Jayne Gest

Saturday, 01 September 2012 13:40

Five things to know about executive compensation

Well-drafted executive compensation programs aren’t just used to recruit and retain top-level leadership to your company. Public and private companies can tailor executive pay packages to encourage executives to achieve certain goals.

“We can put strings on short-term and long-term benefits to drive executive behavior, and that’s one of the things that’s really coming to the forefront now,” says Ted R. Ginsburg, CPA, JD, a principal with Skoda Minotti.

Smart Business spoke with Ginsburg about leveraging executive compensation.

What are the key components of an executive compensation program?

In general, an executive compensation program consists of four key parts. These are base pay, annual bonus, long-term incentives and perquisites, which could include car allowances, country club memberships, executive physical programs, security services and use of the company airplane. Because of recent economic events and more scrutiny by shareholders, perks are not such a big part of the package anymore; employers are providing higher base pay and instructing executives to acquire the perks on their own.

An optional component is a sign-on and/or retention bonus. A sign-on bonus is appropriate when trying to hire an executive from another company who would lose a bonus if he or she left. The retention bonus — a promise to stay through a certain date or event in order to receive a bonus — is used when you have incurred hard times and worry the executive is going to leave.

How does executive compensation differ in a public and private company?

There are some significant differences, and oftentimes, private companies are at an inherent disadvantage. A public company normally provides a long-term incentive using either a stock option or restricted stock. A stock option allows executives to purchase shares at a stated price while he or she remains employed; a restricted stock program gives executives a share of stock outright after meeting certain targets. Stock doesn’t drain cash flow, often doesn’t immediately reduce earnings and can have favorable tax treatment for the company and the recipient. In a publicly traded company setting, the recipient can usually turn around and resell the shares on the open market immediately. The total pay package of chief executives of major public Cleveland corporations may comprise 60 to 70 percent in company shares.

Many executives in private companies don’t want to receive stock unless they already own a substantial company stake. Executives would need to pay income tax on the stock and can’t sell part of the shares to cover the amount. Also, executives usually must sell the stock back when they leave in exchange for a cash payment made over time. Furthermore, private company owners might not share financial information with executives so the value of the ownership interest is unclear.

What can a private company offer someone from a public company instead of stock options?

Some private companies award only base pay and an annual bonus, but attracting a senior-level executive from a public company is difficult without a long-term incentive program. There are programs that provide a cash payment based on company performance and the current company value over a number of years, making executives feel as if money has been put aside for their future. Two types of long-term incentive programs are:

  • Phantom stock — an owner gives executives a check representing the full value of a number of shares of stock when they leave.

  • Stock appreciation rights — an owner gives executives a check when they leave, which equals the number of rights given to them multiplied by the difference between the value of the stock when it was awarded and when they leave. Mimicking a stock option, it rewards executives for increasing the value of the company.

These programs often have a vesting schedule stating an executive leaving before a certain time does not receive the entire benefit.

Another methodology is a change of control payment, where an owner planning to sell or transfer the business gives the executive a check based on the sale price or value of the company at the time ownership is transferred.

Some larger private companies with the necessary liquidity also use long-term cash incentive programs. Over a period of time, if revenue is up or costs are down, cash is put aside for when the executive leaves.

Why do long-term incentive programs help an employer?

These programs act as retention devices. They focus employees on long-term performance rather than maximizing annual bonuses and they don’t drain cash immediately as they are deferred payment obligations.

Long-term incentive programs are familiar to public company executives. If a private business owner offers to pay to replace the value of stock options lost because the executive left for a private company, the recruited public executive might ask what he or she is going to get for subsequent years.

Finally, they allow for a trial period, giving  the option of cutting him or her loose early.

Why are employers moving away from discretionary annual bonuses?

With discretionary bonuses, private company executives walk away without knowing what they did to earn it and how to repeat it. Many businesses now give bonuses based on company performance.

Well-drafted programs have easily measured goals that drive behavior and set annual priorities. Long-term, multiyear program goals relate to financial performance and other forward-thinking items, such as establishing a new geographic market or bringing a certain number of products to market. If the goals aren’t met but executives put in the effort, ownership can always give discretionary bonuses. This type of program helps employers manage the executive’s expectations and creates transparent working conditions.


Ted R. Ginsburg, CPA, JD, is a principal with Skoda Minotti. Reach him at (440) 449-6800 or tginsburg@skodaminotti.com.

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Recently, a company with 55 locations — a good solid credit tenant — was looking for space in Northeast Ohio. There were three potential locations, and in two of the cases, the landlord was not willing to spend money on tenant improvements. Therefore, the owner of the third property got the deal.

“Oftentimes, we see tenants and landlords butting heads on improvements, but really, at the end of the day, most deals get done with some sort of compromise between the parties,” says George J. Pofok, CCIM, SIOR, senior vice president at CRESCO Real Estate. “On the other hand, there also are times when landlords or tenants will kill the deal and decide financially it’s not worth pursuing.”

Smart Business spoke with Pofok about how tenant improvements are used as a negotiating tool for both landlords and tenants.

What types of tenant improvements are typically made and why?

From an industrial perspective, the typical tenant improvements are the movement of a wall or two or replacing paint and carpet, as these are things landlords have been conditioned to take care of. A couple of other considerations could be replacing any stained or damaged ceiling tiles and making sure all mechanicals are delivered in good working order. These kinds of improvements are usually done because they are low-cost items that are easy to complete and make a big impact. For instance, if you have a manufacturing operation, oftentimes guys in the shop walk over the carpet with their oily boots, which tends to wear it out quicker than it really should.

