Category Archives: Human Resources

Compensation Philosophy

The compensation and organizational development committee plays an essential role in setting the overall tone for the company’s philosophy with respect to rewards and incentives generally and executive compensation in particular.  Among other things, the members of the committee are expected to continuously review and assess the company’s executive compensation philosophy and provide counsel and guidance to the CEO and leaders of the human resources function with respect to alternative approaches to rewarding employees for the work they perform on behalf of the company.

When preparing the statement of the company’s executive compensation philosophy the committee should begin with a description of the primary purposes of the executive compensation program, such as attracting, retaining and rewarding talented leaders who can achieve sustainable and profitable growth for the company’s businesses and maximize the long-term value of the company for its shareholders and other stakeholders.  The statement of philosophy is often broken out into several categories, each of which are considered to be important for recruiting and retaining the best people to lead the organization.  For example, realizing that qualified and experienced leaders are highly sought after it is essential that companies be prepared to offer compensation packages that are competitive, which means that the statement of philosophy should incorporate the following activities:

  • Regularly compare the company’s total compensation levels against comparable companies in each of the industries from which the company is likely to draw executive talent, with particular emphasis on salary levels and short and long term incentives, to ensure the ongoing competitiveness of our compensation program
  • Measure the competitiveness of compensation levels in the countries and regions where the company operates, and utilize compensation benchmarks from multiple geographic markets for executives with international responsibilities
  • Use median (50th percentile) compensation values reported by the company’s comparator group companies as a primary reference for establishing target amounts for each element of compensation, and for maintaining competitive total compensation levels
  • Consider factors related to the executive’s potential impact on the company’s results, scope of responsibility and accountability, and reporting structure in determining appropriate compensation levels

It is necessary, but not sufficient, for companies to offer competitive compensation arrangements to their executives.  Compensation plans must also motivate executives to consistently deliver superior performance and this means ensuring that executives have a significant proportion of total annual compensation contingent upon achieving objective measures of financial and operating performance; establishing an appropriate “mix” of compensation elements to ensure an appropriate and balanced focus on short- and long-term results; and preserving a strong and direct relationship between business and individual performance, and the short and long term compensation earned by executives.  Committees should strive to create incentive arrangement that provide executives with opportunities to achieve compensation levels comparable with the highest earners among their peers at other companies; however, incentives should be tailored so that they are aligned with the company’s long-term strategic objectives and not just winning compensation battles with competitors.

Finally, the compensation package should be built in a way that ensure that executives are properly engaged with the pursuit and achievement of the company’s long-term strategic goals and meeting the expectations of the company’s stakeholders.  Engagement provides a foundation for building a deep and committed relationship between the executive and the company and makes the executive a stronger ambassador of the company to both internal and external stakeholders.  In order to achieve engagement, the company’s executive compensation philosophy must include linking a material portion of executive compensation to measures of business performance for which the executive has direct line of sight and accountability; ensuring that the company’s compensation programs and practices encourage appropriate risk taking and discourage inappropriate risk taking; and ensuring that senior executives meaningfully share the risks and rewards of ownership with the company’s shareholders by basing a portion of their total compensation on share price performance.  While compensation arrangements have traditionally emphasized achievement of financial goals, mounting pressure from institutional investors and other stakeholders has driven companies include sustainability issues in their executive compensation philosophies and explicitly provide that sustainability performance and innovation will be tracked and that a significant element of executive rewards will be based on demonstrable success in those areas.

This article is adapted from material in Sustainability and Corporate Governance: A Handbook for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here.

Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedInTwitter and Facebook.

Toward a “Sense of Purpose” for Employees: Investor Engagement on Human Capital Management

BlackRock, a leading global investment manager, provided an illustration of the steps and questions that might be part of institutional investor engagement on an important social issue: “human capital management” (“HCM”).  In his 2018 annual letter to CEOs, the Chairman and CEO of BlackRock wrote that:

“Companies must ask themselves: What role do we play in the community? Are we working to create a diverse workforce? Are we adapting to technological change? Are we providing the retraining and opportunities that our employees and our business will need to adjust to an increasingly automated world?”

BlackRock and other institutional investors have taken note of the importance of recruiting and retaining talented works as a primary factor in the financial performance of companies and investors realize that business continuity and success is tied to the company’s approach to HCM, a broad topic that includes employee development, diversity and a commitment to equal employment opportunity, health and safety, labor relations, supply chain labor standards and continuously adapting the workplace to taken into account rapidly changing technologies.

This article is adapted from material in Governance: A Handbook for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here.

While traditional human resources activities have often been pigeonholed as a management issue, institutional investors expect directors to be proactively involved in HCM as a natural extension of their duties to oversee the company’s strategy and define the company’s purpose.  Among other things, directors should be prepared to monitor HCM initiatives to ensure that they are aligned with overall strategy and that employees are fully engaged and supportive of the company, its business and goals.  The board should also treat HCM in the same way as other sustainability-related topics, which means constantly looking for risks and opportunities and developing appropriate responses.  Management’s role in HCM is obviously more operational and focused on executing the strategies and initiatives approved at the board level; however, working to bring out the best in the company’s people is arguably the most important of any manager’s day-to-day activities and senior executives should be proactively involved in developing and presenting innovative HCM ideas to the directors and should be forging relationships with employees throughout the organization to demonstrate the company’s commitment to their current contributions and long-term wellbeing.  Directors and managers should all be familiar with, and use, the expanding set of recognized qualitative and quantitative human capital management metrics that are now available to assist companies in gauging the effectiveness of their efforts to positively engage with their employees and disclosure the results of those efforts to investors and other stakeholders.

