, but what we want to address here today are some different approaches we see organizations

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taking, as well as possible alternatives to involuntary layoffs despite the fact that in some cases, those
might be necessary.

Another important point that we want to talk about is the fact that layoffs due to a weakened
economy are not the only workforce planning challenge that companies will face. Some companies,
in fact, may not need to lay off employees, but may actually need to increase their staffs or find
employees with different skills. So, why do we think that workforce planning is important as a topic
issue today? There are actually four reasons. First, as we mentioned earlier, the economy has
weakened and it has caused many companies to consider temporary or permanent workforce
reductions. And we will talk about some of the different approaches being used in just a few minutes
and we will also hear from our client, Robert W. Baird on how they handled such a situation at their

Second, changing workforce requirements or skills may require extensive retraining or recruiting of
new talent. For example, many security firms will be required to improve the caliber and skills of
their talent pool.

Third, increased voluntary turnover may occur as recent events cause employees to reevaluate their
life plans, their priorities, and what is important for their futures. For instance, some companies are
finding now that employees are looking to take time off to do philanthropic work or other kinds of
volunteer work. So, that is certainly a situation that some companies are facing today.

Finally, some companies may be forced to implement or develop succession plans, unfortunately to
replace lost executive and management talent as a result of any of the number of items that we just
talked about.

And then last or I guess this is the fifth point, there are some companies that are located in downtown
areas that have approached us and certainly have been talking about in the press, that their employees
and their executives are, in fact, a little bit hesitant to remain located downtown. So, there may be
some relocation issues there. And if employees don’t want to relocate, that perhaps there would be
some talent gaps and some skill shortages in those areas.

Now, certainly when you think about all these different reasons why workforce planning is important
and what the consequences are if you don’t do a good job at workforce planning, it’s certainly
important to take a planful approach to addressing these issues. Many companies, unfortunately, take
a very reactive approach to this with knee-jerk reactions and these can come home to roost in some
very negative ways. So, we encourage organizations to look at the various alternatives, and we will
be talking about those alternatives in just a moment.

While cost savings are the desired outcome of layoffs, we also encourage clients to consider other
alternatives or temporary workforce reduction strategies. Now, before we go into some of those
specific alternatives for temporary workforce reductions, let’s talk briefly about permanent
workforce reduction strategies. And we won’t go into a lot of detail about them because certainly
most organizations now how to navigate these particular waters. But, some of them include early
retirement programs, voluntary separation programs, and involuntary separation programs. In some
cases, we have seen companies provide enhanced early retirement or severance packages. Some
examples include tuition reimbursement, offer of part-time employment, contacts, and small business
administration and loan funds.

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As many companies certainly find out in the implementation of some of these early retirement and
voluntary separation programs, one of the downsides is the fact that it is very difficult to control in
many cases who accepts these programs. Therefore, companies may lose too few or too many
employees or too many employees with specific critical skills. And they also may lose long
employees in terms of losing best performers who have opportunities for employment at other
organizations. Particularly with early retirement windows, people who leave will take with them
significant organizational knowledge that must be transitioned to remaining employees. Now, if there
are specific questions about these approaches or enhancements in terms of how to implement those
kinds of those programs, I will be happy to address those during the later part of the call when we
take questions and answers.

I would like to shift gears slightly now and talk about some strategies for helping remaining
employees in the aftermath of layoffs or for that matter, even voluntary or other kinds of involuntary
workforce reductions. And one of the things that often times is overlooked when implementing
workforce reduction strategies is dealing with the issues that arise after those kinds of layoffs occur.
Many companies believe that the work is done once the layoff activities are completed, but in our
opinion, certainly that is just the tip of the iceberg and that is when the work really begins. So, in
order for employees who remain at organizations in the aftermath of some cuts to remain focused,
engaged, and productive in that aftermath, there are six or seven issues that are critical to be
addressed to ensure continued productivity. These are, one, certainly we need to address the issue of
continuing concerns about job security. So, when a company does do a workforce reduction and it is
anticipated that, in fact, we have resized ourselves to an appropriate level, it is critical that senior
management and the CEO of these organizations come forward and indicate that, in fact, they are
comfortable now, that they are at the right size, and are well positioned for moving forward. This will
help enable employees to look forward and not back at the past.