What is the difference between capital and tenant improvements?

Capital improvements are similar in nature to tenant improvements but usually are bigger building-type improvements such as replacing a roof, repaving a parking lot, or upgrading the heating and air conditioning system. Tenant improvements are often made to the interior and are more cosmetic. For example, there may be 10 private offices and the tenant moving in may only need five and an open bullpen area. An energy efficiency improvement might be replacing lighting fixtures, but if you’re going to waterless urinals, as an example, those are more capital intensive and it’s an added asset, in most people’s eyes, for the building rather than the tenant.

How should tenants negotiate to ensure the best rates on industrial leases?

If you’re an existing tenant, you have more flexibility because you have a past history with the landlord. Since being there, the roof is that much older, the parking lot is that much older and that means more leverage. When you’re a new tenant coming in, there’s less flexibility, especially for capital-intensive improvements. This, however, can depend on the credit of the tenants; obviously if you’re a Fortune 100 company the landlord knows your check is going to be good.

As a tenant, you should:

  • Start the process early on. When you’re touring a property, take careful note of what the space looks like and have all your needs ready upfront first versus having to go back to a landlord again and again.

  • Prioritize so you know what you’re willing to give up. For example, you might want carpet changed in all the offices, to add a couple of additional private offices and have the warehouse painted white. Maybe painting the warehouse isn’t as critical to you, but the other two items are; then one of them can be a gift back to the landlord to get what you really want.

  • Know cost estimates of what you’re requesting. If you’re going to ask for too much, then the landlord may take a tougher stance from the very get-go.

Another tenant tool is to pay for improvement expenses upfront and have the landlord amortize it via free rent or reduce the base rent.

It’s important to be fair and reasonable as you’re negotiating because landlords want to feel that they get a victory. It can be something small, but as long as they feel like they won part of the battle, then they will be more receptive to working with you.

How are the current economy and market influencing negotiations?

With landlords still hungry for tenants, they want to show to their lender a higher base rate but could still spend money to keep the tenant happy with free rent or additional dollars for miscellaneous improvements. Therefore, if your landlord wants to keep a higher base rate, you can typically ask for more improvements.

Despite this, tenants need to be aware of how the market is starting to change. As manufacturing took a hit over the past few years, landlords needed to be creative to backfill spaces that hit the market as a result of the recession. Now, the market is getting to a point where it has recovered and certain product types are more difficult to find. It’s been a tenant market, but now it’s just as favorable to the landlord.

The vacancy rate has decreased significantly. Right now, it is hovering around 8.3 percent, which is extremely healthy for the overall Northeast Ohio/Cleveland market. A year ago, the vacancy rate was 9.6 percent.

Leasing rates are not changing yet. Historically, they have remained very stable and consistent. The hope is as the vacancy rate declines, property owners will start seeing a slight increase in the flat values. This situation is semi-unique to the Cleveland market. When everyone had the big boom, our boom in the Cleveland market wasn’t significant so we don’t have as far to fall. The base rates are within 5 to 10 cents of where they have been over past five years.


George J. Pofok, CCIM, SIOR, is a senior vice president at CRESCO Real Estate. Reach him at (216) 525-1469 or gpofok@crescorealestate.com.

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Saturday, 01 September 2012 17:18

How to guard against cyber security risks

The Division of Corporation Finance, a part of the Securities and Exchange Commission, has issued guidance on disclosure obligations related to cyber security risks and incidents. And although public companies aren’t yet required to disclose this information to shareholders, it’s just a matter of time, says Brittany Teare, IT advisory manager with Weaver.

“Right now, this is just guidance in the best interest for your shareholders, but that will likely change. It could become a requirement, probably sooner rather than later,” says Teare.

Just as the Senate headed for its August recess, efforts were made to pass cyber legislation. Although the bill didn’t pass, more regulation surrounding cyber risks and security is certainly coming.

Smart Business spoke with Teare about what the guidance entails and how businesses can measure and guard against cyber risks.

Have the SEC reporting requirements for cyber security changed with this guidance?

The new guidance takes the existing requirements that public companies follow and expands upon them. There’s no mandatory piece yet that results in a direct impact on a company if it doesn’t disclose information on cyber incidents.

Basically, the guidance states that if cyber security risks and cyber incidents have a material effect on your shareholders — if it could affect how financial information is reported — you have to report them.

How can you tell when cyber security risks are going to materially impact your company?

The guidance addresses some of the possible risks and whether they should be voluntarily reported to shareholders. If you don’t have cyber security controls around your key financial systems, for example, then the way you record or report your data can be easily manipulated or altered. Even if a cyber breach has not yet occurred, it is very likely.

Cyber security itself is a gray area. Employers typically know that network and perimeter security, access and change controls should be in place, but executives may not consider disclosing vulnerabilities. CEOs and CFOs are used to looking at the balance sheet and seeing line items for hardware and other things they can touch. It can be challenging to consider the likelihood and risk that the organization could be breached and the ways it could happen. Addressing weaknesses is something that companies need to continue to do.

What is your advice to CEOs about quantifying data and seeing vulnerabilities?

A starting point is to designate a person or group of people responsible for cyber security. These people should not only understand where the SEC is at and where requirements are potentially heading with this guidance, but should also identify risks to the specific organization.

There is a central entry point in any network, but key people need to know where an attacker will head and what the most sensitive data is. If an attacker can get to the most sensitive data in a network, this could add up to a huge loss. If the company does not store much of this type of information, then an attack could involve a company’s reputation, which is much more difficult to value.

