Sometimes, executives are so busy pursuing the American dream that they forget to protect the hard-earned assets they have accumulated along the way. Vacation homes, jewelry, boats and cars are frequently part of a burgeoning list of assets acquired by executives, while board-of-director roles, managerial assignments and international business travel are some of the responsibilities that accompany success. Each possession and professional activity needs to be evaluated by a broker for potential physical loss or liability exposure, and insured accordingly.
Approximately 70 percent of clients are underinsured, according to Michelle Baxter, personal lines broker with West-land Insurance Brokers. “It is more expensive to rebuild a home than to build it because of demolition and debris removal costs,” says Baxter. “Many homeowners fail to take those expenses into account when they calculate their homes’ replacement cost, if they aren’t advised by a professional broker.”
Smart Business spoke with Baxter about how to close coverage gaps and reduce liability exposure with personal insurance.
How often should I meet with my broker?
Your broker should review your portfolio annually, including an evaluation of all of your assets and your lifestyle. The broker should ‘shop’ your coverage needs among several markets to determine the best value and insurance carrier for you. I say value as opposed to price because coverage should be placed with an A-rated carrier and certain markets cater to high-wealth individuals, so their policies contain clauses that provide protection for the kinds of exposures that executives frequently have. Saving on premiums in the short run often can cost you more in the long run.
What is my broker’s role in reducing my exposure to loss and managing my needs?
You should have one broker who should place all of your coverage with one insurance company.
Primarily, this allows your broker to view your entire lifestyle and portfolio of assets for gaps in coverage and potential exposure. For example, if you purchase a vacation home and secure the insurance coverage through escrow at closing, that policy might have liability limits of $300,000. Meanwhile, your personal umbrella policy is with another carrier and it provides coverage for losses that exceed $500,000, resulting in a coverage gap of $200,000, which could be avoided by having one broker who oversees all of your needs. Hiring occasional or full-time workers, such as a nanny or housekeeper, can also increase your exposure, as does renting out a vacation home, so all of this must be taken into consideration.
Also, placing all of your coverage with one carrier is generally more cost-effective because it allows for premium credits and elimination of costly redundant coverage.
Finally, your broker should be the first person you call in the event of a loss. When you report a potential claim to a carrier, all insurance companies are notified regardless of whether the claim gets paid. In some cases, especially where the claim may be below your deductible, it might be best not to report it at all. Your broker will know what the right answer will be for each situation.
What are examples of personal lines protection that executives should consider?
Your broker should suggest a personal articles floater if you own jewelry, rare wines, collectables, musical instruments or fine art, and all items should be appraised. This will cover the items at full value against loss or mysterious disappearance without a deductible. If you own a condo as a primary residence or as a rental property, you have personal liability exposure that extends beyond the master policy written on the condominium association. For example, if a fire starts in your unit and damages other units, you might have financial responsibility to others.
Extended replacement cost coverage for homeowners is another recommendation. It provides additional protection in the event you discover that you are underinsured after a loss. For example, if you have purchased $500,000 in replacement cost coverage for your home, and after a fire you find that it will actually take $550,000 to replace it, the endoresement clause will provide for $550,000 in replacement coverage automatically; you need only pay the additional premium. Also, you don’t have to settle for coverage limits provided by the California Earthquake Authority. A professional broker has access to other markets that provide broader coverage for reasonable rates.
What are the other benefits of working with a professional broker?
Brokers can assist executives with busy lifestyles by recommending appraisal firms, companies that will scan valuable documents or videotape your belongings, so you have a catalog of your assets. They can also assist in calculating accurate replacement cost values for your properties. As your wealth builds, so does your exposure to loss and your need for professional guidance. It takes years to build the American dream; it only takes a few minutes to lose it.
MICHELLE BAXTER is a personal lines broker with Westland Insurance Brokers with 20 years insurance experience. Reach her at (949) 553-9700, (800) 541-9663 or firstname.lastname@example.org.
It’s rare that CEOs are promoted from within organizations these days. Given the increasing pressures of the position and the need for quick results, many boards turn to outside hires when the CEO position is vacated. It’s rarer still that company employees would nominate one of their peers for the top job in the company and that the board would heed their suggestion.
But that’s exactly what happened in January 2005 when Mike Klayko became CEO of Brocade Communications Systems Inc.
Considering that the company’s previous CEO and the vice president of human resources had just resigned because of a stock backdating scandal, Klayko entered the role when the company was in crisis mode.
“It was a tough time,” Klayko says. “The company situation was turbulent, and we had lots of internal and external pressures on us, and suddenly, I was the new boy in the CEO suite. The easiest thing would have been to stay in my position as head of sales and marketing or go look for something else. After all, I had been with the company since 2003, and I knew the industry and the sales and marketing division well. When my peers came to me and said that they wanted me and would support me to become the new CEO and I received support from the board and my wife, all of the pieces just came together.”
Surrounded by shattered trust, Klayko says that he needed to rebuild confidence both internally and externally, but he says that he also knew that rebuilding trust takes time.
In addition, another situation waiting for Klayko was the fact that even prior to the stock backdating crisis, the excitement among employees in the company had waned, organic growth had subsided and Brocade had become reliant on a very small product base. In short, he says, the company was stagnant.
In order to establish a platform that would serve as a launch-pad for new growth initiatives, Klayko prioritized his initial repositioning efforts on increasing accountability, establishing a shared vision and creating a new culture. Klayko says that executing his plan consistently, over time, would eventually return trust to Brocade.
“My initial assessments of the situation and what to do about it were somewhat easy to make because I had the benefit of being with the company for a while,” Klayko says. “I also knew what my skill sets were, and I wanted to maximize the strengths that I have as a leader, which are setting direction, executing consistently, and holding myself and others accountable. Because of the turmoil, I wanted to get everybody on the same page, and we needed to increase accountability for performance to get the company moving again. You need to have a shared sense of goals and accountability because you’ll never get anywhere as an organization with everyone swimming upstream.
