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❚ Organizational Culture ❚ Compensation ❚ Performance & Recognition
❚ Business Strategy ❚ Benefits ❚ Development & Career Opportunities
❚ Human Resource Strategy ❚ Work-Life
Journal
Content
Key
Executive SummariesSecond Quarter 2008 | Volume 17 | Number 2
Human Resource Management Strategies: Can We Discover
What Will Work Through Benchmarking?
Robert J. Greene, Ph.D., CCP, CBP, GRP, SPHR, GPHR I Reward $ystems Inc.
HR practitioners spend a great deal of energy seeking approaches that have been
successful in other organizations. This process, typically called “benchmarking,” is wide-
spread. This paper discusses: How valuable is benchmarking when it is used for HR
strategies and programs? What form should it take? What processes are most likely to
make it useful?
Workforce Retention and Pay and Reward Practices
in America’s Best Hospitals
Patricia K. Zingheim, Ph.D. I Schuster-Zingheim & Associates Inc.
Jay R. Schuster, Ph.D. I Schuster-Zingheim & Associates Inc.
This study examines the retention strategies and pay and rewards practices of a sample
of the best-performing medical centers and hospitals in the United States. Twenty-one
organizations ranked by U.S. News & World Report participated. A structured interview
with an open-ended questionnaire was used to gather information from these organiza-
tions from CEOs, major operating executives and heads of human resources.
The Role of Line Managers and HR in Reward Program Effectiveness
Tom McMullen I Hay Group
Mel Stark I Hay Group
This paper explores reward program effectiveness and the key role that line managers
play in this regard. New research data suggest that organizations are not effectively
utilizing their line managers in this regard. The HR function must also find better ways to
leverage the manager’s role and better define the role the manager could play in helping
make rewards programs successful.
06
16
30
877/951-9191www.worldatwork.org
Contents © WorldatWork 2008. WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, ghallman@tsp.sheridan.com at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, customerrelations@worldatwork.org, 877-951-9191.
Second Quarter 2008
5
Also
on the
Inside
Second Quarter | 2008
85 Published Research in Total Rewards
88 Facts & Figures
Lessons from the Office: The Organizational Implementation
of Work-Life Policies
Melanie A. Hulbert, Ph.D. I George Fox University
This paper explores factors possibly influencing organizational decision makers to imple-
ment work-life policies by examining the institutional and cultural environments in which
they exist and includes an examination of how such policies become practices and an
examination of the link between implementation and organizational culture.
The Medicare Prescription Drug Plan: A Model of Complexity
and Ineffective Communication
Frank Giancola
This paper examines Medicare’s Prescription Drug Plan’s basic provisions, the number and
types of drug plans being offered, and enrollment tools to provide an in-depth look at the
issues that challenge seniors and provide valuable lessons for benefits professionals.
What Pay For Performance Should Measure
Bruce Ellig
“Pay-for-performance” is the mantra being chanted from the board of directors down to
the first-line supervisor. But what is the definition of “pay”? Whose performance? What
is the definition of “performance?” And how will it be measured? The pay planner must
answer these questions when creating a pay-for-performance process (not a program).
Programs have limited lives; processes continue until changed.
Health Savings Accounts: Their Purpose in a Company Setting
Zuzana M. Micko I University of Minnesota
This paper explains the history of HSAs as well as the basic characteristics of these
plans. It also examines the challenges companies face as they introduce these plans to
their workers.
44
55
64
76
Robert J. Greene, Ph.D.,
CCP, CBP, GRP, SPHR, GPHR
Reward $ystems Inc.
How effectively an organization manages its human
resources has a major influence on its success.
It is therefore prudent for an organization to find
the best way to attract, retain and manage its workforce in
a manner that maximizes effectiveness. The HR strategies
and programs adopted will, to a large extent, determine
workforce effectiveness. But there are no universally effec-
tive HR strategies and programs. What works is what fits
the unique context of each organization.
Determining the strategies and programs that will best
fit an organization is a critical responsibility of executive
management, supported by HR. And since “good fit” is a
critical predictor of the effectiveness of HR strategies and
programs, they must be derived from the organizational
context, as illustrated in Figure 1.
Determining good fit to context begins by defining
the context. What the organization wishes to accomplish
(vision/mission), the culture that prevails, the internal and
external realities it faces, and the strategy and struc-
ture it adopts will define the context the human-resource
strategy must function within. Even though each organiza-
tion’s context is, to some extent, unique the HR strategies
Human Resource Management
Strategies: Can We Discover
What Will Work Through
Benchmarking?
❚ Human Resource Strategy
Second Quarter 2008
877/951-9191www.worldatwork.org
Contents © WorldatWork 2008. WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, ghallman@tsp.sheridan.com at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, customerrelations@worldatwork.org, 877-951-9191.
7 Second Quarter | 2008
and programs constituting a good fit
are not likely to be totally unlike what
other organizations design and imple-
ment. In fact, a great deal of energy
is spent by HR practitioners seeking
approaches that have apparently
been successful in other organiza-
tions. This process, typically called
“benchmarking,” is widespread, but
it is criticized by some as overused
or misused. How, the critics of bench-
marking ask, can an organization
assume that a strategy or program that
succeeded in another context will be
successful in its context when the two
contexts almost certainly differ?
It is prudent to know what other
organizations are doing. They repre-
sent the competition for people, and if an organization ignores what competitors
offer, it is in danger of being bested in attracting and retaining critical skills.
On the other hand, deciding whether to be like or unlike competitors is a difficult
task. The HR literature seems to showcase one strategy/program after another,
giving the impression that practitioners are chasing fads or desperately fishing
for something that might work. It is believable that the dramatic changes in the
business environment commonly occurring necessitate revisions to HR strategies
and programs. But it seems unlikely that what was the panacea last year is out
of fashion this year, replaced by something dramatically different (the panacea
this year). Insanity has been defined as “doing the same things over and over
and expecting different results.” But another variation might be “doing the same
things as other (unlike) organizations and expecting the results to be the same in
your organization.”
So what is benchmarking specifically? How valuable is benchmarking when
it is used for HR strategies and programs? What form should it take? What
processes are most likely to make it useful? Benchmarking is generally defined
as a process used by organizations to evaluate various aspects of their processes
in relation to best/common practice. It can assist organizations in thinking about
how they might adopt best/common practices, usually with the aim of increasing
some aspect of performance. But how can an HR practitioner determine if what
seemed to work in another organization would work well in his/her organization?
A model—such as the one in Figure 2 on page 8—can be a framework within
which transportability might be analyzed.
FIGURE 1 Deriving HR Strategy From
Organization Context
Vision/Mission
Culture
Strategy
Structure
Internal
Realities
External
Realities
HR Strategy
❚ Staffing
❚ Development
❚ Performance
Management
❚ Rewards
Management
8 WorldatWork Journal
CONTEXTUAL COMPARISON
The respective contexts ought to be
a major determinant in deciding how
like or unlike two organizations are.
Contextual similarity might make
transporting strategies/programs
across organizations less risky, while
significant dissimilarities raise the risk
level. Much has been written about
the impact of organizational and
workforce culture on HR strategy/
program effectiveness and substantial evidence in the research indicates that cultural
differences must be taken seriously when projecting probable fit to the importing
organization (Trompenaars 2007). Daimler probably wishes it had paid more atten-
tion to cultural considerations when acquiring Chrysler.
Strategy must also be carefully considered. Treacy and Wiersema (1997) formu-
lated a three-strategy model suggesting organizations compete based on operational
excellence, product leadership or customer intimacy. Using this model, the strategies
of Wal-Mart, Costco and Nordstrom can be compared. Placing these organizations
on a continuum from “Operational Excellence” to “Customer Intimacy,” they might
position as seen in Figure 3 on page 9.
Although Wal-Mart and Costco on the surface appear to be low-cost, warehouse
retailers, they have significantly different HR strategies (Casco 2006). Costco pays
more than Wal-Mart, hires more full-time employees and provides benefits to a
much larger percentage of its employees. Although their retail outlets look physically
similar, the average income level of Costco customers is much higher than Wal-Mart
customers, and the mix of merchandise is tailored to meet the customer mix.
Wal-Mart is criticized by society at large for its practices. The CEO of Costco is
also criticized, but by Wall Street analysts, for spending more than is necessary on
employees and lowering profits unnecessarily. The Costco CEO defends the HR
strategy by noting that their turnover costs are much lower and that better trained
and more experienced employees pay off in the long run. This comparison is not
about who is closer to right—both organizations are successful and are using HR
strategies that are consistent with their business strategy. And so is Nordstrom, which
carries much higher cost merchandise and deals with customer expectations that
are different than those faced by Wal-Mart and Costco. These dramatic differences
among three organizations in the same industry (albeit operating in different niches)
illustrate how difficult it might be for Wal-Mart to copy an employee-incentive plan
successfully used by Nordstrom, or even by Costco.
Benchmarking the results of HR strategies/programs has become commonplace,
pioneered by the Saratoga Institute and industry associations. For example, an
organization can compare its turnover to other organizations by using surveys that
FIGURE 2 Benchmarking HR Strategies
Contextual
Comparison
?
Conceptual
Foundation
Our
OrganizationCompetitors
9 Second Quarter | 2008
include that measure. If the survey database allows for the user to select subsamples,
it is possible to compare to others in the same industry, of the same size, in the same
area, for the same occupational groups, etc. This informs an organization about how
it compares to its competitor for people. It does not, however, provide direct insight
into the cause of turnover in other organizations, only the amount.
Benchmarking usually consists of comparisons to other organizations. This over-
looks the fact that learning can occur by comparing internally across the parts
of an organization in the quest for strategies that might be effective. The CEO of
Hewlett-Packard once despaired, “If only HP knew what HP knows.” For example,
a multi-divisional organization may be contemplating revisions to the HR strategy/
programs used by a division that is transitioning from a product leadership strategy
to an operational excellence strategy. This kind of evolution becomes necessary
when competitors turn once innovative and unique products into commodities,
forcing the organization to compete based on price and efficiency rather than
uniqueness. The subject organization may be able to benchmark internally against
other divisions already employing an operational effectiveness strategy. This may
reduce some contextual variation, due to common characteristics across the corpora-
tion. It may also be easier to obtain detailed information on things such as incentive
programs and experience with them, since managers may be more motivated to
share with peers if executive management tells them to. For example, when Jack
Welch was CEO of General Electric, he made it clear those who shared talent would
be rewarded, while hoarders would not be rewarded.
Another characteristic of HR programs that should be considered…they are inter-
dependent, and each will influence other HR programs. For example, recruiting new
graduates who must be trained, rather than “job ready” people, may reduce the average
pay rates, may also increase the investment required in development. As a result, bench-
marking average hiring rates separately may give one answer, but if training expenses
are bundled into the comparison, the results may be entirely different.
Some HR functions or processes lend themselves better to benchmarking than
others. Compensation practitioners rely heavily on surveys to determine pay levels
prevailing in specific labor markets. This information is quantitative, it can be obtained
rather easily, and there is an accepted methodology for using surveys. Surveys are
often industry-focused. But surveys that cross industries are also plentiful, most often
used for occupations that easily cross industries, such as HR or IT. If Wal-Mart, Costco
and Nordstrom are competing in the same labor markets for merchandise stockers,
FIGURE 3 A Contextual Comparison of Wal-Mart, Costco and Nordstrom
Operational Excellence Customer Intimacy
Wal-Mart Costco Nordstrom
10 WorldatWork Journal
they should attempt to determine what the pay levels prevailing in the local areas
are for these jobs, using pay survey data. Once they know the “average,” each can
adopt a competitive posture fitting the desired type of employee.
Surveys also typically provide data broken by total compensation elements (base
pay, cash incentives, etc.) as well, providing information on “how” as well as the
“how much.” But when an organization wants to design a new compensation
program and seeks “best design practices” information, the process becomes more
difficult. A survey may indicate that competitors paid the average sales representa-
tives $70,000 last year, with much of that coming in the form of commission. Even
if the survey breaks out base pay from commission, all that the user knows is “how
much.” There is almost never specific information on how much revenue and the
type of revenue that was generated to earn that much commission. And rarely can a
survey user tell if the actual earnings were the result of a typical, good or bad year
for the participating organizations. So when designing a sales-compensation plan,
surveys are of some value, but they do not provide information on design features
and which features will fit the sales context existing within the organization.
Although pay programs may seem to be “benchmarkable,” this can be deceiving.
Lincoln Electric has been heralded as an organization that continued to thrive in an
industry that has largely been taken by foreign competitors. Its famous pay programs
(piecework-driven base pay, supplemented by a companywide gainsharing plan)
have been given much of the credit for its world-class productivity. But this orga-
nization found its methods of compensating employees to be unacceptable and/or
ineffective in parts of Europe and Asia. Instead of altering its culture, it withdrew
from those markets, much wiser about cross-cultural differences.
The author worked with an insurance company located in the Southeastern U.S.
that was determined to acquire a competitor. On paper, the “merger” (it was an acqui-
sition but called a merger out of politeness to the owner/founder) was a marriage
made in Heaven. Complementary market, product and customer characteristics made
this action look like a certain success. But when the process was under way, it was
found that some of them did not mesh. The acquirer had a culture that encouraged
lean staffing and high-quality employees who were highly productive and rewarded
using performance-based incentive plans. The company to be acquired was run like
a family, overstaffed, underpaid and with low performance standards. The differ-
ences in the pay levels had been identified as the new pay structure was developed,
but it is always difficult to identify overstaffing, particularly when low pay makes
employee-compensation expense seem reasonable (more, lower-paid people can
easily cost the same as fewer, highly paid people). Most cost savings in acquisitions
and mergers are expected to be realized by combining redundancies. In this case,
the workforces were like oil and water and did not lend themselves to blending.
The lesson is that benchmarking can play a critical role in M&A activities but requires
considerable investment early in the due diligence process and requires in-depth
examinations that may be difficult to conduct.
11 Second Quarter | 2008
Attempting to benchmark strategies and programs in staffing, development and
performance management is a much more challenging activity than gathering data
on prevailing compensation levels. For example, the culture prevailing in an organ-
ization will profoundly affect the type of employee desired, as will the business
strategy. The success of a performance appraisal program will be affected by the
cultural compatibility of the criteria defining performance and the process used.
An HR practitioner can gather appraisal forms used by other organizations, and the
literature provides plentiful information on different approaches. But the sensitivity
of strategies for managing performance to the type of culture existing in an organi-
zation makes emulating other organizations a risky business. Referring back to the
Treacy and Wiersema strategy model, an organization that is relying on product lead-
ership as its competitive advantage is likely to value different behaviors and results
than an organization relying on operational excellence. The former will be more
apt to value innovative, risk-taking behaviors, while the latter will value productivity
and cost containment more highly. Another example would be an organization that
is attempting to determine if a particular type of training yields a high return on
investment. It may find that success in a competitor that utilizes a different strategy to
attain competitive advantage may not pay off for the organization...extensive training
for customer-service personnel might yield a much higher payback for Nordstrom’s
than it would for Wal-Mart.
If an organization believes that a new or revised HR strategy/program might be
beneficial, it is possible to eschew benchmarking against other organizations or
even other parts of the same organization. This might be the case if the unit has a
context that is quite unlike any that could be used to benchmark. The alternative
is to conduct an experiment that is structured to measure whether an intervention
has the desired effect, no effect or an undesirable effect. Research methodology is
readily available to help the practitioner structure such an experiment, and although
this may consume considerable resources, if the potential payback is large enough,
it might warrant the investment. This may be the only approach that can produce
the required level of certainty in cases where the benefits of being correct and costs
of being wrong are large.
CONCEPTUAL FOUNDATION
When the contexts across organizations differ, it is still possible to predict how
a program successful elsewhere might work in the benchmarking organization.
However, for this to be feasible, it is necessary to ask a series of “why” questions.
If a program is highly successful in a competitor organization, the bench-marker
needs to discover why that program worked.
Did it work because it was particularly suited to the other organization’s
context, or did it succeed because it was based on a sound conceptual foundation?
For example, the premise “you get what you measure and reward” is supported
by research findings. Research also supports expectancy theory, which posits
12 WorldatWork Journal
that if an employee believes that
producing outcomes desired by the
organization will result in receiving
valued rewards, the employee will
be motivated to work towards that
result. This is, of course, dependent
on the belief that the employee is
capable of producing that result and
that the organization will recognize
and reward it as promised. So if a
sales-incentive plan used by another
organization rewards sales volume,
desired sales mix and profitability
of sales, and these are the same
metrics the benchmarking organiza-
tion thinks to be appropriate, it is
reasonable to consider using them.
But if the organization values other
outcomes or places different relative values on these metrics, the plan should
reflect that, rather than copying the other organization’s program.
The final decision on plan design should not be made on competitive condi-
tions alone. The conceptual soundness of its structure must also be considered.
Research suggesting which conditions are likely to produce the desired outcomes
is very valuable. Often practitioners are reluctant to use research because they are
unsure about its relevance to their issues. And it is important to ensure that the
research will increase the quality of decisions. There are two types of research
validity a user should be concerned about. Internal validity addresses the veracity
of the research findings—it is impacted by the quality of study design and execu-
tion. But one must also be concerned about external validity—how valid the
study findings are likely to be across contexts. The synthesis of multiple studies
is one tool used by researchers. This contributes to the likelihood that the results
are valid and may also provide some indication of how robust the findings are
under different conditions. Armed with this knowledge, an HR practitioner can
make informed projections about the probable success of an imported program.
Therefore, benchmarking can become a two-pronged activity, comparing to
competitors and to research findings.
If an organization wants to innovate and offer employment conditions providing it
a competitive edge, there may be no experience to copy. By definition, creativity is
lonely. But by using research findings, the innovator can lessen the risk of adopting
a unique practice. An example of a practice that is heavily supported by research
but difficult to benchmark against other organizations is the “realistic job preview.”
Put simply, this is telling the whole truth and nothing but the truth to employment
RESOURCES PLUS
For more information related to this paper:
www.worldatwork.org
Type in either or both of the following search
keywords on the search line:
❚ Benchmarking
❚ Benchmark.
www.worldatwork.org/bookstore
❚ Market Pricing: Methods to the Madness
❚ Survey Handbook & Directory:
A Guide to Finding and Using Salary Surveys.
www.worldatwork.org/education
❚ C17: Market Pricing—Conducting
a Competitive Pay Analysis
❚ Competitive Market Pay: Pricing
Sales Positions.
13 Second Quarter | 2008
candidates. Research has shown this practice typically reduces unwanted turnover
during the first 18 months of employment. But if one were to ask practitioners in
other organizations if they were honest with candidates when interviewing them,
how much faith could be placed in the results of that survey?
One company the author consulted with had several major call centers, and each
center was plagued by high turnover among people with less than a year’s service.
This represented a significant cost, since the training required for new employees
was significant. They started requiring all potential applicants to watch a film
entitled “Thirty Minutes In The Life Of A Center Operator” before they completed
an application. Many applicants who might have accepted employment if the film
had not been viewed did not apply. They left because they were appalled by the
daily work routine depicted realistically in the film. So even though this practice
reduced the number of candidates, it is likely that those driven from the building
in reaction to the film would have become turnover statistics—after the organiza-
tion had invested in training them. The realistic job preview can inoculate new
employees against some negatives to be experienced and also begins the employ-
ment relationship on an open and honest basis. If the preview is expanded to be
an employment preview, including information about the organizational culture
and other environmental realities which might influence employee satisfaction,
the value of this tool can be increased.
Many HR practitioners are reluctant to use research, even though it can provide
conceptual/ theoretical guidance. Much of the research is buried in academic journals,
inaccessible to the lay person who lacks the tools to break the code in which it is
written. But research findings may represent a treasure chest of guidance when adopting
innovations that cannot be supported by benchmarking against other companies.
Many organizations consider their HR strategies/programs as a competitive advantage
and are unwilling to share any substantive information with other organizations.
This makes high-quality benchmarking data even more difficult to find.
Even when plentiful public information is available about particular approaches,
caution should be exercised when one accesses the HR literature. The articles about
successes with “new” approaches are not offset by articles about the failures, which
produce a very biased indication of how well something might work. Few practi-
tioners or consultants are anxious to write about their abject failures, since this is
hardly a career-enhancing activity. Surveys of the technique called “broadbanding”
in the late ‘90s seemed to indicate a keen interest by most organizations, but if
one took care to dig deeper, it turned out to be a lot of interest without a lot of
implementation. In those instances where implementation did occur, the outcomes
reported in the literature seemed to be universally positive, an unlikely finding.
Retreats from the approach, several of which the author participated in, were never
the subject of articles or news releases.
Therefore, if the anecdotal literature is going to be used in benchmarking, one must
take care to recognize it as a biased source of information. Conversely, the research
14 WorldatWork Journal
literature consists of studies that were more rigorously designed and conducted,
with positive, negative and neutral results being reported. This happens because
the research must propose the hypothesis being tested in advance of conducting the
study, thereby avoiding the bias caused by reporting only positive results. Researchers
are given credit for finding out what does not work if they do it rigorously, since they
are contributing to the knowledge pool. Practitioners in organizations are typically
not rewarded for experiments that fail.
CONCLUSION
Every HR practitioner should endeavor to understand what other organizations are
doing relative to his/her HR strategies/programs. It is important to develop a brand
as an employer, and knowledge of how the competitors for people are presenting
themselves to the marketplace is critical. When it is discovered that a particular
approach is becoming widespread, the first step is to understand the approach and
then to attempt to determine why its usage is increasing. It may be in response
to changes in the business environment or supply-demand conditions in the labor
markets. Or it may represent an innovation that should be considered. Information
about the experiences of other organizations with the approach should be sought
and, if it exists, it should be analyzed to determine whether a pattern of success or
failure exists and what factors affect the results. The second step is to evaluate the
probable fit of the approach to the organization’s culture, strategy and structure and
how the internal and external realities faced by the organization might impact its
effectiveness. The third step is to assess the conceptual/theoretical validity of the
approach, assuming that research exists that makes this possible.
A Conference Board research study (2007) suggests “evidence-based HRM (human-
resource management) applies scientific standards of causality to demonstrate how
intangible human capital can be observed and shown to add to business results.”
Most practitioners aspire to provide tangible business results and, therefore, should
be open to methods that enable them to do so.
Benchmarking has its place in human-resource management. But its limitations
must be understood and caution exercised when attempting to import a strategy/
program from another organization. It may be necessary to emulate prevailing
practice to remain competitive, but it is easy to conclude that it is imperative, only
to find that the practice did not travel well and that the impact was not the same.
Popularity does not ensure effectiveness. ❚
15 Second Quarter | 2008
Casco, Wayne F. 2006. “Decency Means More Than Lower Prices.” Academy of Management Perspectives,
August: 26-37.
