Internal Revenue Code (IRC) Section 409A establishes rules governing corporate deferred-compensation plans, including traditional elective deferral plans, equity-based compensation arrangements such as stock appreciation rights and restricted stock, supplemental executive retirement benefits, and individual employment and severance agreements. Failure to comply with the new rules carries significant tax implications for covered employees.
In light of the new rules and their tax-related implications, many corporate decision-makers are reviewing their deferred-compensation plans and policies, says Scott Mayfield, tax partner in Whitley Penn LLP, a regional accounting and consulting firm with offices in Dallas and Fort Worth.
Smart Business spoke with Mayfield to discover how corporate managers can evaluate their deferred-compensation plans to ensure 409A compliance.
How does Section 409A affect deferred-compensation agreements?
IRC Section 409A was enacted as part of the 2004 Jobs Act. The Treasury Department has enforcement jurisdiction of the law that covers all deferred-compensation agreements, including individual agreements such as executive contracts that contain a deferred-compensation clause.
Beginning in 2005, all deferred-compensation agreements that provide for future payment of current compensation must comply with tax rules relative to 409A. If the agreements are not in compliance, the individual receiving the compensation is liable for penalties. Non-compliance eliminates the deferral benefit and changes deferred income to current income, subjecting the income to a 20 percent excise tax on the amount deferred, along with an IRS underpayment penalty plus one point.
Penalties are imposed for each year beyond 2005. For example, if the deferred income is not to be paid until 2007, a noncomplying agreement would subject the individual to taxes and penalties for 2006.
State and local noncompliance penalties may be applied if those entities follow the federal legislation regarding deferred compensation.
How can managers ensure their deferred compensation agreements comply with Section 409A?
Most big companies will have already complied, but it’s still important to review every arrangement for each individual who has a legal binding right to compensation paid in a subsequent tax year.
How can managers evaluate agreements?
Each contract must be in compliance in the areas of distribution of benefits, acceleration of benefits and election of benefits.
Under Section 409A, a deferral election must be made before the beginning of the tax year or, for first-time participants, within 30 days after they become eligible to participate in the plan. If the deferred compensation is performance based for services of a period of 12 months or more, the election must be made within six months of the time the services begin.
Also, the time schedule of benefits cannot be accelerated except if specified by the IRS. Compensation cannot be distributed earlier than separation of service, disability, death, unforeseeable emergency and a date irrevocably determined at the time of at the deferral election. Compensation may be generally deferred only if the deferred election is made prior to the year during which the compensation is earned.
However, companies may continue to offer short-term deferred-compensation plans, as these still qualify for compliance under Section 409A so long as the compensation is paid within 2.5 months after the current tax year.
How should reviews be carried out?
Managers of human resources departments in larger companies will be familiar with Section 409A and its noncompliance consequences, and larger companies may have internal controls for reviewing deferred-compensation agreements. Companies that do not have in-house human resource specialists should start with the tax advisers and their attorneys.
How do managers bring plans into compliance?
If agreements are not in compliance, they may not be terminated. They must be renegotiated. Tax advisers and attorneys should review renegotiated agreements.
How are companies changing their compensation policies as a result of the new rules?
As a result of the new rules established in Section 409A of the 2004 Jobs Act, many companies are replacing deferred-compensation plans with other programs such as qualified retirement plans such as 401(k)s, vacation pay, sick leave, disability and death benefits, incentive stock offerings and medical Health Savings Accounts (HSAs).
The cost of administering deferred-compensation agreements under Section 409A rules is driving this change. Overall, the new rules are encouraging companies to rethink their compensation policies to include diverse benefits packages.
SCOTT MAYFIELD is a tax partner in the Fort Worth, Texas, office of Whitley Penn LLP. Reach him at (817) 258-9173 or email@example.com
As a member of the board of directors, Thomas D. Karol was already familiar with Elk Corp. before he became its chairman and CEO in 2001.
Karol was intrigued by the company’s mix of businesses and by the challenge of making Elk into something better.
“What attracted me to it was that my kind of modus operandi is to try to find what companies do well and exploit or optimize the potential based on the strength of the company,” Karol says. “Elk, I felt, had better potential, and we just needed to figure out what kind of sustainable advantages we had and how to commercialize and exploit those.”
Elk manufactures laminated, architectural asphalt shingles for steep-slope roofing, a product line that was performing well and driving most of the company’s growth. But it also had a puzzling array of other businesses that were performing weakly or losing money.
Those other businesses had evolved from the company’s founders five petroleum engineers from Midland who were natural-born inventors and tinkerers. They would often tackle challenges presented by customers and colleagues, and when they came up with a solution, they’d form a subsidiary around it.
“To a great extent, that’s one of the strengths of our company,” Karol says. “We have an innovative bent.”
The founders had also bought some businesses that didn’t fit in very well with Elk’s strongest performing business its roofing products and none of the subsidiaries made much money.
“They had been in a lot of other businesses, but they had never really, really made a lot of money or done anything else that had been a standout,” Karol says. “So I said, ‘Let’s look at what we do in this business.’... We made the decision that we really were a building products company, and anything that was not in some way adding to or was tangential to that business, we didn’t need.”
Despite his energy and drive, Karol former president, CEO and owner of L.D. Brinkman Corp., a carpeting manufacturer and flooring distributor that he sold in 2001 was not in a hurry. His first order of businesses was to examine those tangential businesses and make them healthier, positioning them for sale in the process.
“To a certain extent, you want to sell something when it’s all dressed up in a wedding dress, having dieted and exercised and with a tan,” Karol says. “We said, ‘Let’s see if we can make these better businesses, to see if someone else will want to own them.’”
The two businesses Karol decided to sell were Cybershield and Ortloff Engineers Ltd. Neither fit in with Elk’s core building products Cybershield made plastic shielding used in the cell phone industry and Ortloff handled matters related to the natural gas industry.