“I kept a high percentage of the management team when I came into the CEO role because we needed to hit the ground running. I know that as single individuals, people in a company can’t change things; when we are all united behind the cause, we can make significant progress.”
Klayko says that he used goal-setting sessions to establish a common performance framework for Brocade. He placed himself and his direct reports on performance contracts and held his performance open to scrutiny and comments from his team.
“I solicited feedback from the employees about how they wanted to hold me accountable and I combined that with how I wanted to hold myself accountable. I created a performance contract for myself and posted it on the intranet for everyone to review and they could also comment about how I was doing,” Klayko says. “Performance contract accountability now cascades down in our organization, and everyone is granular to the same vision, and we all have common financial goals and objectives.
“I think that this has improved our accountability because everyone likes to be measured, people like keeping score. The boundaries are now clear and the staff knows what I’m expecting of them and everybody understands their role in the companywide performance objectives. By posting my performance goals on the intranet, I am open about what I’m doing and I’m demonstrating transparency in my communications which is helping to build trust.”
Compensation drives vision
By adding metrics to the performance plans, Klayko took the next step in further defining his performance expectations for employees, and then he put even more emphasis on the message by tying employee bonus compensation to company performance. Formerly, employees’ bonuses were predicated on individual performance, now employees also earn bonuses when the team is successful.
“We aligned metric measurements to the performance plan and employees share in bonus compensation when corporate objectives are met,” Klayko says. “In addition, their individual bonus plans are now tied to meeting total corporate objectives. For example engineering earns a bonus when they deliver new products on time because achieving that affects the entire company, and we have a per-employee, revenue-performance metric that’s included in each individual performance plan. We set a new target for companywide performance expectations twice a year.”
Klayko says that he expects managers who are at a high level in the organization to earn more of their total compensation from variable bonus structures, so he favors senior leaders having as much as 15 to 20 percent of their total compensation at risk. He also prefers using objective performance measurements over subjective ones, not only because employees will
be clearly focused on what they need to achieve but because performance clarity eliminates potential discrepancies and that engenders trust.
“Through performance plans that are reinforced via compensation structures, everyone understands their role and how it all ties together and everyone knows what they need to do as individuals in order for the company to be successful,” Klayko says. “There are no entitlements; it’s purely a capitalistic environment. We further reinforce our team performance goals at weekly staff meetings. If one area is falling behind, we call them out, and everybody looks at what they can do to help that part of the team meet their objectives. By keeping everyone apprised of the results, there are no surprises.”
Writing the playbook
Another tool that Klayko implemented to help pull his team together and to reposition the company for increased growth was the development of a strategic plan. He calls the plan the playbook, and it contains multiple chapters that outline the company’s values and specific growth strategies. Klayko developed the playbook in collaboration with his senior management team, and he shares the information with all of the constituencies he touches on a frequent and consistent basis.
“We’ve grown quite a bit from just over 1,000 employees to 1,400 due to some acquisition activity,” Klayko says. “So we have new people coming in all the time, and we use the play-book to get them up to speed and on the same page quickly with what we want to achieve. We share it with everyone: investors, shareholders and customers. Not only does it keep everyone together, but having and articulating our goals from a written plan guarantees communication consistency.”
Having made some recent acquisitions, Klayko says that he also opens up the playbook to the employees of the newly acquired organizations and asks for their input and feedback as part of his assimilation plan. Exposing newly acquired workers to the plan gets them on board with Brocade’s mission quickly.
Klayko doesn’t stop at just receiving opinions from new employees. Following another recent acquisition, Klayko also sought input from the entire base of acquired customers with the goal of showing all 27,000 of them a unified front from the company and its representatives. His theory is that delivering consistent messaging to clients will create loyalty and retention.
Klayko says that he frequently takes the pulse of the organization to see if his playbook is still the right game plan for Brocade and to assess if he’s achieving his goal of instilling a new corporate culture through effective communication of his plan.
“We do one big survey each year, but intermittently, we conduct pulse surveys to test the effectiveness of our messaging,” Klayko says. “We survey to assess our employees’ understanding of the strategy of the company and the role that they play because understanding enhances employee engagement. I also spend more than 75 to 80 percent of my time in front of employees and customers so I can judge their level of understanding on a firsthand basis.”
Klayko says that, in his view, one of the questions on the annual climate survey is a true litmus test of employee opinion about the company culture: “I look at whether an employee would refer their best friend to work at the company as a pulse check on how we’re doing,” he says. “Consistently, the response is that 75 percent say they would recommend Brocade Communications as a good place to work to one of their best friends, and that statistic alone tells me that we are on the right track.”
By the middle of 2006, Klayko says that he was satisfied with the progress of Brocade’s cultural shift, the execution of the business plan and the increased performance accountability within the company, and subsequently, he increased acquisition activity to move Brocade away from its vulnerable position as a one-trick pony.
Revenue for the company in 2007 was $1.2 billion, up 65 percent from 2006 further validating that Brocade was past the crisis, and the firm was actively engaged in revenue-increasing activities.
Klayko says that while he wasn’t seeking the endorsement from his peers to become Brocade’s CEO, as it turned out, he’s glad he received it.
“Being recognized by my peers for this opportunity wasn’t a goal that I had set for myself, but I’m glad that the opportunity arose,” Klayko says. “I think that there are two things that I’ve learned from becoming the CEO of Brocade Communications: One is that I sincerely believe that if you prioritize the success of others and if you truly help the people around you succeed, you will be a better CEO. The other thing I’ve learned is that you should really try to understand what you’re good at, focus on using those skills, and then surround yourself with great people who are good with all the rest. If you follow those guidelines, success will follow.”