The Conference Board. 2007. “Evidence-Based Human Resources.” Research Report E-0015-07-RR.
Treacy, Michael and Fred Wiersema. 1997. The Discipline of Market Leaders. New York: Basic Books.
Trompenaars, Fons. 2007. Riding the Whirlwind. Infinite Ideas. Oxford, England: Infinite Ideas Ltd.
REFERENCES
Robert J. Greene, Ph.D., CCP, CBP, GRP, SPHR, GPHR, is the CEO of Reward $ystems Inc. in Glenview, Ill.
He has published more than 75 articles and book chapters and was awarded the first Keystone Award for attaining
the highest level of excellence in the field by the American Compensation Association (now WorldatWork).
He has designed and taught certification courses and seminars for numerous professional associations around
the world. He serves on the faculty for DePaul University in their masters of business administration and masters
of science in human resource management programs.
AUTHOR
Medical centers have a strong scarcity of profes-
sional talent that is not projected to improve
in the foreseeable future. Trends show the
general population is aging, and the number of nurse-
training programs is insufficient for current and future
employment demand. Nurses, who represent the largest
professional group in a medical center, are not the only
jobs in scarce supply. Medical centers also struggle to
attract and retain therapists, medical technologists,
pharmacists, physicians and other technology jobs.
What are the high-performing medical centers doing to
ensure that they have the talent necessary to provide
quality patient care and clinical outcomes? What are
the implications for other types of organizations where
talent makes a significant difference?
This study examines the retention strategies and
pay and rewards practices of a sample of the best-
performing medical centers and hospitals in the United
States. Twenty-one organizations ranked by U.S. News
& World Report participated. A structured interview
with an open-ended questionnaire was used to gather
information from these organizations from CEOs, major
Workforce Retention and Pay
and Reward Practices
in America’s Best Hospitals
Patricia K. Zingheim, Ph.D.
Schuster-Zingheim & Associates Inc.
Jay R. Schuster, Ph.D.
Schuster-Zingheim & Associates Inc.
❚ Compensation
Second Quarter 2008
877/951-9191www.worldatwork.org
Contents © WorldatWork 2008. WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, ghallman@tsp.sheridan.com at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, customerrelations@worldatwork.org, 877-951-9191.
17 Second Quarter | 2008
operating executives and heads of human resources. The questionnaire is included
in the appendix.
US News & World Report (2007) published a study of performance excellence of
“America’s Best Hospitals” based on 5,462 hospitals and identified 173 that led the
field in terms of excellence based on reputation, mortality index and other care-
related factors distinguishing the best from the rest in as objective terms as possible.
While the results of excellence are either measurable or observable, the route to
success is less transparent in many instances, especially from the standpoint of
workforce leadership and practice. This paper sampled and studied 21 of the 173
America’s Best Hospitals, including 12 of the top 18 “Honor Roll” elite performers.
These 21 organizations were willing to be telephonically interviewed in depth for
an extended period, answer the authors’ questions based on a patterned interview,
and provide the detailed information needed for a thorough understanding of what
they do to retain, pay and reward scarce/critical talent.
SCARCE/CRITICAL TALENT
The objective of the top-performing medical centers surveyed is to use their
resources most effectively to accomplish their mission of providing health-care
excellence. This means focusing retention and pay and rewards on the talent who
provide clinical care to patients. Medical centers define these people as scarce,
critical, core and/or professionals in centers of excellence. The term “scarce/critical
talent” will be used in this paper to describe them. Top-performing medical centers
increasingly focus retention, pay and reward resources on scarce/critical talent
rather than the workforce in general.
Nursing is universally included in this scarce/critical talent definition—registered
nurses (RNs), licensed practical nurses (LPNs) and licensed vocational nurses (LVNs).
The talent group also may include research scientists and investigators into new
treatments and cures if the organization is research-based. Other scarce/critical work
roles commonly include technologists in the chemistry sciences, physical therapists,
respiratory therapists, pharmacists, physicians, nursing support technicians, some
other licensed professionals and managers who retain talent in these jobs. Examples
of centers of excellence where scarce/critical talent often work are cancer, heart,
eye and ear centers.
STRATEGIES FOR SCARCE/CRITICAL TALENT VERSUS OTHER EMPLOYEES
The top-performing medical centers in this study have unique strategies and
programs for their scarce/critical talent compared to those for administrative talent,
less-skilled talent and other nonscarce/critical talent. For the administrative and less-
skilled talent, there is less concern about retention and the market competitiveness of
pay. The medical centers studied do not focus on defining and rewarding skill and
career growth for these jobs compared to scarce/critical talent. Nor do they focus
as strongly on developing measures of skill growth or outcome measures as they
18 WorldatWork Journal
do for clinical skill growth and clinical outcome measures. The emphasis for best-
performing organizations is clearly on retention of skilled talent who are close to
the core of health-care delivery and essential to the creation of a high-performance
health-care workplace.
All medical centers in the study sample are nonprofit. In the 1980s, many nonprofit
medical centers were principally concerned with social justice and often paid
lower-skilled jobs (e.g., food service workers and housekeepers) higher relative to
their competitive labor market than they paid professional and administrative jobs.
Their reasoning was based in social equity and thereby ensuring a living wage.
Only two of the medical centers in this study (10 percent of the participants) raised
social justice as a pay objective. The other 19 medical centers are developing and
implementing unique retention and pay and rewards strategies and programs based
on talent scarcity/criticality.
Because of this differentiation, a number of the medical centers studied
commented that they have increased their communication to administrative talent
and lower-skilled talent about why programs are different for different popula-
tions. The objective is to gain these employees’ understanding of the reasons
and thereby increase their acceptance of the differences. One of the communi-
cation messages is the organization’s inability to accomplish its mission without
the scarce/critical talent, thereby jeopardizing not only the organization’s future
but also, more importantly, patient health, frequently in life-and-death situations.
Another message is that the labor market moves differently for different jobs based
on labor supply and demand and that the organization needs to acknowledge
these differences in how it pays.
RETENTION STRATEGIES AND ACTIONS
Some CEOs described retention of scarce/critical talent as on par with, or second
only to, patient outcomes as organizational goals—on par because scarce/critical
talent is considered necessary to achieve patient outcomes. One executive said that
retention is viewed as more important than recruitment because the cost of turnover
is so high, and successful retention reduces the need for recruitment. One CEO said,
“We have learned that keeping our most-skilled talent is really a ‘war for life’ as it
relates to our patients. We can’t quit growing talent.”
In addition to recognizing that people stay with an organization when they feel
valued and appreciated, are respected and receive personal attention, study partici-
pants outlined retention strategies and actions covering a variety of factors. Figure
1 shows a summary of these retention strategies and actions that do not directly
involve adding pay cost. As the figure shows, retention of scarce/critical talent is
multifaceted and is not achieved by addressing only one factor. These organizations
truly believe that “You make us great,” as one CEO said, and hold leadership and
HR responsible for retaining scarce/critical talent. Leadership must be part of the
solution, not part of the problem.
19 Second Quarter | 2008
Examples of Successful Retention Actions
The most frequently mentioned examples of retention programs and actions that
have been successful with scarce/critical talent are:
❚ Provide child-care and elder-care benefits, with on-site centers being the strongest
and preferred benefit (57 percent of the 21 surveyed medical centers).
❚ Enhance total compensation for scarce/critical talent near retirement age to
encourage them either not to retire or to work beyond normal retirement age.
Actions include a base-pay adjustment, bonuses, ensuring competitive pay, adding
to retirement benefits for each year that the individual stays with the organiza-
tion, part-time work and accommodating the individual’s interest in work hours
(52 percent of the medical centers).
❚ Communicate about the medical center’s reputation for excellence because people
generally want to be associated with “winners,” and communicate messages about the
medical center’s association with the university (48 percent of the medical centers).
The first two successful retention actions reflect the demographics of scarce/
critical talent. The first retention action acknowledges the family needs of scarce/
critical talent. The second action addresses the aging of the scarce/critical talent
workforce and the other employment opportunities available to experienced talent
FIGURE 1 Retention Strategies and Actions
Retention Factor Approach to Retain Scarce/Critical Talent
of 21 Top-Performing Medical Centers
Employee satisfaction ❚ Baseline, place to start.
❚ Does not distinguish or differentiate medical center.
Employee engagement ❚ Most critical to retention.
❚ Engaged scarce/critical talent is essential to accomplishing the
organization’s mission and patient-care solutions.
Organization culture ❚ Most frequently mentioned culture: professionalism.
❚ Successful, patient-focused creative medical culture, care-giver
(not “money-grubber”), healing culture, health-care excellence/quality.
Supervisory/manager role ❚ Developers, advisors, educators, coaches, mentors, trainers
❚ Role models, example-setters
❚ Enablers, barrier-breakers, interference-blockers
❚ Communicators.
Work environment ❚ Enabling.
Communications ❚ Method: Small group, face-to-face, Web/intranet (with home access),
CEO Webcasts, multiple approaches, de-emphasis on written.
❚ Style: Often, specific, honest, straightforward, both talk and listen.
Training and development ❚ Invest in yourself, grow as much as you want, employee choice,
in charge of your own development.
❚ Medical center enables opportunities.
❚ “Keep skills fresh.”
Career opportunities ❚ Job rotation
❚ Medical center facilitates job movement—no siloing
❚ “Employee for life” with medical center by providing career opportunities.
Pay and rewards ❚ Integrated with other retention strategies and actions.
20 WorldatWork Journal
(e.g., case management, care coordination and health coaching in health-insurance
companies). The third action highlights these medical centers’ reputation advantage
used not only in recruitment but also in retaining scarce/critical talent by ensuring
the organization is run consistent with its reputation.
Examples of Unsuccessful Retention Solutions
Twenty-nine percent of the medical centers reported that none of their retention
solutions failed, which they believe implies that organizations should move forward
on identifying retention objectives and target-employee groups, and then design
and implement retention programs. For those medical centers that reported some
unsuccessful retention solutions, the majority of the unsuccessful actions can be
categorized into three groups:
❚ Recognition programs that had gimmicks or games were mentioned by 43 percent
of the 21 study participants (although one medical center said that these worked
for its hourly workforce). Other recognition programs, however, do work—for
example, one medical center executive described a strength, hope and caring
award for nurses.
❚ Rigid pay systems that did not focus most on specific critical skills, did not match
the necessary skills and/or paid the same amount to everyone were mentioned by
19 percent of the study participants. Pay systems must be agile and respond to not
only the labor market but also evolving skills and competencies and performance
measurement capabilities.
❚ Any solution that appeared to be a “flavor of the month,” was primarily based on
slogans or sounded like a sales pitch was mentioned by 14 percent of the study
participants.
These programs and actions may have proven unsuccessful because they seem
inconsistent with the most common organizational culture reported by the medical
centers—a cultural of professionalism—or with the importance of skills to licensed
professionals who have made a skill investment in themselves to have become a
licensed professional.
Measuring Results of Retention
The success of retention programs/initiatives is measured, as expected, by the reten-
tion of scarce/critical talent, but the measurement is specific to whatever employee
groups are particularly critical to the organization (for example, top performers,
specific licensed professional expertise such as registered nurses, employees near
retirement). The second most frequently used measure to evaluate retention program
success is overall organizational success.
PAY AND REWARDS STRATEGIES AND PRACTICES
One CEO said, “Don’t be stingy on paying top performers, or our patients pay
for it with their lives.” Providing at least market-competitive compensation is
21 Second Quarter | 2008
considered necessary to retain scarce/critical talent because these individuals
are often aggressively recruited by others. Two-thirds of the study participants
use both base pay and variable pay to reward scarce/critical talent for skills and
performance. Study participants differ about whether they position scarce/critical
talent roles similarly or differently in competitiveness relative to the labor market
based on the degree of criticality of the role’s skills. Total cash compensation
programs also vary among the study participants based on their emphasis on
rewarding skill growth, individual performance and clinical outcomes.
Objective
For two-thirds of the 21 top-performing medical centers studied, individual
performance is an objective for determining base-pay increases and lump-sum
payments, if used, for scarce/critical talent. Forty-eight percent reward skill growth.
The majority that pay for skills emphasize skill growth over individual performance
because 19 percent of the study participants pay more for skill growth than indi-
vidual performance, and 14 percent pay only for skills, not individual performance.
The least frequent approach, used by 19 percent of the study participants, is not
paying for performance but paying for tenure/service, internal equity and social
justice. Figure 2 on page 22 shows a summary of total cash compensation practices
of the top-performing medical centers studied.
Most of these top-performing medical centers evolved from the typical practice
15 years ago of paying for tenure and service. In fact, 38 percent of the study
participants mentioned they must pay the top performers more than their fellow
scarce/critical-talent colleagues to retain them and reflect their value. The strong
usage of paying for skill growth, compared to other industries, reflects the profes-
sionalism of scarce/critical talent in medical centers and the rapid advancements
in medical care and technology.
Base Pay
Two-thirds of the 21 study participants position base pay for all or some of their
scarce/critical talent roles more competitively than the labor market. Examples of
competitive positions higher than the median labor market are 5 percent to 20
percent above market and 60th to 75th percentile.
Base-pay increases are not determined primarily on movement in the labor market.
About one-half of the study participants increase scarce/critical talent’s base pay for
growing skills. This addresses the need to stay up-to-date in skills and to encourage
career growth. Some study participants have career ladders, particularly for regis-
tered nurses, and some of these medical centers have dual career ladders enabling
rotation between supervisory and professional roles to keep skills current.
Paying for skill growth requires the identification and measurement of skills.
A few organizations reported that measurement is a challenge—particularly
refining measurement of skills to keep current with advancements in medical care
22 WorldatWork Journal
and technology. One executive reflected on the challenge of rewarding scarce/crit-
ical talent primarily for skills: “People grow at different speeds and rates over time.
We must keep pay and rewards corresponding with how the individual grows.
This is an individual issue. Managers and leaders must watch this in a large
organization like ours. It is a huge challenge but a necessity.”
FIGURE 2 Total Cash Compensation Practices
Pay and Feature of Pay Scarce/Critical Talent Practice
Rewards Element and Rewards Element of 21 Top-Performing Medical Centers
Overall objective Objective for base-pay ❚ 67% pay for individual performance.
increases and, if used, ❚ 48% pay for skill growth and usage—
lump-sum awards 19% reward skill growth more than performance
and 14% do not report paying for individual
performance.
❚ 19% do not pay for performance (focus on
tenure/service, internal equity and social justice).
Base pay Competitiveness Majority pay scarce/critical talent more than the
competitive (none pay less than competitive)
as follows:
❚ 14% make or lead the market (highest payer).
❚ 38% pay better than competitive.
❚ 14% pay either competitively or better.
❚ 33% pay competitively.
Top performers ❚ 38% position base pay most competitively
for best/top-performing scarce/critical talent.
Individual reviews/ Timing ❚ 19% provide quarterly reviews with eligibility
evaluations for base-pay increases and lump-sum payments
for skill growth and/or individual performance.
Variable pay Usage ❚ 67% have variable pay for scarce/critical talent
below senior managers (14 of 21 participants).
❚ 19% believe variable pay is inappropriate for
health care or is unethical in a university setting.
❚ 10% have eligibility only for senior managers
(executive and director levels).
❚ 5% do not use variable pay but see value in it.
Types Of those with variable pay:
❚ 43% reward results on achievement of clinical goals.
❚ 21% reward acquisition and usage of new skills.
❚ 14% have a lump-sum payment for skills and
goal achievement/merit/individual performance.
❚ 7% have a lump-sum payment for individual
performance/merit.
❚ 7% have a lump-sum payment for performance
if base pay is near the top of the salary range.
❚ 7% have cash awards for excellence.
Metrics ❚ Skill growth and effective usage.
❚ Clinical measures and outcomes.
❚ Quality, patient satisfaction, access to care,
community-focused metrics.
❚ Not cost savings, productivity or income for
individual contributors because study participants
are philosophically opposed to these metrics
(although financial metrics may be used for
executives in some organizations).
23 Second Quarter | 2008
In addition to rewarding skill growth, a frequent organizational objective is not
just to discuss, but to actually provide, the highest base pay to the best performers
who are scarce/critical talent. A few reported that their pay-for-performance program
needs improvement. Also some medical centers that reward individual performance
with base-pay increases either have not found this approach to work effectively with
less-skilled employees who are not scarce/critical talent or have not tried to pay for
individual performance with their less-skilled employees.
Nineteen percent of the study participants provide scarce/critical talent with quar-
terly reviews or evaluations and eligibility for quarterly lump-sum payments for skill
growth and/or individual performance. Quarterly lump-sum awards may also be
accompanied by a quarterly base-pay increase. The objective is to provide more
frequent opportunities for feedback, recognition and compensation awards and to
enable faster response to labor market changes.
Variable Pay
Sixty-seven percent of the 21 top-performing medical centers studied use variable pay
for scarce/critical talent below the senior management level. About one-fifth, however,
believe variable pay is inappropriate for health care or in a university setting. Another
medical center would like to use variable pay, and some would like to use incentive
plans rather than lump-sum awards, but their university restricts their ability to do so.
A variety of types of variable pay plans reward a variety of different accomplish-
ments. Study participants use lump-sum payments, incentive plans and cash awards.
The most common form of variable pay is an incentive plan for rewarding results on
achievement of clinical goals. Also common are lump-sum payments for either skill
acquisition and usage or individual performance or a combination of the two.
Incentive plans universally use clinical outcome metrics to focus on and reward
what is important to patients. Financially oriented metrics, including cost savings,
productivity and income, are not used for incentives for the general scarce/critical
talent population because study participants believe this sends the wrong message
and motivates the wrong behavior. The absence of financially oriented metrics is
substantially different from the incentive practices of other industries but is consis-
tent with the medical centers’ predominant culture of professionalism and caring,
their nonprofit status and the way others, including U.S. News and World Report,
measure health-care excellence.
Examples of Total Cash Compensation Programs
These medical centers designed their total cash compensation programs for scarce/
critical talent differently from common practice for general industry. Frequently, they
said that the program was designed and evolved based on their own specific needs.
They did not base design on the practices of others; in fact, other hospitals and
medical centers tend to copy these study participants. The following five examples
show the variety of total cash compensation programs.
24 WorldatWork Journal
One executive described his program as follows: “Performance management is
linked to both skill scarcity and to the clinical metrics that apply. Each job area
has a ‘scarcity’ factor that magnifies the performance rating. If individuals receive
a ‘3’ rating in a scarce skill, they earn a larger base-pay increase or incentive lump
sum than others in a less scarce area would earn. About 60 percent of our nursing,
technology, science, etc., areas are in high scarcity, so that influences the results of
the performance rating. It keeps us from paying everyone in a scarce skill the same
even though they are not great performers, and the workforce accepts this. Some
will get a 9-percent pay raise, for example, and a 6-percent lump sum during the
year, perhaps spread out.”
An executive of another top medical center studied said, “We pay more for the
skill and competency of physicians, RNs, technical people, even LPNs and LVNs and
radiology and medical technologists than for performance. We combine skill growth
with clinical measures that make a difference to the medical center. We developed
a long list of the skills and competencies in the critical talent areas. We defined
what this skill is for ‘minimal talented,’ ‘fully talented’ and ‘exceptionally talented.’
We use these in performance management and in setting goals related to clinical
areas. Performance management impacts base pay, and clinical goals determine
incentives that are awarded annually in cash. The program works well, considering
the complexity of the performance issue in a changing medical technology.”
A third executive said, “Our program for professionals, including all of our key skill
roles like physicians, nurses, researchers, technical staff, etc., is called ‘Sum Total.’
Each year-end, everyone is evaluated by first a peer rating and then the manager
and the next-level manager make the decision relative to both base-pay adjustment
and incentive award. Guidelines maximize the base-pay adjustment at about 10
percent to 12 percent of base pay but can additionally grant up to a 20-percent
incentive based on clinical outcomes and patient access and other key health-care
center medical performance issues.”
A fourth medical center’s executive described the scarce/critical talent program
as: “We pay for the skills we need since these are licensed professions with
standards. Our focus is to align pay adjustments based on performance to how
nurses learn and grow and take on more assignments. Nurses are offered specific
career ladders based on a combination of service and performance. So we pay
for performance. Other professional systems are based on the working nursing
system: (1) Assess nurses and clinical professionals as often as quarterly but at
least annually; (2) Pay about 5 percent above market at all times and more for
high performers and unique nursing skills; (3) As a result of the individual’s
assessment, pay is adjusted, with premiums for working in the most critical
centers of excellence with the most shortage of skills; (4) Lump-sum cash awards
in addition to base-pay adjustments reward acquisition of new skills that are on
a ‘critical professional skill list’; (5) Goal is to keep ahead of market in total cash
compensation and make it specific as to what is needed to be paid at this level.
25 Second Quarter | 2008
Pay focuses on keeping up with skill.
Performance is application of these
skills to help our organization.”
Finally, another executive commented
on her medical center’s skills focus:
“We review all nurses and therapists
every quarter. We are looking for
skills updates and application. If so,
they receive either a lump sum or
a base-pay adjustment. Adjustments
are small as are lump sums, but they
amount to more than competitive on
an annual basis.”
Recognition
Verbal recognition is considered
essential and communicates to scarce/
critical talent that their contributions
are sincerely appreciated and that they
are “special.” In addition to verbal
recognition, effective recognition for
scarce/critical talent acknowledges
professionalism, patient commendation and living the medical center’s values.
As described earlier, the most common comment about recognition was that
gimmicks, coupons or games were ineffective for professional scarce/critical talent.
Excluding verbal and written recognition, 29 percent of the medical centers studied
do not use recognition programs for scarce/critical talent or use them sparingly—
sometimes after having overused such programs. Most of the medical centers,
however, use recognition programs. About one-fifth of the study participants
reported their recognition programs work well, while about one-fifth reported that
they cannot measure their recognition programs’ value or their programs are moder-
ately successful for retention.
Overall, recognition programs are not viewed as a key driver for retention even
though the top-performing medical centers have customized their programs to the
professionalism of their scarce/critical talent. Figure 3 on page 26 shows a summary
of recognition and benefits practices of the top-performing medical centers.
Benefits
Ten percent of the study participants believe liberal benefits, particularly retirement,
give them a differential advantage in retaining scarce/critical talent. As discussed
earlier, child care and elder care are strongly successful retention tools. Because
these organizations are in the health-care industry, providing health insurance is not
RESOURCES PLUS
For more information related to this paper:
www.worldatwork.org
Type in any or all of the following search keywords
on the search line:
❚ “Retention strategies”
❚ Rewards
❚ Pay.
www.worldatwork.org/bookstore
❚ High-Performance Pay: Fast Foward
to Business Success
❚ Recognition at Work: Crafting a Value-Added
Rewards Program, Second Edition
❚ Collection of Articles from WorldatWork
❚ The Rewards of Work : What Employees Value
❚ Cash Bonuses: Four Ways to Attract, Retain
and Motivate Employees, Second Edition.
www.worldatwork.org/education
❚ T1: Total Rewards Management
❚ C12: Variable Pay—Incentives, Recognition
and Bonuses.
