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3Q | 2009 | $39.95

Competencies Replacing Jobs as the Compensation/HR Foundation Patricia K. Zingheim, Ph.D. Schuster-Zingheim and Associates Inc.

Jay R. Schuster, Ph.D. Schuster-Zingheim and Associates Inc.

Private-Sector Pension Plan Funding and the PBGC: From Recovery to the AbyssJohn G. Kilgour I California State University, East Bay

Ford Motor Company’s 58 Years of Experience with a Cost-of-Living Allowance PlanFrank Giancola

Complex Chronic Illness: An Essential Target in Health Cost ManagementJoseph Marlowe I Aon Consulting Monica Maeyer I Aon Consulting Jennifer Greer I Aon Consulting

Creating a Cost-Effective Process for Physician RecruitmentMichael Hogue, M.D. I Integrated Healthcare Strategies Drew Erra I Integrated Healthcare Strategies

Energizing the Front Lines of Sales Management Steve Grossman I Mercer

A New Approach to Career Ladders Addresses: “What Do I Need to Do to Get to the Next Level in My Career?”Paul Oliva I Decorative Paints NA, Akzo-Nobel

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Julie Adamik, CCP, CBP, CEBS I Employee Benefits Training & Solutions

Ed Bell, CCP, CBP, GRP I Palmetto Health Alliance

John Bremen I Watson Wyatt

David Brown, CCP, CBP I Kaiser Permanente

Sharon Chandler, CCP, CBP I CAAT Pension Plan

Karen Collins I Paccar

Sean Delaney I Microsoft

Sharon Dougherty I Bucks County Community College

Claudia Elmore I Elmore Consulting Group

Henry Federal, CCP I Findley Davies Inc.

Sherry B. Fultz, CCP I Texas Childrens Hospital

Joi Gardner, CCP, PHR

Kevin Garrett, CCP I Deloitte Services LLP

Charles Hawkins, CCP I CSA Ltd., CSA LTD

Ann Kraus, CCP I The New York Times

Latrisse Woods Kuzinski I City of Glendale

Windsor Lewis, CCP, GRP, PHR I InfoSpace

Katherine A. Macrone, CCP, SPHR I Moffitt Cancer Center

Luke Malloy I UnitedHealth Group

Ronnie Moholane, GRP I AngloGold NA

Michael Murphy, CCP, SPHR, CEBS I Shoe Carnival Inc.

Penny Opalka, CCP, CBP, SPHR I Snyders of Hanover

Terry Pasteris I AECOM Technology Corp.

Catherine Peffen, CCP, GRP, PHR I Marriott Vacation Club International

Rosa Perez I DePaul University

Dave Rocheleau, CCP, SPHR, CHRP I RBC Financial Group

Tim Ruffner, CCP I TriHealth Inc.

Esther Scarpello, CCP, CBP I University of Nebraska at Omaha

Pam Schmidt, CCP, CBP I Target

Danielle Shanes I Reed Elsevier

William Strahan I Comcast

Riva Tarnopolsky, CCP

Patrick Wagner I Children’s Health Care

Jerry Warren, CCP I McKesson Corp.

4 WorldatWork Journal

z Organizational Culture z Compensation z Performance & Recognition

z Business Strategy z Benefits z Development & Career Opportunities

z Human Resource Strategy z Work-Life

Journal

Content

Key

Competencies Replacing Jobs as the Compensation/ HR Foundation Patricia K. Zingheim, Ph.D. I Schuster-Zingheim and Associates Inc.

Jay R. Schuster, Ph.D. I Schuster-Zingheim and Associates Inc.

Twenty large, publicly traded, private, nonprofit and governmental organizations replaced

jobs with people’s competencies and skills as the foundation for HR practices. This paper

shares what they did, why, and how it worked in the words of senior-leadership team

members. As competencies and the people who possess them became the center of their

HR programs, the study organizations reported a significant improvement in their ability

to engage, communicate with, develop, provide career growth for and reward their work-

force. All but one of the 20 study organizations use a scorecard to evaluate an individual’s

competencies, and all but two organizations use competencies to determine pay.

Private-Sector Pension Plan Funding and the PBGC: From Recovery to the AbyssJohn G. Kilgour I California State University, East Bay

Traditional defined benefits (DB) pension plans have been declining as employers shift

to defined contribution (DC) and hybrid cash-balance plans. ERISA’s pension plan

funding requirements were strengthened in the 1980s and 1990s. However, the slashed

asset values resulting from the recession of 2001 reduced asset values and increased

required employer contributions. The consequent Pension Protection Act of 2006

was intended largely to protect the Pension Benefit Guaranty Corp. (PBGC) and was

beginning to show some positive results. The economic crisis that began in the fourth

quarter 2007 has changed that. Many more employers will abandon their traditional

DB pension plans and turn them over to the PBGC. However, the PBGC has its own

funding problems and will be hard-pressed by this development. The PBGC’s deficit

tripled from $11 billion to $33.5 billion in the first half of fiscal year 2009.

Ford Motor Company’s 58 Years of Experience with a Cost-of-Living Allowance PlanFrank Giancola

For more than 50 years, Ford Motor Company’s cost-of-living allowance plan has

protected the wages of hourly employees from inflation, provided employee relations

stability and funded employee-benefit programs. This paper provides an opportunity to

track the origin and development of a major pay plan that has addressed an important

economic factor — inflation. The plan’s history involves a contentious pay issue, a major

industry currently struggling to survive, a capable union that occasionally has gone on

strike to protect the plan, and HR professionals who have experienced varying degrees

of success in shaping it to benefit the company.

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Executive SummariesThird Quarter 2009 | Volume 18 | Number 3

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Also

on the

Inside

Third Quarter | 2009

91 Published Research in Total Rewards

96 Facts & Figures

Complex Chronic Illness: An Essential Target in Health Cost ManagementJoseph Marlowe, Monica Maeyer and Jennifer Greer I Aon Consulting

Chronic diseases are the greatest threat to the nation’s health and the leading driver

of death, disability and health costs. While the primary objective should be to avoid

chronic illness, once it develops opportunities exist to manage its toll by improving

patient self-management, securing access to high quality medical providers and offering

care management oversight. By investing in needed resources for those with complex

chronic illness, employers can reduce medical costs, absence and presenteeism.

Creating a Cost-Effective Process for Physician RecruitmentMichael Hogue, M.D. I Integrated Healthcare Strategies

Drew Erra I Integrated Healthcare Strategies

This paper examines the true costs of recruiting physicians, and discusses ways to

maximize the effectiveness of a physician recruitment program. It then explores strate-

gies to encourage physician loyalty and retention as a means of reducing recruitment

needs in the future.

Energizing the Front Lines of Sales Management Steve Grossman I Mercer

This paper advances the precept that companies should leverage their front-line sales

managers’ role. The author indicates that there’s an overemphasis on sales managers’

transactional duties and a hybrid seller/manager job description. Research presented

in this paper points to a strategic process for success.

A New Approach to Career Ladders Addresses: “What Do I Need to Do to Get to the Next Level in My Career?”Paul Oliva I Decorative Paints NA, Akzo-Nobel

National Starch & Chemical Company (NSC) was a matrix organization consisting of

four specialty chemical businesses. Like many mature companies, National’s tradi-

tional salary structure had come into a state of disrepair. By the late 1990s, title and

grade structures evolved independently within each operating business to the point

where more than 4,000 job titles were maintained. In an attempt to resolve some of

this unnecessary title complexity and associated inconsistencies, a new approach to

career ladders evolved in 2004.

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I f prevailing practice is what most organizations do

and if best practice provides some proven advantage

to an organization and workforce, what is it when

20 organizations defy conventional wisdom and move

in a direction that is both innovative and proves to be

successful? Certainly this is not a trend but an event

worth watching — and perhaps a classic benchmarking

outcome. This study and paper focus on 20 large publicly

traded, private, nonprofit and government organizations

that replaced jobs with people’s competencies and skills

as the foundation for HR practices.

The paper shares what they did, why and how it

worked in the words of senior leadership team members.

As competencies and the people who possess them

became the center of their HR programs, the study orga-

nizations reported a significant improvement in their

ability to engage, communicate with, develop, provide

career growth for and reward their workforce. All but

one of the 20 study organizations use a scorecard to

evaluate an individual’s competencies, and all but two

organizations use competencies to determine pay.

No study organization made the change to competen-

cies as the centerpiece of HR programs merely to pay for

competencies. Although paying for competencies was not

their endgame in moving from jobs to competencies, the

Competencies Replacing Jobs as the Compensation/ HR Foundation

z Compensation

Patricia K. Zingheim, Ph.D.Schuster-Zingheim and Associates Inc.

Jay R. Schuster, Ph.D. Schuster-Zingheim and Associates Inc.

7 Third Quarter | 2009

study organizations believe it is important as a communication message to leaders

and workforce members that “you get what you pay for.” They wanted to pay for

what people know and do rather than only the jobs to which they are assigned.

STUDY DESIGN

This study is based on structured interviews with CEOs, COOs, CFOs, senior line

leaders and HR vice presidents in organizations that have made the journey to HR

solutions and programs based on the competencies people need to do the work

rather than the jobs they perform. The 20 organizations in this study provided the

interviewers with access to talk directly with senior executive leaders for an extended

period of time, and the interviewees provided complete answers to the questions in

the structured interview process. The structured interviews were conducted using

the interview guide, which is provided in the Appendix section on page 20.

The study participants did not come from a random sample of organizations as

they have previously developed competency-based HR solutions. The organiza-

tions were selected as a convenience sample from the publicly available client

lists of large vendors of competency products and services that are provided

in the vendor Web sites and promotional materials. The study organizations

had purchased one or more competency products or services from a vendor.

The authors of this paper do not list any of these organizations as clients and are

not advisers to any of the vendors.

The study organizations represent a variety of industries: four provide business

services (marketing solutions, maintenance services, legal advice, food service);

three provide consumer products; two provide federal government agencies; two

provide large retail chains; two provide health-care services; two provide manu-

facturers of large nondurable products; one provides defense electronics; one

provides biotechnology; one provides transportation; one provides agribusiness

commodity products; and one provides a nonprofit organization serving federal

government employees.

SURVEY RESULTS

Study organizations had a common concept for competencies but different specific

definitions. A compilation of their competency definitions includes “individual

knowledge, skill, capabilities, behaviors, abilities, aptitudes and judgment applied

to perform required or essential work to meet the organization’s performance

goals, to address business challenges, to accomplish the organization’s mission

and to make the organization more successful and help people be successful at

the same time.”

Why Move to Competencies?

The organizations made the change to competencies to communicate with the

workforce about work requirements, to apply the organization’s mission and values


to how people work, to change from filling jobs to an HR strategy of creating

a competency-based workforce, and to fight excessively bureaucratic structures

and the continued creation of unnecessary organizational levels and layers.

Figure 1 summarizes the reasons the organizations gave for making this change.

Often the move to competencies was undertaken as an element of some other

change initiative sponsored by executive leadership.

A powerful theme from the leaders about the reasons for the change is the

belief that they needed a new foundation for performance management, training

and development, career growth, compensation, staffing and other HR programs.

The universal goal of executives interviewed was to develop a workforce with the

necessary competencies to effectively perform, and they all believed that jobs did

not fill this bill for the following reasons:

People do work; jobs do not:z With all the talk about the importance of people

to organizational success, these leaders had realized that their HR programs

were designed to focus on jobs, not the people who do work. For example,

they mentioned that training was specifically job training and should instead

be concentrated on improving needed skills and competencies. Also pay was

centered entirely on the job, and the value of jobs was traditionally evaluated

more than people were evaluated. And most of all, recruitment, selection and

succession were too focused on filling jobs rather than looking for talent with the

competencies and skills required by the organization. One comment included:

“Our HR programs were focused on jobs and not people. They were focused on

jobs, not the work process. With constant budget pressures, we needed to get

programs close to where the work is actually done and people do work.”

Jobs may create bureaucracy: z “Jobs pile up like fire logs, and you only take

logs off the top,” said one executive, meaning that the people in his orga-

nization were getting lost in the structure and bureaucracy of a formalized

job structure. The executives interviewed believe that the levels and layers

were not based on the value growth of the organization’s people but on the

semantic differentials that described jobs and job titles that created unnecessary

FIGURE 1 Why Move to Competencies

Reason for Move to Competencies Percent of Organizations Mentioning Reason (N=20)

Communicate key needs of organization to workforce 65

Apply mission/vision to how people work 55

Change from filling jobs to most competent workforce 45

Fight excessive structure and levels and layers 40

Tie together all HR programs 20

Create high-performance organization 15

Stay union free 10


hierarchy and layers through which communication was difficult and agility was

challenging. They believe a job-based approach creates unnecessary hierarchies

that are wasteful and inconsistent with creating a high-performance workforce

and organization.

Maximize performance per individual: z During times of cost pressures, organiza-

tions want fewer jobs and stronger performance from each individual. Common

comments and themes included: “If you have a vacant job in your organization, it

gets filled whether it is essential or not” and “Job descriptions do not communi-

cate what is necessary to be a success in the organization; competency, skill and

performance do.” And the more effective people are in acquiring and applying

the competencies and skills they need to do required work, the better they will

perform and the more likely it is that organizational goals can be achieved.

Job descriptions are often rigid/obsolete: z Agility and flexibility are important

to the executives interviewed for this study. They want people to learn, grow

and acquire contemporary competencies and skills throughout their careers so

they are not saddled with a potentially obsolete workforce from a capabilities

standpoint. Where people learn from a message of competencies and skills,

they do not learn from job descriptions that are centered on experience and

education and not what the employee knows or can do, reported the executives

interviewed. Acquiring and applying competencies and skills are more important

than sustaining a system of jobs and job descriptions that executives believe are

often obsolete and unrelated to how people work and apply what they know.

Competencies/skills define the value of talent: z Jobs have not evolved to

describe competencies and skills. So these executives believe they are best served

to describe the competencies and skills directly and include them in perfor-

mance management, pay systems, training and development and all HR elements.

“Development and coaching can best be designed around competencies and skills

to be acquired and applied to get results.”

Competencies relate better to business commitments: z Effective business strate-

gies that people understand and respond to are commonly built upon concepts

and commitments such as customer, quality, results, collaboration, teamwork,

work knowledge and technology applications. These are workforce competencies

and skills. Never are business strategies built upon the foundation of jobs that

focus on reporting relationships, years of experience, educational background

or functional relationships. For the executives interviewed, competencies better

capture what makes a business successful than do jobs.

Competencies and skills come first: z Jobs and tasks can only be performed if

an individual has the competencies and skills to perform the work and then

applies them to the job.

One CEO summed it up, “We were in a system of jobs. The problem was that we

could not evaluate performance effectively and develop an HR strategy based on

jobs. So we moved to what the organization needs done by people and this was


not necessarily connected to jobs. We did this in large part to combat bureaucracy

and proliferating job titles. As organizations grow, they create titles and levels and

never lessen the level-building process. And nobody wants to leave jobs unfilled.

So competencies work for us.”

Going against the prevailing practice of jobs was likened to rowing a small boat

against a strong river current. Yet these organizations embarked on the journey

and report satisfaction with the result. The momentum to remain an organization

of jobs is powerful. Nearly every organization is structured around organization

charts with boxes inside that are jobs with titles and functional descriptions.

For decades, people have been offered jobs and job promotions. When asked what

people do, most describe their job and provide their job title rather than describe

the competencies and skills they have and the work they are doing. Changing this

paradigm is a formidable task.

These study organizations, however, moved to competencies as they view people

as the source of organizational success rather than inanimate jobs and believe that

jobs do not communicate the most desired way to do work. People matter the most

as success rests with people acquiring and applying contemporary competencies

and skills to the work process.

Where Competencies Come From

The source of the competencies for the study organizations included the

following:

Core competencies of the business z

Organization’s mission/vision z

Work analysis based on the work the organization needs donez

Key competencies of the most successful people.z

The logic is to communicate the most essential capabilities that are critical to

success and come from the organization’s value system. Competencies are typi-

cally selected by the leadership team rather than through employee participation.

Every study organization reviews and periodically updates competencies;

one organization indicated that it continually updates and reviews competencies.

What Competencies Are Used?

A combination of competencies in the categories of work (technical expertise), customer,

teamwork, ethics and results are the most common competencies used by the study

organizations as shown in Figure 2. In 1996, the authors studied 10 other organiza-

tions, and the results of their competency usage are described in Figure 3 (Zingheim,

Ledford and Schuster 1996). Four of the five most frequently used competencies

in this 2009 study are common to the 1996 study although in different ordering.

Ethics, safety/security and environment did not appear in the 1996 competency

study but are important competencies for 65 percent, 40 percent and 35 percent of

the organizations, respectively, in this study due to changing business challenges.


All study organizations use work competencies or technical expertise — e.g.,

biotechnology, law — that are close to the organization’s core competencies.

Career progression based on work competencies keeps these competencies updated

and contemporary to continue to add value. Career tracks often progress from

less complex to more complex work and describe work in the context of whatever

FIGURE 2 Competencies Used by 20 Study Organizations

Competencies from This Study Frequency of Use: Percent of Organizations (N=20)

Work1 100

Customer2 70

Teamwork and collaboration 65

Ethics3 65

Results4 60

Safety/security 40

Environment 35

Business5 35

Quality6 30

Leadership 25

Training/development, continuous learning, continuous growth 15

Other (mentioned by one study organization: communication, — professional contribution, stewardship of assets/resources, treatment of others, new knowledge and behavior, work rules)

1 Also called work knowledge, work skills, technical knowledge, professional knowledge and excellence, work performance, core work competencies, core competencies, work success and capabilities knowledge, work knowledge of science.

2 Also called customer care, customer first, customer service, customer responsiveness.

3 Also called truth and honesty, ideals and honor, personal and business ethics, ethics and professionalism, ethics and honor, ethics/value-driven.

4 Also called goal performance, goal direction, goal orientation, goal accomplishment, measurable results, ability to get results, meet goal commitments, results and best performance, goal performance/success.

5 Also called business knowledge, business acumen, product/service knowledge.

6 Also called accuracy, quality with speed, quality continuous improvement, quality, reliability and consistency, accuracy and diligence.

FIGURE 3 Competencies Identified in 10-Company Sample from 1996 (Zingheim, Ledford and Schuster 1996)

Competencies from 1996 Study Frequency of Use: Percent of Organizations (N = 10)

Customer focus 80

Communication 70

Team orientation 60

Technical expertise 60

Results orientation 60

Leadership 60

Adaptability 50

Innovation 50


products or services the organization provides. For example, computer-based work

described how computer technologies are applied to get desired business results.

The competency of results communicates that merely applying a work or behav-

ioral competency is not enough. Instead the application of competencies must

translate into measurable goal achievement and outcomes that add to business

value. Combined with results, ethics communicates that how work is performed

is as essential as what is achieved. The selection of competencies is important as

it communicates the focus for work and the workforce.

Types of Workforce That Participate in Competency-Based HR Programs

Although all study organizations have organization-wide competencies, only

one-fourth have their entire workforce participate in their competency-based HR

programs. The most common approach, used by 30 percent of the organizations, is

participation of only the core professionals — the exempt professionals possessing

and applying the organization’s core competencies to perform work and meet goals.

However, 47 percent of the organizations with partial workforce participation

would like to have their entire workforce participate in their competency-based

HR programs and view this as a primary area for improvement. What is holding

them back is maximizing the business value-added for the investment of resources

and time. For example, all study organizations use a work competency that must

be defined and specified for each type of work and then updated and managed.

Figure 4 shows the types of workforce that participate in the competency-based

HR programs.

Performance/Competency Management

Keeping score is a first step to making competencies real for the workforce.

“If we cannot apply competencies and skills to work and people, they have no

value,” said one executive. After selecting and defining competencies, 19 of the

20 study organizations developed and deployed a scorecard to evaluate the

individual on the competencies or the skill/competency inventory, communicate

the assessment to the individual and use the results in their competency-based

HR programs.

FIGURE 4 Type of Workforce Participating in Competency-Based HR Programs

Type of Workforce Participating Percent of Organizations (N=20) in Competency-Based HR Programs

Only core professionals 30

Entire workforce 25

Specific workforce roles/competencies participate (not only core professionals) 25

All professionals (excluding nonexempt) 20


Performance/competency management was most frequently cited as the first

application for competencies as it:

Introduces the change to competencies by educating people about how a compe-z

tency-based organization works in contrast to a job-based organization.

Makes competencies real for individuals by personalizing the competency process. z

Focuses initially on identifying not only competency strengths but also training z

and development needs based on areas for improvement.

“Unless competencies are focused directly on the individual, many will believe

‘this too will pass,’ and we are serious about this change,” one CFO said during

the interview.

Some study organizations no longer use the term “performance management”

but have renamed the process, for example, to “competency management,”

“growth coaching” or “work management.” The scorecard meaningfully connects

the competencies to the individuals in the workforce. “It is the measuring cup,”

one executive said, “to determine where the individual stands.” The rating

tool translates the competencies into observable and measurable behavior.

Once current competencies are assessed, the tool can be used to communi-

cate directions and the extent to which competency development is needed.

Scorecards typically provide scores on individual competencies, an overall score

and thereby a value of the individual for use in all other HR programs using

competencies. The reviewers vary from manager only, multi-raters, peer raters

and multi-management raters, but the shared objective is to assess individual

progress on the competencies in the competency model.

For example, one company’s evaluation of people using a talent inven-

tory is called “growth coaching” and has three overall scores of “red” (about

10 percent of the workforce who do not meet standards and expectations and

do not earn a base-pay adjustment), “blue” (meeting standards and expectations,

resulting in an “all go” situation for promotions, pay adjustments, etc.) and

“gold” (top 15 percent of the workforce who are on the fast track for promo-

tions, transfers, etc.). Another company’s performance-management process is

called “work management” and evaluates not only competencies and science/

technology but also performance and results. An individual’s overall weighted

score translates into one of three bands of success: “needs assistance”; “excel-

lent” (midscore for most people); and “beyond excellent” (the top 10 percent

of the workforce). This company decided to move the focus to workforce

management with competencies rather than typical performance management

where most people believe they are above-average performers and then receive

a meets-expectations evaluation.

Competency-based performance assessment subsequently is the foundation

for other HR programs: compensation, training and development, career growth

and progression, recruitment and selection, and communication. It is part of the

coaching and feedback process, ensuring continuous improvement.


Competency-Based HR Programs

Only five of the study organizations use the term “talent management” to describe

the process and tools used to provide a high-performance workforce. Most used

other terms such as “workforce management,” “career management,” “career

growth” and “growth coaching.”

As Figures 5 and 6 show, the most common usage for competencies is “training

and development” (100 percent of the organizations). This is followed by “career

growth” and “communication” about what the organization values and performance

management (95 percent of the organizations use competencies for these three

applications). Base-pay adjustments are next, with 90 percent of the organiza-

tions using competencies in determining adjustments. Figures 5 and 6 describe

additional practices in applying competencies to HR and compensation programs.

“Unless you pay for competencies and skills rather than jobs, the program will

have little direct meaning to the workforce,” one CEO commented during the inter-

views. All but one of the study organizations that use competencies for performance/

competency management also use them for base-pay adjustments. Of the two

FIGURE 5 Competency Applications Not Related to Compensation

Application Not Percent of Practice Related to Compensation Organizations (N=20)

Training and development 100 z Competencies define and determine training and are used to evaluate the results of training.

z Competencies form the basis for feedback and coaching.

z Gap analyses are used to determine training and development needs.

Career growth 95 z 70% have directly integrated competencies into decisions about promotion, transfer and rotation.

z 50% use competencies to make decisions about movement in career tracks, career ladders or career channels.

z Organizations typically describe this compe-tency application as “career growth” or “career planning” rather than “succession planning.”

Communication 95 z Competencies are a major tool to communi-cate to the workforce what is important, how to be successful and new expectations in terms of adding value to the organization.

z A few organizations mentioned using competencies to brand their organization.

Recruitment/ selection 80 z Stronger application is profiling and rating candidates against competencies.

z Weaker application is using the competency model and competencies to communicate what it is like to work for the organization.

Workforce reduction/termination 20 z Competencies are used not only for rewards but also to make decisions about terminations and workforce reductions.


organizations not using competencies for base-pay adjustments, one company only

rewards actual results, so it has significant incentives based on results and its major

competency application is training and development. In the future, it plans to link

competencies to performance management and pay. The other organization also

views training and development as the major focus for competencies and uses the

federal government’s general schedule (GS) system to determine base pay.

