Health care cost increases are rising at twice the rate of inflation for many companies, but not all. Watson Wyatt’s 13th Annual National Business Group on Health Study regarding employer-sponsored health care benefit programs reveals that the median two-year health care cost increase (for 2007 and expected for 2008) for all 453 surveyed employers in 2007 is 6.2 percent. While the poorest performing companies have a cost increase of 10 percent among the survey’s participants, the best performing companies experienced a two-year median cost increase of only 1 percent. What’s their secret? Consumer-directed health plans (CDHP) and programs that encourage employees to take control of their health.
“Employers can sustain a low cost increase trend by combining programs such as CDHPs with effective employee communication and appropriate financial incentives,” says Moji Saavedra, consultant for the Group and Health Care Practice at Watson Wyatt Worldwide. “Our research definitely shows that skeptics who are standing by on the sidelines and not adopting these strategies are missing out on significant cost savings.”
Smart Business spoke with Saavedra about how companies can benefit by adopting a consumer-oriented health care model.
What are other key findings from the survey?
What makes the survey results so significant is that the data continue to reinforce the findings from prior studies and the results are pretty compelling in terms of documented cost increase stabilization. The information shows that both CDHP adoption and enrollment rates are increasing; 47 percent of companies will offer a CDHP in 2008, which is up from 39 percent in 2007, and 42 percent of the companies offering a CDHP now have at least 20 percent of their employees enrolled in the plan. This trend is producing more stability in cost increases. In addition, the best performing companies are offering employees lower premiums for choosing CDHP plans, which is driving increased enrollment.
Why are CDHPs so effective?
A CDHP usually features a high deductible, such as $1,200 for employee-only coverage, along with a personal savings account that can be used to pay a portion of the medical expenses not covered by the plan. But, it’s not just the higher deductible that’s generating the cost increase control; the key is that the plans encourage employees to take responsibility for their own health and become better health care consumers by scrutinizing the treatment proposed by providers and making better informed choices. Many employers provide 100 percent coverage for preventive care before deductibles are met and go even further to offer financial incentives that encourage employees to proactively manage their health.
Are there compatible resources that drive CDHP effectiveness?
If employers want to realize the savings from a CDHP, it’s vital that they provide employees with the tools they need to be accountable for their own well-being. Offering a high deductible plan without the other components just isn’t as effective it’s like giving someone with no driving experience a car but no driving lessons.
Your first goal is to have employees maintain their health, and your second goal is to have those with chronic diseases manage their conditions. CDHP companies offer high-performance networks or tiered provider networks, based on price and quality, and online quality comparison tools that direct employees to high-quality providers. One of the interesting findings in this year’s survey was the increase in employers that offer on-site health centers, which help coordinate care and promote greater productivity.
The bow that ties up the consumer-directed package is effective communication. The best performing companies are clearly communicating goals, benefits, program information and educational resources to their employees through an ongoing communications program that uses multiple mediums.
Are financial incentives effective?
All incentives are effective, and they are a vital component to a results-driven consumer-oriented health care model. Consider offering incentives for smoking cessation and weight management programs or cholesterol reduction plans. The incentives can be customized to fit the culture of each company, so whether you structure the incentive as a contest or offer cash or gift cards for everyone who achieves his or her goal, there is data to show that they are all effective.
What else do you suggest?
Use data to document your return on investment. Certainly, you want to begin by measuring your internal rate of return as you migrate toward a consumer-oriented health model, but also consider benchmarking against other companies by sourcing information from data warehouses. You’ll be able to compare your company’s key metrics, such as CDHP employee adoption rates, and expose where your savings opportunities might lie. The data now exist to prove that consumers can effectively manage their own health care when given the right tools and incentives. So CEOs should pay attention to the results because this might just be the long awaited health care cost management tool they’ve been seeking.
MOJI SAAVEDRA is a consultant for the Group and Health Care Practice at Watson Wyatt Worldwide, San Francisco. Reach her at (415) 733-4210 or email@example.com.
Many executives offer their expertise to the community by serving on the boards of nonprofit organizations.
While CEOs might be skilled and experienced with board interface from their responsibilities as chief executives, a different level of expertise is required when the roles are reversed and CEOs find themselves sitting in a board member’s chair.
“It’s important that board members understand their respective roles,” says Greg Moser, partner with Procopio, Cory, Hargreaves & Savitch LLP. “It isn’t unusual to find that board members, particularly in nonprofit organizations, have no previous board experience, so they need to be trained and educated to make sure they know how to support management and execute their roles as policymakers and don’t become micromanagers. In addition, board members have fiduciary responsibilities and the potential for personal liability, so it’s vital to understand both your role and your responsibilities when serving as a board member.”
Smart Business spoke with Moser about how nonprofit board members should support management and execute their roles and responsibilities.
What constitutes a board member’s fiduciary responsibilities?
The fiduciary duties of a nonprofit director are the duties of care, loyalty and financial oversight. Breaching any of those duties can subject the nonprofit board member, even an unpaid volunteer, to personal financial liability. Most commonly, an ex-employee or third party with a claim against the corporation will name directors in their suits. Directors will generally have immunity and be entitled to indemnification from the corporation as well as defense from their directors’ and officers’ liability insurer, unless they have breached one of their duties.
While there are no shareholder suits, oversight of nonprofits is provided by the state attorney general and often the nonprofit’s parent organization. Additionally, the nonprofit corporation can pursue individual board members who have violated their fiduciary duties.
