Supervisor Pay Level is Under Water

Friday, July 30, 2010

It does not happen often but occasionally, a supervisor, manager or other management level employee will find that a subordinate will actual earn more than their supervisor. If the subordinate is a non-exempt hourly employee, it could be a function of overtime, shift, holiday, danger or “special” pay. If the subordinate is a highly trained technical expert, it may be a reflection of market conditions, which are driving a unique set of job skills up at an extremely accelerated rate. This condition may occur when hiring a new employee, if the supervisor’s role is under or mis-classified. Usually, frequent and detailed monitoring of subordinate-supervisor pay relationships will identify most of these issues with “pay compression”. Pay compression results from a situation where a subordinate’s pay is near or even surpasses the supervisor’s pay. Best practice is to have a well developed and thought-out organizational policy on how to address this infrequent situation.

One possible solution is to raise the pay (base and/or incentive pay) of the supervisor to a level with sufficient latitude so compression will not occur. How much is sufficient? That becomes an organizational business decision; I have seen 20% to 50% spreads. However, in organizations, which have several layers of management, this action may result in compression at higher levels. This is the “trickle-up” rather that the “trickle-down” effect.

A second option is to rotate duty assignments in a way that assignments are spread across a number of employee peers so that no one employee accrues large blocks of overtime, shift, holiday, danger or “special” pay. This could also have positive employee relations effects since everyone would get to share in the wealth. Of course, that premise might not be as effective if the assignments involve a high degree of danger, travel time or prolonged absences.

As a third option, offer some form of lump sum payment to the subordinate. This could be tricky if the subordinates are non-exempt and subject to Federal and/or state overtime rules. The problem is that a subordinate could still earn more than a supervisor depending on the size of the lump sums. Attention would also have to be paid least these lump sums find their way into other direct and indirect compensation calculations.

One suggestion, if these subordinates process extra-ordinary skills, their immediate supervisor will have to come to the realization that the organization needs those skills and that the current situation may have to be tolerated for a short duration. However, the least the organization should do is to provide some form of a temporary increase for the supervisor until the situation can be returned to normal.

If you are not already doing this, you should be closely monitoring the pay between subordinates and supervisors, when hiring takes place, you should review the offer salary to determine if there is any possibility of compression occurring with both peers and supervisors. The same should be done when promotions occur. Most modern payroll and HR systems allow for robust report writing capable of identifying these issues long before they become a real problem. A progressive and proactive compensation plan will apply the best practice having a well developed and throughout organizational policy.

Off-Clock Work and FLSA Rules

Wednesday, July 28, 2010

Some employers are famous for working employees “off the clock” and not paying them for those undocumented hours. This is certainly more of an issue with hourly workers rather than salaried employees. The most famous of these employers appears to be Wal-Mart. Over the last decade, Wal-Mart has faced a number of employee lawsuits over its failure to pay for time worked by employees either before they clocked in or after they clocked out. Federal and state labor law generally speaks to the fact that work of economic value to the employer is work for which wages must be paid.

Bloomberg reporters Lauren Coleman-Lochner and Margaret Cronin Fisk in an article dated June 12, 2007, reported that Wal-Mart was facing over 70 wage and hour lawsuits. In a New York Supreme Court decision, Justice Richard M. Platkin in Albany, New York, denied class-action status to a group of Wal-Mart employees. However, on the same day, Wal-Mart had lost efforts to undo approvals of employee class actions over pay in Missouri and New Mexico. In these suites, Wal-Mart employees alleged that managers required employees “skip meals and breaks and falsified timecards”.

Was this some isolated action by a few store managers striving to keep their labor costs down? Retail often has very tight margins, and a discounter like Wal-Mart would certainly have razor thin mark-ups on product. On the other hand, was it a systemic feature ingrained into the culture of Wal-Mart. It is immaterial as far as the Fair Labor Standards Act (FLSA) and the respective state labor laws are cornered. What are the “facts and circumstances” of the specific events.  For the purposes of time worked, the Fair Labor Standards Act (FLSA), defines “work hours” to mean “time spent by employees performing work for their employers for which they are entitled to compensation.”

As to the question of missed break and meal periods, the “Fair Labor Standards Act (FLSA) does not require employees be given meal or rest breaks.” However, if short breaks (less than 20 minutes), these short break times are considered time worked. Furthermore, meal periods (of at least 30 minutes), “are generally not time for which employees must be compensated.” Therefore, since FLSA generally does require break and meal periods, we must turn to the respective state law for guidance. For example, in the state of Missouri, the Department of Labor states that:

“Missouri law does not require employers to provide employees a break of any kind, including a lunch hour. These provisions are either left up to the discretion of the employer, can be agreed upon by the employer and employee, or may be addressed by company policy or contract.”

Therefore, for the purposes of break (rest) and meal periods, neither the US nor the state of Missouri requires that either a break or a meal period be provided to employees (exceptions apply for youths). While break or meal periods may not be required, nevertheless, employees are required to be paid for the time they work.

In reviewing the “facts and circumstances”, the court will review the time records supporting the employer’s position that employees were paid for their time worked. The employees are going to testify that they were told not to clock-in or to clock-out and return to work. If the employees’ allegations that they were not paid for the time is persuasive, the court may find in their favor. One reason why Justice Richard M. Platkin denied class-action status to the New York Wal-Mart employees was:

``The facts and circumstances surrounding the allegedly unpaid work vary substantially from associate to associate,''

A nice way of saying that the employees’ stories did not pass the “reasonableness” test.

CEO Pay in a Turbulent Recovery

Monday, July 26, 2010

The debate over CEO pay has been in the front of the press and discussed for years. Whether during up-cycles or downturns, most observers have a very specific focus for their criticism or praise when it comes to CEO compensation.  The current economic times has forced the topice of CEO pay to the surface once again

In a June 1, 2006 article, “The great overpaid CEO debate” published on CNET News, by Fred Whittlesey; CEO overpayment was attributed to, “too much power, inattentive boards of directors, conflicts of interest by compensation consultants, [and] the use of stock options”. At the time, Whittlesey was the Chief Compensation Officer with PayScale, currently he is with the Hay Group in Seattle. Whittlesey, in his article, suggests that comparing CEO pay to the average line worker is a “flawed calculation[s]”, of course it is. CEO’s make or break entire organizations with their leadership; a line worker makes or breaks a tool, a single product, or at worst, a day’s production. To compare the impact of a CEO with that of a single line worker is analogous to contrasting a 4-door passage car and an 18-wheel tractor-trailer. Both can be in the top of their lines, both can be relatively expensive; however, both have their distinct functions. Rarely are the two interchangeable.


