“But vacancy rates are not what they appear to be,” says David Marino, principal and executive vice president of The Irving Hughes Group. “We need to stop talking about vacancy rates and start talking about availability rates. Availability rates will show that the overall market is much softer than landlords and their brokers would have you believe.”
A smart CEO also needs to understand the broader picture including time on the market, sublease space and net absorption to pull together a more comprehensive view of the marketplace.
Smart Business interviewed Marino to see how CEOs can improve their company’s bottom line through negotiating more favorable lease rates and obtaining better concessions when leasing space.
Exactly why is availability the better measure of the market?
Vacancy rates are just that a measure of unoccupied space. However, when a company seeks facilities, it doesn’t look at vacant space, but rather at all of the space on the market what is available, and not what is vacant.
Vacancy rates provided by the same brokerage firms that are promoting landlords’ listings do not count available space due to pending relocations. The listing brokerage community also conveniently ignores sublease space, because that space is not technically vacant all 4.1 million square feet at least count, which is up from 3.3 million just a year ago.
The spread between vacancy and availability is extreme: Sorrento Mesa office vacancy is 14 percent, but availability is 26 percent; Carlsbad flex space is 19 percent, but availability is 24 percent; I-15 corridor office is 13 percent, but availability is 17 percent; I-15 corridor flex space is 21 percent, but availability is 27 percent. Another 5.2 million square feet are under construction in San Diego County a figure not captured in vacancy or availability rates. That all paints a pretty scary picture for landlords in 2007.
Time on the market is critical in residential real estate, but why is this first time a commercial real estate professional has mentioned it?
Time on the market is the commercial real estate industry’s dirty little secret. The real estate industry does not want tenants to know how long space has been on the market. The time during which landlords are sitting with space will determine the best strategy for negotiations. Most CEOs are stunned by the amount of time landlords have been sitting on vacant office space.
The reason space has sat is that there has been virtually no net absorption for more than a year. Net absorption is the net result of space being leased versus space being put vacated. Local companies are growing marginally, but the mortgage industry is dumping space county wide, as are big corporations such as Merck, Pfizer, Ericsson, Intel, Nokia, HP (formerly Peregrine Systems) and Avent (formerly Memec).
The market has been running in place for over a year, and it’s in long-term equilibrium. Although landlords have raised asking rental rates, there is no basis for inflation in rents.
What kinds of opportunities does this equilibrium offer a CEO?
The cost of space is a company’s second-largest fixed cost. With this excessive time on the market and the overhang of sublease space, CEOs should consider adjacent submarkets that have greater availability and seek sublease opportunities that can be had for 20 percent to 30 percent below market. These conditions will favorably affect the ability to negotiate lower cost lease renewals into 2007 and 2008.
What is the best strategy to optimize a lease expiration or expansion in 2007?
Engage professional representation to position your company with the landlord and shop the market to fully develop leverage and alternatives.
The most disastrous approach is to call the existing landlord, or his broker, to renew the lease. The landlord now knows you want to renew your lease, and because there is no representation involved, the landlord knows the tenant has no information about market conditions and no alternatives on the table for consideration. Landlords are in business to create return for their shareholders, and renewals directly with tenants have the highest ROI for landlords. The savings of 12 to 18 months of vacancy, $15 to $20 per square foot in tenant improvements, and the credit risk of finding a new tenant all become financial windfalls for the landlord in a direct renewal. Our objective is to obtain those savings for our client.
DAVID MARINO is principal and executive vice president of The Irving Hughes Group. Reach him at (619) 238-5672 or email@example.com.
CEOs often represent the demographic group at the greatest risk for heart attacks because 49 percent of males will develop coronary heart disease after age 40, as will 32 percent of females. While diet, exercise, quitting smoking and stress management can help to reduce the chances of developing coronary heart disease, new technology has been developed that helps find potential problems and fix them before a heart attack actually occurs.
More than 60 percent of the people who come into the emergency room during a heart attack have never had any previous symptoms, says Dr. Oscar Matthews, medical director of the Cardiac Cath Lab at the Western Medical Center, Anaheim.
Smart Business spoke with Matthews about the best way for CEOs to insure cardiac health through lifestyle and a pro-active testing regimen.
What are the best ways for CEOs to prevent heart disease?
Due to the nature of their jobs, CEOs often have the opportunity to eat frequent meals that can be higher in fat and calories. I always advise eating slowly and taking small bites. This helps ‘fool the brain’ into thinking that your stomach is actually fuller than it really is, so it is important not to rush through meals. Also, stress reduction is very important for executives. You need to set aside time for relaxation which is accompanied by positive imaging and doesn’t include thoughts about work or pending business deals.
What types of diagnostic testing are available to help spot heart disease in its early stages?
One of the basic tests is the treadmill. The executive is connected to a monitor while walking on a treadmill. These types of tests have been around for awhile, but electrocardiogram tests alone are less than 60 percent effective in diagnosing coronary heart disease.