What are the board member’s primary roles and responsibilities?
Board members are accountable for selecting auditors, overseeing the compensation of the organization’s executives and making strategic decisions, such as decisions to expand the organization either by acquisition or by devoting time and resources to a new service offering. In larger nonprofits, it’s the responsibility of the board to establish a compensation committee as part of their fiduciary responsibilities. The duty of loyalty includes both an obligation to keep proprietary information confidential and to avoid conflicts of interest. Board members also play a key role in labor-management relations by setting the tone and the philosophy for approaching employee relations and how the organization will be positioned in the marketplace relative to similar organizations, which has a profound impact on employee turnover.
How can board members support the organization’s management team?
The board should help decide the strategic direction of the organization, while the business plan should be crafted by the management team. By conducting a SWOT analysis, which stands for strengths, weaknesses, opportunities and threats, the board can provide an outside view of the organization and help management decide where to take the organization in an effort to optimize its strengths and minimize its weaknesses. Besides having the benefit of knowing how the organization is perceived externally, board members are often the best source for new board members, and having those recommendations come from the board reduces conflict of interest concerns for management. Board members should hold management accountable for the execution of the plan, but they should not be involved in the details.
How can board members get the requisite training?
Initial training for new board members should be conducted by management, who will provide an orientation, a tour of the facility and a general overview of board duties as well as the goals and history of the organization.
Retreats offer an ideal setting to conduct in-depth board member training and to work on the strategic plan. High-functioning boards will use an outside facilitator and take the opportunity afforded by the retreat to build relationships and to set expectations of one another because regular board meetings generally aren’t conducive to this type of interface. Boards should use information from the SWOT analysis to conduct crisis management and contingency planning, which might be required to survive unanticipated changes, such as a major cut in funding. The strength of the board really shows through when they are faced with a crisis and are called upon to lead the organization through difficult times. If the board has merely been rubber stamping things and going through the motions, it won’t be effective under crisis conditions. If the board members trust one another, understand their roles and can work together as a team, they’ll be able to lead the organization through any challenge.
GREG MOSER is a partner with Procopio, Cory, Hargreaves & Savitch LLP, advising a wide variety of nonprofit organizations, including hospitals, schools, and other charitable organizations and foundations. Reach him at (619) 515-3208 or firstname.lastname@example.org.
Bruce Geier has achieved a milestone reached by few other founders in the technology industry his company has turned a profit every year for 26 consecutive years. In an industry that has been through more cycles than a dishwasher, Geier, president and CEO of Technology Integration Group, has outperformed and outlasted most of his competitors.
Although the company is classified as a minority-owned, small, disadvantaged business, it’s Geier’s opponents who may be at a disadvantage when they compete against him, mostly because of his balanced decision-making.
“I credit much of our success to our diversified business model,” Geier says. “It hasn’t always been easy. In the beginning, I was developing software, but people wanted hardware more than software, so I had to learn about hardware. When hardware margins fell, having revenue from services got us through. Over the years, we’ve offered a multitude of different technologies, and we’ve continued to evolve because we constantly have to find a way to get our solutions in front of the right audience.”
In 1981, Geier left a budding career as a tax and litigation consultant for a big eight accounting firm to risk it all in the burgeoning computer industry. As a computer science major, Geier could-n’t resist the urge to develop software in his garage when things were slow in the consulting business. He decided to pursue his strong premonition that computers would change the business world and launched the company. Since that time, TIG, which primarily provides IT solutions to the government as well as small and mid-size businesses, has grown to 19 branch offices, 325 employees and 2006 revenue of $281 million.
Here’s how Geier has conquered some of the biggest challenges facing his company to take it to new levels of success.
Create a winning plan
Success starts with a winning plan. “I think we’ve had a better business plan than our competitors,” Geier says. “It’s like an investment portfolio: You have to diversify and have a balanced approach that’s what I’ve learned.”
Geier began offering a portfolio of technology services to clients long before most of the technology industry realized that margins on traditional hardware and software products were slipping. Consulting, programming and integration services not only offered value to customers, the services provided a way to improve margins and stabilize revenue during down cycles.
“Our goal is to sell multiple solutions to one customer,” Geier says. “I don’t favor jumping on the bandwagon too early because if the technology doesn’t catch on or becomes obsolete too quickly, you will alienate your customers. I say that I prefer to be on the leading edge not the bleeding edge of technology.”
To decide what new products and services the company should offer to clients and to support his middle-ground business offering philosophy, Geier regularly devotes time to evaluating emerging technology. He meets with the company’s practice leaders each month to review new offerings. One of the outcomes from the meeting is the development of a list of new products that might interest customers, while still meeting Geier’s criteria of providing staying power for the customer’s investment in the ever-changing technology marketplace.
“I think it’s important to have interplay between all of the team members when you make your decisions about what you want to offer customers because as the CEO, you have to get the opinions of the smart people around you,” Geier says. “You can’t be an expert on everything so you must rely on others.
“If we reach consensus as a group, then we move forward; if there’s disagreement, I like to handle those discussions through one-off conversations with the dissenting practice leader. Having a lot of conflict out in the open doesn’t do anyone any good because when people are upset, they can’t focus on work. As the CEO, you can set that tone by handling issues that arise off the record.”