A recent report brought CEO pay to the public’s attention when Ed Smith, a Chicago alderman pointed out the disparity between the pay of Wal-Mart CEO Michael Duke and the “average” Wal-Mart employee in a planned store in Chicago’s Pullman neighborhood. Alice Gomstyn of ABC NEWS’ Business Unit reported on the July 2, 2010 story in an article titled, “Walmart CEO Pay: More in an Hour Than Workers Get All Year?”, and pointed out a few errors in Alderman Smith’s facts. According to Wal-Mart’s 4th quarter earnings report 2009 net sales exceeded $405 billion. Gomstyn reported that Equilar, the executive research firm, placed Duke’s earnings at an amount just below $20 million in 2009, excluding any performance awards. That means Duke’s pay was just under 1/2 of 1% of net sales for 2009.


In a Bloomberg BusinessWeek article,”CEO Pay Drops, but…Cash Is King”, released on March 25, 2010, and authored by Jessica Silver-Greenberg, Tara Kalwarski, and Alexis Leondis, it was reported that CEO pay actually fell 8.6% in 2009. Certainly, this would be expected in the light of a weak economy and a sluggish recovery? However, the authors’ analysis pointed to a troublesome fact, while overall CEO pay fell for the 81 companies studied, the portion of total compensation for CEO’s which constitutes cash rose. At issue, here is that companies generally use long-term non-cash incentives e.g., stock options as a means to tie CEO performance to organizational market share growth and financial achievement. Moreover, organizations often do this over extended periods in order to increase that market place growth and thus return value to shareholders. By the way, many of those shareholders are public and private pension funds and 401(k) mutual funds. If organizations refocus their attention from long-term incentives to shorter-term cash, the value returned to shareholders, including pension and 401(k) funds, could be negative.


Devin Leonard in a special report “Bargain Rates for a C.E.O.?” on executive pay in the New York Times on-line version for April 2, 2010, reported that many top executives saw their pay come under increased scrutiny as the recession continued to reverberate throughout the world’s economies and as the US government and Congress looked deeply into CEO pay practices. Moreover, it must be expected, after agreeing or being “encouraged” to take billions in bailout monies, many organizations had their compensation practice brought to the light of day and questioned. Kenneth Feinberg, President Obama’s “pay czar” has a number of recommended pay changes for CEO’s including paying for some perks out of their own pockets. In a surprise move, Feinberg, suggested that more of a CEO’s pay should be in the form of stock. What a radical concept.


It is clear that like many other activities in the world today, CEO pay has become the focus for many to direct their energy and maybe even their anger. Whether it is the Chicago alderman who perceives the gap between Wal-Mart’s CEO and store employees should be narrowed or Kenneth Feinberg who wants more CEO compensation tied to stock, everyone has an opinion. At the most basic level it is a highly charged and emotional issue, most of us feel that we deserve the same as the person next to us. The problem is that CEO pay decisions should made in the boardroom and not in a Congressional caucus room.

“Outside Salespersons” and “Administrative Employees” FLSA Exemptions for Pharmaceutical Representatives

Wednesday, July 21, 2010

To revisit the Second Circuit Court of Appeals recently rendered decision in Novartis’ Fair Labor Standards Act (FLSA) and their claim of exemption from overtime payment since their Drug Representatives were Outside Salespersons, or Administrative Employees under FLSA.

In reaching the decision that Novartis’ “Drug Representatives” were not Outside Salespersons, or Administrative Employees under FLSA, the Court cited a number of facts in the case concerning Novartis’ “Drug Representatives” as salespersons:

1. They do not sell Novartis’ products to physicians
2. There is no exchange of goods or services
3. There is no contracting to sell goods or services
4. There is no consignment to sell goods or services
5. No orders are taken for the sales of any goods or services
6. No transfer of title occur

With these facts in mind, how can a reasonable person conclude that Novartis’ “Drug Representatives” are Outside Salespersons? While it is correct to recognize the Rep’s are “marketing” and “promoting” Novartis’ products, there is no clear linkage between the marketing of the products and the consumption of those products by a physician’s writing of a prescription, days, weeks or months later. Novartis is only able to track the sales of its products through a secondary party who can then only report those products sold in the physician’s geographical area. Since other factors beyond the Rep’s interactions may influence the physician’s prescribing a Novartis product, it would require a grand leap of faith to assume that the Rep was the sole influence on the physician’s behavior.

After the Court addressed the question of Outside Salesperson, it turned its attention to whether or not Novartis’ “Drug Representatives” were exempt Administrative Employees. Once again, the court relied on the facts in the lower court’s finding as well as its own and concluded that Rep’s:

1. Have no authority formulate, affect … Novartis’ management polices

2. They are not involved in short or long term planning
3. They do not carry out major assignments of Novartis’ business operations
4. They cannot bind Novartis to any matters of significant financial impact
5. They cannot change the core Novartis messages to the physician
6. They cannot independently determine the number office visits per week or month
7. They cannot change the number of time a specific drug is promoted
8. They are required to follow a specific script when dealing with physicians

The Novartis “Drug Representatives” contended that such restrictions rendered them little more than “robots”. While that analysis may seem extreme, it is clear that Rep’s had a much-reduced level of independent judgment when it came to matters dealing with physicians.

Novartis argued, on other hand, that Rep’s had the ability to exercise control over what restaurants catered physician events, what hotels hosted those events, what foods were or were not served at these various events. The Rep’s rebutted with the fact that all financial matters were tightly controlled within budgets overseen by several layers of management.

In providing its opinion, the Appeals Court simply sent the case back to the lower District court with the directions to:

“We have considered all of Novartis’s arguments in support of the judgment and have found in them no merit. We vacate the judgment of the district court and remand for further proceedings not inconsistent with this opinion.”

Had Novartis granted a greater role of its Rep’s in the overall design, deployment, planning, and management of Novartis’ pharmaceutical marketing and sales policies, the Appeals Court might have ratified the lower court’s findings?