Most study organizations use a blend of competencies and labor market to

develop their career tracks, bands or broad ranges and subsequently use the

scores from the performance/competency management tool to manage base-pay

progression. The most significant challenge was translating competitive practice

from job-based compensation surveys to competencies. The study organizations

believe they likely have some error in the translation of survey data, but the result

FIGURE 6 Competency Applications Related to Compensation

Compensation-Related Percent of Practice Application Organizations (N=20)

Performance management 95 z All organizations using competencies for performance management have scorecard, ratings and/or scores.

z Organizations vary in how they evaluate results, i.e., results are incorporated into the evaluation of specific competencies, the organization has a separate competency called “results/goal orientation,” and/or perfor-mance management also includes additional business goals for evaluating results.

Base-pay adjustments 90 z All but one organization that use competencies for performance management use them to determine base-pay adjustments.

z 45% of the organizations use bands and 15% use broad ranges for the competency based salary structure.

z Integrating job-based compensation survey data into a competency based salary structure is challenging and requires translation and estimation.

Incentive 20 z Few organizations use competencies to help determine incentive awards. Incentive metrics focus on results, goal achievement, quantitative metrics and/or broader organiza-tional results.

z One organization provides a bonus to the top 10% based on the competency evaluation that determines base-pay adjustments.

Recognition 5 z The only organization that uses competencies to directly recognize employees does not use competencies to determine base-pay adjustments.

z Indirectly competencies provide recognition through career growth, training/development, etc.

Stock options/equity grants 0 z None of the organizations use competencies for determining stock option or equity grants (four organizations are nonprofit).


is close enough to be reasonably competitive. Although the market serves as a

foundation, “Paying for competence is more important than paying competitively”

was a comment made by several executives interviewed.

As an example of integrating market and competencies, the bottom and the

top of a career track are priced in the labor market, and points in between are

estimated based on the assumed or estimated value of competencies. Alternatively,

career tracks, bands or broad ranges are developed based on job-based market

pricing and then a translation is made of the competencies expected at various

levels or zones within those career tracks, bands or broad ranges.

A common competency pay system has a career track associated with salary

bands and the individual’s scorecard result is reflected in the size of any base-pay

adjustment granted. Scores, position in the band, and other factors influence the

size of any base-pay adjustment granted. A few organizations have a point system.

One biotechnology company, for example, has a competency/skill point system in

which people cash in the points for raises and the points’ value depends on the

individual’s market position — the further below the individual’s base pay is from

the market, the more a point is worth.

Vendor Usage

The study organizations used a vendor as part of their process. In their early

migration to competencies as the centerpiece of their HR strategy, some purchased

assistance in identifying competencies, others wanted help with competency/perfor-

mance evaluation tools, others targeted Web technology support, and still others

used other elements of the vendor’s offerings. The study organizations used a vendor

as they wanted to jump start the implementation process, avoid obvious mistakes

and take advantage of the experiences of organizations that had done this before.

The study organizations built an internal infrastructure to support their transition

from jobs to competencies and staffed themselves with talent to self-manage the

programs within the first two years following the transition. Sixty-five percent of

the organizations mentioned their Web-based system as important for effectively

managing and administering their competency-based HR programs.

Strengths and Areas for Improvement

In contrast to a job-based approach, many study organizations mentioned the

major strength of their competency-based HR programs is that it makes people

think about the actual work and what needs to be done to succeed. Executives

said a result of competencies is that they are better able to connect people with

the organization and the work to be done. Study organizations also mentioned

that it makes people part of the solution rather than part of the problem, ties

all of HR together, completely aligns people and the organization, and is a real

business tool for success rather than just a cost. Several executives mentioned the

power of pairing people’s growth and the company’s success.


Consistent with the concept of continuous improvement, the study organizations

identified areas for improvement in their competencies and competency based HR

programs. The most common are shown in Figure 7.

LESSONS LEARNED

Lessons were learned by the study organizations that made what they describe

as a successful transition to HR programs based on competencies and not jobs.

Some of their key learnings include:

It was important to do.z Leadership made it a priority and consistently cham-

pioned and sponsored the change process. And these organizations universally

advised understanding that while competencies may be a better HR solution than

jobs, the journey is replete with challenges as well as opportunities.

Not “just an HR initiative.”z Sponsorship came from the CEO and other senior-

leadership team members. These changes were driven by senior line and staff

executives, and the programs in every instance reflected the culture and character

the leaders were trying to instill in the organization.

Keep the end in mind.z Executives concentrated on the powerful benefits the

organization and talent pool would gain from the change to competencies as

the centerpiece of their HR programs and were not deterred along the way to

success. They viewed the end result as essential and continued to follow through

to ensure effective implementation of the change.

Not one-size-fits-all.z While the vendor products and services clearly got the

transition in motion, it was the senior-executive team who made the migration to

competencies successful. By the time the program was implemented, it had been

strongly customized to meet the requirements of the organization using it.

ADVICE TO OTHERS

In addition to senior-leadership involvement, organizations have some additional

advice to those considering replacing jobs with a HR solution focused on the people

themselves and the competencies they apply to produce results.

FIGURE 7 Improvement Areas for Competencies and Competency Based HR Programs

Improvement Area Percent of Organizations (N=20)

Price competencies better to improve relationship of pay to value 50

Include entire workforce in competency based HR programs 35

Simplify the competencies and the competency based HR programs 20

Refine, continuously improve the competencies and the competency based HR programs 15

Define the competencies more practically, clearly, concretely and understandably 10

Improve communications 10


Select organization-specific comp-z

etencies. Choose competencies that

best reflect the organization’s busi-

ness and workforce strategies. Do not

worry about what other organizations

do, define the competencies that are

closest to what makes your organiza-

tion successful. Select competencies

that align with the organization’s

overall direction and where it is

going. Define competencies in prac-

tical, concrete terms.

Star t with essential talent. z

Identify the people possessing the

essential competencies that the orga-

nization cannot do without and that

are needed to thrive. In a technology

organization, for example, start with

technical and scientific people and

sales and marketing talent. In a

health-care organization, start with

nursing and physician talent.

Keep it (relatively) simple.z “If you

cannot explain it, it does not work,”

said one executive. Most organizations use five or six competencies and

view complexity and verbosity as negatives. A work competency can be

organized clearly in terms of several descriptive career tracks, and other

competencies can be defined to apply to key areas and levels. Complexity

has been a major factor in contributing to the termination of a number of

programs. The authors remember being asked to rescue a people-based pay

system that required numerous manuals to describe. The competency program

was too complex to save.

Keep the customer in mind. z Most organizations have a competency related to

customers as they want to be proud enough of their competencies to communi-

cate them to their customers. If customers do not see a win-win between their

needs and the workforce’s capabilities, a possible dislocation can occur. So the

advice is that an organization should use only HR program features it would be

pleased to share with its customers.

Administer online. z When skills and competencies initially were included in

HR programs in the 1990s, Web and computer-administration tools were not as

available as today. The most popular purchase from vendors is an application

allowing organizations to manage, communicate and update the program online.

RESOURCES PLUSFor more information related to this paper:

www.worldatwork.org Type in any or all of the following keywords or phrases on the search line:

z Competencies

z Performance management

z Scorecard.

www.worldatwork.org/bookstore

z High Performance Pay: Fast Forward to Business Success

z The WorldatWork Handbook of Compensation, Benefits & Total Rewards: A Comprehensive Guide for HR Professionals

z Managing Individual Performance: How-to Series for the HR Professional.

www.worldatwork.org/education

z Performance Management — Strategy, Design and Implementation, Certification Course: C11

z Base Pay Administration and Pay for Performance, Certification Course: C4.

z Competencies vs. Job as the HR/Compensation Foundation Webinar, Nov. 5, Noon (EST).


These automated systems often support whatever the program design is, and

senior executives believe these solutions are essential to administration.

Communicate extensively.z Changing to something new becomes a significant

test of the willingness and ability to communicate through two-way commu-

nications. “To use the term ‘over-communicate’ is an understatement. Constant

and changing communication and information exchange are critical,” one HR

executive said. And communicating using all available media, including elec-

tronic and face-to-face, is important as different people respond differently to

the communication media.

Instituting a competency based people strategy and HR programs takes

time. Clearly, this is not a light-hearted change effort. Every study organization,

however, viewed the change as worthwhile. It is not for the fainthearted as legacy

job-based HR programs are hard to change. The journey was “well worth it,”

many executives said.

CONCLUSIONS

This study’s objective was to understand why and how 20 organizations moved

to an HR solution based on workforce competencies rather than jobs. This study

does not document prevailing practice as organizations in general continue

to focus on describing jobs and building organizational initiatives by creating

organization charts that are job-based. This study, however, provides evidence that

competencies as the center of the HR universe work in 20 organizations, and it can

be a benchmark. The study results show that competencies are a proven foundation

for people-management not only by integrating HR programs into a unified concen-

tration and direction but also by communicating how the workforce can best add

value and be successful. The study results can help organizations wanting to move to

competencies learn from others and facilitate implementing an effective program. z

Zingheim, Patricia K., Gerald E. Ledford, Jr. and Jay R. Schuster. 1996. “Competencies and Competency Models: Does One Size Fit All?” ACA Journal. Spring: 56-65.

REFERENCE

AUTHORS

Patricia K. Zingheim, Ph.D. and Jay R. Schuster, Ph.D. are partners in Schuster-Zingheim and Associates Inc., a globally recognized pay and rewards consulting firm located in Los Angeles and founded in 1985. They consult with a wide range of companies throughout the world on the development of total rewards, incentives and other pay solutions. Schuster and Zingheim received the Keystone Award from WorldatWork in 2006. They were selected as pay and motivation gurus in The Guru Guide. They are authors of three rewards books: High-Performance Pay Fast Forward to Business Success (WorldatWork 2007), Pay People Right! Breakthrough Reward Strategies to Create Great Companies (Jossey-Bass 2000) and

The New Pay: Linking Employee and Organizational Performance (Jossey-Bass 1996). They are authors of more than 300 papers in business magazines on the subjects of rewards and organizational effectiveness. Both are contributors to publications such as Fortune, Across the Board, The Wall Street Journal, Working Woman and Business Week. They have appeared on many television, cable and radio programs including CNBC, CNN, NBC and CBS. They speak throughout the world to leadership audiences interested in creating a high-performance workplace through people. They will be leading the Nov. 5 WorldatWork Webinar on this topic at Noon (EST). Their Web site is www.PayPeopleRight.com.

Schuster-Zingheim and Associates Inc. would like to understand how your organization does the following:

1 | Does your organization use behavioral competencies or other types of competencies (technical competencies, skills, aptitudes) as part of any HR plans, programs, strategies, or tactics? If no, end the conversation.

2 | How do you define competencies (e.g., knowl-edge, skills, behaviors, aptitudes, organization’s core competencies)?

3 | Please share your general competency model.

4 | Are these organization-wide competencies, or does your organization define and use competencies specific to a job family or job?

5 | Where did your organization’s competencies come from? How do they relate to your organization’s goals/objectives? How do they relate to your organization’s business plan or strategies?

6 | What does your organization do with this competency model? Please describe the applica-tions your organization uses for competencies:

z Talent management


z Compensation

z Recruitment and selection

z Succession planning

z Training and development

z Other? What other?

7 | Please describe in some detail each application for competencies? How does it work? What works best? What would you do different?

z Talent management


z Compensation

z Recruitment and selection

z Succession planning

z Training and development

z Other? What other?

8 | How do you use competency in compensation? Please describe.

z Salary ranges or bands

z Determining market value

z Base salary increases

z Adding strategic value to job market value, individual’s market value or worth

z Variable pay or incentives

z Stock options or grants

z Recognition

9 | Please give me the benefit of your ideas on the following.

z How do you market value all your jobs in your organization?

z How do you analyze competencies, values, culture, and the nature of jobs in your organization?

z How do you add strategic value to the market value of your jobs?

z How do you value jobs in your organization that represent both market value and strategic value?

10 | What encouraged your organization to deploy HR programs based on competencies? What did your organization do before it used compe-tencies as the basis for HR programs? How did your organization make this transition?

11 | What are the major strengths of your organiza-tion’s competency program?

12 | What are the most important areas or oppor-tunities for improvement of your organization’s competency program?

13 | What advice or suggestions do you have to others who may be on the cusp of consid-ering competencies as the foundation of its HR programs?

14 | What additional comments and suggestions do you have about deploying competencies?

APPENDIXFocused Interview Guide for Study of Competencies Replacing Jobs for Compensation/HR Foundation

Schuster-Zingheim and Associates Inc. is exploring strategies, practice and evaluative experiences and comments regarding using competencies to replace jobs as the compensation/HR foundation. We have selected a sample of large organizations for this study. We are studying why these organizations moved to a people-based and competency based HR solution, what the journey was like, and how this impacts specific HR programs such as training and development, career growth, performance management, pay and rewards, and recruitment and selection.

Our objective, if you are willing, is to gain insight into your practices, what the results are, and what you have learned as a result of changing to a focus on competencies. The organizations studied will not be listed, and individual input will not be attributed to you in any way.


Private-Sector Pension Plan Funding and the PBGC: From Recovery to the Abyss

P rivate-sector pension plans underwent dramatic

change in recent years. A massive shift from

defined benefit (DB) to defined contribution

(DC) and hybrid cash-balance (CB) plans since the

mid-1980s was only the beginning. Economic reces-

sions in the early 1990s and again in the early 2000s

contributed to increase the underfunding of pension

plans. This resulted in the failure and impending failure

of many traditional DB plans insured by the Pension

Benefit Guaranty Corp. (PBGC). The Bush Administra-

tion’s response was to propose major pension funding

reforms. After lengthy debate, the Pension Protection

Act of 2006 (PPA) was passed. It significantly added to

the employers’ funding obligations.

The recession that began in 2008 put plan sponsors under

greater cost pressure, which made honoring those obliga-

tions more difficult. To provide some relief, the Worker,

Retiree and Employer Recovery Act (Recovery Act) was

signed into law in December 2008. Among other things,

it relaxes the pension funding requirements of the PPA.

This paper examines private-sector DB pension

plans with emphasis on plan funding and its impact

on the PBGC.

Compensation z

John G. Kilgour California State University, East Bay


PENSION PLANS

Pension plans are classified by the Internal Revenue Service (IRS) as DB or DC.

In a DB plan, the participant is entitled to a retirement benefit based on his/her

years of participation, some measure of final average salary (typically the last or

highest three consecutive years) and an actuarial factor that may vary with age

or years of service (e.g., 1.5 percent at age 60). The retirement benefit may be

reduced by a portion of the participant’s Social Security benefit on the theory that

the employer pays for half of it. The employer funds the plan and has investment

control of its assets. Investment risk is borne by the employer.

The most common DC arrangement in the private sector is the 401(k) plan under

which the participant makes contributions that are matched or partially matched

by the employer. The specifics of 401(k) plans vary. A typical arrangement is for

the employer to match 50 percent of the employee’s contribution up to 6 percent

of earnings. Internal Revenue Code Section 402(g) imposes maximum limits on

deferrals. In 2009, they are $16,500 plus the $5,500 Section 414(v) age 50 and above

catch-up contribution. The assets accrue in an individual account owned by the

employee and provide a lump-sum distribution or annuity contract upon retirement

or termination. Investment risk is borne by the employee.

Pension plans are also classified as “single employer” or “multiemployer.” As the

name implies, the former is sponsored by one employer for its employees. A multi-

employer plan is the product of collective bargaining between a labor organization

and two or more (often many) employers, usually in the same industry.

TABLE 1 Shift from DB to DC Single-Employer Pension Plans, 1985 - 2006 (Plans in Thousands, Participants in Millions, Assets in Billions) (U.S. Department of Labor, Employee Benefit Security Administration 2008a and 2008b)

Single-Employer Plans

DB Plans DC Plans

Year Plans Active Participants Assets ($) Plans Active Participants Assets ($)

1985 68 23 716 461 32 420

1990 111 21 798 598 34 698

1995 68 19 1,163 623 41 1,295

2000 47 17 1,621 686 49 2,171

2001 45 17 1,480 685 50 2,066

2002 46 17 1,346 685 50 1,894

2003 45 17 1,593 652 50 2,244

2004 46 16 1,727 652 58* 2,518

2005 46 16 1,852 630 59 2,730

2006 47 15 2,031 644 63 3,131

* The row 2004 (and after) shows active participants computed to include employees eligible to participate in a DC plan who declined to do so and former employees with vested benefits who have not had a break in service as defined in the plan.


As indicated in Table 1, there were about 47,000 single-employer DB plans in the

United States with 15 million active participants in 2006. These numbers declined

substantially over the years. In contrast, single-employer DC plans, mainly 401(k)

arrangements, have grown impressively to 644,000 plans with 63 million active

participants. These numbers are, however, misleading.

The DB plan data include hybrid cash-balance plans that function more like DC

than traditional DB plans. As of 2006, there were 2,126 hybrid plans insured by

the PBGC, 7.4 percent of all insured plans. Participants in hybrid plans numbered

10.3 million, 30.3 percent of all PBGC insured participants. Table 2 shows the

dramatic increase in hybrid plans and participants since 2001. Between 2001 and

2005, lawsuits were filed claiming that cash-balance plans discriminated against

older workers. Several courts have held that this is not the case and the PPA of

2006 made it clear that such plans do not violate the law. A significant increase

in the adoption of hybrid plans is likely.

The data on DB plans also contain many “frozen” plans that are closed to new

employees and/or no longer accrue benefits for existing participants. Until recently,

the little that was known about plan freezes was fragmentary and provided by

consulting firms. In 2005, the PBGC published its first analysis of “hard freezes”

(closed to all new employees and no further accrual of benefits for existing partici-

pants) based on Form 5500 filings for 2003. It found that 9.4 percent of reporting

plans with 2.5 percent of total participants and 1.8 percent of active participants

were “hard frozen” (PBGC 2005).

In 2008, the U.S. Government Accountability Office (GAO) conducted a study of

pension plan freezes. Using a stratified sample, it estimated that more than 14 percent

of plans covering 3.3 million active participants (21 percent of all such participants)

were frozen. Moreover, the rate at which plans are being frozen is increasing with

nearly one-half of the freezes occurring since 2005 (U.S. GAO 2008a). In 2007, of the

1,216 pension plans that had been terminated, 371 (30.5 percent) had been hard frozen

prior to termination (U.S. GAO 2008b).

TABLE 2 PBGC Insured Hybrid Single-Employer Pension Plans, 2001 – 2006

(Participants in Millions) (Pension Benefit Guaranty Corp. 2009a)

Plans Participants

Total Insured Hybrid Percent Total Insured Participants in Percent Year Plans Plans Hybrid Participants Hybrid Plans Hybrid

2001 32,954 1,227 3.7 34.3 7.0 20.5

2002 31,229 1,308 4.2 34.2 7.9 23.1

2003 30,611 1,541 5.0 34.4 8.5 24.3

2004 30,148 1,756 5.8 34.5 10.0 28.9

2005 29,605 1,944 6.6 34.2 10.3 30.2

2006 28,923 2,126 7.4 33.9 10.3 30.3


The DC plan data are also misleading. The employer’s funding obligation, if any,

is limited to matching all or part of the employee’s contribution under the plan’s

provisions. In 2006, the average single-employer DC plan had about $50,000 in assets

(derived from Table 1). That is not a lot of money. Granted, some accounts are much

larger; but, some are much smaller. Assuming an optimistic 8-percent return on

investment, that would yield only $4,000 per year. Given the decline in asset values

and interest rates beginning late 2008, things are much worse than they were in 2006.

Multiemployer plans also exhibit a shift from DB to DC arrangements. As indi-

cated in Table 3, while total multiemployer plans remained fairly stable over the

years, DB plans declined from 2,216 in 1985 to 1,524 in 2006. The number of active

participants declined as well. Meanwhile, the number of multiemployer DC plans

and their covered active participants dramatically increased.

In 2005, the average multiemployer DC plan balance was about $54,000 (derived

from Table 3). Again, that is not very much money.

When the decline in the number of DB plans is coupled with the growth in the

number of frozen and hybrid plans, it is evident that traditional single-employer

DB pension plans, with their guaranteed lifetime benefits, are on their way to

extinction. The 401(k) and other DC arrangements that have replaced them are

poor substitutes for many employees.

FUNDING REQUIREMENTS

Private-sector pension plans are largely a post-World War II phenomenon. In 1949,

the U.S. Supreme Court held that pensions were a mandatory subject of bargaining

under the National Labor Relations Act (Inland Steel Co. v. NLRB). This resulted

in an explosion of employment-based pension plans as employers responded to

union demands and as nonunion employers voluntarily adopted plans to remain

nonunion. This development took place in an absence of regulation other than

IRS “qualification” and some toothless reporting and disclosure requirements.

TABLE 3 Shift from DB to DC Multiemployer Pension Plans, 1985 – 2006. (Participants in Thousands,

Assets in Billions) (U.S. Department of Labor, Employee Benefit Security Administration 2008a and 2008b)

Multiemployer Plans

DB Plans DC Plans

Year Plans Active Participants Assets ($) Plans Active Participants Assets ($)

1985 2,216 5,559 110 805 931 6

1990 1,812 4,957 164 1,092 1,466 14

1995 1,810 4,525 239 1,328 1,773 27

2000 1,758 4,907 365 1,239 1,982 46

2005 1,524 4,586 402 1,420 3,045 77

2006 1,507 4,614 437 1,530 2,977 85


It is doubtful that private pensions could have developed under the funding

requirements that began with the passage of the Employee Retirement Income

Security Act of 1974 (ERISA). The lack of requirements allowed employers to grant

existing employees retirement benefits for past service and amortize the cost for

an unlimited number of years.

ERISA’s funding requirements were relatively simple. Existing plans had to

become fully funded within 40 years. Plan improvements and new plans had

30 years, changed actuarial assumption 10 years, and asset gains and losses

five years. The assumed interest rate had to be “reasonable.” The higher the

assumed interest rate (rate of return on invested assets), the less in current

dollars the employer must contribute. If the assumed rate is higher than that

realized, it contributed to the underfunding of the plan. Most plan actuaries use

7.5 percent to 8.5 percent. The funding requirements were strengthened in 1987

by the Omnibus Budget Reconciliation Act (OBRA ’87) and again in 1994 by the

Retirement Protection Act.

An employer’s annual required contribution (ARC) is driven by the funded status

of the pension plan, as measured by the funded ratio (assets divided by the present

value of liabilities). These calculations are based on a number of assumptions in

addition to the assumed interest and discount rates, which include mortality rates,

employee turnover rates, and the fact that the plan’s benefit and other provisions

will remain unchanged. The chance of all of the assumptions being valid is small.

The hope is that their inaccuracies will cancel out and result in a reasonable forecast.

By the mid-1990s, two funding formulas were used to determine required

employer contributions. If a plan was 90 percent or more funded (or at least

80 percent funded but at least 90 percent funded in two of the past three years),

the ERISA rules applied. The employer paid the “normal cost” (current year benefit

and administrative costs) plus payments for amortized past underfunding and

plan enhancements. If the plan was less than 90 percent funded (and not saved

by the 80 percent/90 percent rule), the employer was required to make deficit

reduction contributions (DRC) designed to ensure that the plan did not become

too underfunded. The DRCs ranged from 30 percent of the plan’s unfunded

actuarial accrued liability (UAAL) for plans that were 60 percent or less funded to

18 percent for plans that were only slightly below the 90-percent threshold.

This arrangement worked well during the economic expansion of the 1990s.

As asset values grew, underfunding became less of a problem. Between 1985 and

2000, single-employer DB plan assets more than doubled and those of multiem-

ployer plans tripled. However, beginning in 2000, pension funds were hit by a

“perfect storm” of significantly reduced equity prices, historically low interest rates,

and the suspension of the Treasury Department’s 30-year “long bond.” Between

2000 and 2002, single-employer DB plan assets declined by $275 million (17 percent)

and those of multiemployer plans by $46 million (12.6 percent). They did not

recover their 2000 levels until 2004. (See Tables 1 and 3).


Table 4 captures the recession’s impact beginning in 2000 on PBGC-insured

single-employer plans. Note the marked growth in net position (increased deficit)

and reduced-funded ratios beginning in 2002. Table 5 reports a similar develop-

ment for multiemployer plans.

PENSION BENEFIT GUARANTY CORP.

The PBGC was created by ERISA. Its purpose is to insure the vested benefits

of participants and beneficiaries of private-sector DB pension plans. DC plans

are, by definition, always fully funded and “owned” by the participant. In theory,

there is no need for insurance. The PBGC operates two programs: one for single-

employer plans and the other for multiemployer plans. The rules and provisions

are quite different.

