Health care providers such as hospitals — particularly the more enlightened ones — started to reform years prior to the Patient Protection and Affordable Care Act (PPACA). Although the law crystallized the industry’s direction, health care systems faced pressure to reinvent themselves long before the act. This reinvention has not only affected the delivery model but also the human capital requirements within the health care system.
“There’s a big shift to outcome-based rewards as opposed to transaction-based rewards,” says Rob Rogers, a principal and health care industry leader at Findley Davies, Inc. “In other words, what is the quality of care provided as opposed to how many units of X were done in the fiscal year.”
Smart Business spoke with Rogers about the outlook for hospitals and health systems, and what this means for business owners.
How will reform affect revenue and other financials for hospitals and health care providers?
The topline or gross revenue for health care systems — which can either be an integrated network comprising multiple hospitals, physicians, clinics and outpatient treatment centers, or an independent community hospital — is going to jump. In particular, hospitals will have more patients as result of 30 million people now being covered under an ‘insured’ delivery system. Providers face the challenge of bolstering staff while facing a shortage of nurses and physicians.
Despite volume increases, net revenue will come under a lot of pressure as reimbursement levels from insurance carriers and Medicare and Medicaid continue to decline. Health care providers are being forced to scrutinize operating expenses to ensure they are providing care as efficiently as possible.
How will patient care be impacted?
More focus on clinical outcomes is one good thing occurring through reform — not necessarily the governmental legislative act, but the whole process. The health care system has recognized, based on internal pressure and pressure from employers covering health care costs, that patients and plan sponsors aren’t interested in paying for the volume of diagnostics. The reform focuses on keeping people healthy. If there are health problems, then the attention shifts to measuring outcomes such as the success rate of treatments, morbidity rate, length of hospital stay, patient satisfaction, etc. Health care systems must learn to cope with the continuous challenge of providing the right mix of care while, at the same time, getting paid for it.
What kind of consolidation and collaboration do you expect?
More collaboration among providers and consolidation of various related-care entities have already started. Some think only large health care systems will be able to operate in this new environment because they have enough volume to manage the margins better. However, while community hospitals will continue to operate independently, there will be pressure for them to partner with other community hospitals or to create alliances with the larger hospital networks.
Physicians are also building more partnerships. In 2010, for the first time, more physicians were employed by organizations such as hospitals and other related entities than were in private practice, though many independent physician groups exist in Ohio.
Health care reform works to eliminate silos of treatment. So we’re seeing the development of an integrated delivery model, with numerous entities working together under one umbrella to provide more efficient and better quality care. To remain competitive, physicians are creating alliances with patient care providers such as hospitals and nursing homes.
How will the operating procedures for health care providers differ?
Health care systems are taking a more proactive role in physician and nurse development and recruitment by providing financial assistance to university students in exchange for employment arrangements. With the assistance of experts to provide strategy, hospitals are looking at how they attract, retain and reward physicians, senior leadership and nurses to ensure staff is highly motivated and delivering quality care.
Most health care systems and hospitals are not-for-profit, tax-exempt organizations. As pressure increases from the public, Congress and state legislators, most health care providers are paying close attention to transparency in everything they do from audits, executive compensation and governance. More and more tax-exempt organizations are operating like public companies, which must comply with Sarbanes-Oxley requirements.
There isn’t a more public entity than a tax-exempt organization — the general public is the taxpayers. Rules governing the reasonableness of executive compensation and benefits under intermediate sanctions statutes are creating added pressure on health systems to ensure transparency and objectivity when dealing with executive rewards.
How might these changes impact business owners who provide health care plans?
The reform, apart from PPACA, is going to be mostly positive for business owners. While there may be additional costs associated with reform, the system will be more efficient with more focus on preventive care and wellness, which are steps in the right direction. There will be more integration with fewer silos of care. There’s more concern with helping the patient get from A to B to C without jumping through hoops. It will be less costly, more efficient and the outcomes will be better, which will make employees healthier.