What is nuclear testing and how is it used?
We inject isotopes into the patient’s vein during a session of rigorous exercise. We are able to capture sophisticated images of the heart and the cardiac muscle as the isotope passes through the bloodstream and lodges in the cardiac chamber. The images are then analyzed for potential defects.
A normal cardiac muscle almost resembles a doughnut. If part of the muscle is not receiving a good supply of blood during the test, we will be able to see it in the image because a portion of the muscle will appear to be missing almost as if someone has taken a bite out of the doughnut.
What happens if the test reveals problems?
If the imaging reveals potential blockages in the arteries, a coronary angiogram can be conducted to determine the extent of the blockage. A small puncture is made in the groin and using a catheter as fine as a hair, we advance into the chambers of the heart and the coronary arteries. There we inject contrast media (dye) from the catheter and illuminate the coronary arteries of the heart for imaging.
If we find that the arteries are less than 50 percent blocked, we normally recommend behavior modification and send the patient home and continue to monitor their progress annually.
If we find that the arteries are between 51 to 70 percent blocked, this is a gray area and one that can be difficult to diagnose. In these cases, we recommend an intervention to evaluate the lesions by performing an endovascular ultrasound that utilizes highly sophisticated equipment. Due to tissue characterization, some of these lesions may require the implantation of a stent which is also required to repair blockages in larger arteries or in cases where the artery is more than 70 percent blocked. The stent is a device that helps hold the artery open and prevents it from re-closing. We place a sealer on the groin after the procedure and most patients are able to go home in three hours.
How often should CEOs be tested?
Executives should plan on being tested every two years after the age of 40, especially if you are overweight, smoke or have other high-risk factors. The test should be conducted using state-of-the-art equipment and should be read by an expert in nuclear cardiology, both of which are available here at Western Medical Center. This type of testing improves the level of diagnostic accuracy up to 90 percent.
OSCAR MATTHEWS, M.D., is medical director of the Cardiac Cath Lab at the Western Medical Center in Anaheim. Reach him at firstname.lastname@example.org. For more information about Western Medical Center Anaheim, go to the Web sites www.westernmedanaheim.com and email@example.com.
A health care financing option that potentially provides a solution to the complex challenge of offering affordable health insurance to employees is the health savings account (HSA).
These types of accounts are very popular with employees, says Sandy Coventry, an independent insurance broker with Westland Insurance Brokers. Coventry says that HSAs make health insurance available to a greater number of people and that many professional-level employees recognize the tax advantages and empowerment potential of account ownership.
According to information gathered by America’s Health Insurance Plans, an association representing 1,300 health insurance companies, the number of individuals covered by HSAs increased from 1 million participants in March 2005 to almost 3.2 million in January 2006. The group projects that up to 14 million people will be covered by 2010.
Smart Business spoke with Coventry about the business advantages of offering HSAs and why CEOs might want to include this option as part of his company’s benefits plans.
Why should a CEO consider including HSAs as part of a comprehensive health care benefit plan?
The first thing to consider is the cost savings. HSAs are offered when an employee is covered by a high-deductible insurance plan. These types of plans often offer premium savings to the company and potentially the employee, depending upon how the premium sharing is allocated.
A recent study completed by United Health Group sampled 40,000 workers from 2003 through 2005. It found that the cost to employers per member in a high-deductible plan declined 3 to 5 percent during the period, while increasing 8 to 10 percent when employees were covered by traditional PPO plans.
Why would an employee want an HSA?
The premium savings from a high-deductible insurance plan often enables employees to cover their entire family, or it allows more employees to participate. The employee can ‘bank’ a portion of the premium savings into an HSA and use that money to meet the deductibles of the plan. Additionally, employee contributions to the account are tax deferred.
For many employees, especially those in higher tax brackets, it’s an opportunity to save money on premiums and lower their taxes. Any excess funds earn interest and continue to accumulate until they are needed, and costs at medical provider offices or pharmacies are paid right out of the account with a debit card. It’s like getting a raise for employees who have few medical expenses in a year.
What types of criteria are necessary to offer an HSA to employees?
Employees must meet the following criteria.
- The employee must be covered under a qualified high-deductible health plan. For 2006, the minimum annual deductibles are $1,050 for single coverage and $2,100 for family coverage.
- The employee must not be covered by another health insurance plan, either as an employee or a dependent, unless it is another high-deductible health plan or specific limited-coverage plans such as dental, vision, accident, hospital indemnity or long-term care insurance.
- The employee may not be enrolled in Medicare under Coverage A or B.
- The employee cannot be claimed as a dependent on another person’s tax return.
What are the steps for putting an HSA in place?
The first step is to research the most cost-effective health plan options that can augment or replace the company’s current medical plan offerings. Then decide on a budget for contributions to the employees’ HSA. Most employers use all or some portion of the premium savings as a funding mechanism for their employee’s HSAs. The company contributions act as an incentive for employees to enroll in the high-deductible health plans and the HSAs.