Next Geier validates his team’s recommendations via direct customer input. TIG hosts vendor-led seminars for customers throughout the year that feature emerging technology. Geier uses seminar enrollment as a gauge of market interest in any new technology. Taking the additional step of validating the company’s offerings through clients keeps the new technology selections on target with customer appetites, and it reinforces Geier’s main value proposition for customers he won’t recommend an unproven technology solution.
Encourage staff participation
Geier authors an annual budget and a business plan that establishes revenue goals for each type of product and service the company sells. Because of wide variances in the margins for each product and service, this type of detailed revenue planning maintains the firm’s profitability by achieving a blended margin that avoids the industry’s extremes. In addition, his plan projects a reasonable revenue growth percentage for the company each year.
Geier says that he favors measured growth as a way of keeping debt under control and reducing risk.
“I start with the VP of sales and I define the desired mix of business for the year, which gives us a blended margin for the total business portfolio,” Geier says. “From there, we transfer the desired mix of business down through the sales organization, which includes the branch managers, and then finally, we roll revenue targets down to each sales rep. This ensures that each person on the team has personal responsibility for achieving the corporate goal, and it makes it very clear what services we need to sell to be profitable.”
As reinforcement, Geier offers bonuses to managers and additional perks to the sales staff for hitting the targeted revenue goals that are specified in the business plan. For example, sales reps earn the opportunity to stay in a suite at the company’s annual president’s club achievement trip to Hawaii as an incentive for selling the right mix of business.
As a final step in reinforcing his revenue goals, Geier holds meetings each year for the firm’s sales, engineering and branch management groups, using the venue to roll out the company’s annual initiatives around business mix. The employee events actually serve dual purposes. Geier expresses his appreciation for the efforts of his team while connecting with the staff in person, and he also uses the time to get everyone behind the company business plan and the revenue goals for the year.
“As the leader, you have to achieve buy-in for your plan, and the key is that everyone has to understand their part and why you’ve made your decisions,” Geier says. “Our people can articulate our value proposition very clearly to customers, and we achieve our business plan because the staff understands it. They know that their performance is vital because they get a chance to hear the plan in person and ask questions. In addition, they are highly motivated by the incentives, which provide just one more step in assuring the results.”
Focus on retention
Geier’s success is also a result of another technology industry anomaly: His employees don’t often leave the company.
“We’ve changed our sales compensation plan only once in 26 years,” Geier says. “We haven’t lost a top sales rep in 15 years. To keep people, you’ve got to create a sense of pride within the staff, and to do that, you have to have a comfortable work environment. In some companies, people just get comfortable, and then management changes the rules by changing the comp plan. To me that’s just not a smart business decision.”
Geier says that 70 to 80 percent of the company’s total work force receives incentives through bonus plans, including the engineers and the collections staff. Allowing employees to have skin in the game also contributes to a sense of ownership throughout the company.
“I think it’s important to offer financial incentives to employees because it encourages the staff to take ownership and have some personal pride in the results,” Geier says. “You want to create a company culture that has an element of pride, and that culture will help you attract the kind of people who take pride in their work.”
Employees are invited to fun activities, like a bowling night, because it contributes toward a family atmosphere and helps people feel like owners.
“If I truly knew the secret to hiring great people, I would have retired long ago,” Geier says. “Anyone who tells you that they always make great hires is not being truthful, but I have always favored hiring a more experienced person who can step right into the position and hit the ground running. Even though we pay a premium for experience, I think the clients prefer working with someone with experience, and more experienced staff are definitely more productive when they work on projects.”
Geier also tries to find the seam between being overstaffed or understaffed when it comes to hiring decisions. That management-middle-ground hiring philosophy allows Geier to hire proactively while avoiding the burden of taking on overhead too quickly.
“I’m generally not of the mentality of ‘build it and they will come’ when it comes to hiring,” Geier says. “My mentality is more of a just-in-time approach to hiring.”
To achieve his goal, Geier establishes hiring priorities by position allowing a green light to new staff additions that can generate revenue and more careful scrutiny for additional head count in areas that represents overhead.
“I would hire any qualified sales executive at any location at any time provided they fit within our pay structure and don’t have any noncompete restrictions,” Geier says. “The same is true for certain types of engineers. That need is established by the senior management of the engineering group, and it’s often predicated by the needs of manufacturer partners or customers.
“I believe that if you make your underlings cost-substantiate any new hire, much of the decision to hire or not is pretty obvious. So what you really need is a good internal structure to evaluate their needs and justify those needs. I balance the decision by position and based upon the current utilization review by branch, especially as it relates to engineers.”
No matter what the challenge, it’s always a matter of spreading the risk whenever possible.
“Over the years, I’ve seen a lot of talented people leave the business because they didn’t spread out their risk but spread out their business,” Geier says. “When the technology bubble burst in 2001 and the hardware and software business went away, the services business pulled us through. I truly believe in a balanced portfolio, measured growth and that you have to be in the right place at the right time to achieve success.” <<
HOW TO REACH: Technology Integration Group, www.tig.com
During uncertain economic times, business owners often find that a private banker’s holistic approach to their financial needs might provide the difference between success and failure. Private bankers are most effective when they take a 360-degree view of a client’s personal and business goals before recommending customized solutions.
Most personal bankers have the ability to offer products and services that meet clients’ needs for business succession planning, tax planning, investment growth, business financing or estate planning, but that’s only part of the success equation. A personal banker with little authority or autonomy to act or your behalf might compromise the results you need. It’s important for clients to inquire not only about the availability of services, but how the financial institution is structured, before selecting a private banker.