Karol’s theory proved correct; growth did, in fact, come after a severe pruning. In fiscal 2005, when Elk sold off those two tangential businesses, Elk’s revenue bounced up to $761.7 million for the fiscal year ending June 30, up from $574 million for 2004.
“When I came in, the earnings were 41 cents for the year and the stock price $14,” Karol says. “This year, our earnings should be in the $2.25 to $2.40 range, and the stock price is $37. To be honest with you, I think that’s been OK. We can do better.”
Karol and the board of directors also intend to sell Chromium, which supplies chrome-plated finishes for abrasive environments such as locomotives. So far, though, they have found no buyers.
“When we exit a business, we want to make sure it’s a good deal for everybody, that we get a fair price and that the employees have a good opportunity and that the buyer is getting a fair opportunity to succeed as well,” says Karol. “We have not found that opportunity for Chromium yet.”
In the meantime, Karol has made that subsidiary profitable by paring it down to one manufacturing plant in Cleveland and improving its manufacturing operation, lowering the sale price significantly. He says the company will keep Chromium for now, and he even sees opportunities to turn it into something more if it doesn’t sell. He sees applications in manufacturing and other fields that use fast-moving machinery, as plating can help prevent costly wear-and-tear.
“There is a whole industry that uses very high impact ceramics or very hardened steel,” Karol says. “We said, ‘We can use our hard chrome plating technology to improve wear on machinery in manufacturing.’ That’s a growth opportunity we see down the road.”
Losing fat, adding muscle
As the company is shedding the extra weight, it’s also adding muscle to its product lines. Since its concentration is in building materials, Karol has worked to buy out other manufacturers that create products that fit.
“We’ve invested in four business platforms that all use, in some manner, similar technology or processes, have similar distribution channels and all complement our brand position as a quality leader in building products,” Karol says.
Because the company is a leader in high-quality architectural shingles for roofs with a steep pitch, it made sense buy out a low-slope roofing company. Elk also sought out other complementary building materials, buying a composite lumber business and a composite railing business.
Karol is particularly bullish on the composite lumber business, which creates products made from a blend of plastic and wood fiber. The blend creates a longer-lasting deck and other wood for exterior use.
“The composite technology is really what I think is the next big thing because you can extrude in a continuous fashion, not a batch process, various profiles or shapes of materials that have enhanced features, including that you can put color in it, you can make it more moisture-resistant, and give it strength,” Karol says. “We are believers that the composite technology will be the next big engineered wood breakthrough.”
The company’s third product line revolves around specialty fabrics used as backing on carpet tiles, the facing for gypsum board and underlayments for flooring. VersaShield, a fire and moisture-barrier fabric, is part of that product line.
The fourth product line is what the company calls VersaShield Building Solutions that go underneath the exterior building products it makes.
Of all four lines, roofing is still the strongest performer, accounting for 90 percent of the company’s sales, but other lines are making strides.
“We make good money in each area,” Karol says. “Composites has been losing money, but we feel we are within one or two quarters of profitability there.”
Investing in the company
Elk has invested in two things that Karol says will continue to lead it into more profitable pastures: a new manufacturing plant in Lenexa, Kansas, that provides greater efficiencies, and a research and development laboratory in Ennis, Texas, which has undergone two expansions in the past five years.
“True innovation is how you succeed best in business, in my opinion,” Karol says. “Our job is to give better products that the consumer gets more value out of. We are big believers in true innovation, either that we can lower the cost to the consumer or give them more features for less cost.”
Growth will come as the company continues to expand its product lines through inventions.
“We’re developing various products in each of our business platforms that we think are very cool products that will provide more value and better performance,” Karol says. “We prioritize and work on certain things at a faster pace than others.”
Karol wouldn’t say what, exactly, the company plans to introduce, but says there are plans for siding and trim created from the composite materials business, and it will introduce a solar product this year to go on top of roofing materials and allow homeowners to capture solar energy.
Elk is making a move to promote itself beyond the builders and developers who know its products, Karol says. With help from a new advertising agency, Elk is making a push to become a brand that consumers recognize and request.
With its new tagline, “Confidence Built-In” and a slogan, “For confidence and peace of mind, ask for Elk,” the firm wants to make its brands known among consumers, who are building homes and making improvements at record rates.
Elk has concentrated its advertising in magazines sold commonly in home improvement stores, and Elk products have been featured on several national home and garden shows, including ABC’s Extreme Home Makeover. What Karol wants for his company is the same kind of name recognition that Kohler has gained for its faucets and Pella has for its windows and doors.
“The basic premise is we want people to have enough awareness of our brand that they would consider us,” Karol says. “If you are going to think about putting a roof on, or a deck or siding, we want you to think, ‘I know Elk. That’s a good company, and I will consider them in our choices.’ That’s all we want to do with our brand.
“Then we want to let the channels work to our advantage. They will then talk to their contractors or go to Lowe’s or Home Depot and hopefully, they’ll say, ‘Do you have any Elk?’”
Karol says the exposure is working since the advertising campaign began, Elk’s Web site traffic is up, as are inquiries from contractors.
As Karol sees it, growth takes time, and he hopes to build on the net income of $46.9 million on sales of $761.7 million posted for fiscal 2005.
“The basic philosophy we have is that we are money managers, if you will,” Karol says. “The investors want us to employ the money in things where we have a competitive advantage. They don’t want us in things that we aren’t good at.”
How to reach: Elk Corp., www.elkcorp.com
Hubbert was ridiculed for his observations, both inside and outside the oil industry. He was also right. A recent depletion analysis predicts that world production will peak between 2003 and 2008. Retired Princeton professor Kenneth Deffeyes, using production data collected in 2005, concluded that the all-time peak of world production was reached on Dec. 16, 2005.
“That time frame has not yet been validated,” says John Barnes, chairman and CEO of B&R Energy in Dallas. “However, production from fields in Russia, the North Sea and half of the OPEC nations has already peaked and, it seems, more and more analysts are accepting that fact.”
Smart Business spoke with Barnes about how the peak in oil production will affect everyone in the world and what is being done about it.
Who will be impacted most by the decline in oil production?