The health care industry is rapidly changing. As health care providers work to deliver more efficient, better quality care, employers and employees both should be able to reap the benefits.
Rob Rogers is a principal and health care industry leader at Findley Davies, Inc. Reach him at (216) 875-1926 or email@example.com.
Insights Human Capital is brought to you by Findley Davies Inc.
Standard business VoIP (Voice over Internet Protocol) sales are increasing as business owners become more aware of the technology and how it has matured over the years. Business IP phones are no exception, and improved features are impacting business efficiency.
“Five or 10 years ago, early adopters were willing to accept poor quality to be on the cutting edge, but now, the quality has caught up with the demand,” says John Putnam, vice president of direct sales at PowerNet Global. “Today, you have low cost, good quality and a lot of features that people with older phone systems didn’t have and are now necessary in order to be competitive in the marketplace.”
Smart Business spoke with Putnam about how business IP phones can improve all areas of your operations, from customer service and communications to sales force activities.
What are some recent feature improvements with business IP phones?
Unified communications, a big buzzword within the industry, combine email, fax and voicemail into a centralized location. Within your email inbox, faxes are converted to emails through E-Fax, and with IP-based phone systems, voicemails are converted to a WAV file and emailed to you. Then, faxes and voicemails can be saved in the relevant customer file. By integrating the phone and computer technology, employees are able to retrieve information quicker.
Phones and computers can also be used more efficiently. A phone call brings up the caller ID and relevant contact information — if that person is in your contact management software — on your computer screen before you answer. You can also open your contact records, click a button and dial the phone. From a contact management standpoint, you now have a record of incoming and outgoing calls in your system, including missed calls that didn’t leave a voicemail.
The next big thing is cell phone integration, in which mobile employees can push a button on their phones or cell phones to forward calls from the office to their cell phones.
How can these advances help employers run their businesses more productively?
Businesses with sales organizations are routing calls to the company first and then bouncing them out to the sales force. As a result, the company directly owns that relationship, while calls still get out in an efficient manner. Then, if a salesperson leaves the organization, you can easily reroute those calls to his or her replacement or manager within, maintaining the client relationship.
Business IP phones give companies options in terms of employees who aren’t located in the office by routing calls to either an IP-based phone or a cell phone. This allows employees to telecommute, so you don’t have to have square footage to house them in your bricks-and-mortar location.
Some business owners have closed their office space entirely and have all employees working remotely. Customers never know they are calling into someone’s house through auto-attendance and IP-based phone systems, and employers aren’t paying rent or any of the other costs associated with having a bricks-and-mortar location.
Routing calls works well with a sales force but also for others such as lawyers who often travel between their offices and court. Travel time becomes more productive for those who have meetings outside the office. Not only can those employees receive calls, but it can be easier for them to retrieve voicemails. They see the caller ID, date, time and duration of voicemails on their cell phones, and then choose what to listen to based on priority, improving your company’s response time.
Additionally, the ability to easily transfer calls to a different location provides better disaster recovery options. For example, if there is a problem in the work space, such as a loss of power, you can take your VoIP handsets and relocate to a place where there is Internet connectivity and power to get the company back up and running as quickly as possible.
How else can business IP phone features improve customer service?
By having remote employees across the country, businesses can extend their hours. For example, an organization can take advantage of the fact that 5 p.m. on the West Coast is 8 p.m. on the East Coast, allowing office hours or support line hours to be extended without paying overtime.
Companies that have teams dedicated to specific clients can bounce calls between offices so that only someone who is on the team is dealing with that important client. This skill-based call routing is possible because there is flexibility not only within offices but also call routing between branch offices.
How do these phones make communication more efficient in an office?
With unified communications, you have a centralized location for voicemail, email and faxes so employees aren’t spending their time chasing down and sharing information. Communications are saved in a shared folder on your network and multiple people can retrieve them more quickly.
