Jeffrey C. Cass, Alvarez & Marsal Business Consulting LLC, Houston
In many ways, energy companies are operating on a different plane than other organizations, from a talent perspective. The broader economy and labor market have suffered setbacks in recent years, creating a specific set of challenges: downward cost pressure for pay/benefits, reduced retirement benefits, restricted hiring and limited budget for talent/human resources (HR). However, the energy industry faces a vastly different picture – a shortage of talent, particularly technical talent, and a generation of workers rapidly approaching retirement.
Newly formed energy companies grapple with even more difficult talent challenges as they compete with well-established, stable "super-major" companies that have significant financial resources. In many smaller companies, an HR function doesn't exist, and if it does, efforts are focused on getting payroll in place, administering benefits and complying with employment law. The demand for strategic talent programs among emerging energy companies is increasing at a fast pace and is required much sooner in a company's maturity cycle. In short, traditional assumptions associated with HR no longer apply.
Myth No. 1 – Talent strategy can be informally addressed until a company has reached a significant size.
The conversation regarding talent and HR is entering the boardroom more frequently. Not only are top executives
calling for a cohesive HR strategy, but in recent months, the boards of many of our publicly-traded clients are posing consistent inquiries to expand the conversation from standard executive compensation issues to broader talent needs and approaches. Even when a strong executive team has been assembled and a business plan has been developed to generate substantial revenue, boards are asking for details around building a team of highly skilled and hard-to-find talent. The key question becomes: How do we get there?
The answer: An integrated HR strategy, ideally looking at least three years into the future, is critical to achieve the business plan objectives of any size company in the energy industry. Development of a strong HR strategy includes direct linkage to the business plan, key initiatives surrounding talent and associated metrics. It outlines how the organization will find, attract, motivate, develop and reward the right team for each segment of the business strategy. The linchpin of developing a strong HR strategy is to gain input and buy-in from the senior executives and clearly link HR's support of objectives. Companies often don't articulate an approach to talent, but if they do, the focus is often on resolving HR's internal challenges, rather than solving the business's talent issues.
Myth No. 2 – The opportunity to work for an exciting new energy company should attract plenty of strong candidates.
When a new energy company is formed, the first wave of hires is often secured through relationships of the founders. These hires typically know the management team and have a tolerance for risk in exchange for joining an exciting venture "on the ground floor." This initial hiring success can send a misleading signal to the executive team that continued hiring will come with low to moderate difficulty and effort. However, it is often the next wave of hires that poses a much more significant challenge.
An emerging energy company should quickly determine the top three ways to differentiate itself from the competition in the labor market, sometimes referred to as the employee value proposition (EVP). Then, define the differentiators, articulate them succinctly, and regularly assess success in delivering on them.
While the opportunity to participate in the company's financial success is often a key distinction, other attractive features include: mentoring from industry experts early on in the career trajectory, the opportunity to learn new technologies, lower levels of bureaucracy compared to established companies, and better work-life balance than the competition.
Some energy firms have begun to adopt creative approaches first introduced by 1990s dot-com start-ups. In some cases, the exercise of defining the EVP exposes the fact that few differentiators exist and, therefore, some must be deliberately created.
Myth No. 3 – Identification of critical roles and key talent occurs after the organization is significantly larger.
Organizations routinely identify high potential employees for top leadership roles because these positions have the highest impact on the organization's success and also the highest risk, if suddenly vacated. However, perhaps the most significant talent challenge to energy companies is the upcoming retirement of employees in technical roles below the executive level. As a rule of thumb, if 10% to 20% of technical roles are occupied by people 55 and older, there is critical degree of risk posed from exiting knowledge and competencies. If more than 20% of the technical workforce falls in that category, the risk is severe.
When asking most energy CEOs about their biggest concerns, one of the first responses is, "Overall, I know what our critical roles are, but there are no specific plans to solve the problem of retiring talent." An effective solution is a streamlined approach to quickly identify critical roles, understand the talent pipeline for each critical role and develop brief, specific action plans to reduce this position-specific risk.
The key to success is to create a simple process with a very low time burden for leaders to execute, rather than a labor intensive process such a competency modeling project. Once plans are created, another major pitfall occurs when organizations fail to assign accountability for executing the plans.
Myth No. 4 – Compensation decisions are typically ad hoc in a new company.
When a company is first formed, compensation decisions, particularly surrounding annual incentives and long-term incentives, are sometimes made with little planning or consistency. This occurs for many reasons. Business strategy is still in the formative stage, which creates challenges in defining goals, and hiring the first wave of key employees sometimes requires a "whatever-it-takes" approach to pay. Problems occur when companies continue this largely discretionary approach for a few years, often through an IPO. While a discretionary approach allows the executive team to make subjective compensation decisions around unforeseen events that influence results (positive or negative), the organization misses an opportunity to align employee efforts to the company's success.
If the company goes public, there will be immediate scrutiny from institutional shareholder "watchdog" groups demanding a certain degree of objectivity in incentive plans before recommending votes for management's plans. In addition, compensation-related regulations such as 162(m) require a pre-defined formulaic approach to determining performance-based pay in order to avoid losing the deductibility of compensation expenses.
The old adage "You Get What You Pay For" still holds true. Measuring any aspect of performance increases the focus on it, and any connection to compensation will raise greater attention. With minimal effort, even qualitative performance goals can be converted to more objective assessments.Today's board members, even in recently formed organizations, expect to see compensation plans aligned with business strategy. The company can develop incentive plans to drive that alignment by answering questions about eligible roles and payout opportunities, and defining which performance measures will trigger those payouts.
Well-managed talent initiatives can add tremendous value at the earliest stages of a company's life cycle. The challenges faced by the energy industry in today's economy underscore the urgency and importance of this value. Action-oriented planning efforts should be developed as early as possible, alongside the business plan, especially for emerging energy companies. The first step is to provide boards with a view of gaps in these areas, along with plans to resolve them.
About the author
Jeffrey Cass is a senior director with Alvarez & Marsal. He holds a Certified Compensation Professional certification from WorldatWork and a Senior Professional in Human Resources certification from the Society for Human Resource Management.