Meredyth McKenzie

Wednesday, 26 August 2009 20:00

Planning your exit

Developing your exit strategy will be one of the most difficult decisions you make for your business.

After years of building your business into a success, it may be hard to figure out what will happen to it after you leave. You need to carefully review your options and make a decision based on your goals and motivations. You also need to start the process early to avoid any problems.

“Too many business owners wait until they want to retire to begin seriously considering their exit strategies,” says Josh Curtis, director, merger and acquisition services at GBQ Capital LLC. “Exit strategies cannot be planned and implemented overnight.”

Smart Business spoke with Curtis about how to start planning for your exit, the importance of reviewing your plan and how to prepare your employees for your exit.

How can you begin planning for your exit?

Start early. For a first generation founder, it can take up to, or possibly longer than, 18 months to determine and implement a comprehensive plan. Surround yourself with advisers who can help you access alternatives. Go into the process with an open mind, and be clear about what is important to you.

You have to look at your financial goals, such as if there is a minimum dollar amount that allows you to retire comfortably. But you also need to determine how long you want to be involved in the business. Do you want to sell and be in Florida as soon as possible, or have a hand in the business for a while? You also have to determine if you are more financially or legacy driven. Are you more motivated by dollars or by preserving your business legacy? You still have viable options to exit your business in this market, some of which may yield high net proceeds.

What are some of the different succession planning options?

There are five main options:

  • Pass the business to family. This option provides estate planning opportunities, ongoing cash flow, and peace of mind for future generations, but it does not necessarily maximize value for the owner. The buying family member must have the skills and financial savvy to establish authority to generate profits. Mismanagement can reduce the value of the business, affect ongoing cash flow to the entrepreneur and disturb family relations.
  • Management buyout. This strategy is ideal for companies with a strong management team. The team may consist of one individual who was second in command or several individuals who can run the business together. This is a way to reward individuals who helped the business become successful.
  • Employee stock ownership purchase. This strategy is the most complex and is not feasible for all businesses. However, there are significant tax and financial benefits to the owner and business. An independent valuation specialist will determine the valuation upon sale. If the owner plans to exit after the transaction, the company needs to have a succession plan in place.
  • Sale to financial buyer. Despite the economic conditions, a significant amount of liquidity remains in the private equity market. Private equity firms provide one alternative for sellers to sell to a third party, but avoid selling to a competitor. Because these buyers generally will not recognize the same degree of synergies as a strategic buyer, sale valuations are oftentimes lower. Financial buyers typically retain the management team, as well as other employees and sometimes the owner during the transition phase.
  • Sale to strategic buyer. This alternative generally yields the highest valuation at the time of sale due to the synergies a strategic buyer will realize from combining businesses. A typical strategic buyer may factor long-term synergies into the offering price. But the longevity of the owner, management team and employee base may be in jeopardy after the sale.

You need to learn about each option and not write one off before you are educated on it. Talk with experts and also put your company in each option to see the financial and management impacts each option would have on your business.

What should you look for in a successor?

Culture, personality, experience and education are important. The person needs to get along with you and you need to trust him or her. The person also should have a similar management style to yours, because you may not want the culture to change considerably after you leave.

The longer you are able to transition the business and the more you can work with the successor, the more successful the transition will be. You may find someone from within whom you want to step into the owner’s role, and then groom him or her for that position.

How important is it to review the plan and make any necessary changes?

It is important because the business can change. For example, your business may have grown since you developed your plan, and the people you have identified to take over may not be capable of doing so now. The older you get, the more you should revisit it. Too often, owners pass away, become ill or have circumstances change while still owning their businesses and do not have a succession plan in place. This creates a significant burden and risk to the business and remaining family members.

How do you communicate your succession plan to employees and prepare them for your exit?

It depends on the exit strategy. If it is an ESOP, that will likely be communicated as good news to all employees. If it is a management buyout, talk to key management who can communicate it to others. A sale is a bit tricky, because you will not be able to tell most people until the deal is complete.

You have to figure out what is appropriate for your company. Talk through the ideas with your advisers and determine how you are going to communicate the plan.

Wednesday, 26 August 2009 20:00

Drug cost management

Prescription drug prices continue to skyrocket, costing more for both you and your employees. Prices will only continue to increase as research and development expands drug development in the future.

Today, biotech drugs, which are costly to develop, manufacture and market, are increasingly being developed for the specialty drug marketplace. The oncology sector alone is slated to expand an additional $12 billion over the next four years as new research and technology creates new patient therapies. Also, “specialty pharmacies” have begun to open, catering to drug therapies aimed at specific disease state management.

The use of these new drugs in the market, along with continued increases in traditional drug therapies, will continue to stress prescription drug expenses over time. One of the most effective ways to control prescription drug costs is by contracting with a pharmacy benefit manager (PBM).

“PBMs are uniquely positioned to administer pharmacy benefits and control trends through their understanding of drug costs and clinical intervention methods that optimize the use of drug therapy,” says Ned Milenkovich, J.D., PharmD, a member at McDonald Hopkins LLC and the chair of its Drug & Pharmacy Practice Group. “By outsourcing drug management to a PBM, you’re putting a sophisticated organization in place that understands how to administer prescription drug benefits and optimize drug costs for your company.”