Possible changes to the Novartis Rep relationship:

1. Have no authority formulate, affect … Novartis’ management polices
  a. Allow Rep’s to have input into management policies
  b. Allow Rep’s to participant in management policy planning
  c. Be able to show where and how those inputs were incorporated into policies

2. They are not involved in short or long term planning.
  a. Include Rep’s in short or long term planning
  b. Allow Rep’s to participant in planning sessions
  c. Be able to show where and how those inputs were incorporated into planning

3. They cannot change the core Novartis messages to the physician
  a. Allow Rep’s to craft the core Novartis messages for their area
  b. Allow Rep’s to participant in core messages planning sessions
  c. Be able to show how Rep’s crafted the core Novartis messages

4. They cannot independently determine the number office visits per week or month
  a. Allow Rep’s to determine the number office visits, as part of “planning”
  b. Allow Rep’s to determine the who, what, when, where, and number office visits
  c. Be able to show how Rep’s determined the number office visits

5. They cannot change the number of times a specific drug is promoted
  a. Allow Rep’s to determine number of times a specific drug is promoted, as part of “planning”
  b. Allow Rep’s to determine the who, what, when, where, and number drug promotions
  c. Be able to show how Rep’s determine number of times a specific drug is promoted

6. They are required to follow a specific script when dealing with physicians
  a. Allow Rep’s to craft a specific script when dealing with physicians
  b. Allow Rep’s to craft a deviations from that script
  c. Be able to show how Rep’s crafted a specific script and its deviations

As with any matters with potential regulatory, legal, and financial, you should seek professional credentialed advice.

Court of Appeals Rejects “Outside Salespersons” and “Administrative Employees” FLSA Exemptions for Pharmaceutical Representatives

Monday, July 19, 2010

The Second Circuit Court of Appeals recently rejected arguments form Novartis Pharmaceutical Corporation that Pharmaceutical Sales Representatives a.k.a., “Drug Reps” were exempt from overtime payment since they were Outside Salespersons, or Administrative Employees under the Fair Labor Standards Act (FLSA). The court reached this decision after concluding that “Drug Representatives” actual do not actually sell any products and they have limited discretion over their work routines. In ruling for the Pharmaceutical Representatives, the Court of Appeals sent the case back to the lower court (District Court) for “further proceedings”.

What makes this case of interest is that a number of earlier FLSA cases have found in favor of the drug companies and their claims that Pharmaceutical Sales Representatives are outside sales and/or administrative employees under the Act. . In an unpublished ruling, the United States District Court for the District of New Jersey found Pharmaceutical Sales Representatives of Alpharma, LLC were exempt from the overtine provisions of the Fair Labor Standards Act (FLSA) since they met the administrative employee exemption under the Act. Alpharma, LLC, is a subsidiary of King Pharmaceuticals and a global producer of animal health products.

In a decision filed February 02, 2010, the United States Court of Appeals for the Third Circuit ruled in favor of an administrative employee exemption for Pharmaceutical Sales Representatives involving Johnson and Johnson. However, in the same filing, the Court declined to offer an opinion that Johnson and Johnson had proven a case for outside sales exemption by stating in its decision:

“Inasmuch as we affirm the District Court’s application of the administrative employee exemption, we do not address the question of the applicability of the outside salesman exemption.”

As recently as November 2009, The United States District Court for the District of Arizona ruled that Glaxo “Sales Reps” were exempt from FLSA and thus exempt from overtime pay. In October 2007, the U.S. District Court for the Central District of California agreed with Wyeth, Bayer, and Roche concluding that Pharmaceutical Sales Representatives were exempt from FLSA as “outside salesmen”.

When the District Court found in favor for Novartis, the court cited the FLSA standards for an outside salesperson as an employee, “ Whose primary duty is: making sales or obtaining orders or contracts for services or for the use of facilities for which a consideration will be paid by the client or customer; and who is customarily and regularly engaged away from the employer's place or places of business in performing such primary duty.” In agreeing that Novartis Pharmaceutical Sales Representatives were “administrative employee”, the District Court cited DOL regulations that employees who “earns more than $455 per week and whose primary duties include: (1) "the performance of office or non-manual work directly related to the management or general business operations of the employer or the employer's customers" and (2) "the exercise of discretion and independent judgment with respect to matters of significance."

Of significance here is that you may not be able to depend on your sole judgment that a positions meets the test for either outside sales or administrative employee exemption for overtime. At issue, are a number of points including your organization’s reputation in the public community, labor market, and business community and the loss of Goodwill with those audiences? It might be more practical to redesign job rather than be faced with large and costly litigation costs. A number of small changes in a job’s “administrative” duties could make it clear that the role meets the administrative employee exemption, even if it does not meet the outside sales test.

As with any action dealing with Federal, state or local laws, rules, and regulations, you should seek qualified credential professional assistance in dealing with such matters.

Plan Features for “Grandfathered” Health Plans Under PPACA

Tuesday, July 13, 2010

The Patient Protection and Affordable Care Act (Act) exempted or “grandfathered” those employer sponsored health care plans in effect on or before March 23, 2010 from some but not all provisions of the Act. Both these exemptions as well as mandated provisions were documented in the Federal Register on June 17, 2010.  Additional information is provided by DOL.  This grandfathering created certain advantages to employers with such plan by allowing them to maintain their current plan design features and avoid having to add possibly expensive features mandated under the Act. At the same time, the Act added certain notification requirement for grandfathered plans, notification requirements in addition to those already on the books.

The mandated and exempted plan feature
provisions include for grandfathered plans:

.................................................................................................................... Applies to ---

............................................................................................................... Grandfathered
Section ---------------------------------------------------- Title ----------------------------------------------------- Plans

§ 2701 ....... Fair Health Insurance Premiums ............................................................  No

§ 2702 ....... Guaranteed Availability of Coverage .....................................................  No

§ 2703 ....... Guaranteed Renewability of Coverage ..................................................  No

§ 2704 ....... Prohibition of Preexisting Condition Exclusions or ................................ Yes

                   Other Discrimination Based on Health Status

§ 2705 ....... Prohibiting Discrimination Against Individual ......................................... No

                   Participants/Beneficiaries Based on Health Status

§ 2706 ....... [Providers] Non-Discrimination in Health Care ........................................ No

§ 2707 ....... Comprehensive Health Insurance Coverage ........................................... No

§ 2708 ....... Prohibition on Excessive Waiting Periods .............................................. Yes

§ 2709 ....... Coverage For Individuals Participating in ............................................... No

                   Approved Clinical Trials

§ 2711(a) ... No Lifetime or Annual Limits ................................................................ Yes