The last and most important step is to educate the employees so that they understand the risks of having a high-deductible health plan and the benefits of having an HSA to pay for out-of-pocket expenses.
Payroll stuffers, educational materials and enrollment meetings are valuable tools to use in successfully implementing a new HSA offering. The key is keeping it simple for employees by providing clear and concise information so that they can make the most informed decision about their health care plan.
SANDY COVENTRY is an independent insurance broker with Westland Insurance Brokers. Reach her at (619) 584-6400 or firstname.lastname@example.org.
Executives aren’t the only ones looking at options to mitigate the impact of health care reform. Employees fear repercussions from this legislation and are creating lists of “what- if” scenarios to deal with the fallout. According to surveys by Towers Watson, 67 percent of employees believe health care reform will increase their benefit costs and 44 percent would be open to new offers if current benefits were reduced or eliminated.
Allowing workplace uncertainty to linger can undermine engagement and productivity, yet thus far only a handful of employers have anticipated employees’ concerns or solicited their solutions or benefit preferences.
“The reality is some companies may decide to reduce health care benefits, and it’s better to begin a conversation with employees about the implications of health care reform rather than keeping them in the dark,” says Christine Infante, senior consultant with the Rewards, Talent & Communications Practice at Towers Watson.
Smart Business spoke with Infante about the best ways to invite employees into the decision-making process.
What’s worrying employees about health care reform?
Our surveys show that employees are increasingly concerned about the rising cost of health care; one in four says it’s a source of significant stress. Increased cost shifting by employers has impacted their ability to make ends meet today and save for the future, and many perceive that reform will only exacerbate their plight. In fact, more than half say the bill will reduce their available benefits and lower their quality of care and 40 percent say they would be uncomfortable purchasing their own insurance in reformed markets as an alternative to getting coverage through their employer. Since health care benefits rank third on the list of employee attractors, behind base pay and paid time off, employers should pay attention to their concerns and reduce workplace angst by giving them honest answers.
What’s the best way to initiate a dialogue with employees?
Employees and retirees are grappling with the complexities of the new health care law and it’s especially challenging to calculate the financial ramifications from key provisions like the excise tax on cadillac plans or the tax on Medicare benefits. So focus first on education by sending a letter that describes the various elements of health care reform, when they take effect and their impact on costs, since the implementation schedule runs all the way through 2014. Providing employees with information sets the stage for future benefit changes as they gain an understanding of the bill’s provisions and how each one impacts their existing coverage.
Next, invite an interactive dialogue by asking benefit managers to moderate an online discussion or chat session and invite employees, spouses and significant others to participate. An online forum allows the employer to create different topics or threads so you can learn what employees want, better understand their concerns, even test ideas and it supports group learning 24/7. Finally, executives should enter the discussion by addressing employees during quarterly meetings or town hall sessions.
What’s the right message for executives?
Business leaders don’t need to be benefits experts to speak to employees; they just need a few sound bites to explain the company’s evaluation strategy and estimated time line. Just letting employees know that a plan is in place to assess the impact of health care reform on their benefits will restore a degree of confidence. Next, remind employees about the company’s strategy for controlling health care costs and that they can help by participating in wellness programs and being smarter consumers of health care services. Towers Watson research reveals that companies with the most effective health and productivity programs have senior managers who advocate wellness and take an active role in communicating with employees. In fact, when big decisions need to be made, 48 percent of managers at these organizations involve employees and 92 percent take the lead in explaining the reasons for the decisions.
What’s the best way to engage employees in the decision-making process?
Ask employees what’s important to them and what they value most about their benefits to make sure expenditures are aligned with the most impactful programs. This is the perfect time to revisit your company’s employment value proposition and remind employees about the total rewards they receive in exchange for their hard work. Many companies create cross-functional teams or task forces to evaluate the current budget and benefit programs and recommend possible changes. Be sure the teams encompass a cross-section of employees and stakeholders, since a 25-year-old employee with no dependents has a different set of priorities than a 45-year-old with college-age children. Members also serve as conduits by soliciting input from co-workers, which allows more employees to have a voice in the decision-making process. When presented with the facts and a slate of alternatives, employees have shown that they are capable of making sound decisions about health care benefits.
How should executives communicate benefit plan changes?
When addressing employees about changes to the company’s health care plan, executives should articulate the employment value proposition (the deal), reinforce the organization’s benefits philosophy and commitment to well being and explain the business challenges imposed by reform. Let employees know that the company is committed to managing costs and re-evaluating the plan should circumstances change. Finally, thank employees for their partnership and guidance in resolving this critical issue.
Christine Infante is a senior consultant with the Rewards, Talent & Communications Practice at Towers Watson. Reach her at email@example.com or (858) 523-5514.
With corporate contributions to 401(k) plans diminished to about 1 percent of payroll, an unforeseen problem has incubated over the past 30 years. Now faced with inadequate savings, rising health care costs and a decade of poor stock market returns, baby boomers are delaying retirement. The current situation will ultimately drive up payroll and benefit costs and curtail productivity unless private sector employers change course and get involved.