In 2009, DB pension plan sponsors pay $34 per participant (employee, retiree

and former employee with vested benefits) plus $9 per $1,000 of unfunded vested

benefit liability per year. There is also a premium or charge of $1,250 per partici-

pant per year for three years following emergence from bankruptcy proceedings

applicable to “involuntary” and “distressed” plan terminations in which the plan

has insufficient assets to cover its liabilities.

The PBGC guarantees vested benefits up to $4,500 per month ($54,000 per year)

for single-employer plans terminating in 2009 for participants 65 years old at retire-

ment. Benefit guarantees are reduced for early retirement and if the retiree elects a

50-percent joint survivor option. They increase for a later retirement age. These limits

increase annually; thus, they are lower for those whose plans terminated in past years.

The retirement benefits are not indexed and consequently erode in real terms over time.

TABLE 4 Financial Position of the PBGC Single-Employer Pension Program (Millions)

(PBGC 2009b and 2009c)


Year Total Assets ($) Total Liabilities ($) Net Position ($) Funded Ratio*

1985 1,155 2,480 -13,250 82.1

1990 2,797 4,710 -1,913 59.4

2000 20,830 11,126 -9,704 186.6

2001 21,768 14,036 7,732 155.1

2002 25,430 29,068 -3,638 87.5

2003 34,016 45,254 -11,238 75.2

2004 38,993 62,298 -23,305 62.6

2005 56,470 79,246 -22,776 71.3

2006 59,972 78,114 -18,142 76.7

2007 67,241 80,352 -13,111 83.7

2008 61,648 72,326 -10,678 85.2

* Calculated by author.


Under the Multiemployer Program, plans pay $9 per participant per year in PBGC

premiums. The guaranteed benefit under a multiemployer plan is up to $37.50 per

month for each year of credited service. Thus, the maximum benefit at retirement

age of 65 is $1,065 per month ($12,780 per year).

When a multiemployer plan is in trouble, the PBGC usually lends it financial

assistance, rather than take it over. The Multiemployer Pension Plan Amendments

Act of 1980 (MPPAA) requires employers withdrawing from a multiemployer plan to

continue to fund their share of the plan’s unfunded vested benefits, often making

withdrawal prohibitively expensive.

Table 6 chronicles PBGC’s overall experience from 2001 through 2007. The period

captures the recession’s impact beginning in 2001 and the subsequent recovery.

It does not capture the full impact of the strengthened funding requirements of the

PPA which were beginning to take effect, but were weakened by the Recovery Act

of late 2008. Nor does it reflect any of the economic downturn beginning in the

fourth quarter of 2008.

It appears that the PBGC was doing fairly well during the period covered.

Assets of both the Single Employer Program and the Multiemployer Program

increased significantly, as did their liabilities. Funded ratios improved once the

effects of the 2001 recession were weathered. However, storm clouds might be

seen in the decline in the number of plans insured and in the increasing number

of payees, total benefits paid and the number and cost of the multiemployer

plans receiving financial assistance.

TABLE 5 Financial Position of the PBGC Multiemployer Pension Program (Millions)

(PBGC 2007, 2009c and 2009d.)

Multiemployer Plans

Year Total Assets ($) Total Liabilities ($) Net Position ($) Funded Ratio*

1985 22,813 29,246 -6,432 78.0

1990 56,512 68,086 -11,574 83.0

1995 118,707 141,434 -22,726 83.9

2000 110,729 131,864 -21,135 84.0

2001 222,297 270,708 -48,412 82.1

2002 295,338 397,807 -102,469 74.2

2003 304,027 482,942 -178,915 63.0

2004 342,777 551,959 -209,181 62.1

2005 364,490 587,010 -222,520 62.1

2006 1,166,000 1,905,000 -739,000 61.2

2007 1,197,000 2,152,000 -955,000 55.6

2008 1,327,000 1,800,000 -473,000 73.7

* Calculated by author.


In February 2008, the PBGC changed its investment policy in the direction of

accepting more risk. It planned to move from having a targeted 15 percent to

25 percent of its assets in equities (as opposed to bonds) to having 55 percent in

stocks and real estate. This included 20 percent in U.S. stocks, 19 percent in foreign

stocks, 6 percent in emerging market stocks, 5 percent in real estate, and 5 percent

in private equity firms (Kranish 2009). The change was intended to increase the

PBGC’s return on investment and help solve its long-term underfunding problems.

Financial experts criticized this move and the GAO expressed concern (2008c).

Fortunately most of the changes had not been implemented by the time the finan-

cial markets experienced their historic contraction in 2008 and 2009. Had it been,

the position of the PBGC would now be much worse.

The worse may be yet to come. According to the May 21, 2009 edition of The New

York Times, 93 companies including Chrysler, had entered bankruptcy in the past

six months. Chrysler, alone, could cost the PBGC $2 billion. Since then, General

Motors has entered Chapter 11. If it sheds its DB pension plans in the course of

its reorganization, it could cost the PBGC another $6 billion.

TABLE 6 Experience of the Pension Benefit Guaranty Corp., 2001 – 2007

(Pension Benefit Guaranty Corp. 2001 through 2007)

2001 2002 2003 2004 2005 2006 2007

Total Assets (Millions) $22,575 $26,374 $35,016 $40,063 $57,630 $61,138 $68,438

Single Employer Program $21,768 $25,430 $34,016 $38,993 $56,470 $59,972 $67,241

Multi-Employer Program $807 $944 $1,000 $1,070 $1,160 $1,166 $1,197

Total Liabilities (Millions) $14,727 $29,856 $46,515 $63,604 $80,741 $80,019 $82,504

Single Employer Program $14,036 $29,068 $45,254 $62,298 $79,246 $78,114 $80,352

Multi-Employer Program $691 $786 $1,261 $1,306 1,495 1,905 2,152

Funded Ratio (Combined) 153.3 88.3 75.3 63.0 71.4 76.4 83.0

Single Employer Program 155.1 87.5 75.2 62.6 71.3 76.8 83.7

Multi-Employer Program 116.8 120.1 79.3 81.9 77.6 61.2 55.6

No. Plans Insured 35,201 32,321 31,135 31,238 30,336 30,328 30,458

Single Employer Program 33,486 30,660 29,512 29,651 28,769 28,784 28,929

Multi-Employer Program 1,715 1,661 1,623 1,587 1,567 1,544 1,529

New Single Employer Plans Trusteed or Pending 101 157 155 192 120 94 110

Number of Payees* 283,219 362,203 477,336 553,208 697,910 622,591 644,926

Total Benefits Paid $1,043 $1,538 $2,489 $3,007 $3,686 $4,083 $4,267

No. Multi-Employer Plans Receiving Financial Assistance 22 23 33 27 29 33 36

Amount of Financial Assistance $5 $5 $5 $10 $14 $70 $72

* Payees are those receiving a periodic pension benefit from the PBGC and those receiving a lump-sum payment in that year. Data include a small number of payees of multiemployer plans.


In a press release dated May 20, 2009, the PBGC announced that its deficit had

grown from $11 billion at the end of fiscal year 2008 to $33.5 billion as of March 31,

2009. The $22.5 billion increase was due to $11 billion in completed and probable

pension plan terminations, $7 billion in the decreased interest rate factor used to

estimate liabilities, $3 billion in investment losses and $2 billion in actuarial charges.

It was also announced that the PBGC is closely monitoring the auto manufacturer

and supplier industries. It estimates that the aggregate amount of pension under-

funding is $77 billion, $42 billion of which is guaranteed by the PBGC in the event

of plan termination.

LEGISLATIVE RESPONSE

The strengthened funding requirements of OBRA ’87 and the Retirement Protection

Act of 1994, and the reduced asset values of 2001, greatly increased the employers’

annual required contributions at a time when many of them could least afford

it. This caused an increased number of plan failures adding to the problems of

the PBGC, and spawned a debate on pension-funding requirements. Congress

responded with temporary measures in 2002 and 2004 that weakened employer

funding obligations while the debate continued.

The Bush Administration (Treasury Department) wanted to bring pension

funding into line with modern financial theory and practice and base it on

yield curves rather than an assumed interest rate. A yield curve relates current

interest rates to bond maturity dates. As pension obligations are long run in

nature, and as long-run interest rates are based on the best available current

information, this makes sense.

The employer representatives were initially against this approach as being

unnecessarily cumbersome. They preferred a system based on a corporate-bond

rate index. The employer representatives shifted their position in 2005 from one

of resisting yield curves to one of improving the proposed law’s requirements.

The result was the PPA of 2006 which, among other things, requires the use of

a three-segment yield curve or a single blended rate based on corporate bonds.

Once a pension plan makes its election, it may change it only with IRS approval.

The new funding requirements were phased in and became fully effective in 2008

(Kilgour 2007).

THE RECESSION BEGINNING 2008

In October 2007, the S&P 500 hit a record high of 1,565. By December it was 816,

a 47.8-percent decline. The result was an estimated $257 billion in aggregate private-

sector pension plan underfunding for 2008, surpassing the $219 for 2002 (Standard

& Poor’s 2008). This massive decline’s impact in pension asset values on sponsoring

employer funding obligations will be somewhat softened by asset smoothing.

However, that only spreads the damage through a few years. Unless the financial

markets recover quickly, the impact on DB pension plans will be devastating.


This does seem unlikely as of this writing. In March 2009 the S&P 500 bottomed

at 676 before starting its slow recovery.

It is highly likely that the employer response to this development will be to

continue the flight from traditional single-employer DB pension plans into DC and

hybrid cash-balance plans. More traditional DB plans will be frozen as they are

replaced by DC and cash-balance plans (or with nothing). There will also be a large

number of plans that are terminated and trusteed (taken over) by the PBGC due to

bankruptcy proceedings or liquidation of the sponsoring employers.

Congress responded with the Worker, Retiree, and Employer Recovery Act of

2008. It was passed unanimously by both houses of Congress and signed by

President George W. Bush on Dec. 23, 2008. The act provides plan sponsors relief

by modifying the operation of the funding targets established by the PPA of 2006

(92 percent for 2008, 94 percent for 2009, 96 percent for 2010 and 100 percent for

2011). If a plan fails to meet the new targets, only the applicable funding percentage

of the funding target is used to calculate “shortfall amortization base” rather than

100 percent as specified in the PPA (Vanguard 2009). While the Recovery Act will

help, it will be insufficient to offset the contraction of asset values and funded ratios,

renamed Adjusted Funding Target Attainment Percentage (AFTAP) by the PPA.

At the end of February 2009, the Towers Perrin funded ratio for benchmark

plans had declined to 60.2 percent, the lowest level since the series began in

1998 (Towers Perrin 2009). The S&P 500 companies with DB pension plans went

from an aggregate $63 billion surplus and funded ratio of 104 percent in 2007

to a deficit of $308 billion and a funded ratio of 78 percent at the end or 2008

(Standard & Poor’s 2009).

IMPACT ON THE PBGC

The stronger funding requirements of the PPA and the record-high equity values

had a beneficial effect on the PBGC until late 2008. The deficit of the Single

Employer Program declined from $23.3 billion in 2004 to $10.7 billion in 2008

while its funded ratio increased from 62.6 to 85.2. (See Table 4). During the same

period, the deficit of the Multiemployer Program increased from $209.2 billion

to $473 billion. However, its funded ratio improved from 62.1 to 73.7 due to a

large increase in assets. (See Table 5 on page 27). It should be noted that the

PBGC reports are as of the end of the federal government’s fiscal year, Sept. 30.

Hence, the data do not capture the massive decline in asset values commencing

in the fourth quarter of 2008 or the impact of its altered investment policies.

It is likely that many more single-employer plans will be trusteed by the PBGC as

employers enter bankruptcy or otherwise become insolvent. The Single Employer

Program has been running an increasing deficit since 2002 and its funded ratio

declined from 155.1 in 2001 to 71.3 at the end of 2005 before improving to

85.2 in 2008. (See Table 4 on page 26). While it has assets to continue to pay

benefits for years to come, the situation is about to get worse.


The Multiemployer Program’s effect is harder to assess. It has run a deficit

throughout its history and its net position declined through 2007. In 2008,

it significantly improved as reflected in its smaller deficit and improved funded

ratio. (See Table 5 on page 27). The shift from multiemployer DB to DC plans will

continue. Beyond that, things are complicated by the involvement of labor unions

and collective-bargaining agreements. The parties are committed to continue to

meet their obligations for the life of the labor agreements, typically three years.

Half of the members of their governing boards are union representatives, who may

be more sensitive to the retirement needs of their members than is management.

Employers are often locked in to a multiemployer plan by the continued MPPAA

funding requirements. Moreover, the PBGC treats multiemployer plans differently.

It lends a troubled plan financial assistance, rather than take it over, which makes

it much less likely that the plan will fail.

As the PBGC acquires the liabilities of more (especially large) single-employer

plans, and must lend more money to troubled multiemployer plans, it will need

additional funding. The corporation gets its funding from the insurance premiums

paid by plans, by acquiring the assets of trusteed pension plans and their sponsoring

employers, and by earnings on its invested assets. The PBGC is supposed to be

self-supporting and the federal government is not formally required to bail it out if it

gets into trouble. As a practical matter, it would have to do something. At some point,

the PBGC funding problem will add to the federal government’s fiscal problem.

Unlike private insurers, the fixed premium rates charged by the PBGC are the same

for all of its insureds, regardless of risk level. In addition, as the plans are statutorily

required to participate in the program, the PBGC cannot decline to insure bad risks.

The result is that those employers with well-funded pension plans disproportionately

pay to protect the benefits of those with less well-funded plans. This adds to the

motivation to shift from a DB to a DC plans that do not pay PBGC premiums.

The PBGC has another problem that has received little attention. Over the years

the number of active participants in single-employer plans declined while retired

participants and separated vested participants (former employees) grew. As indi-

cated in Table 7, of the 29.8 million insured participants in single-employer plans

in 1985, 72.2 percent were active employees while 18.7 percent were retired and

9.1 percent were separated former employees with vested benefits. By 2005, only

45.8 percent were active, while 26.6 percent were retired and 27.7 percent were

former vested employees.

A similar development occurred with multiemployer plans. In 1985, 66.1 percent

of total insured participants were active employees, 22.6 percent were retired and

11.4 percent separated. By 2005, 45.6 percent were active, 30.8 percent retired and

23.6 percent separated. (See Table 8).

The primary economic incentive for employers to sponsor pension plans is to

help recruit, retain and motivate active employees. As funding requirements

become more stringent to protect participants and the PBGC, and as termination


insurance premiums continue to increase, more employers will ask whether it

would not be better to terminate or freeze their traditional DB plan and shift to a

more cost effective DC arrangement. Moreover, no logical economic reason exists

for an employer to sponsor a new DB plan with all of its requirements and the

inherent subsidization of other employers’ underfunded plans. There are no DB

pension plans in California’s Silicon Valley and probably throughout “high tech”

and other new industries.

IMPLICATIONS AND CONCLUSION

When these facts and observations are combined, it is evident that the days of

the traditional private-sector DB pension plan are numbered. The trend of the

past 30 years would have resulted in that anyway. However, the current economic

TABLE 7 Participants in Single-Employer Pension Plans Insured by the PBGC

(Participants in Millions) (PBGC 2009e).


Total Insured Active Retired Separated Vested Year Participants Participants Participants Participants No. % No. % No. % No. %

1985 29.8 100 21.5 72.2 5.6 18.7 2.7 9.1

1990 31.6 100 21.5 68.1 6.1 19.4 4.0 12.6

1995 32.6 100 21.2 57.8 7.5 22.9 6.3 19.3

2000 34.1 100 17.7 51.9 8.3 24.4 8.1 23.7

2005 34.2 100 15.7 45.8 9.1 26.6 9.5 27.7

2006 33.9 100 NA

2007 33.8 100 NA

Note: Percentages shown and used in calculations for plans with 100 or more participants. Number of active, retired and separated vested participants. Calculations by author before rounding.

TABLE 8 Participants in Multiemployer Pension Plans Insured by the PBGC (Participants in Millions) (PBGC 2009f).

Multiemployer Plans

Total Insured Active Retired Separated Vested Year Participants Participants Participants Participants No. % No. % No. % No. %

1985 8.2 100 5.4 66.1 1.9 22.6 .9 11.4

1990 8.5 100 5.0 58.6 2.2 25.2 1.4 16.2

1995 8.6 100 4.5 52.4 2.5 28.9 1.6 18.7

2000 9.1 100 4.7 51.1 2.7 30.1 1.7 18.7

2005 9.9 100 4.5 45.6 3.0 30.8 2.3 23.6

2006 9.9 100 NA

2007 10.0 100 NA

Note: Percentages shown and used in calculations for plans with 100 or more participants. Number of active, retired and separated vested participants. Calculations by author before rounding.


and fiscal situation exacerbates and

accelerates an already bad situation.

Private-sector retirement income

has become largely based on Social

Security plus a DC (401(k)) or defacto

DC (cash-balance) plan. That is

disturbing for several reasons.

The investment risk shifted from the

employers to the participants, who

often do not have what they need

to make sound investment decisions.

They lack the time, training, informa-

tion and long-run perspective of the

professional fund manager.

Notwithstanding recent measures

to allow automatic enrollment, partic-

ipation in DC plans is voluntary and

too many employees opt not to

participate and, thereby, miss out

on the employer’s matching contri-

bution. This is often the case with

young workers who view retirement

as something far in the future and

do not appreciate the compounding

effect of long-term interest and asset

growth. When employees change jobs, they are usually allowed or required to cash

out their 401(k) plans. A relatively small amount of that money is transferred to a

new qualified plan or a rollover or conduit IRA. When it is not, the distribution is

taxed as earned income in the year received, and for those under age 59½, subject

to a 10-percent early withdrawal excise tax, and all too often spent.

Another concern about 401(k) plans is that they usually allow participants to borrow

from their assets. Technically, the participant is borrowing from himself/herself and

must pay the funds back with interest. While there are sound reasons for doing this,

it is dangerous. If an employee loses his/her job and cannot repay the loan, it becomes

a premature withdrawal subject to income taxation and the 10-percent excise tax.

Even when the employee participated in the plan for a long time and has a sizable

amount of money accumulated, he/she usually receives a lump-sum distribution.

While the retiree may buy an annuity contract that pays benefits over time, many do

not. This increases the likelihood that the retiree and spouse will outlive their assets.

A disturbing recent development adds to the problem. Between June 2008 and

February 2009, at least 66 companies reduced or ended their matching contribution

to their 401(k) plans (Pension Rights Center 2009). Undoubtedly, many others have



z Pension plan funding

z Defined benefit plans

z Defined contribution plans.


z ERISA Basics: How-to Series for the HR Professional, Third Edition

z Benefits Compliance: An Overview for the HR Professional

z Guide to Qualified Retirement Plans: How-to Series for the HR Professional

z Developing a Strategic Benefits Program: How-to Series for the HR Professional.


z Retirement Plans — Design Considerations and Administration, Certification Course: B2

z Benefits Outsourcing — Selecting, Contracting and Managing Service Partners, Certification Course: B12

z Strategic Communication in Total Rewards, Certification Course: T4.


done so but have not made a public announcement. The employer may lawfully

do this with no advance notice to employees (unless it is a safe-harbor plan which

requires a 30-day notice). As the recession deepens, additional firms will discover

that this is a quick and easy way to cut payroll costs, typically by 2 percent or

3 percent. The notice is often part of a larger announcement that includes layoffs

and other cost-cutting measures and meets with little resistance or complaint.

The inescapable conclusion is that the decades-long decline of traditional private-

sector DB pension plans is about to accelerate. While it is too early to gauge the full

magnitude of the problem, the current economic crisis and depreciated pension

asset values may take years to recover. The consequent reduction in funded

ratios and increased employer required contributions under the new funding

rules will force more employers to reassess their commitment to providing their

employees with lifetime retirement income. When it becomes more evident that

an ever-growing majority of plan participants, for whom the employer must make

contributions and pay PBGC premiums, are retired and vested former employees,

the pressure to flee will be even greater.

The PBGC will be severely affected by the current economic downturn and

potentially by its recently adopted more risky investment policy. Its asset values

and funded ratio will decline as well. As more plans are subject to involuntary

and distress terminations and their benefit obligations are acquired by the PBGC,

its situation will worsen. And, as it further increases premiums, it will increase

pressure on sponsoring employers to abandon their DB pension plans.

The flight from traditional DB pensions to DC and hybrid plans will not be fully

visible in the data for some time. Frozen DB and hybrid CB plans will continue to

be counted as DB plans which will give the illusion that DB plans are alive and

well. Multiemployer plans will last longer as the employers are largely locked in

and due to the presence and bargaining power of their unions. However, it is only

a matter of time before their employer sponsors feel the same pressure.

The consequences of this development are very serious for the retirement

security of millions of Americans. Compared to other industrialized countries,

Americans save relatively little and have modest Social Security retirement benefits.

The United States is almost unique in having an employment-based retirement

and health-insurance system.

The United States is not the only country with pension problems. All established

industrialized countries are under severe cost pressure from the emerging econo-

mies, especially China and India, whose employers are unencumbered by the

“legacy costs” of providing retirement income and health benefits to an increasingly

large elderly population.

The United States is in the middle of a difficult transition from its tradition

of DB pension plans provided, funded and managed by employers, to a more

individualistic system based largely on employee contributions and control of


investment decisions. Two things must be done. One is to protect and strengthen

Social Security and Medicare. They are the safety net that will become even

more important to an increasing number of the elderly. The other is to educate

participants in DC plans of the importance of making contributions, investing

sensibly, and resisting the temptation to take withdrawals and loans from their

DC pension plans. When most people have investment control of their retire-

ment assets, it is important that they know how to handle them responsibility.

Sadly, too many do not. z

Kilgour, John G. 2007. “The Pension Plan Funding Debate and PPA of 2006.” Benefits Quarterly. November.

Kranish, Michael. 2009. “Pension Insurer Shifts to Stocks.” The Boston Globe. March 30. http://www.benefit-slink.com. Viewed: March 30.

Pension Benefit Guaranty Corp. 2001 through 2007. Pension Insurance Data Book(s). PBGC Data Book at a Glance. Washington, D.C.: Pension Benefit Guaranty Corp.: 2.

Pension Benefit Guaranty Corp. 2005. “An Analysis of Frozen Defined Benefit Plans.” Dec. 21. http://www.pbgc.gov Viewed: Jan. 24, 2009.

Pension Benefit Guaranty Corp. 2007. Annual Management Report. Washington, D.C.: Pension Benefit Guaranty Corp.: 6.

Pension Benefit Guaranty Corp. 2009a. Pension Insurance Data Book 2007. Washington, D.C.: Pension Benefit Guaranty Corp.: Tables S-34 and S-35.

Pension Benefit Guaranty Corp. 2009b. Pension Insurance Data Book 2007, 2008 Annual Report. Washington, D.C.: Pension Benefit Guaranty Corp.: Table S-1.

Pension Benefit Guaranty Corp. 2009c. 2008 Annual Report. Washington, D.C.: Pension Benefit Guaranty Corp.: 2.

Pension Benefit Guaranty Corp. 2009d. Pension Insurance Data Book 2007. Washington, D.C.: Pension Benefit Guaranty Corp.: Table M-10.

Pension Benefit Guaranty Corp. 2009e. Pension Insurance Data Book 2007.

Pension Benefit Guaranty Corp. 2009f. Press release. “PBGC Deficit Climbs to $33.5 Bullion at Mid-Year, Snowbarger Tells Senate Panel.” May 20. Washington, D.C.: Pension Benefit Guaranty Corp.: Tables S-30, S-31 and S-32.

Pension Benefit Guaranty Corp. 2009f. Pension Insurance Data Book 2007. Washington, D.C.: Pension Benefit Guaranty Corp.: Tables M-5 and M-7.

Pension Rights Center. 2009. “Pension Publications Fact Sheets. Companies that Have Changed or Temporarily Suspended Their 401(k) Matching Contributions.” http://www.pensionrights.org. Viewed: Feb. 7, 2009.

Standard & Poor’s. 2008. “S&P 500 Pensions Expected to Report Broad Losses for 2008; Stage Set for Record Underfunding” Dec. 23.

Standard & Poor’s. 2009. “S&P 500 2008: Pension and Other Post Employment Benefits.” June 2.

Towers Perrin. 2009. “Pension Plans After the Meltdown.” http://www.benefitslink.com. Viewed: March 31.