§ 2711(b) ... [Restricted] Annual Limits Prior to 2014 ................................................ Yes

§ 2712 ....... Prohibition on Rescissions .................................................................... Yes

§ 2713 ....... Coverage of Preventive Health Services ................................................. No

§ 2714 ....... Extension of Dependent Coverage ........................................................ Yes

§ 2715 ...... Uniform Explanation of Coverage Documents/ ....................................... Yes

                  Standardized Definitions

§ 2715A .... Provision of Additional Information ......................................................... No

§ 2716 ...... Prohibition on Discrimination in Favor of ................................................. No

                  Highly Compensated Individuals

§ 2717 ...... Ensuring The Quality of Care .................................................................. No

§ 2718 ...... Bringing Down The Cost of Health Care Coverage ..................................Yes

§ 2719 ...... Appeals [Claims] Process ......................................................................... No

§ 2719A ... Choice of Health Care Professional .......................................................... No

Employee Benefits Security Administration (EBSA) Releases Rules on “Grandfathered” Health Plans Under PPACA

Monday, July 12, 2010

On June 17, 2010, the Employee Benefits Security Administration (EBSA) released its “interim final” rules on the “grandfather” provisions of the Patient Protection and Affordable Care Act (Act). Under the PPACA, certain hearth care plans, which were in effect on or before March 23, 2010, are exempted from some but not all provisions of the Act. Current grandfathered plans may lose their status, as a grandfathered plan should, if at some time in the future; they make certain changes to their plan design and features.

Under the Act, should a plan lose its grandfathered status, the plan would become subject to the full weight of the ACT. This could prove to be problematic for any organization that has several plans. The loss of grandfathered status in one plan DOES NOT mean the loss of grandfathered status in all other plans. Each plan stands alone with respect the being grandfathered or not. However, it could result in an additional administrative issues having to manage a mixed bag of plans. One employer with which I am familiar has several dozen plans, some with collectively bargained agreements, and others without such agreements. The grandfathering status of each plan has to be view separately from the status of others.

One surprising turn of events is that collectively bargained plans were not totally exempted from the provisions of the Act as might have been expected. Historically, most Federal benefits legislation has provided for a broad exclusion of collectively bargained agreements. Collectively bargained plans that are “fully” insured will be considered grandfathered if the plan was in effect on or before March 23, 2010. Fully insured plans will continue to be considered grandfathered as long as they continue to meet the grandfathering rules. However, those collectively bargained health care plans, which are “self-funded”, are subject to the Act’s provisions in the same way that any other self-funded plan is.

Grandfathered plans could lose their grandfathered status if they:

- Demand employees switch plans to avoid compliance.

- Eliminate benefit provisions.

- Engage in divestitures or acquisitions to circumvent compliance.

- Fail to inform their employees of their grandfathered status.

- Fail to maintain documentation to support grandfathered status.

- Impose new or decreased annual limits.

- Significantly decrease employer contributions.

- Significantly increase deductibles, co-payments,

  Co-insurance payments.

Grandfathered status, much like self-funded status provided an exemption from mandated benefits, relived plans from meeting some of the provisions of the Act. Loss of that status could prove to be unpleasant at least.

What is Wrong with Employee Engagement?

Friday, July 09, 2010

In this on-again off-again roller coaster economic recovery, why should organizations be concerned with employee engagement? Employees who have been out of a job and on the street for 3 to 9 months or even a year should be plenty engaged, shouldn’t they? After all, many of their cohorts are still looking for a job, for some; they are on their second round of layoffs since the economy went south. For some job seekers things have gotten so bad they have given up looking and are not even being counted in the jobless numbers.

Employers need to remember, these are the production workers assembling products, they are the sales and marketing representatives pounding the pavement selling those products, and they are the administrative staffs in Finance, HR, and IT holding the corporate or regional offices together with a third of their former staff. These are employees who had their pay frozen, their 401(k) contribution match suspended, their hours cut back, the cost of their health care increased by double digits, and assigned double duty to absorb the work of laid off cohorts. They have come in everyday not knowing whether they will get a handshake or a pink slip.

All too often businesses do not consider that a few small acts of appreciation will go a long ways towards engaging employees in the daily operations. The other day I was in a national sub shop waiting in line for my sub to be prepared. All of a sudden, the manager threw my half made veggie sub in the trash can, where upon he explained that “something” had fallen on to the sandwich. He then directed the sub maker to “do it again”. Had that sub maker been “engaged” she would not have allowed my sub to be contaminated with whatever it was that fell on it. True, a 6 inch is not much of a loss, but then multiply it by 5 days a week, 52 weeks a year and organizations that operate on razor thin profit margins cannot not afford one trashed sub.

Every morning I stop at the small coffee shop in my building and order one large coffee. As soon as the manager sees me, he has my large coffee ready to go. No, it is not some national coffee chain headquartered in Seattle. It is a small mom and pop where the owner and his wife work to make a modest lining. How engaged is the owner-manager, very engaged, he knows that his livelihood is directly related to the 500 or so employees who work in that building. If his product quality is poor, there is another coffee shop just down the street. If his service is too slow, there are numerous sandwich shops nearby.

The trick with employee engagement is to get every employee from the loading dock to the C-Suite to act and behave as if it were their personal business. One trucking firm had the names of the designated driver and mechanic painted on the side of the trucks. A paper products company held an annual truck rodeo where families were invited to watch drivers and mechanics “wrangle” their trucks through obstacle courses. Utility companies have held similar “rodeos” where power lineman and others demonstrated their ability to climb poles, hang wire, and make corrections. One utility company holds a rodeo where the main event is locating underground pipes and cables using remote sensing devices.

Sometimes simple is better!

What Is Behind 3 Percent Merit Budgets?

Monday, July 07, 2010

Indications are that 2010 and may be even 2011 will be another couple of years with 3% +/- merit budgets. Why 3%, isn’t the economy is turning around, well yes on some days and on others, well no one is sure where it is going. What is keeping budgets so depressed?

Many organizations are still concerned about upping pay since there is a possible that new lay-offs may be forth coming. Holding back on anything other than a minimal increase is the conservative nature of businesses, large and small. With many organizations seeing only modest increases in orders for goods and services it makes more sense to park any extra cash to hedge against any possible future double-dip or unforeseen events.

