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WorldatWork advisory boards identify current and future strategic issues and topics in compensation, benefits and the work experience. Their suggestions, as well as input from other sources, help determine the technical content of WorldatWork products and programs such as conferences, forums, seminars and publications.

Benefits Advisory Board I Debra A. Weafer, CCP, CBP Vice President, Compensation & Benefits, BlueCross BlueShield of Massachusetts

Compensation Advisory Board I Constance L. Haney, CCP, CBP, GRP, Director, Compensation and Benefits, Mentor Graphics Corp.

Executive Rewards Advisory Board I Randolph W. Keuch Vice President, Total Rewards, H.J. Heinz

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Reviewers

WorldatWork Journal thanks the following individuals for reviewing manuscripts during the editorial cycle for the Third Quarter 2010 issue. Subject-matter experts, including members of WorldatWork’s advisory boards, review all manuscripts.

Todd Allen, CCP, SPHR I Koniag Development

David Bell, CCP I DP Associates

Scott Busch, CCP, GRP I Loblaw Companies Limited

Chris Crawford, CCP I Longnecker & Associates

Charles Csizmer, CCP I CMC Compensation Group

Sean Delaney I Microsoft

Susan EIchen I Mercer

John England I Towers Watson

Tom Farmer, CCP, SPHR I InterContinental Singapore

Mark Fogel, SPHR I Leviton Manufacturing

Evan Gady I Hylant Group

Lori Glasgall, CCP I Integrated Compensation Solutions Inc.

Adam Greetis I Seyfarth Shaw LLP

Regina Hack, CCP I True Value Co.

Myrna Hellerman, CCP I Sibson Consulting, A Division of Segal Co.

Kim Huerta, CCP I Golden Living

Jolene Huey, PHR I Talent Stream Consulting

Deb Jacques, CCP I LL Bean Inc.

Daryl Johnson, CCP I Acton Consulting Ltd.

Jeffrey Johnson, CCP I Workforce Planning & Rewards Consultancy

Robert Jones I ICBC

Randy Keuch I HJ Heinz

Ann Kraus, CCP I The Guardian Insurance Co.

Betsy Larson, CCP, SPHR I MassMutual Financial Group

Jim McKay I Towers Watson

Donald Nemerov I Grant Thornton

Barbara Pogue, CCP, CBP, SPHR I Idaho National Laboratory

Irma Regalado, CCP I Nestle USA Inc.

Dave Roberts, CCP, CBP, GRP, SPHR American Cancer Society

Randy Ruotolo, CCP I United Illuminating Co.

Ruth Ryals I International Benefit Consulting Group Ltd.

Tikeetha Thomas, CBP I FINRA

Dave Walstrom, CCP I Apogee Enterprises

Executive SummariesThird Quarter 2010 | Volume 19 | Number 3

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16

28

Understanding Executive Pay Equity and Fairness: Ratios and RationalityJim Bowers and Fred Whittlesey, CCP, CEP, Hay Group

There is an increasing level of governance and legislative activity proposing disclosure

of pay ratios between the CEO and other employees. As there is no empirical basis for

determining the appropriate ratio, companies must use caution in applying ratios for

assessing or setting pay. This article explains why such factors as company size, orga-

nization structure, business model, extent of global operations and total compensation

mix must be considered in the analysis. In addition, many of the perceived excesses

leading to charges of “unfair” executive pay have to do with design and operation of

pay programs, not the amount of pay itself, further highlighting the difficulties of the

ratio-based approach.

Work-life Programs: Attracting, Retaining and Empowering the Federal WorkforceKathleen Lingle, WLCP, Alliance for Work-Life Progress at WorldatWork

In this article, the author examines the current state of work-life effectiveness in the

public and private sectors and recommends how work-life can be strengthened to

improve federal government operations. The article is adapted from May 4, 2010 written

testimony of the executive director of the Alliance for Work-Life Progress at Worldat-

Work before the Senate Homeland Security and Government Affairs Subcommittee

on the Oversight of Government Management, the Federal Workforce and the District

of Columbia.

A Longitudinal Lens on the Evolution of EAP, Work-life and Wellness Benefit ProgramsRoland Zullo, Ph.D., Institute for Research on Labor, Employment and the Economy, University

of Michigan; Patricia A. Herlihy, Ph.D., RN, Rocky Mountain Research; and Max Heirich, Ph.D.,

Institute for Research on Labor, Employment and the Economy, University of Michigan

This study inquired about how employee assistance (EAP), work-life and wellness

programs had changed in businesses that had been recognized as “family-friendly”

15 years earlier. The researchers used semi-structured interviews of corporate benefits

managers from 28 of those firms acknowledged as “family-friendly” in 1993 to determine

how the programs had changed and the factors contributing to those changes. They

identified six dimensions that influenced benefits reorganization: 1) factors supporting

the resiliency of family-friendly benefits; 2) factors pressuring firms to choose between

targeted and standardized benefits; 3) the globalization of business operations; 4)

administrative requirements to provide a cost-benefit rationale for programs; and 5)

factors influencing decisions to outsource services or provide benefits internally

Third Quarter 2010

877-951-9191www.worldatwork.org

Contents © WorldatWork 2010. 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, [email protected] at Sheridan Press, 717-632-3535, ext. 8175. To order full copies of WorldatWork publications, contact WorldatWork Customer Relationship Services, [email protected], 877-951-9191.

