Harvard Business School ‘476-107 Megalith, Inc.—Hay Associates (A) Frank, there's no question about it. We're out of lie, Way out of line. The stuaon reals Tes harung us, and have two reigraons here to prove John C. Boyd, senior vie president of finance for Megalith, Inc. paced across his office in agitation. Near the door stood Frank C. Nicodemus, Megalith’s vice president for human resources. The ‘hwo men, longtime coleagues inthe successful multinational frm, were continuing a debate begun much earlier, when Boyd had attempted to rase the salaries of his key managers by 25%, Boyd ‘continued: ‘You told me last Jane that these people were too young and inexperienced to be wart the money, and I told you we'd have te pay based onthe competence, not thee seniority. Now its (October and two of them have given notice inthe pest month, ‘You know both of them—Lonny Jackson and George Arnold are two ofthe best managers in the company. They're half of the foam I brought in here to bring the Finance Group out of, the Stone Age, and they've been absolutely vital tothe develop- iment of the group. And now theyre both leaving, to get sla ‘es I wanted to pay them months ago, Boyd tuned and shook his head, Frank, Tknow that what's done is done, and we're not going to get Lonny and George back But what i my other key ple take off too? Where would that leave us? ve got have nore room inthe salary schedule 1 take care of the exceptional people who've made this group click Boyd paused, and Frank Nicodemus responded. ‘Caprigh © 16 he Peseta Flows ol arardCoogeset ney nce John, you remember I showed you that atl four of your key people were ight at the {op of our sale "s compensation system lant something we've arbitrary Flcked out of te aur every year we check The schedule against trade assocations’pub- ed dat‘ weet to make se ‘we're abowe average that we're competitive ‘ith the best in the labor make. To make Crceptions toa well grounded sale would ‘bebbath hasty and rash. It would raise hell Sound here throwing everytog out of “SOT eld the Line, But since then ve been checking to see jst how sound our ‘Sieben are. Wend # crating em thas a very good reputation in compare tre cmputien.an or th gat month ye bean working with one of ete part- nets. His name Ed Rogers, and the fem Eemmihey therpeople cnfacing the inate Sad Sight now, ad reviewing all our corporte- Iie job desespaone, Woald yu ike to ‘Sieto Ropes John Boyd waved se folder at his fend Frank, Te got the comparisons I need, sight here. Lanny Jackson wl tat wih an ‘hin sind yearin ret say, and wil Ihake's bonanty i he does wellas executive vice presdent of RG. Mile, and Pm sure Yell guceed, Meal wil have to pay at Tent $1200 to Sd an brene ina replace them! vce president for intonation ayo {ens, What are we eaving by potting our beri ch ised of tary "And the tame hing goes Ae nel eure, ifs ging tok over 2 new lensing division for Rotel, and AS “dance for pros incentive payments there puts anytheg we can offer to same Thus can’ compete, Frank. You've got us lociled in with a pay schedule tha looks ‘Simpetiive on tle rsiace, Du when the ‘Supe are down, ifs «lose. Janet oe set iy were acnaririn ademas, mane naman ores soa en nena tend sah fo cal the bow compen” minokenees ta fe en ty Sa eeenpa 2 John, what could the com-com really 4? ey ae ean ep and they/d probably rely on out CPAs or ofa ie the ones ve azead pire Woah mabe sate fo bene ‘what Rogers has to say, before we admit de- ‘eat? Won't you talk to him? Megat ne. Th its 50 years of operations, Megalth, In tad grown to interasona_ prominence as rmanciactrer of printing equipment, = pub- {her «supplies of ole equipment and sap- piles, and more recently a builder of computer Felsed printers, plotes, and data recorden. From ls beginning, the frm had led the Bel in development of hography and photo-fiset Printing techies; bse patents in both pent Jig nd pite-making equipment had alowed Megalith to. penetrate inferatonal markets ‘ay ins hitory- Megalth tademasks were found in virally every ob shop printing house inthe