Another challenge is improving communication from the CIO or IT manager. Often, IT will say, ‘We need X dollars for new equipment, applications and hardware that are going to help make our organization more secure.’ It’s usually a considerable amount of money and can be millions of dollars in larger organizations. When management hears that number, they want to know what the return on that investment is going to be. IT typically struggles with quantifying that return.

A CIO needs to be able to tell other executives, ‘If this firewall, application or system is not installed, a breach would cost us X dollars, or the company could lose X dollars per day,’ for example. Not everything can be quantified, such as a company’s reputation, but this gives CIOs a place to start.

Is cyber security a big factor for investors?

Yes, and it is becoming more so as the public realizes the prevalence of cyber attacks. Shareholders and employers alike are justifiably concerned about this because some of the most secure companies in the world have been breached in the recent past. For example, RSA, which provides security management solutions such as strong two-factor authentication for many well-known organizations, was recently breached. If a large company that specializes in security can be breached, then small and mid-market businesses are susceptible.

What are some steps businesses should take to protect their data and reputation?

There are some key, high-level steps that companies should consider:

  • Take inventory of the data systems and gain an understanding of where critical data is located. Then, work to ensure that there is an appropriate amount of security on those areas.

  • Use complex, strong passwords to help protect the network, systems and data, and regularly change them. Have the system lock out users after a certain number of failed attempts and log all such activity.

  • Most important, heavily monitor the networks and all systems. Check who is logging in and from where, who is successfully entering and who is failing. Then set a baseline to understand any abnormalities.

  • Use the principle of least privilege, especially for critical accounts and functions. This ensures that no single employee has all access; instead, access is tailored to the job function. If there is a breach, it prevents those accounts from being abused for something they shouldn’t be used for in the first place.

These simple steps are often overlooked by many companies. There is much more that companies can do, but first take small steps to implement key, basic controls. Then, if a breach occurs, the business can more easily identify what and how it happened.

Brittany Teare is an IT advisory manager with Weaver. Reach her at (972) 448-9299 or brittany.teare@weaverllp.com.

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Is there a pipeline in your investment future? Master limited partnerships (MLPs) are a type of publicly traded holding structure employed widely in the natural resources energy infrastructure space, which includes pipelines, storage facilities and anything in the transportation chain, from the wellhead to the market consumer.

“Yield-starved investors are dying for ideas, so here’s an idea of a niche asset class that has high current income, growth potential and some tax-deferred characteristics,” says John Micklitsch, CFA, director of wealth management with Ancora Advisors LLC. “They bring some diversification to a portfolio because they have a low correlation with stocks and bonds, and they have the potential to hold up well in an inflationary environment because they are a hard asset and their distributions are growing.”

Smart Business spoke with Micklitsch about the advantages of MLPs and why this might be a smart investment for you.

How do MLPs work?

MLPs trade on major stock exchanges such as the New York Stock Exchange or NASDAQ like any corporate stock, but instead of being a common shareholder of a corporation, you are a unitholder in a limited partnership. Like stocks, there are no liquidity or minimum purchase requirements. Some MLP examples include Kinder Morgan Energy Partners (KMP) and Energy Transfer Partners (ETP).

Ninety percent of a MLP’s income must derive from natural resources production, transportation or storage, real estate, dividends or interest income. As it turns out, the majority of publicly traded MLPs are in the natural resources production, transportation and storage sectors. Basically, the government decided in order to have a strong energy infrastructure in this country, it would give companies participating in that infrastructure a subsidy by not taxing them, provided they distribute their income out to unitholders.

Why are they potentially attractive investments?

MLPs have the highly sought after characteristics of strong current income and future growth potential. The business model is very predictable and simple to follow, as MLPs are paid fees, based on long-term contracts, for the natural resources that go through their pipelines or storage facilities. Generally, midstream MLPs take no ownership of the underlying commodity and therefore have little or no exposure to commodity price volatility. This fee-based, steady income stream allows them to pay out high distributions.

The Alerian MLP Index, which represents the universe of publicly traded MLPs, showed yields above 6 percent as of June 30. Comparatively, utilities were around 4.1 percent, real estate investment trusts near 3.9 percent, the Dow Jones Industrial Average was 2.7 percent and the S&P 500 was 2.2 percent.

In addition, MLPs are predicted to grow because energy production is transforming due to the technological breakthroughs associated with horizontal drilling and the exploration and production of the country’s shale resources, known as fracking. Whether the newfound natural gas and oil is consumed in this country, as is likely, or exported, those resources are too valuable to sit in the ground and will find their way to market to the benefit of these volume-based infrastructure providers.

The distributions a given MLP would be able to pay are expected to grow 5 to 7 percent over the next several years. When added to current yields, you could be talking about potential low double-digit returns.

What else might impact MLP performance?

Many people are currently worried about inflation, but MLPs are hard assets. In addition, their distributions, which are not fixed and are expected to grow, stand a better chance of preserving people’s living standards in an inflationary environment.

When purchased directly, there are some potential tax-deferral benefits for investors, making MLPs and the income they produce potentially a tax-advantaged asset. However, it is important to work with an adviser to find the best ownership fit for you, direct or through a fund, as both have certain considerations.

One other advantage the MLP universe has exhibited in the past is a relatively low correlation with both the stock and bond markets, making them a good diversification tool. For example, in 2008 and 2009, MLP prices fell, but importantly, MLPs not only met their distributions but many of them continued to increase those distributions. MLP business models are very resilient to economic and commodity volatility.