The decline in production will have a huge impact on every company in the world that uses energy.
Construction companies will feel it the most, as will those in the construction industry - especially ones that build shopping centers or have to ship products a long way. Heating and cooling costs will skyrocket, and it won’t be an anomaly.
Any company that has to transport goods or people 45 minutes to an hour will feel it at the gas pump. The decline will have an impact on everything, but especially transportation costs.
How fast will production at the fields decline?
According to the Association for the Study of Peak Oil & Gas-USA, production at the Cantarell oil field in Mexico City, the second-largest in the world, may deplete faster than expected, from its current 2 million barrels a day to 1.43 million barrels a day by 2008, and possibly to as little as 550,000.
Petroleum Intelligence Weekly reported that Kuwaiti oil reserves are really at 24 billion barrels as opposed to the previously reported 99 billion barrels.
Samotlor, the largest Russia oil field, has declined from a peak of close to 2 million barrels per day to less than 500,000.
Indonesia, a member of OPEC is now an oil importer.
It has been more than 10 years since the world found as much oil per year as it consumed. As a result, oil prices have gone through the roof. By 2030, demand is expected to be at 120 million barrels a day, while production of conventional oil is expected to drop to 60 million barrels a day.
That shortfall is going to have an impact on everyone. A lot of industries face some serious challenges to how they do business. How it will all play out, no one knows.
Who uses the most energy?
The United States, with 7 percent of the world’s population, consumes nearly 25 percent of the world’s oil and gas. At the same time, the U.S. also provides one-third of the world’s gross national product. While we consume oil disproportionately to our population, we use it more efficiently per dollar of GDP than the rest of the world. Every dollar of GDP requires an input of energy. More advanced economies require less energy per dollar of GDP than less advanced economies.
Energy is required to maintain a more advanced society, and we don’t want to reduce the country’s economy or standard of living. Yet, at the same time, there is a limit on how much oil and gas we can consume.
What are some alternative sources of energy?
Alternative sources have limitations.
The trucking industry is looking at ethanol and bio diesel. But availability, economics and production costs exceed the energy it produces or replaces. We cannot continue to deploy a negative energy resource.
Other alternatives may include nuclear power, solar and wind generation, gasification of and gasoline from coal, LNG, Canadian oil sands, hydrogen and ethanol. But these, at best (other than nuclear), are able to supply only a small percent of the world’s total energy requirements.
The current situation requires some careful soul searching and prompt action.
We need to find and produce more conventional domestic oil with newer technologies and enhanced recovery methods.
We need to exploit all the opportunities we can control: Gulf Coast, West Coast and ANWR field prospects and unconventional sources.
We need to continue to develop alternative solutions.
And we need to focus on critical world issues such as refining capacity, increased world demand, overstated worldwide reserves and peak oil realities.
JOHN BARNES is chairman and CEO of B&R Energy. Reach him at (972) 934-3800 or firstname.lastname@example.org.
There are several significant trends in executive education today, but perhaps the biggest trend is the move toward customization of programs to meet the needs of a particular group of executives, says Hasan Pirkul, dean of the School of Management and Caruth Professor of Management Information Systems at the University of Texas at Dallas.
“There’s been a push for customizing MBA programs to fit very specific needs,” he says. “Companies are often willing to pay for their employees to participate in executive education programs, and they fully expect to gain value from those programs. Customizing programs to meet specific business or industry needs helps to ensure a return on the company’s and the employee’s investment.”
Smart Business spoke with Dean Pirkul about the latest trends in executive education and why investing in it is good for employees and employers alike.
What is executive education?
Executive education is basically furthering the education of mid-level managers who want to come back to school, maybe after several years or more of working, and make up for the deficiencies in their knowledge and prepare themselves for upper-level management jobs.
How can a business benefit by supporting its employees’ executive education?
Most of the time, a company is paying for the executive’s education because it’s not just providing value to the individual, but it is providing value to the company. For example, we have recently signed an agreement with a company where they send us multiple students throughout the year and we not only provide them with the basic curriculum, but they work on solving actual problems associated with their business or company. In this case, the company gets back a significant return on their investment, because issues the company faces are studied as projects in the classroom, and the students are able to go back and provide solutions to the real problems the company faces.
What are the current trends in executive education?
There is more flexibility in executive education programs, because executives are very busy people. Also, many schools are now emphasizing globalization issues in their programs, as that’s becoming increasingly important to large corporations. Other growing areas include governance, ethics and leadership training. While these are subjects that have always been covered in executive education programs, they are receiving a renewed emphasis due to current events and changes in the business world.
But perhaps the biggest trend is the move toward customization: developing programs to meet very specific needs of a particular group of executives. This can range from programs geared toward project managers to physician and health care executives to global leaders, and can include a mix of both campus and distance learning opportunities to meet the needs of business executives all over the world.
How should a corporate leader make use of these trends?
The key is to find an executive MBA program or courses that fit the needs of the individual, as well as the corporation. There are many differences among programs. For example, we emphasize a couple of things that aren’t typically emphasized by other programs, such as executive coaching. We also emphasize customization to meet each executive’s individual needs. When students come to us, we work with them to determine their strengths, weaknesses and professional goals so we can customize the program as much as possible to help them achieve their goals.
There’s a lot of competition with executive education programs. Corporate leaders and business executives can take advantage of this competition to seek the program that offers the right curriculum and best value in terms of results.
Why should a business executive pay attention to executive education trends?
I’m a firm believer in life-long learning, and the business world is changing very rapidly. If you’re not reading, learning and improving yourself and your understanding of the business climate, you’re going to fall behind.
With the move toward customization and tailoring executive education programs to meet specific industry needs, there’s now more opportunity than ever to derive a direct benefit from this type of education. There’s tremendous value for both the executive and the company.
HASAN PIRKUL is the dean of the School of Management and Caruth Professor of Management Information Systems at the University of Texas at Dallas. Reach him at (972) 883-6813 or email@example.com.