Smart Business spoke with Milenkovich about how to control prescription drug costs by working with a PBM and the importance of having fair PBM contract terms.

What role does a PBM play in controlling prescription drug costs?

A PBM contracts with a health plan to administer the pharmacy benefit claims on behalf of the plan sponsor or insurer and provide other programs such as utilization, disease management and other cost containment services, and to reduce prescription drug costs. The PBM may have rebate agreements with drug manufacturers and negotiates discounts with retail pharmacies to help plan sponsors reduce prescription drug costs for their members. PBMs also offer mail-order and specialty pharmacy services for maintenance medication therapy at substantially discounted rates. The type and range of tools offered depends on the PBM, so contact a PBM vendor for more details. What should be included in a PBM contract?

There are generally three different contract models to consider. The traditional contract has little transparency on how money flows. The second is the hybrid contract, which has more transparency to the employer plan — i.e., 100 percent pass-through of manufacturer rebates. The third is the pass-through financial arrangement, where employers get 100 percent of the discounts and rebates and the PBM retains no margin income. The pass-through model is the most transparent.

There are benefits and risks associated with each model. Traditional contracts have undergone severe scrutiny by employer plans due to an inability to understand how the money flows on the PBM side. Consider also that there may not be much difference in cost savings with each model, because there’s a bottom line in every contract and the PBM vendor has a minimum revenue objective under any financial model offered. In the end, the choice of model may not be as important as the types of fee arrangements you have to pay for PBM services.

Fees structures can differ, because every contract is different, depending on which metric and associated discount is used to measure drug cost. Moreover, other discounts and fees are added to the mix to arrive at a final fee structure.

What should you consider when determining the right contract model for your company?

A transparent pass-through model would make more sense if you want to see the flow of money. Then you can see exactly what you’re paying for and minimize the risk of hidden costs. But that’s what audits are for. Under the terms of agreements with PBMs, no matter what contract type, you need to be able to audit the PBM properly to assess the accuracy of the PBM vendor’s performance in relation to the contract.

What problems might you catch during an audit?

Audits can be effective for uncovering mistakes, such as incorrectly applied network discounts, mail-order discounts, specialty discounts, rebate payments, administrative fees, and any other fees associated with the program. Other potential findings might include incorrect application of member or drug coverage eligibility rules, cost-sharing rules, prior authorization, step therapy and override rules. These mistakes could be costly to a plan sponsor.

The time to determine the right to an audit should take place during the negotiation period with the PBM. Don’t allow too many auditing restrictions in the contract, because the audit might become ineffective.

Some typical PBM-requested audit restrictions include:

  • The PBM’s right to limit or veto an auditing firm selected by the employer
  • The information the auditor can access
  • The time in which claims can be audited
  • The auditor’s ability to only copy certain information
  • The auditor providing the PBM a draft of the audit before it goes to the employer
  • Restrictions on the amount, type, specifications and format of the claims data

These limitations on an employer can be problematic in trying to uncover some of the potential financial mistakes in claims administration and contract rate application. It’s a sensitive area, and both parties need to appreciate that there needs to be confidentiality language in place that will minimize any exposure of data to third parties.

Wednesday, 26 August 2009 20:00

Pay regulations

Numerous pieces of federal legislation have been proposed to control the high compensation costs for executives at public companies. While decisions on the legislation are not expected until later this year, approval would impact disclosures, reporting and corporate governance for public companies.

“Any company registered with the SEC will be affected by these new rules if they are finalized,” says Kevin A. McGill, an attorney with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC.

Smart Business spoke with McGill about the different pieces of legislation, new rules developed by the SEC and how to prepare for possible approval of the legislation.

What are the proposed pieces of legislation?

Sen. Charles Schumer recently introduced legislation to overhaul a number of governance areas. Sen. Schumer’s legislation includes significant provisions, such as:

  • ‘Say-on-pay,’ which gives shareholders an annual, nonbinding vote on executive pay practices
  • ‘Say-on-severance,’ which gives shareholders a nonbinding vote on severance packages for executives following M&A transactions
  • Enhanced proxy access, which makes it easier and cheaper for investors to nominate their own directors
  • Elimination of classified boards, which requires companies to hold annual director elections rather than voting on a portion of the board each year
  • Majority vote standard for director elections, which requires directors to resign if they do not win a majority of votes
  • Independent board chairs
  • Risk management board committees appointed by boards

The Shareholder Empowerment Act was recently introduced by Rep. Gary Peters and goes a bit further than the Schumer legislation. This legislation would implement eight governance reforms highlighted in a Council of Institutional Investors letter to Congress late last year. These include:

  • Majority voting for directors
  • Enhanced proxy access for long-term investors in nominating their own director candidates
  • Elimination of uninstructed broker votes in uncontested director elections
  • Separation of board chair and CEO positions
  • Nonbinding annual shareholder approval of executive compensation
  • Independent compensation consultants
  • Clawbacks of unearned incentive compensation
  • Bar on severance for executives terminated for poor performance

Finally, Sen. Richard Durbin introduced the Excessive Pay Shareholder Approval Act and Excessive Pay Capped Deduction Act of 2009 in May. The first act would require a supermajority shareholder vote — 60 percent — to approve a compensation structure in which any employee is paid 100 times the average employee salary at that company. A company’s proxy statement would also need to include disclosures related to the compensation of the lowest and highest paid employees, average compensation paid to all employees, and total compensation and number of employees paid 100 times the average compensation.