What does the future look like for these investment vehicles?

The future is extremely bright for MLPs based on domestic energy production, led by this horizontal drill, shale/fracking revolution and simple demographics. The aging population will be starved for yield; interest rates are at an all-time low. MLPs’ combinations of high current yield plus distributions that should keep pace with inflation put them in a very attractive position for the key baby boomer demographic over the next five to 15 years.

In addition to yield-starved individual investors, institutions — endowments, foundations, defined benefit plans — are becoming more aware of MLPs and their benefits. Institutions could increasingly become involved in the MLP space over the next decade as they search for sources of return that allow them to hit their long-term actuarially driven targets. Even though they face the hurdle of unrelated business taxable income, it can be solved by a variety of ownership structures.

What should investors remember about MLPs?

MLPs are a very interesting asset class that’s growing in stature and awareness, due to the attractive combination of high current yields and growth potential of distributions, but MLPs do have several nuances that make their incorporation into your overall portfolio best accomplished with the help of an experienced adviser well versed in the space.


John Micklitsch, CFA, is the director of wealth management with Ancora Advisors LLC. Reach him at (216) 593-5074 or johnmick@ancora.net.

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Employer-sponsored 401(k) plan fees can cut retirement savings by 30 percent over a lifetime, according to Demos, a public policy research group. However, recently enacted disclosure requirements will shine a light on the hidden fees for plan sponsors and participants.

For employers that sponsor retirement plans, there is a fiduciary responsibility.

“You, as a plan sponsor, might be overwhelmed due to lack of expertise and wish to avoid extra time spent thinking about and understanding retirement plan fees,” says Kimberly Flett, CPA, QKA, QPA, director of retirement plan design and administration for SS&G. “However, you are ultimately responsible for adequate disclosures if you are the owner of a company that maintains a qualified plan.”

Smart Business spoke with Flett about how employers can take responsibility as retirement plan sponsors beyond passing along a stack of papers or website addresses to participants.

What are the new fee disclosure requirements for plans?

The Department of Labor was concerned that 401(k) plans with underlying investments of different types and the related providers — investment managers, brokerage houses — that maintain the investment accounts take out revenue from the various funds to pay fees without sharing or disclosing the information to plan participants. The disclosure requirements hold the investment managers accountable and educate participants about the costs in the underlying investments within the retirement plans.

The new fee disclosure requirements have been established for a while, with additional retirement expenses being reported on many retirement plans’ Schedule C as part of Form 5500 reporting to the DOL. They were brought to the forefront more expeditiously because of how the economy plummeted a few years ago. Several interim regulations were passed, with final regulations taking place in 2012.

What does disclosing these fees entail?

There are two parts to the disclosure. Under the first part, the covered service provider that manages your retirement funds was required to begin disclosing to you, as plan sponsor, all the plan costs as of July 1, 2012. These included items such as name and type of investment, performance data, benchmarks, ratios used in calculating expenses and the allocation of all fees — to a third-party administrator, the adviser or licensed dealer, or the company that maintains the fund. The formulas used with those amounts also had to be disclosed.

As of Aug. 30, 2012, the plan sponsors of qualified plans had to start disclosing this information to participants in the plan, explaining what the fees are and how they work. The plan’s statements had to be updated to comply with the regulation.

How much do plan sponsors and their accountants need to understand about the disclosures?

Ultimately, as the plan sponsor, you bear what is called fiduciary responsibility. Therefore, you need to work closely with professionals, advisers and vendors who know how to interpret these disclosures. Take time to read the disclosures and understand how the investment provider is complying. Then make sure your participants are truly being informed and will continue to be so on an ongoing basis.

It’s a good idea, for example, to appoint your HR manager, internal accountant and CFO to an internal 401(k) committee with the responsibility of reviewing the data, educating themselves and then sharing their knowledge with participants. Does this committee have to be experts? No, but they have to make a reasonable effort and know where to go if they don’t have the answers, such as to an attorney familiar with the Employee Retirement Income Security Act of 1974 or a third-party administrator.

Your employees, once they get their third quarter statements, will be coming to you with questions. You need to be able to connect them with the right experts so employees can receive the necessary answers.

If a company’s provider fails to properly disclose its costs, will the company be held accountable?

Failure to comply with the regulation is considered a prohibitive transaction that can be subject to fees and penalty impositions from the DOL. But there are further ramifications beyond the DOL coming after the plan sponsor for improper disclosures.

A participant might leave your company and be unhappy with the funds or platform that you, as the plan sponsor, chose, because he or she lost money. That former employee could seek out the DOL and get an attorney. Then you could have to prove that you took every precaution to ensure the plan ran smoothly and made smart investments. If the plan did not, you might be held accountable.

It’s too soon to say what the short- or long-term ramifications will be, but as a plan sponsor the first thing you need to do is arm yourself with the right expert advisers. Then make inquires to be forearmed; the preparation phase will help curtail a lot of negative fallout that could potentially happen.

How do you think this will affect the retirement planning industry?

Third-party administrators will be needed more than ever for their expert advice. This disclosure law also brings visibility to the industry, which opens doors for discussion that sets up additional chances for education and awareness about retirement plans.

Despite more costs being in the open, employers should still take a comprehensive approach to retirement planning. Looking at service, benchmarking and longevity, as cheap is not always better. A company might have the highest number of new plans each year because of the low costs, but it also could have low retention rates because of service



Kimberly Flett, CPA, QKA, QPA, is the director of retirement plan design and administration for SS&G. Reach her at (330) 668-9696 or KFlett@SSandG.com.