26 WorldatWork Journal
only a necessity for recruitment and retention but also a philosophical cornerstone.
Flexible scheduling provides no differential advantage since all hospitals and medical
centers provide this.
Next Steps
Study participants reported a variety of next steps to improve pay and other compen-
sation-related rewards programs. The most common were:
❚ Make sure pay keeps up with the desired competitive market position and the
individual’s skills and skill growth.
❚ Improve and refine metrics for measuring skill growth, performance management
and/or clinical outcomes.
❚ Build programs to retain current scarce/critical talent approaching retirement,
although some also mentioned concern about retaining scarce/critical talent newer
to the profession or within the first three years of hire.
LESSONS LEARNED
These organizations have recommendations that can apply to more than just medical
centers. These include:
❚ Work on retention and pay and rewards programs together so they are integrated.
❚ Get beyond strategizing and act. Retention, pay and rewards for scarce/critical
FIGURE 3 Other Rewards Practices
Pay and Feature of Pay Scarce/Critical Talent Practice
Rewards Element and Rewards Element of 21 Top-Performing Medical Centers
Recognition Type ❚ Verbal and professional recognition
is most important.
❚ Mixed response to “fun” recognition—43% report
gimmicks do not work for scarce/critical talent
population (e.g., games, contests, coupons).
❚ Excluding verbal recognition, additional comments
on recognition programs are as follows:
- 24% cannot measure programs’ value for retention.
- 19% report programs are working well.
- 19% use recognition sparingly, have overused
recognition or use programs for other than
scarce/critical talent.
- 10% do not use programs.
Benefits Liberal benefits ❚ 10% have a total compensation strategy built
on liberal benefits, particularly retirement.
Health insurance ❚ Necessity and cornerstone since health care
is their business.
❚ Would be a negative if this was not provided.
Child care and elder care ❚ Positive retention program.
❚ It’s best if these are provided onsite rather
than reimbursed
❚ Several organizations implementing this year.
Flexible scheduling ❚ Not a differential advantage for retention because
all medical centers provide it.
27 Second Quarter | 2008
talent must be addressed sooner rather than later before more talent leaves the
organization. Develop a concrete improvement solution, communicate it, take
action with fast implementation and show examples of it working.
❚ Capitalize on whatever differential advantage your organization has. The smallest
organization in the survey, for example, uses its size as an advantage because
of the personal touch it can give to scarce/critical talent and the communication
that everyone is important to the organization.
❚ Continue to improve communications about a variety of messages, including develop-
ment opportunities and how valuable scarce/critical talent is to the organization.
❚ Train managers on importance of retention. Set in place more aggressive retention
programs that are geared to intercept problems before they become acute.
The bottom line, as one executive said, is to make it both financially attractive
and career attractive for top performers with scarce/critical skills to stay with
the organization.
SUMMARY
These premier medical centers studied are focused on retaining scarce/critical talent
and are aggressively developing and implementing retention, pay and rewards strat-
egies, programs and actions to retain this talent. Senior leadership views this as
a business necessity for the organization to continue to achieve its mission and
clearly understands the cost of losing scarce/critical talent. These medical centers
have adopted some similar retention, pay and rewards programs that reflect the
demographics and needs of the health-care industry’s scarce/critical talent and have
also customized retention, pay and rewards programs to fit their organization’s
specific values and culture. Although the specific approaches may differ for different
industries, the lessons learned are applicable to all types of organizations that are
struggling but must retain scarce/critical talent. ❚
U.S. News and World Report 2007. “America’s Best Hospitals.” http://health.usnews.com/sections/health/
best-hospitals. Viewed: March 24, 2008.
REFERENCE
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, incen-
tives 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 Publishers 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. Their
Web site is www.paypeopleright.com.
AUTHORS
28 WorldatWork Journal
Key Question: What role do workforce retention
and pay and rewards play in supporting an
excellent-performing organization like yours?
SZA would like to know about how your organization
does the following:
1 | What are your current challenges and
strategies related to retention and also pay
and rewards?
2 | What practices have been successful, and
what have been less successful?
3 | To what extent does your organization pay
for performance? How does it work? What have
been the results of the program?
4 | What next steps or actions do you plan to take?
5 | What suggestions and recommendations do
you have for others?
6 | What has been especially successful relative
to communications and gaining workforce
understanding, acceptance and engagement?
RETENTION
7 | Please describe your organization’s most
pressing talent-retention challenges.
8 | What has been your experience relative to why
employees leave or stay with the organization?
9 | Please describe your organization’s strategy
related to talent retention.
10 | What skill and competencies are critical to
your organization to retain and why?
11 | What role do you believe the following play
in workforce retention?
❚ Overall employee satisfaction
❚ Employee engagement
❚ Organizational culture
❚ Supervisor/manager/leadership relations
❚ Work environment
❚ Communications
❚ Training and development
❚ Career opportunity
❚ Base pay
APPENDIXFocused Interview Guide For Study of Workforce Retention Plus Pay and Rewards in America’s
Top-Performing Hospitals
Schuster-Zingheim and Associates Inc. (SZA) is exploring strategies, practices, and evaluative experiences
and comments regarding workforce retention plus pay and other rewards for employees, particularly hard-
to-retain employees. You are one of the top health-care organizations in the USA. We are studying how
top-performing organizations address critical human-resource management issues including the following:
1 | Workforce retention challenges and solutions
2 | Pay and rewards, including paying for performance.
Our goal, if you are willing, is to gain insight into your practices, why you follow them, what the results are,
and what you have learned about these workforce issues in your journey to excellence. The organizations studied
will not be listed, and individual input will not be attributed to you in any way. All that will be said is that a
top-performing health-care organization reflected specific thinking on a topic and anonymous quotes will be
used to add light to a concept or idea you provide.
29 Second Quarter | 2008
❚ Incentives/bonuses
❚ Recognition and recognition awards
(cash or noncash)
❚ Employee benefits (e.g., health insurance,
retirement, PTO)
❚ Work-life benefits (e.g., flexible hours,
job sharing, job rotation)
❚ Other. What other?
12 | What practices have worked best for retention?
Why?
13 | What practices have not worked well for
retention? Why?
14 | What is the next action you plan to improve
retention? Why?
15 | What is the role of the executive team and
managers in talent retention?
16 | How do you evaluate the effectiveness of your
organization’s retention strategy and practices?
PAY AND REWARDS
17 | Please describe your organization’s most
pressing pay and reward challenges.
18 | Please describe your organization’s strategy-
related pay and rewards for the workforce.
For hard-to-retain employees?
19 | To what extent does your organization pay
for performance for the workforce? Why has
your organization adopted this strategy?
❚ Not a strategy
❚ Not truly pay for performance—
although say we pay for performance
❚ Pay market
❚ Pay for competencies and skills
❚ Pay for performance and results
❚ Pay very strongly for performance and
results—with strong pay differentiation
based on performance
❚ Some combination—what combination?
20 | What has been challenging and what has been
successful in measuring employee performance?
Competencies and skills?
21 | If your organization pays for performance
for the workforce, please describe how pay
for performance works in your organization.
What is the program? How would you
evaluate the program’s success?
22 | What pay and reward practices and programs
have worked most successfully? Why?
23 | What pay and reward practices and programs
have not worked well? Why?
24 | What is the next action you plan for pay
and rewards? Why?
25 | How do you evaluate the effectiveness of
our organization’s pay and rewards strategy
and practices?
26 | What has been particularly effective in
communicating pay and rewards for employee
understanding, acceptance and engagement?
SUMMARY
27 | What are your organization’s lessons
learned about:
❚ Retaining employees
❚ Pay and rewards, including paying for
performance if your organization pays
employees for performance.
Thank you very much for your participation.
When considering effective reward-program
implementation, too frequently the role of the
line manager is neglected. Line management
is the lynchpin to executing effective reward programs.
Beyond tangibles like cash compensation, managers have
the most influence on the array of intangible rewards
the organization provides. And, often, these intangible
rewards are the drivers in the company’s “employer of
choice” platform and the primary vehicles in attracting
and retaining talent.
Unfortunately, a majority of organizations get failing
marks when it comes to effectively implementing their
reward programs. In a study of 1,200 organizations in 80
countries, 30 percent of organizations are seen as effective
at implementing their total rewards programs. Attention
should not be limited to line managers in addressing
these shortcomings. While line managers are insufficiently
prepared to take on these accountabilities, many HR func-
tions are inadequately supporting their line managers in
reward-program implementation.
This paper explores the issues around reward-program
effectiveness and the key role that line managers play in
The Role of Line Managers
and HR in Reward
Program Effectiveness
Tom McMullen
Hay Group
Mel Stark
Hay Group
❚ Human Resource Strategy
Second Quarter 2008
877/951-9191www.worldatwork.org
Contents © WorldatWork 2008. WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, ghallman@tsp.sheridan.com at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, customerrelations@worldatwork.org, 877-951-9191.
31 Second Quarter | 2008
this regard. It also explores how the human-resources function must also step up
and find better ways to leverage the manager’s role and better define the role they
could play in helping make rewards programs successful. Managing people effec-
tively is incredibly hard work, but it’s the kind of work that rewards organizations
that do it well.
Hay Group research and the company’s work with clients found that the key
differentiator in successful reward programs is great execution as opposed to
elegant design. In a national study conducted last year by Hay Group, WorldatWork
and Loyola University Chicago, the areas that reward professionals said were
primary differentiators in their reward programs were largely implementation-
related issues—reward communication effectiveness, aligning reward programs
with business priorities and organization values and operationalizing the pay for
performance relationship.
Further, Hay Group’s “Global Line Managers Impact on Reward Program
Effectiveness Study” (McMullen and Stark 2007) reported that most organizations
give themselves failing marks when it comes to effectively implementing their
reward programs.
THE MANAGER’S CRITICAL ROLE
In effective reward-program implementation, consider first the line manager’s role.
Line management is the lynchpin to “making things happen” within the organiza-
tion. Given that managers take the lead role in planning, coaching and assessing
employee performance and reinforcing performance via reward outcomes,
it should also be within their role to influence the employee regarding the intent
and relevance of the organization’s reward programs.
Managers also have the most influence on the array of intangible rewards
the organization provides. Often, these intangible rewards drive the company’s
“employer of choice” platform and are the primary vehicles in attracting and
retaining talent. In this context, managers play a significant role in creating the
work climate of an organization and in creating development and career growth
opportunities for employees.
Moreover, the immediate supervisor is often the lead influencer in the employee’s
satisfaction with the organization. Hay Group’s retention studies during the years
found that, in many situations, when it comes to voluntary employee turnover,
people tend to leave bad bosses rather than bad organizations.
Employees also trust their managers more than any other authority role in the
organization—more than senior leadership and more than HR. A management role
is not just about the traditional functions of “planning, organizing and controlling.”
Managers also play the important role of acting as the “standard bearer” of organi-
zation values—the parental figure within the company. To be effective, managers
need to engage employees’ hearts and minds as well as live and model appropriate
values and behavior.
32 WorldatWork Journal
But there is a problem. Many managers don’t believe their organization’s reward
programs are helping them achieve their objectives. Many times, the authors heard
a manager say the following (Jensen, McMullen and Stark 2007):
❚ “I’m accountable for making huge business decisions, but I can’t spend $15,000 to
reward some of my best people. What’s wrong here?”
❚ My employees see no connection between what they achieve and the amount of
their bonus.”
❚ “I am told that we must pay the market, but our HR department can’t show me
decent benchmarks as to what my people are worth.”
❚ “There is more management attention around here in terms of staying within the
compensation budget than in delivering superior business results.”
So, many organizations and their managers are insufficiently prepared to take on this
critical role. This is reflected in the following findings in the Hay Group “Global Line
Managers Impact on Reward Program Effectiveness Study” of 1,200 organizations:
❚ Less than 40 percent of organizations believed that their managers are effective
at communicating reward programs (from base pay to variable pay, benefits, and
financial and nonfinancial recognition programs).
❚ 35 percent of organizations said their managers are effective at developing connec-
tions for employees between their work and business results.
❚ 28 percent of organizations believe their managers manage the “pay for performance”
relationship effectively.
Figure 1 summarizes HR and line management opinions concerning the perceived
effectiveness of the line manager’s influence on reward programs. In addition to
FIGURE 1 Line Managers’ Impact on Reward Program Effectiveness (McMullen and Stark 2007)
Implementing total rewards programs
Communicating total rewards programs
Communicating rationale for salary increases
Communicating rationale for variable pay programs
Communicating about benefits programs
Coaching employees and providing feedback
Communication about what it takes to advance
Managing overall pay for performance relationship
Utilizing nonfinancial recognition programs
HR Line Manager
60% 40% 20% 0% 20% 40% 60%
Respondent:
27% 34%
34%20%
43%38%
33%
27%
45%
41%
25%
33%
36%
35%
48%
37%
34%
34%
% responding “effective” or “very effective.”
33 Second Quarter | 2008
the relatively low ratings across most areas, the HR function tends to have a lower
opinion of line-manager effectiveness in reward-program implementation than do
line managers themselves.
WHERE IS HR?
The authors cannot limit attention to line managers in addressing these shortcom-
ings. While line managers may be insufficiently prepared to take on reward-program
implementation accountabilities, many HR functions are inadequately supporting their
line managers in this regard. Figure 2 summarizes data from the study concerning
the perceived effectiveness of HR support provided to line managers.
While the ratings, in general, are higher for HR support of line managers in the
same reward areas as shown in Figure 1, it is troubling to see the substantial gaps
in the effectiveness ratings of the HR function between HR and line management
respondents. For example, a 23-percent gap exists between HR and line manage-
ment’s opinion of the effectiveness of line managers in their ability in coaching
employees and providing feedback. This raises several interesting questions.
❚ Can HR change if it lacks the awareness of the gap existing between its own
opinion and that of line management of HR’s effectiveness?
❚ With many needs across many areas, how will HR prioritize where to focus its
attention and resources?
❚ Given a fairly dismal track record, is line management prepared to partner with
the HR function to more positively affect reward programs?
FIGURE 2 HR Support Provided to Line Managers (McMullen and Stark 2007)
Implementing total rewards programs
Communicating total rewards programs
Communicating rationale for salary increases
Communicating rationale for variable-pay programs
Communicating about benefits programs
Coaching employees and providing feedback
Communication about what it takes to advance
Managing overall pay for performance relationship
Utilizing nonfinancial recognition programs
HR Line Manager
80% 60% 40% 20% 0% 20% 40% 60% 80%
Respondent:
45%
42%
48%
58%
62%
54%
58%
45%
46%
57%
39%
36%
44%
35%
% responding “effective” or “very effective.”
59%
53%
67%
69%
34 WorldatWork Journal
One might think that the HR function would minimally be focused on lever-
aging best reward implementation practices across the organization, but this
also does not seem to be happening. Only 36 percent of companies report that
HR is effective at leveraging best practices across the organization related to
reward-program implementation. Few business schools or academic programs
focus on the manager’s influence on reward programs, and few organizations
offer management-development programs to help remedy this blind spot for most
managers. Hay Group’s study revealed that less than 36 percent of organizations
thought they did an effective job of education, training and leveraging best prac-
tices in the area of rewards.
WHAT SHOULD ORGANIZATIONS DO?
Hay Group’s research and consulting experience indicates that most managers
are insufficiently prepared to effectively execute and impact their organization’s
reward programs. This may lead one to suggest that the data are suggesting a
“call to arms” or at least a wake-up call for HR to do something more impactful
than current practices suggest.
The HR function has a key role to play: it can work with managers to educate
them about how to influence employees in this area and execute reward programs
effectively. And senior leaders need to turn their attention to the issue. They need
to understand the pivotal role that managers play in influencing the employee’s
view of rewards. Senior leaders also need to appreciate how managers’ impact on
rewards can—assuming it is a positive influence—reinforce the talent-management
processes within the organization.
SHAPING THE ORGANIZATION’S VIEW OF REWARDS
One area where HR can play is in helping shape the organization’s view of rewards.
When managers criticize their organizations’ reward programs, they often focus
on cash compensation. Employees, however, are motivated by far more than cash.
So, before criticizing how unfairly cash compensation is allocated to employees,
managers would be best advised to consider how to communicate about and use the
range of intangible rewards at their disposal as well as the monetary ones. Effective
HR functions work with managers in developing a “total rewards” mindset in the
broadest context to achieve business success.
Total rewards represent the reasons an employee comes to work at an organiza-
tion. Intangible rewards, far from being “nice to haves,” have become core to many
employers’ “value propositions” to current and prospective employees. Intangible
rewards are critical to the overall recruiting and retention strategy and typically
have a meaningful influence on the organization’s competitive reward strategy.
As the manager is the key deliverer of intangible rewards to the employee, HR
functions would be well-served by working with line managers to create a total
rewards framework that is useful for the manager.
35 Second Quarter | 2008
As Figure 3 illustrates, total rewards is, in effect, the sum total of what an employee
receives from the organization. This broader characterization of rewards is becoming
more common in the market. As such, it is in the best interest of any organization,
from a financial and an “employment branding” perspective, to leverage this broader
definition of rewards.
Applebee’s, the restaurant chain, does exactly this. Applebee’s identified four types
of rewards (translating to the acronym REAL) that the company offered:
❚ Rewards (financial compensation)
❚ Engagement (ensuring work is fun and fulfilling)
❚ Advancement (personal and professional growth opportunities)
❚ Life (ensuring everyone has a healthy, balanced life).
Applebee’s branded its program the “REAL Deal.” According to Applebee’s Vice
President of Performance and People Systems Scott White, “we took all of our HR
programs and aligned them under each category of the REAL Deal to see what
we have currently offered. There were many components under Rewards, a few
under Engagement and Advancement, but even fewer things under Life. After strategic
sessions with senior executives, which were designed to determine where Applebee’s
would win in the marketplace, it was decided that when you really look at why people
come to work for us, it’s not for the money. People are primarily joining because they
are committed to this idea of being a good place to work, of having good leaders and
letting people have an enjoyable work experience in a very tough industry” (Jensen,
McMullen and Stark 2007).
Common Examples Reward Elements Definition
❚ Quality of work
❚ Work-life balance
❚ Inspiration/Values
❚ Enabling environment
❚ Future/Growth
opportunity
❚ Cars
❚ Clubs
❚ Physical exams
❚ Retirement
❚ Health and welfare
❚ Time off with pay
❚ Statutory programs
❚ Income replacement
❚ Stock/Equity
❚ Performance shares
❚ Annual incentive
❚ Bonus/Spot awards
❚ Base salary
❚ Hourly wage
FIGURE 3 Hay Group Total Rewards Model
Intangibles
(typically
intrinsically
valued)
Perquisites
Benefits
LTI
Short-term
variable
Base cash
Total Rewards
TotalRemuneration
Total Direct Compensation
Total Cash
Internal value
or motivation
Intangible
Rewards
where we
can assign
an objective
dollar value
Tangible
36 WorldatWork Journal
THE MANAGER’S TOTAL REWARDS TOOL KIT
The HR function has a key role to play in influencing line managers, both in
having managers realize their effect on reward programs and building managerial
confidence to act on this potential. Managers have tools available to them to reward
employees in their organizations, to drive organizational success and generate a posi-
tive return on their investment in people. Organizations achieving the highest level
of success are the ones where HR plays a direct role in influencing line managers
in knowing when and how to use these tools. Some tools include:
❚ Work climate
❚ Determining the value of work
❚ Base cash programs
❚ Variable pay programs
❚ Recognition programs
❚ Performance management
❚ Employee development.
Work Climate
Recent Hay Group research (Anderson and Zhu 2002) shows that up to 30 percent
of the variance in business results can be explained by differences in work climate
created by the manager. Work climate is influenced and generated by individual,
manager-specific behaviors and management styles that set the tone for a particular
work unit, such that employees in positive work climates are more likely to engage
in discretionary effort in support of their work unit. Managers who are attuned
to climate and who can enhance the work environment create an aspect of total
rewards that money cannot buy.
This is underscored by Scott White at Applebee’s who says, “Probably the most
important thing in this whole area of rewards is having a good boss, because they
set the right kind of work climate in the organization. We have found that many
people work here because they want a place where they feel comfortable and can
be themselves, they want a balanced life, and they want to be treated with respect
in a culture of integrity.”
One way in which HR can effectively support line managers is in making them
aware of the effect a robust work climate can have on employees and overall perfor-
mance. By education and in providing tools by which managers can assess their
current climate, managerial styles and coaching, HR can heavily influence managers’
ability to shape and improve work climate.
Determining the Value of Work
It is typically line managers who design the structure of organizations and its jobs.
Managers can also make their work areas more dynamic, move work processes
around, and be creative and flexible with their job roles as circumstances dictate.
So, it makes sense that line management is the best resource available to HR to
37 Second Quarter | 2008
ensure that job documentation reflects work being performed and that matches
to external compensation surveys make sense. But, how many times does line
management confer with HR when it comes to redesigning roles (versus “just getting
the right dollars for the job”) or HR operating in a vacuum when it comes to
job leveling and market-pricing activities? Many HR functions can be more trans-
parent and inclusive with managers in job leveling and market-pricing processes.
And, managers can better partner with HR to ensure that they understand the “rules”
and processes of designing and valuing work so they can effectively communicate
and manage expectations of employees.
Base Cash Programs
While HR may be accountable for the design of base cash programs, managers
clearly and directly affect them. It is more often the manager—and not HR—who
plays the real role in ensuring that there is a clear message track to employees
regarding the rationale for base-salary increases. Given a tight linkage between the
performance-management system and the base-salary increase program in most
organizations, managers are key to ensuring proper differentiation in performance
ratings and in pay aligning with differentiated performance. HR has a role to play
in terms of counselling managers on how to do this more effectively.
Variable-Pay Programs
Previous research with WorldatWork and Loyola University Chicago on variable-
pay program effectiveness found that two of the top three improvement areas
required in an organization’s variable-pay program are more effective commu-
nication of variable-pay program objectives and creating a better line of sight
between organization objectives and individual employee accountabilities (Scott,
McMullen, Wallace and Morajda 2004). Frequently, managers don’t spend much
time ensuring the clarity of the “internal contract” with employees. This line-of-
sight opportunity is about helping employees see how their role is connected with
the organization’s performance. This is important on several fronts, but mainly
because it gives employees more meaning to their work, which drives engagement
and discretionary effort.