BlackRock made it clear that it intended to back up its public statements on HCM with constructive engagement with directors and executives of its portfolio companies with the goal of building mutual understanding, probing questions and issues to develop effective solutions and sharing information on best practices.  BlackRock’s proposed agenda for discussions with directors on HCM included:

  • Oversight of policies meant to protect employees (e.g., whistleblowing, codes of conduct, EEO policies) and the level of reporting the board receives from management to assess their implementation
  • Processes to oversee that the many components of a company’s HCM strategy align themselves to create a healthy culture and prevent unwanted behaviors
  • Reporting to the board on the integration of HCM risks into risk management processes
  • Current board and employee composition as it relates to diversity
  • Consideration of linking HCM performance to executive compensation to promote board accountability
  • Board member visits to establishments or factories to independently assess the culture and operations of the company

When engaging with management teams, BlackRock suggested that the following topics would be an appropriate starting point:

  • Policies to encourage employee engagement outcomes and key drivers (e.g., wellness programs, support of employee networks, training and development programs, and stock participation programs)
  • Processes for ensuring employee health and safety and complying with occupational health and safety policies
  • Voluntary and involuntary turnover on various dimensions (e.g., seniority of roles, tenure, gender, and ethnicity)
  • Statistics on gender and other diversity characteristics as well as promotion rates for and compensation gaps across different employee demographics
  • Programs to engage organized labor and their representatives, where relevant
  • Systems to oversee matters related to the supply chain (including contingent workers, contractors and subcontractors)

While the recommendations above were intended primarily for engagement between large institutional investors and directors and senior executives of companies with securities traded in public securities markets, they can also serve as a foundation for continuous discussions between sustainable entrepreneurs and their key early-stage investors, some of which may actually have a representative on the board and others will allow the founders to serve as the only directors but will want to be able to monitor their activities with respect to HCM in the boardroom and on the office floor.  HCM oversight is particularly important when the success or failure of a startup often turns on the “talent” that can be brought to bear on solving a particular problem and developing and launching the solution, be it a product, service or combination of both.  Outside oversight of HCM practices is challenging for startups given that lines of authority are blurred and the founders are often so focused on completing a mission critical project that they are unable to step back and consider their actions in the context of creating the appropriate workplace culture and modeling acceptable behaviors.

One of the worthiest calls for sustainable entrepreneurs is launching and building an organization in which all participants feel a “sense of purpose”, which was the central theme of the BlackRock Chairman’s 2018 CEO letter referred to above.  To achieve this goal, sustainable entrepreneurs must act purposefully with an eye on improving the skills and overall wellbeing of their employees.  A purposeful organizational does not come about on its own, it must be nurturing by its leaders.  As such, sustainable entrepreneurs should be prepared to consider the following questions, and take the following actions, when engaging with their investors:

  • Has the sustainable entrepreneur taken the lead in creating a healthy organizational culture in which all employees feel protected from unwanted behaviors of others, particularly those persons who exercise supervisory responsibilities over them? All employees need to feel free to express their opinions and the workplace should be free of harassment and discrimination and compliant with applicable health and safety standards.
  • Has the sustainable entrepreneur proactively launched programs and activities to engage with employees and build loyalty and commitment throughout the workforce? Even the smallest companies can implement wellness programs, providing training and development opportunities and allow employees to assume an ownership stake in the business through stock/profit participation programs.
  • Has the sustainable entrepreneur integrated of HCM issues into the company’s risk management processes? Talent is a scarce resource, particularly during the startup stage, and careful consideration has to be given to the consequences of being unable to recruit and retain the right people and the potential costs associated with mistakes in the hiring process.  The sustainable entrepreneur needs to be able to explain the reasons for voluntary and involuntary turnover with the pool of initial employees and take steps to remediate any problems that may be adversely impacting team building.
  • Has the sustainable entrepreneur explicitly integrated diversity goals into the company’s plans for future recruitment of employees, executives, advisors and directors? Diversity is one of the fundamental tenants of sustainability and effective HCM and goals should be set from the outset and progress continuously checked.  If goals are not being attained, an assessment should be made to identify the reasons and make appropriate changes in recruiting strategies.
  • Have HCM issues been included as explicit criteria for compensation of the sustainable entrepreneur and each of the senior executives and key managers of the company? While traditional financial goals and objectives should remain part of the assessment process, each organizational leader should expect that a significant portion of his or her contingent compensation will be based on success against mutually agreed HCM metrics that are within his or her control.
  • Has the sustainable entrepreneur established career paths for each of the employees in anticipation of future growth of the company including objective criteria for promotions and upward adjustments in compensation and is the sustainable entrepreneur committed to “equal pay for equal work” and equal opportunities for advancement.
  • Has the sustainable entrepreneur established procedures for employees to safely convey their complaints about the workplace to organizational leaders? As noted above, employees should feel free to propose ideas for improving the workplace; however, there should also be ways for employees to report, without fear of retribution or retaliation, activities that appear to be illegal, unethical or otherwise not in line with company culture and expectations and those reports need to be taken seriously.
  • Has the sustainable entrepreneur taken steps to ensure effective oversight of contingent workers and contractors? Many companies, particularly startups, rely heavily on non-employees, such as interns, contractors and outside consultants, and organizational leaders need to monitor the activities of these workers to ensure that they do not disrupt organizational culture and that the expected contributions to the business are being made.
  • Is the sustainable entrepreneur prepared to allow major investors to visit the company’s facilities to assess for themselves the organizational culture and the manner in which day-to-day operations of the company are conducted? If the major investor is a director of the company, board meetings should always be onsite and should include tours of the work spaces and interviews and meetings with managers and employees from different parts of the organization.

If the major investor is a director, each of the questions above should be covered at each board meeting and during briefer meetings or calls at regular intervals between meetings.  For their part, investors electing to serve on the board need to realize they are accepting important and substantial additional oversight responsibility with respect to HCM and should be prepared to invest the appropriate amount of time in fulfilling those duties.  Non-director investors should not be “passive” and leave HCM to the board and the sustainable entrepreneurs.  Instead they should insist on regular meetings with board members and the executive team to go over the above questions and assess whether or not the investors’ choice for director is acting as a proper steward of the company’s human capital.

