Critical Thinking–from Employee to Stakeholder The Unsustainable Status Quo in Compensation and Benefits

By Joe MilanoArea Vice PresidentMid-Atlantic RegionHealth & Welfare Consulting

Critical Thinking–from Employee To Stakeholder

ARTHUR J. GALLAGHER & CO. | MARCH 2015 ::HEALTH & WELFARE 2

In the compensation practices of most organizations, pay for performance and gain sharing are long standing tenets. Why then, is entitlement the overwhelming norm in benefits design and annual merit increases? At what point will both employers and employees commit to shifting the paradigm? Compensation and benefits costs cannot simply increase year over year without corresponding growth to the bottom line.

Businesses reacted to the financial downturn in the past decade by right-sizing themselves and managing their balance sheets. This need to manage risk created a wave of downsizings and reduced investments in remaining staff, and introduced expense management techniques that provided quick cost reductions, sometimes at the “expense” of long-term strategies.

As the recovering employment market continues to strengthen, short-term and long-term strategies should be revisited. Many organizations are ignoring the need to redefine their employee value proposition in light of current circumstances, and to align corporate health and security with employee health and wellbeing.

Companies have long agreed that a stable and engaged workforce leads to and sustains a successful business. The concept of a flexible benefits design was introduced in the 1980s, as more employers recognized the growing diversity of their workforce and the value of a benefits offering with options that help to recruit and retain employees through various life stages. While offering choices and programs to meet the needs of a diverse workforce remains critical, the disconnect between employees and their responsibility in that equation has never been more evident.

A significant percentage of employer health plan costs are attributable to lifestyle-related behaviors (e.g., poor diet, lack of physical activity, smoking, etc.). Many of the expensive diseases we battle today, such as diabetes and heart disease, have reached proportions that were not contemplated thirty years ago when flexible benefit plans were launched. While overtly present in higher healthcare costs to the employer, the hidden costs of disability, death, absenteeism and presenteeism have a significant financial impact on an organization’s top- and bottom-line results. Simply ratcheting up the employees’ cost share does little to effectively manage the overall cost to an employer. The challenge is to turn entitled accident and sickness coverage into true health benefits that protect against catastrophic loss, keep employees healthy, and ultimately, favorably impact the health of the business.

The health and wellness of every organization is dependent upon its employees. The health and wellness of every employee is dependent upon that person taking an active role in the choices made to maintain a healthy lifestyle. Some organizations are connecting these two parts of a balanced equation, and are holding employees accountable for making better choices for themselves and their organization — they are creating stakeholders.

Most companies are ignoring the need to redefine their employment agreement with their employees to align corporate health with employee health and security.

Critical Thinking–from Employee To Stakeholder

ARTHUR J. GALLAGHER & CO. | MARCH 2015 ::HEALTH & WELFARE 3

What can employers do today to help align their employees and their business for a successful and sustainable future? These strategies have proven to be effective in the creation of stakeholders throughout organizations:

• Create a line of sight for employees Employers are becoming more transparent with their employees. In order to survive in today’s economy they need employees’ buy-in and commitment to corporate objectives and missions.

• Be honest with employees Employers need to create a culture in which an honest conversation about the benefits of healthier employees can take place. Employees need to understand how unsustainable the current situation is as well as the opportunity cost associated with a new paradigm.

• Support a culture of wellbeing It starts at the top. If senior management makes it a business priority, employees will have no choice but to make it a priority as well. There are countless examples of organizations being led by top managers to a culture of health and wellbeing.

• Hold employees accountable Traditional carrot and stick methods have proven ineffective, so what’s an employer to do? Again, a clear line of sight is important. Linking behaviors, good and bad, with program costs is proving to be effective. A popular example of this is a tobacco user surcharge. The message: we aren’t telling you to quit, but if you don’t it will cost you more to participate in our benefit program. Employers should make sure they offer tools and resources to help their employees change their behaviors.

• Expand flexibility It has been said, “Treating people fairly does not mean treating people the same.” Employees need flexibility and choices to meet their individual needs. To the extent possible, offer it to them — defined contribution health and welfare platforms, paid time off programs, vacation buy/sell programs, wellness reward programs, and flexible work arrangements are all effective tools to help employees stay productive.

• Share your results Create programs and build scorecards that drive employee engagement in the business. In good years find ways to share the success. Profit sharing, spot bonuses and gain sharing are all good examples. In not-so-good years find ways to pay less. Organizational results results don’t always support merit or cost-of-living increases. Employees need to understand and embrace both (as do employers)!

In order to build a sustainable platform and flourish in today’s global economy, employers must leverage their most important asset — their employees. The old employer/employee contract is changing. Creating a stakeholder culture, which empowers employees to share in success and failure, will be a key competitive advantage for employers who rise to the challenge.

Critical Thinking–from Employee To Stakeholder

ARTHUR J. GALLAGHER & CO. | MARCH 2015 ::HEALTH & WELFARE 4

About the Author

Joe Milano is an Area Vice President for the Mid-Atlantic region of the Benefits and Human Resources Consulting division of Arthur J. Gallagher & Co. Joe is part of the Health & Welfare Consulting practice, and focuses on helping employers invest in their employees and their future with comprehensive benefit programs that reduce organizations’ risk, meet their cost targets and help them compete for top talent.

Joe Milano Area Vice President Mid-Atlantic Region 856.380.4395 www.ajg.com

Joe Milano

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