LL BEAN PAPER

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CaseStudy-LLBean-MAN4301-Fall2019.pdf

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Project team

Author: Sandra M. Reed, SPHR

SHR M project contributors: Bill Schaefer, SPHR Nancy A. Woolever, SPHR

External contributor: Sharon H. Leonard

Copy editing: Katya Scanlan, copy editor

Design: Kellyn Lombardi, graphic designer

For more information, please contact: SHR M Academic Initiatives 1800 Duke Street, Alexandria, VA 22314, USA Phone: (800) 283-7476 Fax: (703) 535-6432 Web: http://www.shrm.org/education/hreducation

09-0235-SW

Case overview

In its 2008 annual Job Satisfaction Survey Report, the Society for Human Resource Management (SHR M) reported that for the past five years, employees rated compensation and benefits among the top three aspects most important to their job. But despite the importance of these aspects, employee satisfaction with their compensation and benefits packages remains low. According to a Conference Board report, “employees are least satisfied with their companies’ bonus plans, promotion policies, health plans and pensions”. Employers are missing critical opportunities to maximize employee job satisfaction and other organizational outcomes through their total rewards programs.1

In the book Dynamic Compensation for Changing organizations: People, Performance & Pay, The Hay Group asserts that traditional pay structures no longer keep pace with the emerging, strategy-focused organizations that exist in today’s globally competitive market. “What shifted were organizational work values, work cultures and business strategies. Although they have been largely overlooked, dramatic changes in the organizational rules have frequently rendered traditional compensation strategies ineffective. Employees today are expected to work in teams rather than solely on their own. They are expected to keep learning new skills and to assume broader roles. They are expected to take more risks and responsibility for results. As a consequence, we are slowly coming to the realization that we may be paying for the wrong things, sending inconsistent messages about the company to its employees, or creating artificial expectations of continued advancement and raises, no matter how well the company performs.”2

Furthermore, in its publication Implementing Total Rewards Strategies, SHR M notes that “the right total rewards system—a blend of monetary and non-monetary rewards offered to employees—can generate valuable business results. These results range from enhanced individual and organizational performance to improved job satisfaction, employee loyalty and workforce morale.”3

Today, HR professionals are responsible for programs far beyond the profession’s administrative personnel roots. They are expected to measure the success or failure of HR practices based on the achievement of organizational outcomes. Brand identity, bottom-line profitability, employee job satisfaction and increased management focus are all outcomes that can be achieved in part through an organization’s total rewards program. This case examines two very different organizations and how they align their total rewards programs with their organizational goals and values.

L.L. Bean

comPany InformatIon

L.L. Bean is a privately held outdoor apparel specialty catalog and retail store founded in 1912 by Leon Leonwood Bean, an outdoor enthusiast and entrepreneur. In his autobiography, My Story, Bean wrote that nothing eventful occurred before his 40th year when he created a leather-topped, rubber-bottomed hunting shoe. As the legend goes, he sold his first 100 pairs by mail order with a 100 percent satisfaction guarantee. When 90 pairs were returned defective, he kept his promise and made the refunds. Bean borrowed $400 from his brother to perfect the design and went on to become a clothing consultant for the military during World War II, an author and, of course, the president and founder of a retail giant. As described by Yahoo finance online:

“With L.L.Bean, you can tame the great outdoors—or just look as if you could. The outdoor apparel and gear maker mails more than 200 million catalogs per year. L.L.Bean’s library includes about 10 specialty catalogs offering products in categories such as children’s clothing, fly-fishing, outerwear, sportswear, housewares, footwear, camping and hiking gear, and the Maine hunting shoe upon which the company was built. L.L.Bean also operates about a dozen retail stores and some 15 factory outlets throughout the Northeast. In addition, it sells online through English- and Japanese-language Web sites.”

L.L.Bean’s annual sales grew from $616.8 million in 1990 to $1.169 billion in 2000, with an average annual growth rate of 6.8 percent. In 2000, L.L.Bean paid a 10 percent company-wide bonus.