world. Shorty afer World WaT the company di versed into publuhing, by 1975 i operated large-scale printing plants in seven countnes Inthe Ite 1980s Megalth attached the office quipment indus, primasly tough argu Stions it ha achieved significant shares of mar- ets in copying equipment. dating systems, and ‘typewitere—although it had faled 1 threaten the dominance of Xerox or IBM in these feds. Megalth’s newest diversification Sntegy ecogrzed that computer had come of ages sources ofthe writ word; the Kem began acquiring. technology-based companies Ialdng high-speed ine printers, plotes, rr (Goflin output printer, and data recorders. By 1576, Mega was leading producer of com puter peripheral equipment under its own fame, as wells a leading supplier tothe com puter industry tel Worldwide sales volume Feacied $3.0 bilion in 1962, and protiaiity ‘emuined at traditionally high levels, inspite of igeneraly poor econamic conditions. (Ean 1 Shows Meyalt’s corporatelevel organization chart, with annual sles byproduct group since 1964) Megaith executives credited the company’s sucess to well-chosen strategy ominance in Printed communkation), fo tecnalogial lead: Eahip, and to strength in Gtancht contol ‘They were quick to sini thatthe compan’ nly faare foreach market dominancein the ce equipment fld-—was due tothe relative @‘unimportance thereof financial controls and en- gineering leadership; marketing genfus wae re- ‘Quired to displace the leaders there. Stl, the Megalith office products group contributed sig: nificantly to profts and was considered a good investment ‘Behind the desk of Megaith President Allen GG. Whiteld hung a large, omatly framed post- ex, loudly procaiming: WE PRINT MONEY. The poster had been commissioned when the company had cosed the order #0 equip the United States Mints it had become an informal slogan ofthe fir, and smaller reproductions of the poster were common in executive offices and factory washrooms. Megalith people were Proud of their blue-chip reputation. — Ten tes att aos eae ee aces eee ee Eonermeeaie eer canner Som Sarees Sate eer re a oem Semen ctameit Sotay seaman Some aerate mia ceeemeae pak bie oa neers =iaenaee Bead ieee ee Soe ner eee mica eres Sanaa = a rd mie nee Sonera: ipouuisenmmmat ast wn comprehensive data base, collected an- peat ent micseecnbe ees elcome tees nee Eis sgn, ty at and varied competitive needs, campensation ‘comparisons could be made ‘by appropriate ‘market, geographic, and specific joo segments ‘Al contributors tothe data bate used the same ‘measurement process; therefore, comparisons ‘were always made on the bass of niform con tent values for any position. John Boyd sat comfortably in »Jeatherssp- bolstered chair beside the window of his Man- hatian office. Across a low coffee table, Ed smund Law Rogers, partner in the frm of Hay ‘Associates, leaned forward intently, listening Joka So there's my situation, Ed. With this team of four realy oustanding managers treve bat the Finance Group fom sake ton cw of badgetascenblets in one of the nest moet professional eas in indos- ‘Now Tim ling the people noponabie im iz ino uid out, ease cur bueele sry syn dee ‘gre thediference beeen talon and fedioaty. Can your system tell the ir tence? ds John, that’s a judgment no formal system ‘can make ‘Only the responsible ecutive the man in yout own shoes—can tel how ‘me Ns people are performing. 0 how high they can go. But formal system conta Something about te jobs themsctves. We Can compare the jobs inthe Hance Group to each other, based on their content, fo Be ys ene of tral ea tire all oles! the Se ch sempre Salaries to those pad for sla-con- rit bya red opera of nity. Wiecan help define what end ests each ost suri fo and on ein ‘your measurements of poromance. hat can help you decide ‘hat “outstanding” means nd how much you're wing to pay for Yd ike to know more about these kay po- sitions. De you have a group organization hart hand ‘The Mogalth Finance Group In early 1976 Allen Whiteld had asked John ‘Boyd to move from the group vice presidency for office products tothe new