REFERENCES

AUTHOR

John G. Kilgour, Ph.D., ([email protected]) is professor emeritus in the Department of Management and Finance at California State University, East Bay. He holds a bachelor of arts in economics from the University of Connecticut and a masters and Ph.D. in industrial and labor relations from Cornell University. Kilgour has published two books and numerous articles

on transportation, labor-management relations, and various compensation and benefit topics. Kilgour has also authored seven electronic white papers for the Society for Human Resources Management (SHRM), is an EBRI fellow, and is on the advisory board of Compensation and Benefits Review. He is a long-time member of WorldatWork.


U.S. Department of Labor, Employee Benefits Security Administration. 2008a. “Private Pension Plan Bulletin Historic Tables.” Washington, D.C.: U.S. Department of Labor: Tables E1, E8 and E11.

U.S. Department of Labor, Employee Benefits Security Administration. 2008b. “Private Pension Plan Bulletin: Abstract of 2006 Form 5500 Annual Reports.” Washington, D.C.: U.S. Department of Labor: Tables A1, B1, and C1.

U.S. Government Accountability Office. 2008a. “Report to Congressional Addressees. Defined Benefit Pensions: Plan Freezes Affect Millions of Participants and May Pose Retirement Income Challenges.” July. GAO-08-817. Washington, D.C.: 21. http://www.gao.gov. Viewed: Jan. 26, 2009.

U.S. Government Accountability Office. 2008b. “Report to Congressional Addressees. Defined Benefit Pensions: Plan Freezes Affect Millions of Participants and May Pose Retirement Income Challenges.” July. GAO-08-817. Washington, D.C. http://www.gao.gov. Viewed: Jan. 26, 2009.

U.S. Government Accountability Office. 2008c. “PBGC Assets: Implementation of New Investment Policy Will Need Stronger Board Oversight.” July 2008. GAO-08-667. http://www.benefitslink.com. Viewed: March 30, 2009.

U.S. Department of Labor, Employee Benefit Security Administration. 2008. “Private Pension Plan Bulletin, Abstract of 2006 Form 5500 Annual Reports. December 2008.” Tables E1, E8, and E11. 2006: Tables A1, B1 and C1.

Vanguard Group Inc. 2009. “Regulatory Brief, January 2009.” http://www.institutional.vanguard.com. Viewed : Feb. 24.


Ford Motor Company’s 58 Years of Experience with a Cost-of-Living Allowance Plan

F or more than half of a century, Ford Motor

Company’s cost-of-living-allowance plan (COLA)

has protected the wages of hourly employees

from inflation, provided employee relations stability and

funded employee-benefit programs. Recently, it has been

a topic of interest in the current economic crisis, as the

auto companies negotiate with the employees’ union to

reduce labor costs as required to obtain governmental

loans that ensure their long-term viability.

This paper provides a rare opportunity to track the origin

and development of a major pay plan that has addressed

an important economic factor — inflation — that affects

the pay programs of all companies. The plan’s history

is interesting and instructive as it involves a contentious

pay issue, a major industry currently struggling to survive,

a capable union that occasionally has gone on strike to

protect the plan, and HR professionals who have experi-

enced varying degrees of success in shaping it to benefit

the company.

ORIGIN

In the years following World War II, labor-management

relations in the automotive industry were unsettled and

marked by a series of long strikes. The tension resulted

Compensation z

Frank Giancola


in part from the lifting of wage controls, which had been imposed by the govern-

ment during the war. In 1945, the United Automobile Workers (UAW) led a 113-day

strike at General Motors (GM) over demands for a 30-percent wage increase to

make up for declines in living standards driven by wartime wage controls and

inflation. In 1947, a 103-day strike occurred at Chrysler.

In 1948, in an effort to stabilize relations, GM offered the UAW an annual

improvement factor and cost-of-living allowance (COLA) as part of a five-year

labor agreement (the parties settled on two). The annual improvement factor (AIF)

was 3 cents per hour per year (base wages were about $1.15 to $1.60 per hour).

The COLA provided a one-cent per hour wage increase for every 1.14-point

increase in the Consumer Price Index (CPI); thus was born the first COLA in the

U.S. auto industry (Katz 1985).

The UAW never liked the COLA plan and resolved to eliminate it in 1950

negotiations (Harbison 1950). The reasons for its dislike are unknown, but some

observers believe that neither the employers nor the union liked being hemmed

in by nondiscretionary wage rules. Union leaders referred to them as “a substitute

for bargaining,” as a specific pay amount is not negotiated. Employers disliked the

idea of guaranteeing a wage level in advance without knowing whether future

business conditions would support them (Jacoby 1985; Katz 1985).

Despite these reservations, the UAW agreed to include a COLA in the 1950 collec-

tive bargaining agreement at GM, because it was accompanied by AIFs and many

company concessions, and employees needed wage protection against inflation

during the agreement’s five-year term. In the same year, Ford Motor Co. granted

the same economic improvements to its UAW-represented employees — a four-

year AIF of 4 cents per hour and the COLA, which generated its first payment of

8 cents per hour in 1950 (Katz 1985).

Before discussing the details of the Ford COLA, it is helpful to understand how

collective bargaining is conducted in the auto industry and the economic circum-

stances that influenced the negotiation of these plans.

COLLECTIVE BARGAINING

By 1955, the UAW had established collective bargaining relationships with GM,

Ford, Chrysler and smaller auto producers. The relationship was based on

company control over business decisions and collective determination of employee

compensation and conditions of employment. Negotiations were carried out at

the corporate level for wages, benefits, and matters affecting all employees, and

at the plant level for local matters.

Collective bargaining at the corporate level is conducted through the pattern

bargaining process, whereby the UAW negotiates a pattern-setting collective agree-

ment with one “target” firm, and then attempts to apply that same agreement to

the other firms. The UAW generally selects the most prosperous company as the

target, because it provides the best opportunity for reaching the most favorable


agreement for all companies. Although there were occasional deviations, hourly

employees at GM, Ford and Chrysler have experienced almost identical compensa-

tion and employment conditions since the 1950s (Block 2006).

ECONOMIC BACKGROUND

Throughout the 1970s, the pattern generally focused on wage and benefit increases,

reflecting a prosperous era for the auto companies. To minimize labor conflict,

economic provisions in the labor agreements generally followed a formula.

Wage adjustments were based primarily on an AIF and the COLA. In principle, the

AIF was designed to provide workers with wage increases as national productivity

increased, and COLA increases were designed to protect workers from declines

in real wages as the cost-of-living increased. As a result, wage levels were highly

predictable, with variation due primarily to cost-of-living changes.

Beginning in the early 1980s, the focus of bargaining and the content of the

pattern shifted from wage increases to job security due to major declines in

the auto companies’ market shares, inconsistent profitability and reductions in

employment levels. Although the COLA has continued essentially intact, the AIF

has been replaced in some years by yearly lump-sum payments, and employees

have benefited in good times through a profit-sharing plan established in 1982 to

compensate for wage concessions (Block 2006).

CURRENT CRISIS IN THE AUTO INDUSTRY

The U.S. auto companies have been in a financial crisis since 2004. Ford, which

lost a record $14.6 billion in 2008, has not had a profitable year in North America

since 2004 and is not projected to break even or be profitable until 2011. In 2005

and 2006, the companies undertook rare mid-contract negotiations that reduced

health-care costs and established early retirement and buy-out programs to elimi-

nate tens of thousands of jobs. (Block 2006).

In 2007, the companies entered into a new contract with the UAW which

enabled them to transfer responsibility and financial liability for retiree health-care

programs to a union-administered trust and to establish a two-tiered wage scale.

The lower tier is comprised of new hires who will receive substantially lower

compensation than other employees, including an hourly base rate that is $10

below the previous one. This tier, which is limited to a maximum of 20 percent of

Ford’s hourly workforce, has yet to be used as thousands of laid-off autoworkers

have first priority in filling openings.

Due to the additional burden of the recession, the U.S. auto companies cannot

survive without making significant cost-saving changes to their operations and

receiving substantial financial aid. In early 2009, GM and Chrysler received billion-

dollar loans from the federal government. To receive additional loans, and to

ensure their long-term viability, the companies must reach labor-cost parity with

the nonunion U.S. plants of foreign automakers, by reducing wage and benefit


expenses by about $10 per hour. Ford, which does not require loans because of a

$25 billion credit line obtained from private sources in 2006, negotiated substantial

concessions from the UAW in February 2009 to achieve parity, setting a pattern

for the other companies to follow.

Wage concessions for the remaining two years of the present Ford labor

agreement include the following actions:

Suspension of COLA paymentsz

Suspension of annual bonuses of 3 percent and 4 percent of earnings z

Suspension of the $600 Christmas bonusz

Elimination of one paid holiday z

Limiting overtime pay to employees who work more than 40 hours in a week, z

instead of more than eight hours in a day.

The following is a description and analysis of the evolution of the Ford COLA

plan which will give compensation professionals an inside look at how one industry

has dealt with the effects of inflation on pay for more than 50 years.

HISTORY OF PAYMENTS

The Ford COLA produced its first payment of 8 cents per hour in 1950. The cumu-

lative amount paid from 1950 through 2007 was $18.95 per hour, with $16.86 of

that amount transferred to base wages and $2.09 diverted to fund benefit programs.

The cumulative amount increased slowly (90 cents per hour) between 1950 and

1970 and rapidly ($12.72 per hour) between 1970 and 2000. The greatest one-year

decrease in the amount paid (2 cents per hour) occurred in 1954 and the greatest

one-year increase (94 cents per hour) occurred in 2005. The plan was suspended

in February 2009 before a steep decline in the CPI would have reduced the COLA

amount to zero in March 2009 from 99 cents.

PLAN FEATURES

Method of Payment

The COLA amount is included in the calculation of overtime pay, shift premiums,

call-in pay, and pay for vacations, holidays, jury duty, bereavement and short-term

military duty. COLA pay adjustments can increase, decrease or remain unchanged

from the prior quarter.

Consumer Price Index

Since its inception, the Ford plan has been based on changes in the Consumer

Price Index for Urban Wage Earners and Clerical Workers (CPI-W), which is calcu-

lated by the U.S. Department of Labor’s Bureau of Labor Statistics. The CPI-W

(sometimes referred as the blue collar index) is based on the expenditures of

households that meet two criteria — more than half of the household’s income

must come from clerical or wage occupations, and at least one of the household’s

earners must be employed for at least 37 weeks during the previous 12 months.


The CPI-W, which represents about 32 percent of the U.S. population, is commonly

used for calculating COLA amounts in labor agreements and increases in Social

Security benefits. It continues the original CPI, which was introduced in 1913 for

use in wage negotiations after World War I.

The CPI-U, which includes all urban consumer groups, is the broadest and most

comprehensive index and is frequently cited in the media. It represents about

87 percent of the total U.S. population and was first used in 1978, when a need

for a broader and more representative index became apparent. The CPI-W is a

subset of the CPI-U population, and the same methodology is used for producing

both indices (Bureau of Labor Statistics 2009).

CPI Exclusion

In 2003, the company negotiated a change to exclude the cost of medical care

from the CPI that is used in the plan. Medical care costs are measured solely

by determining consumers’ out-of-pocket medical care expenditures. Because

the company provides excellent medical coverage that minimizes out-of-pocket

medical expenditures, this component of the CPI had a questionable relevance for

Ford employees and it made sense to exclude its effects on COLA payments.

The benefits of the exclusion were not as great as one might think for two

reasons. First, medical care accounts for only 6.4 percent of the CPI-W. Second,

from 2003 to the present, the CPI-W without medical-care costs has increased at

only a slightly lower rate than the CPI-W with medical care costs — about one-

tenth of 1 percent per year. This translates to a savings in COLA payments of

about $50 per employee per year, which is less than one-tenth of 1 percent of the

average employee’s annual earnings ($68,177 as of 2006). It is also a very small

part of Ford’s health-care expenses for hourly employees and retirees, which were

$3.1 billion in 2006.

Calculating the Cost-of-Living Adjustment

The two key elements in the COLA plan are a method to measure changes in the

CPI and a method to convert that change into an increase in wages.

Measuring CPI Change.z COLA payments are revised each quarter, based on

changes in the average of the monthly CPIs for the prior quarter. On the effective

date of each new collective bargaining agreement, a new base CPI or starting

point for measuring change is established and COLA amounts accumulated under

the prior agreement are transferred to base wages. If a CPI falls below the base

CPI, no COLA is paid in the quarter and existing base wages are unaffected.

This “floor” has made these plans more palatable to employees. Historically,

pay cuts have evoked strong reactions from employees, and employers and

union leaders fear they will result in worker dissatisfaction and strikes (Jacoby

1985). The Ford plan has not experienced a decline in inflation that would

challenge the floor amount. However, if the economy would enter into a


prolonged period of deflation, as some have predicted, the company would

question the idea of having a floor (Faber 2009; Isidore 2008).

Adjustment Formula.z The second key element in the COLA plan is the math-

ematical formula that converts the change in the CPI to a cents-per-hour COLA

figure that is paid to employees. Over the years, the formula has been improved

by reducing the amount the CPI must change to generate a change in pay.

In the original COLA formula of 1950, a 1.14-point change in the CPI generated

one-cent per hour in pay. In 1958, this same amount was generated by a .5-point

change in the CPI, which was reduced to a .3-point change in 1973, to a .26-point

change in 1981, and to a .08-point change in 2003.

INFLATION PROTECTION

Claims have been made that employees have full or close to full protection

against inflation, i.e., if the CPI increases by a certain percentage, hourly wages

will increase by about the same percentage (Block 2006; Katz, MacDuffie and Pils

2002). Calculations using the CPI, COLA formula and the wage rate of a common

classification at four points in the life of the COLA arrangement (1950, 1979, 1990

and 2003) were made to test the validity of this claim.

For example, if the December 1979 CPI of 215.8 rose by 5 percent or 10 points, it

would have resulted in a COLA payment of 36 cents per hour, which is 4 percent

of the $9.085 hourly rate of this classification. In 1979, the COLA formula called

for a one-cent per-hour increase in wages for each .3-point change in the CPI.

Based on this sample, the COLA appears to have provided many employees with

about 80 percent to 85 percent protection against inflation. Employees who earn

a higher base wage, such as skilled persons, would have less protection, because

the COLA amount is a lesser percent of their base wage.

CAPS, DEFERRALS AND DIVERSIONS

During the life of the COLA, amounts generated by the formula have been capped

at specific amounts, paid later and diverted from employee paychecks to fund

benefit programs, as described in the following sections.

Caps. z In 1967, following a 66-day strike, the first and only cap on Ford COLA

payments was established at 21 cents per hour for the three-year term of the agree-

ment. It was established with the agreement that, if the COLA formula would have

produced increases greater than the capped amount, the overage would be paid

to employees following the termination of the 1967 agreement (MacCracken 1971).

Because the cap was reached in 1969, employees did not receive a

COLA increase in 1970. This was the second year in the 56-year history of

the plan in which employees did not experience a yearly increase in the

COLA. (In 1954, the COLA amount declined by two cents.) Because of the

rapidly increasing inflation due in part to the Vietnam War, workers would

have received an additional 26 cents per hour under an unlimited formula.


The union president admitted to

the membership that the cap was a

mistake and pledged to remove it.

The result was a long strike at

GM, the target company for 1970

negotiations, due to a lack of agree-

ment about whether the company

had committed to pay the COLA

lost because of the cap and the

company’s reluctance to restore an

uncapped COLA formula. (At Ford,

the repayment arrangement was

stated in the written agreement.)

The strike was settled after the

company agreed to pay the unpaid

COLA amount and continue the

plan without a cap (Katz 1985).

Deferrals. z The late 1970s and early

1980s were difficult times in the

auto industry. In 1979, Chrysler

received federal loan guarantees

to stay in business. In 1982, as part of a concessionary agreement at Ford, three

COLA payments were deferred by 18 months, no base-wage increases were

granted for two years, employee benefits were reduced, and employees were

granted profit sharing for the first time to compensate for these concessions.

Diversions.z In 1967, for the first time, an increase in the COLA (1 cent per

hour) was diverted from employee paychecks to fund an employee benefit

(one additional holiday). Unlike the cap, diversions (or sacrifices of what the

workers do not already have) became a common practice for funding employee

benefit programs, as shown in the following examples:

In 1993, a 32-cent diversion was made to fund health-care costs and as a trade- -

off to preclude employees having larger co-pays and deductibles (Cimini and

Behrmann 1993). Another 37-cent diversion was made for the same reason in

2003 (McAlinden 2004).

In 2007, for the first time, diversions were continued into perpetuity. About 16 -

cents was diverted to fund a newly established union-controlled trust fund

to administer retiree health-care benefit programs, which removed this huge

liability from the company’s balance sheet.

As described above, COLA payments were suspended from February 2009 -

through 2011. Employees were told that the action was taken to offset

health-care costs. GM and Chrysler have not yet renegotiated their plans,

which are expected to follow Ford’s lead.



z COLA

z CPI

z Pay compression.


z Building Pay Structures: How-To Series for the HR Professional

z Determining Compensation Costs: How-to Series for the HR Professional

z Mastering Market Data: How-to Series for the HR Professional.


z Base Pay Administration and Pay for Performance, Certification Course: C4

z Compensation Fundamentals, Seminar

z Market Pricing — Conducting a Competitive Pay Analysis, Certification Course: C17.


Gaps.z For many years, as a collective-bargaining agreement expires on Sept. 14,

the parties have agreed to forgo COLA increases that would ordinarily be paid

for the quarter beginning on Sept. 1 and ending Nov. 30. Instead, the amount

is used to fund improvements in the new agreement. Employees do not experi-

ence a decline in their pay that would make the practice obvious, and many are

probably unaware of what could be considered a diversion of a COLA amount.

NEW HIRES

Employees hired into the new lower-wage tier do not participate in the existing

COLA plan. Instead they will receive an annual pay increase that equals the

greater of the

Annual percentage increase in average base hourly earnings of U.S. manufac-z

turing workers, or the

Annual percentage increase in the CPI-W (excluding medical expenses) of up to z

3.75 percent.

If 3.75 percent is exceeded, the additional monies are subject to a mutually

agreed upon disposition. If negative amounts are generated, they will not reduce

current wages and instead be used to offset future increases. These employees

also are eligible for annual bonuses of 3 percent of earnings.

PAY COMPRESSION

The Ford COLA would have caused serious pay-relationship problems if the

company and the union had not agreed to take certain offsetting actions.

Because the COLA adds the same flat-dollar amount to the wages of all hourly

employees, it reduces the traditional percentage difference in pay between highly

paid skilled-trades workers and lower-paid semi-skilled workers. To preserve

these relationships, skilled-trades employees receive special base-pay increases.

The union has felt pressure to bargain for these increases because this group at

times has threatened to secede from the UAW for lack of attention (Katz 1985).

The COLA also could have created pay compression problems between hourly

workers and salaried supervisors, if it were not for a company policy that requires

special salary increases for supervisors to maintain a minimum 15-percent pay

differential with their highest paid hourly employee, which includes the hourly

COLA amount after it has been transferred to base wages.

SUMMARY AND CONCLUSIONS

For more than 50 years, the COLA has remained a viable part of the collective-

bargaining agreement as it has met important needs of the parties in intended

and unintended ways. As expected, it has provided employees with protection

against inflation and helped the company to negotiate long-term agreements that

avoided costly and disruptive strikes to negotiate wages. To that end, the parties

have found mutually acceptable ways to amend the standard CPI and to update the


COLA formula to provide wage protection against rising inflation. The downside

has been costly COLA payments, wage adjustments to maintain pay relationships

and stiff resistance from employees to cap payments at lower levels.

The substantial COLA payments have allowed the parties to use the plan in

ways that were not envisioned at its inception. Because the payment is prospective

and difficult to calculate, it provides a “stealthy” mechanism for funding benefit

improvements, and for avoiding benefit reductions, by diverting unpaid monies

rather than using highly visible and painful wage reductions. The union and the

company deserve credit for their ingenuity in discovering a somewhat painless

“self-funding” mechanism within the collective-bargaining agreement, where one

program is used to fund another.

Ironically, this use depends on the presence of inflation to generate COLA

amounts, a condition that would otherwise be unwelcome to the company. If the

parties should experience a prolonged period of deflation, they will face a difficult

task in finding a suitable replacement and could decide to increase the number of

lower-tier employees to control costs. z

Block, Richard N. 2006. “Labor Relations in the Unionized Automobile Assembly Industry in the United States: 1961-2006.” Paper prepared for the Local Legislative Agenda for Automotive Partnership Council for North America, Toluca, Mexico, July 2006. https://www.msu.edu/user/block/documents/MexicoOverheadswithMSUTemplate2.ppt. Viewed: May 6, 2009.

Bureau of Labor Statistics. 2009. http://www.bls.gov. Viewed: February 2009.

Cimini. Michael H. and Susan L. Behrmann. December 1993. “Auto Industry Settlements.” Monthly Labor Review, 116(12):64-65.

Faber, Marc. 2009. “Synchronized Boom, Synchronized Bust.” The Wall Street Journal, Feb.18: A17.

Harbison, Frederick H. October 1950. “The General Motors-United Auto Workers Agreement of 1950.” Journal of Political Economy, 58(5):397-411.

Isidore, Chris. 2008. “The growing threat of deflation.” CNNMoney.com. Dec. 18, 2008. http://money.cnn.com/2008/12/17/news/economy/deflation/index.htm?postversion=2008121810. Viewed: May 6, 2009.

Jacoby, Sanford M. May 1985. “Cost-of-Living Escalators Became Prevalent in the 1950s.” Monthly Labor Review, 108(5):32-33.

Katz, Harry C. 1985. Shifting Gears: Changing Labor Relations in the U.S. Automobile Industry. Cambridge, Mass: MIT Press.

Katz, Harry C., John Paul MacDuffie and Frits K. Pil. 2002. “Collective Bargaining in the U.S. Auto Industry.” 2002 IRRA Research Volume, Private Sector Collective Bargaining, pp.1-57. http://imvp.mit.edu/papers/02/katzauto.pdf. Viewed: May 6, 2009.

REFERENCES

AUTHOR

Frank Giancola ([email protected]) has more than 40 years of HR experience, 25 years with Ford Motor Co., primarily in various compensation and benefits positions, and 23 years with the active and reserve components of the U.S. Air Force as a personnel officer. Giancola has taught HR and

compensation-management courses at several colleges. He graduated from the University of Michigan with a bachelor’s degree in psychology-sociology and received a master’s degree in business administration and a master’s degree of arts in industrial relations from Wayne State University in Detroit.


MacCracken, Richard T. January 1971. “Contract Negotiations — The Past as Prelude.” Compensation and Benefits Review, 3:9-16.

McAlinden, Sean P. 2004. The Meaning of the 2003 UAW-Automotive Pattern Agreement. Ann Arbor, Mich.: Center for Automotive Research.

Also note: The following information was obtained as follows:z History of COLA amounts paid, chronology of wage rates, highlights of all contract negotiations, and

health-care costs 2007 Ford National Negotiations Media Fact Book (http://www.google.com/search? hl=en&q=2007+FORD+media+fact+book&btnG=Google+Search&aq=f&oq=).

z Ford-UAW collective bargaining agreements from 1950 to 2003 — archival documents at The Walter P. Reuther Library of Labor and Urban Affairs, Wayne State University, Detroit, Michigan. The author wishes to express his appreciation to Mr. William LeFevre, reference archivist, for his assistance in locating the historical documents that made this paper possible.

z Gap in COLA coverage and Ford supervisory pay policies — author’s knowledge gained from working as a Ford Motor Co. HR professional and telephone conversations with recent Ford employees.


Jennifer GreerAon Consulting

Complex Chronic Illness: An Essential Target in Health Cost Management

C orporate America continues its battle with

rising medical costs. In 2008, the average

annual cost for family medical coverage in

the United States surpassed an astonishing $12,500.

Between 2002 and 2007, plan sponsors experienced

a 78-percent increase in cumulative health-insurance

premiums while inflation and wages grew by 17 percent

and 19 percent, respectively (Kaiser Family Foundation/

HRET and KPMG 2008). The rapid growth in health-

care costs has caused many plan sponsors to respond

on two fronts: to pass steep premium contribution

increases on to employees and to revise plan designs

to shift more out-of-pocket costs to patients.

THE HEALTH-CARE LANDSCAPE

AND CHRONIC ILLNESS

While cost shifting to employees has moderated medical

trends for employers in the short term, it is not a perma-

nent — or sustainable — solution to the challenge of

increasing costs. Employees rebel at increases in medical

plan contributions that may negate wage increases.