The second act would limit a company’s federal income tax deduction for compensation paid to executives receiving 100 times the average employee compensation. Any amounts paid in excess of this cap would be considered excessive and would not be deductible. Any company paying excessive compensation would be required to file a report with the U.S. Department of Treasury.

What rules does the SEC have in place?

The SEC put fairly extensive proxy statement disclosure rules into place in 2006, but there have been complaints that there was not enough emphasis on compensation policy analysis. The SEC has recently proposed rules that would require a more enhanced discussion about how compensation policies impact a company’s ongoing business. Many companies, primarily in the financial services sector, compensate employees heavily based upon business success and performance. The SEC is looking for a better analysis of how this method of compensating employees may impact business risk, i.e. whether employees of a company or particular business unit are encouraged to take on too much risk in an effort to increase individual compensation. The aim of these new rules would be to allow investors to assess whether a company’s compensation policies are properly aligned with the long-term success of the company.

Currently, the SEC requires a company to include a number of compensation charts in its proxy statement, including disclosures related to option and stock-based compensation. The proposed SEC rules would change the manner in which such compensation is reported in a company’s proxy statement by requiring that option and stock awards be presented in the tables at their aggregate grant date fair value rather than the dollar amount recognized for financial statement presentation.

How can you become educated on the legislation and prepare for possible approval?

Public companies need to be working closely with outside counsel and accountants. Some of these proposed items would require pretty extensive disclosures and could have some serious business impacts, especially if your company’s compensation policies emphasize success-based pay. If you have a good year and certain employees are rewarded for that success, you may not be able to deduct the excess compensation if the 100 times ‘excess compensation’ cap is implemented. You need to be proactive and understand how the legislation and rules might impact your business. Stay tuned, as it will likely be later this year before any new rules are finalized, and we see how many of these areas are impacted.

Kevin A. McGill is an attorney with Baker, Donelson, Bearman, Caldwell & Berkowitz, PC. Reach him at kmcgill@bakerdonelson.com or (404) 443-6704.

Sunday, 26 July 2009 20:00

Closing the gaps

Today’s standard insurance programs often include property, general liability, auto and umbrella insurance policies due to legal or contractual business requirements. While such policies might offer broad coverage, there are many inconspicuous exposures that are often overlooked by today’s insurance brokers. While these gaps in coverage may be subtle, they can often create significant financial risk for your company.

“Just because a coverage is not specifically required by contract does not mean it is not important, especially if the exposure can lead to large financial claims,” says Michael Finn, an account executive with GMGS Insurance Services.

Smart Business spoke with Finn about the problems you face by not including these coverages in an insurance program, and how to identify and close these gaps in coverage.

What problems can arise if you do not include these coverages in your insurance program?

Bottom line — gaps in coverage will create uncovered losses. Many business owners find out about these gaps in coverage because they incorrectly believe standard insurance policies cover all loss scenarios. A company that experiences one of these uncovered claims learns a valuable and often expensive lesson. The question is, can your business really afford to learn one of these lessons?

By reviewing and understanding these non-standard coverages, a company can better identify its true exposures and develop potential solutions to address such exposures. The following coverages can often be added to your present insurance program for a nominal premium or potentially for no cost at all.

  • Wage & hour defense coverage can be added to most employment practices liability (EPLI) policies. Wage & hour covers the defense costs for employee lawsuits related to the Fair Labor Standards Act (FLSA). Common claims include employee lawsuits alleging the lack of mandatory breaks/lunches or improper payment of overtime benefits. There should be no extra cost to add this coverage to your present EPLI policy.
  • Employee benefits liability covers an employer when errors or omissions have been made in the administration of the company’s employee benefits program. Coverage can be included for little to no cost. Common claims include failing to properly advise employees of the company’s benefits program or improperly excluding an employee or dependent from the health coverage.
  • Cyber liability fills the gap in coverage created by general liability policies excluding all Internet related business activity. Cyber liability provides coverage for a company’s Web site, Internet media/ads, and other Web-related content. Common claims include libel or trademark and copyright violation for improper display of pictures, logos or products on a company’s Web site. Coverage is generally added to an existing general liability policy via endorsement for no charge.
  • Privacy liability coverage is needed for companies that receive or store customers’ personal information. The most common claim scenario is when credit card or social security information is received by a business and then inadvertently stolen or publicized. Companies are expected to properly protect this private information.
  • Crime/employee dishonesty insurance provides coverage for employee theft of money, securities and business property. Smaller limits of $25,000 to $50,000 can be added to property insurance policies for no additional premium. A separate policy should be placed for businesses requiring higher limits and broader coverage.
  • Fiduciary liability covers those responsible parties, including company owners, for administering 401(k)s and other employee benefit plans. Fiduciaries can be held personally liable for 401(k) plan losses incurred as a result of their alleged mismanagement, error, omission, or breach of fiduciary duties. Such coverage can be added to a D&O/EPLI policy for a minimal premium.
  • Employed lawyers professional liability covers a company’s exposure when an attorney works as in-house general counsel and is not part of an outside law firm. Both general liability and directors & officers liability policies exclude any professional liability arising from an attorney employed at a company. A separate policy should be placed to correctly cover this exposure.
  • Hired & non-owned auto liability protects a company for its liability arising from employees driving personal or rented vehicles for work purposes. Common claims occur when an employee uses his or her personal car to run a work errand and is involved in a serious auto accident. This coverage can be endorsed on to the commercial auto policy for little or no additional premium.