“Employers need to realize they can’t get out of the pension business; they’re in it whether they like it or not,” says Lee Morgan, consulting actuary with the Retirement Consulting Practice at Towers Watson. “They must take steps to help aging employees retire with dignity or suffer the financial consequences.”
Smart Business spoke with Morgan about the situation facing baby boomers and how employers can influence the bottom line by helping veteran employees plan for retirement.
Why are baby boomers delaying retirement?
The problem is that 401(k) plans were designed to augment not replace traditional retirement plans, and now a perfect storm of events has created financial conditions that the average employee just can’t navigate. And at some point, the Keynesian-style government spending that is propping up the economy and retiree savings, as well, has to end. This will cause aging workers to stay on the job even longer. Consider these facts:
- A 65-year-old couple retiring in 2010 will need $250,000 to pay for medical expenses throughout retirement, according to Fidelity Investments.
- Two-thirds of people aged 65 and over will need some level of long-term care in their lifetime, which runs around $75,000 to $80,000 per year. For couples aged 65, there’s a 50 percent chance that one will live beyond 92.
- The average net worth for those in their 60s in the U.S. is under $200,000. Our savings rate pales in comparison to Japan, where citizens had traditionally saved up to 20 percent of their income, or China, where the traditional savings rate averages around 40 percent. Even though current Japanese savings rates have dropped considerably due to the financial crisis, U.S. savings rates have historically been far below those of most industrialized countries. At this point, it is clear most U.S. employees are ill equipped for anything close to the traditional retirement lifestyle they may have envisioned.
Why should employers get involved?
In their quest to reduce costs, employers relinquished control over the timing and pace of employee retirements. Our statistics show that at least 3 percent to 5 percent of the current work force is unproductive and not engaged, yet firing underperforming veteran workers can be problematic. Age bias charges filed with the EEOC during 2009 were the second highest on record as monetary relief for victims totaled more than $376 million. To make matters worse, a reduction in boomer spending is partially responsible for the current economic malaise, as only those covered by traditional pension plans will feel free to spend their paychecks. In fact, consumer spending had reached more than 70 percent of GDP before the financial crisis, which is very high by historical standards, in part caused by Keynesian-style government spending and home equity lines of credit, which have dried up. As people live longer, only countries with financially secure retirees will be able to sustain economic growth.
In brief, it seems likely employers will either have ‘retirees’ on the payroll (not able to retire) or receiving a traditional pension. Those ‘retired on the payroll’ will have implications for productivity and ability to retain younger employees.
How can employers assist baby boomers?
First, offer financial planning services and education so employees can estimate how much they need to retire and save accordingly. Planning must be personalized and include a range of scenarios that contemplates a reduction in Medicare benefits and a realistic return on investments. Remember, the return on the S&P 500 has been roughly zero over the last decade and turns negative when you account for inflation. Second, review your company’s benefit plans and investment options. Employees may be able to address some of the risks of retirement by purchasing long-term care insurance or annuities.
What’s the best way to keep aging workers engaged and energized?
Employers need to bolster their engagement by continuously investing in their growth and development and offering them new and exciting challenges. Sometimes older workers have ample institutional knowledge but lack the technical or strategic skills to be fully productive. Japanese companies continually refresh their work force because they’ve learned that recycled workers are less expensive and more productive than new hires. Embracing that notion requires a cultural shift by U.S. employers.
Are employers considering a return to defined benefit pension plans?
The only viable long-term solution, if you want to allow employees the option of retiring at 65, is to bring back defined benefit pension plans. Also, younger workers may start considering careers in public service rather than the private sector, which may preclude businesses from hiring the best and the brightest. While CFOs worry about meeting future funding needs, the current pension shortfalls were created by investing in ways inconsistent with eliminating pension risk. Employers have the liberty of structuring a plan they can afford, but investing properly. Investing pension assets in bonds, which is more common in the U.K., can eliminate stock market volatility and facilitate long-term affordability. The data suggests that employees are struggling with self-directed retirement plans, so employers will be in the retirement business whether they like it or not.
Lee Morgan is a consulting actuary with the Retirement Consulting Practice at Towers Watson. Reach him at (858) 523-5553 or Lee.Morgan@towerswatson.com.
After two years of declining compensation, weary U.S. executives should be thrilled by projections of a modest increase in their average pay for 2010. But with shareholders, legislators and media watchdogs fixated on executive paychecks and layers of new regulations on the horizon, companies are still striving to fine tune compensation programs and strengthen the link between executive pay and performance.
A June flash survey of 251 companies by Towers Watson revealed that few were prepared to submit their executive pay practices to a shareholder vote as mandated by the new financial services reform bill. Although companies are waiting for further clarification on several provisions in the Dodd-Frank bill, more than two-thirds were taking action by proceeding with changes to executives’ annual incentive plans, and more than half were altering their long-term performance plans to ensure their programs do in fact align with performance and reward the right results.