position as senior vice president for finance. The corporation, With Advice from a major Amencan consulting Erm, had decided to increase the size of iS central Gnancial staff to being together in thegn ney ac 8) [New York headquarters the analytic and control talents that were then scatered rather unevenly between the operating companies. Whitfield wanted 2 proven leader to build a coherent Fi ypance Group, and Boyd was his ist choice. “The Finance Group, Whitfield and Boyd de- cided, should be responsible fr end results in the areas of strategy planning, policy, and con ‘nol Exhibit 2 deal the specs ofthe Finance (Group mandate ‘Under Boyd's direction, the Finance Group had grown from 350 to 630 employees. (The 1982 organization chart for the department is included as Exhibit 3.) The expansion had re- (quired new personnel, and Boyd had con Sallenge, and fo ring his new veers UP through the rank ofthe group as fst a por: site, This fastirack policy had helped attact the four ky people who, Boyd sid, had made the concept ork Al four ofthe “young strs™ had pesionmed beyond all expecatons, im Dressing the ene Senior management group foth their imagination, forceflnes, and ees veness. All four had eceved every possible commendation, promotion, slr increase and Incentive bonus (EakBt 4 shows tans and personal data on the Key group members) Brow had leveled snd no increases in Salt were projected ohn Boyd sated to Ed Rogers It was in jane's performance planing ‘eth people that began to fee Steed ben mere ae complains people about ener, Nag of hen ‘ould be handle all but wath eer USiho the clings tr Oot anet sais” 2h management inntive opportay. 1 Couldnt ole them enough, snd I count fet Franc Nicodemus to seox the cor~ ‘le—they says seem fo and in Rip ee Er for othe Ngai tompercaton system] Yes dear retool have ght harder ory tnd George both gave notice n September. [Now I'm walng forthe other shoe o drop: iijohn Aver and Manuella should also Jeave, it would be like starting over from scratch, to build a new team. Ed: Was there any connection between the ‘two resignations? John No, Ed. Nether man knew the other ‘was going to quit, and they both fel badly ‘ ‘thatthe group here wil suffer. But the ‘money was too mich for hem to resist Ed: Are you sure i's money that made them ‘sor Sohn, Thats wha ny oth nian sre they'te leveling wih me. if we'd been competitive, nether of them woul have fiven the Hime of day to the recites who Eontacted them. ‘Besides, tall its im with ‘other comments I've heard—that the pay is Fn es, ne at a seat ne ea Ear araee poorer antiga uh rata aS keer pate mcgipeete Serres Se sy Rass cr oem seers Sprout ie oe Ee re Se meegens eon ae ee Sioa ee sh rere “rie Ieee pe og ee Te ee ae Soap mi em a, Se ke mercee See eee Pe adie aie oem a St Pees, el ees one Eo ea pea Se Apes eee ope ent FEES Boyd and Rogers spent the next half hour iscussing the Hay evaluation system, which ‘provided a systematic approach to relative job ‘Content measurement. Hogers briefly described the evaluation process. Responding to Boyd's questions, he detailed how a specific job might be evaluated. Know-how, in the Hay system, is scored according to three diferent aspects of the es reguremencs—tcnial or practi! Knowledge,—— snsons Sis nosed oper the Segara Speed a iets raaatet ie conelnarae cee ee iacenme ale Reena oa antler rtat seine races Sears fro dimersions”ihe thang envoonnen, at arene ait esha Poe sean ‘Accountabilit the last major area for rat ing menarel on tee dimersons—the posion's to ac ranging fom f° ty presi ancora ear or ‘oly is impact on end results, ‘anging irom indet remote to drei ‘aty and the dollar magnitude ofthe area ‘ot ceatyaflected bythe job. Givens lage rub of bs, consisteniy desarbed and rated, we can compare the Sslanes and incentives paid for job contents, father than job ies. You cant compare on {he bass of fide, Because incumbents, org ‘izatons’ needs, andor organizations {yles make the abe diferent "Herein Malt we've Snished withthe updating of ob descriptions [se Exh 7 fa empl descipion an Eh