When Kathleen Mason joined Tuesday Morning Corp. as its president and CEO in July 2000, the upscale discount retailer had a lot going for it.
Customers were loyal and loved the bargains on high-end brands, and they even formed lines on occasion to get into the stores at the start of a sale day. By all accounts, the stores were a hit.
But the company wasn’t doing as well as it could be. Mason, a veteran of the retail industry who previously served as president of Homegoods, thought Tuesday Morning’s balance sheet was bloated and its technology lagging; she notes that Tuesday Morning didn’t even have voicemail when she came onboard.
The company also had way too much inventory, scattered in warehouses across the country to feed the chain of stores. And its marketing wasn’t nearly as savvy as its customers were. As Mason saw it, having a strong brand and bloated balance sheet was an ideal situation.
“It was not looking good from an operational management perspective,” Mason says. “That’s a great set-up for success because as long as you know who your customer is, you have all of the right components for success. ... It was an opportunity to return to some great operating margins and be a very profitable business and be a very low-cost operator so that everything we delivered was value to the customer.”
Tuesday Morning’s formula for success is this: Sell great merchandise at deeply discounted prices and close stores for periods of time, so when they reopen with new merchandise, it’s an event. And the stores are always open on Tuesday mornings, hence the name.
The Dallas-based company, which opened its first store in 1974, operates 732 stores in 46 states.
Mason has made the company profitable, with increased earnings each year. In 2004, it reported net income of $62.6 million on sales of $898 million, compared to net income of $24.6 million on sales of $587 million for 2000.
From the top down
Mason’s plan for success started at the top with the reorganization of the management team.
“We restructured organizationally,” Mason says. “We were able to take some of the people who had made the company great and get them in the right positions. We added, too. We brought in some new people and changed the organizational structure to reflect the best of both of the inside and outside.”
Shortly after Mason’s arrival, Tuesday Morning appointed as chief operating officer/executive vice president Mike Marchetti, who is responsible for distribution, computer and communication systems, and loss prevention. He also helped Mason address the company’s sticky distribution issues as they brought in new buyers to hunt down merchandise.
“I’ve learned that you hire good people you can trust,” Mason says. “You keep in touch, but stay out of the way.”
After reorganizing the management team, Mason tackled the distribution of merchandise.
“First of all, we closed 16 regional warehouses,” Mason says. “We had a lot of inventory sitting in warehouses waiting to go to different regions and stores. We really didn’t need those warehouses, and we lost control of those warehouses. We closed those distribution centers. We expanded our existing facility in Dallas, and that gave us much greater control over our inventory. We improved our systems, our information systems.”
Tuesday Morning purchased new computers and software for the distribution center to help track what was coming into and going out of the warehouse to keep better tabs on the merchandise. It also replaced warehouse distribution and sorting equipment.
“We got the inventory in line with reasonable levels,” Mason says.
Mason wanted to update Tuesday Morning’s image through television advertisements and hired a new agency to help it. The company hired Lauren Bacall to serve as its spokeswoman three years ago.
“I can’t think of a classier woman than Lauren Bacall,” Mason says. “She really speaks well for us and speaks to the brand. Sometimes celebrities can be iffy and have checkered backgrounds. Lauren Bacall fit our needs very well. She represented a fine taste level. Since she was a shopper, she loved Tuesday Morning. She loves our product.”
It’s hard to say if the ads have directly led to increases in sales, but Mason thinks they are at least partially responsible for the company’s growth.
“It has given us greater visibility as the value provider that we are,” Mason says. “It has reinforced our message of being a great place to find first quality brand names at fantastic prices.”
And it’s helped the company reach customers who perhaps had never heard of the stores or weren’t sure what they offered, says Mason.
Mason also uses technology to reach its customers more effectively. Tuesday Morning notifies most customers about upcoming sales via a mailed flyer, capturing addresses at the cash register for future mailings. Some 7.5 million shoppers have signed up.
“We don’t sell that list,” Mason says. “We hold it close to our heart. We take care of our customers by giving them notification of some of the more fantastic buys we find throughout the world.”
Mason says about 10 percent of those 7.5 million people receive e-mail notification of sales, called eTreasures, something she started for the company. Those customers access an online catalog that is essentially the mailed flyer posted on a Web site for their perusal, with daily new arrivals. The company doesn’t sell anything over the Internet.
Taking chances on stores
With the major operational challenges addressed, Mason began leading the company on an aggressive push for new markets for stores.
During her tenure, the number of stores has grown from 415 in 2000 to 732, with plans to reach 1,000 by 2010. She doesn’t shy away from small cities but says a new market must meet specific criteria, such as median income. Tuesday Morning aims for communities with an average household income of $60,000 but doesn’t consider that a hard-and-fast rule. Executives also look at other factors, such as average educational levels, that help them get an understanding of the community and whether it will support a store.
“They do have to have more of an aspirational customer, a customer who really wants quality at a price,” Mason says. “That can still cut a pretty wide swath. Even a young customer on a limited budget wants quality. If they recognize a name brand, nothing else will do. ... We are opportunistic in everything we do, so we might bend the rules a little bit. But there are a number of metrics that we look at.”
To keep costs down and profits up, Tuesday Morning looks for bargains in real estate, sometimes settling for locations that other retailers might pass up because it knows that customers will make the effort to find the store.
It has been aggressive and taken on some risky markets, but there has only been one that simply didn’t fly, Mason says. A store in Cheyenne, Wyo., opened in February 2001 and closed in June 2002.
“That was a real stretch for us,” Mason says. “Although it is an upscale community, there are just not enough people there who are interested in shopping. It’s too spread out, too remote.”
Mason says her only other flop was attempting to make the stores more attractive with better-looking shelving. But after several tries, she abandoned that effort because the new shelving was difficult to work with and didn’t seem to matter to shoppers.
“We thought it was a way to pretty up the stores and better display merchandise,” Mason says. “It was expensive and too specific. Our customer is used to the treasure hunt and doesn’t mind that. We are not for everyone, but the customers who have come to appreciate our no-frills format really do benefit by finding some of the most fantastic things from around the world.”