“Now that the economy is improving, retention of key executives is re-emerging as a concern,” says Ann Costelloe, CFA, senior consultant for the Executive Pay Practice at Towers Watson. “Although preventing executive defections is a priority, companies must cautiously and thoughtfully alter compensation plans, given company goals and performance as well as the increase in regulations and scrutiny surrounding executive pay.”
Smart Business spoke with Costelloe about how companies are strengthening governance and addressing retention by altering their executive compensation programs.
What are the key regulations impacting executive pay?
The Dodd-Frank Act’s say-on-pay provision, among other things, requires public companies to fully disclose executive pay packages and conduct nonbinding shareholder approval votes at least once every three years, possibly beginning with the 2011 proxy season. Theoretically, shareholders could render a negative vote, making it imperative that companies proactively explain the rationale between the executives’ pay and the company’s performance and address shareholder concerns before they become issues.
Another key provision requires companies to disclose the median total compensation for employees and report the ratio of CEO-to-employee pay. While awaiting further clarification, it’s assumed that companies will need to substantiate higher ratios through better financial results or by demonstrating that their CEOs have greater experience, performance or capabilities than their peers.
Are there other significant regulations affecting executive compensation?
A provision in the Dodd-Frank law takes Sarbanes-Oxley up a notch by requiring clawbacks of executive pay in cases of fraud or criminal misconduct, and in situations where the company’s financial results were materially restated. Companies must develop policies to recoup improperly awarded compensation from current or former executives for three years preceding the required restatement filing date. Finally, a rule designed to prevent conflicts of interest requires members of the compensation committee, legal counsel and other compensation advisers to disclose their fees and be independent. Factors to assess independence are to be defined by the SEC.
How are companies adjusting executive compensation programs to comply?
The good news is that 49 percent of the surveyed companies expect to make modest increases in 2010 bonus funding for executives as a result of the improving financial conditions, while about a third expect to make larger long-term incentive grants. Although cost containment continues to be a priority, companies are being cautious about changes in pay and benefits, with only one in 10 respondents reporting that executive retention is not an issue. The survey revealed other trends in executive pay for 2010 and beyond.
- Grossing up parachute payments and providing perquisites like cars, spousal travel benefits and country club memberships
- Golden parachutes and hefty severance packages
- Change-in-control (CIC) protection and single-trigger CIC vesting of long-term incentives
- Supplemental executive retirement plans
- Employment contracts
- Incorporating tangible performance measurements into annual and long-term incentives such as operating profit, EBITDA, revenue growth and cash flow
- Incorporating nonfinancial operating measures into annual incentives such as strategic initiatives and satisfaction measures
- Stretch goals and increases in target award opportunity levels
- Higher grant values due to rising stock prices with fewer shares awarded
What else can companies do to stay in front of the new regulations and public perception?
First, embrace the changes by focusing your annual and long-term executive incentive goals and aligning them with the company’s performance through measurable goals. Next, address public scrutiny by clearly communicating your philosophy (and results) so your proxy and compensation discussion and analysis (CD&A) tells an accurate and compelling story. It’s vital to understand the hot buttons of shareholders and stakeholders and address them proactively in meetings. Research industry pay practices and conduct scenario modeling on proposed plan changes to understand how each element will perform under various conditions. Compare the total pay-out to other industry executives delivering a similar performance before fine-tuning your plan. Finally, watch for clarifications from the SEC while being mindful of the public perceptions that precipitated the regulations. Legislators won’t stop drafting new laws until they’re confident that executives have accepted their message about pay.
Ann Costelloe, CFA, is a senior consultant for the Executive Pay Practice at Towers Watson. Reach her at (415) 733-4244 or Ann.Costelloe@towerswatson.com.
Although the newly passed health care reform bill exceeds 2,000 pages, employers still lack critical details and guidance to implement many of the unprecedented changes that will affect retired, active and future American workers. For many employers, simply complying and maintaining the status quo is not an option. A recent Towers Watson survey found that nearly three-fourths (71 percent) of employers believe health reform will increase the overall cost of health care services in the United States.
“This bill is a call to action for employers both tactically and strategically,” says Caty Furco, senior consultant and actuary for the health and group benefits practice at Towers Watson. “Employers should evaluate the role of health care within their total rewards strategy and consider long-term strategic changes amid the new regulations.”
Smart Business spoke with Furco about the call to action for employers following the passage of health care reform.
What makes health care implementation challenging?
Many mandates lack specificity and consequently preclude employers from making key decisions. For example, the 2014 pay or play mandate requires employers to provide health coverage for employees working 30 or more hours per week, but the qualification methodology is ambiguous. A government task force is working to fill in the bill’s missing details, but the additional clarity won’t reduce the amount of time and resources it will take to implement these changes. There’s certainly enough information for employers to begin assessing risks, develop a communications strategy and conduct a strategic benefits review so that they’re poised to act as additional details become available.