Consider that with national unemployment at 9.5%, many employees see little need to up wages while there is still a significant supply of unemployed labor available. Some employers may be tempted to us the continuing high unemployment levels to “motivate” their current workers to work just a little harder. Some workers may even be reluctant to ask for increases for fear as “getting’ on the bosses radar”. A number of organizations in an effort to side step lay-offs reduced their workers’ hours, so before wages are increased, workers’ hours will have to return to “normal”.

Since the “Great Recession” also cut back on the availability of loans for many small companies, there just may not be the cash flow to support any wage increases or at most 2%-3% for a few. As organizations struggle with low levels or sales and orders, many banks continue to be unwilling to lead to even their better customers. Companies with significant credit worthiness issues are often just flat lack the credit ability to consider borrowing to meet anything other than their daily operations. In such situations, owners have to keep the decision to keep the lights on of give Bob a $25 a week pay raise.

It is hard for most business owners of small companies to ignore the financial plight of their employees. Many of their employees may have worked for them for a number of years, helped to start the business or be a key person in the business operations. In an economy it would not be unssal for the employee’s spouse to be laid off or have their hours reduced. Many owners have themselves made sacrifices to keep workers on and employed in the face of the loss of sales and orders.

The best that can be said of those employees who stick these times out for their employers is that when times do get better; use that as the opportunity to address pay issues. In the meantime, business managers need to do what they can to recognize and reward with what little they may have at their disposal.

Direct Rx Reimbursement

Friday, July 2, 2010

Prescribed drug costs are becoming an increasingly larger proportion of the over costs of individual, private (employer sponsored), and public healthcare plans. As with healthcare in general, the driving force behind the increase in prescribed drug costs is aligned with three factors: (1) Increased usage, (2) Direct consumer marketing by pharmaceutical manufacturers, and (3) Greater patent protection.

According to a report published by The Kaiser Family Foundation on National Health Expenditures data from The Centers for Medicare and Medicaid Services, US drug costs rose a total of 142 percentage points from 1996 to 2008. Thus, a drug that costs $100.00 in 1996 was $381.03 (compounded) in 2006.

As with healthcare in general, organizations look for ways to make their Rx dollar go as far as possible while providing value for their active employees and retirees. Some techniques include the use of preferred pharmacy networks with carrots and sticks to use in-network pharmacies and not use out-of-network pharmacies. Another approach is to maintain a list of preferred (formulary) and non-preferred (non-formulary) drugs for which the organization’s Rx plan will or will not pay. A third technique is for the organization to engage a Pharmacy Benefit Manager (PBM), these vendors negotiate with drug manufacturers and pharmacy chains to deliver discounted drugs to the organization’s insured members. Of course, an organization could choose to reimburse its employees directly for prescribed drug costs through a process known, obliviously, as Direct Reimbursement.

Prescribed drug Direct Reimbursement (also used for dental expenses) at its simplest level works life any other reimbursement payment process, e.g., employee travel. The employee goes to the doctor, gets a script, takes the script to the Rx, pays for the script, presents the payment receipt to the employer, and the employer writes a check to the employee. There are no claim forms, no insurance company, no networks, no formularies, and of course, no controls other than the employee has to have a valid prescription from a licensed medical doctor. Variations in this process includes adding deductibles, co-pays, con-insurance, networks, formularies, incentives for generic drug use, mail order for maintenance drugs, .. etc. Funding of the benefit may look just like any other self or fully insured arrangement, employees and employers may both contribute. Programs may incorporate pre-tax features of Flexible Spending Accounts (FSA). However, at some point Direct Reimbursement becomes so complicated that organizations need a Third Party Administer (TPA) to run the program and any cost savings may be eliminated by administrative service fees. So why should an organization consider a Prescribed Drug Direct Reimbursement program?

Some organizations, most notably school systems, city, county, state governments, and unions (pharmacists support them) have been using Prescribed Drug Direct Reimbursement for some time. Organizations with a workforce concentrated in a very well defined geographical area, i.e., school systems, city, county, state governments, and unions are able limit their exposure to unpredictable costs due to the restricted pharmacies available to their members. They may even be able to obtain special pricing with local pharmacies though contracting, i.e., networking. Clearly, organizations with dispersed workforces in multiple states would not be likely candidates for Direct Reimbursement. Such organizations would also find it difficult or impossible to build such arrangements without the support of employee benefit brokers since compensating those brokers could prove to be problematic, at best.

Executive Compensation – Is It Out of Line? Part #3

Wednesday, June 30, 2010

So how much compensation is executive compensation? The worth of an executive is in the eye of the beholder, who, it this case is the board of directors. Like the owner of an MLB team looking for a winning manager, the board of directors is winning to pay some pretty big bucks to ensure their company makes it to the World Series. However, even if a manager has taken his last 10 teams to the World Series does not guarantee he will take your team there. After all, this is just one man and that is often the argument used my many to support their position that executive pay is out of control.

As reported in CNN Money by Jennifer Liberto, a senior writer with CNN, 4 bank CEO’s admitted to Congress on January 13, 2010 that their banks had taken on too much risk. Lloyd Blankfein (Goldman Sachs), Jamie Dimon (JPMorgan Chase), John Mack (Morgan Stanley), and Brian Moynihan (Bank of America) testified before the congressional Financial Crisis Inquiry Commission. Commission was looking into who knew what and when was it known.

These 4 CEO’s received more or less $60,000,000,000 out of an estimated $204,808,576,320 for all banks, that is almost 30% just to these 4 banks. This “loan” was to be used to stabilize these and other banks to avoid a catastrophic melt down of the worldwide and US banking system. Whether or not you want to admit it, you do not get to be the head of any of these 4 banks unless you are damn smart. Moreover, you have a cadre of staff that are may be even smarter that you to keep you out of the swamp. So how is it that these 4 men and their small army of staffers failed to see the risks associated with the investment schemes that triggered the Great Recession?

On Tuesday, May 18, 2010, The New York Times published compensation data supplied by Equilar, the executive compensation research firm, for these 4 CEO’s.
                                                  ------------ 2009 --------------   ------------- 2008 ------------

Name -------------------------- Bank ----- Base Pay ------ Total Pay Base Pay ----- Total Pay
Lloyd Blankfein  (Goldman Sachs),     $600,000     $900,000*    $600,000   $40,900,000*
Jamie Dimon     (JPMorgan Chase), $1,000,000  $1,300,000* $1,000,000   $35,700,000*
John Mack        (Morgan Stanley),   Not Listed
Brian Moynihan (Bank of America)   Not Listed
*Various stock options

It may be many years before we learn what these 4 CEO’s where thinking when they signed off on such risky speculation as investing in mortgage loans from homeowners whose incomes and assets had not been verified. I stand to repeat myself, “The worth of an executive is in the eye of the beholder, who, it this case is the board of directors.”