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The Pennsylvania Wage Payment and Collection Law (WPCL) allows employees to bring a civil legal action against an employer if they are not paid for work performed and wages earned.

“The law, which has the aim of making sure employers are paying employees what is due when due, provides tough consequences for employers who don’t comply,” says Alfredo M. Sergio, an attorney with the Employment Law and Commercial Litigation groups at Semanoff Ormsby Greenberg & Torchia, LLC.

Smart Business spoke with Sergio about what employers need to know about the Pennsylvania law, including possible individual penalties for noncompliance.

What are the highlights of the Pennsylvania Wage Payment and Collection Law?

The WPCL requires employers to notify employees at the time of hire of their rate of pay, the time and place of payment, and the amount of wage supplements and fringe benefits. Employers must pay wages on regular paydays designated in advance, and must pay non-salaried employees semimonthly or more frequently, unless stipulated in an employment contract. The statute has a fairly broad definition of wages, and includes all earnings of an employee, such as regular wages, overtime and commissions.

Employers are also responsible for keeping accurate records of hours worked and wages paid to each employee. If an employer is separating or terminating an employee from the company, the business must pay any wages due by the next regular payday.

If not, the employee can file a claim with the Department of Labor and Industry (which can take up the action on behalf of the employee), or the employee can file suit against the company.

What penalties can an employer and its personnel face for failing to comply?

Penalties for failing to pay wages can have a substantial impact on an employer, whether resulting from a private civil action or action by the Secretary of Labor and Industry. If an employee files a claim for unpaid wages, the employer must immediately pay any undisputed portion of wages.

If the employer or former employer fails to pay the claim or provide a satisfactory explanation of the failure to do so within 10 days after receipt of a certified notification (or ultimately, if the explanation is deemed unsatisfactory), the employer will be liable for a penalty of 10 percent of the portion of the claim found to be justly due, in addition to the principal. If the employer goes 30 days past the regularly scheduled payday without paying wages due an employee, the penalty increases to 25 percent of what is owed, or $500, whichever is greater, plus the principal.

Additionally, the WPCL provides for mandatory attorney’s fees in the event a lawsuit is filed to recover wages. The court has some discretion regarding the amount, but if an employer has violated the law, the employer will end up paying the principal, the penalties and some degree of the employee’s attorneys’ fees, which can be significant. While criminal penalties are not always imposed, the law provides that an employer can be fined up to $300 or for imprisonment of up to 90 days, or both, for each offense. The nonpayment of wages to each individual employee constitutes a separate offense.

Can company personnel be held personally liable for noncompliance?

In addition to general and criminal liability, the WPCL provides for individual, personal liability for violations. This surprises many employers, as they generally think of the corporate structure as providing protection from individual liability or debts of the company.

The WPCL defines ‘employer,’ in part, as including a company’s agent or officer. An agent or officer who has been involved in the decision to withhold wages can be found individually liable for violations of the law. This can even include the company CEO, president or CFO.

Employees often file wage claims not just against the company but also against individual officers of the company to place additional pressure on the employer and its principals to recover unpaid wages.

In what situations do employers most often violate The WPCL?

Among the biggest missteps to avoid are not paying an employee’s wages when due and making deductions from the last paycheck when the employer is not entitled to do so.

Wage payment and collection issues often arise when an employee is separated from an employer, either because he or she quits or is terminated. These issues are arising more often in recent years in a difficult economy. A company might be closing, contemplating bankruptcy or laying off employees, but employers need to pay employees what is owed.

When a company files for bankruptcy, employees often seek to hold corporate officers personally liable for unpaid wages. Even short of bankruptcy, if an employer thinks it will not have enough funds to continue the employment of certain employees, it is dangerous to fire them and not pay what is due.

Wage payment and collection issues also often arise when an employee owes money to the company at the time of separation. While certain enumerated deductions from wages are permitted by the law, it is easy for an employer to think it is justified in making a deduction from a paycheck, only to run afoul of the WPCL (for example, the employer might want to deduct from a separated employee’s final paycheck the cost of a missing piece of equipment or unreturned laptop).

In general, the employer needs to pay the full amount of wages owed to the employee and can pursue the disputed sums separately.  The WPCL needs to be foremost in employers’ minds because the consequences — including the danger of individual liability — can be severe.

Alfredo M. Sergio is an attorney with the Employment Law and Commercial Litigation groups at Semanoff Ormsby Greenberg & Torchia, LLC. Reach him at (215) 887-0200 or asergio@sogtlaw.com.

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The Medical Loss Ratio (MLR) mandate, within the Patient Protection and Affordable Care Act, requires insurance companies to spend 80 to 85 percent of premium dollars on medical care and health care quality improvement. This provision just started in August, but how will it impact the insurance industry and employers?

“The MLR Legislation has a perverse incentive; when utilization and costs increase, an insurance company makes more money,” says Mark Haegele, director, sales and account management, with HealthLink.

Smart Business spoke with Haegele about what MLR does and the ramifications for health insurance companies, brokers and, ultimately, employers.

How does the MLR mandate work?

Medical loss ratios refer to the percentage of premium dollars an insurance company spends on providing health care and improving the quality of care, versus how much it spends on administrative and overhead costs and, in many cases, salaries or bonuses.