What should employers consider during strategic reviews?
Tactical decisions always flow from strategy, so this is an opportune time to revisit your company’s benefits philosophy by asking these questions.
- Should the company provide employee health coverage or benefits? What should our role be?
- How are employer-sponsored health benefits viewed internally and externally? How do they influence our market position and talent strategies?
- What is our return on investment for providing employee health care benefits?
- Should total rewards or benefit packages be rebalanced to offset rising health care costs?
What are the critical action items for 2010?
The 2010 regulations surround retiree plans, so employers must communicate coverage changes and implement new accounting rules, resulting from the elimination of the employer’s deduction for Medicare Part D drug coverage. The communications plan should also touch current employees, since many are apprehensive about reform and have heard that their health coverage won’t change. To avoid surprising them down the road, explain that the company is reviewing the law, even if you haven’t worked out all of the specifics. Finally, employers must prepare for 2011 changes, including a reporting mandate, which requires disclosure of the annual value of employee health coverage on W-2s.
Is 2011 a pivotal year?
Employers will definitely be impacted by 2011 mandates, including:
- Coverage extended to adult children up to age 26
- Elimination of lifetime health benefit caps with restricted annual limits
- Elimination of pre-existing exclusions for those 18 and younger
If your company offers retiree health coverage, be aware that 2011 begins a three-year initiative to lower provider reimbursements through Medicare Advantage plans. This could diminish provider participation and plan availability, ultimately forcing retirees into more costly plans. Employers will need to closely monitor renewals and the underlying assumptions used to develop 2011 premium rates.
Which of the remaining mandates will have the greatest impact on employers?
Major changes occur in 2014 and include: the introduction of the pay or play mandate and employee free-choice vouchers, automatic enrollment for employees, restrictions on coverage waiting periods and new reporting requirements. The wild card in 2014 involves new fees on health insurers, which seemingly will be passed along to purchasers in the form of higher premiums. The looming excise tax on high-cost group health plans beginning in 2018 requires employers to immediately forecast future increases and possibly devise a strategy to avoid the tax by altering plan designs. Every company’s situation is unique and their response to reform will vary. It is imperative to stay abreast of emerging guidance through regular visits to Web sites such as www.towerswatson.com/health-care-reform.
Are there opportunities for employers to mitigate future cost increases?
State-run insurance exchanges launch in 2014, which may entice employers in the long term to offer a stipend in lieu of company sponsored plans as a cost-control strategy. Insurance companies begin selling coverage across state boundaries beginning in 2016, which is expected to increase competition and lower premiums. Finally, the bill increases incentives for wellness programs, and recent studies have shown that participation in wellness programs reduces health care costs. Remember, the legality of the bill has been challenged and there will be two critical elections between now and 2018, so savvy employers will evaluate their options and be ready to act under a variety of scenarios.
Caty Furco is a senior consultant and actuary for the health and group benefits practice at Towers Watson and can be reached at (415) 733-4309 or firstname.lastname@example.org.
After years of cost shifting, pay cuts and layoffs, employees have accepted their new roles as chief overseers of their own careers and financial security, according to a Towers Watson study exploring the post-recession attitudes of employees. But the burden of these added responsibilities on top of a stressful work environment is taking an emotional toll as employees doubt their ability to handle their expanding responsibilities.
Executives should not ignore employee worries or overlook their unfulfilled expectations. Instead, company leaders should take steps to help employees be successful in the context of an evolving employment relationship.
“In reality, the cost-saving measures enacted by executives during the recession are not cost-free decisions because they add stress to employees,” says Tom Davenport, senior consultant with Towers Watson. “These changes have drained employee confidence with potentially damaging consequences.”
Smart Business spoke with Davenport about the threats to employee engagement and why executives should intercede before productivity suffers.
What did the study reveal about employee attitudes?
In our survey of 20,000 workers in midsize to large companies, employees expressed angst about their futures. They’re worried about saving enough money for retirement as companies retreat from defined benefit pension plans, and about affording health care coverage as employers shift costs. They crave an emotional connection with their leaders and support for their careers, yet they sense a growing gap between their expectations and leader behavior.
Employees also said that executives often bend to the demands of shareholders and Wall Street analysts at their expense. In fact, employees say they rank third on executives’ list of priorities after shareholders and customers.
Overall confidence in senior leadership was disturbingly low with only 50 percent of employees reporting a favorable view. It’s time for executives to rebuild trust and help employees manage their diverse responsibilities in order to bolster their confidence.
How can employers boost employee morale?
Start by selecting the right managers and empowering them to make a difference. Executives often believe that line managers need more technical expertise than relational skills because they wear many hats. They think middle managers create additional expense and impede the lines of communication. In reality, supervisors and middle managers play a vital role in implementing major initiatives like cost reductions. They can communicate the reasons for change and take action to reduce stress in the work environment. Promote managers who possess a full range of competencies, and don’t overload line managers so they can be thoughtful leaders who spend quality time with direct reports.