There certainly are some concerns about physical security. Physical security not just in the aftermath
of terrorism, but rather physical security in the aftermath of layoffs. So, it is important for companies
to communicate how layoffs or reductions in force commenced, what security issues have been
implemented, how they have managed the transition for those employees who have been let go.

A third issue is survivor guilt. There is certainly the issue of survivor guilt for those people who
remain wondering what has become of their former coworkers. So, these things can be addressed
through group or individual sessions. Certainly, it should be addressed in company-wide
communications and it should be addressed through managers to their direct reports and there are any
number of different ways to accommodate those.

Another critical issue is around the redistribution of work. Many organizations find themselves in the
aftermath of layoffs actually hiring back temporary workers and then wind up with the same number
of head count. Part of the reason for that is because they haven’t done a very good job at thinking
about workflow, the redistribution of the existing work because the amount of work actually does not
go down. It is just a question of how you redistribute that in a planful and fair way. Related to that is
that if you do have employees who are now expected to take on additional responsibilities and
different areas of responsibility, how do you train those individuals so that they have the right kind of
skills and competencies to achieve those goals. And that certainly is an important point.

Finally, we need to reemphasize the importance of open, honest, and continuous communication to
minimize and reduce the amount of speculation, the amount of uncertainty, and the amount of
dislocation that can occur in any kind of workforce reduction strategy. This is an issue that many

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clients, many companies, don’t pay enough attention to because of some of the negative psychology
around it that if you communicate about these negative things, that it is just going to reinforce the
fact that people are gone. It is quite evident that the reverse is actually true. The more you
communicate about this, the more comfortable the remaining employees ultimately do become.

Now finally, before we talk about various alternatives to those layoffs or temporary workforce
reduction strategies, we will hear from our client, Robert W. Baird and hear about some of their
history, some of the challenges that they have faced as the market has changed. Just a little bit of
background about Robert W. Baird, it is a financial services company, headquartered in Milwaukee. I
have worked with them personally over the last six years. Recently, they were acknowledged as
being the number one firm in Milwaukee to work for. And with that, I will turn it over to Leslie
Dixon, the managing director of human resources at Robert W. Baird.

Leslie Dixon

Thank you, Bob. Good morning everyone. I want to thank Bob and Hewitt for the opportunity to
share Baird’s challenges and successes with all of you. As Bob mentioned, I am the Human
Resources Director of Baird and I have had the privilege of working with this firm for 14 ½ years.
We are an international wealth management, investment banking, asset management, and private
equity firm. We have operations in 16 states and five countries. Specifically, in the United States, we
have 80 offices, and we have eight offices in Europe. We serve individuals such as you and I. We
serve corporations, institutional investors, and municipalities. We act as financial advisor, asset
manager, equity research specialist, investment banker, and private equity and public finance
specialists. We have been in business since 1919. And our equity capital, as of September 30 , is
$346 million. We have more than 2,600 associates throughout the United States and Europe. And we
are majority owned by Northwestern Mutual with Baird Associates owning a significant minority

Bob asked me to take a few minutes with all of you to share the challenges and the tough journey that
Baird has had this year. And I think to put this year in perspective, I wanted to back up just for a
moment to talk about the previous ten years and quickly highlight them.

I have spent the last ten years with Baird in a very proactive way. Growing the organization and the
people within it. Our initiatives have centered around our vision to be the best place to work and thus
we have developed programs and policies to balance these needs of our associates with the needs of
our business. Some of the initiatives that we have used to grow the organization in the last ten years,
which I am sure are similar to all of you, include things like implementing paid time off plans,
developing and marketing flexible work arrangements within our firm. We initiated a time work life
committee that is still intact made up of our own associates across the organization to look at those
types of issues for the firm. We have totally revamped our performance and development process
using a design team of our own managers trying to develop a best practice for our firm. We have
developed a total compensation philosophy and brand, if you will, that we have used and changed
our internal communication to reflect this type of brand. We have reported for several years now in
layman’s terms a very succinct three-page summary called the “Progress Report” of our business
results each quarter for every associate so that they really feel tied in to the business and how we are
doing. On the training side, we have done things like mandate leadership training. We require any
one of our associates who supervise people in any way to participate in a leadership round table
nine months of the year. We made a business decision to bring every new hire to Milwaukee, our

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headquarters here, for culture orientation when they are a new employee and they spend time with
our president and chairman at that time. And these are just some of the examples. I could go on and
on what we have put in place from 1990 to 2000. It was an incredible journey. Very fast paced, very
positive. And we have capped off this ten-year period by administering Hewitt’s engagement survey
with our entire workforce and scored an overall composite score of 72 percent. In perspective, the
Hewitt database norm was 58 percent. So, needless to say, we were very elated and proud of our
score. And I think as Bob mentioned, we were also named in Milwaukee’s magazine as the top place
to work in Milwaukee for employers of 500+ employees.