Digital recordings also can be used for training purposes, such as for customer service in terms of coaching — the customer was angry and here is how the account manager defused the situation and addressed the client’s needs. Your sales manager can refer back to recorded conversations, and say, ‘Here’s what you said in this situation. Maybe you could have tried this or addressed it differently. Next time, why don’t you try saying this?’ This allows salespeople to more easily take advantage of each others’ experiences.
In addition, recorded conversations can be used as a part of contract negotiations or for a dispute on the collections side. Recorded calls and digital voicemails also create an easily transferred reference if someone else is working that account because of turnover or employee absence.
Business IP phones create more flexibility and accountability, which, in turn, increases your company’s efficiency and productivity.
John Putnam is vice president of direct sales at PowerNet Global. Reach him at (866) 764-7329 or firstname.lastname@example.org.
Insights Technology is brought to you by PowerNet Global
In some grocery stores, your smartphone uses GPS to ping you when you’re near items on your shopping list. Other retailers allow customers to order something online, and when they arrive to pick it up from the store, the item(s) is already bagged and ready to go. Others still provide customers with options of where to buy, where to pick up or have delivered, and have price guarantees in order to create a positive customer experience and resulting sales.
With the retail industry facing challenging times, savvy risk managers are helping their companies understand how to manage costs and allocate capital strategically while finding ways to stay ahead of market trends, says Lynn Serpico, managing director at Aon Risk Solutions.
“These risk managers have the opportunity to help shape the business as they manage operations and costs,” says Serpico. “At most retailers, risk managers are responsible for mitigating — for keeping the operation efficient, making sure that the use of insurance, self-insurance and alternatives are in line with overall company objectives and that the treatment of risk is agreed to by all internal stakeholders. At a retailer, these stakeholders can include treasury, legal, logistics, marketing, merchandising or IT.
Smart Business spoke with Serpico and Todd A. Dillon, senior account executive at Aon Risk Solutions, about the current risks that retailers face and the best ways to mitigate them.
What is new in the retail industry with risk?
Aon compiles a retail industry analytics report annually, collected from proprietary data and client interviews, identifying the top 10 risks. Retailers say the global economic slowdown is the No. 1 risk. With consumer discretionary spending as the biggest driver of retail sales, the industry constantly battles variables that are out of its control, such as gas prices.
Second, retailers worry about damage to their reputation or brand. For any retailer, the worst possible scenario is that customers stop shopping in their stores. The third-biggest risk is a market of increasing competition. This is one of the biggest trends in retail. How are people making their shopping decisions? What does this mean for retailers, and how can they respond? For example, how do they prepare for a situation in which a customer walks into the store, and tries something on before buying it at a lower price on their mobile device?
Other risks include:
- Distribution or supply chain failure
- Regulatory and legislative changes, particularly surrounding workers’ compensation, normally the largest contributor to a retail risk manager’s total cost of risk.
- Technology failure
- Failure to innovate and meet customer needs
- Failure to retain top talent and, therefore, manage crime, theft, fraud and employee dishonesty. With plenty of turnover, there is a need for safety training and internal loss control to ensure not only a good store experience for customers but also employee safety and that employees are behaving in ways beneficial to the company.
What risks are critical priorities to manage?
Most retailers have gotten really good at managing the more traditional risks — property, workers’ compensation and general liability. For example, they know how to get their stores running after a natural disaster and they have programs to get associates back to work after an injury.
Emerging and changing risks are the new focus. These include network security, products liability for vendors, and wage and hour litigation. Network security is key, as this feeds in to a retailer’s reputation. It has customer data, employee data, financial information and, in some cases, medical data, and the risk is ever evolving because bad actors are getting craftier and losses are high profile.
Vendor/supplier contract management also is critical. A store might have products from 50 countries, so how does it control and manage contracts and litigation while understanding its exposure? Additionally, employment practices liability policies exclude wage and hour claims. However, this often drives a retailer’s exposure. Finally, retailers must continuously innovate and drive down costs so savings can be passed on to customers.