HOW TO REACH: Brocade Communications Systems Inc., www.brocade.com
Fraud can be financially and emotionally devastating for any CEO, whether the company is publicly traded or privately held. While most chief executives would agree that segregation of duties (SOD) provides the best prevention and may even be the ultimate cure for a slew of fraud-related problems, they often don’t think the problem can happen to them.
The most frequently asked questions about fraud are: Does my business really face risk? And does that risk justify the expense of segregating duties and instituting controls? The answer to both of those questions is “yes.” All CEOs face the risk of fraud-related loss, yet it is possible to institute a cost-effective control system by applying a pragmatic approach to the segregation of duties review process.
“For many CEOs, it’s hard to justify the time and resources needed to go through a formal SOD analysis because they don’t believe their business is at risk when they are surrounded by tenured, loyal associates,” says Lee Buby, SOX 404 practice leader for Haskell & White LLP. “But it takes incentive and opportunity to commit fraud, and, unfortunately, it’s the more tenured employee that has the greatest opportunity.”
Smart Business spoke with Buby about how CEOs can achieve tight controls through a cost-effective SOD analysis.
Why is the risk of fraud greater with tenured employees?
Tenured employees know the aspects of the company’s accounting system and how to cover their tracks, so they have the know-how to commit fraud. Also, long-term associates are often not only loyal employees but also friends with the CEO, so it’s hard for any executive to imagine such a betrayal of trust. So those kinds of losses are not only the most likely, they are emotionally devastating for CEOs when they occur.
What’s the first step in a cost-effective SOD analysis?
Perform an appropriate SOD assessment that will actually identify and define every existing issue. Then evaluate each issue against the organization’s tolerance for risk. If the risk of loss is small, the CEO may choose to accept it, or he or she may be satisfied that an existing control is sufficient. Having the knowledge will allow the CEO to make cost/benefit decisions for each issue. The best assessments are customized, but to save money and resources, start with an industry template and adapt it by actually performing walk-throughs of each activity. Not every issue is equal, so you can create mitigating controls for higher-risk areas.
What is the next step?
To truly assess the risk, review employees’ access to information, not just their job description. A good analysis should include what each employee can access, physically or via technology. Assume that if an employee is able to access a function or asset, it will be accessed. This is especially important in organizations with tenured employees who have know-how of the different aspects of accounting. Once again, management can apply the cost/benefit test before instituting new controls, but at least the information is there to make an informed decision.
Doesn’t the IT audit evaluate SOD?
Management and audit teams have historically relied on IT auditors to evaluate the accessibility of an IT control environment, but this has been limited to determining whether those who have access also have a valid business purpose for it. This, by itself, does not take into consideration whether various combinations of access or assigned duties presents an SOD issue. Management and auditors must work closely with IT professionals to define and gain an understanding of access rights in order to perform the SOD analysis. This is an area where traditional SOD assessments and IT stewardship has fallen short.
How can CEOs identify the best areas for SOD?
Identify critical areas and hold the related SOD design or mitigating controls to a higher standard. For highly liquid assets that are easily convertible to cash, such as access to a line of credit or the issuance of shares of company stock at a public entity, management should always attempt to design preventive controls before settling for after-the-fact detective ones. This is one of those areas where SOD just absolutely makes sense. And don’t forget about terminated personnel when designing controls. This includes everything from protecting assets to preventing share price manipulation, bad press and disclosure of confidential information or trade secrets.
It’s not always an easy task, and it can be time-consuming, but a pragmatic approach to SOD and control decisions, based on knowledge and risk tolerance, will help reduce risk using a cost-effective methodology. Also, once the initial analysis has been performed, the maintenance time is minimal, and it can be used every time a shift in accounting duties is required or new staff is hired. It may just be the best time and money a company will ever spend because not only will it add value to the organization, it will also give the CEO peace of mind.
LEE BUBY is the SOX 404 practice leader for Haskell & White LLP. Reach him at (858) 350-4215 or email@example.com.
Employees miss three to four hours of work every time they visit the doctor, which impacts productivity. But forgoing a doctor’s visit to avoid missing work is not the best choice dedicated employees can make for themselves or their employers. One solution that’s gaining traction with employers is the on-site health center, which increases the prevalence of ongoing preventive care and reduces time away from work.
“Employers are finding that the on-site center is a used and highly valued employee benefit,” says Teresa Wolownik, consulting actuary for the Group & Health Care Practice at Watson Wyatt Worldwide. “Which is great news because employers are seeing a reduction in nonproductive time by almost three hours per visit and employees are receiving high-quality health care.”
Smart Business spoke with Wolownik about the benefits of on-site health centers and how employers can explore the feasibility of and ROI from implementing one.
Why should employers implement an on-site health center?
The 2007 annual survey conducted among 453 employers by Watson Wyatt Worldwide and the National Business Group on Health revealed that 21 percent of the surveyed companies presently have an on-site clinic and 28 percent expect to open one in 2008. I think the reason behind the trend is that the clinics provide numerous solutions. First, because the on-site services can be delivered more cost effectively than those delivered by outside physicians, the practitioners are able to spend time focusing more on preventive and lifestyle-related risk factors, not just treatment. Second, only one in four employees currently seeks preventative care, which is contributing to the rise in chronic illnesses, such as diabetes. With services available at the work site, more employees engage in preventive care services, receive ongoing management for current conditions and participate in smoking cessation or weight-loss programs. Third, employers and employees benefit from visiting a health care provider who is fully integrated with a company’s program and is familiar with its benefit plans. Last, employees view the on-site health center as a perk, which improves morale and retention.
Which companies are potential candidates for an on-site health center?