Our challenges and really the reason for being on this call began in late 2000 when the bull market
that we all had been riding for so many years came to an end. Towards the end of 2000, the markets
started their decline and we knew we needed to tighten our belt. And for those of us at Baird, in our
80-year history we had never ended a year with fewer associates than what we had started out the
year at. And we prided ourselves in that compared to some of our Wall Street competitors who shrink
and grow fairly regularly. And looking in the rearview mirror, I think we had become fat and happy
in 1999 and 2000 and we realized we needed to do things differently starting in 2001. Our margins
had begun shrinking and we decided to take some very proactive steps. Our president declared that
we needed to find $30 million in costs so that we could bring our margins to a healthier percentage.
So, in January 2001, we declared a hiring freeze wanting to very much balance long-term impact
here. And so, we consciously decided not to harm any of our revenue-generating areas. We weren’t
going to not hire there where we could make upgrades where it made sense. Every single hire
including all temporaries had to go through HR for approval. We formed a cost-savings committee,
which included human resource representation, accounting, and chief administrative officer
representation. And we went through a process of scouring every department and looking for places
where we could squeeze costs. Unfortunately, it became painfully clear for us to reach our goal of
$30 million in savings, that we were not going to do it without impacting people. So, we went on to
look at some cost-savings alternatives such as obviously attrition, job sharing options. We looked and
we reduced some associates work hours and pay as a result. We did look at early retirement options
for our firm and that didn’t work out for us as well because a lot of our revenue-generating people
were in that category. We then had to make a very conscious decision as to how to reduce our people,
which we had not done before and decided to do it very carefully over a period of time, group by
group, rather than simply take a percentage from each group and get it over with quickly, and that
was a fairly controversial decision for us to make. We studied severance trends in the industry and
outside the industry. We looked at out placement. We very carefully planned how we wanted to treat
our employees because we knew it would be just as important to those who left as it would for those
that stayed.

By the end of June, we realized through doing reductions and also quantifying our nonpeople cost
savings efforts, we realized about $27 million in annualized savings and felt fairly good about the
process we had gone through, albeit painful. We had open and very honest communication
throughout the process. There were several communications. We use Baird TV medium through our
intranet to communicate with our employees. And our president gave people updates on our progress.
And granted that was difficult, but we decided to err on the philosophy of trying to over-
communicate versus not.

Our revenues during this entire period were in the largest decline that we had ever experienced as a
firm, especially on our individual side of the business. They were down 24% from the first half of
2000. This actually in an odd way helped us through some of our difficult layoff time with people. In
August, we went on to report to our associates that, “The challenging markets continue to test the

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will and resiliency of the organization and we are passing the test in true Baird fashion.” And though
we never said that we were done in terms of reducing costs through people, we did feel at that point
that we were positioned to weather the bear market. Then September 11 happened. And while our
organization did not lose one associate, we certainly knew many business associates who lost lives
and loved ones. And the resulting market turmoil and slow down had a significant, negative impact
obviously on our industry as well as Baird. In the first week of trading following September 11th, the
Dow Jones Industrial average posted its biggest point drop ever and its biggest percentage decline
since the great depression. So, our cost-savings group went back into action. We met with every
department again and we asked them to report back on the savings that they said they were going to
achieve. We also asked them all to tell us where we could gain additional savings, thinking that we
needed to reposition ourselves again. And this time, we did another reduction in November of this
year and we did it over a three-day period and we did it very swiftly, which is a different strategy
than we had used earlier in the year. But there had been enough pain in the organization at that point
that we felt it was important to operate that way. By mid November, we were down roughly
ten percent of our workforce between U.S. and Europe and we now again feel that we are positioned
for 2002 for the market to return. And we are, as Bob mentioned, really focusing our efforts and
strategy on the “survivors.” We have put together a communication campaign through our Baird TV
and through various initiatives that we are doing. We had a very impromptu special Thanksgiving
event where we bought donuts and bagels for everyone. The president shook hands and we gave
thanks for those that were here and it turned out to be an amazingly well received effort on our part.