At the same time, the difficult economic times make it

impossible for employers to have an open checkbook

for medical expenses.

Benefits z

Joseph MarloweAon Consulting

Monica MaeyerAon Consulting


The only effective long-term solution for plan sponsors is to address the root

causes of medical cost increases. While much attention is devoted to identifying

at-risk populations and promoting wellness, most health-care experts concur that

achieving the goal of quantifiable wellness solutions — both in terms of financial

results and employee health outcomes — is a long-term journey. As that reality

becomes even clearer, the focus has turned to chronic illness — conditions that

continue indefinitely, have no known cure and require long-term treatment and

monitoring such as diabetes, congestive heart failure and asthma. By addressing

chronic conditions, employers can manage costs in the short and long-term, improve

the overall quality of life for individuals and reduce potential incidences of chronic

conditions in the employee population in the future.

Focusing on Chronic Illness

These statistics underscore the size and scope of the problem:

On average, health-care expenditures for someone with a chronic condition are z

four times greater than for someone without a chronic condition.

Nearly 50 percent of Americans have a chronic medical condition.z

Approximately half of all people with a chronic condition have z multiple chronic

conditions.

Annual medical plan spending, on average, is 15 times greater for someone z

with five or more chronic conditions than for someone without chronic illness

(Anderson 2007).

Chronic Illness Increasing at Alarming Rates

The prevalence of chronic illness among the workforce has grown at an alarming

speed. Poor health habits and the resultant spike in chronic illness account

for more than 50 percent of national health-care expenditures during the past

15 years (Thorpe 2005).

In addition, the prevalence of multiple chronic conditions increases with age.

Figure 1 shows that among 45- to 64-year-old workers, 68 percent have at least

one chronic condition and 42 percent have two or more. This multiple condition

cohort is responsible for most medical expenditures and should be an important

target for employer cost-management activities.

Financial Impact of Chronic Illness

Sixty-five percent of private health insurance spending in 2004 was consumed by

individuals with two or more chronic conditions. Expenditures for someone with

a chronic condition are four times greater than for someone without a chronic

condition, and spending is 15 times greater for someone with five or more chronic

conditions (Anderson 2007). Thus, to have an impact on medical costs, employers

must address chronic illness among their employee populations.


The hidden costs of chronic illness.z

Extensive studies demonstrate the

link between employee health

status and worker productivity:

Employers can rely on the intui-

tive axiom that better health leads

to enhanced productivity, while

poor health degrades productivity.

In fact, studies have shown that

the indirect costs of absence,

disability and “presenteeism” can be

three times that of overall medical

plan costs (Loeppke, et al. 2007).

We define presenteeism as reduced

productivity on the job due to illness

or an underlying acute or chronic

medical condition. Presenteeism can

manifest itself in poor time manage-

ment, lack of concentration, lower

quality work (defects) and poor

teamwork. Fundamentally, it results

in lower output per hour worked.

Chronic medical conditions can

signi f icantly diminish worker

productivity. Conditions such as

heart disease, diabetes, depression

and gastrointestinal disorders can

account for 40 percent to 60 percent

of annual medical and pharmacy

costs. But with many employees

taking these illnesses to work every

day, the toll on worker productivity

will exceed the direct costs.

Patient safety considerations.z The complex medical system in the United States

too frequently leads to poorly coordinated and disjointed medical treatment.

Those with multiple chronic conditions are at the greatest risk for poor

quality care as they have exceptional treatment needs and they interact with

multiple medical providers. In fact, a 2002 Gallup survey found that more than

50 percent of those with serious chronic illness used three or more physicians

(See Figure 2).

FIGURE 1 Older Adults Have More Chronic

Conditions (Medical Expenditure Panel Survey [2004])

80

70

60

50

40

30

20

10

0

Ages 20-44 Ages 45-64

% o

f P

op

ulat

ion

w

ith

Chr

oni

c C

ond

itio

ns

40%

15%

68%

42%

One or more chronic conditions

Two or more chronic conditions

FIGURE 2 Number of Different Physicians Seen by People with Serious Chronic Conditions (Gallup 2002).

16%

23%

15%

26%

6%

11%3%

No Doctors

1 Doctor

2 Doctors

3 Doctors

4 Doctors

5 Doctors

6+ Doctors


Individuals with serious chronic conditions who use multiple physicians have

a greater likelihood of medical treatment complications due to inadequate coor-

dination. Poor coordination generally leads to less effective and more costly care,

and more importantly, can result in potential errors, misdiagnoses and expensive

complications, as well as increased mortality and morbidity rates.

EMPLOYERS CAN JOIN THE BATTLE AGAINST CHRONIC ILLNESS

Much chronic illness can be avoided or slowed by adopting a healthy lifestyle

including maintaining a healthy weight, practicing proper nutrition, avoiding smoking,

exercising regularly, controlling stress and adhering to prescribed medication.

Some chronic conditions, such as diabetes, may not disable an individual in the short

term, but may lead to severe disabling effects if not treated early and effectively.

It costs less to maintain health, especially for those with complex chronic

illness, than it does to restore health when a condition worsens (Edington 2009).

Comprehensive and convenient support services provided to individuals with

complex chronic illness, such as coronary heart disease, advanced diabetes, COPD

and heart failure, will avoid expensive emergency room visits, hospitalizations and

extensive absences during long recovery periods for unmanaged complications.

This focused, proactive, patient-centered care creates a “win-win” for all partici-

pants — the patient, plan sponsor and medical provider.

Incentives

As a result of heightened awareness about the role of unhealthy lifestyles in driving

increased chronic illness and medical costs, employers have shown intense interest

in finding novel ways to motivate workers and dependents to be more account-

able and responsible for their health-related actions. We find the majority of

employers are actively investigating, offering or expanding wellness program efforts.

They understand that the success of these programs is closely linked to featuring

incentives to motivate individual change. Many employers now use incentives to

motivate health-behavior change.

Opinions vary on the effectiveness of incentives to drive sustained health behavior

change. However, evidence indicates that some incentives motivate discrete health-

behavior change, such as medication compliance, completing a health assessment,

or participating in weight loss, smoking cessation, or other specific programs.

Incentives come in many forms such as cash, contributions to a health reimburse-

ment account, flex credits, lower monthly contributions, prizes, lottery drawings

and wellness credits. Experience has shown that different populations are

motivated by different types of incentives.

Aon Consulting interviewed strategists and product management staff at leading

health-management programs and health plans to discover the latest industry

thinking about incentives. Highlights of major findings include:


Employers should target incentives for condition management to the subgroup of z

chronically ill with the proper risk profiles.

For risk-averse employers with self-funded medical plans, it may be best to let z

their health-plan partners design condition-management incentives to minimize

exposure to possible discrimination (see “Examples of Condition Management

Incentives” below).

Incentives for condition management remain relatively uncommon today as most z

employers limit incentives to wellness (healthy behavior) programs.

Value-based benefits design is the most common approach being explored by z

employers for condition-management engagement. For example, one national

health plan’s financial incentive for diabetic condition management waives

deductibles and co-payments for diabetic medications and essential screenings

for those who enroll in health coaching.

Increasingly, employers use a tiered approach for incentives with a defined z

financial amount earned for enrollment in a condition-management program and

another financial amount received upon “graduation” from the program.

Some employers extend incentives across all health management activities z

affecting healthy behavior and chronic condition management.

Health plans and health management vendors encourage the use of “point systems” z

enabling individuals to amass points for complying with health-management

activities; the points can then be traded for various awards.

Increasing numbers of employers with consumer-driven health plans deposit z

financial awards in reimbursement accounts that may be used for current-year

medical services or rolled into the next year.

A small minority of employers have implemented punitive (also know as stick)

incentives, and a considerable number of employers are considering punitive incen-

tives. Some observers view these incentives as a desperate reaction by frustrated

employers who face high medical premium increases despite efforts to control costs.

Some examples include increasing premiums in the following year for individuals

with chronic illness who opt out of condition management support in the current

year, and denying medical plan enrollment rights to adult members who fail to

complete a health risk assessment.

Examples of Condition Management Incentives

Aon Consulting has advised several clients on a new approach to incentives

that is predicated on the proposition that a comprehensive, low-cost health plan

should not be viewed by employees as an entitlement. Rather, employees would

earn the right to enroll in a health plan with lower contributions by completing

a health risk assessment, enrolling in health-behavior change programs where

needed and participating in condition management to address chronic illness.

The lower-value plan forced on those who are not compliant with the wellness

message might have higher contributions, a large deductible and/or may lack


coverage for certain services. Employees might need to earn specific amounts of

“wellness credits” to qualify for the preferred plan. Following are some examples

of using incentives to encourage participation in and compliance with condition

management programs.

Risk assessment for diabetes/cardiac issues/hypertensionz . An employer offered

a $25 gift card incentive to employees and spouses who participated in a risk

assessment. Between 60 percent and 70 percent of eligible participants completed

the risk assessment.

Drug co-pays waived when diabetic member joins health-care system’s z

diabetes management program. An employer offers a diabetes-management

program, in which members who are covered by the health plan can receive

free counseling and ongoing management for their diabetes. As a result of their

participation, employers waive all co-payments for drugs and supplies related to

diabetes (see “Value-based Benefit Design” below).

Incentives for actively engaging in condition management. z Members receive

a $20 deposit in their flexible spending account (FSA) to return the initial call

from the condition management supplier and answer questions for an initial

assessment. Compliant members receive a $100 deposit into their FSAs every six

months. Members also receive a $120 deposit every six months into their FSAs

if they adhere to their medication.

Value-Based Benefit Design

Shifting more financial responsibility to patients for medical and prescription drug

plans at point of care has meant increasing plan deductibles or co-payments to

discourage unnecessary care. A famous RAND experiment revealed that higher

out-of-pocket costs do reduce medical care utilization (Newhouse 1993). However,

unintended consequences of cost shifting can include a decreased use of lifesaving

health-care services leading to a worsening of health outcomes, especially to those

with complex chronic illness.

Value-based benefit design (VBBD) is based on the understanding that

employers will reap the highest value for health dollars spent if the benefit

design encourages members to use scientifically proven, high-value services and

supplies. Under VBBD, the traditional “one-size-fits-all” plan design is discour-

aged, and patients are encouraged to use services when the clinical benefits

exceed the costs. In other words, VBBD tailors co-payments to the evidence-

based value of specific services for targeted groups of patients. Currently, cost

sharing is usually based on the expense of the service or medicine and rarely

is related to its potential benefit to a patient. However, under VBBD, the patient

pays less for proven, high-value treatment and is responsible for more out-of-

pocket expenses for unproven or lower-value services. For example, a diabetic

would have lower out of pocket costs for high value glycemic (glucose lowering)

agents and medications to regulate hypertension and cholesterol, while all plan


members pay more out-of-pocket for

low value services, such as routine

whole body CT scans.

Experience to date with value-

based benefit design shows improved

patient compliance with prescribed

services and medications. Patients,

empowered through instructed

self-management of chronic illness,

have experienced lower medical

costs, higher productivity and more

satisfaction with the medical system.

COMMUNICATION AND

EDUCATION: THE CRITICAL LINKS

For health initiatives to succeed,

employees must be engaged and willingly participate in the initiative and in any

resulting health-care activity. Unfortunately, merely offering an incentive will not

make employees do something they otherwise would not (Hunnicutt 2008).

Communication and education are the critical components that foster

employee engagement and link program design with employee action. Research

into employer-based programs that create employee health behavior change

consistently identifies communication as a vital factor behind program success

(National Business Group on Health 2004). Additionally, Aon research reports

that 75 percent of employers indicate that communication has a very significant

or significant impact on employee participation and appreciation of benefits.

The most effective communication programs draw upon best practices in infor-

mation delivery and incorporate social marketing practices. Social marketing

recognizes that changing behavior involves changing perceptions. For example,

successful marketers understand that for consumers to purchase their product

in place of a competitor’s, consumers must perceive the new product as better,

stronger, faster — or perceive that it will make the consumer better, stronger,

faster or more appealing. Changing perception is hard and changing behavior

is even harder.

Reaching Employees

It is essential, and challenging, to cut through the clutter of advertising

messages and other “background noise” in the employee’s life. That noise

includes 5,000 advertising messages every day, up 300 percent since the 1970s

(Shaller 2005).

INFORMATION DELIVERY PRINCIPLES

Effectively delivering information to a target

audience entails:

z Reaching employees

z Being understood by employees

z Having relevance to employees and

creating engagement

z Clearly explaining any desired action

steps and mitigating barriers

z Managing expectations around what

will happen when an action is taken

z Making messages clear, honest

and direct.


Being Understood by Employees

Today’s workforce includes employees

at many educational levels, some of

whom may not speak the employer’s

primary language as their first language.

Reaching employees in a language

and vocabulary they truly understand

is critical. Employees must be able to

understand and follow direction for plan

design and incentives to be effective.

Having Relevance to Employees

and Creating Engagement

Creating relevance and engage-

ment involves building trust, letting

employees know they are cared

for (and not simply the means to

an employer’s money-saving end)

and clearly conveying the benefit

a given action or decision provides

to the employee (Hunnicutt 2008).

Clearly Explaining Desired Action

Steps and Mitigating Barriers

Once employees are engaged,

they must clearly understand the action(s) they are being asked to take.

Barriers that make it difficult or impossible for employees to complete the action

must be anticipated and addressed.

Managing Expectations Around What Will Happen When An Action Is Taken

To lay the groundwork for positive health-related interactions, communication

must build trust, mitigate fear and help employees understand what to expect

from a specific interaction.

Making Messages Clear, Honest and Direct

Depending on an organization’s culture, employees may be skeptical of employer

motives regarding promoting wellness and managing chronic illness. That is why

it is critical to develop messages that are consistent with the organization’s culture.

Each communication is an interaction with employees. With each interac-

tion occurring repeatedly and in different combinations, each touch point is

an opportunity to apply the communication principles, build and/or strengthen



z Wellness incentives

z “Condition management” incentives

z Health care cost containment.


z Managing Employee Health Care Costs: A Collection of Articles from WorldatWork

z Developing a Strategic Benefits Program: How-to Series for the HR Professional

z Benefits Compliance: An Overview for the HR Professional.


z Health and Welfare Plans — Plan Types and Administration, Certification Course: B3

z Health and Welfare Plans — Strategic Planning and Design, Certification Course: B3A

z Benefits Outsourcing — Selecting, Contracting and Managing Service Partners, Certification Course: B12



the relationship with employees and support appropriate health behaviors and

improved outcomes. Whether printed material (letters, newsletters, posters),

electronic communication (e-mail, Web, podcasts, video), or face-to-face channels

work best depends on the specific needs of the organization and the desired

outcome, message being delivered, and worksite communication practices.

For example, face-to-face communication is often best suited to delivering

personal and/or sensitive health information, given the importance of building

trust, the emotional impact of the content and the focus on confidentiality.

Additionally, personalizing communication (where appropriate and feasible)

consistently increases the impact of communication by drawing employees in,

enhancing awareness and encouraging action.

CONCLUSION

The fundamental key to controlling health-care costs in the long run lies with

improving the health status of workers, especially those with chronic illnesses.

To make a real difference in the health of employees, senior management must

be committed to improving the overall health of the employee population.

An organization’s leadership must be involved, in appropriate ways, in that process

and held accountable for process outcomes. This is the “acid test” of how well

the organization “walks the talk” of its vision and values.

The commitment, both financial and in program content and function, must be

driven from, and supported by, the top of an organization for employees to truly

understand the importance of managing chronic conditions. The reward is an

organization that takes a fiscally responsible approach to actively manage

health-care costs, and one that addresses the overarching and complex issue of

presenteeism, and, ultimately, improves each person’s quality of life. z

AUTHORS

Joseph Marlowe ( [email protected]) is senior vice president and leads Aon Consulting’s health and productivity consulting service. Marlowe specializes in strategic design for health benefits, work-site health centers, patient care management, disease manage-ment, health promotion/wellness and value-based benefit design. Marlowe is a graduate of the University of Connecticut and earned a Master of Science degree from the London School of Economics. In addition, he earned a Master of Public Health degree from the University of Michigan.

Monica Maeyer ([email protected]) is a vice president in Aon Consulting’s human capital practice,

specializing in benefits and HR communication. Maeyer received her Bachelor of Science in Journalism from Boston University.

Jennifer Greer ([email protected]) is a consul-tant in Aon Consulting’s human capital practice. Greer has developed marketing and communica-tion solutions with an emphasis in financial services and human resources in both the United States and Australia, giving her a unique perspective from which she builds innovative and effective communication solutions across a diverse range of organizations and employee audiences. Greer received her Bachelor of Arts degree in Economics from Yale University.


Agency for Healthcare Research and Quality, Medical Expenditure Panel Survey 2004.

Anderson, Gerald. 2007. Chronic Conditions: Making the Case for Ongoing Care. Baltimore: Johns Hopkins University.

Edington, Dee. 2009. Zero Trends: Health as a Serious Economic Strategy. Health Management Research Center.

Gallup. 2002. Serious Chronic Illness Survey.

Hunnicutt, David. 2008. “Utilizing Incentives to Maximize Participation, Absolute Advantage.” Absolute Advantage. Summer: 2.

Kaiser Family Foundation/HRET Employer Health Benefits 2008 Annual Survey.

Loeppke, Ronald, Michael Taitel, Dennis Richling, Thomas Parry, Ronald Kessler, Pam Hymel Doris Konicki. 2007. “Health and Productivity as a Business Strategy.” Journal of Occupational and Environmental Medicine. July: 712-721.

National Business Group on Health. 2004. “Corporate Health Care Communications: Getting Employees ‘in the Game;” National Business Group on Health Issue Brief. February.

Newhouse, Joseph. 1993. Free for All? Lessons from the RAND Health Insurance Experiment. Cambridge, Mass.: Harvard University Press.

Shaller, Dale. 2005. Consumers In Health Care: The Burden of Choice; Study for the California Health Care Foundation. October.

Thorpe, Kenneth E. 2007. “The Rise in Health Care Spending and What To Do About It.” Health Affairs. November: 1436-1445.

REFERENCES


Creating a Cost-Effective Process for Physician Recruitment

Surveys show that the No. 1 issue keeping

health-care CEOs awake at night is the need

to recruit enough quality physicians to meet

growing patient-care demands. The Council on Grad-

uate Medical Education (2005) predicted that physician

shortages in the United States may reach 10 percent, or

96,000 providers, by the year 2020. Studies show that a

disproportionate number or physicians in this country

are over age 50 and will reach normal retirement age in

the next five to 10 years. (U.S. Department of Health and

Human Services, Health Resources and Service Admin-

istration, Bureau of Health Professions 2006). At least

one survey shows that as many as 20 percent of current

physicians plan to retire if the country adopts universal

health coverage (LocumTenens.com 2008).

There are many reasons to expect widespread physi-

cian shortages, including the retirement of Baby Boomer

physicians, differences in work habits of younger

physicians, population growth rates in an era of capped

medical school and residency positions (American

Medical Group Association and Cejka Search 2006),

increasing numbers of patients seeking medical care

under universal health-care programs, advances in

Human Resource Strategy z

Michael Hogue, M.D.Integrated Healthcare Strategies

Drew ErraIntegrated Healthcare Strategies


medical testing and early interventions (Council on Graduate Medical Education,

U.S. Department of Health and Human Services 2005), and the uneven distribu-

tion of physicians across the country. Clearly, finding and recruiting enough of

the right kinds of physicians to care for patients will continue to be a problem for

most health-care delivery systems in the years ahead.

THE TRUE COST OF FILLING AN OPEN STAFF POSITION

Business relationships between hospitals and physicians are once again changing.

Hospital executives understand that the economic engine driving the success of

their organizations is the physician who admits patients to their institutions and

utilizes their facilities. The formula is simple: no patients, no margin. At the same

time, physicians are finding it more difficult to practice independently and profit-

ably in the face of declining reimbursement.

Hospitals and physicians have a choice of competing with each other for every

available health-care dollar, or forming closer partnerships to provide medical care

more cost effectively. Many are choosing partnership over competition. Although

joint ventures are becoming difficult to implement because of Stark 2.5, other

arrangements, including direct employment of physicians by hospital systems, are

on the rise. These new relationships are changing the role of hospitals in physician

recruitment. When physicians are employed by private medical groups, hospitals

often provide financial support for signing bonuses, relocation expenses or salary

guarantees. When physicians are employed directly by a hospital or a health-care

system, the employer must absorb all recruiting costs.

Health-care systems are finding the recruitment of physicians to be expen-

sive and time-consuming, especially in light of current shortages. Even so, many

systems fail to understand the true cost of filling medical-staff positions. The hard

costs of recruitment, such as airplane tickets and hotel rooms, are easily quantified.

But soft costs are typically overlooked, as is the cost of leaving a position vacant

for a period of time. Both hard and soft costs must be considered if an organiza-

tion wants to improve the efficiency of its recruitment efforts.

Soft, or indirect, costs properly include the time spent evaluating the need for

a new physician before a decision to hire is made. If recruitment is necessary

because of an overworked clinical department or growing demand for services,

then little managerial leadership may be required to make the decision. But it

is not uncommon for a system to feel a need to recruit a new physician despite

the local medical community’s opposition. For example, a hospital might want to

bring in a bariatric-trained laparoscopic surgeon as a strategic move to maximize

reimbursement at a bariatric center of excellence, even though surgeons in the

local community believe they have the capacity to meet the surgical need. In this

situation, CEOs and other executives must spend many hours selling the strategy

to the medical staff. While costs associated with these activities are difficult to

track, they are legitimate indirect costs of recruiting.


Many organizations have in-house HR professionals and support staff assigned

to the recruiting function. Salaries and benefits for employees filling these roles

are clearly indirect recruiting costs, although allocating a portion to a specific

recruitment may be difficult.

Even hard costs are sometimes overlooked in the process of budgeting to fill an

open position. For example, consider the cost of recruiting a new interventional

cardiologist. Table 1 shows the typical cost of identifying, interviewing and relo-

cating a physician.

As Table 1 illustrates, the typical cost of recruiting and relocating an interven-

tional cardiologist in today’s environment approaches $100,000, especially if family

members accompany the candidate for a site visit. The cost is steeper still if more

than one candidate is interviewed. This budget reflects direct costs only, and not

the indirect costs involved in the initial decision to hire and the use of in-house

recruiting staff to screen candidates, arrange travel and lodging and develop inter-

view schedules. Other indirect costs include the valuable time senior executives

and practicing physicians take from their schedules to meet with and interview

multiple candidates.

Counterbalancing the cost of recruitment is the opportunity cost health-care

systems face when a position is unfilled for a period of time. A three-person

interventional cardiology group that loses a physician while being fully staffed

for three providers feels the loss acutely. Two providers simply cannot carry the

patient load and call load of a three-person group for an extended period of time,

yet they must maintain office staff and office space while working to recruit a

replacement. Turnover is often referred to as the “silent killer” of an organization.

Lost revenues, especially those stemming from a high-volume procedural specialist,

can significantly impact a hospital’s bottom-line performance.

For example, surveys indicate that an interventional cardiologist will generate

average annual inpatient and outpatient net revenues of $2,662,000 for the hospital

TABLE 1 The Typical Cost of Identifying, Interviewing and Relocating a Physician

Interventional Cardiologist Recruitment

Direct costs of recruiting:

Advertising (Internet, print ads and mailings) $4,500

Site visit (travel, lodging, car rental, meals) $2,000

Second visit for home search* $2,000

Relocation costs $15,000

Signing bonus $40,000

Search firm fee $30,000

Total $93,500

* Not including expense for family members’ travel


(Merritt, Hawkins & Associates 2007). Also an interventional cardiologist will

generate inpatient and outpatient net revenues and $1,124,000 for the practice, on

average (Medical Group Management Association 2008). Assuming a conservative

20-percent margin for the specialty of cardiology, the cost of recruiting a physician

to fill an opening in an established practice can reach $850,000 or more, as shown

in Table 2, if recruiting the new physician takes 12 months.

Health systems often overlook opportunity costs when evaluating the cost of

recruitment, but these need to be included if the cost effectiveness of the recruiting

process is to be maximized. A process that is completed in a six-month timeframe

is more cost-effective than one that takes a year, even if it requires greater outlays

for a search firm, signing bonuses or relocation allowances.

Opportunity costs are lower for practices that are recruiting to expand services

than at established practices that lose a practicing physician. Even then, efforts

to shorten the recruiting cycle will pay dividends by maximizing productivity.

And efforts aimed at encouraging loyalty and retention are important to reducing

the need for physician recruitment in the long term.