We usually say that employers with a critical mass of 1,000 or more employees at a single location are candidates. However, there are vendors that cater to smaller employers, so it’s possible to adopt a scaled model that focuses on health coaching with or without disease management and still receive many of the benefits. Most on-site centers are outsourced to third-party vendors, so employers needn’t worry about additional liability, employee privacy issues or in-house expertise.
A design and feasibility study will help to validate ROI. The analysis process includes:
- Engaging key stakeholders, such as representatives from legal, finance, benefits, occupational health and real estate, in a meeting to educate and define the objectives for the center. Include consulting experts to advise on the range of health center models and third-party vendors and discuss considerations of eligibility, cost-sharing, integration with other programs and data/measurement.
- Shaping the center’s parameters, such as whether it will be led by an M.D. or a nurse practitioner. Knowledge of your employees and their preferences is vital.
- Conducting a claims history review to help determine the types of services needed and the estimated patient volume for the center. Extract key data concerning current cost and frequency of visits, condition prevalence and proximity to local physicians to estimate adoption rates.
- Leveraging the expertise of a clinician with experience operating an on-site health center. The needs and considerations of an employer-based center are unique to those in the outside community. The physician expert helps you to define your desired ‘patient experience’ and then reviews the data to determine the necessary health center resources and the estimated cost of providing them.
How is the ROI determined?
Once the volume of services is estimated along with the cost, it’s compared against the actual costs of purchasing those same services in the community, which can be validated by the claims review data. Next, we look at other savings opportunities, including productivity gains from employees missing less work time to overall employee health improvements. We typically see a 2-1 ROI rate, meaning that if an employer spends $500,000 for an on-site health center, it is seeing direct and indirect savings of $1 million.
What is the role of employers during the feasibility study and center implementation?
It’s important to have executive sponsorship from the beginning and an ongoing communications campaign. Second, it’s important to select an analysis partner that uses a cross-functional team approach, which includes an experienced physician, an actuary to evaluating community versus on-site services and an attorney to advise on compliance issues. Select a partner who is also familiar with integrating the on-site center with other employer-based programs, such as EAP and disease management, and who understands the options around integrating data with your insurance carrier and/or data warehouse. Data capture is vital for accurate ROI validation once the center is operational.
TERESA WOLOWNIK is a consulting actuary for the Group & Health Care Practice at Watson Wyatt Worldwide. Reach her at (858) 523-5586 or Teresa.Wolownik@WatsonWyatt.com.
The clock is ticking toward the 2010expiration of the favorable capital gainstaxation laws enacted under the Bush administration in 2003. This portends hugeimplications for individuals and small businesses alike because small businesses areoften structured as sole proprietorships orpass-through entities, so capital gains arepassed along to the owners, and becausestock ownership is now commonplaceamong Americans. In 1980, only 13 percentof Americans owned stock, but by 1998, thatnumber had grown to 52 percent. One thingis certain, the next president must deal withthe issue, and the options include everythingfrom maintaining the more favorable rates totreating capital gains as ordinary income.
“The sunset on the Bush legislation is nearing,” says John M. Wyson, tax partner withHaskell & White LLP. “The capital gains taxnow affects so many of us that when politicians argue that the capital gains tax is a taxon the rich, they are painting with an increasingly broad brush. Business owners shouldbe more interested than ever to hear whatthe candidates are proposing.”
Smart Business spoke with Wyson aboutwhat business owners should know aboutthe expiration of the capital gains tax ratesand the current positions of the leading presidential candidates.
How do capital gains and ordinary incomediffer in terms of rates?
The most common form of ordinaryincome is salary and wages, and it is taxed atprogressively tiered rates with brackets ranging from 10 to 35 percent. If capital gainsbecome taxed as ordinary income, it will betaxed at those same rates, and there’s somehistoric precedent for that because, prior to1921, capital gains were generally taxed atthe same rates as ordinary income. Then in1921, Congress enacted favorable tax ratesfor sales of long-term capital assets. Sincethat time, the tax rate on capital gains hasvacillated. In the mid-1980s, the maximumtax rate on long-term capital gains was set at28 percent until 1997 when it was lowered to20 percent. It was reduced to the present day15 percent in 2003. Although the rates havevaried, Congress generally remained consistent by encouraging longer-term investments.
Short-term capital gains, sales of capitalassets held less than 12 months, are still generally taxed at the less favorable ordinaryincome rates.
Will the political party controlling the WhiteHouse impact the new tax rate?
It’s perceived that Republicans generallywant to lower taxes and Democrats want toraise them. However, the capital gains ratewas raised in 1986, during President Reagan’sterm, and lowered in 1997, during PresidentClinton’s term. So, the political party of thepresident does not always dictate which waythe rate will go.
What can we expect from the likely candidates we see today?
John McCain has indicated a desire toextend the 15 percent rate on capital gains.Barack Obama, as part of his ‘Tax Fairnessfor the Middle Class’ plan, supports a returnto the 28 percent maximum rate on capitalgains. Hilary Clinton has expressed her intention to raise taxes on capital gains eitherthrough a proactive change in the enactedrate or by simply allowing the Bush tax cutsto expire.
Who will be affected by changes in the capital gains tax rates?
Those affected may include the rich, middle class and even working class families;basically, anyone who holds and sells stockor other capital assets at a gain. The tax alsowidely affects small businesses. Large corporations are generally unaffected by changesin the capital gains rates because a corporation’s regular income and capital gains areeach taxed at corporate rates.
It’s worth mentioning that the capital gainstax does not apply if you don’t sell. As WarrenBuffett has said, ‘The capital gains tax is nota tax on capital gains; it’s a tax on transactions.’ As a result, wise investors, like Buffett,who are really in it for the long-term, can endup with very low effective tax rates.
What action should business owners take inadvance of the election?