How can you make sure these inconspicuous exposures are properly covered in your policy?

The key to protecting a company’s assets is working closely with a knowledgeable and technical insurance broker. A professional insurance broker should function more as a risk manager than as a salesperson. It is your broker’s responsibility to have regular meetings with you and determine which of these exposures exist in your business. If these exposures are not properly insured, your company may unknowingly be ‘self-insuring’ these risks.

Do you need to include all these overlooked exposures in your policy?

The need for any insurance coverage depends on a company’s individual operations and exposures. Every business is unique and certainly not all of the above exposures pertain to every company. In this turbulent economy, it is important to properly protect your company’s assets by having the appropriate coverages in place, not just the standard contractually required coverages.

Michael Finn is an account executive with GMGS Insurance Services. Reach him at (949) 559-3376 or mikef@garrett-mosier.com.

Sunday, 26 July 2009 20:00

A watchful eye

The recession has led to an increase in fraud perpetrated on businesses. For example, identity theft has become more common, with employees taking images of customer credit cards or hacking into their employer’s system to steal personal information.

“There’s also increased pressure for publicly traded companies to meet earnings expectations,” says Donna Beck Smith, CPA/CFF, CrFA, who leads the financial advisory services practice at Brown Smith Wallace LLC. “Earnings manipulation, via overly aggressive interpretation of accounting rules and manipulation of inventory costs, comes into play, which can lead to fraudulent reporting.”

With companies reducing their work forces, it’s important to put tight controls and surveillance systems in place to minimize opportunities for fraud.

“There’s an opportunity for weaker internal controls because there are not enough people for an effective system of segregation of duties,” says Don Mitchell, CPA/CFF, CFE, co-leader, audit at Brown Smith Wallace LLC.

Smart Business spoke with Mitchell and Smith about the components of the fraud triangle, the warning signs of fraud, what to do if you suspect it and how to prevent it.

What are the components of the fraud triangle?

One is motive — there’s some type of financial pressure, whether from banks or personal financial problems. The second is opportunity — when you have a reduction in force, there is more opportunity to commit fraud because there are fewer checks and balances and less segregation of duties. Finally, there is rationalization — you make the situation look better by thinking you’re just doing it for a short time or you’re going through a difficult period or you’re entitled.

What are the warning signs that fraud is occurring?

You have to watch cash and have good controls over wire transfers and who can set up vendors. Watch for eroding profit margins that you can’t explain, inventory shrinkage or unusual changes in revenue. You might just think it’s because of the down economy, but there could be underlying fraud issues. There’s a much higher need for analysis in this environment.

Another red flag is employees who have a change in demeanor or appearance. If they’re not taking any time off, coming in early or staying late, they may be doing something on the side and can’t afford to be away. Companies are cutting back on overtime, so there shouldn’t be a lot of late night or early morning work.

Background checks are also important during hiring. Many times, people continue to perpetuate the fraud, moving across the country and industries. They just pick up and do their work until just before they get caught, leave, and by the time the fraud is revealed, they’re continuing it someplace else.

What should you do if you suspect fraud?

You should contact a certified fraud examiner (CFE) or certified forensic accountant (CrFA) to assist in determining whether fraud has occurred and the extent to which it has. Is it limited to one employee, or is it a broader base with a large network?

Companies will also typically have insurance coverage for employee dishonesty. You need to give notice to the insurance company, and the CFE or CrFA will assist in filing that claim. After that, it’s up to you to file charges and pursue prosecution. You want to recover what you can — if you can’t recover from the fraudster, you can try to recover on insurance coverages and let the insurance company go after the perpetrator.

How can you educate employees about fraud?

It’s critical that the proper tone is set at the top. If you wink at small indiscretions, employees are going to see that and follow suit. Set up mandatory fraud awareness training for employees so they understand the risks, red flags and repercussions of fraud. Whistleblower policies have also become more common to help protect those who report fraud.

How can a business leader prevent fraud from occurring?

There are many action steps you can take, but the following are critical:

  • Separate duties and have a strong set of checks and balances. No one person should have access to a process, such as the cash flow stream, from beginning to end.
  • Cross-train employees so you can enforce mandatory vacations. You may boast that Sally or John never took a day of vacation, but if he or she has easy access to cash, that could be an indication of a fraud scheme.
  • Secure your check stock and endorsement stamps.
  • Set up an ethics hot line for employees to anonymously report fraud. Public companies are required to do this.
  • Enforce conflict-of-interest statements requiring that employees not have side businesses or steer work toward companies they have relationships with.
  • Have adequate software and IT security.
  • Establish an audit committee.
  • Conduct a fraud risk assessment to determine which areas of your company are at risk for fraud.