DEVELOPING A COST-EFFECTIVE RECRUITING PROCESS

As an organization begins the process of recruiting a new physician, it can increase

its chance of success by focusing on these four key questions:

How can the candidates needed to fill the practice openings be attracted? 1 |

Is the correct pool of potential candidates being reached?

How does the recruitment process distinguish this organization from others 2 |

that may be trying to attract the same candidates?

How can a financial proposal be structured to be attractive and fair for both 3 |

the new physician and the hospital?

What is the organization doing to retain this physician over the long term? 4 |

Is enough being done to retain the current medical staff?

TABLE 2 Interventional Cardiologist Recruitment

Opportunity cost of an unfilled position over one year:

Lost practice revenue (net) $1,124,000

Lost hospital revenue (net) $2,662,000

Total lost revenue $3,786,000

Total cost of recruitment:

Lost margin at 20% $757,200

Direct recruitment cost for successful candidate* $93,500

Travel expenses for 5 unsuccessful candidates $10,000

Total $850,700

* Not including expense for family members’ travel


Recruitment processes need to be

well-designed from start to finish.

Examine every step, from advertising,

sourcing and interviewing candidates,

and making an offer, through orienting

and acclimating a new provider and

his/her family to the community.

With more Baby Boomers reaching

retirement age every year, and provider

shortages growing across the country,

physicians seeking new employment

opportunities have literally dozens

of openings to consider. Practicality

makes it impossible to interview for

every open position, so candidates

are generally selective and contact

only those organizations that make an

impression, often on a “gut level.”

An organization must endeavor

to reach the maximum number of

qualified candidates through every

available means, even as it focuses

its recruitment efforts on those most

suited to its openings. Using a variety of advertising modalities is a must, and the

Internet is high on the list of information sources for today’s tech-savvy candidates.

Institutions need to have a top-of-the-line Internet site to attract top-of-the-line

physician talent. Don’t be shy about promoting an advanced level of technical

advancement and a focus on quality patient care. These two factors are important

to the young providers coming out of training.

One way to reduce recruiting costs is to limit the number of candidates brought

in for a site visit. Many search firms suggest using telephone interviews to narrow

the candidate list to three or four per opening. Remember that, after a first round

of interviews, candidates will frequently narrow their options to the top three

positions that made a positive impression.

On-site interviews will require a significant investment of time by members of the

recruitment team. This team should include the senior operations executive from the

physician practice, the chief medical officer of the physician group, a senior execu-

tive from the hospital or system, and the recruiter who has had the most contact with

the candidate during the sourcing process. In addition to formal interviews, consider

having an informal, social gathering including other physicians from the practice.

The connection between the recruiting team and the HR professions needs to be

strong to ensure that the facility is offering a competitive salary and comprehensive



z “Recruiting methods”

z “Cost of turnover”

z Attract and retain.


z Building Pay Structures: How-To Series for the HR Professional

z Determining Compensation Costs: How-to Series for the HR Professional

z Employee Engagement Fundamentals: A Guide for Managers and Supervisors.


z Pricing Critical Skills and Unique Positions (Competitive Market Pay), Seminar

z Market Pricing — Conducting a Competitive Pay Analysis, Certification Course: C17

z Fundamentals of Equity-based Rewards, Certification Course: T11


benefits plans befitting the position. Pay careful attention to other factors such as

work schedules, call schedules, integration of the physician into the organization’s

culture, and effective socialization for the family members within the community.

If candidates are coming from outside the immediate area, they will benefit from a

tour that highlights the positive aspects of the community. Local real estate agents can

be an excellent resource for this purpose. Rather than showing individual properties,

ask the real estate agent to discuss the neighborhoods, school systems, amenities and

resources within the community. This is an opportunity for the candidate and his/her

spouse to relax and begin to envision their lives in what may be their new home town.

REDUCING PHYSICIAN TURNOVER

Turnover is a reality that every organization faces. Newly trained physicians

who are leaving their residency programs for their first clinical position are at

the highest risk for turnover. Surveys show that 61 percent of physicians who

leave a practice do so within the first three to five years (American Medical

Group Association and Cejka Search 2006). The good news is that simply having

an active retention strategy has been shown to increase physician retention.

The components of a retention program should reflect the culture of the organi-

zation. A successful retention strategy addresses both financial and nonfinancial

issues that impact a physician’s decision to stay, including the quality of patient

care, state-of-the-art diagnostic facilities, system responsiveness to issues and a

reasonable call schedule.

To encourage retention, make sure close attention is being paid to how physi-

cians are integrated into the management structure of the hospital or health system.

Too many systems simply “paste” a new physician organization onto the side of

the organization chart, giving little thought to the leadership roles physicians may

expect to play, or to the outward signs of status and prestige they may expect to

be accorded.

Remember that physicians who leave private practice to join a hospital or health-

care system give up equity ownership in their practices, reducing their opportunities

to accumulate wealth and defer income for retirement. A physician’s benefits package

should include attractive accumulation programs that are capable of generating

retirement benefits comparable to those in private practice. Properly structured,

these programs can be a significant factor in encouraging long-range retention.

SUMMARY

Recruitment and retention of physicians has repeatedly been identified as the

major issue being faced by hospitals and health systems today. Currently, open

positions far outnumber new physicians coming out of training, and poten-

tial recruits have a wider range of openings to choose from than in the past.

As shortages grow, retention will become an even-greater problem as job

offers for good physicians will come from all directions. The cost of recruiting


combined with system losses related to open positions can easily approach the

$1 million mark. Inefficient, ineffective recruiting and retention strategies will

magnify those costs as physician shortages worsen.

Health systems that develop an effective recruiting process, provide competitive

compensation and benefit programs with wealth accumulation opportunities, and

focus on creating a satisfying work environment for the medical staff will position

themselves for success in serving the needs of their patients. z

American Medical Group Association and Cejka Search. 2006. 2006 Physician Retention Survey.

Council on Graduate Medical Education, U.S. Department of Health and Human Services. 2005. Physician Workforce Policy Guidelines for the United States, 2000-2020 (16th Report). January. Washington, D.C.: Council on Graduate Medical Education, U.S. Department of Health and Human Services.

LocumTenens.com. 2008. 2008 Physician Jobs and Universal Health Care Survey.

Medical Group Management Association. 2008 MGMA Physician Compensation and Production Survey: 2008 Report Based on 2007 Data. Englewood, Colo.: Medical Group Management Association.

Merritt, Hawkins & Associates. 2007. 2007 Physician Inpatient/Outpatient Revenue Survey. Irving, Texas: Merritt, Hawkins & Associates.

U.S. Department of Health and Human Services, Health Resources and Services Administration, Bureau of Health Professions. 2006. Physician Supply and Demand: Projections to 2020. October. Washington, D.C.: U.S. Department of Health and Human Services, Health Resources and Services Administration.

REFERENCES

AUTHORS

Drew Erra is senior vice president and consultant with Integrated Healthcare Strategies. He has more than 16 years of experience in senior health-care management positions and consulting on executive compensation and benefits. Prior to joining Integrated Healthcare Strategies, Erra was CEO of Regional Health Physicians (RHP). Erra has a degree from the University of California at San Diego in Public Health Administration. His work on capitation rates was published by National Health Information.

Michael Hogue, M.D., is a senior vice president and consultant with Integrated Healthcare Strategies. Before joining Integrated Healthcare Strategies, he held the position of chief medical officer at Regional Health Physicians. Prior to that role, Hogue practiced as a board certified family physician. He is president and founder of CFMC LLC, an Emergency Room staffing company. He graduated from the University of North Dakota School of Medicine, and completed his residency in Sioux Falls, S.D.


Organizations with high-performing sales efforts

are good at aligning three imperatives: a strong

strategic focus, consistently executed processes;

and an enabling infrastructure. Not surprisingly, front-

line sales managers are critically positioned to manage

that alignment on a day-to-day basis. Front-line sales

managers are the linchpin of high performance. And yet,

while sales leaders widely acknowledge the importance

of their front-line managers, the reality is that few compa-

nies fully leverage the role. Why aren’t companies doing

more with it? Two factors seem to be in play.

Historically, CEOs and sales leaders have paid more

attention to their salesforce than to their sales managers.

In addition, companies have worked hard to evolve

their sales model from purely transactional to solutions

or consultative selling, yet many have left their front-

line managers mired in the transactional — that is, the

internal meetings and “administrivia” that have become

the hallmark of the job — and, in too many instances,

responsible for their own selling and account manage-

ment, a hybrid seller/sales-manager role that is difficult

to do well.

Energizing the Front Lines of Sales Management

Steve GrossmanMercer

z Organizational Culture


The second factor is the challenge of getting the role right, of figuring out how to

structure, populate, measure and reward the ranks of front-line managers without

losing momentum, customers or salespeople.

Even in organizations with a transactional sales model, a sales management role

that is transactional in nature is out of step with overall business interests. Updating

and upgrading this role should be a strategic priority for all companies seeking

to accelerate growth and advance the overall performance of their sales effort.

With the help of some recent Mercer research on the front-line role, this paper

outlines a call to action to help leaders fully leverage this underleveraged asset.

DEFINING THE OPTIMAL

In 2007 and 2008, research drilled down on the issue of front-line sales manage-

ment. The company’s survey tapped more than 150 sales executives, sales

managers and sales representatives in large, business-to-business companies.

The survey asked them about the drivers and impact of optimal front-line

management, the ideal capabilities of the front-line role and the actions that

have the biggest effect on salesforce productivity.

More than 80 percent of the respondents agreed that developing sales representa-

tives and focusing on their results are the two most important drivers of performance

(See Figure 1). The need for sales managers to personally close deals received the

lowest ranking, a good sign that neither the transactional player nor the hybrid seller/

Sales managers focus on sales representatives’ development

Sales managers drive performance of sales representatives

The ratio of sales representatives to sales managers

Top sales managers were the top sales people

Sales managers spend enough time with sales representatives

Our training is superb

Sales managers personally close orders

Percent

0 20 40 60 80 100

FIGURE 1 Drivers of Front-Line Manager Performance

2 5 11 36 46

3 8 7 42 40

2 16 22 48 12

6 16 24 42 12

9 25 17 37 12

6 27 25 28 14

14 29 17 32 8

Strongly disagree Somewhat disagree Neither disagree nor agree

Somewhat agree Strongly agree


sales manager is considered today’s image of success. Despite that high level of

agreement on the drivers of performance, almost one-half of respondents believed

their managers were not optimally performing. This gap between defining optimal

performance and achieving it is sizable (that is, 80 percent know what it is, but only

about 50 percent are doing it).

The survey results strongly endorse the fact that optimal front-line manage-

ment performance directly influences business results. The 53 percent who

believe their managers are operating in an optimal way select high achievement

(percentage of salespeople exceeding quotas) and low turnover (representa-

tives and managers) as the major indicators of their effect (See Figure 2). Those

who believe their front-line managers are not optimally operating select a low

percentage exceeding quotas, an inability to recruit and high turnover as their

indicators of this role’s misalignment.

The respondents ranked a list of attributes based on “relative importance for

an ideal sales manager” (See Figure 3). Selling skills received the lowest ranking.

Again, as with the need to have managers personally close deals, the fact that

selling skills come in last is a good sign that the image of the “optimal” manager

has evolved from the purely transactional.

Respondents ranked a cluster of “relational” skills as the most important for the

ideal front-line manager. Sales executives chose motivational and interpersonal

skills as most important; sales managers put communication/listening and motiva-

tional skills first; and sales representatives selected communication/listening and

Low turnover of sales managers

A high percent of sales people exceed quotas

Low turnover of sales representatives

Sales representatives strive to be sales managers

Out cost of sales is on target

Recruitment of sales manager talent from other organizations

Other

Percent

0 10 20 30 40 50 60 70

FIGURE 2 High Achievement and Low Turnover Indicators of Optimal Front-Line Behavior

What are the indications that your sales managers are operating in an optimal way?

65%

65%

59%

50%

46%

41%

9%


coaching skills. Differences across the three groups may speak more than anything

about the difficulty in differentiating among these capabilities. Unbundling this

cluster of skills is part of the answer to getting things right.

An interesting perspective emerges when most- and least-important skills (top

and bottom three) are examined relative to optimal sales manager capabilities.

Sixty-two percent of respondents who put a high priority on industry/product

knowledge had identified their companies as having suboptimal sales-manager

performance. Even more significant, nearly two-thirds of those respondents put

a low priority on “relational” skills. Companies with suboptimal front-line sales

management may have misplaced priorities, focusing on product knowledge and

selling skills in their managers rather than focusing on building those skills that

help managers drive sales representative performance and company results.

What does it take to achieve optimal behavior? The survey found that strong

leadership at the top (not surprisingly) and specific organizational initiatives

can help create long-term optimal performance. Training or re-training sales

managers, getting rid of nonperformers and restructuring the sales function top

the list of initiatives.

High turnover in general and the time managers spend in the office are seen as

the leading barriers to achieving optimal performance (See Figure 4). Only approxi-

mately 25 percent chose “wrong people in the sales manager role” as a barrier

and only 5 percent chose “span of control.” (A cautionary note about the latter:

Communication/listening skills

Organization/time management skills

Interpersonal skills

Willingness to empower

Honesty and integrity

Possession of knowledge

Motivational skills

Leadership skills

Coaching skills

Selling skills

Percent

0 20 40 60 80 100

FIGURE 3 Selling Skills is Least Important for Sales Managers; “Relational” Skills Is the Most Important

Rank these attributes based on their relative importance for an ideal sales manager

100%

96%

93%

89%

89%

84%

84%

78%

75%

68%


The survey respondents average a reasonable span of control of eight to 10 employees.

In many companies, getting this number correct — not too high or too low — will

be a factor in achieving optimal front-line performance.)

Finally, the survey asked the respondents to select three sales manager-related

actions that would have the most immediate impact on improving sales-force produc-

tivity in their companies. Across vice presidents, sales managers and representatives,

the No. 1 choice was reducing the time managers spend on nonselling activities.

Increasing the time managers spend with representatives and aligning manager and

representative incentives were second and third.

RESTRUCTURING THE FRONT-LINE ROLE

Optimizing the front-line sales manager role calls for organizations to reduce the

time managers spend on nonselling activities and increase the time they spend

with representatives. But neither large nor incremental initiatives alike will do the

trick; companies must be willing to first take on the structure of the role itself. In

other words, if they get the role right, time allocation takes care of itself.

For some time, research has confirmed that sales management far outweighs

other factors in driving sales performance and retaining sales talent. Yet the role

continues to be overlooked and underleveraged. The author hears from sales vice

presidents and managers alike that “no one owns the responsibility for making

sales managers successful.”

Thus, a leadership call to action is required to optimize the front-line role.

Such a call usually results in big actions — including restructuring, staff purges,

training programs, investing in automation, and changing spans of control.

High turnover in sales organization

Sales managers spend too much time in the office

Sales representatives have no motivation to become sales managers

Limited investment in sales organization

Wrong people in the sales manager role

Unfavorable market dynamics

Sales manager have too many direct reports

Percent

0 10 20 30 40 50

FIGURE 4 High Turnover and Too Much Time in the Office Barriers to Optimal State

What factors are keeping you from getting to that optimal state?

50%

50%

35%

30%

25%

20%

5%


These are good investments in and of themselves, but like most large, sweeping

actions, they are often disappointing in terms of measurable and sustainable

improvements in sales results.

And so, the leadership call to action requires a more practical approach; it necessi-

tates a process. Mercer has concluded that the best way to effectively and sustainably

improve sales manager impact is to start with a three-step process to:

Redesign the role around managing critical assets.1 |

Get the right people in the role and build the right capabilities for leading.2 |

Align manager and representative compensation.3 |

Step One: Redesign the Front-Line Sales Manager Role Around Critical Assets

Front-line managers are the linchpin of any high-performing sales effort. As a

result, the role should be designed to deliver on critical strategic and process

accountabilities; specifically, managers should be responsible for the key assets

of their sales efforts:

Aligning representatives and customers to properly create and execute sales z

strategies and nurture key relationships.

Developing the right skills and driving the right behaviors in sales representatives. z

Engaging and motivating the salesforce.z

Maintaining necessary staffing levels and minimizing “bad” turnover.z

Instilling the discipline of consistent and transparent sales processes.z

Meeting (or exceeding) financial and nonfinancial sales objectives.z

Expectations and activities around each of these responsibilities should be

defined, as should the support required for optimal performance in each area.

Moving from administrator and seller to “asset manager” will require a significant

reallocation of priorities for most front-line managers (See Figure 5).

Two radical shifts result: The 10% to 20% of time that managers spend on selling/closing deals themselves is absorbed into the time they spend on coaching repre-sentatives how to sell and close their own deals. When managers focus on real time strategizing and driving representative behavior, the time they spend on administra-tion can shrink from 50% to as little as 10%. The manager is closer to results, not just compiling and reviewing them (also some tasks transfer to more appropriate roles.)

Transactional Asset Manager

FIGURE 5 Call to Action: Step One — Redesign Front-Line Role Managing Critical Assets

100

80

60

40

20

0

Pro

po

rtio

n o

f sa

les

man

ager

tim

e

Strategy

Selling on their own

People management

Administration


Step Two: Get the Right People

in the Role and Build the Right

Capabilities for Leading

Of all the critical assets, devel-

oping the right skills and behaviors

among the sales representatives and

engaging and motivating them are

the most challenging and elusive.

Mercer survey findings confirm that

what was termed “relational skills” —

leading, communicating, motivating,

listening and coaching — are widely

acknowledged as the most important

capabilities of front-line managers.

The fundamental job of front-line

managers is to engage the sales-

force day-to-day. The relational skills

are the way they accomplish that.

Yet many companies don’t sufficiently

differentiate the relational capabilities

required to lead through engagement.

In addition, typical role descriptions

are unlikely to apply to this newly

redesigned front-line role.

In the asset manager model, the

front-line manager’s business activi-

ties and accountabilities are defined in detail and integrated into the sales and

sales management processes. The activities and accountabilities in a transactional

sales manager job description are typically broad (and often must be extracted

from narrative paragraphs), for example:

Manage activities and results of account managers.z

Achieve and exceed revenue and profit goals in your market.z

Recruit, select, hire, train and develop new and existing account managers.z

Build relationships and work across lines of business.z

By contrast, Figure 6 is an example of an asset manager role description.

Once the activities and accountabilities are defined within the realities of a compa-

ny’s sales environment, the correct business outcomes can be measured and, as

appropriate, rewarded.

Organizational discomfort with traits deemed personal — “Joe’s never been a

good listener” — may contribute at some level to a reluctance to take on these

“close-up” capabilities. If listening, for example, is defined as regular interaction

with representatives and customers about specific content areas, and attached



z Sales performance

z Coaching employees

z Communication skills.


z Designing Sales Compensation Plans — How-to Series for the HR Professional

z Sales Compensation Math

z Sales Compensation Essentials — A Field Guide for the HR Professional

z Rewarding Group Performance — How-to Series for the HR Professional.


z Sales Compensation Design — Developing Next Year’s Plan, Seminar

z Sales Compensation for Complex Selling Models, Seminar

z Elements of Sales Compensation, Certification Course: C5

z Performance Management — Strategy, Design and Implementation, Certification Course: C11.


to desired outcomes and metrics, “Joe” could relax about his personal inclina-

tions and understand what is expected of him. The ability to draw out the right

information for the situation is a capability that can be built.

One high-performing sales organization has “broken the code” on making

coaching an integral part of the sales process, especially before and after

customer visits. The onus on managers to coach their representatives has been

laced with “that’s the way we do things around here.” Such code-breaking

takes a well-managed effort and this client did several things right to substan-

tially change behavior. Coaching was never the stated objective; acquiring a

specified percent of new business in the next three years was the objective.

Sales managers and sales representatives were brought together to design

manager/representative interactions and decide how to make them happen on

a day-to-day basis. Implementation lasted for a year and success was tracked to

new business results (not to use of the coaching tools, even though they were

carefully developed and central to the rollout). As the behavior became part of

the daily sales process, the tools themselves faded into the background and are

now used primarily in new hire orientation.

FIGURE 6 Highlights from an Asset Management-Based Job Description

Key asset

Customer relationships

Sales people’s skills

Staffing levels

Energy, motivation

Key processes/tools

Key activities/accountabilities

z Align representative and customer to support sales strategies and protect key relationships

z Assess needs of each major account, segment and match with appropriate profiles of sales people

z Create and maintain relationships with senior players at major accounts

z Develop the right skills and drive the right behaviors in sales representatives

z Create development planes for each representative

z All representatives complete e-learning modules on schedule

z All representatives complete career planning tools and processes

z Maintain necessary staffing skills (minimizing “bad” turnover)

z Constantly assess representative behavior, motivation, drive

z Maintain and develop appropriate “bench” strength

z Maintain recruiting pipeline

z Engage, energize and motivate the salesforce

z Set and achieve stretch goals for the team

z Lead monthly, quarterly team events and meetings

z Effectively use Sales Promotion Incentive Funds and other incentive tools/events

z Instill the discipline of consistent and transparent sales processes

z Maximize the value of the sales process and supporting tools made available by the company

z Ensure increasing levels of proficiency by sales people in utilizing key processes and tools


Step Three: Align Manager and Representative Compensation

Once the first two steps are completed, look at aligning compensation. For these

survey respondents, the leading indicator of optimal front-line manager behavior is

high achievement — defined as the percentage of representatives exceeding quota.

The benchmark for a highly motivated, high-performing sales effort is typically

60 percent to 70 percent of representatives meeting or exceeding goals.

No single answer exists to aligning compensation; each organization is unique.

Issues to consider: Are we using the right measures and incentives for the front-

line managers? Is there too much overlap with the representatives or not enough?

Is there enough upside to attract the right talent into the manager role?

A recent client experience illustrates one path to a “right” answer, a path that

led to a rapid turnaround in achievement (See Figure 7). For this client, aligning

manager and representative goals did two things. It focused front-line sales

managers on the correct issues at the correct level (field versus corporate), while

having the roll-up accountability for their teams’ goals helped both require and

position managers to lead through engagement.

In terms of pay, one challenge companies have in “harmonizing” pay plans

across management and sales people is their pay structure itself and the underlying

philosophy guiding the design of plans, practices and policies. The worst reason

for a sales person to want to move into management: It is the only way he/she

can earn more than they’ve been earning as a sales person.

Unfortunately, this is the primary impetus to make this move in too many

companies. This hurts companies in several ways. First, they promote the wrong

people for the wrong reasons. And, perhaps more importantly, they continu-

ously deplete their sales ranks and jeopardize customer relationships, particularly

FIGURE 7 Call to Action: Step Two: Align Manager and Representative Compensation

Situation

Solution

Impact

z Current plan: 26% of representatives above the goal, 74% below

z Representatives’ goals polluted by factors to which they weren’t connected

z Managers’ goals tied to corporate, not to sales

z Changed representatives’ metric to gross revenue with product mix. Not easier to achieve but now based on clear line of sight.

z Redesigned manager role and refocused managers on coaching their people rather than on closing the deals themselves

z Changed manager profile and re-staffed the role

z Representatives’ goals roll up to become the manager’s revenue goal. Managers have additional metrics (e.g. corporate)

z First year new place: 62% of representatives above goal, just 38% below

z Redesigned goals inspires internal competition among representatives leading to faster individual selling against annual goal

z Given the nature of the company’s business, sales earlier in the year are more profitable.


across their top performing sales people as there are practical limits or even caps

(either hard or soft) on their ability to earn as sales people.

Figure 8 illustrates the differences between a firm whose pay structure inherently

limits its sales people’s earnings (on the left) and one that does not (on the right).

Getting to the “right” is not difficult and has a significant pay-off.

One distribution company recently addressed these pay issues by revising their

philosophy and structure to increase the earnings potential of sales people and

take pay out as the key driver to move from sales representative to sales manager.

They then redesigned their sales manager incentive plan to drive the more “relational

skills” we described earlier. This was a clear win-win for the entire sales effort.

As noted, this three-step process should be viewed as an effective starting point

for leveraging the front-line sales manager role to drive sales representative results

and company revenue — not as an end in itself. Setting a process in motion is no

substitute for working “close-up” on the front-line manager role, and responding

flexibly and in real time to the tendencies and capabilities of real people. But by

mastering the process on one hand and committing to closely coaching the sales

effort, optimizing those front-line managerial assets becomes much more possible

and more measurable. z

FIGURE 8 A Firm Whose Pay Structure Inherently Limits Its Sales Representative’s Earnings (Left)

and One That Does Not (Right)

Single Path Dual Path

Second level manager

Frontline manager

Sales representative #1

Pay level (in thousands)

$160

$100

$60

Payout topped off — A promotion to a manager-level posi-tion is the only way for pay to increase

Second level manager

Frontline manager

Sales representative #2

1. A sales representative can transfer to a sales manager position

2. Instead of transferring to management, a sales represen-tative can stay on to increase his/her pay.

Payout at 100% of quota

Top 10%X

X

X

X

X

X

X

X


Mercer. 2007. “Optimizing Front-Line Sales Management: A Survey.” Mercer sales effectiveness consulting group.