Most experts agree that, regardless ofwhich party is in the White House next year,capital gains rates will likely remain at 15 percent through 2010. So, there doesn’t appearto be any urgency to trigger gains by sellingcapital assets between now and the election.However, if taxpayers have a significantamount of ‘gain’ property, they should discuss the various options of minimizing capital gains taxes with their tax adviser.
How will California capital gains tax rates beimpacted?
Unfortunately, California has no favorabletax rate for capital gains. Rather, capital gainsare taxed as ordinary income. With the topindividual tax rate in California at 10.3 percent, the extra state tax paid on capital gainscan be significant, particularly when a taxpayer is in an alternative minimum tax position and is unable to get a federal deductionfor the state taxes paid. While the expirationin 2010 won’t affect California’s rates, taxpayers always have the opportunity to expresstheir opinions and perhaps influence ratesthat nurture long-term investments.
JOHN M.WYSON is a tax partner with Haskell & White LLP. Reach him at firstname.lastname@example.org or (949) 450-6200.
Most CEOs are all too familiar with the nearly 15 percent average annual increases in the direct cost of health insurance and the subsequent impact on the company’s bottom line. It’s when companies begin expanding through mergers and acquisitions that the indirect costs and the inflexibility of most health insurance plans become apparent.
With vast regional differences among health plans and coverage provisions, health insurance issues often impact on business expansion initiatives.
Mike Lutosky, employee benefits broker with Westland Insurance Brokers, says that there is no need for CEOs to become victims of the business cycles of the health insurers a situation which has been further exacerbated by industry consolidation, causing average HMO premiums to double over the last few years. He says that what CEOs need is an effective strategy that provides an alternative to traditional health insurance.
“What’s your current strategy to control health coverage costs? If you are waiting until 60 to 90 days before your current renewal and then merely reacting to the increase that your health insurer dishes up, you aren’t strategically dealing with the issue,” says Lutosky.
Smart Business spoke with Lutosky about how CEOs can incorporate self-funding into their overall strategy for controlling the cost of health care.
What is self-funding?
Self-funding is an alternative to fully insured group health insurance plans. Instead of an insurance company collecting premiums and paying your claims, the company funds the program, sets the rules and has control over paying claims. More than 60 percent of U.S. companies offering benefits use a self-funded program.
What are the qualifications for offering a self-funded program?
Companies in any industry with as few as 50 employees should consider implementing a self-funded program. Frequently, CEOs who want to establish their firm as an ‘employer of choice’ prefer self-funded programs because they have greater flexibility in terms of plan design, claims payment thresholds and claims processing speed.
Because consumer satisfaction with health insurance is based upon personal experience, employee satisfaction is much higher when companies offer a self-funded program that avoids yearly swings in premiums and coverage limits. With greater consistency, employees feel more secure and have fewer reasons to look for new opportunities.
How can CEOs benefit from self-funding health coverage?
CEOs will regain an enormous amount of control with a self-funded program. Financially, there is an increase in cash flow through the ability to recapture the use of plan reserves, and the company will earn interest on the money held in reserve. Self-funded plans comply with federal guidelines instead of state-mandated laws, and there is a reduction in most of the state-imposed taxes. Not only are the administrative fees lower through a third-party administrator than through traditional health insurance plans, but with a self-funded plan you see where every penny spent on health care goes.
I worked with one company that wanted to make an out-of-state acquisition. There was a key employee in the new firm who was vital to the business, but because the plan offered here in California was more expensive and did not offer a comparable level of benefits, the acquisition was impacted. With a self-funded plan, this kind of scenario can be avoided. You have the flexibility with self-funding to design a separate plan for a group of key employees when merging or acquiring.
How can CEOs limit risk with a self-funded program?
We protect against catastrophic loss by purchasing reinsurance from an A+ rated carrier. Because the market is plentiful, there are numerous choices for CEOs when selecting a reinsurance company. With the average monthly HMO premium standing at $250 to $300 for each employee, self-funding your benefits program makes more financial sense than ever. In more than 20 years, we have only had a handful of employers move back to a fully insured program for financial cost reasons.
What are the steps to initiating self-funded health coverage?
Self-funding is a much more proactive way of dealing with the issues associated with providing employee health coverage than the reactive process of soliciting competitive bids 60 days prior to renewal. We start by educating CEOs about self-funding. Then we provide a financial analysis to see if it is financially viable for your organization to consider self-funding. Next, we design a comprehensive transition plan for the company and its employees.
Self-funding gives CEOs a strategy and a plan to better understand and deal with the financial impact of escalating health care costs. This strategy gives CEOs a large measure of financial control and understanding that does not exist in a fully insured program.
MIKE LUTOSKY is an employee benefits broker with Westland Insurance Brokers. Reach him at email@example.com or (619) 641-3276.
He founded InfoSonics Corp. 14 years ago, and, in that time, he has led the company through three major repositioning initiatives, taken the company public and reached record revenue of $240.9 million in 2006.
As a distributor of wireless handsets and accessories, InfoSonics operates in an industry that has evolved quickly. Ram, the company’s president and CEO, says that given the dynamic nature of the industry, he frequently reviews data in an effort to forecast the company’s future market position and isn’t afraid to make changes.
In an industry where success is a moving target, Ram’s latest plan includes expansion into the Latin American and South American markets, a move which required him to lead yet another corporatewide repositioning initiative.
“Making changes is always difficult, and it can take years to fully transition a company,” Ram says. “Along the way, you can doubt yourself, and people will question the decisions you are making. You have to have a tremendous amount of self-confidence, and you have to believe in your vision because you always have your detractors. CEOs need to envision where they want to be in two years and in five years, and eventually, by persevering, you can get very close to your goals.”
Here’s how Ram has conquered the challenges of change while taking InfoSonics to new levels of success.
Craft the vision
Surviving in today’s business climate means being willing to change.