Mason also has increased the number of days the stores are open. When she came to Tuesday Morning, they were open about 250 days a year and closed in January, July and between sale events. Now, they are open about 300 days a year.
“There is always that risk of hurting that sense of urgency that was part of our formula,” Mason says. “But we had to balance that with the consumer’s desire for convenience. It was a clamoring request, especially from younger customers who say, ‘Look, I’m a working woman and I can’t pay attention to when you are open and closed.’”
Mason and other Tuesday Morning executives give a lot of thought to that customer, who she is and what she wants. They want to know who those customers are, how much they make, where they live and what their shopping habits are.
In 1998, before Mason came to the company, Tuesday Morning did a complete analysis of customers through surveys to get that information. It recently completed another year-long survey, and the results will likely guide future decisions.
“It helps us really refine our understanding of who is buying at Tuesday Morning and to be more pointed in addressing that customer in terms of communication in every way,” Mason says. “It’s like when you give a speech, you need to know your audience. You don’t communicate with everyone the same way. The more you know that person, the better you are able to communicate with them.”
The survey results are still being tabulated, but Mason says it appears that the Tuesday Morning customer is very much the same person she was six years ago.
“We still have a wonderful core customer who is an upscale customer,” Mason says. “She really appreciates and recognizes brand names. They really have to be a shopper.”
HOW TO REACH: Tuesday Morning, www.tuesdaymorning.com
With a new year upon us, many people approach both their business and personal finances with renewed vigor. Whether the goal is to better track expenses, pay off debt, or to grow savings, there are a few questions individuals and business owners should ask to get their finances in order for 2011.
Smart Business spoke to Tracie Gusola and Theresa Bazan of Comerica Bank about how to organize your finances, get the most out of your banking institution and reach your financial goals in 2011.
What is the first step in getting your business and personal finances in line?
Tracie: I believe that in today’s digital world, face time with your banker is extremely important. Get to know your banker and make sure his or her financial viewpoints align with yours. Ask plenty of questions and make sure your banker is explaining their recommendations to you clearly. It is important to tell them about your business or personal needs and goals so they can help you develop a customized financial plan. Building a good rapport with a banker will not only help them better understand your business or personal financial situation, but can also give you the peace of mind that you have a trusted financial adviser and partner.
How can you make sure you’re getting the most out of your money in 2011?
Theresa: The best way to make sure you’re getting the biggest bang for your buck is to be proactive with your account and work with your banker to identify opportunities to make the most of the money you already have or expect to earn.
For example, research different types of business or personal checking accounts to see which one is right for you. Popular checking accounts for individuals include basic, interest-bearing, joint and senior or student checking accounts. And most banks offer a variety of business checking accounts, too, based on your cash flow and deposit levels. Discuss with your banker what types of accounts will make the most of your money.
What are some easy ways to keep track of what you’re spending?
Tracie: One of the best and easiest ways to know what you’re spending is to develop a budget. Developing a budget allows you to see exactly what you have, what you spend and where there is room for saving. Having a budget also allows you to get out of debt by developing a payment plan that aligns with what you can afford each month.
Another way to keep track of your spending is to keep an accurate register in your checkbook. Always remember when you write a check to keep a record of it and to balance your checkbook each month.
Most banks now offer online banking and a great benefit of it is you can instantly see any charges to your account and your account balance. By regularly checking your account, you can keep track of your spending and how much money is in your account, which can ultimately help you avoid unnecessary overdraft fees.
What institution should you be using?
Theresa: Every banking institution offers an array of financial products and services so it’s important to find one that best meets your needs. If you own a business, then you may need special banking products and services like small business loans, business checking accounts and cash management products. If you have a large amount of money to invest, you should look for a bank that has a dedicated wealth management team that can help you with everything from portfolio management to asset management accounts. Before you put your money into any bank make sure the services they offer align with your financial needs.
What other services do banks typically offer?
Tracie: Very often banks offer more products and services than you think. Many institutions offer online bill pay services, allowing you to save money on postage stamps and envelopes. You can also find insurance and business services at banks, as well as financial planning tools, loans and investing services. Comerica has a team of financial planners that can help you with retirement planning, education funding and estate planning. We also offer personal insurance services like life and estate planning, disability and long-term care, and business insurance like business succession plan funding.
Tracie Gusola is a senior vice president and North Texas retail regional manager for Comerica Bank. Theresa Bazan is a senior vice president and South Texas retail regional manager for Comerica Bank. Comerica Bank is the commercial banking subsidiary of Comerica Incorporated (NYSE: CMA), the largest banking company headquartered in Texas, and strategically aligned by three business segments: The Business Bank, The Retail Bank, and Wealth & Institutional Management. Comerica focuses on relationships, and helping people and businesses be successful. In addition to Dallas, Houston and Austin, Texas, Comerica Bank locations can be found in Arizona, California, Florida and Michigan, with select businesses operating in several other states, as well as in Canada and Mexico. Comerica reported total assets of $55.0 billion at September 30, 2010. To receive e-mail alerts of breaking Comerica news, go to www.comerica.com/newsalerts.
Wayne L. Williams Jr. is a partner in the audit and financial advisory services group with Crowe Horwath LLP. He has more than two decades of experience in the accounting and financial industry.
Q. What can businesses do with their accountant during this recovery to prepare for 2011 and beyond?
A lot of what companies will do in a downtime so they can come out a winner is to really take a look for bargain assets, because they’re on sale now; some companies are really strapped for cash and there are fire sales. So we can come in and help them set their priorities on what creates value in the company. We can help them leverage unique accounting information or information systems and how to use them to gain more insight about what’s happening in the company or in the market to position them better against their competitors. We can help them manage their cash flow, their capital structure and how they’re structured from a cash standpoint.