Has the role of human resources changed?
HR must enable employee self-reliance by providing the tools and resources they need to survive under post-recessionary employment relationships. This new role requires an HR organization that can adapt swiftly to change, one that uses a holistic approach and addresses employee needs via a comprehensive plan. Traditionally, HR has been structured in functional silos, which leads to disparate data collection and programs. When you break down the internal barriers, HR can respond to signs of dwindling employee engagement, like increasing absenteeism or declining productivity, with coordinated and connected wellness programs, incentives or training.
While many companies offer self-service financial management tools, employees also need stress management skills, health management resources and career planning strategies to be fully self-sufficient. This is the perfect time to connect with employees and offer new services to boost their confidence.
How can employers use compensation, given smaller annual raises?
Many companies are moving to larger performance-based incentives and smaller annual raises, but it is still possible to raise confidence and limit turnover by designing a flexible compensation system that rewards high achievers and affords every employee the opportunity to increase income. This is treacherous territory, however, because competitive base pay is still the primary attractor of new talent according to our survey, and 61 percent of employees said that making more money was very important after several years of limited promotional opportunities and small raises. The stakes are high, so HR needs to take the time to get it right.
How can executives rekindle employee trust and sustain engagement?
Now that the economy has improved, executives need to focus internally rather than externally; in fact, 44 percent of surveyed employees said that senior leaders should be more visible and were conspicuously absent during the recession. Simply spending time with employees and giving them a chance to voice their concerns can be therapeutic after the prolonged downturn. Leaders are expected to care about the well-being of others, so if morale seems low, it may be time to take a stand and declare an end to cost cutting. Some CEOs have recently declared their companies fat-free, such as Mark Hurd, president and CEO of Hewlett Packard. His bold actions received kudos from his employees. Rebuilding employee confidence takes time and a plan, but the key is trustworthy leaders who keep their promises and advocate for employees.
Tom Davenport is a senior consultant with Towers Watson. Reach him at (415) 836-1127 or email@example.com.
Current economic conditions offer M&A bargain hunters a variety of strategic opportunities. But executives focused on plans for expanded product lines and market reach often overlook the need to consider the financial risks, not the least of which includes integration of employee benefit programs such as retirement and medical. The complex process might entail meeting future obligations and complying with both U.S. and international regulations and disclosure requirements.
The accompanying costs are often characterized as minor when the deal price is under negotiation, but with these costs rising around the globe and an increase in administrative and reporting complexities, a lack of proper planning and due diligence may undermine the success of M&A transactions.
“World-class acquirers assess the financial risks with benefits and plan the integration strategy during due diligence. It’s those that wait until after the announcement that run into trouble, since they don’t know what they are getting and can’t change what they’ve agreed to in the purchase agreement,” says Alex Young-Wootton F.I.A., F.S.A., senior international consultant with Watson Wyatt Worldwide. “Risks associated with cost and compliance for employee benefits often arise when the buyer begins to integrate two disparate benefit plans onto a universal platform, only to find the financial impact and integration strategy weren’t given due consideration when the deal price was calculated.”
We have all read about how many M&A deals fail to meet their objectives due to insufficient integration planning. Recent tough economic times only serve to reinforce the necessity for success.
Smart Business learned more from Young-Wootton about the hidden benefit risks that threaten M&A success and the steps executives should take to mitigate them.
Why is due consideration of employee benefits a key driver for M&A success?
Benefits assessment and their subsequent integration play a major role in assessing the true economic value of the target and in retaining key employees, which directly impacts the success of the newly combined organization. Also, it is critical to be able to correctly identify, quantify and allow for the financial implications of the liabilities being inherited.
In addition, the M&A transaction may necessitate compliance with additional regulations, either because a change in control subjects the organization to another country’s laws or the size of the newly combined organization mandates that additional benefits be offered to employees, which need to be reflected on the company’s balance sheet.
The recent fall in equity markets has highlighted the significant risk that pension provisions represent, however in addition to economic factors, a multitude of other factors affecting volatility, cost and competitiveness of the benefits provided need to be considered. Long-term obligations may be underfunded and require future cash infusions to plug these deficits, which can be offset during price negotiations if the financial risk is known, quantified and understood.
Why are employee benefit costs frequently overlooked?
Executives may perceive that retirement costs are relatively fixed and just look at what’s currently on the balance sheet, thus requiring no further investigation, without realizing that they bring with them compliance complexities and integration issues critical to the success of the M&A process. However, many inherited liabilities may bring with them previously not required disclosure requirements and, given the sign-off requirements imposed by Sarbanes-Oxley, executives need to include identification of these costs and risks as part of the early review process.
Which techniques reveal these hidden risks?