In August, health insurance companies paid $1.1 billion in total rebates to customers when less than 80 percent (for individual and small group markets) to 85 percent (for large group markets) of premiums were not used for health care costs. Approximately 31 percent of Americans with individual insurance got the rebate, with an average check of $127, according to the Kaiser Family Foundation. Rebates went directly to businesses that sponsor their own plans and they decided whether to distribute them or put the funds toward lowering future premium costs.

Why does MLR create a problem for insurance companies and, subsequently, employers?

Many insurance companies have had to make up a gap of up to 10 percent by balancing their administrative costs in order to pay for overhead, employee salaries, etc., and to run their business. In the individual market, for example, typically 70 to 85 percent of a premium is used to pay for the claim, according to a 2010 report by the American Academy of Actuaries.

Now, if you are an insurance employer, suddenly you have to spend 85 percent of the premium that you take in on claims. That means that 15 percent is the only bucket of dollars that you have for profit, administration, overhead, etc. So, logically, there are only two ways that insurance companies make more money year over year and increase their profits. They can either reduce their administrative overhead by cutting staff or have a claims increase.

For instance, if your premium was $1,000, $850 goes back to claims and $150 goes to profit and overhead. Let’s say next year your premium is $1,500; now the insurance company has increased its potential for profit by 50 percent — to $225 rather than $150. Artificially increasing utilization isn’t good for our health care system, and increasing premiums wasn’t part of the reform game plan.

The more realistic and impactful method is reduction. Insurance companies are in it to win it; they are not going to sacrifice profits. With insurance companies facing huge budget constraints, what does that mean for employers and their employees? It means a lower level of service because there are fewer people answering phones and less staff to handle claim issues as insurance companies are forced to squeeze their administration expenses.

In addition, employers will want to know if their group is subsidizing other employers. Insurance companies will need to provide information about the cost of claims, how much is being spent administratively and where are the funds going, and how groups compare. The president of an insurance company recently received a call from an employer who was very upset about the payment of his rebate check because he knew that his premiums were artificially high for many years and that he’s been subsidizing other employers.

How have insurance brokers been negatively impacted by MLR?

The U.S. Department of Health and Human Services has decided that agent commissions are not exempt from the administrative calculations. This creates a difficulty because brokers rely on incentives/bonuses from insurance companies to sell their business.

With the MLR mandate, the broker’s commissions have been cut considerably, if not all together. The National Association of Insurance Commissioners recently released a study that reported that a significant number of health insurance companies have reduced commission levels, particularly for the individual market. Brokers and agents are worried that this will run them out of business.

In the era of health care reform, it is important for employers to have consultants to ask questions, which often is the broker’s role and where that person earns his or her 6 to 10 percent fee. This will be even more vital if insurance companies themselves are giving lower service.

Are there other health care solutions not affected by MLR?

Self-funded programs are not held to the MLR and other PPACA mandates. Therefore, consultants who work off commissions could be suggesting self-funding more frequently. If business owners feel their group is not benefiting from MLR requirements, they also could look at self-insured models.

There’s no doubt that the MLR is clearly another driver to push employers to look at alternative methods of health care, including self-funded insurance. This already has been demonstrated by more interest from brokers and others entertaining a self-funded solution; they are not all buying it, but they are all looking at it.


Mark Haegele is a director, sales and account management, with HealthLink. Reach him at mark.haegele@healthlink.com or (314) 753-2100.

Insights Health Care is brought to you by HealthLink®

Cloud computing may invoke images of an abstract technological force floating in the atmosphere, but the term itself is misleading. The term originated because on technical diagrams, a cloud was drawn around any mixture of resources that made a particular application work, says Pervez Delawalla, president and CEO of Net2EZ.

“Cloud computing means so many different things to so many people, and there is a lot of confusion,” says Delawalla. “It’s cloudy out there in the cloud. An easier way to explain it is by using the utility computing concept. This resonates the most with people because they can compare to how they use gas or electricity as a utility, so now can you use computing power as a utility.”

Smart Business spoke with Delawalla about what cloud computing is and how to apply its advantages to your business.

How does cloud computing work?

You have to envision that the physical architecture itself is vast. Data centers all over the world house servers, and each server or set of servers is designated for a certain type of application or resource. Servers, routers, switches and security devices combine with network connectivity and an operating system to form the cloud. You could compare it to an electrical grid, in which power comes from substations and power generation points before electricity goes over wires to provide power to households or businesses.

Some examples of cloud computing include Apple products that back up data to their iCloud, and Microsoft products with which data is backed up on SkyDrive, Google Drive, Salesforce.com or Dropbox. A business may approach a data center for complete automation of its infrastructure and take care of the software itself.

The data center is then responsible for ensuring that all of the hardware pieces are working in harmony with each other and have different versing capabilities within that physical layer.

What are the advantages of cloud computing?

A major advantage of cloud computing is time. As a startup business you can get up and running online reasonably quickly and with minimal investment because you are not buying servers, routing or switching equipment. Instead, you are plugging into a utility that doesn’t require any setup, that is already functioning, and you simply pay for it on a monthly basis.

Cloud computing also offers more versatility and capacity. For example, say your company has a new e-commerce site and a product becomes an overnight sensation. If your website is on a cloud computing platform, you can scale up and sustain a high volume of traffic without having a performance degradation for users of your site.

Cloud computing can also improve your ability to be agile and nimble because the monthly fee for service includes taking care of your hardware and resources. As a user of the cloud, you don’t need an army of IT personnel or consultants, freeing you up both financially and staffing-wise to concentrate on your target business.