Sources: BlackRock, “BlackRock Investment Stewardship’s approach to engagement on human capital management” and the BlackRock Chairman’s 2018 annual letter to CEOs.

This article is adapted from material in Governance: A Handbook for Sustainable Entrepreneurs, which is prepared and distributed by the Sustainable Entrepreneurship Project and can be downloaded here.

Alan Gutterman is the Founding Director of the Sustainable Entrepreneurship Project, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  Visit the Project’s Library of Resources for Sustainable Entrepreneurs to download handbooks, guides, articles and other materials relating to sustainable entrepreneurship and keep up with the Project’s activities by following Alan on LinkedInTwitter and Facebook.

The Other Side of Paradise

Arguably the most valuable resource for any business is the minds and commitment of its employees.  This is especially true in the technology sector.  Larger companies such as Google, Facebook and Amazon are battling for “talent” to maintain their edge and are continuing to invest in research in continuously expanding areas, most of which are uncharted and in which success will depend in large part on the creativity and innovativeness of engineers, developers and designers.  In many cases, these giants have purchased entire companies primarily to gain access to their technology and people who helped developed it, even though the acquired companies were far from achieving profitability independently.  An article in The Economist noted that smaller startups are also scrambling to attract talent, and that established manufacturers in other sectors seeking to compete on the basis of technology are setting up research outposts in Silicon Valley (e.g., leading automobile manufacturers from all over the world including GM, Ford, Nissan and Toyota) that need to be staffed, thus creating more intense competition for human resources.

The result, according to The Economist and others, has been a “pay-and-perks arms race” as companies invested lavish sums to make their firms into a “paradise for talent”.  At larger companies, workers enjoy generous compensation packages and a dizzying array of perks such as free food cooked by Cordon Bleu chefs, nap pods, workouts in on-site gyms, in-house yoga classes, dry cleaning services on the premises and buses to take them to and from work (a perk that has caused dismay among others in the communities where the buses operate for the additional congestion they create on the roadways).  While the founders and other senior executives of these companies site these strategies as signs of their commitment to the value of their staffers, critics and skeptics argue that they are nothing more that “golden handcuffs” used to keep people at their desks and that everyone is expected to work so hard that they wouldn’t have time to go outside the building and have a meal, exercise, run routine errands or just talk to somebody other than a work colleague.

Startups lack the resources to replicate what employees find at Google and Facebook, but they still work hard to provide a friendly work environment to keep employees engaged and in the building all day long.  In fact, it’s possible to put together what is almost a standard menu for “startup perks”: free snacks, coffee, beer (and even hard liquor in some cases); happy hours; company swag including a wide array of branded goodies such as shirts and hats that employees can wear to get the company name out when they’re allowed to leave the office; discounted gym membership or health and wellness stipend; employee discounts; casual dress code; fantasy football and March Madness tournaments; dog-friendly offices; and ping pong tables, pool tables, foosball tables or basketball hoops.

The Economist observed that the tech economy has long been, and continues to be, a “ruthless meritocracy” in which the best and brightest are extremely well compensated in relation to their peers and the others, those who are merely good but not great, are expendable and can expect to labor in obscurity while the stars get the credit.  It appears that tech workers can benefit from mobility in the sector, jumping from one company to another if they perceive a better opportunity; however, Silicon Valley companies aggressively track former employees to ensure that they don’t use the same knowledge they employed in their previous posts, even if the employee developed that knowledge on his or her own.  This sort of activity creates particular difficulties for startups that lack of the resources to get involved in a legal war with a new developer’s former employer threatening a trade secrets misappropriation lawsuit.   Moreover, what seems to be a great opportunity often turns out to be a dead end like Sidecar, a ride-sharing service forced out of business in the face of competition from still-expanding rivals such as Uber or Lyft.

And the mouthwatering stock grants offered by Silicon Valley firms to attract talent?   They make people dream of being millionaires before age 40 as long as they give over their lives to helping their companies go public or get sold at a huge valuation, but the reality is that companies often use multiple classes of shares that preserve the biggest gains for insiders, leaving the employees with common stock that can easily lose value. The traditional method of raising money and providing liquidity for employees, an initial public offering, has given way to additional rounds of private financings at historically high, but often mysterious, valuations.  But, instead of providing more value for employees, these rounds often come with guarantees to the investors from the founders and other senior executives that the investors will make their money back at a liquidity event, a promise that can only be kept by issuing more common shares to the investors that dilute the holdings of employees.

The Economist conceded that the tech industry offers fabulous rewards for a fortunate few, but cautioned that a career as a software developer or engineer came with no guarantee of job satisfaction.  In fact, The Economist cited the results of a 2015 survey of 5,000 workers at both tech and non-tech firms regarding employee satisfaction that found that many tech employees felt alienated, trapped, underappreciated and otherwise discombobulated”.  Specifically, only 19% of tech employees said they were happy in their jobs and only 17% said they felt valued in their work.  In addition, tech employees were significantly more discontented than their colleagues in marketing and finance in several important areas including a clear understanding of their career path, an understanding of their companies’ vision and good relations with their work colleagues.

While people will always be willing to sacrifice to pursue what they perceive to be paradise, it seems that many otherwise intelligent folks are being misled, sometimes unintentionally, by the founders and other senior managers of the companies they work for.  New hires cannot possibly know all they should know about the company’s organizational culture and expectations that will impact their work-life balance.  They also don’t have access to information about deals that have been made with investors that will impact their compensation and return on their investment of time and effort.  Will the arms race slow down?  That’s not likely.  But recognition of, and respect for, the growing dissatisfaction outlined above will hopefully prod founders to practice more transparency with their workers and find different ways for workers to contribute and derive satisfaction from their participation in the pursuit of the company’s business model.  The list of startup perks above is shockingly devoid of options for workers to make time for their personal lives, work remotely so that they can help their mates and relatives with family matters and pursue personal growth opportunities that will not only benefit their current companies but prepare them for the inevitable day when it is time to move on to the next startup or project.  Fixing this problem requires making placing commitment to the well being of employees on the same footing as business growth and profitability.