REFERENCES

AUTHOR

Steve Grossman ([email protected]) is a principal in Mercer’s Human Capital Business, and leads Mercer’s national Sales Effectiveness Business, helping clients focus their sales effort on the right customer segments; optimize their sales and sales management processes; and effectively motivate and enable their sales people to exceed expectations. He has particular expertise in helping clients manage through the difficult process of driving change in a sales environment. A frequent speaker on sales

effectiveness, Grossman has authored numerous articles on sales-effectiveness topics including high-performing sales efforts (Journal of Organization Excellence, Selling Power) and sales compensation (WorldatWork). He is also a principal contributor to several books. Grossman holds a Bachelor of Mechanical Engineering degree from Tufts University and a Master of Business Administration degree from Boston University. He is a Certified Management Consultant (CMC).

A New Approach to Career Ladders Addresses: “What Do I Need to Do to Get to the Next Level in My Career?”

N ational Starch & Chemical Company (NSC),

a more than 100-year-old global specialty

chemical company with operations on six conti-

nents, was a $4 billion subsidiary of Imperial Chemical

Company (ICI). Prior to its recent acquisition, NSC

was a matrix organization consisting of four specialty

chemical businesses: adhesives; electronic materials;

natural polymers; and specialty polymers. Like many

mature companies, National’s traditional salary struc-

ture had come into a state of disrepair. By the late

1990s, title and grade structures evolved independently

within each operating business to the point where more

than 4,000 job titles were maintained on the company’s

Global Human Resource Information System (GHRIS).

When the head of research and development asked

Compensation to resurrect the Research and Development

Technology Ladder in 2004, the author had no idea

a new approach to career ladders would come from

this project, or that its global success would serve as

a springboard for the development of 11 more global

career ladders to follow.

Development & Career Opportunities z

Paul OlivaDecorative Paints NA

Akzo-Nobel



This paper covers:

Why the global career ladders were createdz

How the global career ladders were built and what’s behind the new approachz

Deliverables and special built-in features that comprise the laddersz

Why the global career ladders were successful.z

CASE FOR CHANGE — WHY GLOBAL CAREER LADDERS WERE CREATED

As a global company, National’s job titles were used in dramatically different ways

throughout the world. This issue was most clearly evidenced when planning

developmental expatriate assignments. The need for greater title consistency was

highlighted as talent was shared and redeployed across businesses and regions.

There was no “level playing field” to ensure that a scientist, process engineer or

production manager, for example, had the required background, experience level

and an expected level of contribution regardless of which business an employee

worked for or where the employee was stationed.

Periodic employee surveys consistently revealed that significant portions of the popu-

lation felt that promotions frequently did not go to those most deserving. The career

ladders marked an effort to provide clarity around the central question: “What do I need

to do to get to the next level in my career?” This paper will reveal how the global career

ladders were specifically designed to answer this fundamental question, and how once

implemented they were used to gauge employees’ readiness for promotion.

The Global Career Ladders were designed to support three guiding principles:

Establish acceptable career band and position hierarchy structures to be used 1 |

by all businesses across all regions.

Set consistent job standards. -

Establish position requirements and uniform guidelines for recruitment. -

Facilitate consistent standards and expectations for performance. -

Provide job-relevant examples of the required knowledge, skills, abilities and 2 |

behaviors an employee must demonstrate for a period of time to be considered

for promotion.

To serve as lasting policy, thus, it must support the corporate culture while 3 |

incorporating sound market principles.

HOW THE GLOBAL CAREER LADDERS WERE BUILT

Laying the Groundwork

After comparing external technology markets and the company’s current job

family hierarchies, Compensation mapped the company’s positions to established

benchmarks in the market place. This was done primarily through participation

in closed and industry wide compensation surveys. This background work was

done while assembling an international market research library as part of a larger

initiative to establish market pricing as the preferred platform for making informed

salary-administration decisions.


Title and Band Structures

Ladder project teams’ initial charter was to review titles currently used across

the globe and propose consensus title and career-band structures that trans-

lated well across businesses and regions. While developing job-family hierarchy

and career-band structures sounds fairly straight forward, each project team

had to take cultural sensitivities and prevailing regional practice into account.

Unsurprisingly, differences in how titles are used across global regions were

found. For example, the title of “manager” is most often used for those who have

direct reports, conduct performance reviews and have salary planning responsi-

bilities in North America. However, in Europe and Asia-Pacific regions, manager

titles can often be used for senior-level individual contributors who may provide

task direction to a small group of employees, but do not have performance-

management or salary-planning responsibilities. And while “director” titles are

commonly used for second-level manager positions in North America, in the

United Kingdom and some Asia-Pacific countries, “director” can often mean

“board member.”

Project-team members were encouraged to conduct informal focus-group studies

by testing proposed ladder structures with their senior managers and trusted peers

as a check of face validity. (In other words, does this proposed ladder structure

make sense?) On a number of occasions, changes were made at this early stage

incorporating good suggestions along the way. The solicitation of title and career-

band proposals provided a vehicle to reestablish senior-management support and

buy-in. In this manner, global consensus could be reached fairly early on in the

development process.

Part of the challenge in building job-family hierarchies and career-band structures

that incorporate regional input from throughout the globe is that project-

team members must define what constitutes standard practice for agreed jobs.

Title and career-band structure proposals often met with compromise in terms of

what various professional levels across regions were called; so some degree of flex-

ibility was incorporated into the proposed-title structures for individual contributor

roles. For example, in North America the title of “strategic account manager” described

sales professionals who are relationship managers with a portfolio of large national

accounts, whereas the equivalent role in Asia-Pacific was titled “key account manager.”

The team held fast to a set of principles or corporate expectations regarding what

the requirements would be to be called a “manager.” These included:

Managers must have professional-level direct reports.z

Managers must be responsible for conducting performance reviews of their z

direct reports.

Managers must have salary-planning responsibility for their direct reports and z

must make merit increase recommendations during the annual common review

date process.


Employees were free to have business cards printed with titles they deemed

necessary (within reason: they could not adopt the title of COO or CEO

for example), for it was recognized that customers sometimes had certain expec-

tations regarding the effectiveness of company representatives based on title.

This was more often the case for primary client-facing jobs in sales and

technical service.

New Application for Constructs

Once agreement was reached on title and career-band structures, the next phase of

development involved identifying constructs. Subject Matter Expert (SME) project

team members working with human resources acted as informal focus team

leaders and they would obtain agreement from senior managers that an acceptable

title structure and job family hierarchy had been reached. These senior managers

were ultimately impacted by the ladder and would ultimately become stake holders.

Constructs are knowledge, skills, abilities or attributes which elicit observable

behavior (Conway 2000). For the company’s purpose, constructs were defined as

clusters of knowledge, skills, abilities and behaviors an employee needs to perform

a job successfully and to an expected level of performance. The selection criteria

identifying constructs were differentiating positions within each career band in

a meaningful way and were considered critical competencies an employee must

demonstrate to be considered for promotion.

Drawing from a number of sources, including assessment center research and

behavioral inventories, project-team members identified constructs which were

aligned with the ICI’s “Success Factors.” The ICI “Success Factors” were generic

constructs consisting of functional competencies and core behaviors identified as

critical to success at ICI. Once constructs were identified, project teams modified

them to differentiate the positions in a meaningful way within a career band. As a

consequence of modifying them, constructs naturally evolved across career bands.

The following example illustrates a progression as an employee moves up the

career bands for communications-related constructs. The factors included:

Written and verbal communication skills (first career band)z

Presentation skills (second career band)z

Influencing skills (third career band) z

Organizational impact (fourth career band).z

The emphasis shifts from an ability to effectively communicate with one’s peers

and managers to the outcomes of effective communication such as influencing

departments and levels of management to ensure allocation of required resources.

While ascending the career bands, the “bar gets higher” in terms of the required

level of competency and supporting behaviors to be successful.

Once constructs were identified and modified, project teams spent the next four

to eight months on weekly global teleconferences (approximately 90 minutes) devel-

oping competency statements describing expected level of performance for each


job on the ladder. The constructs were never intended to be an exhaustive list of

every task and duty. Rather, constructs and their supporting competency statements

were specifically designed to address the central question: “What Do I Need to Do

to Get to the Next Level in My Career?”

WHAT ARE THE GLOBAL CAREER LADDERS?

Constructs Profiles and Career Band Definitions

The global career ladders consist of two core documents: “Constructs Profiles” and

“Career Band Definitions.” The “Constructs Profiles” document is a career-development

tool used for categorizing jobs based on the knowledge, skills, abilities, and behavioral

competencies employees need to be successful on the job and to demonstrate they’re

ready to be promoted. The process for developing the “Constructs Profile” document

is described in the preceding section, and is unique to the company’s global career

ladders, representing a new application of constructs (See Figure 1 on page 80).

The “Career Band Definitions” document captures experience and education

requirements, duties and responsibilities and the primary role of the positions

within a career band. Band definitions were most often developed around the

end of ladder development phase. This makes sense given that jobs were being

defined during the constructs-development process and it is easier to describe

roles that are well defined (See Figure 2 on page 81).

Links to Compensation

Through participation in closed-industry and industry wide surveys, the compen-

sation department found fairly robust benchmark comparisons of the company’s

ladder positions to the market. Consistent with the corporate culture, the career

ladders had more levels than generally recognized in the market. Therefore, the

company developed hybrid pay range structures based on the 25th, 50th and 75th

percentiles of the market from benchmark positions immediately above or below

the company’s positions. Pay-range structures developed for the United States and

Canada were regional (e.g., New York City Metro, Southeast, Central and Cali-

fornia), to mirror the location of the plants and businesses. For Europe, Asia-Pacific

countries and South Africa, a combination of local surveys and widely recognized

survey vendors were used to develop market-based pay range structures, using a

similar approach as described in this paper. Drawing from the author’s previous

experience developing broadbanding and establishing market-based pay ranges

associated with this initiative, range spreads gradually increase moving up the

career bands, and there is considerable overlap in band ranges.

GLOBAL CAREER LADDER IMPLEMENTATION

Job Slotting Process

The company’s HR community was routinely updated on the progress of career

ladders during their development. In some cases, they were participants during

FIGURE 1 Production Management Ladder Guidelines: Position Profile and Requirements by Level

SHE Management Demonstrates clear SHE leadership. Ensures compliance with legal, regulatory and NSC standards pertaining to all aspects of site operation. Secures internal and external resources to sustain safe work environment.

Demonstrated track record of delivering successful safety results through continuous improvement systems. Establishes a culture that emphasizes safety through the use of internal and external resources as well as a variety of management tools.

Influencing Skills/Organizational Impact/Public Relations

Clearly communicates linkage of business objectives to manufacturing strategy. Uses support functions to maximize site performance. Assures alignment with strategic goals of business. Ensures successful implementation of new technolo-gies, applications and approaches to achieve small business unit objectives. Engages employees in ways that inspire commitment to business goals. Presents a vision for a high-performance culture.

Influences/impacts public relations by participating on community awareness panels (e.g. manufacturing review board, United Way Campaign), helps shape perception of NSC operations and role in community.

Tactical Planning and Strategy Development

Creates plans to deliver competitive advantage through application of best practice. Contributes to development of manufacturing strategy for a market segment/small business unit.

Develops key performance indicators, metrics and asset utilization strategies (e.g. ROCE, budget costs structures, NCV) to meet business objectives across entire supply chain.

Organization Planning and Development

Develops and modifies organizational structure to meet business demands and conditions. Oversees management of employment, selection, orientation and development processes to ensure a diverse and talented staff is in place (e.g. able to recognize and promote talented employees, and can make tough staffing decisions.) Creates a vision for continuous development of production teams.

Recognized within business for long-standing track record of people manage-ment and development, including design of effective work organizations and teams, champions management process, (e.g. total quality management, Six Sigma, reward and recognition systems) individual/team development processes and successfully drives culture change.

Creating Customer Value – New Business Development

Understands market demands based on business team representation and activity. Builds effective networks within the organization to anticipate customer desires and market trends. Participates in proactive customer visits to improve NSC position and qualify as a preferred supplier. Delivers commitments arising from customer audits.

Partners with the business to handle complex issues with key contacts at customer accounts.

Education Plus Years Relevant Experience

Manufacturing manager experience

Manufacturing manager experience

Job Code:

PM501 PM502

Career Band: Plant Manager

Plant Site Manager Manager

X X

X

X X

X

X X

X

X X

X

X X

X

Typical Experience

3+yrs Mnftg Mgr 3+yrs Oper Mgr

3+yrs Mnftg Mgr 8+yrs Mnftg Mgr

Constructs Profile: Knowledge, Skills, Abilities and Scope of Responsibilities


informal focus-group testing of title and career-band structures, or in the case of the

Global Sales Ladder, HR directors also participated on the project team with SMEs.

The first phase of implementation was the job-slotting process. To kick off the

job-slotting process, a detailed instruction memorandum was prepared and distrib-

uted to high-level managers in the business functions as well as their supporting

HR director or manager, with attachments containing the ladder documents and

a spreadsheet with employees to be slotted. The job-slotting process was orches-

trated as a partnership between HR and senior managers. Initially, this was a

spreadsheet exercise downloaded from the company’s Global Human Resource

Information System (GHRIS). However, obtaining senior-manager input and align-

ment across global regions left a confusing trail of spreadsheets and an inability

to identify which spreadsheet had the latest job-slotting assignments. Later, a

customized Lotus Notes database was used to ensure changes made to job-slotting

assignments reflected the latest amendments.

Targeted Presentations and Town Hall Meetings

Communication plans were carefully developed in alignment with the culture

of the business units targeted for implementation. In regions with more formal

management protocols (e.g., China, Japan, Singapore, South Korea and Thailand),

there was a strong preference for tiered rollout by level of management; thus

targeted presentations for the intended audience were developed. For example,

the author might have conducted a presentation with senior managers only, then

HR directors and HR managers would deliver a presentation specifically targeted

to line managers, and finally town hall meetings would be conducted for those

slotted on the ladder. In the case of businesses functions with a less-formal style

(e.g., production management, engineering, and sales in North America), town

hall meetings were conducted with managers and their direct reports who were

slotted. At the end of town hall meetings, copies of the ladder documents were

FIGURE 2 Plant Manager Band

Band for those with a technical degree and 15+ years of manufacturing experience, the majority in production management or engineering. Leads an operational unit or manufacturing site.

A Site/Operations/Plant Manager typically:

z Drives manufacturing strategy in alignment with business objectives

z Develops annual objectives and implementation plans to achieve production and budgetary goals

z Contributes to and influences business strategy

z Develops a vision aligned with business strategy for manufacturing unit or site objectives in accordance with vision

z Leads the development and implementation of action plans to achieve objectives in accordance with vision

z Builds organizational talent and resources to meet present and future business needs

z Ensures legal/regulatory compliance in addition to the National Starch & Chemical Co. and Imperial Chemical Co. requirements

z Delivers products of specified consistency and quality to customers on time in full

z Leads continuous improvement projects involving area/site operations

z Manages people, equipment and material assets in line with business goals


distributed to attendees. Project team members were present at line manager and

town hall meetings to answer questions from employees. Enlisting visible support

from the SME project team helped reinforce buy-in and credibility of the ladder.

Once town hall meetings were completed, managers individually met with their

direct reports within one- to two-week timeframes to communicate where they

were slotted and why. In the rare case of a disagreement, this would be further

discussed with their supporting HR manager or director as well as the next-level

functional manager.

Corporate News Service Article

Corporate communications interviewed project team members and sponsoring

senior executive managers to develop an article for publication on the company’s

electronic communications system or intranet portal. This paper’s author had input

on the article. The articles would be posted around the same time as town hall

meetings were conducted.

Intranet Posting

With each ladder rollout, intranet Web pages were developed with a branded

look and feel (See Figure 3), and posted on the U.S. and global HR intranet

portals under the heading “Personal Development.” The intention was to make

the global career ladders readily available to employees and their managers.

Deploying Global Career Ladders on the company intranet HR portals helped build

the case for ladders to be developed for job families not addressed at that time.

FIGURE 3 Production Management Ladder

The Production Management Ladder covers those supervising or managing a production line and those managing a manufacturing site globally. It creates a clear career path for those looking to assume greater responsibility for managing production operations. Production management professionals advance

through four “career bands” with two to three posi-tions in each band. “Site manager” is the highest position achievable on the Production Management Ladder, and is reserved for those managing our largest and most complex manufacturing sites.

Production Management Ladder

z Site manager

z Plant manager

z Operations manager

z Senior manufacturing manager

z Manufacturing manager

z Principal production supervisor

z Senior production supervisor

z Production supervisor

z Principal production team leader

z Senior production team leader

z Production team leader

For more information see the descriptions below:

➤ The Production Team Leader Band

➤The Production Supervisor Band

➤The Manufacturing Manager Band

➤The Site Manager/Plan Manager Band

Download the Production Management Career Ladder Documents. You can open or save these documents for later reference or discussion with your supervisor.


GLOBAL CAREER LADDER FEATURES

Promotion Requirements for Individual Contributors

To be considered for promotion to individual contributor career-ladder roles, an

employee must:

Meet education and experience requirements.z

At a minimum, must be performing their current job responsibilities consistently z

and to an expected level of performance.

Consistently demonstrate 80 percent of the required constructs at the next-level z

position for a period of six months or more.

If an employee meets all three criteria, he/she can be considered for a promotion

within the same career band. Promotions to the next career band are based on

organizational need in addition to meeting all the previously listed requirements.

If an opportunity does not currently exist for an employee being considered for

promotion to the next career band, the employee must consider transferring to

another business unit or moving to a new location with an open position, or wait

until an opportunity opens in his/her business unit.

Promotion Requirements for Managers

While the promotion requirements for manager roles are highly similar to those

for individual contributors, organizational need also comes into play for promo-

tions to the next-level position within the same career band in addition to the

next-level career band.

Individual Contributor Versus Management Career-Path Choice

In comparing NSC ladder positions to market, it was discovered that high-level

individual contributors in technology and sales disciplines can earn just as much

as their first-, second- and third-level management counterparts. Mirroring market-

pay practice, ladder pay range structures have a fork or “Y,” where high-level

individual contributor roles have considerable overlap with the market-based

pay-range structures of their management counterparts. (See Figure 4)

By eliminating career plateau for high-level individual contributors, compen-

sation was removed as a primary motivation to become a manager. Should an

employee choose to pursue a management career path, management ladder

roles emphasized managerial skills by incorporating constructs such as “problem

resolution/decision-making/decision support,” “coaching/mentoring,” “people

development” and “organizational development.” Thus readiness for promotion

in manager roles was strongly linked to demonstrating required managerial

competencies. This sent a powerful message that if an employee decided to

pursue a management career path, he/she must care about developing his/her

subordinates and managing his/her people in the manner he/she would like to

be treated. Thus, employees could be tested in a management role and if they

did not succeed, they could be returned to an individual contributor role with


an equivalent pay range structure and a good technical resource did not leave

the company. This feature of the career ladders helped foster an improved pool

of managers as well.

Parallel Career Ladders

Parallel ladders have the same number of career bands and positions within bands

by design. Parallel ladders were developed for the technology and supply-chain

disciplines. Examples of parallel ladders for individual contributor roles are in

Figure 5. An example of parallel ladders for manager roles are included in Figure 6.

Parallel career ladders were developed for four of the supply chain disciplines:

customer relations; logistics, inventory and production planning; procurement; and

warehousing, transportation & distribution. The one exception to this is the supply

chain management discipline, which requires an intermediate level of experience

and a college degree or equivalent work experience, or a combination of work

experience in several supply chain disciplines to be effective as a first-level supply

chain analyst (See Figure 7).

Greater Clarity Means More Career Choices

To repeat a central issue, the primary purpose for which global career ladders

were designed was to address the fundamental question: “What do I need to do

to get to the next level in my career?” To this end, the ladders provide specific

examples of the competencies required, thus clarifying what employees need to

demonstrate to be considered for promotion.

Removing career plateaus for individual contributors and creating parallel career

ladders where it makes sense to do so gives employees more freedom to pursue

new career paths. Employees can choose individual contributor or manager roles,

FIGURE 4 Global Sales Ladder Title Structure

Sales Leadership Career Band

z VP, Sales

z Regional or Strategic or National or Country

- Sales Director

z Regional or Strategic or National or Country

- Sales Manager

Sales Manager Career Band

z Senior or Senior Channel or Senior Distributor or Senior District

- Sales Manager

z Sales or Channel or Distributor or District

- Sales Manager

Territory Portfolio Management Career Band

z Senior Account Manager

z Account Manager

z Senior Sales — Engineer or Professional or Executive or Account Supervisor

z Sales — Engineer or Professional or Executive or Account Supervisor

z Sales — Engineer or Professional or Executive

z Sales Associate or Trainee

Relationship Management Career Band

z Global Account Director

z Global Account Manager

z Senior Corporate or Key or Distributor or Strategic

- Account Manager

z Corporate or Key or Distributor or Strategic

- Account Manager


or decide to try related disciplines such as research and development, technical

service or engineering without fear of being penalized for trying something new.

Improved clarity around what it takes to get promoted, coupled with increased

career choices, enables employees to pursue a chosen career path because it is

what they like to do and they are good at it.

KEYS TO GLOBAL CAREER LADDERS SUCCESS

Track Record of Success

The success of global career ladders was defined by their ongoing use in the

various businesses and regions, impacting selection, performance management and

succession planning. Career ladders were developed and implemented globally

across NSC for the following areas:

Research and development (individual contributor roles)z

Engineering (individual contributor roles)z

FIGURE 5 Technology Ladders

FIGURE 6 Technology and Engineering Management Ladders

Technology Career Ladder

z Imperial Chemical Co. (ICI) Fellow

z National Starch & Chemical Co. (NSC) Fellow

z Principal Business Scientist

z Senior Business Scientist

z Business Scientist

z Senior Associate

z Associate

z Principal Chemist

z Senior Chemist

z Chemist

z Principal Technician

z Senior Technician

z Technician

Technical Service Ladder

z ICI Fellow

z NSC Fellow

z Principal Technical Adviser

z Senior Technical Adviser

z Technical Adviser

z Senior Project Leader

z Project Leader

z Principal Technical Service Chemist

z Senior Technical Service Chemist

z Technical Service Chemist

z Principal Technical Service Technician

z Senior Technician

z Technician

Engineering Career Ladder

z ICI Engineering Fellow

z NSC Engineering Fellow

z Group Principal Engineer

z Senior Principal Engineer

z Principal (Functional) Engineer

z Senior Engineering Associate

z Engineering Associate

z Senior Engineer

z Engineer

z Engineering Technologist

z Principal Engineering Technician

z Senior Engineering Technician

z Engineering Technician

Technology Management

z Vice President, Technology

z Senior Group Technology Manager

z Group Technology Manager

z Senior Technology Manager

z Technology Manager

Engineering Management

z Vice President, Engineering

z Senior Group Engineering Manager

z Group Engineering Manager

z Senior Engineering Manager

z Engineering Manager


Technical service (individual contributor roles)z

Technology management (manager up to vice-president level for research and z

development and technical service)

Engineering management (manager up to vice-president level)z

Production management (production supervisor to plant general manager)z

Global sales ladder (individual contributors to vice president, sales)z

Supply chain/logistics ladders (individual contributors to group manager)z

Customer relations -

Logistics, inventory/production planning and control -

Procurement -

Supply chain management -

Warehousing, transportation and distribution -

In addition to their wide spread use and acceptance across National Starch &

Chemical Co., two subsidiaries of ICI, Quest and Uniqema, also participated in

the development of the global sales ladder. Prior to the acquisition of NSC, a

finance career ladder project comprised of a global team from ICI and NSC was

well under way.