Fraud is a big expense that contributes to the increased cost of goods and services. If you can keep that under control, you can improve your business’s profitability. People also feel better when they know they’re working for organizations with high moral and ethical standards.

Donna Beck Smith, CPA/CFF, CrFA, leads the financial advisory services practice at Brown Smith Wallace LLC. Don Mitchell, CPA/CFF, CFE, is co-leader, audit at Brown Smith Wallace LLC. Reach Smith at (314) 983-1259 or dsmith@bswllc.com. Reach Mitchell at (314) 983-1248 or dmitchell@bswllc.com.

Sunday, 26 July 2009 20:00

Protecting your company

Contracts for public and private works projects vary greatly. Public works projects are built for government agencies and generally require a competitive bidding process, and the project is usually designed long before the contractor first becomes involved. In the private works arena, owners have almost unlimited discretion to select their general contractor and negotiate the terms of the contract, which has benefits but also risks.

“Because private construction contracts are generally left to the discretion of the owner and the contractor, it is critical to ensure that the contract has key terms that will protect you and limit your liability,” says Kevin Dorse, senior attorney with Theodora Oringher Miller & Richman PC.

Smart Business spoke with Dorse about the differences between public and private works contracts, provisions that should be included in contracts, what to do if the provisions are not adhered to, and how a properly drafted contract can protect you during litigation.

How do public and private works differ?

There is greater room to negotiate in private contracting, while there are numerous limitations in public contracting. For public contracts, competitive bidding requires the agency to award the contract to the lowest responsive and responsible bidder. The general contractor is not free to change major subcontractors who were listed in the bid. There may also be requirements in public contracts for paying prevailing wages. There’s a long list of statutes and regulations that limit the flexibility in the public contracting arena.

What are some provisions that owners should include in private works contracts?

Every project is different, but there are certain key issues that should be considered when entering into a new contract.

  • Include design submittal procedures that require the contractor to provide you with specific submittals. There are going to be certain elements of work designed by the contractor as the project is built. This gives you an opportunity to see and comment on those designs before they’re put in place.
  • Schedule submittals and milestones. You can require the contractor to give you regular and detailed updates so that you know the project is on schedule. If it’s not, you can identify problems and fix them.
  • Establish change order and claims procedures. There should be clearly defined steps so that any problems, overruns or delays are identified immediately, notice is given, documentation is provided, and the time, delay analysis and cost impact calculations are provided. This allows you to make any necessary adjustments.
  • A ‘Continuing Duty to Perform the Work’ requires the contractor to continue to work, even if there is a claim, dispute or change request. Courts can also enforce this requirement.
  • Termination provisions need to be included. One option is a termination for convenience, where you can terminate or suspend the project if your circumstances change. This is happening frequently due to the new economic conditions.
  • Include liquidated damage and reverse liquidated damage provisions. Liquidated damages are charged when the contractor is at fault for delaying the project. Reverse liquidated damages are paid when you are at fault for delaying the project, and you would be assessed a specific price for causing the delay.
  • Include a provision that addresses the impact of early completion or concurrent delays. This precludes the contractor from asserting a delay claim if the work is completed by the project deadline. Concurrent delays occur when there are multiple reasons for the delay. If you and the contractor are both at fault, these delays offset each other and the contractor would not have a claim.
  • Right to audit the contractor’s records, especially in the event of a claim or delay. Most job records for construction projects are created by the contractor, giving you little visibility to project details. Broad audit rights provide a more effective means to monitor performance and control project costs.
  • Determine if you will require performance and payment bonds on the job. These bonds give protection by a bonding or surety company that would step in if the contractor defaults on the job. This is optional, and there is a cost to obtain this type of insurance that will be built into the contract price.
  • Include contractor warranties. A ‘Free of Defects’ provision increases the owner’s protection and states that the contractor’s obligations are absolute. Also include a provision for remedying defective work. This provision gives the owner flexibility to require the correction of defective work at the contractor’s expense.

What happens if these provisions are not adhered to during the project?

The terms of the contract not adhered to may be deemed waived and the owner’s ability to enforce the contract may be compromised. The owner should communicate with the contractor, in writing, on a regular basis about any problems that have occurred. Good communication avoids and solves most disputes.

How does a properly drafted contract protect you during litigation?

Almost every one of the provisions mentioned above can and should provide protection if litigation arises, especially if you’re vigilant during the project and require compliance with the contract along the way. Each of these provisions can limit liability, ensure flow of information to you, be an early warning system to claims, problems, delays or change orders, and limit liability for certain types of damages.

Kevin Dorse is a senior attorney with Theodora Oringher Miller & Richman PC. Reach him at kdorse@tocounsel.com or (714) 549-6180.

Sunday, 26 July 2009 20:00

Design tools

One of the biggest challenges business leaders face is finding a health plan that meets all of their needs.

But before you even begin researching the options, you need to determine your overall objective for the plan. Do you want it to encourage healthier lifestyles among employees? Do you want it to include higher-quality networks?

“Figuring out what you want to accomplish is the beginning of the process,” says Don Whitford, director of sales and client services at Priority Health. “You also need to understand the overall value of your health plan and how it can help as a recruiting and retention tool for employees.”