“Every day the world is changing a little bit faster,” Ram says. “There are no assurances for any CEO that you are going to continue to make money unless you are willing to shift your business model.
“I’ve always had the ability to detach myself from the day-today operations, to take the time to look forward. Some CEOs go on retreats, others talk with their friends, but you have to take time to talk about the future. Most people look at the daily activities in a company and think that everything is urgent, but in reality, everything is not urgent. You really have to take time away from the fray on a daily basis and review where you are going.”
To anticipate your company’s future growth, the first thing you need is intelligence from multiple data sources, and you need to review it often and be completely honest with yourself about what lies ahead.
“I think that you need to look at industry data, the global economy and the local economy when looking at your company’s strategic direction and the prognosis for continuing growth,” Ram says. “Start with the outer circle, and look at what’s affecting your operation from the outside, and then look at the inner circle to see where your organization fits within the marketplace.”
Ram spends part of his time engaged in sales activities, none of which are more important than selling his revised vision to constituents.
“Once you have a plan in mind, the hardest part is to sell it,” Ram says. “In my case, I have to sell my plan to our board, our investors, and the members of the senior management team and the employees. The employees will then sell your plan to people outside the company, like customers. The complexity of the organization and the extent of the changes you are proposing determine how long that will take, but it can take months just to build consensus.
“Once, I thought I had completely sold my idea only to find that I hadn’t built consensus, so I had to go back in order to convince people. I think the best methodology for building consensus is to present everyone with the facts. Explain the situation, and give everyone the same set of facts, so they can see the logic behind your plan. If it makes sense and it’s logical, they’ll get behind it. If it doesn’t make sense, they won’t follow you just because you’re the CEO. And of course, as the CEO, you have to be convinced that your plan will work because you need to sell your idea with conviction.”
Ram has an interesting philosophy when it comes to dealing with those who doubt the vision. While many CEOs might choose to eliminate those who aren’t on the bus with the proposed changes, Ram says that CEOs just have to work harder to convince any dissenters.
“You just have to work harder to convince the naysayers,” Ram says. “You have to admire them for their guts. I don’t think that just because somebody doesn’t agree with you that you should let them go; I think you should embrace them.”
Execute the plan
Once the strategic vision is sold, Ram provides his managers with the plan’s parameters as part of the execution stage.
“I provide the managers with the strategic vision and some parameters, and they provide the detail that will execute the plan,” Ram says “We work from three sets of goals, which all have timelines. The plan includes macro goals, such as where you plan to be in the global marketplace, tactical goals, which detail the execution of the plan, and then the financial goals that result from the completion of the macro and tactical goals.”
Flushing out the details of the plan is a process that is often extended throughout several weeks as the exchange of information crosses the desks of managers stretched out across InfoSonics’ global footprint. While each manager authors their respective portion of the plan, Ram checks in weekly with each one in order to gauge each person’s progress. Ram says that if it occurs, he welcomes disagreement among the team members during the process of laying out the tactics.
“It’s important to have your most influential people be in charge of executing the plan so they can lead the other employees,” Ram says. “I think we thrive on disagreement here because it really helps us look at a problem from different angles, and as the CEO, you really don’t want to brainwash people.
“I think that most people come into a planning session understanding that they aren’t always right, so they are open to other suggestions. Usually, we can come to a consensus about our tactical plan. I also think everyone understands that as the CEO, you often have to make difficult decisions, and unless the team can reach an agreement, you’ll have to step in.”
The steps in the plan’s execution phase are laid out like dominos, requiring one department to achieve its goals before another department can execute the next step in the plan. The sequential nature of the plan not only allows Ram to track each group’s progress, but it also helps him focus his attention.
“I monitor the tactical achievements of each department once we move to that stage in the process,” Ram says. “The goals and timeline are laid out sequentially. For example, engineering has to complete their portion if we are offering a new product or service before sales can get the contracts signed, and I focus most of my attention on the weak areas. I think that most CEOs enjoy spending time with the strong areas in the company, but in reality, you need to dedicate your time and efforts to those who need the help.”
Bringing a company and its employees through the emotional roller-coaster ride that often accompanies a major change initiative can be a challenge. As a change process veteran, Ram has learned to make the best of tense times.
“I think that people want to be part of a winning team,” Ram says. “As an employee, even if I think I’m underpaid, the work environment is more important, and the psyche of employees is such that they are motivated to help the company move forward and win. A major repositioning effort is a great time to work shoulder to shoulder with employees, and as long as they understand the vision, they will support you. In addition, it’s important to let the employees know that there’s light at the end of the tunnel.
“Each year, we set aside a certain percentage of our earnings, which go to InfoSonics employees and to charity, so they are financially motivated to help the company succeed. We always take a reflective look at the end of each year to see where we’ve been and to review what we’ve accomplished. This is important because it helps with morale, and it makes people feel like they’ve been part of a team that has accomplished something. I always maintain an open-door policy and let people voice their opinions, and having that kind of culture helps when you are going through big changes.”
A look at InfoSonics’ revenue after the first three quarters of 2007 hints that there might be light at the end of the most recent repositioning tunnel. Year-to-date revenue numbers for nine months of 2007 show a decrease in revenue in Central and South America for the company. However, net sales in the third quarter of 2007 were a record $69.4 million with South America sales representing 59 percent of net sales, or $41.1 million, compared to $49.1 million in the third quarter of 2006. Central America sales were 33 percent of net sales or $22.6 million, compared to $16.4 million in the third quarter of 2006. Latin America made up 92 percent of the company’s sales in the third quarter of 2007.
Ram says that he will continue to persevere through the company’s shift into newly emerging markets despite the challenges because he thinks it’s the best move for the company, and he has confidence in his vision.
