2009 and 2010 Merit Budgets Fall Below 3%

Wednesday, February 24, 2010

World at Work, a global human resources association focused on compensation, benefits, work-life and integrated total rewards, released the detailed results of its January 2010 Update of the 2009-10 Salary Budget Survey on January. 14, 2010. The survey, completed in May 2009 received 2,644 submissions from the United States and 208 from Canadian companies and is a benchmark survey used by many employers to formulate their upcoming salary and merit budgets for 2010. The survey reports actual salary increases for 2009 ranged from a low of 2.0% to a high of 2.3%, while projected increases for 2010 are at 2.8%.

With salary and merit budgets at historic lows, merit budgets frozen or even cutbacks, how are employers to differentiate between high and low performers? The answer is there is no easy way to spread a less than 3% budget across all performers. Employers are forced to focus on the top performers. A planning tool that can prove to be helpful in some organizations is a Merit Matrix.

A Merit Matrix is a simple simulation tool easily built in any worksheet software product and consists of a Row by Column table (Table # 1) with the number of employee head counts in cells respective of their Position in Range, Comp-Ratio or other measure and their respective performance level. The proportion of employees is found for each cell in the table (Table # 2). The proportion of each cell is then used to allocate the organization’s merit budget across a third table (Table  3) of proposed merit increases by salary range and performance rating. The fourth and last table is the resulting fraction of the merit budget for each cell. If the sum of the cells in Table # 4 is equal to or less than projected merit budget, this is an indication the allocated merit increases will come in under or at budget. Since our sample merit budget is 3% and the estimated applied budget modeled is 2.77%, we should come in slightly under budget.

Next Round of Health Care Reform Talks

Tuesday, February 23, 2010

After handing off health care reform to Congress and seeing it stalled following the election of Scott Brown (R) to fill the Massachusetts Senate seat of the late Senator Edward Kennedy (D), President Obama appears to be stepping into the ring with a bipartisan meeting on health care reform scheduled for Thursday, February 25. Taking the initiative, the President posted his updated proposal on the internet in advance of Thursday’s meeting in an effort to have transparency in advance of the talks or gain the upper hand.

Thursday’s bipartisan meeting will be held on the somewhat neutral grounds of the Blair House ("White House guest house”) and includes Congressional members (12 Democrats/9 Republicans) from both Houses and both parties, the invitation list includes:

• Senator Harry Reid, D-NV, Majority Leader • Senator Mitch McConnell, R-KY, Republican Leader • Senator Richard Durbin, D-IL, Majority Whip • Senator Jon Kyl, R-AZ, Republican Whip • Senator Max Baucus, D-MT, Chairman of the Finance Committee • Senator Chuck Grassley, R-IA, Ranking Member of the Finance Committee • Senator Tom Harkin, D-IA, Chairman of the Health, Education, Labor and Pensions Committee • Senator Mike Enzi, R-WY, Ranking Member of the Health, Education, Labor and Pensions Committee • Senator Christopher Dodd, D-CT, Member of the Health, Education, Labor and Pensions Committee

• Speaker Nancy Pelosi, D-CA • Representative Steny Hoyer, D-MD, Majority Leader • Representative John Boehner, R-OH, Republican Leader • Representative James Clyburn, D-SC, Majority Whip • Representative Eric Cantor, R-VA, Republican Whip • Representative Charles Rangel, D-NY, Chairman of the Ways and Means Committee Representative Dave Camp, R-MI, Ranking Member of the Ways and Means Committee • Representative Henry Waxman, D-CA, Chairman of the Energy and Commerce Committee • Representative Joe Barton, R-TX, Ranking Member of the Energy and Commerce Committee • Representative George Miller, D-CA, Chairman of the Education and Labor Committee • Representative John Kline, R-MN, Ranking Member of the Education and Labor Committee • Representative John Dingell, D-MI, Chair Emeritus of the Energy and Commerce Committee


In attendance in addition to the President, will be Vice President Biden, Rahm Emanuel, Assistant to the President and Chief of Staff, Kathleen Sebelius Secretary of Health and Human Services, and Nancy-Ann DeParle, Director of the Office of Health Reform; along with representatives from the Office of Management and Budget and representatives from the Congressional Budget Office and the Joint Committee on Taxation.

The President’s proposal appears to be a reheat of the versions of the health care bills from the House and Senate passed earlier, with some amendments. As I like to say, “the devil is in the details” those details can be found at:

http://www.whitehouse.gov/health-care-meeting/proposal

Only time will tell if any meaningful action will come out of the latest effort by the White House. Recent polls place the President’s job approval rate below 50%. With half of the nation questioning the President’s job performance, does he have the public support to carry out health care reform?
http://www.realclearpolitics.com/epolls/other/president_obama_job_approval-1044.html

Incentive and Variable Compensation-Design

Friday, February 19, 2010

Regardless of who sponsors an incentive plan, any form of incentive, reward, bonus or variable compensation must have the buy-in of senior management and fulfill a demonstrated business and competitive need within the organization’s overall total rewards strategy. As with all total rewards programs, each program must be cost effective if the overarching goals and objectives are to be achieved and maintained.