Smart Business spoke with Whitford about what to consider when building a health plan and how to make sure you are meeting your employees’ needs.

What factors should a business leader consider when building a health plan?

The first is wellness and looking at the connection that employees have with the plan. Is it embedded in the benefit design and then supplemented with wellness programs that focus on behaviors important to your company? Or are they standalone components? For example, if you have a high population of smokers, you may want to develop a health plan that will encourage your employees to quit smoking.

Cost is the next factor. When you think of cost, it’s centered on premium. That’s a major component, but you can adjust the premium through changes in benefits, co-pay and deductibles. It’s looking at how much you want to contribute and how much you want your employees to contribute.

You can either choose a simple benefit design, or a new spending account plan such as a Health Reimbursement Arrangement, Flexible Spending Accounts or Health Savings Accounts.

The third factor is network. Some carriers boast that they have every physician in their network. But that’s not a real network, because there are no qualifications and everyone is allowed to participate. You need to look for a network that has criteria for its physicians and hospitals, so it’s based on outcomes and quality medical care.

The last factor is service. Your employees may only interact with the carrier’s customer service team, so you want to look at the services provided. Hours are important, because you want a carrier with evening and weekend hours so your employees don’t have to call during the workday. But you need to make sure the carrier can guarantee a certain level of service.

Make sure the carrier can tell you its first-call resolution rate — employees only need to call once to get a problem solved. What does the carrier do with its calls? Does it record them in case there is a problem or concern?

How do you build a health plan that meets employee needs?

Survey your employees to see what types of benefits are most important to them. That will help design a plan tailored around those specific health needs.

You can also build in incentives to encourage wellness. If your carrier offers health risk assessments — online questionnaires analyzing behaviors and other factors contributing to health — you can provide some type of reward to employees who complete them. Or if the carrier offers disease management programs, you can give employees incentives for participating in those activities.

Oftentimes, employees don’t fully understand the total cost of health care. They only see what they’re paying, such as a portion of the premium, deductible or co-pay. You need to clearly communicate why you’re making these decisions.

The total health care cost needs to be shared. Tell employees what percentage you are paying, what percentage you want them to pay and what they can do to help control future costs.

What resources are available to help you build your plan?

You can work with an independent insurance agent or health benefits consultant and also use your carrier’s resources when designing a health plan. Carrier representatives can also work with you to understand your needs. Carrier Web sites also have a lot of information that can educate you and your employees about the plan.

What are the benefits of taking the time to put together the right health plan for your company?

Setting your objective will determine what is right for you. You want the plan to improve employee health, so they’re more aware of the behaviors they can control. Employees will then see the positive impact they can have on their well-being as well as the potential impact to reduce future health care costs.

It can also have a positive impact on your absenteeism rates, improve productivity, make employees greater contributors and improve morale.

How often should you revisit your plan design?

You need to review it annually. Frequently, you just renew the health plan, but things change, product designs change, so it’s important to look at it every year. Have your representative, consultant or agent present options to you.

Don’t accept the status quo of the plan you’ve had for years just because you think it’s the best. There are plenty of options as plans are becoming more cutting edge and are tied to achieving better outcomes for your work force.

Don Whitford is director of sales and client services for Priority Health. Reach him at don.whitford@priorityhealth.com or (248) 324-4711.

Sunday, 26 July 2009 20:00

A job well done

The recession has caused many businesses to cut back on expenses in many areas, including raises. While your employees may deserve raises, you may not have the money there to provide them with monetary recognition. Despite spending decreases, it’s important to recognize your employees’ hard work through other means of compensation.

“Employees are concerned and consumed with the prospect of reduced salaries, temporary layoffs or job losses,” says M.J. Helms, director of operations for The Ashton Group. “Now is the time to retain your super stars. You can attract and retain employees by offering rewards in exchange for time and effort.”

Smart Business spoke with Helms about how to recognize employees, how to keep track of employee performance for recognition and rewards, how to help employees understand the recognition tools, and how to use these tools to leverage your company during the hiring process.

What are the benefits of rewarding and recognizing your employees?

Recognition helps reinforce the actions and behaviors you most want to see people repeat. An effective employee recognition system is simple, immediate and powerfully reinforcing. When employees feel like they matter, they’re much more willing to give their all for your company.

When you praise employees, you let them know you’re aware of their hard work. You acknowledge they’ve put forth a great effort to accomplish something and you’re celebrating that accomplishment with them. It shows that you don’t necessarily need to spend money to make someone feel valued and appreciated.

How can you recognize employees for their hard work?

Employee recognition is not just a nice thing to do for people; it’s a communication tool that reinforces and rewards the most important outcomes people create for your business. You need to show your employees the value they add to the team and point out specific instances where they went above and beyond the call of duty. Recognition, such as identifying one employee each month who has gone above and beyond, needs to be a planned activity. Giving someone a pat on the back in private may make that employee feel good for a few minutes, but taking time to recognize that person during a staff meeting in front of his or her peers will extend that good feeling into days, if not weeks. This also entices others to strive for the same reward. You can even do something as simple as having a Wall of Fame in your office to post pictures of employees and their accomplishments.

How do you keep track of employee performance so you know whom to recognize?