More than 11,000 people worked for the company during the 2006 holiday season, and in 2007 the company reported $1.5 billion in sales, with approximately 80 percent of those sales coming from Internet and catalog sales. The company continues to evolve into a multi-channel sales giant through mail order, telephone, Internet and in-store sales.

the brand

L.L.Bean has always been a marketing professionals’ dream of creating a brand into an institution. Strategists, marketing specialists and other business professionals (including the competition) have tried to duplicate the company’s achievements with varying degrees of success. A brand is built on perceptions about quality, service and status created by using a particular product or working with a specific

company. A brand can be built using marketing techniques such as visual imagery, wording that identifies what the organization does, and advertising campaigns targeted to a desired demographic. Strong brand identity can build a relationship with the consumer. In L.L.Bean’s case, this is a relationship with Maine and the great outdoors. The company operates on the belief that the brand should reflect Bean’s values, not just the products it sells. This case examines how L.L.Bean built the brand by using employees as the critical channel through which to accomplish strategic directives.

When Leon Gorman, grandson of Leon Leonwood Bean, assumed the presidency of the company in 1960, he sent a message to employees defining their stakeholders— those to whom L.L.Bean was ultimately accountable in a values-driven business. L.L.Bean’s stakeholders were its customers, employees, vendors, communities and the natural environment.

In addition to a strong customer focus, the company sought to solidify the brand through social responsibility. Social responsibility is a business concept driven by the principles of ethically sound practices, awareness of the business imprint on the environment, and improvement of the quality of life of the company’s employees and the communities in which it operates. Social responsibility at L.L.Bean is divided into four categories:

The environment n

With company products geared for outdoor use, L.L.Bean focuses its philanthropic efforts on preserving the environment. Examples include green building, charitable giving and employee participation in preservation activities.

Paper procurement n

L.L. Bean is committed to sustainable, responsible paper procurement, an important consideration because the company mails more than 200 million catalogs each year. It uses recycled fiber, and suppliers are required to have programs in place to support sustainable management of natural resources.

Labor rights n

When the company decided to move some operations offshore, it made a commitment to labor rights, including human rights monitoring. In fact, the company terminated at least three offshore vendor relationships that did not meet its human rights standards. Included in Bean’s Vendor Code of Conduct are standards for safety, non-discriminatory practices, and fair compensation and benefits. This code of conduct includes processes for auditing and investigating complaints.

Charitable giving n

Charitable giving at L.L.Bean is based on Gorman’s concept of the stakeholder and the company’s heritage in the outdoors. The company has donated more than $5 million toward environmental conservation efforts to groups like The National Park Foundation and Ducks Unlimited. It sponsored the Peace Climb up Mt. Everest, during which more than three tons of trash was collected. In addition, quality of life of the Bean employee and customer is reflected in the company’s charitable giving efforts to groups such as United Way and the Portland Symphony Orchestra.

the Problem

The company spent the 1970s and 1980s developing the brand into an American institution. L.L.Bean operated on the premise that profits are an outcome of strong customer service. Profits, therefore, were a byproduct rather than a corporate focus. Growth was strong, particularly in mail order. By 1990, however, sales were stagnating, productivity was declining and the mailing list was not growing. The U.S. economy slipped into a recession, and as a result, 1990 was the worst year for L.L.Bean in a decade. Sales growth improved in 1992 when the company expanded into the Japanese market. In 1995, Bean launched their e-commerce web site. There was significant upper-management turnover, though, and Gorman believed that because of the rapidly changing external environment, the company had lost direction. In 1996, sales flattened again, and for the first time under Gorman’s leadership, the company reported a decline in sales. It was the first time the board of directors voted to not award annual bonuses to employees.

the case at l.l.bean

L.L.Bean launched a strategic review. The 80+-year-old company had been through decades of change, yet its core business model had consistently provided excellent growth and profit. This was no longer the case by the 1990s when the competitive landscape reflected a more technically savvy and cost-conscious customer and global employee market. The need to reorganize became obvious to Gorman.

The strategic review process began in 1996 and included analyses of both strategic and operational processes, including brand identity, target markets and operational competencies (employees). HR was one of the strategic business units (SBUs) developed as an outcome of the review process. The SBUs were part of a decentralization process in which each unit had responsibility for its profit and loss and was held accountable to a balanced scorecard approach in performance metrics. This designation for the HR department allowed it to develop operational tasks such as compensation and benefits into a strategic process with measurable outcomes—for example, linking pay to performance and increasing employee job satisfaction. In addition, total rewards were used as strategic solutions to many of the

issues identified in the review process, including global outsourcing, multi-channel marketing initiatives, employee recognition and the redefining of the brand.