Someone, internally or externally has to look at the targeted functions and determine what changes are needed and what the desired outcomes are and will an incentive program have some likelihood of achieving success. Increasing sales is great, unless the sales are unprofitable or at the loss of current long-term clients. You may not be able to anticipate every unintended outcome of an incentive program. Modeling the program though simulations or on a pilot basis will uncover most hidden issues.

Consider customer or client services employees. How that customer or client service employee interacts with the customer or client affects whether business is relatained or lost. True, customer or client service employees may not be able to change organizational pricing policies, but how they respond to that upset customer will influence the customer’s perception of “service”. Monitoring service levels via post contact surveys analyzed down to the representative level allows for measurement of individual performance levels. Combined with the proper initial selection, training, and coaching techniques, customer feedback provide for an objective basis for incentive program rewards.

Safety programs for short and long haul truck drivers are common features in the trucking industry. How can anyone argue that fewer accidents are not a desirable outcome? However, consider fuel use, idle time, normal wear and tear, damaged cargo, unhappy shipping and receiving staffs, angry motorists, and the general cleanliness of the trucks. Even short haul drivers spend 8-10 hours a day in their trucks and most know every odd sound made by their trucks, preventative maintenance is far less expensive than towing a truck to the shop. While the use of GPS to map delivery routes has done much to minimize fuel use and cargo tracking, many trucks idle unnecessarily (at idle, fuel consummation is about 1 gal/hr) at delivery stops. Reduction in idle time, along with other measures could make up an effective incentive program. That motorist your driver cut-off yesterday may have been a customer or the spouse or child of a customer. How much goodwill did that action cost your organization?

While not every job in your organization leans itself to some form of incentive pay, but many that are not incented today could be with a small amount of effort. The best approach is to start small with the low hanging fruit and as your skill grows, expand your vision. Referring back to the opening sentence, get your management team’s buy-in and get a department head to allow you to use their area as a demonstration pilot.

Incentive and Variable Compensation-Employee Role

Thursday, February 18, 2010

If incentives, rewards, bonuses, and variable compensation forms of remuneration have the ability to change and shape employee behavior and direct it towards higher levels of productivity, what role does the employee play? Technically, the employee’s role is that of the vehicle with which the desired outcomes are achieved. However, to achieve those desire outcomes the employee has to have both the ability and capacity to carry out the actions that will result in goal attainment. No level of incentive will entice the employee who lacks the ability to design a circuit board to build a defect free board. A variable compensation plan will not yield higher sales if there are an insufficient number of sales leads.

To be effective, an incentive plan design must allow a degree of control by the employee. Furthermore, the employee has to be able to recognize that he has the ability to control those aspects of the plan that will allow him to achieve the target goal. Employees in jobs that are traditionally incented are accustomed to recognizing their degree of control. However, non-traditional jobs will require a significant amount employee communications. A large portion of implementing successful incentive plans is employee communications and the building of trust. After all, you are dealing with the employee’s livelihood.

At a large bank I worked at, new accounts representatives where able to earn $50 for each new checking account they opened from a new banking customer. There was no limit placed on the amount that could be paid to any given new accounts person within any period. There was no need to place any limits since the employee had very little control over how many new accounts could be opened. Representatives were not out canvassing the malls for new accounts; they only had access to those new customers who walked into their branch office. Later we added cross selling features where the representatives had the ability to sell safety deposit boxes, savings accounts, ATM/Debit cards, and other “products”. Once this change was in place we saw a significant increase in the number and types of products sold. Although the number of new customers did not increase, but what did change was the average number of products sold per new account. We allowed more control for the new account representatives over the desired outcomes of increased sales.

When working for a mutual insurance company, we wanted to increase the number of employees who achieved various levels of actuarial designations and to move up to the next successive designation. Actuarial candidates were allowed time off with pay to study for the exam, they were assigned a “mentor” to help prepare for the exam, and they were allowed paid time off to actually take the exam, and they had their base pay increased by $100 per month for each exam they successfully passed. Contrary to what you might think, some allocated slots for actuarial candidates went unfilled, however, we were able to attract and retain the desired number of actuarial candidates into the program. Actuarial candidates were able to control the outcomes with the features of the plan, e.g., study time and mentoring.

Clearly, the employee engaged in an incentive plan must perceive that they can have some control or influence over the outcome or the employee will not be motivated to take action to achieve the target. In addition, as we know, motivation is what is going to direct and shape the employee’s behavior towards the desired outcome.