Reward those who make a difference. Keep a personal log of significant contributions your employees make to your company from day one. For example, how they saved the company money or boosted sales, how they handled a project successfully from start to finish or how they showed leadership under pressure. Use as many details as possible, with corresponding data. Remember to base their salary increase on the contributions made to the company.

If you don’t have the funds for bonuses or raises, you may want to consider offering other incentives like flextime, extra vacation time, stock options or telecommuting from home. Even if you cannot offer your employees pay increases, it’s important to show them you are sensitive to the tough times. Find ways to help them, short of spending more money on a raise right now, but always acknowledge they do deserve a raise if the money were there. Taking that approach and working with your employees will allow you to retain and motivate good employees.

You can also include employees in your company productivity planning; you might be surprised at the ideas they may bring forward. Those employees will feel more engaged and appreciated in the company, instead of discouraged because they are not receiving pay increases. Establish criteria for what performance or contribution in the meeting constitutes employee rewards. Ask employees to come to the meetings prepared with suggestions and ideas for increased productivity for the company.

How can you help employees understand the use of these recognition tools instead of pay increases?

There is always room for employee reward and recognition activities that build positive morale in the work environment — you just have to work on these programs. For example, you could have company lunches on Fridays, or prize drawings for those employees who met their goals for the week. Or give your team members who go above and beyond a new job title. Job titles don’t always mean more money, but sometimes receiving a title means more than getting a few more dollars in the paycheck. It show that’s you’re pleased with their performance.

How can you use these tools to leverage your company during the hiring process?

Point out to the potential employee your company recognition program and show you are committed to your employees’ well-being. A well-designed peer recognition program promotes organizational values. Candidates will want to work for a company that recognizes employees for their hard work.

M.J. Helms is the director of operations for The Ashton Group. Reach her at (706) 636-3343 or mj@ashtongrp.com.

Thursday, 25 June 2009 20:00

Get in the game

New projects and initiatives have been springing up in Ohio, as money from the Economic Stimulus Act is distributed. Ohio received $8.2 billion when the act was passed, along with more than 24,000 applications for funds.

“The state budget is relying in large part on the stimulus money (about $5 billion) to balance it,” says Michael Caputo, director of government affairs and chair of the government affairs group at McDonald Hopkins LLC. “One-time money is key to balancing the budget, but that’s all going to be gone in two years. Businesses have to be aware of the impact that will have in the coming years.”

Smart Business spoke with Caputo about the stimulus money’s impact in Ohio, what’s going on with the state budget and its relationship with the stimulus money.

How has the stimulus act impacted Ohio?

The governor’s office is sorting through applications, trying to leverage as much funding as possible. Due to federal guidelines, this has caused certain projects, such as those dealing with transportation and water quality, to move to the top of the list. The blessing for Ohio is that we have a lot of needs in these areas, such as highway renovation, so we’re starting to see the fruit of this package in the form of jobs and projects. There should be many announcements in the coming months about additional projects that are funded through the stimulus effort.

What projects have received stimulus money?

The most significant one to date in Northeast Ohio is $200 million for construction of a new Innerbelt Bridge. The Opportunity Corridor economic development project has also received $20 million. Over the summer, new projects will be awarded in areas such as institutions and nonprofit organizations. Public housing and government buildings will be another major benefactor from this process. While they may not eclipse the Innerbelt project in terms of regional significance, they will certainly provide ample work for Northeast Ohio businesses and contractors.

What is happening with the state budget?

It is a complete mess. The budget for the FY 2010-2011 biennium has revenue projections equal to what they were in 1999-2000. Because of the growth of government over these last ten years, getting government spending back to that level requires major cuts to just about every government program. Primary and secondary education, Medicaid and virtually every other area of spending that once was viewed as ‘untouchable’ is very much on the cutting block. I do not see this legislature or the governor raising taxes to balance this budget. Getting there via cuts, while extremely painful, can be done. Unlike the federal budget, the state budget has to be balanced by June 30 of every year, and deficit spending is not allowed. So if the state projects receiving $2 billion less, $2 billion has to be cut or raised. The voters will ultimately need to decide which course they would like their state government to follow: balancing this budget by making major cuts to just about every state program, or raising revenue through tax increases.

How does the state’s stimulus money impact the budget now and in the future?

All of the money being used to balance the budget is going to be gone in two years, causing the state to look at major tax increases. If the deficit had to be made up through a sales tax increase, it could go up 4 or 5 cents, which almost doubles the rate at the state level. That is just going to offset the one-time money being used and does not include the growth in spending that will most likely occur through federally mandated increases in Medicaid rates and education increases or possible downward revenue projections.

How does this affect businesses?

A few years ago, Ohio underwent a major overhaul of the tax code. New taxes like the Commercial Activity Tax were created, and others like the tangible personal property tax were eliminated. The conversation will most likely be about which taxes to bring back or raise to offset this deficit. If you are a company with a large amount of tangible personal property, you should be worried about the possibility of the tax being reinstituted. Another possibility is increasing the sales tax or the personal income tax on income earned over a certain level. Frankly, it may be a combination of multiple tax hikes to get the revenue needed for future state spending.