Additionally, a minimal amount of software is installed on the personal computer or path, so instead of downloading the entire Microsoft Office suite, for example, you can sign up for Microsoft Office 365, which allows you to subscribe to the cloud-based service on a month-to-month basis to access all Microsoft Office products.

What is the difference between public and private cloud services?

On a public cloud, you don’t know where your data is stored or who has access to it, but you are able to increase your capacity more quickly. An example is Amazon Web Services, which hosts websites on hundreds of thousands of servers which allows users to increase capacity as needed.

A private cloud can be established for businesses that know their growth plans and that want extra security. The business can then control who has access to that data and knows that it is stored in a secure location.

How are security and privacy handled with cloud computing?

Security and privacy are the main reasons businesses are hesitant to go over to the cloud. However, with a private cloud, you manage your environment so closely that the security is as good as with conventional computing. Because of privacy issues, HIPAA-compliant and PCI-compliant credit card companies will always have to use private cloud services.

For extra security, you can do an automation deployment with a private cloud, but that will result in higher costs because you have dedicated resources just for your company. For data that isn’t as sensitive, a public cloud offers more versatility and nimbleness.

What should businesses think about when considering cloud computing?

Ask yourself exactly what it is you want out of the cloud. What are your needs and what do you want to accomplish? With so many different products, you have to ascertain what you will use it for. If you require word processing or Excel, you could use Google Drive, Microsoft Office 365 or Google App. For massive data storage needs, there’s Box.com or Amazon Web Services.

For private cloud service, you need to find a data center company to meet those requirements. Examine what the various companies are providing as their feature set for cloud computing, then choose which company best suits your business needs.

If your focus and expertise is not in IT, the more you can outsource to a cloud computing environment, the lower your costs will be for computing needs and data storage. Then your company can focus on its strengths, knowing that the rest is being taken care of up in the cloud.



Pervez Delawalla is president and CEO at Net2EZ. Reach him at (310) 426-6700 or pervez@net2ez.com.

Insights Technology is brought to you by Net2EZ

Productivity losses related to personal and family health problems cost U.S. employers $1,685 per employee per year and $225.8 billion annually, according to the U.S. Centers for Disease Control and Prevention. So what is creating these problems with health care claims and insurance, which ultimately lead to poor health and lower productivity?

“It is the delivery system, administration and billing,” says Danone Simpson, founder and CEO at Montage Insurance Solutions. “I have no doubt about this, as our firm battles away at claims that take hours, weeks, months and sometimes years to sort through.”

Smart Business spoke with Simpson about what she sees as the problems with health care, how carriers are coping and what employers can do about it.

What is the problem with health care today?

From wait times for approvals to multiple bills being sent to carriers, carriers are denying needed PET scans, MRIs and other tests so doctors can determine care — partially because of what they deem as ‘abuse’ from doctors who overtreat or analyze treatment. Approvals can sometimes take two months when patients need major surgery to remove cancer.

The real issue with health care is not only who is paying what premiums, fines or co-payments, it’s more about the overall cost of health care and billing complications.  Doctors desperate to earn more may overbill, even though they know the contracted amount they agreed to. However, that may be a different amount with each carrier, which makes the administrator’s job a nightmare.

How will private exchanges and mandated health care impact the system?

It’s likely that health care insurance exchanges won’t necessarily lead to better health care pricing. In addition, private health insurance carriers will be forced to offer coverage on the exchanges and compete with themselves.

Surveys prove that employers are angry about being forced to pay for coverage, even if they already cover 100 percent. They expect employees to ask for more coverage of dependents, and some employers who stretch to pay a portion of dependent coverage are feeling backed into a corner. It’s not required to cover dependents, but most plans today do.

What are carriers doing to help with costs?

With expensive fines that can account for more than the actual premium amounts, carriers are helping form Accountable Care Organizations (ACOs) to hold doctors and hospitals responsible. These organizations use incentives to cause providers to work together when treating a patient across care settings such as doctors’ offices, hospitals and long-term care facilities, according to HealthCare.gov. For example, the Medicare Shared Savings Program rewards ACOs that slow health care cost increases while meeting performance standards on quality of care and putting patients first. Patient and provider participation in an ACO is purely voluntary.

What can employers do to lower health insurance costs?

Offering a wellness program is one way to truly impact the heart of the problem of the country’s health care costs. An unhealthy work force is a major issue for businesses large and small. For example, 20 million Americans — 7 percent of the population — have diabetes and 30 percent of this population remains undiagnosed, according to Katz. Moreover, a recent Newsweek article states that two-thirds of adults and one-third of children and adolescents are overweight or obese.

The law might require an employer to buy an insurance policy for employees, but it causes anger and rebellion on the part of many employers. The more proactive approach is to dive down into the parts of the reform that assist in either lowering premium costs or aiding in the retention and well being of your employees.

There are a number of tax credits available to help you with this proactive approach, if they are available to companies of your size.

  • The Patient Protection and Affordable Care Act includes a variety of provisions aimed at encouraging wellness and disease prevention. As shrm.org reports, effective Jan. 1, the ‘law will permit rewards or penalties such as premium discounts of up to 30 percent of the cost or coverage. Existing wellness regulations permit incentives of up to 20 percent of the total premium, provided that the program meets certain conditions. The law increases the amount of the potential reward/penalty to 30 percent of the premium.’ There is also the possibility of an even higher amount after national studies are performed.
  • Another option is the Small Employer Health Insurance Tax Credit. The U.S. GAO states, ‘Fewer small employers claimed the Small Employer Health Insurance tax credit in tax year 2010 than were estimated to be eligible.’  Calculators are available on the National Federation of Independent Business, www.nfib.com and many other websites.