Executive Compensation – Is It Out of Line? Part #2

Monday, June 28, 2010

So who or what determines, sets, approves, and authorizes executive compensation?

In the case of publicly held organizations, those companies whose stock is publicly available for sale through one or more of the stock exchanges, generally there is a subcommittee (Compensation Committee) of the board of directors who reviews and sets pay for the “officers” of the corporation. Typical officers include the Chief Executive Officer, the Chief Financial Officer, the Chief Operations Officer, and may include other “chiefs” in areas of IT/IS, HR, Marketing, Legal … etc. This subcommittee is composed of anywhere from 3 to 7 board members whose job it is to review current executive pay and make recommendations to the full board on what, if any, actions to take. When new “chiefs” are hired, it is also their job to formulate an offer and get it approved by the board.

The Compensation Committee is often advised by internal and external consultants in the areas of executive pay and legal practices. In the case of hiring a new executive, the candidate may even have their own executive pay and legal consultants advising them on how to negotiate pay and benefits. If the Compensation Committee is reviewing current executive’s, they may also employ consultants in executive pay, and legal practices to advise them what can and cannot be done. It is common for the organization to have a compensation philosophy stating how executive pay is to be set, e.g., “the 50th percentile of similarly sized companies in the same industry”. The determination of what constitutes the 50th percentile of similarly sized companies in the same industry often falls to an executive compensation consultant who has access to detailed information on the pay and benefits of executives in other organizations.

Executive compensation packages may include pay, benefits, retirement plans, stock options, performance bonuses, non-performance bonuses, severance packages (Golden Parachutes), personal vehicle(s), use of the company plane(s), boat, apartment(s), first class travel, miscellaneous reimbursement accounts, … etc. This, you will remember, may be the strategic leader of a worldwide organization with billions in sales, thousands of employees, and hundreds of operational locations. Some executives have the ability to turn a failing company into an industry leader, saving the company, shareholders, and yes, even employee jobs. I once worked with an executive who was hired to turn around large organization. In return, he was rewarded for his efforts; however, he had to demonstrate that the turnaround was real so his reward was deferred for 10 years. Most employees I know would not wait 10 years for their bonus check!

Executive compensation has outpaced compensation for rank and file employees of the last two decades. Equilar, a provider of executive compensation data and research, reported on January 20, 2010 that executive salary reinstatements are on the rise, incentive compensation is changing, and companies are getting creative with equity compensation. The full report is available by contacting Equilar.

A special report published on October 13, 2009, by Bloomberg Businessweek quotes Don Delves and Hewitt Associates’ head of the North American compensation consulting practice Ken Abosch on executive compensation trends in the midst of the Great Recession.

While I am a firm believer in paying an employee for what they are worth and for what they can produce, it does beg the question how Michael Jefferies, CEO of Abercrombie and Fitch, can take home more, when their business is under performing, their stock is down, and they laid off employees?

Part #3, tomorrow.

Executive Compensation – Is It Out of Line? Part # 1

Friday, June 25, 2010

Periodically over the years, the subject of executive compensation is raised as to whether or not exe pay is out of line with other forms and levels of pay. Usually the topic surfaces along with headlines proclaiming that Joe Smith was awarded a multi-million bonus, severance package, stock option or retirement plan. Often in the same article is an announcement that some factory is being closed and production work is being sent offshore to be performed by some third world minion at one quarter of the wage rate of a laid off US worker. When questioned as to the appropriateness of the executive’s compensation, a not too articulate spokesperson responds with something about an agreement made several years ago, when economic times were better.

There are a number of restrictions in place, under two statutes, (10 U.S.C. 2324(e)(1)(p) and 41 U.S.C. 256(e)(1)(p)), the Federal Office of Management and Budget, Office of Federal Procurement Policy, Cost Accounting Standards Board caps senior executive compensation for Federal contractors at $693,951 for 2010. This does not outright prevent a government contractor from paying senior executives more, but it does limit how much of the executive’s compensation ($693,951, 2010) the contractor can charge back to the US Government.

In addition, certain employees within organizations may be classified by the Internal Revenue Service as either “Highly Compensated Employees” and/or “Key Employees”. These two classes of employees often are limited in their ability to participate in the organization’s retirement plans. The American Jobs Creation Act of 2004, Pub. Law No. 108-357, 118 Stat. 1418, added § 409A to the Internal Revenue Code (Internal Revenue Bulletin: 2005-2) and provides that amounts deferred pay under a non-qualified deferred compensation plan has to meet certain requirements or it becomes taxable income for the executive. Provided that the employing organization meets these requirements of § 409A, the organization and/or the employee is allowed to legally contribute to these plans up to and/or beyond certain IRS limits.

Internal Revenue Service Code Section 162(m)(1) limits publicly held corporations to compensation of $1,000,000 as a tax deduction for “ordinary and necessary expenses”. Once again, this does not mean that an organization cannot pay more; but it will not be allowed a tax deduction for “ordinary and necessary expenses” for amounts above $1,000,000.

The Securities and Exchange Commission (http://www.sec.gov/) requires publicly held companies to report the compensation of their top officers and certain other positions. Pay for the organization’s top exec’s may be found in one of several official filing documents, including (1) the company's annual proxy statement; (2) the company's annual report on Form 10-K; (3) registration statements filed by the company to register securities for sale to the public; and (4) the company’s current report on Form 8-K. Going to the SEC’s website and accessing the EDGAR System and looking up GM (General Motors Co, CIK=0001467858) you will find the various required filings by GM for 2010. Opening the link to Annual report [Section 13 and 15(d), not S-K Item 405], dated 2010-04-07, you will find the “EMPLOYMENT AGREEMENT FOR KENNETH W. COLE”, document name: dex1015.htm. Opening that document (it is considered a “public” document) will display the compensation and employment agreement for one Ken W. Cole.

We see who restricts executive compensation, tomorrow we will see who controls executive compensation?

Who’s Your Daddy or Mommy for FMLA?