Q. Do you see more cash flow and do you expect more mergers and acquisitions in 2011?
I would have expected more M&A activity at this point, but I do think it’s going to pick up in the balance. Some of the tax rules are very favorable for buying and selling companies. I would see some of that turning around in 2011. There will be a lot of debt starting to come due, and there will be a lot of assets coming on the market because there’s a lot of cash sitting on the sideline.
Q. What else should businesses expect during the next year?
People are starting to look for help again in managing their cash flow, because they’re starting to see an uptick in their business. They’ve weathered the storm, they have some good things happening, and now the questions are along the lines of, ‘How should they structure their company? How many people should they hire? How should they manage their cash flow?’ And we’re getting more of those calls, from a financial advisory standpoint. Now, I don’t think the economy is necessarily that much better, but a lot of these companies have reduced their spending and they know they can survive. They got smarter.
When Dr. Jeffrey Canose moved up into his role as president at Texas Health Presbyterian Hospital Plano, he didn’t have to worry about healing any major ailments in the organization. He didn’t need to lead a major turnaround. And he wasn’t dealing with disgruntled employees causing problems.
Instead, his 1,600-person hospital was at the top of its game and had been recognized for such, and the culture was one of high-performance.
“Probably the single biggest challenge was coming into an organization that already had a great culture and already had a track record of many notable accomplishments and creating a burning platform for change and transformation in that kind of [environment],” Canose says. “People are already very high-performing, already have garnered a lot of regional and national recognition, but have to get prepared for a multitude of challenges that face all of us in health care, even in places that otherwise have a stellar track record for clinical excellence and customer service.”
So despite having a great organization already intact, he wanted to take it to the next level by increasing efficiency, and he did that by promoting communication, getting feedback and fostering a culture of collaboration.Communicate effectively
Two jobs prior to his current one, Canose was in his first full-time hospital administration position in North Carolina and had come from the North. A patient had died unexpectedly on the operating table, and he was asked to explain to the board why the patient had died.
“The chairman of the board was this little raisin of a man who had been out in the sun way too long, and he was a retired ATF agent, who I later learned had proudly drawn his gun and used it on numerous occasions when he was chasing down moonshiners in the mountains of western North Carolina and eastern Tennessee,” Canose says.
As he explained to the board, he reached the point in the story where it was clear that the patient wasn’t going to live, and out of his mouth came the phrase, “And the patient started going south.”
“The entire boardroom got deadly quiet, and everybody just sort of looked at me, and it was like the cartoon where you have that little word bubble you wish you could reach out and grab and stick back in your mouth,” he says.
The chairman then broke the silence by asking, “Son, what do you mean by that phrase, ‘going south?’” Canose was quick on his feet with an explanation so he wouldn’t have to find a new job so quickly.
“I replied, ‘Closer to heaven,’” he says with a laugh. “That’s called when you’re in the South, get rid of your Yankee vocabulary.”
While it’s a funny story, it’s also an important lesson that he learned in communication during his career: You have to be careful in the words you use to communicate your message and how your audience will interpret them.
Another lesson Canose learned in communication came when he worked in Pittsburgh when he was still a practicing anesthesiologist but was also charged with running the operating room. It was a challenge because he was learning insight into the administration side while also still practicing, and it was during this time that he realized a problem in his communication.
“I spoke in tongues,” he says. “I had this whole new vocabulary that administrators used. When you go out and you sit in a room with bedside nurses or the guys that keep the boilers and the air conditioning working, they don’t speak that language, and it doesn’t connect with them, so knowing who your audience is and figuring out how to connect with them, how to be able to present the information in their context and help them connect the dots, I think that’s an acquired skill.”
By learning to eliminate administration jargon from his vocabulary, he was able to more effectively communicate with employees.
In addition to learning how to communicate his message in ways that his audience understands, he’s also learned that consistency is key.
“Like any communications theory, No. 1, the message has to be consistent,” Canose says. “You’ll hear me say that over and over and over again, but at the same time, you have to deliver it so many different ways to reach people who have different learning styles and who assimilate information in different ways.”
He does this both in written form via the company newsletter and verbally via town-hall forums, and he’s mindful to make sure that his message is the same in both venues.
“There’s no difference whatsoever,” he says. “That’s where I’m always very focused on making sure it’s the same message just delivered a different way. We really do want to make sure that the key messages are always clear, that the content is consistent, that we’re maintaining a focus on our priority goals and objectives.”Get feedback
The cheerleader pranced around the hallways of Texas Health Plano in her short skirt and white ribbons in her hair, but if you look a little closer, you’ll quickly realize that the cheerleader is actually Canose. He promised employees that if he got a high response rate on the employee satisfaction survey, he would put on the cheerleading gear, and when he got an astounding 87 percent response rate, he made good on his promise to dress like a cheerleader for both the day- and night-shift employees.
“I can tell you that that did more for employee morale this summer, just the willingness to dress up in that kind of outfit,” he says. “Now the most frequent comment I got was that I have great legs, which my wife has known for 37 years, but it was the first time the employees found out.”
Feedback is critical to successfully leading, so he knew he had to do something good to get what he was looking for. Clearly it worked. Employees were amused for the day, and he got answers to critical questions 65 of them in total that ask whether or not employees think their leaders communicate the most important information, that leaders listen to them and that leaders identify the things they need the employees to work on.
The results the last time around indicated that the hospital was between the 78th and 87th percentile on the majority of categories compared to the national average.
In addition to getting feedback for the annual employee survey, he also says it’s important to gather feedback in the moment. For example, after a town-hall meeting, instead of sending out an electronic survey, he asks those who attend to fill out a survey before they leave.
“If you get them done right there in the moment, you have the best chance of getting a good response,” he says.
While it’s not mandatory, he usually gets a 95 percent completion rate by doing it this way. Doing this allows him to see if employees actually understand what he says.
“We ask them whether they are experiencing a consistency in those messages and whether we are making it relevant to their daily work and do they feel like they’re getting the information they need in order to understand the strategic context for the very meaningful work that they do,” Canose says.Foster collaboration
When Canose gets up in the morning, there’s very little he can control for the day.