One example of a practical tool that HR can use to support managers in this area
is the “personal impact map,” which lays out the linkage between organizational
success drivers and individual work processes. A sample of such a map is provided
in Figure 4 on page 38 for a floor associate working in a retail drug store. Again, the
key emphasis is to show a connection between how the business achieves success
and how a particular role adds value.
The authors have audited many variable-pay programs in organizations, with a
number of them bordering on the incomprehensible. That is, these pay programs
have too many measures, measures that are too vague, overlapping measures and they
really don’t do a good job at communicating what’s important. HR’s opportunity to
38 WorldatWork Journal
work with managers can make a real impact in terms of making the variable-pay
program messages clear, which reinforces to employees where they should be
spending their time.
Recognition Programs
HR and line managers in many organizations do not leverage the motivational power
of nonmonetary reward and recognition programs. Hay Group employee opinion
data suggest that approximately one-half of employees report that their contributions
are recognized when they perform well.
Organizations are getting more serious about this, however, and approximately
85 percent of organizations report having instituted some form of recognition
program (Abrahamsen and Boswell 2003). Some are adding recognition programs
to management-development curriculum. Recognition programs are also evolving
from a traditional focus on “thank you” programs to ones that focus on employee
engagement. And some organizations are starting to emphasize the importance of
effective recognition processes in their management-development programs.
The best recognition programs are ones aligned with organizational objec-
tives, reflecting the mission, vision and values of the organizations and are an
integrated part of the rewards program, rather than stand-alone or ad-hoc plans.
This integration is typically evidenced by a formal recognition strategy (and
meaningful recognition program budgets) that is linked to the business plan and
overall HR strategy.
Some most effective recognition programs don’t financially cost the organiza-
tion because employees value simple and personal gestures from the company’s
senior leaders which recognize their efforts. Carl Smith, compensation manager at
Caterpillar Corp., agrees. “We have dozens of recognition programs across our orga-
nization. Our managers can hand out spot cash rewards. But we find nonfinancial
FIGURE 4 Personal Impact Map
❚ Wait times
❚ Employee accessibility
❚ Customer acknowledgement
❚ Aim checklist
❚ Supply on floor
❚ Easy location of products
❚ Clean store
❚ Clear aisles
❚ Faced products
❚ Sales-item signage
❚ “Hot item” visibility
❚ Individual product accountability
❚ Employee visibility
❚ Company visibility
CustomerService
Stock
Shopability
Merchandising
Community Involvement
SalesGrowth
39 Second Quarter | 2008
recognition is typically the most powerful, especially when it is given by our leaders,”
he said. “We get more mileage from public recognition from a manager when it’s
done in small groups or privately. It’s inexpensive and it goes a long way” (Jensen,
McMullen and Stark 2007).
HR can play a significant role in promoting more widespread use of nonfinan-
cial recognition programs, promoting best practices and in leveraging their use
throughout the organization.
Performance Management
The manager’s effect on performance management is substantial. Managers are the
center of the performance-management process. It is the manager who must know
how to translate organizational “must-wins” into departmental “must-wins” and to
cascade goals that make sense for the department. It is the manager who ensures
that employees know what they need to do for the organization to succeed and,
as previously stated, it is the manager’s role to ensure clarity in role design and
ultimately hold employees accountable for what they do.
Perhaps the most important aspect of performance management is the ongoing
“blocking and tackling” of providing periodic feedback and constructive criticism.
This is perhaps the biggest miss and the biggest opportunity for managers. Dick Brown,
CEO of EDS, reinforces this point by saying that “a leader should be constructing
his appraisal all year long and giving his appraisal all year long. You have 20, 30, 60
opportunities a year to share your observations. If, at the end of the year, someone
is truly surprised by what you have to say, that is a failure of leadership. By failing to
provide honest feedback, leaders cheat their people by depriving them of the informa-
tion that they need to improve” (Charan 2006).
At the time to review and to reward performance, many managers tend to avoid
the difficult conversations accompanying poor performance ratings. Accordingly,
when final performance ratings are assigned for the year, the same patterns apply.
Employees need to understand and appreciate the difficulty in achieving high
ratings. Providing them with the necessary information needed to excel helps to
challenge them continually and raise the standard of excellence across the orga-
nization. HR needs to work with managers so they realize that they have a broad
range of vehicles at their disposal to reward employee performance that includes,
but isn’t limited to, base salary increases, promotions and future career develop-
ment, new project opportunities, training, public recognition, increased exposure
to senior leadership and greater empowerment in making key decisions.
HR can play a substantive role in improving how managers leverage the perfor-
mance management process. Heineken USA reinvigorated its performance calibration
process by convening meetings with managers at a given level across the organiza-
tion to discuss specific information on their employees’ competencies. According to
Amy Nenner, vice president of HR at Heineken USA, “We have an open and candid
conversation about the person, getting input from other people who may have
40 WorldatWork Journal
worked with that individual. The calibration process results in a collective rating on
each employee with which the line manager would be comfortable. If the manager
was not content with the rating, the dialogue would continue. What we didn’t do
was take away the manager’s responsibility or authority, but HR gave them a much
greater perspective” (Jensen, McMullen and Stark 2007).
HR provided Heineken’s line managers with the performance-management tools
and, perhaps more importantly, a supportive process so that each manager had
the ability to more consistently and confidently evaluate employee performance.
Many more underperformers were identified through the calibration process and
placed on performance-development plans. According to Nenner, “we’re having
much more candid and transparent conversations than we’ve ever had before, and
it’s making a positive impact on our business.”
Employee Development
While pay factors into why people leave their employers, professional and manage-
ment employees tend to be more concerned about their opportunities for personal
development and growth. The manager is the key influencer in an employee’s
personal development. Chairman and CEO of Procter and Gamble A. G. Lafley, a
perpetual Fortune Most Admired Company said, “The people we hire, and the focus
we put on their development as leaders, are critical to P&G’s ability to innovate
and compete. Nothing I do will have a more enduring impact on P&G’s long-term
success than helping to develop other leaders” (Holstein 2005).
Hay Group employee-opinion norms suggest, however, that many employees aren’t
getting the advancement-related support they seek from their managers. Less than
one-half of employees surveyed consider their managers to be doing a good job of
counselling them in their career development. To keep more of their best people,
HR in most organizations would do well to focus managers on the need to attend
continually to the development of their employees and to ensure that they are being
positioned for and placed in the roles that best align with their skills and capabilities.
The importance of nurturing and developing talent, and promoting from within is
born out by the fact that those who do this well can pay less for their talent than
other organizations (the authors’ research suggests 5 percent less). But without top-
management commitment to sensible job/role progression within the organization,
the line manager’s job will be made much more difficult. Still, HR can work with and
encourage individual managers to identify employee needs and shape work or look
for opportunities that can enhance an individual’s development.
THE MANAGER’S ROLE IN COMMUNICATIONS
Managers have a primary role to play in communicating the organization’s rewards
program. HR can help managers in ensuring that they have a clear and simple
message track for telegraphing the primary components of the rewards program
and what they are intended to achieve.
41 Second Quarter | 2008
Communication is the key to ensuring that the reward program is delivering what it
was designed to do. Communications can be the “make or break” behind a successful
rewards program. But many organizations have a long way to go. Figure 5 shows that
while most organizations do have a rewards philosophy, lack of documentation and
reinforcement of that philosophy results in a poor track record of employees who
understand it (Scott, McMullen, Sperling and Wallace 2003). The reward program
can serve as a motivator only if it is understood and then accepted by employees.
Employees perform better when they know what is expected of them and how they
will be rewarded. Moreover, employees expect to be kept informed about things
affecting them and become upset and/or disengaged when this doesn’t happen.
The organization is best-served when HR does a good job at identifying and
segmenting the communication message for different employee groups. Managers
need to hear communications before employees hear them and need to have addi-
tional communication tools available to them because they are the primary resource
to answer the tough questions about the rewards program from employees. This goes
beyond a launch e-mail and/or set of PowerPoint factoids. Managers need “plain speak”
talking points and discussion protocols for one-to-one discussions with employees.
According to Liz Baldock, senior vice president, HR and learning, at American
Modern Insurance Group (AMIG), “The company’s philosophy is that the line
manager should do as much of the implementation and communication of the
compensation program as possible. When it comes to salary planning, rewards and
everything else around the total cash piece. The responsibility and accountability
for communicating and implementing is the line manager’s. HR’s role is to provide
the tools and assistance necessary to make them successful” (Jensen, McMullen and
Stark 2007).
“We give managers a standard presentation to give to employees,” added Caterpillar’s
Smith. “They get talking points with suggestions on what to advise their employees
based on their job level or type of situation. Some supplement what we give them
and others don’t make it a priority. This shows up in employee opinion surveys,”
FIGURE 5 Effectiveness of Reward Communication (Scott, Sperling, McMullen and Wallace 2003
and the Hay Group Employee Opinion Database)
“My organization has a reward philosophy” Percent of employees who understand it
True Have a written philosophy
91%
62%
Most About Half Less Than Half
35%
28%
37%
42 WorldatWork Journal
he noted. “Managers who make it a
priority usually get better results from
the employee-opinion surveys.”
Will excellent communications limit
complaints about a program that slows
compensation growth or one that
shifts guaranteed compensation to
variable pay? Probably not. But good
communications will blunt much of
the grumbling by making a sound
business case for change.
THE ROLE OF HR
Managing people effectively is hard
work, but it’s the kind of work that
rewards organizations that do it well.
Of course, HR has much work to do in
better using and preparing managers
in this regard. Because of its unique
role within the organization and with
regard to capability building, the HR
function has a critical role to play
in facilitating managers’ success and
leveraging the best management practices across the organization. HR needs to better
understand the criticality of the role that managers should play and the enhanced role
they themselves could play in helping make rewards programs successful.
Many HR and rewards professionals have an opportunity to make a difference
in their organization by engaging in a more active partnership with their line
managers and helping them become more successful by supporting their individual
development, ensuring they really understand the strategic intent of HR programs
(and not just the technical details), ensuring their involvement in the design and
refinement of rewards programs and in leveraging the best practices in reward-
program implementation across the organization.
Done well, the HR function, in concert with line management, can collectively
and positively influence how employees perceive and value total rewards in light
of this new, more comprehensive framework. ❚
RESOURCES PLUS
For more information related to this paper:
www.worldatwork.org
Type in either or both of the following search
keywords on the search line:
❚ “Line Managers”
❚ “Recognition Programs.”
www.worldatwork.org/bookstore
❚ Maximizing the Impact of Recognition:
How-to Series for the HR Professional
❚ Recognition at Work: Crafting a Value-Added
Rewards Program, Second Edition
❚ Total Rewards—From Strategy to Implementation:
Step-by-Step Help for Rewards Program
Development, A Total Rewards Guidebook
❚ Communicating Total Rewards:
How-to Series for the HR Professional.
www.worldatwork.org/education
❚ T1: Total Rewards Management
❚ C11: Performance Management—Strategy,
Design and Implementation
❚ C12: Variable Pay—Incentives, Recognition
and Bonuses.
43 Second Quarter | 2008
Abrahamsen, Lane and Greg Boswell. 2003. “Employers Turn to Recognition to Motivate Employees.” workspan,
December: 24-26.
Anderson, Krista and Guorong Zhu. 2002. “Organizational Climate Technical (OCSII) Manual.” Hay Group
McClelland Center for Research and Innovation. October.
Charan, Ram. 2006. “Conquering a Culture of Indecision.” Harvard Business Review, January: 108.
Holstein, William. 2005. “Best Companies for Leaders.” Chief Executive, November: 24.
Jensen, Doug, Tom McMullen and Mel Stark. 2007. The Manager’s Guide to Rewards. Chicago: Hay Group Inc.
McMullen, Tom and Mel Stark. 2007. “Global Line Managers Impact on Reward Program Effectiveness Study.”
Chicago: Hay Group.
Scott, K. Dow, Richard S. Sperling, Thomas D. McMullen, and Marc J. Wallace III. 2003. “Linking Compensation
Policies and Programs to Organization Effectiveness.” WorldatWork Journal, Fourth Quarter: 35-44.
Scott, K. Dow, Thomas D. McMullen, Marc J. Wallace III and Dennis Morajda, 2004. “Annual Cash Incentives for
Management and Professional Employees.” WorldatWork Journal, Fourth Quarter: 6-15.
REFERENCES
Tom McMullen (tom_mcmullen@haygroup.com) is a vice
president and U.S. Reward Practice leader at Hay Group,
based in Chicago. He has 20 years of HR practitioner
and consulting experience working with clients on broad
reward issues. His work focuses primarily on total rewards
and performance-program design, including rewards-
strategy development, incentive-plan design, employee
pay and job evaluation. Prior to joining Hay Group,
he was in senior compensation analyst roles with Kentucky
Fried Chicken Corp. and Humana Inc. He holds a master’s
degree in business administration and a bachelor’s
degree in mathematics from the University of Louisville.
He is co-author of the book The Manager’s Guide
to Rewards.
Mel Stark (mel_stark@haygroup.com) is a vice presi-
dent and the Regional Reward Practice leader in the
New York Metro office of Hay Group. In his practice
role and in his personal consulting, he is focused on
adding clarity to clients’ operations through cultural
diagnostics, job analysis, work measurement, account-
ability mapping and organization design. Building
commitment in client’s employees is also stressed
through the effective implementation of holistic
reward programs. He holds a bachelor’s of arts from
The American University in Washington, D.C. and has
earned an master’s degree in business administration
from Bernard M. Baruch College and an advanced
professional certificate in organizational behavior and
development from New York University’s Graduate
School of Business Administration. He is co-author of
the book The Manager’s Guide to Rewards.
AUTHORS
What does it mean to experience work-life
balance? What is a “good” place to work? And
how have employers responded to the need
for flexibility and work-life balance? In recent decades,
analysts recognized the institutional, legal, organizational
and social forces influencing employers’ responses to the
family caregiving needs of their employees. This study
explores factors possibly influencing organizational deci-
sion makers to implement work-life policies by examining
the institutional and cultural environments in which they
exist, including an examination of how such policies
become practices and the link between implementation
and organizational culture.
BACKGROUND OF CURRENT RESEARCH
Work-life Policies
Men and women work in different environments than
previous generations, and the need to balance work and
family life remains an issue in both scholarly and popular
worlds. After several decades of responding to the labor
force’s changing face, new work-life policies and practices
have been developed. Jacobs and Gerson (2001) argue
Lessons from the Office:
The Organizational Implementation
of Work-Life Policies
Melanie A. Hulbert, Ph.D.
George Fox University
❚ Work-Life
Second Quarter 2008
877/951-9191www.worldatwork.org
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45 Second Quarter | 2008
that several key factors are contributing to the expanding need for family leave:
the dramatic growth of female laborforce participation, especially among married
women and mothers; the growing demand for elder care; an inadequate supply of
child care; the increasing (if still relatively small) number of men who participate
in family caregiving; and inequality in the distribution of work-life benefits across
income levels. The need for financial support during leaves from work is increas-
ingly acute for those in households at the bottom and middle layers of the income
distribution since real incomes for this group of workers stagnated or declined in
recent years (Gault and Lovell 2006). Both grassroots and political advocates in
some states are engaged in intensive advocacy to pass paid parental leave and paid
sick-leave laws.
On July 1, 2004, California implemented the first and only paid family-leave
bill in United States history. This new law provides up to six weeks of partial
pay—55 percent of weekly earnings up to a maximum of $728 per week—for
eligible employees who need time off from work to bond with a new child or to
care for a seriously ill family member. The program (funded by a payroll tax of
less than $3 per month) builds on California’s existing State Disability Insurance
(SDI) system. Milkman and Appelbaum (2004) suggest that California’s new law
is especially valuable for “the growing numbers of low-wage workers, many of
them female, who currently have limited access to employer-sponsored fringe
benefits providing paid time off (such as paid sick leave and vacation).” At this
writing (March 2008), 21 states are considering some form of paid family leave
legislation. As of March 1, 2008, a federal version has been introduced by Rep.
Pete Stark (D.-Calif.), and this version would institute a nationwide system for
paid family leave. These bills build on the California initiative with longer leave
and more robust benefits.
Many advocates of work-life balance feel that these legislative bills/programs
begin to address the severe limitations of the 1993 federal Family and Medical
Leave Act (FMLA). The FMLA was a significant advance for working families, since
it gave large numbers of employees the right to take up to 12 weeks off to care for
a new child or a sick family member. Unfortunately, the law has limitations: (1) it
applies only to workplaces of 50 or more employees, (2) it has restrictions on its
use and (3) it provides only for unpaid leave, meaning many families cannot afford
the lost income to take advantage of the program. One study (Heymann 2000)
found that families in the top quartile of the nation’s income distribution had
the most extensive employer-provided benefits, but that families in the bottom
quartile of income were significantly more likely to lack paid sick leave, paid
vacation leave, and flexibility (in regards to work schedules) than were families
in the upper three quartiles. Moreover, although women continue to shoulder
the bulk of family caregiving responsibilities, employed mothers had significantly
less access to paid sick leave and paid vacations than did employed fathers, and
mothers were also less likely than fathers to have flexible working hours.
46 WorldatWork Journal
Some argue that if “family friendly” organizations wish to remain competitive
in their economic sector, they must develop innovative compensation, retention
and benefit programs that are geared to maximizing retention rates for dual-career
family employees (Hill et al., 2006; Bianco and Bosco 2000). The objective of
business managers, in one form or another, is to maximize stakeholder wealth.
This objective can best be described in terms of return on investment. A comparison of
shareholder returns for the past five years among organizations listed in Working
Mother magazine’s 100 Best Organizations to Work for in America showed that
45 of 61 organizations yielded higher financial returns as a correlate of imple-
menting work-life policies (2006). Corporate culture is predominately a reflection
of management values. If management sends the signal that having children and
a career are acceptable, employees will be more satisfied and productive and
organizations will experience financial benefits (Brandon and Temple 2006; Gault
and Lovell 2006).
Yet, to what extent do we understand the ways in which organizational decision
makers “go about” their business when it comes to work-life policy development and
implementation? This research draws upon the internal “world” of those responsible
for creating and implementing work-life policies. How do these key players turn
policies into “realities”? Also, how does workplace culture contribute to successful
implementation and utilization? An understanding of how organizational decision
makers think about the process of implementation and the ways in which organi-
zational culture either fosters or hinders employee utilization, can move the total
rewards professional closer to educating and ensuring that the vast number of workers
and employers who stand to benefit from such policies do so.
Methods
Semistructured individual qualitative interviews were held with 52 people (12 in a
pretest study and 40 in the final study). Among the subjects, the positions included
HR managers, HR directors, vice presidents of human resources and presidents/CEOs.
Respondents worked in a wide variety of organizations and were located within many
different industries including finance and insurance; professional, health and social
services; manufacturing; retail and public administration.
SUMMARY OF FINDINGS
Policy Implementation and Work-life Policies
How do HR managers turn work-life policies into a “reality”? First, managers need
knowledge regarding work-life issues. Most respondents discussed the need to be
current on what is occurring in the media, the law, other organizational settings
and in their own organization. Without knowledge (or information regarding work-
life issues/strategies), many respondents felt they could not successfully take an
idea, present it to top leadership, offer suggestions and reasons for use, and then
turn this into an actual policy and/or practice.
47 Second Quarter | 2008
Secondly, networking is a significant part of the knowledge-gaining process.
Some respondents relied on the relationships they had built through human-
resources organizations and other business professional groups. These relationships
gave some respondents a sense of ownership and legitimacy in their field and, as
they explained, enabled them to have dialogues with other HR people and access
to current work-life issues.
An HR manager for a large insurance company, Bob Klifton (all respondents have
been given a pseudonym to ensure confidentiality), suggests being a “successful” HR
person in the area of work-life issues requires contact with others in the field not only
for information but to compare what is occurring in his own organization. He said:
Really, to be successful in HR, you need to network in order to bring new
ideas to your own organizations.
How does networking contribute to the implementation process? (interviewer)
Well, I think that my responsibility at means that I have to look at
my job, not only as an insurance professional, but also as a human-resource
professional, so I have to keep in touch with both areas, and when I view my
job this way, I realize how powerful networking and staying current helps
me advocate for new things here.
Being a part of a network of people lends attention to the notion of an organi-
zation’s institutional environment. Drawing from the work of Meyer and Rowan
(1977) and DiMaggio and Powell (1983), this paper links institutional theory to the
process of policy implementation. These authors highlight the practice of mimetic
isomorphism occurring when organizations implement practices and policies in
an attempt to mimic practices and policies that have already been legitimated
within similar industries. Essentially, that is what networking was about to these
people—it was an opportunity to see what others were doing in regard to work-
life policies, to borrow ideas and methods, and to then attempt to tailor similar
programs for their organization. “Why reinvent the wheel?” was the response from
many respondents.
Similarly, this research lends support to Granovetter’s (1985) notion of social
embeddedness in organizational transactions. Granovetter argued “it is not only at
top levels that firms are connected by networks of personal relations, but at all
levels where transactions must take place.” Businesses are bound in formal and
informal ways, and economic actors construct alliances and mobilize resources
through networks of contacts. Most respondents placed heavy emphasis on the need
for interorganizational networking as a way to better implement work-life policies
and practices at their own organizations.
48 WorldatWork Journal
ACTION MAKER OR REACTOR?
The implementation process is ultimately linked to an organization’s strategic response
to institutional pressures to conform to “family friendly” laws, norms and social expec-
tations. An organization’s response is connected to the amount of power an HR
manager has been given. In some cases, leadership responsibilities had been placed
in the hands of human-resources managers. If they were given the “go ahead” from a
leader or were personally interested in promoting opportunities for work-life balance,
then these options seemed to be more likely to flourish. These people are labeled
action makers. They were an interesting subgroup in the total population because
many of them considered themselves to be experts in the realm of work-life issues.
Action makers spend time reading and researching issues, hiring consultants and
guest speakers to enter the organization, developing programs and practices, estab-
lishing a rubric of success, and following through with implementation. Following
Goodstein’s (1994) work, this paper argues that action makers are individuals who
wish to signal to the outside world that their organization is “family friendly.” Action
makers are aware of current standards of excellence and wish it to be known that
they have strategically put forth an effort to be “cutting edge” through obtaining
and retaining the best available employees.
In other organizations, the HR manager was not given a great deal of structural
authority and was therefore only able to respond as needs arose in the environ-
ment. These people are labeled reactors. Similar to Kelly and Kalev’s (2006) work,
reactors were individuals who used their discretion to grant or deny requests
for flexible working arrangements. They were people who either compromised
by partially complying with institutional pressures or avoided institutional pres-
sures through means such as concealing noncomformity and/or responding only
symbolically. Reactors were able to discuss work-life policies and practices with the
author, but had not devoted a great deal of time thinking about them, formulating
ideas and/or networking with other human-resources specialists. Unlike action
makers, reactors were unlikely to include dealing with work-life policies and prac-
tices as one of the most crucial components of their workplace responsibilities.
