BearingPoint Struggles To Hang On to Its People

By David S. Hilzenrath and Ellen McCarthy
Washington Post Staff Writers
Monday, February 6, 2006

As Harry L. You arrived at the troubled BearingPoint Inc. consulting firm in early 2005, the new chief executive couldn't help but notice a disturbing trend: A lot of people were heading in the other direction and quitting the company. More than a quarter of BearingPoint's consulting staff left voluntarily last year, up sharply from previous years.

To stem the exodus from the McLean firm, You over the past year has handed out millions of shares of restricted stock to hundreds of key employees and elevated the company's bonus system to a central place in his turnaround strategy.

BearingPoint had accounting problems, legal troubles, a fall-off in European business and such a tangle of other difficulties it had to spend $100 million to sort out its financial statements. But You said in recent interviews that changing the compensation structure was "the biggest thing" he could do to change the company's culture and keep hundreds of managing directors from walking out the door with their expertise, contacts and clients.

"People respond, of course, to how they're paid," said You, who was given the power by the company's board to award up to $165 million worth of restricted stock to employees at the managing director level and above. He has said he wants also to make BearingPoint's thousands of consultants eligible for the program.

Using financial incentives to persuade employees of troubled companies to stick around is far from novel.

"You see this all the time in instances where people need to make a change quickly or are under time pressure," said Brooks C. Holtom, a Georgetown University professor who has studied employee-retention methods.

Stock awards and bonuses "are often an effective way to put glue in the seat . . . if the amounts are large enough," said Mark Rosen of Pearl Meyer & Partners Inc., a consulting firm that specializes in compensation practices.

BearingPoint executives note that the new compensation strategy is just part of the effort to turn the company around and make it a more attractive place to work. After months in which BearingPoint's workforce was preoccupied with correcting bookkeeping errors from previous years, the company passed a key milestone last week when it filed its complete financial statements for 2004 and restated its earnings for 2002 and 2003.

But reducing turnover is nevertheless critical. Even more than in most industries, Wall Street analysts track attrition at consulting firms carefully because the employees are, in essence, the companies' biggest asset.

"It's the second or third thing you look for in a company," said Andrew C. Steinerman, an analyst with Bear, Stearns & Co.

BearingPoint has been in turmoil for the past 15 months. In November 2004, longtime chief executive Randolph C. Blazer was "asked to leave," according to company documents filed with the Securities and Exchange Commission, just as news of accounting errors began to emerge. Last year the SEC began an investigation of BearingPoint's accounting, and several lawsuits were filed by shareholders.

People started quitting -- at an annual rate that peaked around 28 percent last fall.

You is betting that the restricted stock awards will help BearingPoint keep the employees at the heart of the firm's relationships with clients. The stock can be given to managing directors and select executives, a group that numbered about 850 when the program was introduced last spring, said James Monastero, BearingPoint executive vice president.

BearingPoint has about 17,600 employees, including more than 15,000 consultants.

"I think in a service business like ours, when the employees own a good, significant piece of the company . . . they tend to do the right thing by the company," You said in an interview last week.

The early results are mixed.

The company's executives credit their new compensation strategy with bringing the turnover rate down to 22 percent in December. Paul Villella of Reston-based technology recruiter HireStrategy Inc. said there has been a "significant drop in active initiation of job search from BearingPoint candidates."

But the firm's recent success could be deceiving. At the end of any year, consultants expecting year-end bonuses have good reason to stick around. And, Villella said, many BearingPoint employees have already "found their way to new homes."

The first batch of restricted stock was granted in June. By the time those 5.5 million units vested on Jan. 1, employees had forfeited about 500,000 of them by leaving the company, either voluntarily or otherwise, according to company officials and a report BearingPoint filed with the SEC last week.

BearingPoint's use of restricted stock in its compensation system reflects a broader shift away from stock options, which have long been a staple of employee compensation at many companies. A new accounting rule has contributed to the trend by requiring companies to include the cost of stock-option grants in earnings reports.

Stock options benefit employees only to the extent that the share price rises, and BearingPoint's declining stock price has rendered many employees' options worthless.

In contrast, restricted stock -- essentially an award of company shares at no cost to the employee -- has value even if the share price declines, making it particularly attractive to employees who have lost confidence in their employer's prospects, consultants said.

But, as the name implies, it comes with strings attached. At BearingPoint, restricted shares vest over a period of years. And if employees leave the company with vested shares, they can't sell them until 2015 unless they get the company's permission.

That restriction does not apply to the chief executive, according to company spokesman Elliot Sloane. You was granted 750,000 restricted stock units when he joined the company.

In October, You also introduced a new system for determining bonuses for the company's more than 15,000 consultants. In the past, the bonuses of BearingPoint consultants were based largely on the number of hours they billed to customers, You said. That program backfired in a very public way last week when the company disclosed that some employees in its Chinese subsidiary falsely inflated their time sheets to increase the size of their bonuses.

With BearingPoint's new system, bonuses, which can be 10 percent to 20 percent of a consultant's salary, are based on performance reviews by supervisors, clients and co-workers.

"Basically the things you'd want people to work for -- making more money for the company, satisfying customers, working well with your peers -- that's what people are paid on now," You said.