What best practices address common mistakes for retail risk managers?
As an industry, margins are thin, so retail risk managers need to carefully analyze their portfolios to determine the best use of capital. For example, should you have higher retentions on certain programs because the loss history is predictable? Or perhaps you might be buying too much insurance on other programs. Maybe there is a way to self-fund a certain amount of loss and buy excess capacity, which could reduce fixed costs. Is there an alternative that has not been considered?
If you have a loss that is not insured, have you vetted the process internally? Do you know how it will be funded? Risk managers are asking these questions as they work to create operational efficiencies for their companies. Asking questions helps avoid buying too much or too little insurance. Risk managers can also identify maximum capacity for loss across multiple lines of business. For instance, a $10 billion retailer may be able to absorb a penny per share of loss in a given year. However, you need to know what would happen if you have losses totaling five cents a share in a worst-case scenario year with a fire in your main distribution center, a customer death in a store and a security breach that compromises customer data. It is important to get feedback internally and ensure that all stakeholders understand decisions being made around insurance and the effect those have on the business from a financial perspective.
Know your overall retentions and whether they are aligned with the corporate strategy. Some companies are extraordinarily risk averse, so retentions are low, while others are very comfortable managing their own risk. It is up to risk managers to know the appetite of their company and make decisions that align with the financial objectives. In addition, whenever there’s a loss, multiple internal stakeholders need to be involved in the process.
Lynn Serpico is a managing director and the National Retail Practice Leader at Aon Risk Solutions. Reach her at (203) 326-3464 or email@example.com.
Todd A. Dillon is a senior account executive at Aon Risk Solutions. Reach him at (314) 854-0864 or firstname.lastname@example.org.
Insights Risk Management is brought to you by Aon Risk Solutions
The most damaging thing women business owners can do regarding financial planning is nothing.
“It’s often the last thing that people want to talk about because they are so busy living their lives and running their businesses,” says Nancy Kunz, CFP®, ChFC®, CLU®, Lead Financial Planner at First Commonwealth Financial Advisors, Inc. “Then, by the time they figure it out, they are 65 and staring at retirement. A woman’s instinct often is to help everyone else first, to take care of everyone else, and that is compounded when a woman is also running a business,” says Natalia Paich, CPA, AIFA®, Wealth Relationship Manager at First Commonwealth Financial Advisors, Inc. “But sometimes she needs to put herself first and plan for the future of herself and her business.”
Smart Business spoke with Kunz and Paich about business and financial planning for women business owners.
How do women need to plan differently than men?
There is a high probability of a woman being alone late in life, as men tend to have a shorter life expectancy. It is important to take control of finances now, as doing so will lay the groundwork for making the choices for the future. While the thought of taking ownership of one’s finances may seem daunting, doing so both personally and professionally is imperative.
A common mistake made by women business owners is trying to do it all themselves. Instead, get help from the beginning and find the appropriate professional. Most people don’t truly understand their financial decisions and therefore make uninformed choices or no choices at all. When working with a trusted professional, women should ensure that they are active participants throughout the partnership, from hiring a professional to understanding the decisions and implications of those decisions.
What are some of the biggest financial mistakes female owners make with their business?
We mentioned that the biggest mistake women can make in regard to their finances is doing nothing. The same can be said for women business owners using slightly different words, ‘failure to plan.’ Very few businesses take the time to plan income, expenses, management of receivables and cash flows, money for capital expenditures, etc. Women should take the time to create a financial plan for their business. A big part of creating the financial plan is finding the right professional expertise for legal, tax, financial planning, etc. A business owner’s time should be spent doing what she does best — not on the behind-the-scenes mechanics.
Part of creating the right team of professionals includes where to look for them. Women should look for professionals who are familiar with and have experience with small businesses. Spending the money upfront to pay professionals can save a lot of headaches further down the road.