In fact, most of the reactors referred to the ad hoc nature of their responsiveness
to work-life issues. Often, decisions about what do to with an employee request
were made on the spot and with no formalized practice or procedure to reference.
Definitions of “family-friendly” tended to be narrow and neither seen as a practice
nor as an organizational ideal. Instead, work-life practices were merely seen as
random accommodations for employees on case-by-case bases. Policy decisions
were reported to never fully come to fruition in these organizations. These HR
managers had not been given the authority to explore work-life practices and,
therefore, were unable to accurately attach value to the outcomes.
As Laura Terry, director of HR for a dot.com company, suggests, her organization
doesn’t have a need to institute work-life policies in any formalized way. She can
make accommodations, however:
49 Second Quarter | 2008
No, no. We have no—our policy handbook is such that—it’s sort of a [Whispers—
We have to really review it.] It has some folksy stuff in it. You have to be nice to
everybody. But primarily, it’s just all the same legal stuff that you see in most
employee handbooks—the FMLA, the unlawful harassment, disability, vacation
and sick time…so on. But, we do make accommodations for people if they need
them. So yeah, I mean, I guess we have statements that say we want to make
sure that you’re happy and working, but we don’t have any formal policy or
practices written down.
The study of action makers versus reactors is unique because it highlights how
organizational actors choose to either conform to or avoid institutional pressures
and expectations regarding work-life issues.
SUCCESSFUL IMPLEMENTATION
If policies are implemented, what does successful implementation look like to an HR
manager? After speaking with the action makers, the author was curious as to how
HR managers looked at the next step in implementation. The two leading responses
to the question “What does successful implementation look like to you?” were effec-
tive and appropriate communication and policy utilization. In other words, people
must know about the programs available to them, and then they must use them.
Communication through a variety of methods (intranet and e-mail communications,
verbal methods such as staff meetings, “brown bag seminars,” orientation meetings
and training weekends, written memos and handbooks) was noted as an important
factor because it ensured “full coverage.” As Kammy Sargent, an HR manager at a
manufacturing plant, argued: “It needs to be carefully and fully communicated in
order for people to really understand what is being offered.” Communicating with
employees also allows for HR managers to fully assess what employees need.
This ultimately leads to the second indication of successful implementation: policy
utilization. Todd Anderson, president of a nonprofit organization, suggests that
successful implementation can only be judged on whether or not people feel comfort-
able using the practices available to them. In his perception, “There is no point even
offering work-life programs if you aren’t going to let people use them.” In this sense,
Anderson is speaking about the culture of his organization and the extent to which
it legitimizes work-life balance. In his organization, he employs approximately 50
people, and of those 50 people, he suggests that close to one-half use some type
of work-life policy. He sees this as a positive indication of implementation.
The analysis of policy usage is at the core of work-life policy implementation.
If employees are unable, or are not encouraged, to use what is available to them, then
the decision to offer these policies and the process of implementation are not topics
worthy of much research. By documenting what it means to take a decision to offer
these programs, turn them into a reality and then allow their use, an organization comes
closer to envisioning what family life-oriented organizations are capable of achieving.
50 WorldatWork Journal
Workplace Culture
Policy implementation and utilization are ultimately linked to workplace culture.
This research revealed that the uneven implementation of work-life policies across
organizational departments was connected to the type and kind of workplace
culture. Workplace culture can be defined as the shared assumptions, beliefs and
values regarding the extent to which an organization supports and values the integra-
tion of employees’ work and family lives. This definition is consistent with Schein’s
(1985) and Denison’s (1996) definitions of organizational culture as the deep struc-
ture of organizations, which is rooted in values, beliefs, and assumptions held by
organizational members (Denison 1996). Much research on workplace culture has
studied the influence of work-life culture on employee-level benefits utilization,
career consequences associated with using work-life benefits and levels of work-
life conflict (Mathisen and Einarsen 2004; Rose and Griffin 2002). However, little
is known regarding how upper management, specifically HR managers and other
leaders, believe these cultures either impede or encourage the use and implemen-
tation of such policies.
Most respondents agreed that organizational culture is shaped by the leaders and
decision makers of the business, whose personal values and experiences become
reflected in company values. The reports that the respondents gave ultimately shed
light on the cultural work that leaders have chosen to promote their businesses as
family-friendly in an attempt to legitimize themselves in their particular industry.
“This is what I think my employer feels is a responsible thing to do” was a common
response given when describing the effort that their “boss” took in promoting and
creating work-life policies. If an organization had a leader who bought into the
legitimacy and benefits of a having a family-friendly environment, it was more
likely to occur; whereas, a reluctant or pessimistic leader could deter an organiza-
tion from developing “real” policies and practices that people felt free to use.
In the few cases when the author was able to—on a face-to-face basis—talk with
leaders or an HR person who was in a leadership position, the author learned a
great deal about how the “tone” of an organization can be set by those at the top.
One of these leaders, during the conversation, described his thoughts on workplace
culture and the work-life atmosphere at his publishing company:
Under our prior leadership, the director felt that if you worked 8:30 to 4:45
and you took your lunch, then you just weren’t committed. I feel that I am
very different than he was.
And how so? (interviewer)
That I have small children and I really buy into the advantages of work-
life policies. I want to run a good business, and the way to do that is to
let my people do the best they can when they are here…but that can only
51 Second Quarter | 2008
happen if they are able to take care of their families. I have a real problem
with business leaders who put the bottom line before their employees.
What they don’t realize is that the bottom line is only a result of satisfied
and “unstressed” employees.
Workplace cultures are very complex. Cultures cannot be simply seen or
witnessed. They cannot be pictured exactly, and they are not something that
someone can accurately describe in an hour-long interview. No research on work-
place culture is either exact or accurate. While a company undoubtedly has a
universal culture affecting all employees, different departments with different
managers form subcultures as well. Even within a particular department, subcul-
tures may also exist. However, workplace culture—in all its complexity—frames
most of what is going on within an organization.
MANAGERIAL BUY-IN AND RESISTANCE
Even though what happens in the top management is important, how that
message infiltrated down to the organization’s middle management is signifi-
cant. As mentioned, in some organizations it was reported both that the leaders
of the organization bought into a “real” family friendliness and that the lower
management teams and human-resources personnel took that vision and actively
produced a culture where flexibility for, and acceptance of, work-life issues had
firmly been legitimated. But other organizations—with similar “progressive-type”
leaders—had resistant managers who either overtly or covertly resisted the legiti-
macy of these ideas. In these organizations, the uneven implementation of policies
across departments prevented any successful outcomes. In some of these cases,
the HR manager would talk about having to “coach” or “train” these managers to
think in new ways. These HR managers had to take on the role of “culture cops”
in that they had to work with resistant managers who seemed unwilling or even
unable to promote a healthy work-life balance for their employees because they
were not used to managing people in nontraditional arrangements.
Even though dealing with resistance was not a dominant theme in this study,
it was an issue mentioned enough to discuss. These stories highlight the impor-
tance of looking at the factors potentially deterring the successful implementation
of work-life policies. When establishing a workplace culture of family friendliness,
if human-resources managers run up against resistance, then their job becomes
one of enforcing culture—both literally and symbolically. Just as some HR managers
deal with the daily logistics of an employee’s use of work-life policies, some must
ensure that midlevel managers are not getting in the way of those activities (Kelly
and Kalev 2006). Up to this point, the literature on managerial resistance does not
address the strategies that organizational players are taking to deal with resistance.
This research provides insight into this topic and highlights the need for further
research into managerial policy resistance.
52 WorldatWork Journal
FUTURE DIRECTIONS
This research revealed that one
potential key to the successful imple-
mentation of work-life policies is an
organization that has “bought into”
the need for flexibility and work-life
balance. But of real interest was the
resistance that many respondents
discussed. Why are managers resis-
tant to change?
What is the root of resistance?
Several suggestions were offered in
this research. For example, the diffu-
sion of work-life policies often is
limited because these practices chal-
lenge firmly institutionalized practices,
beliefs and rationales. The assumption
that organizations should not be
involved in family life, that the worlds
of work and home are separate, and that work-life conflict is seen as a personal
issue were salient themes in this research.
Resistance could also be seen as a result of fearing flexibility in the workplace.
As research has shown, the kinds of skills necessary to manage a workforce
which is increasingly diverse in cultural origin and lifestyle are different from
those effective in the past when workers were more homogeneous (Glass 2000).
Organizations need to select and train individuals who value diversity, who are
flexible, and who can help workers cope with work and personal-life conflicts. But
where does this training really begin? If flexibility is being proposed as “a critical
organizational tool” (Gault & Lovell 2006; Glass 2000), then it becomes essential
to see if flexibility is being incorporated into the rhetoric, training and education
of future human-resources managers.
Popular discussions of corporate family policies focus on employers’ desire to
attract, retain and motivate their workers. Work-life specialists, business allies and
federal officials developed and repeated these accounts during the past 20 years.
Despite the prevalence of the “business case” that has been built around these
policies, they remain not well-institutionalized in American organizations. These
findings suggest the need to reconsider the amount of support and discretion that
HR managers are given in implementing work-life policies.
RESOURCES PLUS
For more information related to this paper:
www.worldatwork.org
Type in this search phrase on the search line:
❚ “Work-life balance.”
www.worldatwork.org/bookstore
❚ Work-Life Effectiveness: Bottom-Line
Strategies for Today’s Workplace
❚ Life at Work: Beyond Compensation
and Benefits.
www.worldatwork.org/education
❚ W1: Introduction to Work-Life Effectiveness—
Successful Work-Life Programs to Attract,
Motivate and Retain Employees
❚ W2: The Flexible Workplace—
Strategies for Your Organization
❚ W4: Organizational Culture Change—
A Work-Life Perspective.
53 Second Quarter | 2008
CONCLUSION
The optimal solution is that work and family issues would not need any designated
resources—that human-resources managers and other key players would integrate
work-life balance so much in the culture that they would become a way of life,
and those manager roles would no longer be necessary. Ideally, each person in the
company would automatically consider flexibility, balance and diversity. Policy people
would not need to consult with a work-life manager because they would automatically
take work-life needs into account.
Work-life issues are not fads; rather they reflect the inevitable current and future
flux in workforce demographics, attitudes and needs. The availability and use of such
policies reflect organizational responsiveness and vitality. Although no easy answers
exist for implementing work-life policies and programs in a manner promoting true
culture change, the author remains optimistic that a growing number of organiza-
tions will achieve this vision. ❚
Melanie A. Hulbert, Ph.D. is an assistant professor of sociology at George Fox University. She holds a bachelor
of arts from Western Washington University, a master’s degree in women’s studies from the University at Albany,
State University of New York and a Ph.D. from the University at Albany. She specializes in the sociology of work
and gender issues and family and has an interest in race/ethnicity themes. She received the Paul Meadow’s
Teaching Award from the University at Albany.
AUTHOR
Bianco, C. and S. Bosco. 2000. “Perceptions of the Next Generation of Workers.” Management Development
Forum, Vol. 3, No. 2: 79-110.
Brandon, Peter D. and Jeromey Temple. 2006. “Family Provisions at the Workplace and Their Relationship to
Abesenteeism, Retention, and Productivity of Workers: Timely Evidence from Prior Data.” Australian Journal
of Social Issues, Vol. 42, No. 4: 448-460.
Denison, Daniel R. 1996. “What is the difference between organizational culture and organizational climate?
A native’s point of view on a decade of paradigm wars.” Academy of Management Review, July: 619-654.
DiMaggio, Paul J. and Walter W. Powell. 1983. “The Iron Cage Revisited: Institutional Isomorphism and Collective
Rationality in Organizational Fields.” American Sociological Review, April: 147-160.
Gault, Barbara and Vicky Lovell. 2006. “The Costs and Benefits of Policies to Advance Work/Life Integration.”
American Behavioral Scientist, May: 1,152-1,164.
Glass, Jennifer and Sarah Beth Estes. 1997. ‘The Family Responsive Workplace.” Annual Review of Sociology,
August: 289-313.
Goodstein, Jerry D. 1994. “Institutional Pressures and Strategic Responsiveness: Employer Involvement in Work-
Family Issues.” Academy of Management Journal, April: 350-382.
Granovetter, Mark. 1985. “Economic Action and Social Structure: The Problem of Embeddedness.” American
Journal of Sociology, November: 481-510.
Heymann, Jody. 2000. The Widening Gap: Why America’s Working Families Are in Jeopardy—and What Can Be
Done about It. New York: Basic Books.
Hill, Jeffery, Alan J. Hawkins, Maria Ferris and Michelle Weitzman. 2001. “Finding an Extra Day a Week: The Positive
Influence of Perceived Job Flexibility on Work and Family Life Balance.” Family Relations, January: 49-54.
Jacobs, Jerry A. and Kathleen Gerson. 2001. The Time Divide: Work, Family, and Gender Inequality. Cambridge:
Harvard University Press.
REFERENCES
54 WorldatWork Journal
Kelly, Erin and Alexandra Kalev. 2006. “Managing Flexible Work Arrangements in US Organizations: Formalized
Discretion or ‘A Right to Ask.’” Socio-Economic Review, Vol. 4, Issue 3: 379-416.
Mathisen, Gro Ellen and Stale Einarsen. 2004. “A Review of Instruments Assessing Creative and Innovative
Environments Within Organizations.” Creative Research Journal, Vol.16, No. 1: 119-140.
Milkman, Roth and Eileen Applebaum. 2004. “Paid Family Leave in California: New Research Findings.” The State
of California Labor 2004. Berkeley: University of California Press.
Meyer, John W. and Bruce Rowan. 1977. “Institutionalized Organizations: Formal Structure as Myth and
Ceremony.” American Journal of Sociology, September: 340-363.
Rose, D. M., and M. Griffin. 2002. “High Performance Work Systems, HR practices and High Involvement: A group
level analysis.” Academy of Management, Conference 2002, Denver.
Schein, Edgar H. 1985. Organizational Culture and Leadership: A Dynamic View. San Francisco: Jossey-Bass.
Working Mother. 2006. “The 100 Best Companies for Working Mothers.” October.
The Medicare Prescription
Drug Plan: A Model of Complexity
and Ineffective Communication
The Medicare Part D Prescription Drug Plan provides
a rich source of information on how not to design
and communicate a benefits plan. While many
people are familiar with the gap in the drug plan’s
coverage, or “donut hole,” which caught seniors by
surprise, other plan aspects and its launch in 2006 also
caused considerable consternation.
This paper examines the plan’s basic provisions, the
number and types of drug plans being offered and enroll-
ment tools to provide an in-depth look at the issues
challenging seniors and offer valuable lessons for benefits
professionals.
An understanding of the plan will be of significant value
to total rewards professionals when they are deciding
whether to replace their company’s prescription drug plan
for retirees with the Medicare plan, and when explaining
its complex maze of benefits and costs to seniors.
REACTIONS TO THE PLAN
A sample of reactions to the plan’s design from a variety
of sources follows:
❚ Consumer Reports: “Confounding hodgepodge of
offerings” (2006)
Benefits ❚
Frank Giancola
Second Quarter 2008
877/951-9191www.worldatwork.org
Contents © WorldatWork 2008. WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, ghallman@tsp.sheridan.com at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, customerrelations@worldatwork.org, 877-951-9191.
56 WorldatWork Journal
❚ Money: “Masterpiece of confusion…complete with a decoder Web site”
(Andrews and McGirt 2005)
❚ The Wall Street Journal: “Twisted and complicated design” (Wessel 2006).
MEDICARE PART D
Prescription drug coverage is offered to everyone receiving Medicare, regardless of
how much they earn, where they live and why they are receiving Medicare. This is
referred to as Part D of Medicare coverage and is administered by the Centers for
Medicare & Medicaid Services (CMS). Except for certain low-income groups, partici-
pation in the plan is voluntary and requires the payment of monthly premiums,
although the cost is largely subsidized by the federal government.
There are two ways to receive coverage. Medicare recipients can join a stand-alone
Medicare Prescription Drug Plan (PDP) or a Medicare managed-care medical plan, such
as an HMO or a PPO, which includes Medicare Part D coverage as part of the plan.
Private organizations offer the drug coverage, instead of the federal government, as
under Medicare’s traditional medical coverage. All plans must be approved by the CMS
and meet certain criteria, such as offering certain types of drugs and meeting cost-
sharing parameters. Nevertheless, providers have considerable latitude in designing
their plans, which is the source of many issues for seniors.
NUMBER OF PLANS
According to studies by the Kaiser Family Foundation, 2,642 PDPs were offered in
2007 by 1,167 organizations, from nationally known insurers to regional companies.
Seniors in each state select from 45 to 66 plans (Kaiser Family Foundation 2007a).
A 2006 survey of seniors found that 60 percent believe CMS should select a handful
of plans to simplify the selection process (Kaiser Family Foundation/Harvard School
of Public Health 2006). A 2005 CMS survey indicates that 30 percent of private-sector
employers offer more than one health-insurance plan for employees, one indica-
tion of the overabundance of drug-plan options (Centers for Medicare & Medicaid
Services 2007a).
THE STANDARD PLAN
PDPs must provide the equivalent or better value to participants as the “standard
plan.” This plan reflects mandated cost-sharing parameters and not necessarily a
user-friendly plan design.
The following is the standard plan outline for 2008:
Yearly deductible—$275
❚ After the deductible has been met, participants pay 25 percent of costs until their
expenses and plan costs reach $2,510.
❚ Participants pay 100 percent of costs until their expenses reach $4,050. This is the
“donut hole.”
57 Second Quarter | 2008
❚ For the rest of the plan year, participants pay the greater of 5 percent of drug
costs or co-pays of $2.25 for generics and $5.60 for brand-name drugs. (Centers
for Medicare & Medicaid Services 2007b).
Providers have some freedom to use different cost-sharing arrangements when
designing their offerings. Only 12 percent adhere to the standard plan structure.
For example, plans can eliminate the deductible, but cannot offer a higher one,
and they may use fixed dollar co-payments instead of coinsurance percents to
share costs with participants. The annual catastrophic limit on participant expenses
cannot be modified.
PLAN DESIGN
Plan design presents a formidable challenge for Medicare recipients because there
is no universal design, and plan features change frequently. According to the Kaiser
Family Foundation, the 10 PDPs with the highest enrollments in 2007 use these
elements of the standard plan, as follows:
❚ Five use the standard deductible; five use no deductible.
❚ Two use the standard 25 percent coinsurance for all drugs.
❚ Eight use a combination of coinsurance and co-pays.
❚ Three use three tiers of co-pays; five use four tiers.
❚ Eight made changes to their tiers in 2007.
The lack of standardization means that the same drug can be in different tiers,
with different co-pays and coinsurance, in the various plans (Hoadley, Hargrave,
Merrell, Cubanski and Neuman 2006).
Gap Coverage
The gap in coverage, or “donut hole,” is a major stumbling block for many seniors,
who are surprised when their coverage stops while their premium continues.
In 2007, 71 percent of the plans had no gap coverage; 27 percent covered only
generic drugs; and 2 percent covered brand-name and generic drugs while in the
gap. The number of plans with gap coverage increased to 538 in 2007 from 220 in
2006, likely due in part to federal guidance that requires enhanced gap coverage for
providers offering three Medicare drug plans (Hoadley, Hargrave, Merrell, Cubanski
and Neuman 2006).
Cost-Sharing Arrangement
The cost-sharing arrangements of many PDPs are complex and are unlike those
found in employer-provided drug and medical plans.
First, most employer prescription drug plans have no deductible, coinsurance
amount and threshold for out-of-pocket expenses. They simply provide three or
four tiers of co-pays, rather than coinsurance amounts, for various types of drugs
(Employee Benefits Research Institute 2007).
58 WorldatWork Journal
Second, Part D’s three-step cost-sharing format differs from the three-step format
commonly found in medical plans. These plans have a deductible and use a
coinsurance amount, typically 20 percent, until an annual out-of-pocket amount
is reached, at which point the plan pays 100 percent for covered services. Many
PDPs have a gap in coverage, and all require cost sharing in the form of small
co-pays or coinsurance amounts after reaching the annual limit, which is referred
to as a “catastrophic limit.”
In addition, the lower threshold of the gap is attained when the total of participant
expenses and plan costs reach a specific dollar figure. The counting of both partici-
pant expenses and plan costs is atypical for medical plan cost-sharing arrangements,
which only count participant expenses. Thus, participants reach the gap sooner than
they might expect. The upper limit of the gap, however, is based only on participants’
out-of-pocket expenses, which adds complexity.
Changing Dollar Amounts
PDPs are highly detailed and dynamic, as reflected in the annually changing dollar
amounts, including the deductible, lower and upper boundaries of the gap in
coverage (the size of the gap has increased each year by about $100) and co-pays
after reaching the annual limit. It is unusual for employer-provided drug and medical
plans to change similar dollar amounts annually.
FORMULARY
One key consideration for seniors is whether, and to what extent, their medications
are covered by a plan. This is not a simple task since there is no standard list of
covered drugs, or “formulary,” that all plans must offer. To select a plan meeting their
needs, seniors must call those in their area, or use Medicare’s Web-based tools, to
find ones that cover their medications and to determine their co-pays, coinsurance
amounts, utilization requirements (e.g., trying cheaper drugs first) and pharmacy
locations. The formulary can change each year, so participants must repeat the
process annually to find the best plan.
A 2006 Kaiser Family Foundation study of 35 national PDPs found substantial
variation in plan formularies. For example, the plans cover from 64 percent to 97
percent of the most commonly prescribed drugs for seniors and only 51 percent of
the top 10 prescribed brand-name drugs. The study confirms the complexity of the
Medicare marketplace and the difficulty seniors must deal with in making compari-
sons (Hoadley, Hargrave, Cubanski and Neuman 2006).
COMPLEXITY
In one national survey, 73 percent of seniors, 91 percent of pharmacists and 92
percent of doctors stated the plan is too complicated. Thirty-six percent of seniors
plan to stay in their current plan because it is too much trouble to compare plans,
and 14 percent were unaware they could switch plans (Kaiser Family Foundation
59 Second Quarter | 2008
and the Harvard School of Public Health 2006). Kaiser researchers have concluded
that complexity poses a challenge to seniors and, without careful consideration of
the differences in plan-design details, they could find themselves paying hundreds,
if not thousands, of dollars more for their prescriptions (Hoadley, Hargrave, Cubanski
and Neuman 2006).
COMMUNICATIONS
In 2006, Congress asked the U.S. Government Accountability Office (GAO) to review
the effectiveness of Medicare Part D communication tools that launched the program
(United States Government Accountability Office 2006). A summary of the GAO
findings and this author’s comments follow.