We are carefully looking at our pay and benefits for 2002. We have frozen salary increases for
January at a $50,000 level and higher. We have reduced our bonus pool, but we are going to give out
bonuses, and we are carefully working through the management issues right now of how to
communicate that with people. We have done an overabundance of communication on the job
security concerns through some of our management roundtables. We are trying to reprioritize to
redistribute the work that has been left behind by people who are no longer here. So, I could go on
and on. I think, in summary, we have gone from a journey of being the best place to work with some
entitlement built in to still being a great organization with hopefully people now more saying, “Gee, I
really value having a job here.” And that is a very tough journey to travel. With that, I think I will
turn it back over to Diane Krieman who will talk more about some of the cost-savings alternatives.

Diane Krieman

Thank you very much, Leslie, for sharing your experiences. I think a common theme that you all
have heard throughout the call, and hope that you will take away from the call today, is that given the
turbulent times that we are in and the down turn in the economy, your focus on people is now more
crucial than ever. And as Bob mentioned, there are many organizations that often times quickly react
by thinking, “In order to cut savings, we need to downsize and lay off people so that we can please
our investors.” Well, what we are suggesting and recommending is that organizations carefully
consider other alternatives to a layoff. We realize that the layoff might ultimately be necessary, but
carefully consider some other alternatives, some other short-term reduction in workforce strategies
before maybe just jumping off into a layoff or downsizing situation. And these alternatives will
provide varying levels of cost savings for you, but will also most likely impact in a more positive
way, your organization in terms of employee morale, culture, productivity, and even your market
image. The good news is we believe that many companies are, in fact, taking this message to heart
and are seeking some creative alternatives to layoffs. Our recent Hewitt survey indicates that some of
these common alternatives include, some of the more prevalent ones include mandatory time off, I
think we heard that example from Leslie. For example, asking employees to take time off over the

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holidays or even maybe a shorter workweek. One company that we know of has implemented a
Friday off policy. Some other more prevalent examples include part-time work and unpaid sabbatical
or leave of absence for your employees. Also, not quite as prevalent, but what we are seeing some
companies implement is a job sharing program.

Let me describe in a little bit more detail some of these programs that I have just mentioned and
some of the issues that you will want to consider before implementing them. The first program that I
would like to discuss is a part-time work program. Obviously, what this means is that your
employees will work less than a full-time schedule while their salary will be prorated and benefits are
prorated or maybe not even not available depending on the number of hours worked. Employees on
part-time schedules may work fewer than five days each week or they may work five days a week
but fewer than eight hours a day.

Some of the issues for consideration would be…I think one of the most important things is will this
help us keep some talented employees? Is this an option that will help us keep some of those skills?
Another issue for consideration if you do decide to offer a part-time schedule to employees, is how
will the work get done? Can we ensure that all of the work can be done given fewer hours worked?
Or, can parts of the job be redistributed to other employees? Also, will the employees that are
working part time need to be accessible on nonwork days? How will you handle that situation or
those situations? And what are the expenses, if any, associated with employees moving to a part-time

The next alternative would be job sharing that I mentioned. In this arrangement, you have two people
sharing the responsibilities of one full-time job, while salary and benefits are generally going to be
prorated. A job sharing approach can be structured in one of two ways. The functions or projects of
one position are divided and each employee takes responsibility for specific parts of the job or you
could have both employees continuing responsibility for all functions of the work, but each employee
is responsible for coverage or the project only during their scheduled workdays.

Some issues for consideration whether to implement a job sharing arrangement, is first of all, is this a
feasible alternative given the nature of the work? You will also want to take a look at employee
performance for those that you may be considering partaking in this arrangement. Are they
dependable and reliable? Are they flexible? Can they count on each other? Do they get along? How
will this arrangement improve productivity? Will coverage improve? You will need to consider what
are the opportunities for cross training or developing new skills for these employees? An important
issue for consideration would be how will the performance be measured of these employees in a job
sharing arrangement? Will they be evaluated individually or as a team, or both? And also, when and
how will this arrangement end? And of course, another consideration would be what, if any,
additional costs are involved?

