Velma Company

CASE

The Velma Company designs and manufactures high-tech communications equipment. The firm is a world-class supplier, and its three largest customers are Fortune 50 firms. Velma also has major clients in China and the European Union. Over the last five years the company’s sales have tripled, and the biggest challenge it faces is hiring and retaining state-of-the-art people. In particular, there are two groups that are critical to the company’s success. One is the design people who are responsible for developing new products that are more efficient and price competitive than those currently on the market. The other is the manufacturing people who build the equipment.

In an effort to attract and keep outstanding design people, Velma has a very attractive benefit package. All of their health insurance premiums and medical expenses are covered (no copay or deductibles). The company contributes 10 percent of their annual income toward a retirement program, and these funds are vested within 24 months. So a new design person who is earning $75,000 annually will have $7,500 put into a retirement fund by the company, and the individual can make additional personal contributions. Each year all designers are given 100 shares of stock (the current sales price is $22) and an option to buy another 100 shares (the current stock price is $25 and this option is good for 10 years or as long as the person works for the firm, whichever comes first).

The manufacturing people are on a pay-for performance plan. Each individual is paid $7 for each unit he or she produces, and the average worker can turn out three units an hour. There is weekend work for anyone who wants it, but the rate per unit does not change. Each year, the company gives manufacturing workers 50 shares of stock with an option to buy 25 more shares. The company also gives all of the manufacturing people free health insurance and covers all medical expenses.

Another benefit is that everyone in the company is eligible for five personal days a year, and the company will pay for any unused days. Velma also has a large day care facility that is free for all employees, and there is a state-of-the-art wellness center located on the premises.

Last year the company’s turnover was 9 percent, and the firm would like to reduce it by 50 percent this year. One proposed strategy is to strengthen the benefits package even more and make it so attractive that no one will want to, or could afford to, leave. Some top managers privately are concerned that the firm is already doing way too much for these employees and are troubled by the fact that exit interviews with designers who left in the last year indicated that many of them were unaware of the benefits they were receiving. For example, most of the designers who have gone elsewhere reported that they were attracted to the stock offered them, yet they did not exercise the options to buy additional shares of Velma stock because they were not sure what the financial benefits were to them. The manufacturing people who left reported that $7 per unit was acceptable, although a higher rate would have resulted in their remaining with the firm. The manufacturing people also liked the stock that the company gave them, but were somewhat confused about the options they held.

Both groups—designers and manufacturing personnel—seemed pleased with the contribution that the company made to their retirement program, but most of them did not put any additional personal contributions into their retirement fund. When asked why, the majority of them were unaware that this could be done on a before-tax basis, thus temporarily shielding the contributions from taxes and making it easier to build a nest egg for the future. Finally, all of those who left said that they liked the child care benefit, although most of them did not have young children so they did not use it, and they thought the wellness center was also a good idea but they were so busy working that they admitted to never using the facilities.