Sources: Schumpeter: The other side of paradise, The Economist (January 16, 2016), 74; and L. Drell, Are These the Best Startup Perks You’ve Ever Seen? (May 28, 2012).

This article was written by Dr. Alan S. Gutterman, who is the Founding Director of the Sustainable Entrepreneurship Project (, which engages in and promotes research, education and training activities relating to entrepreneurial ventures launched with the aspiration to create sustainable enterprises that achieve significant growth in scale and value creation through the development of innovative products or services which form the basis for a successful international business.  This article appears in the chapter on “Human Resources” in “Launching a New Business: A Guide for Sustainable Entrepreneurs”, which is prepared and distributed by the Sustainable Entrepreneurship Project and available for download here.

Federal Trade Secrets Law Requires Changes to Employment Agreements


The federal Defend Trade Secrets Act of 2016 (“DTSA”), which came into effect on May 11, 2016 as Public Law No. 114-153, amended the federal criminal code to create a private civil cause of action for trade secret misappropriation.  Specifically, a trade secret owner may file a civil action in a U.S. district court seeking relief for trade secret misappropriation related to a product or service in interstate or foreign commerce (18 U.S.C.A. § 1836(b)(1)). The DTSA established remedies including injunctive relief, compensatory damages, and attorney’s fees, and set a three-year statute of limitation from the date of discovery of the misappropriation (18 U.S.C.A. § 1836(b)(3)).  The DTSA does not preempt state law, which means that trade secret owners may continue to pursue remedies in state courts while taking advantage of the provisions in the DTSA.

Under the DTSA (18 U.S.C.A. § 1836(b)(2)), a trade secret owner may apply for and a court may grant, in extraordinary circumstances, an ex parte seizure order (i.e.,, seizure without prior notice to the person against whom seizure is ordered), such as an employee whom an employer suspects may be prepared to leave the U.S. with the employer’s valuable trade secrets) to prevent dissemination of a trade secret if the court makes specific findings, including that: (1) a temporary restraining order or another form of equitable relief is inadequate, (2) an immediate and irreparable injury will occur if seizure is not ordered, and (3) the person against whom seizure would be ordered has actual possession of the trade secret and any property to be seized.  A court must take custody of and secure seized materials and hold a seizure hearing within seven days. An interested party may file a motion to encrypt seized material.  It should be noted, however, that the DTSA allows individuals or companies who believe they have been subjected to wrongful or excessive seizure to pursue a cause of action for damages including lost profits, costs of materials, loss of goodwill and punitive damages if the seizure was sought in bad faith.

The DTSA amended certain definitions in 18 U.S.C.A. § 1839 and added the following definitions of “misappropriation” and “improper means”:

“(5) the term ‘misappropriation’ means—

“(A) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or

“(B) disclosure or use of a trade secret of another without express or implied consent by a person who—

“(i) used improper means to acquire knowledge of the trade secret;

“(ii) at the time of disclosure or use, knew or had reason to know that the knowledge of the trade secret was—

“(I) derived from or through a person who had used improper means to acquire the trade secret;

“(II) acquired under circumstances giving rise to a duty to maintain the secrecy of the trade secret or limit the use of the trade secret; or

“(III) derived from or through a person who owed a duty to the person seeking relief to maintain the secrecy of the trade secret or limit the use of the trade secret; or

“(iii) before a material change of the position of the person, knew or had reason to know that—

“(I) the trade secret was a trade secret; and

“(II) knowledge of the trade secret had been acquired by accident or mistake;

“(6) the term ‘improper means’—

“(A) includes theft, bribery, misrepresentation, breach or inducement of a breach of a duty to maintain secrecy, or espionage through electronic or other means; and

“(B) does not include reverse engineering, independent derivation, or any other lawful means of acquisition”

The DTSA provides immunity from civil and criminal liability for an individual who discloses a trade secret: (1) to a government official or attorney in confidence to report or investigate a violation of law, or (2) in a legal complaint or filing under seal.  See 18 U.S.C.A. § 1833(b).  It is important for employers to be aware that they are required to provide notice of the DTSA immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information, which notice requirement may be satisfied by providing a cross-reference to a policy document provided to the employee that sets forth the employer’s reporting policy for a suspected violation of law.  Failure to comply with the notice requirement will prevent employers from be awarding certain exemplary damages or attorney fees under 18 U.S.C.A. § 1836(b)(3).  The notice requirements apply to contracts and agreements entered into or updated after the effective date of the DTSA (May 11, 2016).  It is recommended that notice language track the statute, such as the following:

“Notwithstanding the foregoing nondisclosure obligations, 18 USC § 1833(b)(1) added by the U.S. Defend Trade Secrets Act of 2016 (“DTSA”) provides that an individual shall not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that is made: (1) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, and solely for the purpose of reporting or investigating a suspected violation of law; or (2) in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal.  In addition, the DTSA provides that an individual who files a lawsuit for retaliation by an employer for reporting a suspected violation of law may disclose the trade secret to the attorney of the individual and use the trade secret information in the court proceeding, if the individual (1) files any document containing the trade secret under seal; and (2) does not disclose the trade secret, except pursuant to court order.”

For examples of how the notice should be placed into a full agreement, see the chapter on Employee Confidentiality and Innovations Assignment Agreements (§§167:1 et seq.) in Business Transaction Solutions on Westlaw.