Simply, better due diligence, including integration planning before the transaction is complete by examining each element of your company’s benefit plans and those of the target organization. Sometimes the identification process may reveal hidden liabilities, especially around mandatory benefits outside the U.S., because those costs are frequently overlooked, especially by organizations that believe they only have a global ‘DC’ strategy in place. Many companies get confused with the term mandatory, assuming its state or government paid, but this is not the case; the state determines you have to offer the benefit, but the company pays for it.
Identify any accounting implications, including the need to comply with additional disclosure requirements, as well as how the transition to the post-deal benefits platform will take place. Once the liabilities are identified, quantify their value using an approach and assumptions that are appropriate for the purpose. Dollarizing the liabilities will help executives understand their impact on the transaction as a whole and potentially impact the deal price.
What other risk mitigation techniques are effective?
Once the risks have been examined during due diligence, additional techniques can reduce their impact.
? Attempt to leave the employee plans and their related liabilities with the seller as part of the negotiation process (and get the employee onto your plans for future service).
? Introduce indemnity agreements that result in post-acquisition price adjustments as a hedge against unforeseen benefit costs or lackluster asset performance.
? Communicate the possibility of an acquisition to your HR staff early on so they have time to conduct effective due diligence and reflect risks in final purchase price.
? Don’t lose sight of the need for a competitive package and its value when contemplating the long-term risks associated with employee benefits.
Executives need to garner increased levels of employee productivity and unabashed business innovation to drive their companies out of the recession. But capturing the hearts, minds and imaginations of workers has never been more difficult. With business plans in flux, budgets slashed and goals no longer attainable, employees are languishing under the weight of uncertainty, workplace stress and shifts in strategic direction. Executives can reap the benefits of an energized work force by capitalizing on engageable moments and creating a culture of continuous engagement.
“It’s difficult to align the efforts of employees with the company’s mission if the plan has become muddled,” says Matthew Kamensky, office practice leader for organizational effectiveness at Watson Wyatt Worldwide. “Leaders who set achievable goals, communicate continuously and capitalize on engageable moments can position their companies to emerge from the current crisis.”
Smart Business spoke with Kamensky about leadership strategies that engender a culture of employee engagement.
What’s the benefit from increased employee engagement?
Our Watson Wyatt research continues to validate the gains from employee engagement. Employees with high engagement work at companies with 26 percent higher revenue per employee and 13 percent higher total returns to shareholders over five years. Our research also shows that highly engaged employees have lower turnover and absentee rates, are more resilient and are better able to deal with the ambiguity of shifting business priorities than their lower-engaged counterparts. Furthermore, executives have a tendency to lean on the most engaged players to drive the company out of recession.
How do recessions impede engagement?
Engagement occurs when employees are committed to help the organization succeed and when they have line of sight — that they understand the business goals, the steps being taken to achieve those goals and how their roles and individual performance impact the goals of the organization. Recessions require constant course corrections, causing employees to lose their compass, so productivity suffers. Also, when goals become unattainable and monetary incentives are reduced, employee morale declines and stress increases, resulting in diminished focus on the business plan.
Which messages are most effective in driving an engaged environment?
Employees don’t expect executives to have all the answers, and it’s better to err by communicating more, rather than less, during challenging times. Engagement is bolstered by frequent executive communications, especially around milestone attainment leading to annual goals. But when milestones are missed and executives are struggling for answers, they are often reluctant to communicate just when it’s needed most.
Provide transparency around the difficult decisions you’ve faced, such as those involving staff reductions. Explain the reasons behind your actions so employees will understand why the moves were necessary. Capitalize on an engageable moment by educating survivors about why their performance is even more vital.
What other techniques bolster engagement?
Review past employee engagement surveys or conduct focus groups to discover employee hot buttons that don’t require increased budgets. Look to understand what drives engagement for the employee groups that have the greatest impact on the business. Recognizing employees for innovative ideas or cost saving tips doesn’t have to be expensive — yet public recognition of achievements offers an engageable moment and creates a culture of continuous engagement.
Look to your existing programs to create engageable moments. Any program or benefit, such as annual performance reviews or the launch of an open enrollment period, can offer an engageable moment if employers take the opportunity to connect those benefits to the value proposition employees receive for their contributions. Opportunities for engageable moments happen all the time; it’s just a matter of recognizing them and leveraging the moment.
What steps can executives take to reduce workplace stress?
Uncertainty, layoffs and pressure for results lead to workplace stress, which, if left unchecked, actually has a paralyzing effect on employees and is the leading cause of turnover. Expanding the company’s circle of core contributors reduces stress and bolsters engagement. Refocus employees on achievable goals that will not only help the company emerge from recession but enhance individual and company growth.
As an example, when layoff rumors persist, employees react by going into survival mode and become inwardly focused. Re-energize your employees around external goals, such as increased customer satisfaction, which is achievable in any economy. And, in the process of working more closely with customers, employees may even discover ideas for new products or services that will help the company emerge from the recession.
Matthew Kamensky is the office practice leader for organizational effectiveness at Watson Wyatt Worldwide. Reach him at (303) 575-9742 or matt.kamensky@WatsonWyatt.com.