What do women business owners need to know about saving for retirement, and how can they balance that with other needs?
Women business owners have many options to save for retirement. The best option often depends on whether the business owner has employees, and if so, how many. Some retirement options include SEP IRAs, self-employed 401(k), self-employed Roth 401(k), SIMPLE IRAs and Keogh plans. Each type of plan has different contribution limits, may allow for tax-deductible contributions and withdrawal provisions, and may require taxation of monies at distribution.
It is important to consult with a financial adviser and/or accountant to determine which plan is best suited for the business and business owner. In regard to retirement savings, women business owners should avoid using their own retirement money to fund their business. The long-term effect on retirement savings can be significant. Monies designated for retirement should remain in retirement. Monies designated for business development and growth should be used for the business. A woman doesn’t want to find herself at retirement with only illiquid assets.
What should women know about financial planning when one spouse takes times off from work?
Keep retirement funding going, if possible. If one spouse takes time off to raise the family, increase savings into the spouse’s company-sponsored retirement plan and/or consider establishing a spousal IRA. This may not always be an option, so it is important to confer with a trusted adviser. Expectations for the family’s standard of living are paramount not only to planning but also to adjusting to one income, so those need to be realistic and continually reviewed.
If a woman business owner decides to leave her business, she should keep current with her profession so that when she is ready to re-enter the work force or start a new business, doing so will be easier.
When running a business, how can women incorporate their role as a primary caregiver to an elderly parent?
This can be financially and emotionally difficult, especially when paired with taking care of children and running a successful business. This is where long-term care insurance comes in, helping to ease the burden. Women should ensure their parents have long-term care insurance, even if they have to pay for it themselves. Oftentimes, care starts being required when a daughter is trying to raise her own family and her business is taking off.
When purchasing long-term care insurance, do the research to ensure a quality product. Certain companies are better with premiums and rate increases than others, and large annual rate increases can lead to unaffordable premiums. Financial stability of the insurance company is also important, as the need for the insurance may not arise for years.
The peace of mind acquired after confronting one’s own financial planning situation and working with a trusted adviser to put a sound plan in place is priceless, allowing you to focus on other things.
Nancy Kunz, CFP®, ChFC®, CLU®, is Lead Financial Planner with First Commonwealth Financial Advisors, Inc. Reach her at (412) 562-3232 or email@example.com.
Natalia Paich, CPA, AIFA®, is Wealth Relationship Manager with First Commonwealth Financial Advisors, Inc. Reach her at (412) 562-3232 or firstname.lastname@example.org.
Insights Wealth Management is brought to you by First Commonwealth Bank
Employers — and subsequently, their employees — are becoming more savvy about the decisions involved in choosing and administering a health plan, often a business’s second- or third-biggest cost of operations. Just as safety initiatives can help reduce property and casualty insurance premiums, health insurance savings can often be achieved through self funding, says Mike Debo, senior sales and renewal executive at HealthLink.
“By instituting wellness programs and encouraging routine physicals and post-condition care for not only employees but for covered dependents, employers can reduce premium and claims costs while increasing productivity,” Debo says. “Instituting wellness programs, encouraging routine physicals and promoting post-condition care are especially beneficial to self-funded groups as they see the savings in the form of fewer claims spent, which can reduce reinsurance costs.”
Smart Business spoke with Debo about how increased involvement on the part of employers and employees can lead to lower health plan costs.
What is driving employers to be more involved with their health plans?
For many employers, the No. 1 reason they are becoming more involved is that they have no other option. They may have already maxed out what they can do from a plan design perspective with greater participant out-of-pocket costs. In addition, fully insured employers are constantly getting rate increases, but over the years, often no one has been able to fully explain the increases.
What are some tools an involved and educated employer can use to lower health costs?
An employer’s decisions are only as good as its information. That is why many business owners move into self-funding, where there is greater reporting about their group and its claims, whether medical or pharmacological.