“Some financial institutions merely use private bankers as a means to gather assets, and some bankers only look at the personal investment side of the financial equation,” says Mark Rhein, Senior Vice President of Private Banking at Fifth Third Bank (Tampa Bay). “Clients only stand to benefit from a personal banking relationship when the banker understands what you’re striving to accomplish in all areas of your life, has an intimate knowledge of how those needs are intertwined and is empowered to act on your behalf.”
Smart Business spoke with Rhein about how CEOs can achieve a competitive advantage through a private banking relationship.
What is private banking?
Private banking is a comprehensive, advisory approach to personal financial management that gives clients a single point of contact for all of their financial needs. Private bankers work closely with their clients to provide customized credit and cash management services that typically include: checking and money market accounts, certificates of deposit, lines of credit, mortgages, credit cards, as well as investment management for stock and bond portfolios. They also act as the liaison between clients and the other specialized wealth management service within the bank, such as trust and estate-planning services.
What business advantages does a private banking relationship offer to CEOs?
Private banking should offer you quick and easy access to a local expert who can use his or her intimate knowledge of what you’re striving to accomplish in your business to tailor a comprehensive customized solution. For example, let’s say you want to launch a company expansion into Hong Kong. Your banker must comply with all banking regulations regarding the transfer of funds in and out of the country. Your private banker should be familiar with your sources of income and the regulatory environment surrounding wire transfers to and from Hong Kong and should be able to expedite the flow of international transactions. Through this type of service, CEOs can expand their business more quickly, and having a single contact for communications and accountability gives CEOs peace of mind.
Why does the hierarchy and structure of the banking institution matter?
When the bank utilizes a locally based operating model, the personal banker has much more autonomy to act on behalf of his clients and use his knowledge of the local marketplace to make customized recommendations. In fact, at Fifth Third Bank, while we use the same global products as other institutions, we just tailor them so they have a local feel. Having an established, trusted local relationship often means shorter response times, faster solutions and greater flexibility in meeting the client’s needs.
Why is a holistic view to account management beneficial?
Individuals who qualify for private banking are multidimensional people, so they need multidimensional solutions. For example, let’s say you are planning to retire in the next few years and perhaps you’re trying to save for your children’s or grandchildren’s educations. Given those objectives, you’ll need to create an effective business succession plan that will pass your company along to your children, while still providing a retirement income for you and your spouse. Achieving those goals might require greater asset protection, more insurance or the ability to save a greater portion of your income through tax reduction strategies.
What are the financial qualifications for personal banking?
Most individuals that qualify for private banking have a minimum of $350,000 to $400,000 in annual household income and $1 million in investment assets. There’s no fee for using the service and clients often benefit from preferred rates on savings and lending programs. Of course, one of the main benefits is the personalized service. At Fifth Third Bank, our personal bankers even make house calls on weekends and evenings, so we can accommodate the busy schedule and needs of our local CEOs.
MARK RHEIN is Senior Vice President of Private Banking for Fifth Third Bank (Tampa Bay). Reach him at email@example.com or (813) 306-2497.
While appropriate funding and growth potential are critical factors for a successful acquisition or merger, the people who come along as part of the acquisition could be one of the most important assets. Companies don’t generate profits, people do, and they often hold the key to strategic customer relationships and possess institutional knowledge that just can’t be captured in a computer program.
For CEOs, an important part of the due diligence process lies in assessing the cultural fit between the two organizations and the similarity in corporate goals between the two groups of employees. Without employee retention, the merger or acquisition may never live up to the profit potential that was promised on paper.
“You can’t just look at the assets because, at the end of the M&A process, the assets won’t get up and walk out the door, but sometimes people do,” says Wayne Pinnell, managing partner with Haskell & White LLP. “It’s critical for the CEO of the acquiring firm to spend time communicating with key personnel and be appropriately transparent in his or her communications throughout the M&A process in order to minimize turnover.”
Smart Business spoke with Pinnell about how CEOs can evaluate the intangible match between companies when considering potential mergers and acquisitions and how to effectively manage the communication process with employees and other constituents.
How can CEOs evaluate the prospective cultural match between two companies?
First, acquiring CEOs should spend time with the employees in the firm being acquired to see how they interact. You want to observe how the employees communicate with one another and the pace of the work environment to see if you think those employees will blend with your company’s work force. Each company develops its own culture; people are attracted to jobs where they feel comfortable and they leave when they are uncomfortable.
Second, review the prospective company’s policies and procedures to get a deeper understanding of the operating philosophy.
For example, if the company allows its employees a great deal of autonomy in decision-making, it will be reflected in the way the policies and procedures are written and the way decisions are made. Conversely, companies with a great deal of structure will have lots of rules and binders containing forms and approval procedures. Employees who like structure will be lost without it, and employees who relish autonomy don’t like being told what to do.
How can CEOs assess which employees must be retained?
Spend time with employees in one-on-one meetings and quickly identify any personnel who hold key customer relationships or institutional knowledge that must be retained. Also, assess if the top executives in the two firms can work together, because competing egos can get in the way. You can address some of the ego issues through the M&A planning process, but you need to take those challenges into account before proceeding. Last, don’t assume that all the important people hold top jobs in the organization. The key knowledge holders or customer relationship managers often work throughout the organization, from customer service to accounts receivable, so don’t overlook them when you’re deciding who must be retained as part of your assimilation planning process.