“I’m the first to confess that there’s not much that I control around this hospital,” he says. “I control how I act. I control how I react, and I control what clothes I wear when I come in in the morning, but aside from those things, there’s not a lot we can control.”
Because of this, instead of trying to control everything himself, he works to promote collaboration within the organization by knowing the right questions to ask and the right people to bring in to help solve a problem and achieve the hospital’s goals.
“It’s not a whole lot unlike when you’re practicing medicine and you recognize that there are people with specialty expertise who you need to consult to come in and help with the care of your patient, especially when they have a lot of complex co-existing medical conditions going on at the same time,” he says. “That’s my mental schema for how you identify what’s going on. You make an initial diagnosis. You figure out what kind of problem are we trying to solve. Then you decide who you need to bring in to that conversation in order to be able to solve the problem and create a sustainable solution and then move on.”
This is the approach he took when he realized that, at one point, the hospital had more than 90 committees. He knew he had to get that down to between 30 and 40, because far too much of his people’s time was being spent in meetings, so he brought in all of the involved parties and started a dialogue, asking what committees will help them achieve their priority goals and objectives and move the strategic plan forward. There are also others that are required by law. If a committee didn’t fall into either of those two buckets, it was gone.
In addition to having a team approach to reducing committees, he also took a team approach to changing the patient experience in the emergency room by creating three teams of front-line employees to redesign the whole experience. He started by bringing the right people together for those teams.
“We were looking at getting people involved who were sort of the doubting Thomases,” he says. “We wanted a number of them to participate directly in the process, because we wanted them to own it, and we wanted them to feel empowered to change it. We needed to know what their doubts were as we were going through this redesign project.”
He says to also look for your top talent, as well, so he found the high-performers across multiple disciplines but left management out. These people worked as a team to look at all of the processes and make recommendations to the management about how to improve. The implementation process took about 12 to 15 months to complete, and the result speaks for itself: The national average time from when you walk into an emergency room door to when you walk back out is four hours and nine minutes. At Texas Health Plano, it’s two hours and 30 minutes. At most hospitals, it takes hours of sitting in the waiting room until you’re assigned a room and seen by a doctor, and again, Canose can brag that his team does it in 18 to 20 minutes. Lastly, the average time it takes once you’ve been seen to get your discharge instructions and prescriptions is 67 minutes, but Canose’s team does it in 10 minutes.
“We didn’t try to make little incremental process improvements and see if we could make things 5 or 10 percent better. We made sure that we knocked Humpty off the wall, smashed him into 1,000 pieces and then put together three teams of front-line employees to put Humpty back together again and do it in a way that was focused on the patient’s experience and how we could help patients get in and out of the emergency room or get admitted up to the hospital as quickly as possible,” he says.
Canose has also seen other improvements that show he’s on the right track to raising the level of excellence. For more than a year, patient satisfaction scores in the emergency room have been consistently running in the top 5 to 10 percent in the country. Physician satisfaction scores are between the 82nd and 97th percentile, making the hospital in the top 20 percent in all categories and the top 10 percent in the country in things like the quality of care provided.
“That combination of patient, physician and employee engagement doesn’t happen by accident,” Canose says. “That means we spend a lot of time focusing on the kind of culture we have here in the organization, and I think it says that we’ve created an incredible environment for our professional staff to be engaged and empowered and energized to go do their professional best every day at the bedside, and it shows by the kinds of outcomes we’re seeing.”
But it’s not just the numbers that tell him he’s on the right track. He receives letters all the time, and the most meaningful one was from a Navy SEAL who Canose says was the size of an offensive lineman and as rough and tough as they come. He wrote a beautiful letter thanking Canose and his staff for the way they seamlessly worked together and didn’t panic and kept him calm when his wife had complications during the birth of their child. Both his wife and child were fine, but he was amazed at how the staff handled the one-chance-to-get-it-right situation.
“This can never be a command-and-control environment the success of patient care depends on collaboration and recognizing interdependency,” he says. “Some people would just come out and say that health care is a team sport, then my role as the head coach on the sidelines is once again to make sure everybody’s prepared when we go onto the field and to make sure that we’re communicating very clearly with each other and that everybody knows everything that they need to know and that they get that consistently, and we create that environment where they can do their professional best.”
How to reach: Texas Health Presbyterian Hospital Plano, (972) 981-8000 or www.texashealth.org
The internal audit: It’s a necessary part of conducting business that, done right, can at once assess operations, identify areas for improvement, manage risks and help maintain compliance. Now more than ever, audit committees, chief financial officers and other stakeholders need greater assurance that internal controls and risk management procedures are effective and efficient.
Internal auditors can help restore stakeholder confidence and reduce the cost of the audit process by adopting four key principles of a more progressive internal audit model, says Larry Rieger, a partner at Crowe Horwath LLP.
Smart Business spoke to Rieger about deriving greater value from an internal audit function that is more central to building financial and operational excellence with confidence.
What are the main concerns that may not be addressed by current audit models?
Crowe Horwath LLP and partner organizations commissioned a set of three surveys to determine whether companies’ internal audit groups were meeting current business needs. In the survey, stakeholders indicated that internal auditors excelled in reviewing financial controls and transactions and testing past events; what was lacking was the ability to inform stakeholders of the company’s current status and what should be done to improve in the future.
Most audit committee members (75 percent of the respondents) echoed the stakeholders’ concerns by stating that risk management practices were an integral part of a company’s ability to avoid and/or plan for surprises. The ideal audit model would not just provide for traditional compliance audits but would address these concerns surrounding assurance, business performance processes and risk management efforts.
What specific changes should internal audit departments make?
Auditors will need to be smarter about where they spend their time by relying more on automated tools and using workflow methods that allow them to focus on the high-level controls.
- Leveraging the work of others is one way that internal auditors can be more efficient with their processes and time. They can rely on the monitoring metrics and reporting that business managers are already using to manage their operations. Internal auditors can determine which of these reports they can accurately use during assurance audits and home in on the areas where problems are indicated.
