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  1. 1. Great American Financial Services Compensation Consulting Project Fall 2006 You recently contracted with Great American Financial Services (GAFS) to complete an analysis of their business and compensation strategies and to recommend a compensation system for their company. GAFS desires a compensation system that will enhance productivity and be as cost-effective as possible. History of GAFS GAFS had humble beginnings. Fred Foster, an unemployed banker, was unable to find a permanent job in banking when his company went bankrupt in the savings-and-loan crisis in the 1980’s. With a large family to support, Fred turned to selling life and accident insurance for a broker in his hometown. As Fred learned about the business, he saw opportunities for building his own insurance and financial services company. Fred had a lot of financial management experience from his banking career and he quickly picked up some expertise in sales and marketing by selling insurance. Fred opened his own insurance agency in 1985 and recruited promising salespeople, encouraging them to look for complementary products the company could market along with its insurance line. Thanks to the motivation, enthusiasm, and talent of his sales force, Fred’s agency quickly grew into one of the largest privately-held financial services companies in the country, with several lines of products and sales offices in every state in the union. Fred chose the name “Great American” to emphasize his belief that anyone in the USA could be successful in business with enough hard work and motivation. Much of the company’s success has been attributed to Fred’s energy and guidance. He remains a strong presence in the company, with the help of several top assistants. At present, Fred owns 80% of the company’s stock; the rest is owned by employees and executives. Over the past ten years of rapid growth, GAFS has added a number of insurance, mortgage, and investment products. Each year more and more sales agents have joined the company as well, often recruited by existing agents. These additions in products and sales agents brought about challenges in managing a rapidly-increasing work force. Present Operations At present, GAFS operates out of its home offices in Atlanta. There are about 60,000 sales agents across the USA who are paid on a commission basis and will not be included in your compensation analysis. Over 3,500 people work in the home office. Their primary roles are supporting the sales staff in marketing, ensuring SEC compliance, processing orders, developing and bringing to market new products, and keeping company records. This work force will be the focus of your study and recommendations. More information about specific work force characteristics is provided later in this report. 1
  2. 2. The home office staff performs largely administrative and marketing functions. Home office staff members work with top management to evaluate potential new products and to train the field agents on how to sell them. Thus, there are a number of trainers and marketing specialists in addition to clerical and administrative personnel. Because of the need for heavy marketing support from the home office, GAFS has its own television station for the sales force and develops many of its own sales videos. GAFS has used little national advertising. Rather, most sales are conducted by personal contacts of the selling agents in each office or through telemarketing of new products from the home office. There is no real “brand name” stressed. In some sales offices, agents operate and market themselves as agents for certain insurance companies, and they sell GAFS products along with that insurance brand. In other local offices, the GAFS name is displayed prominently. Local agents have discretion over how they prefer to portray themselves, as most agents feel their sales are made on the basis of a continuing trusting personal relationship with their clients. Because of the special nature of the relationship with sales agents, GAFS has had little or no feedback on perceptions by customers. Many customers surveyed by GAFS had never actually heard of the company, although they had purchased products from sales agents working with GAFS. Of the 3,800 or so people employed in the home office, the typical employee has been with the company an average of 4 years. Turnover was fairly high in the early years but has slowed as the economy has slowed and alternative job opportunities have declined. During the early years, employees and sales agents held an almost cult-like affection for Fred Foster, as his charisma and vision for the company served as a powerful motivation tool for home office employees as well as sales agents. But as the company grew and sales agents began operating more independently, Fred’s influence on employees has waned and there is much less of a “family feeling” in the company. This is especially true in the home office where workers have less experience and have been with the company a shorter time. Business Units GAFS has divided itself into three divisions: Insurance, Investments, and Financial Services. The insurance division contracts with a number of insurance companies who underwrite policies for life, health, casualty, disability, and auto insurance. GAFS acts as the sales agent only; the company does no underwriting of its own. The Investments division primarily sells stocks, mutual funds, and bonds. GAFS does not manage any funds directly, but again merely acts as the selling agent for other funds and investments. Financial Services consists of tax preparation, advice on estate planning and money management, mortgages, debt consolidation, and retirement planning. GAFS has used the large reserves of cash it built up over the years to provide a large pool from which to 2