Multi-channel marketing was another outcome of L.L.Bean’s strategic review. Multi-channel marketing is the ability to offer customers more than one way to purchase a product. The company decided to expand their brick-and-mortar stores and capitalize on the opportunity presented by the Internet (Exhibit A). According to Gorman, Internet retail sales doubled each year since 1996.

A weakness identified in the strategic review was that the company’s financial and human resources were geared to grow the catalog business but not retail expansion or Internet sales. The diversification initiative took staffing to another level. For example, the decentralization of the management team to other locations required concentrated efforts by the company to infuse the non-corporate facilities with L.L.Bean values. The development of new jobs required thorough market research, including a comprehensive job analysis process. The lack of technical skills such as data processing threatened to topple the organization if it didn’t acquire the staff with the required knowledge, skills and abilities to perform in a highly competitive market at an organization that was used to setting the standards for quality. Developing job descriptions and conducting salary surveys allowed the company to develop a comprehensive compensation and benefits framework to manage this period of rapid growth and diversification.

As a result of the strategic review process, total rewards at L.L.Bean became a core business practice critical to the accomplishment of organizational goals. Traditional benefits offered at L.L. Bean include performance-based bonuses and cafeteria- style health care. Non-traditional benefits include store discounts, on-site fitness programs and the use of company-owned outdoor gear such as tents and canoes. The company continues the tradition of outdoor adventure days and trips as a way to connect employees with the L.L.Bean values—the love of the outdoors. L. L. Bean himself believed in profit-sharing with employees long before it became a strategic compensation practice. Back in the days when pay was 18 cents an hour, paid in brown envelopes of cash, Bean surprised employees with bonuses calculated as a percentage of profits—Bean’s employees were paid when the company performed. These practices reflect the L.L.Bean philosophy that the employees’ passion for the company and its products will translate to the customer. As far as Bean was concerned, the company had an obligation to stakeholders, and it began with employee satisfaction. As Leon Gorman put it:

“Our stakeholders have invested their patronage, careers, finances, social services and outdoor values in our enterprise. They trust us to tell the truth, to sell quality products, to guarantee satisfaction, to pay fair wages and provide opportunities for growth, to secure their investment, to participate in society, and to sustain our natural environment. They trust us to grow to the extent that we can enhance our benefits to them. They trust us to go the extra mile in everything we do.”4

Global outsourcing of operations brought intense scrutiny to the function of compensation and benefits. This resulted in Gorman leading the challenge for fair wages at the company’s global subsidiaries and vendors and, in some cases, firing those who failed to comply.5 In addition, global benefits were markedly different from U.S. benefits because they were infused with cultural purpose. For example, among Japan’s official holidays are Respect for the Aged Day, a Cultural Day, the Emperor’s Birthday and Physical Fitness Day. In addition, although Japan’s retirement system was similar to the United States (a combination of Social Security and employer-sponsored plans), Japanese employees typically collect one lump-sum severance payment at the time of retirement based on years of service. Commuter costs and housing subsidies are also common fringe employment benefits in Japan.6

Did the 1996 strategic review work? Were employees rewarded for their continued excellence, loyalty and dedication to the corporate objectives? Let’s look at L.L.Bean’s 2006 Year in Review press release, as reported by PR Newswire:

l.l.bean Inc. rePorts 2006 net sales results

“For the 2006 fiscal year ending February 25, 2007, L.L.Bean reported record annual net sales of $1.54 billion, a 4.6 % increase over 2005. The company also announced that its Board of Directors approved a cash award of 7.5% of annual pay to eligible employees, a payout of approximately $25.5 million. An additional $8.8 million will be allocated to the pension plan, keeping the plan fully funded.

“It’s a well deserved bonus,” said Leon Gorman, L.L.Bean’s Chairman of the Board. “2006 was a year in which we made excellent progress on a variety of strategic initiatives important to the future of our business. We are pleased to be in the position of rewarding Bean employees for their achievements.”

Chris McCormick, L.L.Bean’s President and CEO, expanded on the year-end results for 2006. “We had a strong start and strong finish to the fall and winter selling season,” he said. “Although unseasonably warm weather had an impact on sales in December and early January, our business performed very well and the product line continues to hit the right mark with our customers. I am very proud of all that we accomplished in 2006 through our employees’ hard work and dedication,” he continued. “It was an exciting year with a lot of energy and growth, including the opening of three additional stores, launching $90 million in investments in our hometown of Freeport, and making further progress on the international side of our business.”

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