One of the first tools businesses use is to have participant biometric testing, which provides the employer with information on how many people in the group have high cholesterol, hypertension, weight or smoking issues. From that — combined with reporting and claims — employers can create wellness programs and condition management programs. Wellness programs eventually save money from a claims perspective, but it might take a year or two to absorb the initial cost of testing.
With a year’s worth of information from claims and wellness programs, businesses can begin to change their plan design to address health conditions, utilization patterns or provide unique coverage for their plan participants. For instance, a business may find its participants are frequently visiting chiropractors because of their job type. With that information, they can look at not only how many visits they are allowing for chiropractors and the cost but also institute a condition management program strictly for back injury care.
Then, they can look at pharmacy claims. Are participants using generics as often as they can, brand names as necessary or mail order whenever possible? What does the employer need to do regarding the pharmacy benefit to not only ensure that people get the drugs they need but also to make it cost effective for the group?
By changing the plan design and addressing the specific needs of a group, employers often find they don’t need a particular program, such as condition management or a 24-hour nurse line, further cutting costs.
How can employers overcome initial resistance to wellness programs and other initiatives?
Most people aren’t going to participate in biometric testing, a smoking cessation program, a weight loss program or a condition management program unless there are cost differentials to participants in the form of incentives or disincentives. Plan participants often think such programs are an invasion of privacy or that they require too much of a time commitment, but when there is a 10 to 30 percent difference in premium costs, they get involved.
How can employers communicate to employees the true costs of health care?
One of the easiest ways is to use a plan with no co-pays, where everything goes toward deductible/coinsurance, so that participants understand how getting an X-ray at an outpatient facility versus a hospital can mean the difference between a bill of $700 or one of $1,800.
Reporting is extremely important because it provides the knowledge to make wise decisions. Communication is equally important, whether via traditional posters and payroll stuffers or new technology smartphones, emails and blast texting.
To be effective, the communication must address how to get the most out of plan benefits and programs while avoiding unnecessary costs to the participant and the group.
How do self-funded plans give employers so much more control of their health program?
Employers have full control, outside of federal mandates, to do what is best for plan participants and plan costs. For example, if an employer has a population with an average age of 45 and people taking off work for elderly parents going into nursing homes or going to the doctor frequently, the employer can bring in a vendor to work with employees on how to make decisions about their parents. This takes pressure off employees. They show up to work more regularly and are more committed to the company because of the service their employer provided.
With self-funding, it’s at least a three-year commitment of time and effort to cut costs and provide better benefits for employees. The employer has to sit down on a quarterly to semi-annual basis to go through reports and have someone scrutinizing claims. Employers with healthy groups may stay fully insured because they think there is no risk involved, but the risk is that they pay $2 million for something that costs $1.5 million. With self funding, employers have a program that they are in charge of, a program better suited for them and for their plan participants.
Mike Debo is a senior sales and renewal executive at HealthLink. Reach him at (866) 643-7094, ext. 1, or email@example.com.
Insights Health Care is brought to you by HealthLink®
When focusing on the day-to-day operations of your business, it’s easy to overlook planning for its future. And if your adviser doesn’t bring it up, you may never put a plan in place. However, having a well-thought out succession plan can ensure that your business continues after your retirement or death.
“It’s always a delicate conversation to have,” says Michael Dreveniak, vice president and wealth market leader with First Commonwealth Advisors. “Nobody wants to talk about when they are no longer here, but this is something that you have to do.”
It’s crucial to have answers for two questions, he says — what happens to the business if you are no longer around, and what happens in the event of your incapacity?
Smart Business spoke with Dreveniak about the importance of planning and how insurance can play a critical role in the process.
Why is succession planning critical to the continuity of a business?
There are risks associated with failing to plan. For example, when an owner passes away, there could be a lack of cash flow to maintain the business, which could result in a lower company value. And if the business isn’t well funded, it will lose key individuals and be unable to attract top talent to continue running the business.