There is never a good time to raise taxes, and now is about the worst time possible, but it would take a miraculous turnaround to get through this period without a tax increase. Even if we went to full-blown casinos, they would only generate between $700 and $800 million a year in additional revenue, which is less than 10 percent of what is needed. We have major challenges from a state budgeting standpoint, and we cannot punt.

How can you prepare for these tax increases?

The biggest thing is accepting the premise that tax increases will likely be a key component of any effort to balance future budgets. People and businesses need to start planning, forming coalitions, building their cases and lobbying legislators and the administration as soon and as proactively as possible. If you want to have a say in how those tax increases look, you’d better get in the game right now.

A lot of the bigger businesses are more in tune with what is going on, but smaller companies don’t have the time or resources to follow this stuff. They need to take the time to understand the severity of the problem. We are going to hear suggestions on statewide tax increases, and everyone needs to know why that conversation is occurring. Get up to speed now; do not just sit on the sideline while your pocketbook is under attack.

Tuesday, 26 May 2009 20:00

Closing the gaps

Today’s standard insurance programs often include property, general liability, auto and umbrella insurance policies due to legal or contractual business requirements. While such policies might offer broad coverage, there are many inconspicuous exposures that are often overlooked by today’s insurance brokers. While these gaps in coverage may be subtle, they can often create significant financial risk for your company.

“Just because a coverage is not specifically required by contract does not mean it is not important, especially if the exposure can lead to large financial claims,” says Michael Finn, an account executive with GMGS Insurance Services.

Smart Business spoke with Finn about the problems you face by not including these coverages in an insurance program, and how to identify and close these gaps in coverage.

What problems can arise if you do not include these coverages in your insurance program?

Bottom line — gaps in coverage will create uncovered losses. Many business owners find out about these gaps in coverage because they incorrectly believe standard insurance policies cover all loss scenarios. A company that experiences one of these uncovered claims learns a valuable and often expensive lesson. The question is, can your business really afford to learn one of these lessons?

By reviewing and understanding these non-standard coverages, a company can better identify its true exposures and develop potential solutions to address such exposures. The following coverages can often be added to your present insurance program for a nominal premium or potentially for no cost at all.

? Wage & hour defense coverage can be added to most employment practices liability (EPLI) policies. Wage & hour covers the defense costs for employee lawsuits related to the Fair Labor Standards Act (FLSA). Common claims include employee lawsuits alleging the lack of mandatory breaks/lunches or improper payment of overtime benefits. There should be no extra cost to add this coverage to your present EPLI policy.

? Employee benefits liability covers an employer when errors or omissions have been made in the administration of the company’s employee benefits program. Coverage can be included for little to no cost. Common claims include failing to properly advise employees of the company’s benefits program or improperly excluding an employee or dependent from the health coverage.

? Cyber liability fills the gap in coverage created by general liability policies excluding all Internet related business activity. Cyber liability provides coverage for a company’s Web site, Internet media/ads, and other Web-related content. Common claims include libel or trademark and copyright violation for improper display of pictures, logos or products on a company’s Web site. Coverage is generally added to an existing general liability policy via endorsement for no charge.

? Privacy liability coverage is needed for companies that receive or store customers’ personal information. The most common claim scenario is when credit card or social security information is received by a business and then inadvertently stolen or publicized. Companies are expected to properly protect this private information.

? Crime/employee dishonesty insurance provides coverage for employee theft of money, securities and business property. Smaller limits of $25,000 to $50,000 can be added to property insurance policies for no additional premium. A separate policy should be placed for businesses requiring higher limits and broader coverage.

? Fiduciary liability covers those responsible parties, including company owners, for administering 401(k)s and other employee benefit plans. Fiduciaries can be held personally liable for 401(k) plan losses incurred as a result of their alleged mismanagement, error, omission, or breach of fiduciary duties. Such coverage can be added to a D&O/EPLI policy for a minimal premium.

? Employed lawyers professional liability covers a company’s exposure when an attorney works as in-house general counsel and is not part of an outside law firm. Both general liability and directors & officers liability policies exclude any professional liability arising from an attorney employed at a company. A separate policy should be placed to correctly cover this exposure.

? Hired & non-owned auto liability protects a company for its liability arising from employees driving personal or rented vehicles for work purposes. Common claims occur when an employee uses his or her personal car to run a work errand and is involved in a serious auto accident. This coverage can be endorsed on to the commercial auto policy for little or no additional premium.

How can you make sure these inconspicuous exposures are properly covered in your policy?

The key to protecting a company’s assets is working closely with a knowledgeable and technical insurance broker. A professional insurance broker should function more as a risk manager than as a salesperson. It is your broker’s responsibility to have regular meetings with you and determine which of these exposures exist in your business. If these exposures are not properly insured, your company may unknowingly be ‘self-insuring’ these risks.

Do you need to include all these overlooked exposures in your policy?

The need for any insurance coverage depends on a company’s individual operations and exposures. Every business is unique and certainly not all of the above exposures pertain to every company. In this turbulent economy, it is important to properly protect your company’s assets by having the appropriate coverages in place, not just the standard contractually required coverages.

Michael Finn is an account executive with GMGS Insurance Services. Reach him at (949) 559-3376 or mikef@garrett-mosier.com.