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Changes ahead for Paychex

A new CEO is not the only change in the works for Paychex Inc.

Just before the payroll and human resources services company announced the promotion of Senior Vice President of Operations Martin Mucci to president and CEO, its founder outlined changes to the sales structure to improve declining closing rates.

Analysts said the changes bode well for the company’s outlook, which also is bolstered by the selection of in-house candidate Mucci.

In a conference call after release of the Penfield company’s second-quarter results, founder and Chairman Thomas Golisano said he had noticed weaknesses in the sales of core payroll products since taking a larger role at Paychex after the resignation of CEO Jonathan Judge in July.

To remedy that, Golisano said, the company will modify its product offerings and pricing, though he did not go into details. Golisano also said compensation plans for salespeople would be changed to put greater emphasis on incentives, adding that the company has leaned too much on base pay.

There also will be a tighter focus on the structure of the sales staff, he added.

"We’ve got to do a better job of territory and quota assignment, as we’ve been weak in this area," he said.

His announcements were met with encouragement by analysts.

Kartik Mehta, an analyst from Northcoast Research Holdings LLC in Cleveland, said the choice of Mucci as CEO means Paychex has someone who clearly understands the changes being made.

"I think the company had a chance to go with an internal or external candidate, and in Marty they have someone who understands the company and the culture," Mehta said. "I think the advantage he has is that he clearly understands what Tom Golisano wants to accomplish."

Plans to introduce a pay structure for sales that relies more on incentives and to introduce new product and pricing packages mean the company is looking to return to its historic double-digit revenue and profit growth, added Vishnu Lekraj, an analyst with Morningstar Inc.

"We find this development encouraging, and we applaud the firm’s board in being proactive with improving its overall sales process," Lekraj wrote in a note to investors. "Combining these initiatives with a slowly improving operating environment should produce good short- and long-term results."

Golisano said he plans to be more active than he had been in the last five years, characterizing his role as an agent for change in the company.

"When I came in the door two or three months ago, it was obvious from the board chair that we had some issues, and if I contributed anything it was an impetus for change, which there seemed to be some reluctance for," Golisano said.

Golisano said the declining sales performance had much to do with the problems Paychex has faced in recent years. For fiscal 2010, Paychex saw total revenue fall 4 percent to $2 billion. In fiscal 2009 revenue had increased 1 percent to $2.1 billion while net income fell 7 percent to $533.5 million and earnings fell 5 percent to $1.48 a share.

When asked by Mehta whether the results at Paychex reflected the economy or were the fault of the company’s pricing or compensation, Golisano blamed both.

"I would say 70 percent internal versus 30 percent economy," he answered.

Mehta said Paychex clearly needed to do something to re-energize the sales force and he was encouraged that it saw the need for change.

"This is a step, and now they just have to wait it out to see if it’s successful," Mehta said.

Aside from making internal changes, Golisano said, Paychex must do more to expand outside the United States. A foray into Germany has been described by company officials as the early stages of a broader European initiative, but the operation is not significant compared to its U.S. operations.

"This company has been pretty dormant in trying to seek out opportunities in other parts of the world," Golisano said. "Where there are governments that are very intrusive in the payroll process, there have to be opportunities for us."

For the quarter ended Aug. 31, Paychex beat analysts’ estimates for revenue with an increase of 4 percent to $518 million. It also reported a 7 percent increase in net income, to $132 million, and an increase of 6 percent in diluted earnings per share, to 36 cents.

Lekraj called the results "an indication of accelerating improvement for the payroll processor" and praised the company’s profitability as cost cuts, efficiency gains and solid revenue growth helped improve operating margins.

Since the second quarter’s end, shares of Paychex’s stock have risen 11 percent, trading near $27.60 at midweek.

Despite the changes the company has made and announced in recent weeks, Mehta said it has done little to change his long-term outlook for Paychex.

"I’ve always thought this is an excellent company with a great business model, amazing margins and an excellent return on capital, and this doesn’t change any of that," he said.

Mucci is the third chief executive in the company’s nearly 40-year history.

Golisano said that while there was no strong predisposition among board members to hire from inside the company, it was a consideration that the company have an easy transition to its next leader.

"It was about 60-40 to choose from inside, because then (the company) would not have to go through that learning curve," he said.

Golisano called Mucci the kind of long-term builder the company will need in the future.

At Paychex Mucci led a team of more than 8,000 employees in 85 locations across the country and was responsible for all operations and customer service for the company’s 536,000 payroll and human resources services clients.

Before joining Paychex, Mucci was CEO of Frontier Telephone of Rochester Inc. and president of telephone operations for Frontier Communications.

Mucci was part of the three-member interim executive team appointed to lead the company, with oversight from Golisano and the board, after Judge’s departure.

10/8/10 (c) 2010 Rochester Business Journal. To obtain permission to reprint this article, call 585-546-8303 or e-mail [email protected].



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