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!

Wages and Salaries as the Economy Recovers – Or Not

Tuesday, June 15, 2010

As the economy begins to show signs of recovery you would expect to see a growth in wages and salaries, or maybe not.

In a May 19th article titled “Starting salaries drop with higher unemployment” published in the St. Joseph News-Press by Ryan Davis, it was reported that this year’s crop of new college graduate may need to adjust their salary expectations before heading out into today’s job market.

In a related story by Ruth Mantell, of MarketWatch, in the Business and Financial News titled “Low-ball salary offers can complicate job hunt”, Mantell reports that some hiring managers are offering starting salaries below what the job applicant earned at their former job.

So what is the issue? Labor is a commodity and like any commodity its value raises and falls as the demand and supply fluctuates, or at least that is what I recall from Dr Green Span’s Econ 101 class. Yes two years ago that job seeker might have been earning $100k, but today I just interviewed 6 just like him that were every bit as qualified as he is and two are willing to join my organization at $85k. Why should I pay last year’s prices for this year’s apples? I can hire the other two at “market rates”, get the benefit of their skills and if they both walk in two years, I am still ahead of the game. With their advanced skill sets I can make my numbers and may be still have some room for a small bonus for them. What is wrong with that thinking?

There may not be anything wrong with obtaining the best-qualified candidate at the going market rate. After all, almost every day there is still news of a lay-off here, a plant closing there, and continuing pay cuts and freezes. True, there is a good chance that a “low balled” hire will exit your organization in 12, 24 or 36 months, or as soon as the economy really heats up. But what have you lost, a few months pay, a few benefit dollars or maybe something more.

So what’s the value of the client list that the employee took with him when he got that better offer after being with your organization for just 9 months? How about the knowledge of your IT network infrastructure, what’s that worth? Or maybe the knowledge of your manufacturing process that took a decade for you to develop and refine, what is that work? Yes, you made your numbers last year, but with your top sales guy walking out the door today, how are you going make your numbers this year? How are you going to explain to your CEO that you cannot close the Iowa City deal because the closer just went to work for your competitor?

Yes, we have to live in the reality of today’s economy, which means that we may have an opportunity to hire some very strong talent at some very low prices. Nevertheless, if we fail to take the long-term approach we may find ourselves regretting “low balling” that same talent.