Another popular idea that we are seeing companies implement right now are unpaid sabbaticals or
leave of absences. A sabbatical provides employees with the opportunity to expand their skills or
explore new areas of interest, while at the same time, you are removing them from the payroll. One
company that we know of recently allowed employees to take time off to work with philanthropic

Some issues for consideration if you are going to implement this type of a program is to determine
whether all or partial benefits are going to be provided. What is the timeframe in the company’s
ability to bring them back? What are your rules and guidelines going to be for returning to work? Are

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you going to be offering them the job at the same status or grade in which they left? Or are you just
offering them a job? Determine who will be responsible for placing and coordinating the employees
return as well. Another creative alternative to a layoff might be a flex-leave situation, which is
similar to a sabbatical. One management consulting firm that we know of, earlier this year, they
offered a flex-leave arrangement for 6 to 12 months to employees with 20 percent pay and benefits.
Then, of course, whenever your employees are on these types of arrangements, they are encouraged
to stay in contact with the company and their coworkers.

Another option to consider is loaning out employees with decreased business to organizations with
temporarily increased business for some period of time. These would have to be carefully arranged
situations. You will have to determine whether all or partial benefits would be provided. You will
have to determine the timeframe. Again, what are the rules and guidelines for returning back to your
normal job, and who is going to be coordinating all of this?

Now, with all of these alternatives that I have just described, you are really going to have to consider
the following issues. You are going to need a written policy and guidelines, an approval process. This
is very critical. You don’t want there to be some haphazard approach to this in your organization.
You want it to be consistent. You will have to decide whether you will want to make these programs
or initiatives voluntary or involuntary. You will have to carefully consider what the impact will be on
other departments internally as well as what is the impact on your clients externally? You will have
to consider what information you are going to need to share with managers regarding operating in a
flexible work environment. They need to carefully understand how all of this works. And you will
also want to determine how these arrangements are going to be communicated with employees.

In addition to the initiatives that I have just reviewed with you, some other comments, strategies,
cost-saving strategies that we are hearing about our clients implementing include a hiring freeze. Just
letting attrition take care of your overly abundant workforce situation. Some other common things
include reduction or elimination of business travel. I think we have all heard a lot of that since
September 11 . Postponing noncritical projects and expenses is a popular thing. Mandating an
across-the-board expense reduction program for your organization is something to consider so that
everybody feels that they have a stake in the game in helping the organization thrive through this
economic downturn.

Now, I am going to turn it over to Ryan Harvey who will briefly describe some more short-term
savings opportunities that you may be able to take advantage of, where you can quickly identify
some cost savings.

Ryan Harvey

Thanks, Diane. I want to quickly go through an emerging trend that we have been seeing with our
clients. And Leslie actually touched on it at Baird. A lot of clients are being challenged to find some
quantifiable cost savings, some areas they can quickly show management that they are able to pull
costs out of a jar. And they are really being challenged to look at every area of HR to find those
costs. They need to scour everything from their programs and policies to potentially even a reduction
in force. But they would like to avoid that. So, in our conversations with clients to kind of brainstorm
some of these ideas and come up with some creative solutions, we have actually ended up developing
a pretty extensive list of strategies. I just want to quickly go through some of those strategies.

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We recently worked with a large client, a Fortune 100 client, and we were only actually looking at
their insurance arrangements. This particular client heavily used executive insurance arrangements
and so they wanted to take a look at those to see if there was potential for cost savings. We were able
to uncover roughly $60 million worth of cash savings that they were able to realize within that
quarter, that fiscal quarter. So, there potentially are some enormous savings out there in some areas
that maybe haven’t been looked at in years within the organization. Just to quickly run down a bullet
list of a sampling of some of the other areas that clients are taking a look at and that we are looking at
with them. In the area of pensions and defined benefits, we are looking at funding issues. Seeing if
there is any over funding and potentially using some of that funding for possibly the salaries of
individuals who work directly on those pension plans. If you have been a high merger and
acquisition-type of company with a lot of different divisions and you have maintained separate
programs, there is a possibility of pulling those defined benefit programs together and trying to avoid
some of the requirements for under-funded plans. Looking at assumptions in the underlying plans to
see if there are some accounting issues that we can deal with, maybe using a different discount
assumption or changing some other assumptions that we use on assets and how we account for assets
to try to develop some profit and liability savings.