“I think it’s crucial to be honest about the enterprise and yourself, so you can remain objective and make the right decisions,” Ram says. “Leaders can fall in love with a product or a customer and then they fail to make objective decisions, which can ultimately lead to business failure. When you go through these big transitions, you’re going to have good days and bad days. You have to continue to believe in your plan and in yourself, and you can’t show it if you have a bad day.” <<
HOW TO REACH: InfoSonics Corp., www.infosonics.com
Executives used to worry about whether their employees had their heads in the game because the commonly held theory was that employee focus created a competitive advantage. Now executives must win the minds, hearts and souls of their workers because recent research has shown that employees who are emotionally attached to their companies are more productive. Achieving that level of engagement requires a holistic management style.
According to Gallup, companies that are adept at engaging their employees are significantly outperforming companies that don’t engage their workers. In fact, the earnings per share growth rate of the top performing companies in a recent Gallup study was 2.6 times that of the companies that scored below average in engaging their employees.
“Engagement not only improves productivity, it reduces employee absenteeism and turnover,” says Hosetta Coleman, SPHR, Senior Vice President of human resources at Fifth Third Bank (Tampa Bay).
Smart Business spoke with Coleman about how to nurture employee engagement through a holistic management style.
How does work environment engender engagement?
To drive engagement, it’s important to create an inclusive environment; one that elicits employee feedback and ideas. When people feel like they have a voice, they will become more involved and they also feel valued. Here at Fifth Third Bank, we have a monthly session called ‘Bagels with Brian,’ where new and more tenured employees can participate in a question-and-answer session with President Brian Keenan. They have the opportunity to ask Brian questions in an open forum, and he gets the opportunity to share information about our growth plan and vision. We made adjustments to our on-thejob branch training format based upon feedback we received, and now our training is much more effective.
What other tools encourage employee involvement?
By giving employees a stake in the outcome, they are more likely to become involved with their work on a deeper level. Variable compensation plans that reward employees for business outcomes are highly effective tools, and they don’t have to be limited to sales staff. Consider offering new business referral bonuses to everyone because they engender ownership for results, and they also help employees see that their individual contribution matters. Referral bonuses are another effective tool because they not only help attract talent, but they also directly incentivize employees by offering them a role in furthering the company’s growth plan.
Here at Fifth Third Bank, our managers have a round-table discussion group that specifically focuses on work processes and ways to make our company more productive. We not only get great ideas during these sessions, but people feel like they have more control over their work, and when they have control, they think and act more like owners than employees.
How can CEOs measure their employees’ level of engagement?
Talk to them and learn their dreams and aspirations. Conducting employee engagement surveys through third parties, such as Gallup, allows executives to measure employee engagement levels and benchmark against other companies. Conducting spot climate surveys and eliciting feedback through online tools, such as Zoomerang, allows executives to keep their fingers on the pulse of the organization and initiate a continuous improvement process around employee engagement.
Are there other techniques for improving employee engagement?
Consider an employee action team that specifically focuses on driving engagement. Who better to make recommendations about how to drive employee engagement than the employees themselves? We have a group here at Fifth Third Bank called the Pride 53 Team, and they’ve made a number of recommendations that we’ve adopted. For example, they recommended that we encourage our employees to become involved in the community, so they feel connected externally, not just internally. When they represent the company in outside events, they feel a sense of pride and ownership about the company, and it makes them feel and act like entrepreneurs.
Also, begin the engagement process before employees are hired and carry it through to your on-boarding process and beyond. Our recruiters talk to prospective employees about what it’s like to work at Fifth Third Bank as part of our assessment process because we want to select employees who will be engaged by our culture. Brian Keenan speaks to each new hire group during orientation, and we have follow-up sessions at 30, 60 and 90 days, so they feel bonded with the organization. I think most of all, it’s important for executives to have talks and communication with employees that go beyond the financial results. To gain the hearts of employees, you have to show that you care about them as individuals, and you can’t do that unless you get to know them through conversation and by using a holistic management style.
HOSETTA COLEMAN, SPHR, is Senior Vice President of human resources at Fifth Third Bank (Tampa Bay). Reach her at (813) 306-2424 or Hosetta.firstname.lastname@example.org.
CEOs who have been perplexed about the tarnished image of corporate America now have the opportunity to drive profits and positively impact the world. Often referred to as the fourth sector, the for-benefit business model is composed of organizations driven by both social purpose and financial promise that fall somewhere between traditional companies and charities. The success of this hybrid model is behind the emerging trend toward greater social responsibility and purpose in all companies, placing competitive pressure on CEOs to reinvent their company’s mission and vision.
“The emergence of the for-benefit business model and the rise of corporate scandal is really a call to action for CEOs,” says Rick Smetanka, partner with Haskell & White LLP. “There has been a growing discussion and debate in this country regarding the role that businesses play in our society; many believe that corporations are soulless and exist only to generate financial profits for shareholders. The next generation CEO will embody the notion that profits will be earned by prioritizing social responsibility.”
Smart Business asked Smetanka about what differentiates the for-benefit model and how CEOs can reposition their companies to profit through social responsibility.
What are the drivers influencing greater social responsibility?
Studies show that our country’s faith in corporate leadership is at an all-time low. Memories of Enron and WorldCom and the disappointing choices made by business leaders, such as Bernie Ebbers and Martha Stewart, are behind the tarnished perception, which is causing many business leaders to reexamine their role within their own organizations and, more importantly, the meaning of their business to society at large. Without an action plan, CEOs may find themselves in a position like Wal-Mart, fighting an uphill battle against poor public perception and stagnant valuations that have fallen behind their forward-thinking competitors.
What is a for-benefit business?