Counseling the Human Resources Function

The human resources (“HR”) function is at the forefront of a company’s efforts with respect to two of the key elements of organizational design—people and organizational structure.  While HR practices differ around the world, it would seem to be universally true that in order for companies to successfully achieve their strategic goals and objectives they must strive to attract, motivate, and retain those employees who are best qualified to carry out the necessary activities of the company and make sure that they are placed into the right spots in the most effective organizational structure.

The traditional role of HR was perceived as being largely administrative—recruiting and interviewing prospective employees, administering benefit plans and writing policies—and is often referred to as the “personnel administration” approach; however, forward thinking companies now realize that the HR function must be part of the company’s strategic planning activities and that HR leaders must engage in what is common referred to as “human resources management”, or “HRM”, strategy, and proactively suggest new policies and initiatives to the senior executives of the company to ensure that the company has access to appropriate knowledge and talent in each of the markets where it is active.

The personality profile for HR managers and specialists has also changed radically in recent years due to the fact that the HR function now provides a wide array of services to persons throughout the company’s organizational structure including training and development, job analysis, oversight of workplace conditions and mediation of disputes between employees and the company.

A new chapter recently added to Business Transactions Solution (§§ 165:1 et seq.) provides an introduction to the issues that confront a business counselor providing guidance to the HR function.  One of the most importance subjects covered in the chapter is the activities of the HR function.  HRM strategy is executed through the careful selection of appropriate activities for the HR function.  Many lists of HRM activities have been developed and different labels have been used; however, it is reasonable to assume that HR managers will need to be involved in recruiting, hiring and placement (“personnel marketing and selection”; job analysis and organizational and space planning; compensation and benefits; training and development (“personnel development”); performance management and evaluation employee relations, including relations and communications with trade unions and development of labor policies; dispute resolution; development and maintenance of information systems; management of employees working in foreign countries; designing and implementing strategies for motivating and incentivizing employees; employee safety, welfare, wellness and health; employee services and counseling; and, of course, compliance applicable laws and regulations.

When companies are first launched there may be little attention paid to the formal aspects of HR apart from the activities necessary to comply with the basic legal and regulatory requirements and reliance may be placed on outsourcing to handle payroll processing and benefits issues. The first full-time HR manager usually takes a generalist approach and therefore should have an extensive range of knowledge in order to adequately address all the needs of the company in the HR area as it grows rapidly. For example, the manager may be the only person working on recruiting at the same time that he or she is administering benefit plans, writing new policies and procedures and coordinating training programs. When the company reaches the point where it has hundreds, even thousands, of employees spread across multiple business units and geographies the HR function will become much larger, formal and specialized with an executive-level leader who supervises several departments that each specialize in certain activities such as employment and placement, compensation and benefits and training and development.  Each department would have its own manager and would be staffed by personnel with appropriate training and background in required specialties.

Other topics covered in the chapter include HR documents, practices and systems; the scope and importance of HRM; the processes that companies follow when developing and implementing HRM strategies; and guidelines for organizing and managing the HR function.  The chapter also includes a slide deck presentation on counseling the HR function to be used for law firm and department training purposes and a chapter on counseling the HR function to be included training materials for new business counselors.

Employee Handbooks and Policies

Almost from the very beginning each company intentionally and unknowingly develops a set of policies and practices relating to its relationship with its employees.  Unwritten rules and customs evolve regarding employee conduct and these are eventually supplemented by formally established policies, such as published rules and procedures regarding working hours and recording work time, overtime, holidays and vacations, pay and benefits, disciplinary actions and termination.  Since employees are obviously essential to any business, companies typically try and avoid misunderstanding by laying out the rules of their relationship with their employees through personnel handbooks, which are also called “employee handbooks”, that supplements verbal explanations of company rules and policies given to new employees upon orientation; provides a ready reference on rules and procedures for all employees, even those who have been with a the company for a significant amount of time; and ensures that all employees receive essential information regarding the company and the respective rights and obligations of the company and its employees in a complete, accurate, and standardized form.  In addition, a properly-written employee handbook can reduce disputes and help protect employers from costly litigation, build a sense of company identify among employees, and showcase reasons why the company should be considered a good place to work.

Employers are not required to have a handbook. However, if they do, they’re generally free to pick the rules to include in their handbook. Typically, personnel handbooks describe the employer-employee relationship, from hiring until termination; tell employees what is expected from them; and tell employees what they may expect from the employer.  If employers adopt a handbook, they must train their managers about their rules and the procedures for implementing those rules. Unless the policies are enforced as written, they are just “good intentions.”  Besides handbooks, some employers also have a written personnel policy manual. Policy manuals are usually designed only for managers and used to guide them about implementing company policies. In contrast, personnel handbooks are usually given to all employees.

When creating and administering employee handbooks and policies it is important to understand the relevant legal considerations, strategies for formatting and contents, equal opportunity policies, pay and benefits policies, methods for laying out standards of conduct, time off and leave policies, “on the job” policies, safety and health policies and Internet use and social networking policies.  In order for employee handbooks and policies to be effective, the drafter must have a good working knowledge of the fundamental legal principles associated with the employer-employee relationship and law and practice in specific areas such as recruitment and hiring, discipline and termination, and discrimination and harassment.  In addition, it is not sufficient to write and distribute handbooks and policies; the contents of those documents must have practical and “real world” meaning in the workplace and should be followed by executives, managers and other supervisors.  Plans should always be made to educate and train anyone in a supervisory role about their responsibilities under employee handbooks and policies.

While employee handbooks and policies can, and often do, relate to issues other than laws and regulations, such as organizational culture and communications among employees, most of the documents are indeed written to support compliance with equal employment opportunity laws, laws and cases pertaining to sexual harassment, the Americans with Disabilities Act, the Occupational Safety and Health Act, wage and hour laws, the National Labor Relations Act and recordkeeping requirements.  Other legal issues of concern in the workplace context include prevention of workplace violence, protecting the principle of “at will” employment and workplace privacy and confidentiality.  All of the information in employee handbooks and policies must conform to the law and be presented in a way that satisfies any specific legal requirements as to form and/or manner of distribution.  Reference should made to the language included in statutes regarding the contents of notices that must be provided to employees regarding various aspects of the employment relationship and a review of relevant cases should also be made since judges are often asked to comment on the sufficiency of employer policies and procedures when deciding employment-related claims.