Handbook
The primary document that informs seniors about Medicare Part D is the annual
handbook, Medicare & You. The GAO found that it describes the plan completely
and accurately, although serious weaknesses were noted. First, about 40 percent of
seniors read at or below the fifth-grade level, so many would have difficulty under-
standing a document at the seventh-grade to post-college reading level.
Second, due to a lack of clarity, none of the 11 tested participants and only
two of the five advisors were able to complete the task of computing their total
projected out-of-pocket expenses for the described standard plan. Third, the hand-
book failed to indicate that few plans offer the same coverage as the standard plan
and that people should be prepared to compare plans with different premiums,
co-pays and covered drugs.
The GAO report also noted that insufficient information was provided about
the cumulative cost penalty for not enrolling when first eligible (1 percent of
the monthly premium for each month of delay). Readers were also left with the
impression that exceptions to a plan’s list of covered drugs would be granted if
a doctor simply made an exception request, even though the final decision rests
solely with the plan.
This author also notes that the handbook contributed to the confusion about
the “donut hole,” which is part of the three-step cost-sharing arrangement. First,
cost sharing was not given prominence in the handbook—it was covered in one
paragraph on page 13 of the 15-page Part D description, and no warning was given
about a gap in coverage. Second, the cost-sharing formula for the standard plan was
described inaccurately and without an example, which is essential for plan compre-
hension. All areas mentioned in this paper’s “Handbook” section are improved in
the 2007 edition of the handbook.
Help Line
Responses to the 500 calls placed to the Medicare Part D help line were frequently
accurate and complete, but 33 percent were inaccurate, incomplete, inappropriate,
60 WorldatWork Journal
and sometimes involved an extensive wait time (75 percent were answered in less
than five minutes). For example, when help-line employees were asked to identify
the lowest cost plan for specific drugs, the accuracy rate of their response was 41
percent, and 35 percent of callers were told the question could only be answered
with personal identifying information, when none is required.
Web Site
The GAO found the Medicare Part D Web site hard to use because its tools,
such as the drug-plan finder, were complicated and at times difficult to navigate.
The drug-plan finder is a helpful tool for determining which plans cover drugs
in a given geographical area, as well as drug utilization requirements, pharmacy
locations and drug costs.
The GAO’s evaluation of 137 usability features of the Web site found that 70 percent
were likely to cause confusion. The seven test participants were able to proceed
only halfway through 34 user tests. Based on the author’s experience with the site,
computer literacy is needed to use it successfully.
FINAL THOUGHTS
Strategic Importance
HR professionals may overlook Part D’s strategic importance to their organiza-
tion because it is a government program for retirees. There is a tendency to focus
on ideas that have greater “buzz” and resonance with top management. Recent
McKinsey & Co. surveys found that line managers were critical of HR for focusing
too much attention on senior managers and not enough on the needs of the front
line (Guthridge, Komm and Lawson 2008).
McKinsey researchers also have observed a decline in the past 10 years in HR’s
influence over business strategy and its lack of deep business knowledge. HR profes-
sionals must be aware of these issues and give sufficient attention to Part D’s
potential impact on the bottom line, as described below.
In 2007, 33 percent of employers with more than 200 employees offered retiree
health-care benefits, the majority of which include prescription drug coverage
(Kaiser Family Foundation and Hewitt Associates 2004; Kaiser Family Foundation
2007b). Prescription drugs accounted for 40 percent to 60 percent of health-
care costs for retirees over age 65 (about $2,000 each year) in 2000 and were
projected to represent a greater percentage by the end of the decade (Kaiser Family
Foundation 2000). Many companies welcome the opportunity to shift health-care
expenditures to government plans, such as Medicare Part D, to reduce costs and
to be able to devote greater resources to the main business.
For example, when Part D became available, Ford Motor Co. and Chrysler Corp.
terminated their medical, dental and drug plans for Medicare-eligible salaried retirees
to reduce administrative costs and benefits expenses. They now provide retirees
with a tax-free health-reimbursement account, funded annually at $1,800 per person.
61 Second Quarter | 2008
This figure allows the company to
achieve a substantial cost savings and
covers retirees’ expenses for purchasing
comparable coverage from Medicare
and private insurance companies.
A deep understanding of the benefits
and costs of Part D is necessary to
realize both goals.
Finally, Part D should not be viewed
only as as a retiree benefit, since it
also applies to employees who work
past age 65. These employees are
being retained in greater numbers,
if their skills are difficult to replace,
by forward-thinking companies
(Morton 2005). To reduce health-care
costs, employers should consider
reimbursing them for the cost of
joining a Medicare drug plan if they
opt out of the company plan.
Helping Seniors
Because of plan complexity, a multitude of options and inadequate communica-
tions, the task of selecting the best PDP would be a difficult one for most people
with a high-school education, personal computer skills and Internet access. Since
the majority of seniors are less well-educated and not online, many would not be
up to the task (Kaiser Family Foundation 2005). They would need the assistance of
someone with those abilities and access to make a good decision, and they would
be aided greatly by clear, complete and easy-to-use communication tools.
HR professionals can assist retirees by preparing enrollment communications
that supplement CMS materials and by arranging meetings to explain and answer
questions about the plan. They also can locate and refer them to agencies that
offer personal assistance in selecting a Medicare drug plan, such as a state health-
insurance assistance program.
Too Many Choices
Many seniors probably identify plans that cover their current medications and select
the one with convenient pharmacies and the most affordable premium, without
doing the cost-sharing calculations. And some probably base their decision solely
on the plan’s low premium.
Hewitt Associates reports that 70 percent of the 6 million employees in its 2006
health-care open enrollment did not make an active decision on a health-care
RESOURCES PLUS
For more information related to this paper:
www.worldatwork.org
Type in either or both of the following search
keywords on the search line:
❚ “Medicare Part D”
❚ “Prescription Drug Plan.”
www.worldatwork.org/bookstore
❚ Benefits Compliance: An Overview
for the HR Professional.
www.worldatwork.org/education
❚ B1: Fundamentals of Employee Benefits
Programs
❚ B3: Health Care and Insurance Plans—
Design and Management
❚ B3A: Health Care and Insurance Plans—
Financial Management.
62 WorldatWork Journal
plan and were placed in default coverage. One explanation given by Hewitt is
that the more decisions people are asked to make, the less likely they are to make
them (Peterson and Trout 2007). In an open enrollment for health-care plans,
employees have far fewer options than the 50 or so that seniors typically face. For
seniors, the “default option” might be the plan with the lowest premium, since
many are of limited means and without drug coverage.
“Low-Balling” Seniors
In 2006, the first year drug plans were offered, the default option apparently was
easy to identify. The Wall Street Journal reports that one of the two companies with
40 percent of the market share gained its share, in large measure, based on low
premiums. This company offered an average monthly premium for its basic plan
of $9.51, when the Medicare handbook states such plans have a premium of about
$32 per month. In 2008, the company’s premium increased to $25.56. The other
company with a leading market share recently increased its monthly premium on
a low-cost plan by 87 percent to $27 (Zang 2007). Basic plans were selected by 83
percent of enrollees.
A Better Alternative
Leaving seniors subject to the forces of the marketplace resulted in money being
wasted, unexpected gaps in coverage and anxiety about benefits and costs.
One frequently mentioned alternative to the present arrangement calls for CMS
to operate a simple universal plan and to negotiate drug prices with the pharma-
ceutical companies (rather than leaving it to the drug-plan providers), an option
favored by 81 percent of seniors.
This option could have achieved the same or greater cost savings and would have
avoided the burden placed on seniors. One study found that drug prices under
Medicare Part D are considerably higher than the prices negotiated by the Department
of Veterans Affairs (VA) for military veterans. For the 20 drugs most frequently
prescribed to seniors, VA prices were consistently lower than the lowest base price
of any Part D drug plan. The median difference in price for a year of treatment was
48.2 percent, or $260 (FamiliesUSA 2008). This option also would have precluded the
extensive government bureaucracy to regulate the operations of the drug providers
and required a simple communications program. ❚
63 Second Quarter | 2008
Andrews, Michelle and Ellen McGirt. 2005. “Mastering the Medicare Machine.” Money, November: 158-164.
Centers for Medicare & Medicaid Services. 2007a. Medical Expenditure Panel Survey. 2005. http://www.meps.
ahrq.gov/mepsweb/data_stats/summ_tables/insr/national/series_1/2005/tia2d.htm. Viewed: Oct.17.
Centers for Medicare & Medicaid Services. 2007b. Medicare & You. 2008. 1-117.
Consumer Reports. 2006. “What you need to know about Medicare Part D.” February: 34-36.
Employee Benefits Research Institute. 2007. Fundamentals of Employee Benefit Programs. http://www.ebri.org/
publications/books/index.cfm?fa=fundamentals.Viewed: Oct. 17.
FamiliesUSA. 2008. “Falling Short: Medicare Prescription Drug Plans Offer Meager Savings.” http://www.
families usa.org/assets/pdfs/PDP-vs-VA-prices-special-report.pdf. Viewed: Feb. 29.
Guthridge, Matthew, Asmus B. Komm and Emily Lawson. 2008. “Making talent a strategic priority.” The McKinsey
Quarterly, Issue 1: 48-59.
Hoadley, Jack, Elizabeth Hargrave, Juliette Cubanski and Tricia Neuman. 2006. “An In-Depth Examination of
Formularies and Other Features of Medicare Drug Plans.” Kaiser Family Foundation. April: 1-32.
Hoadley, Jack, Elizabeth Hargrave, Katie Merrell, Juliette Cubansk and Tricia Neuman. 2006. “Benefit Design and
Formularies of Medicare Drug Plans: A Comparison of 2006 and 2007 Offerings.” Kaiser Family Foundation.
November: 1-33.
Kaiser Family Foundation. 2000. “The Implications of Medicare Prescription Drug Proposals for Employers and
Retirees.” July: 1-99.
Kaiser Family Foundation. 2005. “Online Health Information Poised to Become Important Resource for Seniors, But
Not There Yet.” http://www.kff.org/entmedia/entmedia011205nr.cfm?RenderForPrint=1. Viewed: Mar. 1, 2008.
Kaiser Family Foundation. 2007a. Statehealthfacts.org. Viewed: Oct. 17.
Kaiser Family Foundation. 2007b. “Employer Health Benefits. 2007 Summary of Findings.” http://www.kff.org/
insurance/7672/upload/Summary-of-Findings-EHBS-2007.pdf. Viewed: Mar. 22, 2008.
Kaiser Family Foundation/Harvard School of Public Health. 2006. Seniors and the Medicare Prescription Drug
Benefit. December: 1-19.
Kaiser Family Foundation and Hewitt Associates. 2004. Retiree Health Benefits: Now and in the Future. 1-87.
Morton, Lynne. 2005. “Managing the Mature Workforce-Report # 1369.” The Conference Board. July: 1-27.
Peterson, E. Scott and Tricia Trout. 2007. “Improving Employees’ Benefits Decisions—A Holistic Approach.”
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Wessel, David. 2006. “Once Unloved, Medicare’s Prescription-Drug Program Defies Critics, but Issues Remain.”
The Wall Street Journal, Dec. 7: A.2.
Zang, Jane. 2007. “Medicare Premiums On Drugs Set to Rise.” The Wall Street Journal, Oct. 3: D.9.
REFERENCES
Frank Giancola (frankgiancola1@hotmail.com) 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.
AUTHOR
P ay for performance is the mantra being chanted
from the board of directors down to the first-line
supervisor. But what is the definition of “pay?”
Whose performance? What is the definition of “perfor-
mance?” How will it be measured?
It is critical that the pay planner answer these questions
when creating a “pay-for-performance” process (not a
program). Programs have limited lives; processes continue
until changed. This paper reviews each of these questions:
❚ What pay?
❚ Whose performance?
❚ What performance?
❚ How will performance be measured?
WHAT PAY?
“Pay” in a pay-for-performance program is usually defined
as short- and long-term incentives, although some are
still trying to apply it to salary. The problem with tradi-
tional salary programs is that they are rarely reduced.
However, users of lump-sum merit programs can employ
performance criteria since the payment is not built into
the base salary. Further, it is difficult to imagine how
What Pay for Performance
Should Measure
Bruce Ellig
❚ Compensation
Second Quarter 2008
877/951-9191www.worldatwork.org
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65 Second Quarter | 2008
employee benefits can be included in the pay-for-performance definition. Except
where company profit sharing can result in an increased company contribution
to the defined contribution plan, employee benefits are typically age and years of
service related. That leaves the short-term and long-term incentive plans as the most
common pay elements employing performance to determine amount.
Short-term incentives by definition have a measurement period of one year or
less. The most common is the organization’s annual business year. The long-term
incentive plan is a measurement period typically of three to five years, except
for stock-option and stock-appreciation rights (traditionally extended for 10 years).
However, with the requirement to take a charge of earnings under FAS 123(R), some
are moving to shorter-term options (such as five years). Long-term incentives may
be paid in cash and/or stock, as are short-term incentives, but with the latter, cash
is the most common form of payment.
WHOSE PERFORMANCE?
This question breaks into two questions.
❚ Who is included in being eligible for a pay-for-performance payment?
❚ And whose performance is measured for that payment?
Is it performance of an individual or a group? If it’s a group, is it a small unit—such
as a team—or a larger portion of the company, or is it the entire company?
Traditionally, those covered by incentive systems have been at the organization’s
two extremes. The CEO and other executives were covered by both short- and
long-term incentive plans. In the factory, many workers were covered under short-
term incentives that measured output per piece produced during an hour or
a day. As time progressed, companies extended the long-term incentive of stock
options down through the organization. But this has been curtailed with the earn-
ings charge required under FAS 123(R). However, a trend that continued is the
extension of the short-term incentive plan throughout the organization. In some
cases, it has replaced the price-rate system, but in most situations, it has included
employees who were not participants in any incentive system. Suffice it to say that
the best-practices companies are ensuring all employees are covered in at least
one type of short-term and long-term pay-for-performance plan.
Although situations exist where only performance of the individual or only of the
group may be appropriate, it can be argued that the most appropriate assessment is
a combination of the two. The definition of “group” varies. At the organization’s top,
the group would be performance of the entire company. But as one drifts through
the organization, the various subdivisions should be considered. Thus, at the level
immediately below the CEO, the unit head might have his/her own unit performance
and the company performance considered in addition to his/her own personal
performance. Including company performance in all sublevels of the organization
is done when it is believed appropriate that individuals understand they are part of
a whole, and that it is the whole that is assessed by shareholders.
66 WorldatWork Journal
WHAT PERFORMANCE?
The definition of “what performance” flows downstream in an organization. It starts
with the board of directors, who identify the CEO’s key performance-success factors.
These are the key components of the company’s strategic plan.
The measurements for the CEO are typically set by the board of directors and
heavily influenced by shareholder input. The measurements for the first level below
the CEO are set by the CEO and reflect an allocation of his/her objectives, in addi-
tion to those that the CEO and subordinate also believe appropriate. This breakup
and allocation of objectives continues to cascade through the organization. If done
effectively, at lower levels, an employee can see his or her own objectives contribute
to the top organizational objectives. This assessment is referred to as line of sight—
in other words, a straight-line relationship of aggregating performance going up the
organization, leading to organizationwide objectives.
Performance objectives typically are set in relation to past performance, future
expectations and/or performance of comparable companies. Historical (or look-
back) targets are improvement-focused in relation to a defined base. Future (or
look-forward) expectations are described in quantitative ways, perhaps with a look
at past performance. Peer performance (or look-around) is focused on outper-
forming organizations in one’s own industry.
Typically, the desired performance level is called the target. A predetermined range
around it establishes a threshold and a maximum. The threshold is the minimum
level of performance below which no incentive payment will be made; the maximum
is the upper limit beyond which no credit will be given for accomplishment.
These three levels of performance are shown in Figure 1, along with their respec-
tive incentive awards. It is important that whatever is being identified can be
measured and that the outcomes are at least influenced, if not totally controlled, by
the person being rated. It is equally important to identify those factors outside of the
rated person’s control and their degree of significance. If setting targets for different
measurements and for different parts of the business, the degree of difficulty should
be included. These are called stretch targets and should be of equal difficulty rather
than equal in absolute or percentage improvements.
FIGURE 1 Threshold, Target and Maximum Performance and Bonus Opportunities
Maximum Award
Target Award
Threshold
Threshold Target Maximum Performance Performance Performance
67 Second Quarter | 2008
If more than one measurement is used, the question is: “What weight should be
given to each?”
The answer is: It depends.
If each is of equal importance, then each is of equal weight. That is the first step in
the weighting process. If they are of equal weight, stop. If not, attempt to determine
the rough order of magnitude. If, for example, there were four objectives, it might be
determined that “A” was four times as important as “D,” two times more important
than “C,” but only slightly more important than “B.” However, if “B” were viewed
as three times as important as “D,” relative weightings would be as follows: “A”
(40 percent), “B” (30 percent), “C” (20 percent) and “D” (10 percent).
Individuals should know what is being measured and how before the measure-
ment period begins. They should also receive regular reports during the period on
progress in relation to the identified target. If these two steps are not performed,
how can one expect to motivate performance? People need to know the basis for
measuring performance, especially as it relates to pay. It is important during the
communication phases to show how individual performance is aligned with the
identified objectives. This is the line of sight alignment. Furthermore, the specific
link between performance and pay needs to be clearly described.
HOW WILL PERFORMANCE BE MEASURED?
Several basic choices determine how performance will be measured. Will it be
financial, nonfinancial or a combination of the two? In addition to performance
within the company, will outside performance factors be considered?
Key Financial Measurements Within the Company
By far, the most common type of performance measurements are financial. They are
easily available from the financial function and are commonly accepted as valid perfor-
mance indicators. They are of two types: relative returns and absolute changes.
Relative Internal Returns. Relative internal returns include a wide variety of
income definitions comparing a specific definition of income to another measure-
ment typically on the balance sheet. The definition may be for one or many years.
The multiyear formula’s advantage is that it is harder to “beat” than a one-year
formula. It is helpful to compare the multiyear return with a single-year result.
If the single-year return is higher than the multiyear result, it indicates the position
improved. Conversely, if the most recent year’s return is lower than the multiyear
return, it indicates the performance deteriorated. Several of the most common
return formulas include:
❚ Return on assets (ROA). This is net income divided by total assets. This formula
is not uncommon with capital-intensive companies and financial institutions as a
measurement of the return on this definition of capital. This percentage excludes
the time value of money because non current assets are carried on the balance
sheet at historical cost less depreciation and amortization.
68 WorldatWork Journal
❚ Return on equity (ROE). This is net income divided by total shareholder equity.
It is appropriate with companies with little or no debt. To the extent assets are
undervalued (see Return on investment), shareholder equity will be comparably
lowered, thereby possibly distorting any ROE measurements.
❚ Return on investment (ROI). This is a generic term to describe any of the “return”
formulas (e.g., ROA, ROCE, ROE and others). It may be somewhat misleading
if a significant portion of “investment” is in undervalued assets (e.g., land and
significantly depreciated assets). In such situations, executives might be reluctant
to invest in needed asset replacements since it would make improvement difficult
because of a larger “investment.”
❚ Return on net assets (RONA). This is net asset, divided into operating income.
Like ROA, it is typically used for capital-intensive organizations. It is frequently
used at the strategic business-unit level, where no shareholder equity exists.
❚ Return on sales (ROS). This is net income divided by net sales (e.g., sales
minus freight and returns). This is frequently used by manufacturing and service-
sector companies.
Absolute Internal Changes. These changes measure absolute changes in different
definitions of “income.” Like the relative internal returns, the measure could be for a
stated number of years, but more typically is an annual measurement, which in turn
can be compared with either an earlier year or a targeted value. Several common
absolute change definitions follow:
❚ Earnings before interest and taxes (EBIT). Also called operating income; many
argue that this definition makes the most sense in measuring executives, as it
includes all expenses other than income taxes (over which executives have no
control) and interest charges (over which they may have some control).
❚ Earnings before interest, taxes, depreciation and amortization (EBITDA). This is
gross margin less operating expenses or, stated another way, it is EBIT (operating
income) with depreciation and amortization added back in. EBITDA is not usually
found as a line item in many company annual reports, but it may be useful
in incentive plans if the board of directors believe management should not be
held accountable for interest charges, income taxes, depreciation of buildings and
equipment, as well as, amortization of goodwill. However, many believe execu-
tives should be held accountable for achieving an income in excess of borrowing
and acquisitions decisions, and therefore, it would be more logical to use EBIT
than EBITDA.
❚ Economic profit (EP). This is what remains after the cost of capital is subtracted
from net operating profit after taxes (NOPAT). The cost of capital is the interest paid
on debt plus a return to the shareholders. The latter may be defined as dividends
paid or an expected return such as the risk-free rate of return on a government
debt obligation plus a risk premium (6 percent, for example). Alternatively, a cost
of capital could be determined by identifying the current short- and long-term
borrowing rates and what the investors look to receive beyond a risk-free rate
69 Second Quarter | 2008
of return. Assume, for illustration, this is 10 percent. This might be multiplied by
capital consisting of net current currents. In other words, current assets minus
current liabilities. Because of the equity element, this measurement is most likely
to be found only on the corporate level.
❚ Gross margin. This is income after subtracting the direct costs of goods sold
from net sales. This definition is often used for subdivisions of an organization
(e.g., a manufacturing division on site) where other expense deductions do not
apply (e.g., selling expenses).
Because of their composition, some measurements are inappropriate for subunits
of the company, whereas all of those just reviewed could be used at the corporate
and subunit levels. In selecting the ones to be used, make a determination of
whether to use the same definition on a companywide plan, as well. For example,
if operating income is used for a division plan, and the division head will be paid
partly on company and partly on division performance, should the company plan
also include operating income, or perhaps EBIT or EBITDA?
While financial measurements are commonly used in short-term and long-term
incentive plans, do they really reflect the way an organization measures its perfor-
mance? They account for financial stewardship, but do they measure value added?
Furthermore, they are backward-looking, not forward-focused, and therefore do
not highlight important changes until after the fact. For these reasons, exclusive
use of financial measurements is probably inappropriate. Nonfinancial performance
measurements, although more difficult to quantify than financial measurements,
may be more appropriate in indicating how an organization is truly performing.
However, such measurements lack the Generally Accepted Accounting Principles
(GAAP)-prescribed definition of consistency of financial measurements.
Other Key Measurements Within the Company. There are other financial
measurements available; however, they exclude a host of other items that could, and
maybe should, be measured. Financial measurements do not include all factors that
management examines when running the company. These factors include nonfinan-
cial assets and processes leading to the creation of value and execution of strategy.