  3. 3. sell mortgages. Many of these are second mortgages for slow-paying debtors, a profitable niche market for GAFS. Financial Position Since GAFS is privately owned, little detail about financial affairs is known and management believes in keeping the company’s financial condition a closely-held secret. Some critics say this is a problem for the company, as people may not be willing to trust a company with their money if they cannot discover how well that company manages its own finances. GAFS is subject, however, to certain SEC and other government reports, so there is some financial information known. The company’s summarized financial position is attached to the appendix of this report. Fred Foster and the other top managers receive a base salary, but most of their compensation comes from dividends and from bonuses paid out of earnings. The amount and type of bonuses and incentives paid to top management is confidential. The Business Environment GAFS has enjoyed a decade of rapid growth and profitability. The new business climate has severely affected the business, however, as it has the financial services market in general. While there is still steady demand for some products, investment activity among individuals is stagnant and the sometimes sluggish returns in the stock market have put a damper on consumer confidence. As expected during economic downturn, GAFS has lost a number of sales agents who can no longer afford to stay in the industry on a commission basis. It may be possible, though, to recruit new sales agents with good products and the charisma of Fred and his management team. Some argue, however, that Fred’s charisma is sorely lacking in some of the rest of the management team, possibly a problem in a business driven by intense personal selling. The financial services industry has always been subject to close legal regulation. The WorldCom, Enron, and FBI whistleblower incidents have also changed the business climate for large corporations as customers and investors demand more accountability from them. More legal regulation of corporations looms as legislators respond to the public’s growing distrust of “big business.” Changes in tax laws (that encourage or discourage investment) are always a large influence in the industry, as are reporting requirements and disclosure laws. As in most other industries, GAFS faces challenges in its markets from many powerful competitors and entrants. Most banks now sell many of the products offered by GAFS, and even small towns across the USA are likely to have several insurance agents who sell a myriad of financial services. Stocks and bonds may be purchased at little or no cost over the internet. Discount brokerage houses offer a variety of services they market through intense advertising. Increasingly, tax preparation services are offering new products and services to offset the seasonal nature of their business. Since these are usually already well-established businesses with strong name recognition, GAFS agents find it difficult to compete with them. GAFS agents rely strongly on their personal 3
  4. 4. relationships to overcome these competitive challenges and remain strong players in the financial services market. There may be other factors affecting GAFS they have not yet considered. As Fred ages, many wonder what the company’s future should be. There are no obvious successors, and Fred shows few signs of delegating more responsibilities. At some point, however, he will want to retire and possibly sell the business. GAFS’s strategy will have to take this possibility into account. Fred’s hard-driving management style has created a lot of interest within the company in going international with operations and sales or even expanding into other services such as banking, consumer goods and services, or even diversification into areas that would help balance the effects of a bad business environment. Your Assignment Fred’s management team and the Human Resources Department have been pushing for a comprehensive compensation review and strategy program for several years. Since the company’s success depends on the abilities of the sales and support staff, it seems critical that human factors and expenses be closely monitored. Labor costs also constitute a large proportion of total expenses, so a return on those expenses is very important. A year ago, the HR department attempted to perform job analyses and write job descriptions for all positions in the home office. Compensation specialists within the company also performed job evaluations using FES on the positions. They have not had time, however, to complete the task and do not have the business expertise to link compensation to strategy. The company has assigned you the following tasks: 1. Perform a strategic analysis on the company and industry and make a recommendation as to business and corporate level strategy(s). A convincing rationale is also required for your choices. 