Incentive and Variable Compensation

Wednesday, February 17, 2010

As with any form of employee compensation, there must be a business linkage and reason for such forms of remuneration to exist. The basis for incentive and variable compensation comes from their ability to direct an employee’s energy and focus the employee towards a specific goal, i. e., to motivate action.

A general definition of motivation is:

• internal state or condition that activates behavior and gives it direction;
• desire or want that energizes and directs goal-oriented behavior;
• influence of needs and desires on the intensity and direction of behavior,
• the arousal, direction, and persistence of behavior.

Common thinking is that almost any human behavior is capable of being incented or motivated and thus shaped into a desired action. If higher sales are required, fewer product defects needed or increased customer service levels demanded; incentive and variable compensation will focus the employee’s actions towards that goal. Unfortunately, it is not as simple as increasing the commission on new sales, adding a bonus for fewer rejected sub-assemblies or adding a cash incentive for handling more customer calls. To uncover the root cause of poor sales, high defects or lackluster customer service may require significant research. An incorrectly designed incentive, bonus or variable pay plan may lead to undesirable outcomes in another area of the business.

I once worked for a billion dollar bank that provided check and item processing for surrounding community banks. Every day these smaller banks shipped their items to us for processing and clearing. Each item processor was paid a base hourly rate plus a per piece rate for each correctly processed item. Once all items for that day’s work had been processed, the operators could leave for the day. What I saw was that as soon as one operator had completed their own work, they immediately began to help the other processors. Consequently, all operators were able to normally leave work 1-2 hours early every day. No one had ever told them to pitch in and help with each other’s work, but getting to leave 1-2 hours early every day was more important than the 1-2 hours of base pay. Nor did they mine losing the variable compensation from their shared work. The result was that our item-processing center was highly profitable and efficient.

While working for a large mutual health insurance company we began to notice that our sales force cross competed with each other on product lines. Many sales members had long and strong relationships with their clients and we certainly did not want to harm those relationships. Products like PPO’s, POS’s, and HMO’s were still relatively new and unfamiliar to our traditional indemnity sales force. A decision was made to create a consolidated sales force that would market all product lines to all clients. To incent sales members to focus efforts on the newer and more profitable PPO’s, POS’s, and HMO’s products, sales members were paid an incentive to team sale by taking a member from two or more product lines along on each sales call. Sales members who accompanied the lead sales member were paid an incentive to participate in the presentation. This allowed for a smooth transition to a consolidated sales force, cross trained the traditional, PPO’s, POS’s, and HMO’s sales members, and allowed old relationships to be maintained and new relationship to be developed. One unexpected outcome was that an increased number of clients purchased multiple product lines.

At large multi-state health care provider our collections began to fall off after a change in the management team. As we looked for the root cause of this decline, it was discovered that two job classifications were essential to the collection’s process: the biller (data entry) and the collector.(customer/payer calls) The collector position was paid a base rate plus variable pay based on their collections for the past quarter, the biller was paid a base rate only. The decision was made to add an incentive to focus the biller’s attention on getting care information into the system and billed to the proper payer, thus allowing the collector to follow-up on overdue payments. The outcome was those delinquent days declined and collections returned to acceptable levels.

While consulting with a large multi-state educational institution, I learned of an incentive plan that paid classroom instructors to show up on time for each class session. My recommendation to the institution was that showing up for class and on time was a basic function of the role and had to do with manageing performance. Digging deeper, it was discovered that department heads lacked basic skills in setting expectations during the interviewing on boarding processes. The root cause of this performance issue was related to the failure to set expectations, monitor new hire performance, and follow-up with performance coaching. The institution is in the process of eliminating this incentive and measuring the outcomes.

States’ Heath Care Reform Efforts

Tuesday, February 16, 2010

With the apparent inability of the House, Senate, and the President to reach some kind of compromise on health care reform, will states step up and move forward with their own individual versions of reform?

A 2009 report from The Kaiser Family Foundation on health care reform indicates a small number of states have already passed reform measures: Maine, Massachusetts, and Vermont. In addition, other states are in some phase of proposing reform measures, including: California, Colorado, Connecticut, Illinois, Iowa, Kansas, Minnesota, New Jersey, New Mexico, New York, Oregon, Pennsylvania, Washington, and Wisconsin. http://www.kff.org.