What are the communication best practices for executing successful mergers and acquisitions?
CEOs should communicate frequently, and be sure to include as many specifics as possible about the pending transaction throughout the entire M&A process. Remember to communicate internally with employees and externally with customers and suppliers because it’s important to communicate with all constituents. People are always concerned about change and, in the absence of information, those fears will grow.
Whether you’re talking about executive egos or valuable employees, proactive out-reach can help the acquiring company cultivate champions for the acquisition among key managers and executives within the candidate company. Having leaders on board with the idea will ensure a smooth assimilation because others will naturally follow.
How can my CPA assist with the human side of mergers and acquisitions?
Your CPA should have experience with mergers and acquisitions and should be able to give you advice and transition plan assistance. Having a comprehensive assimilation plan that covers sales and marketing, operations, finance, R&D, customer relations and human resources is vital. Within the human resources portion of the plan, you should address compensation, benefits, titles, training, retirement plans, bonus structures and other people-related issues to assure retention through creation of a win-win situation. Your accountant can assist by suggesting ideas that have been successful for other CEOs facing similar challenges and by running financial models comparing comp and benefit plans. Employees who feel valued throughout the M&A process are more likely to stay on and contribute to the newly combined organization, and that’s good news for the bottom line.
WAYNE PINNELL is the managing partner for Haskell & White LLP. Reach him at firstname.lastname@example.org or (949) 450-6314.
CEOs face monumental challenges when navigating issues surrounding their aging work force. In order to avoid the predicted brain drain caused by retiring baby boomers, many CEOs are orchestrating knowledge transfers between retiring employees and less-experienced workers, while other executives face retention issues with younger employees, as middle-aged managers stay longer and limit opportunities for up-and-comers. The best solution for CEOs is to control when workers retire.
As it stands today, the baby boomers are in control of their retirement dates and many aged 55 to 65 are choosing to stay on the job longer because they just can’t afford to leave or are anticipating limited access to affordable medical insurance. The more employers step in to help solve some of the problems facing prospective early retirees, the more they’ll be able to control their exodus.
“There are many issues facing employees who might like to retire early,” says Jon Joss, senior retirement consultant with Watson Wyatt Worldwide, San Francisco. “Without 401(k) oversight, retirees are forced to manage their own asset portfolios and the volatility of the financial markets doesn’t portend enough income stability for prospective retirees. If CEOs want to get a handle on the issues and control the timing of employee retirements, they really need to provide more assistance to potential early retirees.”
Smart Business spoke with Joss about what CEOs can do to support early retirees and exercise better control over the egress of middle-aged workers.
How can employers provide more stable retirement income to early retirees?
In order to help employees retire early, employers should consider offering annuity options under their 401(k) or other defined contribution plans. Over the past few years, financial services firms have introduced insurance products to help fill the hole left by the winding down of traditional plans, where vested participants are promised a lifetime monthly benefit at retirement. The growth of 401(k) and other defined contribution plans place the investment management and draw down burden on employees as retirees receive a lump-sum benefit when they leave. Consider offering employees the choice of several annuity plans and the option to invest all or part of their defined contribution retirement assets into the program. Because employees will feel more secure receiving a guaranteed income and relieved from the burden of managing their investment portfolio, they may retire earlier.
Offering annuities as an option can also keep scarce knowledge workers on the job longer or assist with retaining younger workers who frequently say they want guaranteed retirement benefits. By leveraging their purchasing power, employers may be able to offer retirees better annuity programs than those they could purchase on their own. The Pension Protection Act has provided some good guidance around the selection and protection to employers for offering annuities, making employers feel more comfortable.
Should employers offer planning assistance to prospective retirees?
Employers can provide modeling tools that will help prospective retirees determine how much money they’ll need to retire and their projected income levels resulting from a variety of portfolio investment scenarios. Employers can also continue to make those tools and investment advisory services available to employees once they retire. This type of assistance provides reassurance to prospective retirees, because navigating the volatile investment markets can be treacherous enough.
How can employers help employees obtain medical coverage before they reach the age for Medicare eligibility?
There are several options that employers can consider to help prospective early retirees obtain affordable health coverage. Under one strategy, the employer can create a defined contribution type plan used to pay health care premiums for the employee based upon a length of service formula. For example, let’s say that an employee has 20 years of service, the employer can allocate $1,000 per service year, or $20,000, and place that money in a separate account, or leave it unfunded and use it to pay for medical premiums. Or the employer can place the funds in a Health Savings Account that the employee can use to meet deductibles and uninsured expenses. Another option is to make the company’s group health coverage available to early retirees.
By leveraging their group buying power, employers can offer retirees more affordable, guaranteed coverage with no eligibility requirements. Employers can decide if they want to contribute all or part of the premiums, and some of the cost could even be covered by the defined contribution plan allocation. There’s a great deal of flexibility available to employers in meeting this need.
What other health care assistance might early retirees need?
CEOs should consider maintaining the claims administration for early retirees and, if they decide to extend group health coverage, offer HMO or PPO options, which will help retirees manage their costs and achieve greater financial security. The more financially secure employees feel, the sooner they’ll retire.
JON JOSS is a senior retirement consultant with Watson Wyatt Worldwide, San Francisco. Reach him at (415) 733-4466 or email@example.com.