While there is no standard form of employee handbook, and employers have substantial latitude in selecting the policies and rules that will be included in their handbooks, the provisions that are included in the handbook must comply with the current version of applicable laws and address all of the issues that are relevant to the company’s specific line of business. Employment laws and regulations, as well as general norms and expectations regarding the workplace environment, are constantly changing and this means that employers must continuously review their handbooks to make sure they are up to date and, if necessary, make appropriate modifications.  As noted above, employers are not required to have an employment handbook and the decision as to whether or not to have one should be made after considering various advantages and disadvantages.  First of all, employers should not create a handbook unless they are committed to writing it properly and supporting it through training and leadership from the top of the organization.  A poorly written handbook is arguably worse than having no handbook at all since it can only lead to problems that result in unnecessary expense for the company and undermining of employee morale.  Employees that do use well-written employee handbooks will have employees who sense that the employer is fair and treats all employees equally, that know what is expected from them and what they should expect from the employer, and that will be less likely to assert that they were unaware of workplace rules and their legal obligations.  Employee handbooks are an opportunity for employers to showcase their benefits package and explain company policies to employees in a clear and concise manner that will hopefully reduce misunderstandings and provide both the employer and employees with a benchmark from which disciplinary actions can be taken and objective decisions can be made about interpretations of the policies.

However, employee handbooks will raise serious issues for the company if the handbook contains rules that are confusing or ambiguous, implies that employees intended to be “at will” have some form of job security, or fails to reserve the right to discipline or terminate employees or modify the handbook at any time.  In addition, of course, the value of an employee handbook depends upon company managers following the rules that have been laid out in the handbook.  For example, if violations of company policies have been ignored by managers, most courts will probably determine that the policy has been waived and find that the employee was unjustly disciplined or dismissed unless the policy is formally “reinstated” by a firm and clear warning.  In addition, if policies are applied in a discriminatory manner by company managers this will also result in adverse legal results to the employer.

There are no hard and fast rules regarding the subjects that companies must cover in their employee handbooks and/or employment-related policies and procedures; however, it is generally best to be sure that each of the following topics have been addressed.

  • Disclaimer of guarantee of employment and statement of “at will” employment status;
  • Equal employment opportunity statement and specific policies for each of the key federal laws creating protected classes of employees;
  • Policies and procedures regarding “time off” (i.e., lunch hour and other breaks, holidays, personal days, vacation policy and pay, leaves (e.g., personal, family, bereavement, educational, military service and reemployment rights), jury duty and election time off)
  • Policies and procedures regarding “job-related issues” (i.e., performance evaluations, discipline and termination and other general employment practices);
  • Rules and standards of workplace conduct (e.g., attendance and punctuality, protection of confidential information, visitor rules and access to premises, personal appearance and dress, smoking, gifts and gratuities, insubordination, harassment and substance abuse);
  • Policies and procedures regarding compensation (i.e., pay computation, payday dates, pay deductions, bonuses, overtime pay, meal allowances, direct deposit and check cashing) and benefits (e.g., insurance, pension and tuition reimbursement benefits, including eligibility requirements);
  • Policies and procedures regarding safety and health (i.e., reporting accidents, rules concerning accidents and physical examinations); and
  • Policies regarding use of technology (i.e., Internet use and e-communications).

Special requirements with respect to public companies must also be taken into account, although such policies might also be adapted for privately held businesses. For example, under the Sarbanes-Oxley Act of 2002, public companies must adopt “whistleblower” policies that set out detailed policies and procedures regarding receipt, retention and evaluation of reports received by employees regarding instances of financial fraud within the company. Public companies are also required to implement business ethics policies and companies engaged in international business activities, both public and private, need to be sure policies are in place covering export controls, import and customs laws, antiboycott laws and compliance with domestic and foreign anti-bribery laws.

Two basic methods are commonly used for organizing the policies and other material included in employee handbooks: ABC indexing and grouping of homogenous policies.  As the name implies, ABC indexing presents the policy statement in alphabetical order.  While this makes it fairly easy for employees to quickly find information about a discrete topic or issue, there is no continuity in the information presented and employees may have to skip to several different places in the handbook to get a complete answer to their questions.  With the grouping-of-homogeneous-policies method, the handbook is divided into sections, each of which is composed of related policy topics (e.g., employment policies, compensation-related policies, time-off benefits, medical and other benefits, employee conduct, internal communications, career development and termination).  Assuming that each of the sections include all of the necessary information, the grouping approach allows readers to go to a particular section and see all the information that they need organized in a consistent and hopefully readable fashion.  In general, the grouping method is preferred and recommended; however, even when this approach is taken it can be useful to include an alphabetical index with page numbers to provide further help to readers in navigating the handbook, particularly since many readers may not know which section should be selected for learning about a particular topic or question.

Numerous examples of strategies for collecting and disseminating employment-related policies are available online and in legal and HR treatises.  The decision as to what approach to take depends upon the stage of the company’s development—most new companies tend to have shorter handbooks or simply collect the most important procedures and put them in the form of a memorandum or hand-out that is delivered to employees at the time that they join the company and then periodically thereafter; the types of activities engaged in by the company’s employees; the specific laws and regulations applicable to the company’s business; the company’s prior experience with responding to concerns and questions raised by employees; and the size of the company’s HR department, since that department is primarily responsible for overseeing administration of the policies included in the handbook.  Organizational culture also plays a role in how communications relating to the employee’s relationship to the company are presented.