The Atlanta Journal-Constitution reported on February 15, 2010 that Georgia State Senator Preston Smith(R) introduced two health care bills: one allowing small businesses to group together to insure their workers under a single policy. The second bill would remove certain coverage “caps”; permit children to remain covered on a parent’s policy up to age 25, and prohibit insurers from canceling policies and refusing claims under certain conditions. According to the report, Smith’s bills have the backing of 20 Democrats and Republicans. http://www.ajc.com/

The Wyoming Tribune-Eagle reported on February 13, 2010 that state lawmakers are attempting to pass legislation, for the third time, that would create a 500 participant pilot project for health-reform. The pilot’s design tests various cost savings measures, including: care for the state's uninsured, benefits package that encourages preventive care, and health savings accounts to cover deductibles and co-payments. Wyoming Governor Dave Freudenthal, the Wyoming Medical Society, and AARP support the proposal. http://www.wyomingnews.com/

If Congress fails to pass health care reform on a national level, there is a real possibility that states, acting out of their own self-interest will address the issue. Conceivable, the result will be 50 versions of health care reform, some similar, some as different as night and day. Multi-state employers will face the prospect of dealing with non-uniform mandates (some already are) in the various states they operate. Thus increasing the likelihood employers will abandon the sponsorship of health care plans.

In a February 13, 2010 report, the Associated Press noted that health insurance participants in 4 states are facing double-digit increases in their private individual premiums. California’s Anthem Blue Cross, has been facing strong pushback for its plan to up rates by as much as 39% for some 800,000 individually insured members. In Maine, Anthem Blue Cross has requested rate increases of 23% for some individual members. In 2009, rates increased as much as 32% for this same group. One un-named Kansas carrier proposed raising individual rates from 20% to 30% but was later convinced to limit the increases to 10% to 20%. Oregon granted increases of 15% and higher for multiple insurers for the 2010 policy year. This came on the heels of a 25 % increase in 2009.

Is the lid off the health care reform pressure cooker? Are we going to see increased pressure from individual states to affect health care cost control by denying carriers rate increases? Are carriers going to become emboldened by the lack of action by Congress and now feel free to implement double-digit increases? Are double-digit increases another indication that most individual policy holders are excessive users of health care?

Securing Life Time Income for Retirement

Monday, February 15, 2010

Currently, only about a quarter of American workers are covered by a traditional defined benefit pension plan. Over the last several decades, traditional defined benefit pension plans have been terminated, frozen, converted into cash balance or pension equity designs. Virtually no new employers offer such plans. Beginning in the early 1980’s, defined contribution plans such as 401(k), 403(b), and 457(h) have displaced older pension designs. This displacement shifted the roles and responsibilities of both the employer and the employee. Previously, the employer was responsible for 100% of the initial and ongoing investments to fund the employee’s retirement as well as long term management of those investments. The employee’s role was passive, with no or few opportunities to influence the design, investment directions, and management of the plan. Even union sponsored plans were generally run by the top union leaders, who, although elected by their members, were often less than responsive to their members’ demands.

The rise of the defined contribution plan saw the role of the employee become that of primary investor, with some portion of contributions matched by the employer, if such a match was provided. The employee also took on the role of the financial advisor and manager in an attempt to determine how much they would need to save at any given time in order to have sufficient savings during retirement. Employees often lacked the knowledge to understand the costs associated with investing, how to determine and calculate the required savings needed, and how to manage those savings before and during retirement. Retirement, itself, has even taken on a different face with employees working longer, “phased” retirement, working part time after “retiring”, and even starting their own businesses during “retirement”.

Most employers, recordkeepers, and fund managers have attempted to help plan participants with retirement planning. Almost all have web-based tools to assist the employee in planning and preparing for retirement. These tools include calculators to determine how much an employee should save and for how long. However, such tools become ineffective when an employee’s career is interrupted every 3-7 years due to economic or business cycles. Booms go bust, companies are bought and sold, organizations are downsized, right-sized, re-engineered, RIF’ed, and re-organized daily. With the employee having the major responsibility in planning, preparing, and managing for their financial retirement; is it possible to have any degree of securing lifetime income for retirement.

Yes, it is possible to reach a degree of financial security for retirement. However, it means making many difficult choices before, during, and after entering the workforce. It means maximizing the educational opportunities available and constantly upgrading skills; this is equally true regardless of the trade or profession. It means starting a lifelong savings plan early in life, both with employers, if available, as well as privately. It means managing the individual debt loads and personal spending habits. It means seeking out professional help in planning and executing retirement savings decisions. As with so much in the current lives of all of us, it means becoming and remaining knowledgeable consumers of savings, investing, and planning for retirement.

Where to start to become that knowledgeable consumer? Public libraries, community centers, community colleges, banks, credit unions, employers, recordkeepers, fund managers, investment managers, local, state, and Federal governments offer a host of opportunities to gain the knowledge to become a better consumer of retirement issues. A recent Google internet search for "retirement investment help" found over 65,000 “hits”, many sponsored by major banks and investment firms, others hosted newspapers, magazines, and journals, and still others connected to non-profit interests groups, such as AARP, retired teachers associations, … etc.