When a major customer files for bankruptcy, you may think that the receivables you have already collected are safe in the bank. That is, until you are confronted by a demand letter and ensuing litigation from counsel for a trustee, debtor in possession or unsecured creditors’ committee seeking repayment of all transfers received from your customer within the 90 days prior to the bankruptcy petition date known as the “preference period.” Your business is then faced with the prospect of not only having to disgorge what was received but also with the costs of defending the claim.
“While it is important for CEOs to act decisively once such a claim is made, because of prior inattention to the receivable, many times it is simply too late to significantly alter the outcome,” says Jeffrey Isaacs, a partner within the Finance, Restructuring & Bankruptcy practice at Procopio, Cory, Hargreaves & Savitch LLP.
Smart Business spoke with Isaacs about how CEOs should handle adversary proceedings in bankruptcy court and some of the proactive measures that are helpful in defending bankruptcy-related litigation.
What are bankruptcy avoidance powers?
As a CEO, you may not be aware that some of the companies you are dealing with are on the verge of bankruptcy and, should they file, you may be subject to litigation based on what are known as ‘the trustee’s avoiding powers.’ Avoiding powers are statutory rights provided to a bankruptcy trustee or debtor in possession in a Chapter 11 case to recover certain transfers of property such as preferences, transfers in fraud of creditors or avoidance of certain liens created before the commencement of a bankruptcy case.
Even if your debt is secured by a lien, it may be divided into a secured claim, to the extent of the value of the collateral, and an unse-cured claim equal to the remainder of the total pre-petition debt. Generally, a secured claim must be perfected under applicable state law to be treated as a secured claim. In this regard, a perfection problem that is corrected at the eleventh hour is often treated as an avoidable preference.
What are adversary proceedings in bankruptcy court?
Bankruptcy litigation, known as ‘adversary proceedings,’ is litigation conducted pursuant to the specific Federal Rules of Bankruptcy Procedure. One unique feature of the litigation is that personal jurisdiction may be easily acquired through service by mail. Usually, bankruptcy adversary proceedings will be commenced in the district where the underlying bankruptcy case is pending, which may have no relationship to where the facts giving rise to the claim occurred and is therefore convenient only to the trustee or debtor in possession and its counsel.
Because of this, from a pure tactical standpoint, the deck is decidedly stacked in favor of the trustee or debtor in possession. Also, fees for prosecuting the preference action are normally borne by the bankruptcy estate, whereas fees in defending a preference action are borne solely by the creditor alleged to have received the avoidable transfer.
What immediate steps should CEOs take if their company is sued?
Because there is normally only 30 days to respond to an avoidance action once it is filed, it is important for the CEO to act decisively and receive advice as to whatever options are available in defending the action, such as abstention or change of venue.
Do CEOs need local or specialized representation?
If you end up defending the action in a distant jurisdiction, it's often important to hire local counsel because the judges and attorneys who work bankruptcy cases in a given judicial district tend to have very collegial relationships, so this will level the playing field to some extent. However, the creditor's general counsel may also participate on a pro hac vice basis to avoid duplication of effort and reduce defense costs.
How can CEOs evaluate the costs of defense in determining their options?
Since your company will be responsible for the costs of defense in any event, it is important to weigh the projected expenses of defense and the potential outcome. CEOs do not want to find themselves in a position where the already incurred cost of defense becomes the primary factor in whether the litigation should go forward. Experienced bankruptcy counsel can provide realistic estimates that can help with this risk/benefit analysis at an early stage in the case.
What proactive steps can be taken to ensure success in bankruptcy-related litigation?
It is important to monitor how your customers are performing in regard to payment of your accounts receivable and how much credit you are extending to them. If it appears that a customer is having financial difficulty and is falling behind in payment, decisions as to how any monies received against those receivables is applied may be vital to the ability to defend a subsequent preference claim.
Since we may be headed toward an economic downturn, it’s likely that these issues will arise in greater frequency.
JEFFREY ISAACS is a partner with the Finance, Restructuring & Bankruptcy practice at Procopio, Cory, Hargreaves & Savitch LLP. Reach him at (619) 515-3213 or firstname.lastname@example.org.
Sarbanes-Oxley (SOX) compliance rigors have affected the exit strategy landscape for CEOs and investors of privately funded and venture-backed companies. While the initial public offering (IPO) is still the outcome desired by many who toil to build a company, an acquisition may well be the exit event of choice, given the current compliance requirements and IPO climate.
During the boom era in the late '90s, some venture-funded technology companies went public without posting significant sales dollars to their ledgers. Today, companies must generally post above-average performance results or have a very compelling story to garner interest from underwriters.
“If your company is doing reasonably well but not great, then chances are, as a CEO, you should think about how ready you are for an acquisition, because it’s more likely an acquisition will be your exit strategy,” says Paul Johnson, partner with Procopio, Cory, Hargreaves & Savitch LLP.
Smart Business spoke with Johnson about both exit strategies and what CEOs should consider when evaluating their options and preparing for the event.
What are the IPO advantages and disadvantages that CEOs should consider?
During the IPO, there’s the chance that the stock held by the executive will increase in value, and holding the shares over time creates a residual incentive that engenders both a sense of accomplishment and a financial reward for the CEO. This can be especially gratifying for founders who have nurtured the company from conception. However, another consideration is that regulations usually only permit executives to sell their stock over the course of time, and there’s no guarantee that the shares will appreciate. There’s greater access to public equity markets after an IPO, so companies that require additional funding to reach the next level of development may find more readily available financial resources after going public.