And then, there is obviously the area of health care which many companies are continually battling
cost issues in health care. We have looked at those issues. And then finally, there is the area of HR
delivery which clients don’t always think of right off the bat of looking at how they deliver HR. But
we have been able to discuss with clients issues like potentially even selling their HRIS systems to a
third party and leasing those assets back to save money in the short term. Looking at some of their
noncore processes and trying to develop some other delivery strategies.

So, those are just a sampling of some of the things we have looked at with clients. Now, I am going
to turn it over to Bob for your questions.

Bob Conlon

I think employers must be mindful of the fact that they really do have the chance to determine if the
company that emerges from the current recession is better able or not as able to compete for critical
talent in the future. And that said, in order to get to the long term, we certainly need to successfully
navigate the short term. So, we hope that what we have presented today is an actionable list of
short-term suggestions that recognize the fact that they still have an impact on the long term.
Certainly, you want to ensure that implementation of any of these programs are linked back to the
longer-term business strategy. We have mentioned several times that the survey is still out there and
if anyone would like to continue, to submit the results, we would encourage you to do so. The results
will be posted on our Hewitt Web site. And we encourage you to respond to that survey.

Again, thanks for your participation and I will now turn it over to Ed for questions.

Ed Curran

Let’s go to one of the email questions that we received from DTE Energy. And they ask, “With
budget dollars tightening and few options to reward existing employees, what are some nonmonetary
solutions that can be implemented swiftly and cheaply in order to continue to motivate the remaining

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Ryan Harvey

Certainly, I think that there are two major categories to look at in answering this question. The first
category is challenge yourself not to feel the need that you need to develop new programs or
processes. So, in other words, leverage off the things that you are currently have in place. For
instance, you may have career development processes that aren’t being fully utilized. You may have
some opportunities to recommunicate some of the value that you currently providing. We would
certainly encourage employees and managers to look back on the competency models that they might
have and also the performance systems that are in place. So certainly, go down the path of leveraging
off the things you currently do have. If you are in the process of or looking at the process of
designing new things, I think I would just remind everyone that employees are going to be conscious
of the fact that money is being spent on new programs, so just be careful with that.

Diane Krieman

I would just like to add, one of the cheapest things that any organization can do is communicate,
communicate, communicate, and then, continue to communicate about your employee value
proposition. What is the total package of benefits, through to development programs, to reward
structures that you offer your employees? Because many times employees take that for granted and
don’t realize the true value of everything that an organization has to offer them.

Ed Curran

We have someone on the line from Molex Corporation. Hi, who is this?

Norm Blackwell

Hi, my name is Norm Blackwell.

Ed Curran

What is your question?

Norm Blackwell

This is for the woman from Robert W. Baird company. By explaining the programs that they put in
place at Baird, it sounds like they have a pretty extensive and long-term employee relation strategy in
place. My question is, did it take a full ten years to get your strategy in place and to effect your

Leslie Dixon

I think we had a fairly strong culture that was there even prior to 1990. But clearly, I think
proactively we really attacked at building that and strengthening that in that ten-year period. I don’t
think it is quite fair to say that it took that long to get there, but I think we just continued to really
strengthen it as we grew the organization.

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Norm Blackwell

Great. Thank you.

Ed Curran

Let’s go over here now to Vancouver International Airport Authority.


My question has to do with strategies for helping remaining employees. There were about five points.
The second point mentioned was physical security of the layoffs…

Bob Conlon

I think what is happening there actually is two-fold. I think in today’s environment and in your
particular case, there is the issue of pure physical security. What are we doing to ensure that
employees are safe coming to work; to ensure that we have taken all the necessary precautions to
allow employees to focus on their work and not be concerned about their physical well being.
However, the second facet is really around the issue if you have had some involuntary separations
and involuntary layoffs. I think that we have all heard about in the press or seen on the television
instances where disgruntled employees may take some action that is obviously unintended. And we
would certainly encourage organizations to utilize their violence in the workplace policies to manage
the message very carefully to be as humane as possible whenever undertaking any kind of
involuntary workforce reduction policy.

Ed Curran

Thank you very much for your phone call. We have run through our hour here very quickly. We want
to thank you, everybody out there for participating. And as always if you have questions, you can
direct them to this email address, www.peoplesolutions@hewitt.com.

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