Michael Knaggs of Kellogg discusses the group's benefits approach
For a name that covers the globe, the Kellogg Company is surprisingly small and amazingly diversified. With a workforce that just numbers over 14,000 worldwide, only 5,500 are in North America, around 4,500 are based in Europe, with the remainder spread globally.
Operationally, Kellogg divides the world into four regions, with Europe, which includes South Africa, being clearly the largest outside North America. Apart from a relatively recent move into convenience foods, the group has stuck to its breakfast foods business. Each European country has its own commercial operation for sales, marketing and customer services, tapping into the efficient pan European supply chain fed by the four production plants, of which two are in the UK, one each in Germany and Spain.
Michael Knaggs, who heads the employee benefits programme in Europe, works from Manchester, which he agrees might not seem the most logical place geographically, but about half of the European staff is based in the UK. “We operate in 20 countries in Europe, including some of the emerging markets in the east and along the Mediterranean”, he says.
The Kellogg approach has been very much to keep in with the practice on the ground. “We have an umbrella philosophy which says that we should provide people with an appropriate income in retirement, and generally speaking, this means reflecting the local market. So, for example, as these markets change, as they are in southern Europe at the moment, as in Spain and Italy, we will look at what the other multinationals are doing in those markets.”
He does query, whether this ‘follow the pack’ approach is the most appropriate and whether the group should be taking a more positive stance. But with the consolidation taking place within Kellogg, to reduce costs, there are limits as to what the corporation can effectively do currently. The motivational impact of being a benchmark benefits provider on employees can be significant in his view. “In somewhere like Spain, where we have a plant but no pension scheme, putting one in place could have a very positive effect, by sending a clear message about our long-term intentions there”. But in the short-term, he realises that it may be impossible to do something that is substantial by way commitment to new pensions schemes.
Knaggs, who headed up the UK pensions and benefits side for some years before moving desks to take over the European side, sees the pattern of benefit provision changing. “This will point us towards a more flexible approach to pensions than we have at the moment in most countries”. Until recently, the likelihood of someone joining the company and staying for a long time, for the whole of their career in fact, has changed in Kellogg, as elsewhere. “We have had a number of initiatives in North America and Europe, which meant we lost people, so the message we are sending out to them is that we will reward and develop you well while you are with us, but there are no guarantees in the future of longer-term employment. Against that background you have to examine the messages that final salary schemes are sending out, which is the completely opposite”. The company’s final salary in the UK, Germany and Ireland, which accounts for a good proportion of the European workforce.
As to the move to defined contribution, Knaggs says: “Like many companies, we have done a great deal of work on it and examined it very closely, but we have tended to step back from the brink, certainly for existing employees”. One of the reasons from holding back, has been the group’s very successful pattern of employment in that people have tended to stay a long time. “So in the UK where we have a high average age in our workforce, around the low 50s in fact, pensions have a very high profile in peoples’ minds. While we have not gone as far as introducing it for new entrants to the company, this is a possibility we have also looked at closely.”
The issue of flexible benefits is under scrutiny as well. “In the salaried areas across Europe, we have introduced a new performance bonus plan due to be paid next year. We would like to include some flexible benefit structure for that bonus, in order to give people a choice as to how it is paid.” In other words there could be an element of salary or bonus sacrifice to obtain an enhanced pension entitlement. There is some doubt whether this could be introduced across all of Europe. “In principle, we like to do this, but local practice often overrides any chance of harmonising or approximation. But we intend to look at this in detail over the next few months.”
Benefits in some countries have been linked to levels of social security payments for pensions and so on, which certainly happens in a number of the countries with established plans. “But if we are introducing plans in Spain and Italy, these certainly would not be linked to social insurance”. But the two main countries – UK and Germany – is where there is the link. As a US group in origination, the practice has not been to index pensions in the States. Any improvements in pension benefits that are going to cost the group over a certain amount will need to be approved by the US headquarters and there is definitely a philosophical difference in approach on this question between the two sides of the Atlantic at the principles level. But where there is a legal requirement this ofcourse is followed”, he points out.
The structure that Kellogg has on the benefits side is to use Knaggs and his team as a ‘Centre of Expertise’, which can be accessed by the local human resources people, who handle the detail in each country. He will then pull in specialist advice if needed. The areas he gets involved in include questions of pooling of insured benefits, though not currently of pension funds, which would have to be organised on a local basis. “The principles, policies and procedures can be pan-European. For example, we can have retirement principle of aiming for 60 to 70% of salary replacement, and this can be maintained as we move people around the organisation, so these will match the level of benefits of the home country or the intended final country. I would be brought in to discuss and advise on that stage, rather than get involved in the detail of implementation”. Kellogg uses Watson Wyatt as its benefit consultants on a pan European basis.
More and more employees are now moving cross border, but as he notes: “We have more issues, but not major problems. We have in some cases, where the host and home countries arrangements have not fitted together to design individual pensions for people”. These can be bridging arrangements, to tide personnel though these temporary phases in their Kellogg career. The number involved is still manageable – as for the most part it is possible to keep people in their home country schemes. The real problems arise in the case of third country nationals or when the moves get more complicated. “You can’t keep people in the home country plan, particularly when they left at a more junior level and return at a much more senior level. Each of these cases is individual, and so far we have not had that many”.
The pan-European structure has only been in place for a matter of three years, so Knaggs has not made as much progress as he would like to have on trying to co-ordinate things more. “We are a small group of people. During that time the group has been re-organising, restructuring and down-sizing. “So this is very much where we have focussed our benefits and total compensation attention. We have made some progress on the pension principles we want, particularly in the area of mobile employees. What we want to do is to take a hard look now across the whole area to see if we are consistent. But that is a priority for 2000, rather than 1999! The ideas are there, it is just a question of getting the time and the opportunity”.
The concept of a pan-European pension plan Knaggs finds attractive, even if it is many years away as a reality. There is considerable interest from head office in the US in the matter of leveraging investment opportunities and cost control, particularly in light of FAS 87. He agrees: “These are questions that need to be asked continuously, particularly when there are sizeable assets in pension schemes around the world”. The drive is coming from the US looking for greater co-ordination possibilities, but it is world-wide in focus.
“Like many companies, we are waiting for some one to give us a vehicle, a European pension plan opportunity, so that a lot of the ideas people have can be driven forward. All you can do now on a pan-European basis is fine tuning, which does not have any real impact. If you had the opportunity to put all your schemes together, many companies would be prepared and eager to do it”.