The process of preparing an employee handbook, which depends on the size of the company and the resources, human and otherwise, available for investment in the preparation process.  Smaller companies, or companies without a formal human resources (“HR”) department, generally assign a single person to develop and write the handbook.  Other companies designate a coordinator for the handbook project and create a committee to support the coordinator and divide up the various tasks necessary to put the handbook together, distribute it among the workforce and ensure that adequate training is made available to managers and other supervisors.  When a committee structure is used the group should be kept relatively small, generally no more than five people, and membership should include the top HR executive, one executive from each of the key operational functional groups within the company, the controller to handle tax and legal questions, and a representative from the company’s communications or public relations department.  A committee leader should have the final approval rights on major decisions relating to the handbook.  While all members can and should contribute to the content of the handbook, writing responsibility should be assigned to one person, typically the project coordinator.  The committee must determine what policy statements will be included in the handbook; collect and analyze information on current organizational practices, including “unwritten” policies, procedures and expectations among employees; make recommendations to senior management about policy content, policy organization and handbook format; and must review the drafts of the handbook policy statements written by the project coordinator or by the coordinator’s designees.

Whatever approach is taken, however, the persons involved in the handbook process should have the approval and support of management; access to the top executives of the company; access to relevant documents, memos and records; knowledge and understand of company operations; access to legal advisors for specialized topics outside of the expertise of committee members; and an ability to express ideas and prepare a handbook in a style and format that fits the organizational culture of the company.  The following is a suggesting ordering of the steps that should be taken for managing and completing the preparation and distribution of an employee handbook:

  • Designate a coordinator for the handbook project and create a committee to support the coordinator and divide up the various tasks necessary to put the handbook together, distribute it among the workforce and ensure that adequate training is made available to managers and other supervisors.
  • Ensure that the persons involved in the handbook preparation process have the approval and support of management; access to the top executives of the company; access to relevant documents, memos and records; knowledge and understand of company operations; access to legal advisors for specialized topics outside of the expertise of committee members; and an ability to express ideas and prepare a handbook in a style and format that fits the organizational culture of the company.
  • Conduct a thorough review of formally established policies, such as published rules such as published rules and procedures regarding working hours and recording work time, overtime, holidays and vacations, pay and benefits, disciplinary actions and termination.
  • Identify policies that may not be formally articulated but which may nonetheless be inferred from past practices, such as unwritten rules and customs covering such matters as employee conduct.
  • The committee should meet to discuss and reach agreement on the contents of the handbook including the specific policies that will be included and the agreement should be formalized as a draft table of contents for the handbook.
  • The project coordinator (or the coordinator’s designees) should draft the policy statements agreed to by the committee and the policy drafts are distributed to each committee member for review and comment..
  • Committee members should return the policy drafts to the project coordinator, who reviews the members’ comments and modifies the drafts and distributes the second drafts of the policy statements to the committee members for further review. The second draft should be accompanied by a summary of the comments received on the first draft and an explanation from the coordinator as to how each of the comments was addressed in the second draft.
  • After second drafts are returned to the project coordinator, the coordinator and committee should proceed in the same way to prepare and review a third draft, which should be close to a proposed final version of the handbook.
  • The committee should submit the third draft to in-house or outside counsel to ensure that the policies comport with applicable law and, if necessary, to the company’s public relations department or an outside professional writer to ensure that the policies are easily understood.
  • The third draft should also be circulated to a select group of first-line supervisors for input on how it is likely to be received by employees and how comfortable the supervisors feel about their role in administering the policies in the handbook on a day-to-day basis. First-line supervisors should receive training on the contents of the handbook before it is distributed once the policies have been approved by senior executives.
  • The project coordinator should prepare a final draft of the policies to submit to the policy committee members and to senior executives with approval authority.
  • Upon receiving approval, the project coordinator should prepare the policy statements in final form for inclusion in the employee handbook.
  • Complete the distribution of the new handbook including recalling copies of old handbooks, distributing separately to managers and supervisors along with instructions on their roles in ensuring that employees receive the new handbook and understand its provisions; distributing the handbooks to employees during an information session—small group or company-wide, depending on the size of the company— in which policies are explained and employees are given an opportunity to ask questions; and  requiring employees to sign and return an acknowledgement of receipt for the handbook that should be maintained in their personnel file.


Sustainable Businesses Embrace Family Leave Solutions for Employees

The face of the American workforce has undergone a dramatic transformation since the early 1950s, when about one-third of American women were worked as opposed to almost 90% of the men. In 2016 57% of women were working while the percentage of men in the workplace had slipped significantly to a little under 70%. This shift has transformed the American workplace and allowed women to come forward to launch new companies, invent new products and services and become more economically self-sufficient. Life in American homes has also changed radically with the roles of both women and men changed forever. However, many problems remain unresolved: women are still under-represented among senior executives and entrepreneurs; the median female wage is just 80% of that of men, a percentage that is lower than the average among OECD countries; and, in general, American companies are still not required to provide paid family leave to parents when a child is born, a shortcoming that stands in stark contrast to the OECD average of 54 paid weeks off—in fact, the United States is the only OECD country that does not guarantee some form of paid maternity leave.

Interestingly, considering how little they agree, both major candidates for President in 2016 have expressed support for some type of paid leave for parents following the birth of a child: Clinton proposed 12 weeks of paid leave and universal preschool and Trump became the first Republican nominee to propose paid family leave (six weeks) and help for child care. While these initiatives are not extensive as some would like, and would probably face fierce opposition from a Congress in which Republication control at least one of the chambers, they do represent an important step in addressing labor market troubles that have persisted due to a continuing failure to deal with changes in family structures. It should be noted that the federal government, and many states, have required employers to allow some employees, both women and men, to take up to 12 weeks’ unpaid leave for the birth or adoption of children, or to care for a sick family member, with assurance that they would not lose their job; however, for many families it is impractical to go that long without some form of payment, even if it’s only a portion of the wages they would have otherwise received.

