In my experience in the Government Contracting sector, compensation is basically comprised of pay in various forms and benefits. They are Base Compensation, Retention Based Compensation, and Owner/Partner Compensation from personal experience, I’ve seen the big messes when the Incentive and Retention tiers aren’t well thought out by the company. I’ve also witnessed the challenges that small businesses face when the base compensation tier isn’t well defined and left to the mercy of the hiring manager, recruiter, and human resources to negotiate per candidate.
Base Compensation Program
Base Compensation Programs are comprised of pay rate or salary and benefits. Benefits can include insurance coverage, training, education, retirement plans, holidays, and paid time off, student loan payments to name some.
It is ideal for an organization to have a compensation philosophy. This creates a framework for executives, managers, recruiters, and human resources personnel to operate within. This philosophy is highly dependent on your industry and the type of work your organization does.
For example, a company providing highly technical and specialized services or one that recruits from a small pool of available candidates based on experience, expertise and suitability may look something like: We provide above market pay and benefits programs.
Having a philosophy will enable your team to operate more effectively as the philosophy will enable the creation on a framework that streamlines recruiting of new staff by eliminating “one off” decisions. It also can support your performance management program which should entail parameters for merit increases and professional advancement of staff into management and potentially executive roles.
Incentive Based Compensation Program
Every employee is hired to perform a certain set of defined tasks and other tasks as assigned. What types of behaviors does your company want to reward employees for performance? Incentive compensation is designed to encourage and drive those behaviors that the employee can reasonably obtain through their own efforts. They should also understand clearly how these are measured, calculated and paid.
A very simple Incentive Based Compensation Program for a government contactor could reward an employee that bills 460 hours (based on a 1,840 billable hours/year) in a quarter with a “x”% quarterly bonus. To build on that, if that employee qualifies in “x” quarters per year then that employee qualifies for an additional “x”% annual bonus.
Managers can be incented in other or additional ways based on what financial metrics are valuable to your company such as project profitability, deployments completed on-time, additional positions added to the contract or others that meaningfully drive performance toward your company’s annual plan and are reasonably obtainable and understandable.
Retention Based Compensation Program
Retention and incentive compensation programs can easily become lumped together if care and forethought aren’t taken to develop each independently. Unlike incentive compensation, retention compensation isn’t paid to the employee as a cash bonus. Retention compensation creates a longer-term commitment between the employer and a key employee or company executive.
This can be accomplished in many ways short of providing real equity to this person. A simple solution could be to provide some profit sharing or non-elective contributions to the key employee within the company retirement plan. There are ways to provide different levels of corporate contribution to employees in addition to simple matching and safe-harbor programs (which typically fall within the Base Compensation Program).
There are other programs that fall outside of ERISA and allow for the company to make choices for specific individuals that can be funded and/or insured while providing the company with protection in case the employee departs. These types of programs need to be thought out and commitments made beyond what is expedient today. If clear bright lines are developed and directly communicated to the key person(s); he or she will not see the value. I’ve seen employers fail to understand the difference between incentive and retention pay resulting in frustration on behalf of the employer and employee.
In addition to the based benefits and the ability to utilize some of the same instruments from the Retention Programs, owners and partners should develop and curate an exit strategy.
An exit strategy should encompass both the sale of the corporation and in the case of multiple owners the exit (death, disability, retirement, etc.) of a partner short of a corporate sale. Health of an owner/partner or partner family member can impact corporate performance. Other life events could result in an owner/partner choosing to move on from the corporation.
A plan should be in place beyond the basic founding documents that were developed and executed prior to achieving any measure of financial success. These are detailed and personal discussions that result in the creation and/or modification of legal documents. These discussions are best done well in advance of any real need to ensure the best outcomes for all are achieved. Some of these risks can be funded internally and others insured. Simply put if your partner dies, would you want to be in business with his or her spouse? What if your partner is incapacitated in any number of ways and can’t contribute to the business, would he or she still be entitled to pay, profits, and distributions?
You get a big renewal and your broker suggests a plan with a deductible or a higher deductible to mitigate the renewal increase. The broker will suggest various ways to help the employee pay for the deductible, but will only push so hard because they are afraid to challenge too much which could hurt their relationship with you, their client. Who gets hurt, the employee. Why? Because of bad information coupled with poor insurance consulting.
There are two very important reasons and many ways to help employees manage the deductibles for the plans you offer them. I believe employers have a responsibility to help their employees with this. There are numerous tax advantaged ways to pay for a deductible and those generally provide some financial benefits to companies as well.
Without you setting up some sort of spending, savings, or insurance program for your employees to manage their deductible; an employee is left to pay out of their pockets. While paying out of my personal accounts is simple and easy, it is the most expensive option for both them and your company. This is because the employee gets no tax advantage from these payments and you will not get any tax benefit either. It’s also important to keep in mind that most people don’t have enough saved to pay for a $1,000 unplanned expense. So, higher deductibles can impact the financial wellness of your employees.
Now with only 15% of health plans having a deductible of less than $1,000, I think it’s important for an employer to provide some help in this area. Of covered workers, 85% have an individual deductible over $1,500 and that has doubled since 2008. This increased cost sharing for health care services coupled with increases in both total health insurance premiums and your employees share of those premiums has laid the burden on your employees to pay more and more of their healthcare expenses. Increasing deductibles, consumer directed or otherwise, is not the complete solution to your company’s nor our nation’s healthcare problem. Providing a tailored solution to your company’s needs is what I do. Regarding our national healthcare problem, that’s a topic for another blog(s) and may be out of my area. I focus on helping my clients navigate within the system to increase engagement and control costs.
I think having your employees pay out of standard checking or credit accounts is the worst option but a burden that is placed on many of them. This generally means using a credit card and that likely makes this even more expensive as most people carry a balance on their credit cards. The average American has over $6,000 in credit card debit and the average credit card interest rate is over 16%. Another reason it’s the most expensive method is because almost everyone reading this can’t write medical expenses off on their taxes. You can only deduct your medical expenses when they are in excess of 7.5% of your adjusted gross income. In today’s tight labor market with 3.7% unemployment, you should think it’s a bad option as well. Your staff can find gainful employment easily and the recruiter they are talking to will convince them that they are getting better benefits and higher compensation. Employees will leave you for a $6,000/year raise even if they don’t understand the total compensation you or the new employer is providing them.
So what’s the financial benefit to the company? In short, money that is paid by you or deducted by your employee through payroll to fund medical expenses through an employer sponsored plan will reduce your company’s tax liability. So, if the employee sets aside money in a spending or savings account then you aren’t matching the FICA on that set-a-side. Simply calculate the cost of setting up and maintaining the plan(s) and if the employees are appropriately educated to foster participation, the company may very well satisfy what I believe is their responsibly while gaining a tax advantage.
To be clear, deductibles and deductible funding strategies are not cost containment strategies. These are tools for addressing ways to spend money but not ways to lower healthcare costs. I’ll discuss cost containment elsewhere.
I’ll detail the many ways to support your employee’s deductible funding needs in upcoming posts. Hey, if you agree, disagree or have any valuable contribution please post a comment.