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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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WorldatWork Journal thanks the following individuals for reviewing manuscripts during the editorial cycle for the Third Quarter 2009 issue. Subject-matter experts, including members of WorldatWork’s advisory boards, review all manuscripts.
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
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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.
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Danielle Shanes I Reed Elsevier
William Strahan I Comcast
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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.
06
Executive SummariesThird Quarter 2009 | Volume 18 | Number 3
21
37
5
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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6 WorldatWork Journal
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
8 WorldatWork Journal
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
9 Third Quarter | 2009
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
10 WorldatWork Journal
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.
11 Third Quarter | 2009
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
12 WorldatWork Journal
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
13 Third Quarter | 2009
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.
14 WorldatWork Journal
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.
15 Third Quarter | 2009
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).
16 WorldatWork Journal
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.
17 Third Quarter | 2009
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
18 WorldatWork Journal
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).
19 Third Quarter | 2009
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 Performance 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 Performance 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.
21 Third Quarter | 2009
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
22 WorldatWork Journal
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.
23 Third Quarter | 2009
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
24 WorldatWork Journal
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
25 Third Quarter | 2009
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).
26 WorldatWork Journal
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 ($54,000 per year)
for single-employer plans terminating in 2009 for participants 65 years old at retire-
ment. Benefit guarantees are reduced for early retirement and if the retiree elects a
50-percent joint survivor option. They increase for a later retirement age. These limits
increase annually; thus, they are lower for those whose plans terminated in past years.
The retirement benefits are not indexed and consequently erode in real terms over time.
TABLE 4 Financial Position of the PBGC Single-Employer Pension Program (Millions)
(PBGC 2009b and 2009c)
Single-Employer Plans
Year Total Assets ($) 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.
27 Third Quarter | 2009
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.
28 WorldatWork Journal
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.
29 Third Quarter | 2009
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.
30 WorldatWork Journal
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.
31 Third Quarter | 2009
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
32 WorldatWork Journal
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).
Single-Employer Plans
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.
33 Third Quarter | 2009
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
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 Pension plan funding
z Defined benefit plans
z Defined contribution plans.
www.worldatwork.org/bookstore
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.
www.worldatwork.org/education
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.
34 WorldatWork Journal
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
35 Third Quarter | 2009
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.
36 WorldatWork Journal
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.
37 Third Quarter | 2009
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
38 WorldatWork Journal
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
39 Third Quarter | 2009
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
40 WorldatWork Journal
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.
41 Third Quarter | 2009
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
42 WorldatWork Journal
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.
43 Third Quarter | 2009
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.
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 COLA
z CPI
z Pay compression.
www.worldatwork.org/bookstore
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.
www.worldatwork.org/education
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.
44 WorldatWork Journal
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
45 Third Quarter | 2009
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.
46 WorldatWork Journal
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.
47 Third Quarter | 2009
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
48 WorldatWork Journal
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.
49 Third Quarter | 2009
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
50 WorldatWork Journal
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:
51 Third Quarter | 2009
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
52 WorldatWork Journal
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
53 Third Quarter | 2009
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.
54 WorldatWork Journal
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
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 Wellness incentives
z “Condition management” incentives
z Health care cost containment.
www.worldatwork.org/bookstore
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.
www.worldatwork.org/education
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
z Strategic Communication in Total Rewards, Certification Course: T4.
55 Third Quarter | 2009
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.
56 WorldatWork Journal
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
57 Third Quarter | 2009
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
58 WorldatWork Journal
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.
59 Third Quarter | 2009
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
60 WorldatWork Journal
(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
61 Third Quarter | 2009
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
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 “Recruiting methods”
z “Cost of turnover”
z Attract and retain.
www.worldatwork.org/bookstore
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.
www.worldatwork.org/education
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
62 WorldatWork Journal
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
63 Third Quarter | 2009
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.
64 WorldatWork Journal
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
65 Third Quarter | 2009
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
66 WorldatWork Journal
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%
67 Third Quarter | 2009
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%
68 WorldatWork Journal
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%
69 Third Quarter | 2009
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
70 WorldatWork Journal
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
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 Sales performance
z Coaching employees
z Communication skills.
www.worldatwork.org/bookstore
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.
www.worldatwork.org/education
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.
71 Third Quarter | 2009
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
72 WorldatWork Journal
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.
73 Third Quarter | 2009
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
74 WorldatWork Journal
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
75 Third Quarter | 2009
76 WorldatWork Journal
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.
77 Third Quarter | 2009
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.
78 WorldatWork Journal
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
79 Third Quarter | 2009
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
81 Third Quarter | 2009
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
82 WorldatWork Journal
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.
83 Third Quarter | 2009
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
84 WorldatWork Journal
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
85 Third Quarter | 2009
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
86 WorldatWork Journal
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 Professional Adviser
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 Professional Adviser
z Senior Adviser
z Adviser
z Senior Analyst
z Analyst
3b3a
21
87 Third Quarter | 2009
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
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 Career + ladders
z Career + bands
z Communicating + change.
www.worldatwork.org/bookstore
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.
www.worldatwork.org/education
z Global Compensation — Strategy in Practice, Certification Course: C15
z Performance Management — Strategy, Design and Implementation, Certification Course: C11
z Strategic Communication in Total Rewards, Certification Course: T4.
88 WorldatWork Journal
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
89 Third Quarter | 2009
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
90 WorldatWork Journal
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
91 Third Quarter | 2009
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.)
92 WorldatWork Journal
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)
93 Third Quarter | 2009
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)
94 WorldatWork Journal
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)
95 Third Quarter | 2009
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)
96 WorldatWork Journal
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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