2. Set up a detailed compensation system that matches and supports your strategy choices and explain to management how the program benefits the strategic plan. 3. Provide a budget for your plan. Will an increase in labor expenses be necessary? How much? Will the form of compensation change, perhaps resulting in tax consequences or increased obligations to employees by the company. The company wishes you to use the job evaluation data they have compiled. GAFS management warns you that they are primarily sales people and don’t have much technical expertise in compensation and other HR terminology, so you will have to be very clear in your writing and provide good explanation for what you are proposing. You realize that you do not have as much information as you would like, but the company is unwilling to disclose any additional details. Your client agrees, however, that you may make assumptions (as long as you state them) and point out that you do not have details in some areas. 4
  5. 5. Financial Information Income Statement Summaries (in 000’s) 2005 Insurance Division Investments Division Financial Services Total Sales 457,170 167,582 93,740 718,492 Cost of Sales 362,120 32,170 41,155 435,445 Gross Margin 95,050 135,412 52,585 283,047 Expenses: Facilities 2,120 1,190 2,720 6,030 Employee benefits 11,396 20,016 6,535 37,947 Wages/salaries 32,560 57,188 18,670 108,418 Training costs 9,512 6,212 915 16,639 Marketing/Promotion 16,920 14,590 7,580 39,090 Other 9,207 6,319 10,490 26,016 Total Expenses 81,715 105,515 46,910 234,140 Profit before taxes 13,335 29,897 5,675 48,907 5
  6. 6. Summary of Prior Income Statements (3 Divisions Combined) 2004 2003 2002 Sales 840,512 823,290 895,120 Cost of Sales 487,497 463,620 483,240 Gross Margin 353,015 359,670 411,880 Expenses: Salaries/wages 92,560 89.250 82,970 Other 42,890 52,670 46,120 Total expenses 135,450 141,920 129,090 Profit before taxes 217,565 217,750 282,790 *Auditor’s note: Sales fluctuations are primarily in the “Investments” division. 6
  7. 7. Balance Sheets (in 000’s) 2005 Assets Liabilities and Equity Cash 8,000 Accounts Payable 115,000 Accounts Receivable 127,000 Long-term debt 10,590 Building 12,250 Retained Earnings Land 3,615 (less dividends) 25,332 Other assets 57 Total 150,922 150,922 2004 Assets Liabilities and Equity Cash 10,257 Accounts Payable 93,240 Acct. Receivable 109,420 Long-term debt 12,265 Building 13,170 Retained earnings Land 3,615 (less dividends) 30,999 Other assets 42 Total 136,504 136,504 2003 Cash 23,540 Accounts Payable 82,860 Accounts Receivable 98,440 Long-term debt 13,140 Building 15,230 Retained Earnings 45,065 Land 3,615 (less dividends) Other 240 ______ Total 141,065 Total 141,065 7
  8. 8. JOB EVALUATION DATA JOB # OF CODE JOB TITLE EE'S MEAN MEDIAN FES POINTS 13-1073 TRAINING AND DEVELOPMENT 6 43,120 45,970 1970 SPECIALIST 13-1121 MEETING AND CONVENTION 4 56,520 48970 1890 PLANNER 27-2012 TV/ VIDEO PRODUCER & 12 37,920 38,917 1590 DIRECTOR 27-1014 MULTIMEDIA ARTISTAND 4 41,270 42,988 1720 ANIMATION SPECIALIST 43-3051 PAYROLL AND TIMEKEEPING 9 26,220 27,982 920 CLERK 43-4141 NEW ACCOUNTS CLERK 427 24,371 23,917 1170 43-4171 RECEPTIONIST AND 196 22,532 23,841 620 INFORMATION CLERK 43-9011 COMPUTER OPERATOR 417 29,610 28,240 940 43-9061 GENERAL OFFICE CLERK 241 26,570 24,820 680 43-9081 PROOFREADER AND COPY 6 32,060 30,120 970 MARKER 11-2021 MARKETING MANAGER 11 72,730 70,020 2070 27-4021 PHOTOGRAPHER 1 24,220 24,220 1220 PUBLIC RELATIONS 27-3031 SPECIALIST 3 36,100 36,300 2230 33-1012 FIRST LINE SECURITY /POLICE 3 27,200 34,100 1410 MANAGER 33-9032 SECURITY GUARD 12 16,873 16,219 850 8
  9. 9. 37-1011 JANITORIAL SUPERVISOR 3 21,220 21,963 720 37-2011 CLEANING PERSONNEL 9 18,930 19,100 640 43-1011 OFFICE STAFF MANAGER 110 33,956 35,271 1270 AND SUPERVISOR 43-2011 SWITCHBOARD OPERATOR 37 24,916 23,742 720 43-2021 TELEPHONE OPERATOR 18 14,220 16,010 680 11-3021 COMPUTER AND IS MANAGER 3 92,675 89,100 3220 11-3011 ADMINISTRATIVE SERVICES 12 51,570 52,888 3460 MANAGER 11-3061 PURCHASING MANAGER 6 82,511 78,008 2920 13-2031 BUDGET ANALYST 94 55,120 58,207 2580 13-2051 FINANACIAL ANALYST 75 62,970 61,222 2560 41-9041 TELEMARKETEER 275 18,120 18,273 960 43-4071 FILE CLERK 360 23,970 22,980 1010 13-041 COMPLIANCE OFFICER 6 49,390 46,520 3120 43-3031 BOOKKEEPING CLERK 220 27,950 26,532 970 43-4051 CUSTOMER SERVICE 173 26,920 26,470 1120 REPRESENTATIVE 43-4161 HR ASSISTANT 10 26,550 27,100 1350 43-9021 DATA ENTRY WORKER 188 20,920 21,377 870 11'-2031 PUBLIC RELATIONS MANAGER 1 110,520 110,520 3620 11.-3040 HUMAN RESOURCES 9 48,120 52,120 3410 MANAGER 13-1071 EMPLOYMENT,RECRUITMENT 6 36,120 38,970 1820 PLACEMENT SPECIALIST 13-1072 COMPENSATION 2 37,980 37,980 3580 SPECIALIST 13-2011 ACCOUNTANT &AUDITOR 62 41,040 43,220 3780 9
  10. 10. 27-4014 SOUND ENGINEERING 2 37,120 37,120 1910 TECHNICIAN 43-4151 ORDER CLERK 470 23,110 22,009 740 43-9022 WORD PROCESSOR & 180 18,120 20,006 680 TYPIST 15-1021 COMPUTER PROGRAMMER 12 55,250 56,250 2180 15-1031 COMPUTER APPLICATIONS 3 59,270 56,200 3110 ENGINEER 15-1032 SYSTEMS ENGINEER 3 68,227 65,580 3080 15-1041 COMPUTER SUPPORT 5 36,220 37,117 2170 SPECIALIST 19-3021 MARKET RESEARCH 6 57,220 58,916 2970 ANALYST 32-2011 PARALEGAL &LEGAL 12 32,673 34,911 1240 ASSISTANT 23-1011 LAWYER 6 68,120 70,203 3620 11-1011 CHIEF EXECUTIVE 10 187,230 223,570 3890 11-1021 GENERAL &OPERATIONS 12 73,721 73,780 2430 MANAGER 11.-3071 TRANSPORTATION,STORAGE 2 42,100 42,100 1840 DISTRIBUTION MANAGER 27-4032 FILM &VIDEO EDITOR 3 34,150 35,090 1810 TOTAL NUMBER OF EMPLOYEES 3757 10