What are the acquisition advantages and disadvantages?
Unlike the IPO, where executives may usually only sell their stock over time, depending upon how it’s structured, an acquisition event can offer immediate cash gratification for investors and executives. Also because the executive's entire stock position is usually sold at the time of the event, without a new option or a stock grant from the acquiring company, there’s no future upside or downside. While taking stock in the new entity rather than cash is sometimes an option, and doing so preserves some of the upside potential for the executive, the former company generally becomes a smaller part of a larger whole. Accepting the acquiring company’s stock is a change in the risk proposition for executives since it’s likely that the acquiring company will be run by others.
Are there other advantages driving the acquisition exit trend?
Perhaps one of the main attractions to the sale event is that, under most circumstances, the selling executive will not have to directly face the relatively new rigors of public company reporting in the post-SOX era. Examples of the burdens of being a public company include the pre-SOX obligations of filing 10-Qs every quarter and 10-Ks every year, preparing and filing annual proxy statements and filing 8-Ks. Sarbanes-Oxley has added to this list CEO and CFO certification of 10-Qs and 10-Ks, which comes with potential criminal liability for misstatements, a significantly accelerated time frame for 8-K filing, an expanded list of 8-K-triggering events as well as SOX 404 attestation by auditors and management as to the company’s internal controls. Few entrepreneurs really want to deal with all of the administrative headaches that public company executives must face.
What else should be considered when choosing between an acquisition and an IPO?
Certainly both processes are long and arduous, and the due diligence process is more thorough than many imagine, so executives should get professional advice and prepare for the event by cleaning up any intellectual property and stock ownership issues. Executives should also consider the tax consequences resulting from each event. Because an acquisition for cash is a liquidity event, it usually results in immediate tax consequences, whereas the IPO itself does not have tax consequences on the stockholder until he or she sells.
Should CEOs consider their future goals when selecting an exit strategy?
An important consideration in choosing an exit strategy is the CEO’s future plans. In theory, founders and executives who choose to stay with the company should have more control following an IPO. Although they still must report to a board and please public shareholders every quarter, any retained executives won’t have to report up through an additional layer of management, which becomes the most likely scenario if the company is acquired.
For certain execs, becoming part of a larger organization offers advantages. If they want to continue to be involved with the organization because they believe that it can truly benefit from being acquired, this is often an option. But, the acquisition will change their focus and their ability to control the outcome. Knowing yourself and your goals as well as contemplating the notion of reporting to others are important considerations when evaluating your options. I’ve observed that many entrepreneurs start another venture after they’ve cashed out. Launching a new company just seems to be in their blood, but dealing with SOX compliance isn’t very appealing.
PAUL JOHNSON is a partner with Procopio, Cory, Hargreaves & Savitch LLP. Reach him at email@example.com or (619) 525-3866.
The financial evidence supporting the return on investment for wellness programs is growing. Recent studies show that the medical care costs for people with chronic diseases account for more than 75 percent of the nation’s total medical care costs. In addition to incurring the direct costs of higher premiums, employers lose more than 39 million employee workdays each year just due to obesity-related illnesses. For example, according to the Centers for Disease Control and Prevention, people with diabetes lose 8.3 days per year from work, accounting for 14 million disability days compared to 1.7 days for people without diabetes.
Perhaps the most impressive statistic of all is the ROI achieved by employers who invest in employee wellness programs. According to Michael Pondrom, employee benefits specialist with Westland Insurance Brokers, on average, employers are saving between $1.50 to almost $5 in premiums for every dollar they invest in these programs. The key to actually realizing the savings is getting employees to act.
“True employee engagement results from increased focus on communication and, perhaps more importantly, incentives,” Pondrom says. “Since half of Fortune 500 companies offer wellness programs, it’s perceived to be a luxury that only large employers can afford, but fortunately, it’s possible for mid-sized employers to also offer this benefit without significant expense by outsourcing the design and administration of the program to an insurance broker.”
Smart Business spoke with Pondrom about how CEOs can achieve a next-level employee wellness program without the associated costs.
What evidence exists that CEOs will achieve ROI by investing in employee wellness programs?
For starters, more than 80 percent of chronic disease is preventable. So if employers can help to prevent the disease, they prevent most of the related direct, or hard, and indirect, or soft, costs. As an example, all of the research I’ve read indicates that an employee who controls his or her diabetes costs an employer only $24 in monthly health care premiums versus $115 in premiums for diabetic employees who don’t control the disease.
What constitutes a next-level employee wellness program?
Taking your wellness program to the next level of engagement is really a three-step process that can be facilitated by your insurance broker: Identify the risks, educate your employees and, most importantly, offer incentives.
The first step is to review the potential risks posed by the specific demographics of your employees. The most efficient and accurate way to accomplish this would be to first review your company’s claims data for clues. As an example, in reviewing the claims data for one of our clients, it became evident that they had an above-average incidence rate for cardiovascular-related claims among employees. As a result of the findings, we scheduled an on-site health fair for the employees, offering free screenings for early signs of cardiovascular disease through a specialized cardio-assessment firm. Many employees were unaware that they were at risk for cardio disease, and the screenings provided them with both the information and the incentive to take action and to make lifestyle changes.
Broker-coordinated health fairs are also an excellent avenue to reach out to those employees already diagnosed with a disease who just need information on how to enroll in a program.