While economists have certainly been involved in convincing lawmakers about the merits of paid family leave, they are turning more and more to talking directly to businesses about why it makes sense for them to implement leave policies voluntarily and collaborate with both employees and local governments to come up with share solutions that make sense for all involved stakeholders and not unreasonably compromise the economic performance of the organization.  Researchers have found evidence that family-friendly policies boost labor supply through higher participation of women in the labor force, increase wage rates, improve the lives of struggling families, boost workers’ productivity, reduce absenteeism, and reduce the costs that companies would otherwise have to incur to replace workers—estimated to be between 15% to 20% of annual pay–who must leave the company altogether if no leave policy is in place. Family leave contributes to the development of sustainable human capital for companies by facilitating reentry of valued and experienced workers back into the organization, thus reducing the loss of institutional knowledge that is difficult to replicate. While workers generally return to their jobs at their old salaries, some studies have found that wages often increased quite quickly for mothers who have returned to their jobs after taking a leave. Other research suggests that more flexible work rules reduce absenteeism and increase productivity. In fact, when Google increased its paid maternity leave from 12 to 18 weeks in 2007, the rate at which new mothers left the company fell by half.

The minimum obligation of companies to their employees is to abide by applicable legal standards in key areas and activities including, when they have been implemented, laws and regulations pertaining to family and medical leaves.  However, sustainable entrepreneurship and socially responsible human resource management is based on the proposition that employers have an obligation to exceed legal standards when forging relationships with their employees and take steps to ensure that employees are treated with dignity and value and that their contributions and hard work brings both financial and non-financial rewards. Socially responsible employers assist employees who need to balance work with their obligations to take care of their children and elderly parents (e.g., by providing on-site day care, referral services for elder care and adopting flexible policies regarding working remotely and required arrival and departure times).

The issues surrounding “family leave” need to be addressed in a manner that acknowledges that the traditional principles of company performance, which focused primarily on what is best from an economic perspective for the owners of the company, are inadequate and unfair. Simply put, human capital is not a commodity and relationships between companies and their employees and families should not be not be governed by the same market forces that apply to commodities.

One of the core subjects of ISO 26000, the guidance on social responsibility for businesses issued by the International Organization for Standards, is “labor practices” and within that topic ISO 26000 calls on employers to respect human development in a number of ways including respecting the familial responsibilities of workers and providing policies and programs, such as parental leave, that can help workers achieve work-life balance. Also instructive is the obligation on employers to engage in social dialogue with respect to their labor practices including negotiations, consultations and information sharing between employers and employees (and their representatives).

Google’s paid leave policy mentioned above was not implemented because any government told it to do so, and large companies such as Google are certainly better positioned to absorb the costs of a leave program. However, smaller businesses, including startups, do need to think twice about the short-term financial impact of a leave policy and implement their policies intelligently. How can it be done? Here are some thoughts for sustainable entrepreneurs looking to develop family leave solutions for their employees and their businesses:

  • Analyze the demographics of the current team and projected hires, taking care not to make too many assumptions about age, gender or other factors that might expose the company to discrimination claims, to estimate the impact of a family leave policy over a reasonable planning period.
  • When setting the leave period, take into consideration any applicable legal requirements and “industry standards” set by larger companies engaged in similar businesses.
  • Consider establishing an “insurance program” that will help fund the anticipated costs of the leave program before the time comes for payouts to employees on leave.
  • Engage early and often with investors to make sure they understand how the policy will work, the justifications for the policy and the projected impact of the policy on all relevant measures of performance (not just economic performance).
  • Establish continuous dialogue with employees regarding the leave policies and establish mutual expectations include commitments from employees to remain engaged with the company during their leaves and continue to develop their skills while away.
  • When hiring and promoting, consider the skills that will be needed in order to fill in for employees who are on leave.
  • Establish a program for “re-boarding” employees who are returning from leaves and making sure that they are able to make an easy transition back to full-time employment, including assistance with child care etc.
  • Engage with employee representative and local government to implement social insurance policies that can ease the burden of leave programs on companies (e.g., small businesses pay into a fund that employees can draw from when they take their leaves).
  • Involve employees in decisions above the structure of the leave program, particularly when problems arise in implementing the program.
  • Make leave programs part of a broader discussion regarding other work-life balance policies such as job splitting, flex-time and support for daycare for children or elderly dependents.
  • Senior executives needs to set the proper “tone at the top” regarding their enthusiasm for, and encourage of, employees taking advantage of leave opportunities so that employees do not feel they will be penalized for taking a leave.
  • Monitor the impact of the leave policies, including reduced costs of replacing employees, and report the results regularly to relevant stakeholders.
  • Celebrate successful leave experiences to help transform organizational culture and position the company as a “family-friendly” employer in the eyes of prospective employees.

Sources: All in the family: America does little to help people’s work-life balance. Enter Heather Boushey, The Economist (September 10, 2016); Trump Unveils Plan to Expand Aid to Parents, The New York Times (September 14, 2016), A1; R. Perez-Pena, Comparing Trump’s and Clinton’s Child Care Plan, and Those in Other Countries, The New York Times (September 15, 2016), A16; K. Doerer, “How much does it cost to leave the workforce to card for a child? A lot more than you think” (June 11, 2016); S. Pathe, How Paid Parental Leave Helps You, Your Newborn and the Job Market (January 3, 2014); P. Hohnen (Author) and J. Potts (Editor), Corporate Social Responsibility: An Implementation Guide for Business (Winnipeg CAN: International Institute for Sustainable Development, 2007), 30-31; Handbook for Implementation of ISO 26000, 29-30.


Dr. Alan S. Gutterman is the Founding Director of the GSE Project (“Growth-Oriented Sustainable Entrepreneurship”) ( and the Business Counselor Institute ( Further information about Alan is available at his LinkedIn Profile and more materials relating to the subject matter of the post can be found here.