Employers also can ask their carriers about the Medical Loss Ratio reimbursement, which was just issued for the first time.

Take care to avoid fines and earn tax credits on wellness incentives. Many employers are starting to offer a carrot approach to motivate employees, and then a stick with some sort of penalty for not participating to truly see employees take advantage of a wellness-based plan.

Danone Simpson is the founder and CEO at Montage Insurance Solutions. Reach her at (818) 676-0044 or danone@montageinsurance.com.

Insights Business Insurance brought to you by Montage Insurance Solutions


Employers have a sacred, fiduciary duty to treat benefit plans as if they were their own nest eggs. Therefore, such plans are heavily governed by the Department of Labor (DOL) with numerous expectations, communication needs and filing rules.

“The dilemma today is that so many plans are underfunded,” says Bertha Minnihan, national leader, Employee Benefit Plan Services, at Moss Adams. “People have worked hard for their retirement, and if a sponsor should screw that up, they have nothing to fall back on.”

An aging population that needs its money to go further compounds the problem. When benefits aren’t administered properly, society struggles to care for the older generation, she says, and the younger generation suffers when older workers stay on the job longer.

Smart Business spoke with Minnihan about how to properly administer your benefit plan to help employees and how to avoid common regulation pitfalls.

What is the typical reporting structure for employee benefit plans?

There are several disclosures and reporting that are required to go to the participants, as they are the first consideration, and all entities are working to ensure that plans are administered properly for them. Additionally, plans must file a tax return annually to the DOL and the IRS, and those meeting additional requirements must be externally audited, as well. The Pension Benefit Guarantee Corp. also monitors benefit plans that have gone defunct or become underfunded by a certain percentage. The system is quite complex.

Who are the service providers in this space?

Internally, there may be the company sponsoring the plan and a committee delegated to oversee the day-to-day operations, as well as HR and payroll. Externally, benefit plans have investment custodians holding the funds and investing them at the participants’ direction and record keepers tracking plan activity. Record keepers can be a separate entity, or they can be an arm of the investment custodian. Other players include auditors, plan attorneys, actuaries for defined benefit plans, investment advisers and trustees.

What DOL hot button areas do sponsors need to consider when administering benefit plans?


One of the more common pitfalls is the timeliness of deposits into the trust. The DOL wants employee deferrals put into participant accounts quickly because employees deserve to start earning. It’s problematic when companies are careless or feel payroll taxes and other items are more important so they withhold withholdings and play cash flow games.

Compensation is another challenging area, especially when different types of bonuses are paid. The DOL’s hot button is whether the deferrals are being calculated on the correct costs and whether the right components are eligible. If you are missing income components and deferrals are understated, your company could be offering an understated match.

Then, if the employee is shorted, the employer has to make up the entire shortfall, which often surprises people. Some Fortune 500 and 1,000 companies in Silicon Valley have miscalculated compensation and now owe their plans millions of dollars from deferrals, earnings and unfunded matches.

The DOL is also very concerned with educating employees, whatever their demographic. As a business owner, you need to make an effort to get your employees to participate and to maximize their retirement savings.

What are some best practices for plan administrators?

Here are some best practices that could help mitigate risks, concerns and challenges.

  • Appoint an oversight governing committee. If your board does not delegate, it is automatically the fiduciary, and the board is often not up to speed on the plan, HR, payroll and/or the Employee Retirement Income Securities Act (ERISA), the law governing benefit plans. Additionally, in private companies, a third-party trustee who is an internal officer is also at fiduciary risk, and a class-action suit could be brought against both the board and the trustee at a risk of personal liability.
  • Have your oversight committee be timely with sending funds to the trust.
  • Review your census data regularly and ensure databases are accurate. Changes, such as a termination date, reporting someone’s death or a wrong age need to be communicated to different departments.
  • Ensure your personnel understand how the plan works. For example, if you hire a new payroll person, make sure that he or she has read and understood the summary plan description.
  • Benchmark your fees and look at them regularly. With new federal disclosures, there is transparency by law, so pay attention and ask questions.

How should merger and acquisition groups approach benefit plans?

Whenever companies — small or large — fold or change ownership, a number of items can be missed, so keep this in the back of your mind as you go through the process. Have an ERISA expert advise you early on, as this is not just a matter of merging benefits. The acquired company could have a 401(k) plan that needs to be terminated, a defined benefit plan that is unfunded and frozen, or a deficient benefit plan that must be cleaned up before it can taint your plan on contact. M&A committees should have checklists to ensure employees do not lose their benefits and that the company is still protected and reporting in a timely manner.

How are governing entities dealing with work force globalization in this area?

Globalization is affecting benefits plans without businesses realizing they are possibly being sloppy. If you have U.S. employees working abroad or foreigners coming to your company to work, you need to consider how this will affect benefits. How is your plan written? Are employees still accruing benefits in a timely manner? What does your plan include or exclude, and is that what you intended to do? There is a lot of interest on the subject, and the IRS is working with other governments to ensure that documents are in order, that they understand what the U.S. is doing and that they know what to tell their citizens who come here.

Bertha Minnihan is the national leader, Employee Benefit Plan Services, at Moss Adams. Reach her at  (408) 916-0585 or bertha.minnihan@mossadams.com.

Insights Accounting is brought to you by Moss Adams.