FIGURE 7 Global Supply Chain Ladders (5)

Customer Relations

z Group Manager

z Senior Manager

z Manager

z Professional Team Leader

z Senior Team Leader

z Team Leader

z Lead Coordinator

z Senior Coordinator

z Coordinator

z Lead Specialist

z Senior Specialist

z Specialist

Logistics, Inventory, Production Planning and Control

z Group Manager

z Senior Manager

z Manager

z Professional Adviser

z Senior Adviser

z Adviser

z Lead Analyst

z Senior Analyst

z Analyst

z Lead Specialist

z Senior Specialist

z Specialist

Procurement

z Group Manager

z Senior Manager

z Manager

z Professional Team Leader/Buyer

z Senior Team Leader/Buyer

z Team Leader/Buyer

z Professional Agent/Officer

z Senior Agent Officer

z Agent/Officer

z Lead Administrator/Specialist

z Senior Administrator/Specialist

z Administrator/Specialist

Warehousing, Transportation and Distribution

z Group Manager

z Senior Manager

z Manager


z Senior Adviser

z Adviser

z Lead Analyst

z Senior Analyst

z Analyst

z Lead Technician/Operator

z Senior Technician/Operator

z Technician/Operator

Supply Chain Management

z Group Manager

z Senior Manager

z Manager


z Senior Adviser

z Adviser

z Senior Analyst

z Analyst

3b3a

21


Senior Management Buy-in

To help make the case for career

ladder projects, the author sought

sponsorship from senior executives

who were key stakeholders in their

ultimate success; they in turn helped

win the approval of Bill Powell

who was company’s CEO at the

time of the project’s development.

Powell challenged HR to make

the ladders global, which, in turn,

led to an expanded methodology

involving the creation of regional

teams from Europe, Asia-Pacific

and South America representing the

four specialty chemical businesses.

Having successful ly developed

and implemented a truly global

career ladder for research and

development, technical service and

technology management, the author

was surprised when the CEO made

it a “corporate focal point” for 2005

to develop engineering and produc-

tion management career ladders. Successful completion and delivery of the

2005 “Corporate Focal Points” created demand and senior executives were

soon lining up to request and sponsor Global Career Ladders supporting their

respective areas.

Supporting the Corporate Culture

The author’s first attempt at career ladders was unsuccessful as the attempted

model mirrored market practice. The designed model was not a good fit for the

corporate culture. Focus-group surveys were routinely conducted in the research

and development community and this resource provided a better handle on

developing an approach which supported the needs of research and development

professionals. Eliminating position levels was not an option for it was perceived

as a huge takeaway. Focus-group survey results pointed to an expectation by

research and development professionals in individual contributor roles of being

promoted every two to three years. While this expectation was out of sync with

market practice, it was clear that the solution must have no perceived takeaways

while ensuring market competitive pay; the way to resolve this quandary was to

create more job levels than the market. For example, while the market generally



z Career + ladders

z Career + bands

z Communicating + change.


z Understanding Development and Career Opportunities: How-To Series for the HR Professional

z Employee Engagement Fundamentals: A Guide for Managers and Supervisors

z The WorldatWork Handbook of Compensation, Benefits & Total Rewards: A Comprehensive Guide for HR Professionals.


z Global Compensation — Strategy in Practice, Certification Course: C15

z Performance Management — Strategy, Design and Implementation, Certification Course: C11



recognizes six individual contributor levels for research and development: entry,

intermediate, career, specialist, master and fellow levels; NCS’s research and devel-

opment ladder had 13 position levels within five career bands.

The lesson learned: Wed market practice to corporate culture. This approach was

taken for all ladders afterwards for it fostered the perception that global career ladders

meant no takeaway while providing managers with proactive tools to maintain

competitive pay based on a pay-for-performance approach to salary management.

A Carefully Planned and Orchestrated Communication Campaign

HR professionals have all, at one time or another, probably worked hard on a new

policy, procedure, tool or initiative only to have it collect dust sitting on a shelf

as senior management buy-in was not secured, or the communication plan wasn’t

thorough enough or well executed. The thoroughness and attention to detail paid

in developing communication plans and their targeted delivery are as important to

the successful launch of corporate-wide HR initiatives as the compelling reasons

for doing them and the quality and relevance of related tools and instruments

behind them. Every communications channel available was used, from targeted

presentations delivered in town hall and one-one-one meetings, to corporate news

service articles and brochures for job candidates.

Ladder Champions

In addition to the using all communications channels available, it was recognized

that getting the HR community to embrace using the ladders was another key

to their ongoing success. HR directors and managers championed the ladders,

ensuring that they were vetted through tangible HR processes; the ladders success

was attributable in large part to their support. Once implemented, the ladders

impacted selection, performance management, capability reviews for promotions,

salary planning and succession planning (See Figure 8).

A Proven Formula for Success

During the course of the first few ladder projects, the evolving well-organized

process ensured successful completion, implementation and ongoing utilization;

this enabled human resources to track progress as the ladders were begin built

FIGURE 8 Ladder Champions

Selection

Performance Reviews

Capability Reviews

Salary Planning

Succession Planning

HR Directors and HR Managers


and when completion could be expected (See Figure 9). The ladder development

process is summarized as follows:

Enlist senior-executive management sponsorshipz

Appoint a subject matter expert project teamz

Kick off meeting/process orientation -

Develop job-title and career-band structures z

Conduct focus-group testing of proposed job title and career bands -

Identify constructsz

Develop “Constructs Profile” documentz

Develop “Band Definitions” documentz

Convene global meeting with project team members to review ladder documentsz

Held in Europe or North America -

Develop communication planz

Conduct job slottingz

Communication campaignz

Targeted presentations -

Corporate news service article -

Town hall meetings -

Intranet deployment -

Revise as necessary to ensure ladders reflect current practice.z

Maintaining Relevance of Global Career Ladders

The global career ladders were designed to serve as lasting policy: The tool had to

be kept relevant to the businesses and to current business practices. So from time

to time, subject matter experts were reconvened to amend or suggest additional

improvements. Such efforts reassured employees that the global career ladders

continued to be relevant and can be used with confidence. z

FIGURE 9 Global Career Ladders Development Cycle

Ongoing Utilization

MILESTONES

Communication Plan Launch

Global Title Structure Approved,

Constructs Identified

Constructs Profile & Band Descriptions

Completed

Project Team Appointed


Conway, James M. 2000, “Managerial Performance Development Constructs and Personality Correlates.” Human Performance. January: 23-46.

REFERENCES

AUTHOR

Paul V. Oliva CCP, GRP, ([email protected]) obtained his bachelor’s degree in psychology from the University at Buffalo, and his master’s degree in industrial/organizational psychology from the Stevens Institute of Technology in Hoboken, N.J. Oliva is employed by Akzo Nobel Decorative Paints U.S. as

director, compensation. He has more than 20 years diversified industry experience in both public and private sectors, with noted global expertise at ICI serving as an internal consultant in sales-incentive plan and variable reward program design.

This paper is dedicated to Clifford E. Montgomery, former vice president of global human resources, and William H. Powell, retired chairman and CEO of National Starch & Chemical Co. Cliff gave me creative license to develop the career ladders methodology and he

immediately grasped their potential for success across ICI. Bill challenged me to make the career ladders global in their application and reach — his sponsor-ship created overwhelming demand and lead to the successful launch of 12 career ladders.

DEDICATION


Most Workers Consider Defined Contribution Plans as Their Main Retirement PlanNearly three-quarters of workers who participated in an employment-based retirement plan

considered a defined contribution (DC) plan as their primary plan in 2006. According to EBRI

Notes, 67.1 percent of workers chose this type of plan, which is up from 2003 and more than

double the level in 1998. According to EBRI, 30.9 percent of workers said a defined benefit plan

was their primary retirement plan in 2006, compared with 46.3 percent in 1998 and 56.7 percent

in 1988. According to EBRI research, since 1980, significant changes have occurred in the kind

of employment-based retirement plan that workers participate in: defined benefit (DB) (so-called

“traditional” pension) plans have declined (reflecting pressures on DB plan sponsors to control

costs and funding volatility, in addition to increased regulatory burdens), while defined contribu-

tion (401(k)-type) plans have grown. (www.ebri.org)

Most Boards Want to Keep CEOs During RecessionDespite news reports of high-profile CEOs stepping down, new research shows that top manage-

ment are not dropping like flies. Corporate boards in North America and Europe are hanging on

tight to their current CEOs, and the decline in succession rates in these regions contrasts with

the slight rise in chief executive departures globally, found management consulting firm Booz

& Co. The firm’s research shows that the financial services and energy industries saw “outsized

increases” in CEO exits that were spurred by performance, government intervention and a vola-

tile commodity market. The study also found that the nature of this recession is causing boards

of Western companies to retain the leaders of whom they are already familiar. The Booz study

shows that CEO departures fell .5 percentage points in North America and 1.9 percentage points in

Europe in 2008; globally, that figure climbed .6 percentage points. Conflict-related departures, the

study found, fell in North American by .3 percentage points and in Europe by .2 percentage points.

Survey methodologyThis study identified the world’s 2,500 largest public companies, defined by their market capi-

talizations (from Bloomberg) on Jan. 1, 2008. To identify companies among the top 2,500 that

had experienced a chief executive succession event, Booz & Co. cross-checked data across a

wide variety of printed and electronic sources, including Factiva and Hoover’s. Additionally, the

company conducted electronic searches for announcements of retirements or new appointments

of chief executives, presidents, managing directors and chairmen. Booz & Co. also conducted

supplemental research for regional CEO changes not identified by other sources. (www.booz.com)

U.K. Pay Raises in 2009 Among Lowest in the WorldEmployees in the United Kingdom can expect a pay raise this year of less than 1.5 percent,

which is among the lowest raises in the world, according to research by the Hay Group. The Hay

Group study surveyed HR and reward professionals in nearly 2,000 private and public sector

companies in 88 countries and found that the United Kingdom’s average 1.46 percent pay raise

falls short of the global mean of 3.8 percent. This lags behind all but six of the 88 countries in

the study, including France (2.2 percent), the United States (1.78 percent) and Germany (1.48

percent). The United Kingdom isn’t the lowest, though, with Hong Kong, Slovaki and Portugal

coming in at 1.2 percent, Ireland at .8 percent, Latvia at .67 percent and Singapore at .22 percent.

(www.haygroup.com)

Published Research in Total RewardsA review of total rewards, compensation, benefits and HR-management research reports.

(Compiled by the editors from the WorldatWork Newsline column at www.worldatwork.org.)


One-Quarter of Companies Do Not Have Severance Policy Despite Recession, LayoffsOne-quarter of companies say, despite massive layoffs as a result of the recession, they do

not have a severance policy and 70 percent of employers that do have a policy do not plan to

modify it, according to Mercer’s U.S. Severance and Strategy Survey. According to the survey,

most severance policy features are applied consistently to all employees and typically include

benefits continuation and outplacement services in addition to severance pay. The survey found

that the features differ slightly, though. Seventy-four percent of companies said they provide

continuation of benefits to executives as part of their severance policy compared to 65 percent

for professional/technical employees and 61 percent for non-union/hourly workers. The survey

also found that 69 percent of companies offer outplacement services to executives as part

of their severance policy compared to 57 percent for professional/technical employees and

49 percent for clerical/technician workers. Survey results show that 52 percent of severance poli-

cies do not have a minimum length of service requirement for employees to receive severance if

they are part of a workforce reduction. The survey found that of those policies that primarily use

years of service as a key criterion for determining the length of severance payments, two to four

weeks is the most common minimum period for the majority of employees. The minimum period

of payments for most executives is more than 12 weeks, the survey found. The maximum period

of severance payments for the majority of employees is 26 weeks with the exception of executives

which is one year. (www.mercer.com)

Analysis Disputes Beliefs that Some Executive Pay Programs Encourage Excessive Risk TakingMany elements of corporate executive pay programs that are believed to cause excessive risk

taking actually encourage executives to reduce risk, according to experts at Watson Wyatt.

Watson Wyatt evaluated the executive compensation policies at more than 1,000 firms and found

that many of the elements of executive pay programs contradict widely held beliefs, including

the common critique that high incentive levels encourage reckless risk taking. The Watson Wyatt

analysis also disputed conventional wisdom that higher amounts of annual bonuses, long-term

incentives and stock options encourage excessive risk taking. The analysis even found that

in some instances pay elements that encourage more or less risk taking behavior conform to

conventional wisdom. The analysis found that high levels of stock ownership were associated

with reduced risk, and excessively high levels of pay opportunity encourage taking more risk.

(www.watsonwyatt.com)

Significant Number of Employers Still Not Prepared for Possible Flu PandemicNearly half (41 percent) of employers surveyed recently by Mercer said they do not have an HR

policy in place regarding health-related emergencies, yet many acknowledge they have employees

in areas where cases of the swine flu have been confirmed. Key survey findings:

z 53 percent of the employers surveyed were considering whether to create

back-up and contingency plans in response to the outbreak.

z 43 percent said they planned to restrict or cancel business travel

z 41 percent said they planned to allow employees to work at home

z 27 percent opted for voluntary quarantine for employees exposed to risk

z 24 percent enforced quarantine on employees judged at risk

z 21 percent said they would cancel meetings/conferences

z 20 percent said they would screen staff/visitors returning from travel

z 12 percent said they would require medical check-ups

z 10 percent said they would review health or insurance plans

z 24 percent indicated they were taking no special actions. (www.mercer.com)


Employers Consider Doing Away With Health BenefitsNot only are more employers expecting to increase their health-care costs due to the recession,

now many are considering not providing health benefits at all. A new Hewitt Associates survey

on employer-sponsored health benefits found that 19 percent of employers said they are moving

away from directly providing health-care benefits, which is up from 4 percent in 2008. The survey

also found that 4 percent of companies said they are taking steps now that will allow them to

stop offering health-care benefits. According to Hewitt, many employers planned their benefit

strategies before the recession really sunk in, so serious talk of companies eliminating their

health-care benefits is going to get noticed. Watson Wyatt and the National Business Group on

Health (NBGH) conducted a survey in January of 489 large U.S. employers; 62 percent are very

confident they will continue to offer health-care benefits 10 years from now, down from 73 percent

last year. Paul Dennet, senior vice president of health reform at the American Benefits Council

said employers overwhelmingly indicate that they want to provide health-care insurance, yet the

ability to provide the kind of health benefits that they do now depends on affordability. The Hewitt

survey found that most employers are not planning to eliminate their health insurance benefits and

will concentrate on other cost-cutting measures: 65 percent plan to shift more costs to workers,

49 percent plan to reduce the number of health plans, 33 percent plan to increase their focus on

wellness programs and 40 percent plan to add more consumer-driven health plans.

Survey methodologyHewitt surveyed more than 340 employers, representing more than 5 million workers.

(www.hewitt.com)

More Than Half of Employees Work While on VacationVacation is supposed to be a time to disconnect, but more than half of employees surveyed said

they work while on vacation. A new Accenture survey of 200 professionals from medium to large

organizations in the United States found that 79 percent of respondents said it is important to

maintain a work-life balance, yet 53 percent said they work on vacation. Survey results show

that younger workers and those without dependents are the least likely to work on vacation:

38 percent of Generation Y respondents (those born after 1979) said they work on vacation,

71 percent of Baby Boomers (those born before 1964) said they work on vacation and 49 percent

of Generation X respondents (those born between 1965 and 1978) said they work on vacation.

Of those respondents without dependents, 44 percent said they work on vacation compared to

61 percent of those with dependents. According to survey results, men and women differ in the

way they work on vacation: 94 percent of men who said they work on vacation said they read

and respond to e-mail, compared with 83 percent of women; of those who said they work on

vacation men were more likely to say they answer phone calls from their supervisors or colleagues

(77 percent of men, 65 percent of women), and participate in work-related conference calls while

on vacation (52 percent of men, 44 percent women). Other key findings:

z When asked to identify their key priorities, respondents ranked work-life balance second,

cited by 64 percent of all respondents, after salary/income (79 percent).

z 44 percent said they sacrifice work-life balance in order to advance their careers.

z Surprisingly, men were more likely than women to say that it’s important for them to be

available when their families and children need them (68 percent of men vs. 46 percent of

women) and to have flexibility in their work schedule (49 percent vs. 39 percent).

z Men were also more likely than women to say they take advantage of the opportu-

nity to work from home when offered (91 percent of men vs. 75 percent of women).

(www.accenture.com)


More Employers Implementing Short-Term Expatriate AssignmentsThe ORC Worldwide 2008 Worldwide Survey of International Assignment Practices and Policies

survey found that 80 percent of multinational employers today use short-term assignments (those

lasting less than 12 months), which is up from 59 percent eight years ago. Short-term assignments

are typically for needs such as on-site training, an assessment of the local or regional market

before launching a new product, the opening of a new facility or a quick troubleshooting effort.

According to ORC, short-term assignments have an added advantage. “They help minimize disrup-

tion in the personal lives of assignees by allowing spouses to remain in their home-country jobs

and children to continue with their studies in a familiar school,” said Geoffrey Latta, executive vice

president for ORC’s international compensation practice area. “After all, family members accom-

pany short-term assignees in only about 17 percent of the participating organizations. “When the

family does stay behind,” Latta added, “some employers send assignees on commuter assignments.

By having the employee return home on a regular basis, family disruptions are somewhat predictable.”

(www.orcworldwide.com)

Companies Implementing Web 2.0 Tools At Fast PaceSocial networking tools, blogs and Web casts — also known as Web 2.0 initiatives — are being

embraced as internal communications tools as part of companies’ overall technology mix,

according to a new survey. Watson Wyatt’s 2009 HR Technology Trends survey found that since

the economic downturn began, 72 percent of employers have increased their use of their company

intranet and 61 percent have increased their use of e-mail to communicate with employees.

The survey also found that 32 percent of employers have increased their use of Web casts,

13 percent have increased their use of social networking tools and 12 percent have increased their

use of blogs for communication. “Using tools such as role-based portals, internal blogs and Web

casts ensures that both managers and employees can send and receive tailored messages in an

engaging format,” said Jon Osborne, senior technology consultant at Watson Wyatt This is useful

for improving productivity and maintaining employee morale and engagement, particularly in this

difficult economic time.” The survey found that 41 percent of companies have already deployed or

are piloting role-based employee portals and 24 percent are planning to adopt these in the next

two years. The survey found that adoption of generic intranets has slowed almost to a halt: 86

percent of companies currently have an intranet but just 2 percent plan to implement one in the

next two years. Survey results show that 13 percent of companies are planning to deploy blogs,

13 percent wikis and 10 percent podcasts. “We are seeing substantially more dissatisfaction with

older technologies that cannot be personalized, as employees become much more familiar with

Web 2.0 tools and the benefits they provide. Such benefits range from ease of global collabora-

tion to better communication and increased productivity,” said Michael Rudnick, Watson Wyatt’s

global portal and collaboration leader. “Even though defining what exactly comprises Web 2.0

can be imprecise at times, employers are clearly recognizing its practical and near-term value.”

Survey methodologyWatson Wyatt’s survey was conducted in February and March 2009 and includes responses from

181 large employers. (www.watsonwyatt.com)


Small Business Owners Say Employee Morale Steady Through RecessionSmall businesses believe their efforts to maintain employee morale during the recession and the

work environment have more impact on employee satisfaction than financial factors, according

to a recent survey. The TriNet quarterly HR Trends Survey found that more than 75 percent of

small business leaders said employee morale has held steady or improved in second quarter

2009. According to the survey: The single largest group of respondents (41 percent) believed that

employee morale in their companies has remained unchanged from a year ago. Of the remaining

respondents, 34 percent think employee morale has improved, while 24 percent said it declined.

Thirty-six percent of respondents said the company culture and reputation are the biggest

contributors to employee morale; other major factors included flexibility and work-life balance

(23 percent) and job security (22.3 percent). The report shows that 4 percent of small business

leaders do not believe employee morale is affected by advancement opportunities, 5 percent

said benefits and 9 percent said compensation. More than half (60 percent) of respondents said

they believe they successfully built and maintained a positive employment brand through good

communication and quality management practices. “These results prove that employees are

happier and more likely to stay with their companies due to the quality of their management,”

said Burton M. Goldfield, president and CEO of TriNet. “Companies that develop the skills of

their leaders boost employee morale, which then positively contributes to the company’s overall

employment brand.” Goldfield said TriNet also recommends paying attention to fundamentals,

such as benefits and payroll, as they remain important foundations for a thriving company culture.

A total compensation package that includes both work environment and financial factors, such

as a comprehensive benefits package, will protect and expand an organization’s employer brand

regardless of the economy, he said. (www.trinet.com)

CEO Confidence Soared in Q2CEO confidence — despite being in the throws of a recession — surged in second quarter 2009,

according to The Conference Board Measure of CEO Confidence, which also increased in the first

quarter. The measure improved to 55, which is up from 30 last quarter. “CEOs are considerably

more optimistic than last time about the short-term outlook, however, their assessment of current

conditions, while also improved, suggests the economy remains weak,” said Lynn Franco, director

of The Conference Board Consumer Research Center. “Among those expecting an increase in

profits over the next year, the majority see cost reductions as the primary driver.” The report

found that CEOs’ assessment of current economic conditions was considerably less pessimistic:

32 percent claim conditions have improved compared to six months ago, up from 0 percent

last quarter. In assessing their own industries, business leaders were also much less negative:

24 percent claim conditions are better, up from just 1 percent in the first quarter. According to the

report, nearly 55 percent of business leaders expect economic conditions to improve in the next

six months, which is up from about 17 percent last quarter. Expectations for their own industries

were also more optimistic, the report found: 45 percent of CEOs anticipate an improvement in the

next six months, which is up from 26 percent last quarter. Nearly half (46 percent) of executives

said they anticipate profit increases over the next 12 months, 77 percent of executives in the

durable goods industry and 64% of executives in the non-durable goods industry expect profits

to increase. The report found that of the CEOs who expect profit increases, 56 percent believe

cost reductions will drive profits up, 33 percent said market/demand growth, 7 percent said new

technology and 4% said price increases. (www.conference-board.org)


Facts & Figures Statistics from this issue of WorldatWork Journal

Under the Multiemployer Program, plans pay

$9 per participant per year in PBGC premiums.

The guaranteed benefit under a multiemployer

plan is up to $37.50 per month for each year of

credited service. Thus, the maximum benefit

at retirement age of 65 is $1,065 per month

($12,780 per year) (PAGE 27).

The CPI-U, which includes all urban consumer

groups, is the broadest and most comprehen-

sive index and is frequently cited in the media.

It represents about 87 percent of the total U.S.

population and was first used in 1978, when

a need for a broader and more representative

index became apparent (PAGE 41).

Sales management far outweighs other factors

in driving sales performance and retaining sales

talent. Yet the role continues to be overlooked

and underleveraged (PAGE 68).

At least 66 companies, between June 2008

and February 2009, reduced or ended their

matching contribution to their 401(k) plans

(PAGE 33).

Despite the high level of agreement on the

drivers of performance, almost one-half of

respondents believed their managers were not

actually performing optimally (PAGE 66).

Jobs and tasks can only be performed if an

individual has the competencies and skills to

perform the work and then applies them to the

job (PAGE 9).

The Ford COLA produced its first payment of 8

cents per hour in 1950. The cumulative amount

paid from 1950 through 2007 was $18.95 per

hour, with $16.86 of that amount transferred to

base wages and $2.09 diverted to fund benefit

programs (PAGE 40).

10.3 million

The number of participants in hybrid plans

insured by the PBGC (PAGE 23).

Age 50

Studies show that a disproportionate number

or physicians in this country are over age

50 and will reach normal retirement age in

the next five to 10 years (PAGE 57).

20%

At least one survey shows that as many as 20

percent of current physicians plan to retire if

the country adopts universal health coverage

(PAGE 57).

$2.7 Million

An interventional cardiologist will generate

average annual inpatient and outpatient

net revenues of nearly $2.7 million for the

hospital (PAGE 59).

10%The Counci l on Graduate

Medical Education recently

predicted (2005) that physician shortages

in the United States may reach 10 percent,

or 96,000 providers, by the year 2020

(PAGE 57).

80%More than 80 percent of the

respondents agreed that devel-

oping sales representatives and focusing

on their results are the two most important

drivers of performance (PAGE 65).

61%Surveys show that 61 percent

of physicians who leave a prac-

tice do so within the first three to five years

(PAGE 62).

14%The number of pension plans

frozen in 2008, according to a

GAO study (PAGE 23).

Now more than ever there’s an opportunity to rethink what your organization needs to be competitive. Companies that use these challenging times to proactively consider new ways to think about and deliver rewards will be the ones toemerge from the downturn with a competitive advantage.

Hay Group has the experience, data, and tools to help you address making changes to your reward programs during these challenging times, and beyond.

haygroup.com/worldatwork

Are your

reward programs taking advantage of the

current economic climate?

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