for ‘ompenaiion comparison), and | expect 10 Submit ost final eport to Frank Nicodemus in two weeks. He’ suid you'll be the int tne he snd copy f John Boyd thought for a moment as he lita ‘Ggarete and said, “O.K,, youl tell us how our gt my Amott pay scale stacks upin terms of the jobs we pay for. But you're nol going to evaluate the indi- viduals involved, or the problem of identifying ‘exceptional alent and holding it. Is that right A: John, thats got tobe your job. We an help by ging you information, eit is of your own system's strength and alice rr Sper fo ang Sarena show Meas vie et gente Bea Soap ae SSneerens es seas eemwicon te foe neeost Seon Ee Paras ame Sen ae ae mist eseean Bi Sikes Bisco eet See erate John: 1 look forward to seeing that report “And U assume well mest ago talk bout ‘what i iy wth Frank [Smis) ve tied a couple of nes to pin ou down on an answer to ths, but you've edged me. Bette you go, Pd tke to ask jou rely. do You Rave any o Seton msing these ceings of owes) Ed: [Smiling] No way, John, but I! look for- ‘ward to seeing you again after the reports Enushed.gn tay ia 8) Esibit ‘Corporate Organization Chart, 1962 ($ in milions) | = Sc 7 | { ont an ool Sate, ona saten omens + 5 #5 = ve 18 a = 300 Exhibt 2 Expected Outcomes for the Finance Group's Activities 1. Financial strategy that significantly contibutes to corporate profit and growth objectives. 2. Financial policies, processes, and controls to provide timely and accurate infor- imation, comply with accepted prachces and regulatory authorities, and protect 3, Corporate planning and measurement process that provides an effective means tointeprate group operations, evaluate achievement, and assure top management ‘awareness of problems and opportunites. 4 Continuity ofa corporate financial management team organized and competent to achieve functional objectives and a significant cortribution to group financial ‘management continuity and competence. 5, Effective astet and lability management that contsibutes to corporate short-term profit objective and long-term growth and stabi. 6, Significant contibution to acquisition strategy and effective implementation through development of objectives, evaluations, and analysis. 7. Systems and control capability to provide effective management information 8, An informed top management and board of directors aware of financial results ‘and projections Sear: Maileie nm teExhibit 4 Excerpts trom Personnel Resources Reference, July 1, 1983, Senior Vice President, Finance: John Covert Boyd, age St. MBA, Harvard, 195. Founded Dupliopy, inc, and served as its president unt its acquisition by Megalith in 1968. Became group vice president, office products, in 1967, and SVP in 1976, 1983 salary: $230,000 plus $25,500 incentive Controller: John T. Auer, age 39. MBA, Wharton, 1971. Financial analyst, then [Sseistantcontrller of Itek Interatonal until 1974, when he joined a sall consulting ‘Erm as an associate, Recruited by Boyd in 1976 to head the controllers systems and methods group. Promoted to director of accounting operations in 1980, and to controler in 1982. 1963 salary: $125,000 plus $25,000 incentive “Treasurer: Gearge Miles Amold, age 43. MS., London School of Economics, 1969. Lecturer in fiance, University of Bologna, then joined a major intematonal oll ‘company as coordinator of fnancal planning for Europe and the Middle East. joined ‘Barclay Intemational in 1974 o form a new consulting service group in international ‘money management. Recruted in 1977 by Boyd to head Megalth international [Enancal operations department eet up the domestic fnancal operations office in 1979, and reorganized the accounting operations department in 1981. Promoted to taeasurer in 1982 1969 salary: §135,000 plus $33,750 incentive (plus cat) ‘Vice Presiden, Management Information Systems: Stephen Alonzo Jackson, age 35, BS. MIT, 1970. Parmer in a sll, Boston-based software consulting firm for three years, then head of systems analysis for McGraw-Hill West Coast operations. MBA, Stanford, 1977. Joined Megalith as director of systems and procedures; became director of management information services in early 197; director of systems and data processing in 1980; and VP for MIS in 1983. 