How does employee education play a role in achieving engagement?
Education is an ongoing and critical element in any successful wellness program. There are numerous sources of free information that help employers achieve awareness among employees. The goal is not only to educate your employees on what programs are available, but also on how to use them and the advantages of using them. Your insurance carrier and broker can provide brochures, posters, online information sources, payroll stuffers, newsletters and nurse hot lines. Most of the materials are free; all you have to do is request them from your broker.
How do incentives drive employee engagement?
It’s vital that employers offer no-cost or low-cost incentives to incite employee lifestyle changes. Some employers are providing subsidized on-site healthy lunch programs or discounted gym memberships. I’ve seen very effective programs that pay employees as little as $1 for each pound of weight they lose. Like any incentive program, the plan must be well communicated and reinforced in order for it to work.
Which employee wellness program elements can be outsourced and what does outsourcing cost?
Your broker can implement and administer an employee wellness program that will not only provide all of the necessary employee education and on-site health fairs, but brokers can design, implement and coordinate low-cost or no-cost employee recognition and incentive plans free of charge. An employee walking club is an example of a zero-cost program that your broker can organize for you; low-cost programs that engender employee engagement include bonuses for weight loss and personalized coaching programs that average $4 per month per employee. All employers can impact their bottom line by driving employee engagement toward wellness, and it doesn’t require any additional internal staff time when they outsource.
MICHAEL PONDROM is an employee benefits specialist at Westland Insurance Brokers. Reach him at (619) 641-3241 or firstname.lastname@example.org.
Should owners of closely held businesses plan for the ultimate sale of their business from the outset or as the sale date appears on the horizon? The answer: They should do both, says Peter G. Dolbee, corporate tax partner with Haskell & White LLP.
Dolbee says that both short-term and long-range planning are vital when it comes to achieving the optimal return from ownership and the subsequent sale of a closely held business. Planning should be an ongoing owner activity that starts before the business is launched and ends only after the business is sold and the final check is cashed. Along the way, there are strategies and supporting activities that can help owners achieve the maximum return on their business investment.
“The problem is that owners generally think about short-term tax-savings opportunities without considering the long-term consequences,” says Dolbee. “Effective exit strategies are conceived from the outset, and they should be considered when the business is first formed. Very few owners do this well. I have seen sales transactions where we structured the sales strategy about 12 years before the business was sold, and it resulted in millions in tax benefits for the owners.”
Smart Business talked to Dolbee about how owners can achieve maximum return by conducting short-range and long-term planning around the sale of their business.
How does the initial selection of the business entity impact return when the business is sold?
It’s important to think long-term when planning for the sale of your business, and an important consideration when selecting the appropriate form of business entity is how long you intend to keep the business. Many owners think that if you’re only going to keep the business short-term, it’s best to structure as a C corporation, but that can be a bad strategy for closely held corporations because a sale or liquidation of the assets by a C corporation results in double taxation. Structuring as an S corporation or an LLC is a popular alternative because the tax consequences resulting from the sale of the business are more favorable than those resulting under a C entity. However, C corporations that convert to S status within 10 years of the sale may be subject to built-in tax gains at the highest corporate rate.
Also, don’t be ambiguous by structuring one component of your operations as a C and another as an S corporation. I’ve seen this before, and it makes no sense because you may not be getting the advantages of either type of entity. Last, keep your personal and real estate assets out of the business. If you wish to purchase such assets, do so in your own name and then lease them back to the company. Otherwise, when the business is sold, any assets will be taxed based upon their appreciated value.
What type of presale planning benefits business owners?
First, consider if you want to transfer the wealth resulting from the sale of your business to your heirs. Valuations of the business made in advance of the sale can be substantially less than at the time of the actual deal, and waiting until the sale is imminent imposes negative tax consequences. Anticipation and planning are vital, because when the gift is made well in advance of the sale, you can employ estate-planning techniques allowing you to transfer substantial value to your heirs at reduced gift-tax levels, and valuation principals decrease the amount of the gift.
Second, consider transferring a minority interest in your business to charity before the transaction to get the full benefit of the deduction without the taxable gain. You don’t want to make a gift with after-tax dollars. Third, consider transferring ownership to your children before the transaction, which can save substantial taxes resulting from the sale.
What records are needed to complete the transaction?
Once the deal starts, things happen quickly, and the better organized the seller is, the more likely the deal is to close. Get a list of what records you need to keep and how long you need to keep them before you launch your business. Organize the files for easy access because recreating documentation is costly and delays can kill the deal.
Also, document all employee compensation agreements in writing. There can be substantial confusion as to what was promised once the deal is imminent, and having properly executed contracts in place will eliminate misunderstandings and ease the transaction
Where should owners go for advice?
Don’t assume that your traditional advisers are the best ones to turn to when you need advice about selling your business. You want to select lawyers and accountants who specialize in mergers and acquisitions, and they should know the latest techniques. To select competent advisers, consider asking these questions:
- Should I do a stock sale or asset sale?
- Do you know what constitutes typical representations and warranties, indemnities, and sale provisions?
- Do you know what a basket, cap, claw-back and antichurning mean?
Asking screening questions like these will assure business owners that they are selecting the right team when it comes time to sell their company.
PETER G. DOLBEE is a corporate tax partner with Haskell & White LLP. Reach him at email@example.com or (949) 450-6307.