Friday, June 25, 2010

The Family and Medical Leave Act requires covered employers to grant an eligible employee up to a total of 12 workweeks of unpaid leave during any 12-month period for one or more of the following reasons:

• For the birth and care of the newborn child of the employee;

• For placement with the employee of a son or daughter for adoption or foster care;

• To care for an immediate family member (spouse, child, or parent) with a serious health condition; or

• To take medical leave when the employee is unable to work because of a serious health condition.

On June 22, 2010, the US Department of Labor (DOL) released an interpretation clarifying the definition of in loco parentis(to stand in and act as a parent) under the Family and Medical Leave Act (FMLA). The DOL clarified that in order to meet the requirements of in loco parentis status, an employee need only establish one, but not both of the following two elements: (1) the employee provides day-to-day care for the child; or (2) the employee is financially responsible for the child. Since today’s families are often made up of step-parents, grand[-parents, domestic partners, and other non-related individual who provide child care, this clarification of the definition of "son and daughter" and who has parental rights under FMLA regardless relationship.

The interpretation was issued by Nancy J. Leppink the deputy administrator of the DOL's Wage and Hour Division. "This is a critical step in ensuring that children have the support and care they need from the persons who have who assumed that responsibility," said Leppink. The clarification extends FMLA rights to non-traditional families, which includes families with same sex partners. Secretary of Labor Hilda L. Solis was quoted as saying, "No one who loves and nurtures a child day-in and day-out should be unable to care for that child when he or she falls ill,” The DOL's action on June 22, 2010 communicates the very strong message that in loco parentis status may be extended to those who provide day-to-day care for the child OR is financially responsible for the child regardless of relationships.

Clearly, blood relatives caring for grand children, nieces and nephews, cousins, and other children of blood, who provide day-to-day care for the child OR is financially responsible for the child while the biologic parent(s) is(are) in active military service could, most likely qualify for FMLA rights. Non-blood relatives are also afforded the same FMLA rights in situations of domestic partner, same sex or otherwise provided they can meet one of the two conditions noted above. FMLA rights conveyed under this interpretation extends to birth and illness allowing these non-traditional individuals who are in loco parentis to bond with the child.

This action adds a significant amount of effort to the employer’s administration responsibilities for FMLA. Organizations will need to establish policies and procedures to handle FMLA requests from non-traditional caregivers and the potential for appeals.

As with any organizational efforts directed at complying with Federal, state or local regulations, professional legal counsel should be retained.

Worker Retirement and the Economy

Thursday, June 24, 2010

For most workers, retirement is about having the ability to retire, which translates into having the necessary financial resources to do so. The pre-boomer generation generally talked about the “three legged stool”. The three legs being Social Security, Employer Sponsored Pension, and Private Savings. Some boomers may still look forward to a “three legged stool” but for most, that Employer Sponsored Pension Plan has been replaced with a matrix of 401(k) plans accumulated over time from various employers. During this last recession, the so-called, “The Great Recession”, numerous organizations discontinued funding the employer matching contributions, further eroding the value of 401(k) accounts. As older laid off workers found themselves unemployed longer, many dipped into their 401(k) accounts to keep afloat in an uncertain recovery and jobs’ market.

While 65 has been the traditional age at which workers retire, in 1983 Social Security was amended to increase the full retirement age for persons born in 1938 or later. This change was attributed to both improvements in the health of older workers and an increase in the average life expectancy of most people. Currently, the “official” retirement age at which workers can receive full Social Security retirement benefits is based on the worker’s year of birth. Beginning for workers born after 1937, the Normal Retirement Age ranges upwards from 65 plus 2 months to age 67 for workers born in 1960 and later. This upward increase in the Normal Retirement Age is not isolated to the United States; European and Asian (Japan) countries faced with mounting debt and declining skilled labor pools are rethinking their traditional retirement age thresholds.

The Baby Boomers, those US workers born in the post World War II period from 1946 to 1964 will begin to retire in 2012 as the first reach the Normal Retirement Age of 66. As they do, employers will be faced with the prospect of finding replacements. The bad news is that many of these workers will take with them decades of talent and experience. The good news is that due to the recent recession and 2 decade’s long shift from defined benefit pension plans to 401(k)’s, many Boomers will opt to work longer. Some will continue in their current trade or profession, while others will enter new trades or professions and even voluntary work. While older workers are often maligned by many, with the right motivation, older workers are highly productive and dedicated, with a wealth of knowledge and skills.

Organizations should consider the formula it is going to take to win in the market place in the coming decade. One term in that formula that will not go away is the continuing shift in globalization of virtually all business processes. A global business often has a large cadre of ex-pat’s with decades worth of knowledge concerning regional markets and resources. Another is the quality of the organization’s products and services; demand for quality is not going to disappear. Many of an organization’s soon to retire workers were on the teams that developed, designed, and deployed those products and services. One driver in globalization is the continuous search for the lowest cost of product development and manufacture. A business’s ex-pat’s often know where and how to locate low cost, high value labor resources and infrastructures are in order to bring products and services to market.

If there can be a bright side to any economic downturn, many employers could be facing the availability of a wealth of skilled knowledgeable older workers with high levels of motivation, dedication, loyalty, and talent.

Sexual Harassment of Males in the Workplace

Tuesday, June 22, 2010

Recently I was asked to comment on sexual harassment of males in the workplace, a topic not too often discussed. We generally think of male-on-female harassment when the topic of workplace harassment is the topic of discussion. However, harassment, sexual, non-sexual, physical, verbal and non-verbal forms, and may be targeted to members of the opposite or same sex. Harassment may come in the form of various media including electronic, photographic, and even artwork maybe considered harassment.

According to statistics published by the US Equal Employment Opportunity Commission, the number of harassment cases filed by males declined from 15,889 in 1997 to 12,696 in 2009 or 20%. However, the number of harassment cases filed by males as a proportion of ALL harassment cases filed rose from 11.6% in 1997 to 16.0% 2009. Of course this DOES NOT indicate an increase of sexual harassment of males in the workplace, rather it is correlated to the decline in the number of harassment cases filed by females during the same period. By extrapolation from the same report, we can calculate the number of harassment cases filed by females for the same period to be  136,974 in 1997 to  79,350 in 2009.