The biggest misstep business owners make is failing to address this issue at all. Talk to your advisers — accountant, attorney and wealth manager — to ensure the best interests of your beneficiaries and heirs are considered. Your advisers are paid to walk through risks and anticipate them, providing ‘what if’ scenarios to ultimately arrive at a solution.
The classic example is the mom-and-pop shop that has been in business for 30 or 40 years and then closes its doors because the owner retires and there is no plan to continue the business. Proper planning could have allowed the business to continue running and the owners to accumulate additional wealth. Small businesses — classified as those with less than $7 million in annual revenue and fewer than 500 employees — represent 99.7 percent of all employer firms, and too many of those fail to create a plan.
When should business owners start planning and what steps should they take?
Five years is the perfect time horizon. Begin with the end in mind and allow financial professionals to ensure your balance sheet is cleaned up to maximize value. If the company is more attractive, you can receive top dollar and enable the parties involved to receive financing from a bank, other financial institution or investors. Then, evaluate the plan every year or two to monitor your progress.
Being proactive and having a well-designed plan can help with unforeseen future issues. When planning, prioritize what is most important to you, such as exit planning, income protection, retirement income, business protection, wealth transfer or survivor income. This keeps you from trying to tackle everything at once.
As your business changes — for example, you bring on another employee or your personal life changes — discuss it with your advisers so those changes are reflected in your succession plan.
How does a one-way buy-sell agreement work and why should a business consider it?
Many succession plans engage a well-defined buy-sell strategy, which dictates ownership going from the owner to another individual. It’s a key component of the planning process. With a one-way buy-sell agreement, if the owner of a company has somebody in mind — whether internal or external — who plans to purchase the company, there’s an agreement that he or she will buy from the owner upon some qualifying event, such as disability, death or retirement.
This works well where there is a sole owner, oftentimes for businesses with $1 million to $5 million in annual receipts and fewer than 100 employees. The one-way buy-sell will dictate how the funds change hands to purchase the business. If the owner is not around, in many cases, it provides a way for the beneficiaries and heirs to be compensated.
How can life insurance assist with a buy-sell agreement?
If the person who is going to purchase the business buys life insurance on the life of the business owner and the owner dies prematurely or the plan is to transition at death, the insurance provides the funds needed to purchase the company quickly. It’s a plan to provide certain funding when needed.
How else can the right insurance aid with planning?
Business owners work extremely hard to grow their assets, so protecting them should also be a priority. After accumulating a large asset base, that money can go quickly for long-term care if something goes wrong with your health.
In Pennsylvania, the cost to be in a nursing home averages $8,000 per month, or $96,000 per year, for care in a semi-private room. If high costs erode your asset base, your beneficiaries or heirs are forced to have a fire sale of assets to raise money for your care. Long-term care insurance is a way to mitigate some of that risk, to transfer it to an insurance company as opposed to the owner.
Here is a final reason to ensure that you incorporate insurance into a defined plan. Though some business owners say, ‘I may never use long-term care insurance. I get no benefit and just pay out every month,’ properly placed insurance enables business operations to continue when the unthinkable occurs. Until then, it works to protect your assets and brings peace of mind so that you can concentrate on your business instead of worrying about the ‘what ifs.’
Michael Dreveniak is a vice president and wealth market leader with First Commonwealth Advisors. Reach him at (412) 518-1854 or firstname.lastname@example.org.
Insights Wealth Management is brought to you by First Commonwealth Bank.
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 email@example.com.
Insights Accounting & Consulting is brought to you by Skoda Minotti
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 firstname.lastname@example.org.
Insights Real Estate is brought to you by CRESCO Real Estate
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 email@example.com.
Insights Accounting is brought to you by Weaver
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 firstname.lastname@example.org.
Insights Wealth Management & Investments is brought to you by Ancora