- When businesses are better managed, process owners can be held accountable for developing and owning controls at the business level and the internal auditors are unburdened. Internal auditors are then able to focus more on the principles of the new internal audit model.
- Audit executives must focus resources on the constant review and enforcement of the four principles. Managing resource demands wisely allows for internal auditors to address areas of high and emerging risk while also providing continuous coverage to the principles of the new audit model.
What are the four principles of a progressive internal audit model?
Compliance: This traditional internal audit role can be streamlined through closer collaboration with management. Audit departments can save time and resources when testing past events and transactions to determine compliance with laws and regulations by taking advantage of reports that managers already use to monitor controls in their unit.
By relying on the work of business unit managers as a starting point, auditors can focus on the issues that are red-flagged during the audit of the control processes. For example, reports generated by a business’s IT department can help auditors to determine whether control processes in place sufficiently safeguard security and adequately provide for an appropriate segregation of duties.
Assurance: Continuous monitoring systems generating real-time reports allow anything outside the bounds of tolerance to be detected as early as possible. By regularly reviewing control reports generated by a system, auditors can provide a level of continuous assurance that supports stakeholder confidence that everything is under control at all times. For example, if expenses in a certain business unit are out of line, the monitoring system at the business-unit level would send an e-mail to the appropriate person. Or, the accounts of delinquent customers could be flagged so that no new sales would be made to those customers.
While a continuous monitoring system does require an upfront investment, it pays off by lessening the burden on the internal auditors’ resources, allowing them to focus on the high-level items.
Business performance improvements: An area that is often lacking in the audit function is the ability to actually improve business operations. By identifying problems, and then taking it a step further by recommending ways to improve, the internal audit can and should add value to the organization as a whole. Comparing their reports to benchmarks and best practices, auditors have the knowledge to support such recommendations as shifts in resources or operating procedures, or new technology investments.
Risk identification: Again, auditors can tap into information that already exists in business units — this time regarding each unit’s own risk-management activities that are already in place. This makes the process of ongoing monitoring of risk less time-consuming and more integrated. Key risks are always changing; stakeholders require as much knowledge as possible concerning the company’s risk exposure as a whole within a business environment that is constantly in flux.
Larry Rieger, CPA, is a partner at Crowe Horwath LLP. Reach him at (214) 574-1000 or firstname.lastname@example.org.
With the vast array of telecommunications choices and unproven technologies available to businesses, how can they determine which solutions will work to meet their unique operational needs and be the most cost-effective?
“The variety of options available to large companies only adds to the complexity. There are too many competing carriers and technologies,” says Shane Heise, president of Simplify Inc., a firm that helps large multi-location corporations simplify and optimize their communications lifecycle management. “It makes for a world where companies are forced into being reactionary and devoting too many resources to deal with the chaos. This is the opposite of any best-practices approach; but it’s the norm that the industry creates.”
Smart Business spoke with Heise about how to make the right choices that fit your telecommunications needs.
What telecommunications challenges are companies facing right now?
There is a lot of uncertainty in the marketplace right now when it comes to telecommunications. Much of that is due to consolidation in the industry. Additionally, the traditional way of buying telecommunications (local, long distance and data products) has changed because of different technologies available today, some to which people have never before had access.
Most companies today hear buzzwords like VoIP and SIP, but they don’t have anybody on staff with the expertise to even know if those are the best strategies for them. Are they going to save you money long-term? What is the return on investment? Could going to one of these new technologies increase productivity?
Can you really rely on your carrier for these answers? They aren’t going to give you an honest appraisal of their products compared to those of their competitors. The key is opening your mind and saying, ‘I do have those challenges and I know there are a lot of technologies out there, but I don’t know how to uncover what’s best for me.’
How are companies dealing with these challenges?
The traditional telecommunications provider’s tactic is to lock you up in a long-term contract, or try to consolidate all your spend with them as a single provider. They tell you that the more you spend, the better your price points.
However, that’s not necessarily true. You don’t have to give everything to one carrier to get the best price. You don’t have to sign high-commitment, long-term contracts with a single provider. You can consolidate everything into a handful of companies and still get the best solution at the best price, while still doing what is right for your business instead of just doing things the way they’ve always been done.
How can this be done?
Instead of working with an account representative that proposes the same old contract renewal with a few minor changes, consider using a dashboard that identifies trends and assesses your current situation. Then take action to improve technology, reduce cost, etc. You can proactively identify, assess and take action, or reactively work within the constraints of a traditional contract renewal. Which would you rather do? We recommend using a strategic solution process that puts together short- and long-term technical, cost-effective solutions.
How does an executive team ensure that they are optimized?
Great question. You need a collaborative process that leads to a strategic solution. The telcos are not invested in your business. They aren’t meeting as a team and brainstorming new solutions for you. They are proposing options that benefit them but not necessarily you. They may cooperate, but they can’t collaborate. Instead of being in reactionary mode, renegotiating and renewing each contract, companies can ensure optimization by peeling back the layers, assessing all of the telecom spend and bringing an objective voice into the conversation. It’s about collaboration. Ultimately, contract negotiation is part of the process and some renewals may be appropriate. The question is whether you arrive at your strategy based on objective input from a collaborative partner or merely a price quote from a cooperative vendor. The difference is vast. We’re trying to open the eyes of executives to what a collaborative relationship looks like and can mean to the bottom line.
How can you be sure the approach you are taking is truly strategic?
The heart of it is having the right analytics, the right insight into the provider world, and a commitment to an over- arching, specific direction. The dynamics of the industry are continuing to evolve and new technologies are available, but who has time to test all the options? Ultimately, you need to know players in the industry who have both the insight to provide guidance and the accountability to be responsible for the direction they suggest. This goes beyond the average consultant. Companies need a trusted adviser. Most successful executives wouldn’t dare go through life without a trusted wealth manager. Why would they allow the business to go without a trusted adviser for such a critical service as communications? Executives don’t just need a consultant. They need someone whose neck is on the line for any solution they suggest. They need a trusted adviser.