Often these are grouped in a category called goal sharing since eligible persons
share credit for the extent to which the goal has been achieved. When including
nonfinancial measurements, it is important that each be clearly defined in terms of
output and time. The objective must be important to the organization, and it must
be attainable. Some possibilities are:
❚ Culture. The embodiment of values and beliefs of the workforce on how work is
to be done. This is especially important when companies are attempting to change
their culture. Attitude surveys and behavioral tests are typical measurements.
❚ Intellectual capital. It has been often cited that an organization’s workforce is its
only sustainable competitive advantage. The collective and interactive skills of an
organization’s workforce (and contractors) at all company levels are the major factor
in determining its creativity, productivity and customer satisfaction. The first two are
70 WorldatWork Journal
obvious, the last less so. But empirical evidence suggests that customers are most
likely to be satisfied with a company if the employees (with whom they interact)
are also satisfied; the reverse is also true. Dissatisfied employees often result in
dissatisfied customers. Therefore, employee work should be evaluated in terms of
what they know, what they do and how they do it. The first is knowledge-based,
the second is output-based and the third is value-based.
❚ Intellectual property. How strong are the company’s copyrights and patents?
When do they expire? What is the likely impact on company revenue and earnings?
❚ Organizational objectives. This covers a wide range of possibilities, from business
strategies (the “what”) to culture (the “how”). Business strategies might include
organizational restructuring (acquisitions, divestitures, mergers, alliances and/or
joint ventures) and planning issues (environmental compliance, product port-
folio, technology transfers, executive succession and workforce diversity). Culture
defines how work is done and how people are treated. Ethical behavior is only
the first rung in developing a high-performance workplace.
❚ Product/service innovation. New product development can be examined at the
corporate and divisional levels. Some measure the cost of research and develop-
ment in relation to sales. This is an input model and does little in measuring the
effectiveness of the other expenditures. Some measure the market potential of new
products in the pipeline. This is a market-share model. Others will measure R&D
costs covering a period of time in relation to new sales (namely, the product of the
expenditure). This is an output-cost model. Some measure the time from discovery
(or development) until the product is marketed; namely, how long does it take to
bring a product to market? This is a process or calendar model. Others measure the
prevalence of new products as a percentage of total sales (e.g., 20 percent of total
sales came from products not sold the previous year, or 80 percent of total sales came
from products not sold five years ago). This is a revenue output model. One would
expect the percentage to increase with an increase in the time period measured.
❚ Productivity. If output is defined as volume times cost, then productivity increases
can come from increasing volume with no increases in cost, decreases in cost with
no decrease in volume or increases in volume and decreases in cost. Productivity
can be measured at all organizational levels. Operating income divided by total
employees in the unit might be a productivity indicator.
❚ Quality. This is defined in terms of nearness to perfection at any level of the
company. Some have chosen the six-sigma standard, in other words, 99.99966
percent perfect (stated another way, only 3.4 imperfect products for every one
million produced). The quality standard selected should be consistent with the
requirement, especially if the product is delivered at higher cost; otherwise, the
lower-cost product would be the obvious choice of the buyer.
❚ Quantity. This is volume, or the number of units produced or sold at any level of
the company. It excludes cost and price. It is useful in netting out price changes
in measuring productivity.
71 Second Quarter | 2008
Combination of Financial and Other Key Measurements. It is more difficult to
motivate individuals with multifactor performance measurements than with a single
measuring stick. This difficulty stems from the fact that it requires the person to focus
on more than one item, some of which, at least on the surface, may appear to be
contradictory. Nonetheless, multimeasurement systems add balance to the process.
It would be reasonable to have a measurement combining innovation, productivity,
customer satisfaction, employee commitment and financial results. Designing the most
appropriate mix must be company-specific. It is also likely that the measurements will
change periodically. Minimally, they should be reviewed annually to ensure they are
still focusing on the key components.
A great example of the combination plan is the “balanced scorecard,” developed by
Robert Kaplan and David Norton. It identifies four areas of measurement: customer
(acquisition, retention and satisfaction); financial (internal and external measurements);
internal processes (linking financial and customer measures through productivity and
innovation); and learning growth (identifying the gap between current and what is
needed on the other three measurements).
The balanced scorecard is not simply a measurement process, it is a system rein-
forcing management objectives. It is a process that can be applied from top to bottom
in an organization.
Financial Measurements Outside the Company. There are three types: performance
of other companies, ratings by outside organizations and general economic factors.
1 | Performance of other companies. These measurements are typically relative to
own company performance and could use any measurement identified as internal
to the company. The purpose is to show how well the company is doing relative
to others. An excellent example of this is the stock chart included in the company
proxy statement for publicly traded companies. It could be a company-defined
group of companies, an industry subset within the appropriate stock exchange,
or the composite performance of the entire stock exchange. Such measurements
are for shareholder value. However, some companies have designed annual and
long-term incentive plan payouts in relation to how well the company performed
against a defined peer group of companies on such factors as earnings per share,
economic profit and return on sales, to mention a few. Valid peer comparisons
are difficult to do because no two companies are alike; however, the objective is
to view the comparison from the eyes of an investor trying to decide in which
company (in a particular sector) to make an investment.
2 | Ratings by outside organizations. The Corporate Library, Institutional Shareholder
Services, Moody’s and Standard & Poor’s head the list of organizations doing their
own analyses of the health of companies. Companies want the highest possible
rating, as this enables them to get the most favorable treatment on bond issues
and secondary stock offerings.
3 | General economic factors. Own company performance could be adjusted in light of
changes in economic factors. Two key measurements would be the cost of capital
72 WorldatWork Journal
and corporate income taxes. One could
argue that it is misleading to compare
historical performance or even the cost
of capital or corporate-taxes charge
against budgeted expectations when
either of these factors is changed.
More specifically, one would expect
better financial performance if interest
rates and/or corporate income taxes
decline. Conversely, one would expect
poorer performance if the reverse
were true. However, some planners
attempt to avoid such comparison
difficulties by using measurements
excluding their impact. For example,
EBIT (earnings before interest and
taxes) excludes both, while both are
included in net earnings.
Other Key Measurements Outside
the Company. These include customer
satisfaction, customer retention, environmental compliance and management
cost ratios.
❚ Customer satisfaction. Measured by surveys and/or focus groups, this is an indica-
tion of future sales potential companywide and/or by division. Satisfied customers
will buy again; dissatisfied customers will not. Both will tell others, so their expe-
riences also affect future sales. Items measured are quality of product/service in
relation to price. Such surveys may also include delivery of undamaged goods,
goods when promised, back-up warranty with fast repair, and fast response to
information requests and complaints. When measuring the customer-satisfaction
levels with a company’s own products/services, it is important to put this assess-
ment in terms of customer needs and expectations. Why do the customers who
like us value our products/services? What one thing do we do best? What one
thing is our greatest opportunity for improvement? Of those who do not value
our products/services, what three things must we address to gain their approval?
And who are the major competitors, and how do they measure up?
❚ Customer retention. This is a measurement of the percentage of customers who
return to buy again. What percentage of first-time customers come back? What
percentage keeps coming back? The shorter the interval between their return and the
longer the period of continually coming back, the more impressive the indicator.
❚ Environmental compliance. This is a measurement of how well the company is
performing in terms of air and water pollution and complying with regulatory
requirements. What is the likely financial exposure of noncompliance?
RESOURCES PLUS
For more information related to this paper:
www.worldatwork.org
Type in this search phrase on the search line:
❚ “Pay for Performance.”
www.worldatwork.org/bookstore
❚ Designing Management Incentive Plans:
How-to Series for the HR Professional
❚ The Best of Performance Management:
A Collection of Articles from WorldatWork
❚ Incentive Pay: Creating a Competitive Advantage
❚ Linking Pay to Performance: How-to Series
for the HR Professional.
www.worldatwork.org/education
❚ T1: Total Rewards Management
❚ C11: Performance Management—
Strategy, Design and Implementation
❚ C12: Variable Pay—Incentives, Recognition
and Bonuses.
73 Second Quarter | 2008
❚ Management cost ratio. The ratio of CEO pay to a stated financial measurement
(e.g. earnings, market capitalization or sales) can be compared to ratios of
comparator companies. The lower the ratio, the more expensive the cost of
management. The same calculation can be made for the combined pay of the
five proxy-named executives. A high ratio of CEO pay to the next highest paid
in the company worries many that a team approach is missing. Ratios should not
only be measured and compared with peer companies but viewed longitudely
to determine if they are improving or deteriorating. Where does one company
stand in the pecking order? Is a change warranted?
Combination of Financial and Nonfinancial Measurements
Comparing a company’s own financial performance with that of others on earnings
per share and stock price could, for example, be combined with measurements of
customer retention and satisfaction.
Combination of Internal and External Measurements
To determine the most appropriate measurements, consider the industry, stage
of the market cycle, strategy focus and organization structure. The industry will
suggest factors on the income statement and balance sheet that are most significant
and the importance of the cash flow statement. Comments on these were made
earlier when reviewing the various financial measurements. As for market cycle
stage, as shown in Figure 2, there is almost a reciprocal relationship between
sales and earnings. At the threshold stage, revenue is key as the company looks
to establish market position. Profits may be nonexistent because of development
and marketing costs. In the growth stage, market penetration to increase market
share is still key, but profits are becoming important. At maturity, revenue has
slowed and profits are high in importance. And in decline, revenue is decreasing
but opportunities still exist.
Strategy focus aligns the shareholder with its measurables: community environ-
mental compliance; customer satisfaction and customer retention; employee-attitude
surveys; undesirable separations; charges of discriminatory treatment; improvements
in the workforce’s core-competence knowledge; and shareholder ROI.
Organizational structure affects not only the level where the measurement is
made but also, given the definition of measurements available, the type most likely
used. A centralized organization is likely to emphasize corporate measurements;
FIGURE 2 Market Stage versus Revenue and Profit Importance
Category Threshold Growth Maturity Decline
Revenue (sales) High High Moderate Low
Profits (earnings) Low Moderate High High
74 WorldatWork Journal
a decentralized organization is more likely to emphasize measurements at lower
levels in the organization. To the extent the latter have no shareholder equity or
decisions on taxes and debt, the financial formulas available are even more limited.
Nonetheless, possibilities were identified earlier in this paper.
The industry, market stage, strategy focus and organization structure measure-
ments identified can be measured for the company itself as well as in relation to
identified peer companies. In other words, the internal performance (financial and
nonfinancial) is assessed and the results compared with external measurements to
see how well the company is doing versus others and in light of major economic
factors affecting profitability.
Characteristics of Valid Measurements. In selecting what measures to include when
designing the pay program, many considerations exist, including the following:
❚ Are the factors being measured the most important ones?
❚ Are the definitions clear, enabling a valid and reliable measurement?
❚ While difficult, are the targets (and even the maximums) attainable?
❚ Are the factors being measured and the measurements understandable to those
being rated?
❚ Is the degree of difficulty comparable across the organization for similar posi-
tions/jobs?
❚ To what extent are individuals able to achieve the stated performance based on
their own efforts? And for group plans, to what extent are the individuals able to
at least significantly affect the results?
❚ Will individuals be able to receive regular feedback on progress?
❚ Are the raters objective and not subject to bias?
❚ Has the plan been successfully tested?
❚ Will the measurements place the company in a cost-effective position with other
comparable companies?
SUMMARY AND CONCLUSIONS
In designing a pay-for-performance plan, the first and a most important step is to
determine what performance will be measured. Will it be financial, nonfinancial or
a combination of the two? Will it be based on individual, group performance or a
combination of the two? Will there be a hurdle (minimum level) before payment will
be made? Will there be a target? Will the performance relative to other companies
in one’s peer group be assessed? These are all-important issues to be examined
because empirical evidence suggests that what gets measured gets attention.
The attention is even greater if it is the basis for earning money.
An additional question needing attention is: Will the same measurement(s) be
used for salary and short-term and long-term incentives? Typically, the answer is
“no.” Individual performance usually is the sole basis for salary actions, while the
basis for short-term incentives is often combined with group (up to and including
companywide) performance, and only group performance is the basis for long-term
75 Second Quarter | 2008
incentive payouts. For example, a salary increase might be for satisfactorily doing
the routine, day-to-day work, whereas the short-term incentive might be based
on several specific individual objectives as well as the extent to which a group
objective was achieved (e.g., economic profit). The long-term incentive might be
tied to earnings per share and shareholder value increase versus a defined peer
group of companies. A key factor is avoiding paying more than once for a particular
measurement for a prescribed time period.
Since short- and long-term incentives are the best vehicles for pay for performance,
it is critical that the performance factors be carefully identified and defined. Problems
in recent years with companies engaging in off-balance-sheet transactions and
revenue recognition changes to improve their financial position suggest that the
rewards should be significant but not enormous. The more emphasis companies
place on plans that reward handsomely for financial performance, the more careful
they should be in ensuring legally and morally defensible numbers. ❚
Bruce Ellig is the noted author of more than 90 articles and seven books including his most recent, the updated
and revised edition of The Complete Guide to Executive Compensation. Much of the material in this paper has
been taken from this book. Ellig served as worldwide head of HR for Pfizer Inc. for the last 11 years of his 35
years with the company. He is a member of the National Academy of Human Resources and the recipient of
many lifetime achievement awards including those from SHRM and WorldatWork, where he was awarded the
2004 Keystone Award.
AUTHOR
It is well-established that compensation is not the only
factor in determining whether a job candidate will
select a company or an employee will remain with
an employer. The New York Times recently published
a piece indicating that benefits topped employees’
considerations in deciding whether to stay at a company
(Brown 2007).
And, of course, the WorldatWork Total Rewards Model
(Figure 1) presents an overview of everything an employee
could perceive to be of value resulting from the employ-
ment relationship.
In the last decade, due to its rapidly increasing cost, the
benefit of health insurance has been getting much atten-
tion. The extent of employers’ ability to offer attractive
health-insurance plans became limited. To lower the cost
of health plans, on Jan. 1, 2004 the federal government
created health saving accounts (HSAs) (National Center for
Policy Analysis 2004). HSAs make health care less costly
by using a “tax-favored savings account” in combination
with a “high-deductible health plan” (HDHP) (eHealthIn-
surance Services Inc. 2008). This enables employees to
pay for qualified medical expenses using pretax money.
Considerably lower premiums for the HDHPs allow compa-
nies and workers to save health-insurance dollars.
Health Savings Accounts: Their
Purpose in a Company Setting
Zuzana M. Micko
University of Minnesota
❚ Benefits
Second Quarter 2008
877/951-9191www.worldatwork.org
Contents © WorldatWork 2008. WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, ghallman@tsp.sheridan.com at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, customerrelations@worldatwork.org, 877-951-9191.
77 Second Quarter | 2008
FIGURE 1 The Total Rewards Model (WorldatWork 2008a)
©2007 WorldatWork
The HSA concept is different from other concepts used in the American health-
insurance industry. This difference means that it is not an easy switch for employers
from health-insurance plans with no deductibles or low deductibles to HDHPs.
To alleviate or eliminate possible employee resistance, providing extensive employee
education, communication and training is crucial.
This paper explains the history of HSAs as well as the basic characteristics of
these plans. It also examines the challenges companies face as they introduce these
plans to their workers.
HSA HISTORY
The originator of the model of health savings accounts was the chief economist of
the American Medical Association, Jesse Hixson. He introduced this concept to the
President of the National Center for Policy Analysis (NCPA), John Goodman, and
to Senior Fellow Gerald Musgrave. Later, Goodman became the spokesman for this
idea, and shortly after, he earned the title of the “Father of HSAs” (National Center
for Policy Analysis 2004).
According to the National Center for Policy Analysis (NCPA) (2004), the first HSA
attempts date back to 1984, when the plan was to tackle “the long-term problem
of Medicare” by “individually owned ‘medical IRAs’.” In 1990, medical savings
accounts (MSAs), the prelude to health savings accounts, were introduced. This
model was based on buying HDHPs and allocating dollars saved on premiums
in a “personal health account” for later use for “small medical expenses.” At first,
MSAs had major tax disadvantages. The unspent money could not roll over at
year’s end to grow and earn tax-free interest, and the “deposits were subject to
income and payroll taxes.” This was changed in 1996 when small businesses and
self-employed individuals could have tax-free MSAs.
78 WorldatWork Journal
Health reimbursement accounts (HRAs) represented the next preface to health
savings accounts. Again, according to the 2004 NCPA report, HRAs were significant
in strengthening “employer support for consumer-directed health care.” These health
plans were more popular among large employers. Employers fund these plans and
since June 2002 the plans can be rolled from one year to another on a tax-free
basis. However, they are not portable, which means that if employee positions are
terminated, employees cannot take HRAs with them, and they are (more or less)
“expense accounts with use-it-or-lose-it incentives.”
HSAs became effective on Jan. 1, 2004. Since then, Americans had the advantage
to manage their health-care money by participating in these plans (eHealthInsurance
Services Inc. 2008).
In 2008, according to Watson Wyatt, 27 percent of companies offer CDHPs with
a health savings account, while 24 percent offer a health reimbursement account.
Employers are three times more likely to add an HSA in 2009 (9 percent of the
survey) than an HRA (3 percent of those surveyed) (WorldatWork 2008b).
HSAS MORE IN DEPTH
Breaking the topic of HSAs into the following sections is best approached
for discussion:
❚ What is an HSA?
❚ Who and how much can fund HSAs?
❚ Which high-deductible health plans are HSA eligible?
❚ How can employees access their HSA dollars?
❚ What is most important that employers need to remember in the process of
implementing HSAs?
What is an HSA?
One main characteristic of a health savings account is that it represents “a system
that is responsive primarily to individual consumers, rather than to third-party
payers” (HSA For America 2008a). This theory is called consumer-driven health
care, or CDHC. An HSA “is a tax-favored savings account” used in combination
“with a qualifying HDHP” (HSA For America 2008b). In other words, it is a savings
account that lets employees save tax-free dollars for health care. Two important
points are of note. First, the health savings account is separate from the high-
deductible health plan, which provides the health insurance. Insurance carriers sell
HDHPs. The health savings account, independent from the HDHP, is administered
by account administrators, some of whom are banks. Second point: an HDHP
can exist without an HSA, however, a health savings account cannot be set up
unless it is accompanied by an eligible HDHP (eHealthInsurance Services Inc. 2008).
Unlike flexible spending accounts, HSAs do not have a use-it-or-lose-it incentive.
This means that unused money in employees’ HSAs at the end of the year rolls
into next year. HSAs are also portable. Employees own their HSAs and, in the
79 Second Quarter | 2008
event of job termination, employees keep their HSAs with current balances.
Also, the account owner can pass the HSA to his/her successors (eHealthInsur-
ance Services Inc. 2008). Money in the HSA can be used tax-free to pay for
any eligible health-care expenses. Eligible expenses are those listed in Internal
Revenue Code Section 213 (d). HDHPs typically come with a plan summary
listing qualified and nonqualified medical expenses under the particular plan.
A guideline to remember with qualified and nonqualified expenses is that the cost
of any medically necessary service, device and/or medication falls under qualified
expenses. Some examples of such expenses are chiropractor services, crutches,
nursing and medical services, etc. (HSA Bank 2008). HSA noneligible expenses
are those that are medically unnecessary (for example, some surgery to approve
one’s appearance). In spite of the distinction between qualified and nonqualified
expenses, employees are free to use their HSA funds for any medical expense
deemed needed by the user. However, if these dollars are used for nonmedical
purposes and prior to the age of 65, employees must pay an income tax and a
10-percent penalty. After the age of 65, only income tax applies.
Early in 2008, Wolters Kluwer Financial Services reported:
A majority of the nearly 1,200 financial institutions responding to a recent
Wolters Kluwer Financial Services survey say they are offering their customers
Health Savings Accounts (HSAs) and that the top reason they are doing so is
customer demand.
Sixty-two percent of the survey’s respondents, a majority of which were commu-
nity banks and credit unions, said they are offering HSAs while more than one
in three of the respondents who said they are not currently offering HSAs are
planning to start in the next three months.
The number one reason institutions offering HSAs said they were doing so in
the survey was customer demand (80 percent), followed by the ability HSAs give
them to generate new accounts (58 percent), increase cross-sell opportunities
(51 percent) and increase deposits (51 percent).
While HSAs are growing in popularity, it is clear customers are still in the early
stages of adoption as the number one reason institutions not offering HSAs
surveyed was also customer demand at 74 percent. And the majority of institu-
tions offering HSAs responding to the survey reported a small number of accounts.
Sixty-nine percent of respondents reported 100 or less HSA accounts, 18 percent
reported 101 to 500 accounts and seven percent listed more than 500.
80 WorldatWork Journal
Who and How Much Can Fund HSAs?
Employers and employees can put money into employees’ HSAs. At the same time,
neither party is required to make any contributions to these accounts. However,
contributions are highly recommended so that employees have the means to cover
possibly arising health-care expenses. To become more attractive to the public,
HSAs have been undergoing many legislative changes. One legislative modifica-
tion removed the rule of prorated contribution limits to health savings accounts
based on the month of the year employees enroll in the plan. Removing this rule
allows employees, who enroll for HSAs and enroll in an HDHP during the year, to
contribute to their HSA up to the same total of dollars as if they were enrolled for
an entire year. If they change their HDHP before an entire year passes, payments
toward their HSAs “become taxable in the year participation in the HDHP ends
and a 10-percent penalty applies as well” (Milliman Inc. 2008). The maximum
allowed yearly contribution, between the employer and the employee, is subject
to annual change reflecting the inflation rate (Milliman Inc. 2008).
In 2008, the amount of this contribution is “$2,900 for single coverage and
$5,800 for family coverage, regardless of the HDHP’s deductible” (eHealthInsurance
Services Inc. 2008).
According to the HSA Resource Center (2008), individuals of ages between 55
and 65 are allowed a “catch up” contribution, $900 in 2008, on top of the regular
maximum yearly contribution. As previously explained, any unused dollars in health
savings accounts at year’s end roll into the next year. The amount of this rollover
does not count toward the maximum allowable annual contribution. This enables
employees to save more tax-free dollars than solely the allowed yearly sum. HSA
dollars earn interest on a tax-deferred basis and workers have the option to invest
this money as well.
Among recent legislative changes in the HSA area is a ruling regarding the roll-
over of funds from flexible spending accounts (FSAs) and HRAs to HSAs. When
employees enroll in an HDHP, they are allowed a one-time rollover from FSAs
and HRAs to HSAs without the rolled-over funds counting against the highest
annual allowed contribution to HSAs (Milliman 2008). Beginning the day an HSA
is enacted and prior to Jan. 1, 2012, employees could relocate “the lesser of: the
amount in the account on Sept. 21, 2006, or the amount remaining on the date of
the rollover” (Wellpoint Inc. 2008). For example, if an employee had $2,000 in his/
her FSA on Sept. 21, 2006, this person enrolled in an HDHP on Jan. 1, 2007, and
the amount in the account on Dec. 31, 2007. is $2,500, he/she could rollover only
$2,000. According to Milliman (2008), employees can also do a one-time rollover
from their IRAs to their HSAs.