It usually falls to an organization’s Human Resources function to monitor and deal with workplace harassment issues, whether or not they are sexual or non-sexual in nature. It is a sad commentary that schoolyard bullies often grow up to become office bullies. As with most things in life, prevention is a far better approach than trying to fix the problem after the fact. In today’s lean and leaner staffs, management does not have the luxury of staff productivity diminished by distractions and lowered morale. With the majority of today’s cell phones photo and video enabled, the loss of an organization’s goodwill, not to mention possible legal action, is just a Facebook or U-Tube positing away.

Organizations would be well advised to adopt a “no-tolerance” rule for workplace harassment along the same lines that many have done for substance abuse and violence. This may require revisions and updates to existing organizational written policies or the creation of such policies if they do exist today. Initial and ongoing education and training for employees at all levels within an organization, from the loading dock to the corporate suite, is essential to help to define what constitutes harassment, and the avenues for redress. Clearly communicated channels and alternative means for reporting suspected harassment, including those, which allow for the employee being harassed to remain anonymous. Something to consider, harassment can come from individuals other than employees such as vendors, providers, contractors, suppliers, and even customers.

True to form, even the EEOC maintains an anti-harassment policy by publicly stating that:

“[The EEOC] establishes policies and procedures to help the EEOC maintain a workplace free from unlawful harassment. It … establishes a system of accountability for ensuring a workplace free from unlawful harassment. … ensure that appropriate officials are notified of, and have the opportunity to promptly correct hostile or abusive conduct”

Health-Care Cost Savings a Function of Employee Commitment

Monday, June 21, 2010

The numbers have been repeated many times over, according to the Henry J. Kaiser Family Foundation, the United States spends over 16% of its Gross Domestic Product (GDP) on health care costs annually. Over the next several years, this country will attempt to bring that cost under control by increasing the numbers of insured individuals through a variety of efforts. Many of those efforts are directed at employer sponsored health care plans. However, key to health care cost savings is the role played by the enrolled employee and their covered family members. Until recent times, only modest attention has been paid to the pro-active role employee engagement and commitment plays in altering the rate of health care cost trend. Anyone familiar with patient compliance can attest to the challenges providers face in even simple treatment regiments. The Patient Protection Act hopes that by increasing the role of covered employees in their own health care with informed provider selection; value based care delivery systems, and coordinated treatment plan development cost savings can be achieved. The outcome of this effort will only be known in time.

In prior years, many employees had little or no incentive to be concerned with their health care plan. Premiums, deductibles, co-pays, co-insurance rates, and employee out of pocket expenses were comparatively low. After all, it was mainly the employer’s money. With many employers picking up 60%, 70%, 80% or more of the plan costs, employee out of pocket expenses were little more than an annoyance. Yes, carriers and employers tried limiting benefits, prior authorizations, concurrent review, post procedure reviews, restrictive networks, audits, nurse lines, and mandatory generics and mail order. Were employers, carriers, and the government successful in slowing the rate of health acre trend? No, they were not. The Henry J. Kaiser Family Foundation reports that between 1980 and 2008, health care costs rose from $253 billion to $2.3 trillion.

Therefore, what is going to make the current health care reform any different from any of the prior attempts over the last 20 years? There is more focus on employee involvement, education, and information availability. Some of the restrictions around employee wellness plan designs have been relaxed allowing employers to offer greater monetary incentives for employee participation in wellness plans. However, fundamental to employee wellness is participation and the commitment to sustain that participant overtime. Participation on not only the employee but also family member participation, encouragement, and support as well. We have all tried to stop smoking, lose that extra 10 pounds, increase the amount we exercise, switch to decaffeinated coffee or develop better sleep habits. The true test is the outcome and that comes from long-term commitment and goal attainment. Trying to lose 10 pounds is not the goal; actually losing the 10 pounds is the goal.

What motivates an employee to commit to actually losing those 10 pounds? Is there some leverage that we can apply to engage the employee to commit to losing 10 pounds? Can it be so simple as to reward the desired behavior? Lose 10 pounds and your employer will pay you X dollars? Can employers appeal to the employee’s basic needs? No matter what employers desire to do, true health care cost savings will require the engagement and commitment of employees to make it happen.

Smoking and Health Care Costs

Friday, June 18, 2010

It is expensive to light-up, it is dangerous, and for a lifelong non-smoker it just does not make sense, yet millions still do it. Increasingly, smokers are charged more for their health care coverage, they are being tested by their employers for tobacco use, and in some cases, and they are being directed to a lower level health care coverage option.

As reported in the Winston-Salem Journal by Sarah Morayati, effective January 2011, Winston-Salem city workers will be tested for tobacco use and will only be offered the city's Basic health plan, a lower benefit option plan as opposed to the city's Basic Plus health plan. Faced with a 10 percent increase in its self-insured health care plan; the city is looking for smokers to bear some of the responsibility and a portion of the additional cost.

According to Centers for Disease Control and Prevention (CDC), 46 million people or 20.6% of all adults in the United States smoke cigarettes. Cigarette smoking is more common among men (23.1%) rather than women (18.3%). The CDC reports that cigarette smoking is the leading cause of preventable death in the United States, accounting for approximately 443,000 deaths or 1 of every 5 deaths in the United States each year.

West Virginia 26.6%, Indiana 26.1%, and Kentucky 25.3% have the highest rates of smoking while Utah 9.2%, California 14.0%, and New Jersey 14.8% have the lowest rates. Smoking rates are highest amount African American and lowest among Asians. Although rates of smoking have declined, the prevalence of current cigarette smoking among adults declined from 24.1% in 1998 to 20.6% in 2008. Nevertheless, according to the CDC, smoking accounted for approximately $157 billion in annual health-related economic losses from 1995—1999. The CDC reported that among current adult smokers, 70% reported they wanted to quit completely 40% of all adult smokers attempted to quit at sometime in 2007.

Fortunately, for those who do stop smoking their risk of disease and premature death are greatly reduced:

• Smoking cessation lowers the risk for lung and other types of cancer.

• The risk for developing cancer declines with the number of years of smoking cessation.

• Risk for coronary heart disease, stroke, and peripheral vascular disease is reduced.

• Cessation reduces respiratory symptoms, such as coughing, wheezing, & shortness of breath.

• Cessation reduces the risk of developing chronic obstructive pulmonary disease (COPD).

• Women who stop smoking during their reproductive years reduce their risk for infertility.

• Women who stop smoking during pregnancy reduce the risk of having a low birth weight baby.

So why do they continue to smoke?  I guess there are some things that you just cannot fix!