Some for-benefit companies have been around for a while and are well recognized, such as Newman’s Own, and Ben & Jerry’s was a for-benefit company before it was acquired. Many of these firms are very successful because their customers identify their brand with their cause. Although the business concept is still evolving, the trend toward for-benefit corporations, also known as B corps, is growing. Even Wall Street investment bank, Goldman Sachs has a team that analyzes the environmental, social and management responsibilities of these new companies in much the same way a traditional financial analysis is conducted.
Essentially, the for-benefit company recognizes the generational shifts that are occurring in our society today and uses those shifts to create a competitive advantage and drive profits. In a country characterized by aging demographics and a young work force, for-benefit companies appeal to both consumers and employees through a commitment to making a difference in the world. These types of businesses are where consumers will want to shop, where employees will want to work and what communities will embrace.
What steps should CEOs take to focus on social responsibility?
First, give customers reasons to think about your organization as more than a commodity. The for-benefit model creates a greater bond between customers, employers and suppliers, and everyone understands the larger objectives. Many of these for-benefit companies use their social objectives as their primary marketing focus, which gives them an identity and establishes their values in a public forum.
Also, adopt a stakeholder model rather than a shareholder model. The shareholder model emphasizes profitability over responsibility and all business activities focus on driving returns to the company’s owners, while the stakeholder model aligns the interests of customers, vendors, employees and community to benefit everyone. Today, leaders and companies that practice a stakeholder model may enjoy a competitive advantage over their peers.
How should CEOs manage employee and supplier relations?
Become an employer of choice. Trader Joe’s and Costco are known for how they treat staff, and treating employees well is part of social responsibility. Training, good compensation and employee advancement programs will drive a socially responsible corporate culture as well as attract the best and the brightest people. Engaged employees will be more innovative and productive than their peers, and CEOs will likely earn a strong return on their investments. Treat suppliers as partners and contribute to their success through collaboration and by providing value-added advice. In turn, suppliers will be motivated to provide high-quality goods and services at fair prices.
What else should CEOs do?
Be an active participant in the community and make sure your corporation stands for something besides profits. Many organizations, such as Patagonia, donate a percentage of their revenue to charities and challenge their customers, vendors and business partners to do the same. By supporting the community and specific social initiatives, CEOs can lead their organizations to a higher level of profitability and social responsibility.
RICK SMETANKA is a partner with Haskell & White LLP. Reach him at (949) 450-6313 or email@example.com.
In the latest communications effectiveness survey conducted by Watson Wyatt Worldwide, information from 750 companies representing 12 million global employees provides hard data substantiating the correlation between effective communication practices and improved business results.
“The relationship between effective communication practices and shareholder value is no longer anecdotal,” says Kathy Kibbe, west division communication practice leader for Watson Wyatt Worldwide, San Francisco. “This is our third communications ROI study and, when we look at the results, companies with the most effective employee communications programs provided a 91 percent total return to shareholders from 2002 to 2006, compared to 62 percent for firms that communicated least effectively. Additionally, companies that improved their communications effectiveness experienced a 15.7 percent increase in market value.”
Smart Business spoke with Kibbe about how CEOs can drive communications effectiveness within their organizations and the best techniques for achieving results.
What is the CEO’s role in influencing effective communications?
CEOs and other members of the C suite set the tone for communications effectiveness by creating a line of sight between the mission, vision and goals of the organization and the employees. Top executives recognize the role managers play in communicating the organization’s messages and how vital those managers are in driving a plan to improve communication. Our research shows that employees want to hear directly from their CEOs about important business messages. They also want their managers to translate those issues into their daily realities and managers need C-suite support to do that.
What were the secrets of the top performing companies?
Best performing companies keep their customers front and center as they communicate organizational change. Letting employees know how their performance impacts customers not only drives employee engagement, it drives financial performance. For example, we worked with a retail client to build an internal customer support center and our mission was to make sure that every employee in that call center had a strong sense of their internal customers as well as how their service to employees affected external retail customers down the line.
Managers can play a role in connecting the dots for employees who may not deal directly with end customers, such as IT professionals. In companies with high communications effectiveness, the IT workers know who their internal customers are and how their work impacts both internal and external customers. Also, when change is communicated, the discussion should focus on why the change is beneficial for customers, not how it will better serve the company.
How can CEOs support managers in their roles as communication leaders?
Managers are the interpreters of change within an organization. They give the change context, so it’s important that managers know not only how to communicate change but how to talk to employees about what the change means to them individually. It’s also important to involve internal groups, like communications and HR, in the design and execution of communications programs, especially around organizational change. In our survey, highly effective companies had comprehensive change management programs that engaged managers in the process; those companies reported that their managers were nine times as likely to enthusiastically implement new approaches to work.
How are the executives in the top performing companies measuring ROI?
These executives are measuring employee engagement as an indicator of communications effectiveness, and they are also tracking the scores within specific employee groups to see where they might have more localized issues. Some are also tracking employee retention and productivity increases as a way to measure communications effectiveness. After deciding which levers they want to move to drive shareholder return, CEOs can track the results and refine the organizational communication strategy.
The top performing companies also incorporate company branding into internal communications programs as part of their employee engagement and retention strategies. Internal branding allows companies to define to candidates the employment experience, how employees are expected to perform and what they receive in return.
Did the survey note any opportunities for improvement?
We’re seeing a downward tick in the number of companies that are soliciting employee input about major decisions, such as how work gets done. Companies are also becoming a little less transparent in communicating the reasons behind major changes. My sense from talking to clients is that they are not soliciting input because they fear an inability to act on employee recommendations. But sometimes having the conversation about why the organization can’t meet employees’ requests is just as critical. It’s this kind of respect for opinions and willingness to be open about the business that can drive real engagement. There are too many benefits to making employees part of the discussion to shy away from having the conversation.
KATHY KIBBE is the west division communication practice leader for Watson Wyatt Worldwide, San Francisco. Reach her at (415) 733-4334 or firstname.lastname@example.org.