1983 salary: $110,000 plus $22,000 (plus ear) ‘Vice President, Corporate Development: Manuella Cheysolors, age 1. MBA, Dar- den, 1969. Joined an investment banking frm, and three years ater setup her own brokerage in mergers and acquisons. Retained by Megalith to assist in acquisition of four small computer peripheral manufacturers, and became executive vice presi- Gent ofthe largest one. Drafted into nance group by Allen Whitfield in enly 1978. 13983 salary: $:30,000 ps $25,000 incentive ‘General Course: James Twins, age 61. LLB, Univers of Virgina, 1956. Joined legal staff of ene of Megalth’s printing equipment companies in 1963. Extensive workin antitrast, finance, and tax law. Appointed corporate secretiry in 1966 and {general counee! in 1975. 1969 salary: $165,000 plus $25,000 incentive ‘PiRatitpn pens wre tse on ra rc yar ended an 0, 198: thy wer Cee ope ae Te a dp a peMt tay hn Exhibit 5 ‘Summary: Compensation Policy, Revised July 1,197 Compensation Objective: To attract and motivate professional management people, tcnhancing their positive identiation with corporate strategy and goals. Total com pensation practice shall be competiive with an appropriate market mix of similar igivgrowth companies. ‘Compensation Components: Cash compensation shall consst of a base salary (de- tennined by compenson with appropriate markets), and management incentive op- ‘portunity (determined by formula and approved in each cae bythe compensation Committe of the board), ‘Noneash compensation includes pension plan: deferred savings plan; group life inpurance: medical plan, shor-term disability and long-term disability plas. These Combined benefits spproximate 35% of base salary expenditures for the company: Aetails ofall plans are avalable from the vice president, hunan resources, ‘Compensation Procedures: All positions shall be described in writing whenever ‘hanged or filed following a vacancy all desripdons shall be audited annually by {he Raman resources staff’ Changed or added descriptions shal be evaluated by the [ppropnate HR review committee to maintain internal consstency and equity. Management inceine Orpauniy Pans MIO rye pl oa postions ee Or aaa meee bard oe bot ee eee cea ins dna pane al doe @ misc pote Tele Bere my MO eat ae pul Meh mut cn 2 aoe ee ee ey cual eons ee BS pa ed ST strc doin tj spt ee ee cca in pian he ae ee sn Soothes call ls ‘Peformance Planning: Each MIO participant shall agree with his or her super ‘oor, before the beginning ofeach year, on his or her own performance goals {nd implementation plans. Group and functional haads are responsible for ‘Coordination of these goals within the framework of corporate strategy, and shall Skform each participant of his or her own potental MIO earnings forthe frth- ‘coming year at different levels of performance. Performance Growth Plan: Participants wil be eligible for annual awards, deter- mined by the compensation comumitice and calculated as a percentage of the MIO [payments received during the immediatly preceding four rears. ‘Parcipants may accept awards wholly in Megalith stock (with a 20% inducement [premium for doing 50) or half in stoce and half in cash. PGP awards may be Etferred ntl after retirement, and taken over a period net to exceed 10 years, at the partdpant’s option. Cash deferred awards wil accrue interest atthe prime rate; stock deferred optione shall reinvest dividends in additional stock, ‘Soe MegREUTE i Be za ele e335 e| lal zaajregere saaeealess RRGERRRES redeaaiees iy EE Raz alas e 5 zaaleaajneseee|*| [23 aeajzaaieegjssels 3\** & 5 s : 3 i = a : a Exhibh 6gl nH Ana 8) Position: Treasurer Inoumbent: George M. Arnold (Organization Unit Financial Location: New York ‘Accountability Objective: This poiion is accountable for planning of debvequity “financing and the direcion and coordination of cash mobiization, short-term in- vestmen, insurance and benefit plan services. Dimensions: Department Operating Expenses: $1.0 million Short-Term investment Earrings: $2-5 milion Department Employees: 8 [Nature and Scope: Megalith, In, is 4 major, multinational corporation with financ- ing @ and cash management operations throughout the world. Major ‘ullays of ash are antcpated fo continue an upward trend during the next 810 [Years Possble changes in acounting for and reporting of off-book financing, the Theed to generate increased emounts of capital overseas fr use in overseas operations, ‘and the uwertaintes created by new international monetary arrangements pose formidable challenges tothe corporation’ financial capability and plans for growth, “The treasurer’ fancion has been recently reorganized to concentrate on these prob- Jems. Reporting tc the treasurer are four directors. Their areas of concentration are: Financ! Planning and Analysis (3 employes)—This unit conducts overall analysis, of debvequity francing and performs sila analyses in developed plans for fancing foreign operations trom foreign Gnancing sources; develops plans for the maragement of foreign exchange; makes buy/lesse analyses of property from the Enancal point of view and generates regularly total forecasts of cash re- fgurements worldwide for short and midterm periods of time, and updates fbrecast periodically during the year. ‘Domest: Financial Operations (5 enployers)—This unit makes short-term invest ‘ens in the money macket including treasury notes, CDs and banker's accep- ‘ances: gathers and deposits cath through the operation and collection of $00 ‘bank accounts throughout the United States, and monitors compensating bal ances in relation tones of credit. International Finacial Operations (8 employes)~This unit coordinates overseas project financing, manages more than 40 bank accounts in approximately 12 ‘Eiderect foreign counties, including the transfer of funds between accounts; Geals with a variety of currencies; borrows money from other than offshore finance companies) and provides advice and coursel to management on the [mmplcadong ofthe cash management and Sinancing suppor for their operations. ‘Aminétration (8 emploees)—This unit develops working company policies, in- acing those having to do with rect and conecon, for the guidance of all ‘operating groups: buys insurance (premiums amounting to $2-3 milion per year)mee ay oc) Exhibit 7 (continued) for the corporation in the form of blanket policies covering worldwide risks (a $5 milion deductible provision is a featur of all covered risks). In addition, {hie unt performe coetbeneft analyses of group benefit plans and partipates in negotiting and placing benefits with caries. Principal End Results: 1 Finuncal plans and forecasts that reliably project the Gnancing needs of the ‘company. 2. Optimum cash availabilty for current needs through effecive use of cash mobi- [zation systems and policies, and efficent financial operatons. ‘3. Maximum return on short-term investments consistent with the company needs for iquidity 4. A worldwide system of banking relationships that facilitates the management of fands, the avalbiity of cash short-term investments, ané assures required bor rowings. 5, Risk and benests plan placement that effectively meets company objectives. 6. Knowiedgeable advice and counsel fo management conceming proposed capital tures and investments for domestic expansions, acquisitions, mergers, snd other business ventures 7. Continuity and development of a professionally competent staf of nancial man- agers and specialists Sam Map inepe, an Exhibit 8 Feaults of the Hay Executive Compensation Survey 1983 for the Megalith Group (in thousancs) Capea Sve) ‘Sure Fete Tost bar seh” sare Meow |e ES “iat pati cot Tie “ieaie’ — Compoatin _Penrie_—_ Compton Senior VP. nance 1s Ses so Si 285 ‘VP. inlormaton management 518 ar mo sao Gener cna 8 19.235 isis 180 Conzoter os 95105 ee) Treasurer 6 sous BMS 1685 VP. corporate development wo s.115 wo mags No: Al sey parcpus are cis woe potons ave nen mead ing the ue Hay Guide Chat Proce [ora epor by and menue ob con