Which High-Deductible Health Plans are HSA-Eligible?
For a health-insurance plan to be HSA-eligible, it must have a certain minimum
yearly deductible and a certain maximum yearly out-of-pocket. These amounts are
81 Second Quarter | 2008
subject to annual change, and in 2008, the minimum deductible is $1,100 for indi-
vidual coverage and $2,200 for family coverage (HSA For America 2008a). This year,
2008, the maximum out-of-pocket expenditure for eligible costs cannot be more than
“$5,600 for self-only coverage” and “$11,200 for family coverage” (HSA For America
2008). To avoid a common misconception, it is important to reiterate that HDHPs
are not the same as HSAs. However, for one to be able to open an HSA, one must
be enrolled in an HDHP.
How Can Employees Access Their HSA Dollars?
Employers decide which HSA administrator’s services they will use. Most companies
consult their employee-benefits brokers before they make this decision. Administrators
of health savings accounts continually improve with new services to make HSAs user-
friendly as possible. The newest innovation makes accessibility of HSA dollars easier
by providing customers, in this case employees, with debit cards and/or checkbooks.
When workers must pay for medical services, devices and/or for medicine, they use
their cards or checkbooks. This process is identical to the one of purchasing any other
good or service. Employees also receive a periodic statement in the mail from their
HSA administrator. This statement looks similar to a bank statement and summarizes
the HSA’s activity and balance. So, accessing HSA funds and keeping track of them
is as easy as accessing and tracking a regular bank account.
What is Most Important that Employers Need to Remember in the Process
of Implementing HSAs?
Employee education tops the list of issues for total rewards professionals to consider
when implementing an HSA program. The premise of health savings accounts is based
on four crucial edifying ideas. The first two are directly related to HSAs; their design
and their workings. The other two are related to the overall behavior of employees
as consumers of health care.
First, employees must understand that the money in their health saving accounts
is theirs at all times. From the author’s experience as an employee-benefits broker
and administrator, often it is difficult for workers to understand the reality of
their ownership of their HSAs. This misunderstanding is based in the fact that
employees are not allowed to use their HSA dollars unless it is for medical expenses.
Establishing this concept is especially tricky when employers help fund employees’
HSAs. In this case, employees tend to not realize that ultimately, what employers
are doing is “giving them money.”
One might think that employees should more easily grasp the idea that they own
their HSAs when a firm does not contribute toward that HSA. However, from the
author’s experience, this is not the case. People frequently struggle with compre-
hending that when they contribute into their HSAs, the contributed dollars remain
in their possession, except that a purpose has been assigned to those funds.
82 WorldatWork Journal
The second point of education
involves helping workers compre-
hend that when they open HSAs,
they are responsible for all medical
expenses, with the exception of
preventive care, up until they fulfill
the amount of their HDHP’s deduct-
ible. Further, depending on type of
the particular HDHP, the employee
carries responsibility for a portion of
or for all medical expenses up until
they meet their annual out-of-pocket.
Out-of-pocket amounts of HDHPs are
substantially higher than the ones of
low-deductible health plans. Many
employees have been accustomed to
these low-deductible plans. Currently,
there are various designs of HDHPs.
The primary difference among them
is the amount of their deductibles.
Some HDHPs follow the more historical low-deductible plan principle, where the
deductible is considerably lower than the out-of-pocket. Workers are 100 percent
responsible for all expenses up until the total deductible is reached. Once that
deductible is fulfilled, employees are still responsible for covering a portion (typi-
cally 10 percent or 20 percent) of the medical claims up to the amount of the yearly
out-of-pocket (HSA Bank 2008). When the insured party reaches this sum, he/she
is covered at 100 percent for the remainder of the year. Next year, the same cycle
repeats. The other HDHP design is one with an out-of-pocket equal to the deduct-
ible. Employees who have these types of HDHPs are responsible for covering all
health-care services, devices and/or medications up to the yearly total of deduct-
ible/out-of-pocket. Once they fulfill this sum, they are 100 percent covered for the
remainder of the year. Next year, the cycle repeats. The question of “Which HDHP
design should the company offer to its employees?” depends on costs, organiza-
tional culture, workers’ mindset and the company’s economic situation.
Third, total rewards professionals need to help employees understand that the
cost of their health insurance is negatively related to their health. If the employee
population is in poor health, the health-insurance cost is usually high. The opposite
is also true. So some HSA believers are confident that prevention is a key to lowering
the cost of health insurance. Therefore, most HDHPs cover preventive care at 100
percent to encourage ongoing disease prevention.
The final point involves teaching employees to be smarter consumers of health
care. The author’s experience indicates that people struggle with perceiving medical
RESOURCES PLUS
For more information related to this paper:
www.worldatwork.org
Type in any or all of the following search keywords on
the search line:
❚ HSA
❚ “Health Savings Accounts”
❚ Healthcare
❚ Benefits.
www.worldatwork.org/bookstore
❚ The Employee’s Guide to Becoming
a Smart Benefits Shopper, Second Edition
❚ Managing Employee Health Care Costs:
A Collection of Articles from WorldatWork.
www.worldatwork.org/education
❚ B3: Health Care and Insurance Plans—
Design and Management
❚ B3A: Health Care and Insurance Plans—
Financial Management.
83 Second Quarter | 2008
services, devices and medication as any other good or service they purchase on
a daily basis. Most individuals shop to find the same quality at a lower cost for
clothing, food, vehicles, oil change, etc. However, they fail to do the same when it
comes to health care.
On the other hand, participants enrolled in HSAs are more likely to plan and
save for health-care coverage, according to a Blue Cross and Blue Shield Association
(BCBSA) survey. The “BCBSA 2007 CDHP Member Experience Survey” found that
consumers eligible for health savings accounts (HSAs) were 17 percent more likely
to participate in an exercise program than those enrolled in non-CDHP prod-
ucts. These consumers were also more likely to engage in the following wellness
programs: smoking cessation (20 percent versus 6 percent), stress management
(22 percent versus 8 percent), and nutrition and diet programs (27 percent versus
12 percent). Furthermore, HSA-eligible consumers participating in these programs
were more likely to see positive results. Additionally, the survey found 63 percent
of consumers eligible for an HSA, tracked their health-care expenses and 47 percent
are currently saving for future health expenses. In contrast, only 43 percent of
non-CDHP consumers track health-care expenses while 18 percent save for their
future health-care expenditures. HSA-eligible consumers also are more likely to seek
information about insurance as well as about provider (doctor and hospital) costs
and quality (Blue Cross and Blue Shield Association 2007).
Communication is the key to educating the consumers. And more companies in
the U.S. in 2007 were implementing internal communication programs, especially
those that aim to increase employee participation in benefits programs.
Watson Wyatt’s 2007/2008 Communication ROI study found that 53 percent of
employers used communication vehicles such as printed materials, special mailing
and employee meetings to increase enrollment in benefits programs in 2007.
This has more than doubled during the past four years from 25 percent in 2003
(WorldatWork 2008c). ❚
Zuzana M. Micko graduated from the University of Saint Thomas, St. Paul, Minn., with a degree in Spanish. She gained
her experience in employee benefits as an employee benefits broker, and later as an HR assistant. She is scheduled
to graduate with a master of arts in human resources and industrial relations degree from the Carlson School of
Management at the University of Minnesota in May 2008. Upon graduation, she will join Target as a participant in
the company’s Human Resources Leadership Program.
AUTHOR
84 WorldatWork Journal
Blue Cross and Blue Shield Association. 2007. “Blue Cross And Blue Shield Association Survey Shows Consumer
Driven Health Plan Enrollees Are Taking More Control Of Their Healthcare.” http://www.bcbs.com/news/bcbsa/
blue-cross-and-blue-shield-12.html?templateName=template-28767547&print=t. Viewed: March 20, 2008.
Brown, Paul B. 2008. “Same Office, Different Planets.” The New York Times, Jan. 26: 35.
eHealthInsurance Services Inc. 2008. https://www.ehealthinsurance.com/ehi/Alliance?allid=Goo18312&type=
HSA&sid=HSA+1+032306. Viewed: March 24.
HSA Bank. 2008. http://www.hsabank.com/HSAInfo/StaticContent.aspx?contentID=76. Viewed: March 24.
HSA for America. 2008a. http://www.health—savings—accounts.com/faq.htm. Viewed: March 24.
HSA for America. 2008b. http://www.health—savings—accounts.com/ Viewed: March 24. HSA Resource Center.
2008. http://www.hsaresourcecenter.com/contributions/catchup.php. Viewed: March 24.
Milliman. 2008. www.milliman.com. Viewed: March 24.
National Center for Policy Analysis. 2004. http://www.ncpa.org/pub/ba/ba481/. Viewed: March 24, 2008.
WellPoint Inc. 2008. http://www.anthem.com/shared/noapplication/f0/s0/t0/pw_ad086422.doc.Viewed: March 24.
WorldatWork. 2008a. “What is total rewards?” http://www.worldatwork.org/waw/aboutus/html/aboutus-whatis.
html. Viewed: March 21.
WorldatWork. 2008b. “More Companies, Workers Adopt Consumer-Directed Health Plans.” Newsline: March 13,
2008. Viewed: March 20.
WorldatWork. 2008c. “Employers Saying More about Benefits.” Newsline: Feb. 14, 2008. Viewed: March 20.
Wolters Kluwer Financial Services. 2008. “Health Savings Account Survey Results.” Jan. 24, 2008.
http://www.wolterskluwerfs.com/Info/HSA/HSA_Survey.pdf. Viewed: March 20.
REFERENCES
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 on www.worldatwork.org.)
CEO Bonuses Down, 10b5-1 Stock Trading Plan Use Up
In a study of 178 companies with annual revenues of more than $1 billion, the median value of CEO
bonuses tied to annual performance plans covering 2007 fell by 18.6 percent. The prevalence of
such payouts fell from 77.5 percent in 2006 to 70.4 percent in 2007. However, overall CEO bonus
compensation in fiscal 2007 grew by 1.4 percent during 2006. Overall bonuses include discretionary
awards and cash payouts from annual and multi-year performance plans. While the prevalence of
CEO discretionary bonuses increased slightly from 24.2 percent in 2006 to 26.8 percent in 2007,
the median value of discretionary awards grew by 27.6 percent. (www.equilar.com)
Worldwide Gender Gap is Stuck at 16 Percent
A report reveals that, on average, women around the world are paid 16 percent less than their male
work colleagues. The International Trade Union Confederation report, “The Global Gender Pay Gap,”
includes detailed analysis of statistics from official sources in 63 countries worldwide. Data from an
online salary survey covering more than 400,000 workers in 12 countries is also included in the new
study, as reported by Online Recruitment. (www.incomesdata.co.uk)
Departing CEOs Not Receiving Increased Termination Payments
At Most Companies
The vast majority of U.S. companies paid CEOs who departed in 2007 the same compensation
disclosed in their 2007 proxy disclosures and provided no additional ad hoc termination payments,
according to a survey. The Watson Wyatt Worldwide analysis compared 2007 proxy disclosures
with 8-K filings for CEOs departing between April and December 2007. Watson Wyatt found 54 of
70 companies (77 percent) provided no additional compensation at termination to that compensa-
tion disclosed to shareholders in the 2007 proxy. Disclosure of potential termination payments was
required for the first time by the Securities and Exchange Commission (SEC) in 2007 proxy filings.
The remaining 23 percent of companies increased compensation for their CEOs at termination by
a median value of about $600,000. The weighted average of the extra payments, the difference
between 8-K filings and what was reported in the proxy, was 224 percent. In some cases, the
increase included additional quid pro quos such as general release from claims, transition services
provided as a non-CEO, additional noncompete time or an agreement to provide future consulting
services. Smaller companies ($1.4 billion average revenue) were more likely than larger firms to
provide exit pay above what was reported in their proxy. (www.watsonwyatt.com)
Most Multinationals Take Local or Regional Approach to Pay
Although multinational organizations are striving to globalize their compensation practices, less
than one-half have predominantly global programs, according to a recent survey. Mercer’s “Global
Compensation Strategy and Administration Survey” reports 45 percent of participating organizations
take an almost exclusively global approach to compensation design while the majority continue to
take a local approach (39 percent) or regional approach (16 percent). According to Mercer, the devel-
opment of global compensation programs starts with an overall global compensation strategy. While
the vast majority of responding organizations (84 percent) have established a global compensation
strategy for their executive-level employees, much fewer have done the same for other employee
groups, continuing to define their compensation strategies at the local or regional level. Slightly more
than one-half of the organizations (53 percent) have specific global compensation strategies in place
for their managers while slightly less than one-third (30 percent) have global strategies for profes-
sionals and slightly more than one-quarter (26 percent) for sales employees. (www.mercer.com)
Second Quarter 2008
877/951-9191www.worldatwork.org
Contents © WorldatWork 2008. WorldatWork members and educational institutions may print 1 to 24 copies of any WorldatWork-published article for personal, non-commercial, one-time use only. To order 25 or more print presentation-ready copies, or an electronic copy for distribution to colleagues, clients or customers, contact Gail Hallman, ghallman@tsp.sheridan.com at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, customerrelations@worldatwork.org, 877-951-9191.
86 WorldatWork Journal
Directors, Institutional Shareholders At Odds Over Whether
Executive Pay Model Is Improving
Corporate directors and institutional investors disagree on whether the U.S. executive pay model
is changing for the better, but both groups feel the current model has hurt Corporate America’s
image. These are the findings from a study by Watson Wyatt Worldwide. “While directors and
institutional shareholders agree on key executive pay issues, they don’t see eye to eye on other
areas,” said Ira Kay, global director of compensation consulting at Watson Wyatt. “While directors
believe the system generally works, institutional investors generally feel the model’s flaws run
deeper and require more substantial changes. Clearly, more work needs to be done.”
(www.watsonwyatt.com/boardandinvestors)
Financial Security Tops List of Gen Y Career Concerns
What career issues keep Generation Y professionals awake at night? When asked to name their
chief career concern, 33 percent of Gen Y workers polled cited compensation and benefits issues.
The second most common response was finding and keeping a job, provided by 26 percent of
those surveyed; career satisfaction ranked third, named by 23 percent of respondents. The survey,
commissioned by Robert Half International and Yahoo HotJobs, examines the professional priorities
of the most senior members of Generation Y, or the “Millennials”—those who have already started
a career or will soon start one. More than 1,000 adults between the ages of 21 and 28 were polled
for the project. The findings are available in a report, “What Millennial Workers Want: How to Attract
and Retain Gen Y Employees.” (www.rhi.com)
Tech Wages Hit Highest Level in Seven Years, but Growth Slows
Hourly wages for highly skilled technology professionals reached an all-time high during the fourth
quarter of 2007. And though growth slowed sequentially at year’s end, it still remained ahead of
2006, according to an index. The “Yoh Index of Technology Wages” reports the average hourly wage
for high-impact technology workers was recorded at $32.39 during October, the highest average
pay figure documented by the index since its inception in 2001. (www.yoh.com/yohindex)
Health-Care Costs Coupled with Small Pay Raises an Issue
With health-insurance premiums growing four times faster than workers’ earnings from 2001 to 2007
(78 percent compared to 19 percent, respectively), workers and employers are paying increasing
attention to health-care costs. A report in the Kaiser Family Foundation’s “Snapshots: Health
Care Costs” series examines changes in wages and benefits since the 1960s, and concludes that
one way working families may be feeling the impact of rising health-care costs is through smaller
increases in their paychecks. (www.kff.org/insurance/snapshot/index.cfm)
Optimism Remains Strong for High-Deductible,
Spending-Account Health Plans
While adoption of high-deductible health plans coupled with spending accounts remains modest,
supporters believe consumer-directed health plans (CDHPs) will take hold as part of a larger employer
strategy to confer more responsibility on workers for health-care costs, lifestyle choices and treat-
ment decisions, according to a new study. National surveys suggest that while CDHPs—typically
a high-deductible health plan accompanied by either a health reimbursement arrangement (HRA)
or health savings account (HSA)—are being offered by a growing number of employers, enrollment
in these products constituted 5 percent of total enrollment in employer-sponsored health plans in
2007. “There’s a lot of window shopping going on with consumer-directed health plans, and there’s
a lot of watchful waiting to see how early adopters fare,” said Paul B. Ginsburg, Ph.D., president of
the Center for Studying Health System Change, a nonpartisan policy research organization funded
in part by the Robert Wood Johnson Foundation (RWJF). (www.hschange.com)
87 Second Quarter | 2008
In the Game of Hiring, Flexible Employers Win
Twenty-nine percent of U.S. workers consider work-life balance and flexibility to be the most impor-
tant factor in considering job offers, according to a survey. Compensation still matters, of course,
but it finished second (23 percent) behind lifestyle when workers were asked to name the primary
reason they accepted their current positions. “Money will always be important to people, but in
this age of Internet-powered remote access where there are so many virtual options, employees
place a much higher premium on flexible work arrangements,” said Robert Morgan, co-president of
Recruitment and Talent Management, Hudson, which conducted the survey. (www.hudson.com)
Salary Is Top Draw for Job Candidates, but Benefits Nearly As Popular
A survey suggests that successfully wooing job candidates takes more than salary alone. While 37
percent of chief financial officers (CFOs) interviewed said offering higher compensation than
competitors is the most effective incentive for attracting accounting professionals, nearly as many
(33 percent) felt the benefits package had the greatest influence, up from 2 percent five years ago.
The findings also suggest traditional incentives are a higher priority today: While the popularity of
benefits surged, the number of financial executives who feel telecommuting and flexible work sched-
ules are the top draw fell 20 points, from 33 percent in 2003 to 13 percent in 2008. (www.rhi.com)
U.S. Retirement Assets Grew Substantially in Last 10 Years
Although recent market downturns are holding back asset growth, U.S. retirement plans have nearly
doubled in value since 1997, research reports. Watson Wyatt Worldwide’s 2008 “Global Pensions
Asset Study” found that assets in U.S. pension funds, 401(k)s, individual retirement accounts and
other retirement savings vehicles increased from $7.9 trillion in 1997 to $15 trillion in 2007. As of
the start of the year, these U.S. retirement assets were worth more than the gross domestic product
($14 trillion) based on a compound annual growth rate of 6.7 percent since 1997, compared with
GDP growth of 4.8 percent during the same period. “Retirement plans have built up strong reserves
over the last 10 years, benefiting employers, employees and retirees,” said Carl Hess, director of
Watson Wyatt’s investment consulting in North America. “Companies that have taken steps to
optimize returns or reduce risk through their investment strategies, whether by hedging, diversifi-
cation or better deals on fees, are better positioned than those still thinking about it. The current
market will be challenging for many investors, and we can expect to see declines in asset values
over the next year if the market turmoil continues.” (www.watsonwyatt.com/globalpensionassets)
Small Business Health-Care Survey Points to Need for Reform
While rising health-care costs are an ongoing concern for all businesses, a recent survey confirms
that the small-business community in particular is struggling to maintain health-care coverage for
employees. The survey was conducted of members by the Michigan Business and Professional
Association (MBPA) and its sister association, the Michigan Food and Beverage Association (MFBA).
(www.michbusiness.org)
IRA Plan Assets Concentrated in Families with High Incomes
Assets in individual account retirement plans are concentrated in families with high family income
and higher net worth, as well as in families with older family heads, higher educational attainment,
and white, non-Hispanic family heads, according to a study. These assets were in employment-
based defined contribution plans (typically 401(k) plans), individual retirement accounts (IRAs) and
Keogh plans. The Employee Benefit Research Institute study, in the March 2008 EBRI Notes, reports
individual account retirement plans assets amounted to $6.767 trillion in 2004, according to the
most recent data from the Survey of Consumer Finances. (www.ebri.org)
Facts & FiguresStatistics from this issue of WorldatWork Journal
2,642 Number of Medicare Prescrip -
tion Drug Plans (PDP) offered
in the year 2007 (PAGE 56).
2006 Congress asked the U.S. Govern-
ment Accountability Office (GAO)
to review the effectiveness of Medicare Part D
communication tools (PAGE 59).
70% The Government Accountability
Office’s evaluation of 137 usability
features of the Medicare Part D Web site found
that 70 percent were likely to cause confusion
(PAGE 60).
57% The most frequently mentioned
examples of retention programs
and actions that have been successful with
scarce/critical talent include: Provide child-care
and elder-care benefits, with on-site centers
being the strongest and preferred benefit
(57 percent) (PAGE 19).
Down by More Than 18% | In a study of 178
companies with annual revenues of more than
$1 billion, the median value of CEO bonuses tied
to annual performance plans covering 2007 fell
by 18.6 percent (PAGE 85).
5,462 | U.S. News & World Report (2007)
published a study of performance excellence
of “America’s Best Hospitals” based on 5,462
hospitals (PAGE 17).
35% | In a survey, 35 percent of organizations
said their managers are effective at developing
connections for employee, between their work
and business results (PAGE 32).
Three | Book authors Michael Tracey and Fred
Wireman (1997) formulated a three-strategy
model suggesting organizations compete based
on operational excellence, product leadership or
customer intimacy (PAGE 8).
July 1, 2004 | On July 1, 2004, California imple-
mented the first and only paid family-leave bill
in United States history (PAGE 45).
Expectancy Theory | Research supports expec-
tancy theory, which posits that if an employee
believes that producing outcomes desired by
the organization will result in receiving valued
rewards, the employee will be motivated to work
towards that result (PAGE 11).
Three Types | For financial measurements from
outside a company, there are three types of
measurements: performance of other companies,
ratings by outside organizations and general
economic factors (PAGE 71).
Two | The question of “Whose Performance?”
breaks into two questions: “Who is included
in being eligible for a pay-for-performance
payment?” and “Whose performance is
measured for that payment?” (PAGE 65).
Two-thirds
For two-thirds of the 21 top-performing medical
centers studied, individual performance is an
objective for determining base-pay increases
and lump-sum payments, if used, for scarce/
critical talent (PAGE 21).
27%
In 2008, according to Watson Wyatt, 27 percent
of companies offer CDHPs with a health savings
account (PAGE 78).
Nearly 1,200
A majority of the nearly 1,200 financial institu-
tions responding to a recent Wolters Kluwer
Financial Services survey said they are offering
their customers health savings accounts (HSAs)
(PAGE 79).
28%
Twenty-eight percent of organizations believe
their managers manage the “pay for perfor-
mance” relationship effectively (PAGE 32).
Second Quarter 2008
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