Was Our Initial Confidence in the Total Rewards Concept Justified?Frank Giancola

In 2000, when WorldatWork introduced its version of total rewards concept, research

demonstrating how effective nonfinancial rewards were for attracting, motivating and

retaining employees was in short supply. Little was known about the relative importance

of the total rewards elements for each of these objectives and how they interact to

affect an employee’s behavior. During the past 10 years, this gap in knowledge has

been narrowed by the intelligence gained from employee surveys and field studies of HR

consulting firms and organizational psychologists. This paper examines the evidence

to see if the early confidence in the total rewards concept was justified.

Internal Equity and External Competitiveness:Critical Components of Effective Rewards StrategiesBy Robert J. Greene, Ph.D., CCP, CBP, GRP, GPHR, CPHRC, Reward Systems Inc.

Effective rewards strategies result in programs that are individually and in aggregate:

1) internally equitable; 2) externally competitive; 3) well administered; 4) affordable; 5)

acceptable to employees; 6) a good fit to the organizational culture and the workforce

culture(s); and 7) contributors to organizational success.

If conflicts arise among these characteristics, a balance must be achieved that is

optimal. Rarely can all seven of the “ideal” results be fully realized. This article focuses

on achieving a balance between internal equity and external competitiveness.

Funding Public Sector “Other Post-Retirement Employee Benefits” (OPEBs) By John G. Kilgour, Ph.D., California State University, East Bay

The Government Accounting Standards Board’s 2004 adoption of rules for public-sector

employee pensions required for the first time that state and local governments quan-

tify and disclose the magnitude of their unfunded post-retirement employee benefits

(OPEB). At that time, some jurisdictions were in good shape while others had large and

serious problems. The new standards became fully effective in late 2008, coincident

with the beginning of the 2008– 09 recession, which has had a devastating impact on

state and local government revenues. This article examines this development and the

various alternatives available to public-sector employers in grappling with this new

and huge problem. The choices are to shed costs, transfer them to the employees and

retirees, and/or to prefund their OPEB liabilities. Prefunding makes sense in the long

run; however, the elected officials who are ultimately responsible for the decision and

its implementation tend to operate in the short run.

5 Third Quarter | 2010

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62

Any examination of fairness in executive pay

likely will meet with criticism. Many Main Street

residents feel that executive pay is excessive; the

media like to keep reminding them of this. Executive

pay bashing has almost become a sport.

A recurring theme is the concept of “fairness.” As

the authors discussed the need for an article about the

“fairness” of executive compensation, they went to the

dictionary for help.

The historical roots of the word “fair” in old English

and German mean “beautiful.” When we discuss the

notion of whether executive pay is fair, however, we’re

often referring to whether it is “marked by impartiality

and honesty; free from self-interest, prejudice, or favor-

itism; conforming to the established rules; allowed;

consonant with merit or importance; due” (Merriam-

Webster 2010).

In economics, fairness is defined as the relation among

economic factors where price matches fair value that is

bias-free and rational. Executive pay today is under attack

with concerns about improper bias by compensation

committee members and consultants, and irrationality.

Many parties are weighing in on the issue of fairness

and executive compensation, for example:

Understanding Executive Pay Equity and Fairness: Ratios and Rationality

Fred Whittlesey, CCP, CEPHay Group

Jim BowersHay Group

Third Quarter 2010




Edgar Woolard, former CEO of DuPont, has long promoted the notion that z

fairness is defined as the CEO not being paid more than two times those

at the next highest executive level.

Kenneth Feinberg, the Obama Administration’s Special Master of Executive z

Compensation, has been making decisions in light of overall fairness, consid-

ering performance, government bailouts and public perception.

The Compensation Discussion and Analysis (CD&A) portion of the annual z

proxy statement for public companies requires justification of pay decisions,

and “fairness” is one of the criteria.

Shareholder interest groups also have jumped on the bandwagon in promoting z

fair and reasonable pay, ranging from say-on-pay proposals to specific pay

limitations and disclosure of executive-to-employee pay ratios.

Labor unions, especially the AFL/CIO, have been emphasizing the relation-z

ship of union labor pay to CEO pay and have promoted the concept of using

reasonable multiples to determine top executive pay.

Congress and the Securities and Exchange Commission (SEC) have been z

considering whether to require disclosure of pay multiples between execu-

tive and workers as a way to view pay reasonableness.

A BRIEF HISTORY OF FAIRNESS IN EXECUTIVE PAY

Ratios and their use in determining fairness is not a new concept. Thirty-

three years ago management expert Peter Drucker wrote an opinion article

for The Wall Street Journal advocating the use of ratios between executive

and non-executive employee pay. Drucker (1977) indicated flexibility in the

concept, noting that an appropriate ratio in a small business might be 15-to-1,

while in a larger firm 25-to-1 or 30-to-1 might be reasonable. He stated

that a ratio of 25-to-1 is “not equality. But it is well within the range most

people in this country, including the great majority of rank-and-file workers,

consider proper and indeed desirable.” He might have meant “fair.”

Seven years later, Drucker (1984) again opined in The Wall Street Journal

that “… the compensation of a tiny group — no more than 1,000 people —

at the top of a very small number of giant companies … offend the sense of

justice of many, indeed of the majority of management people themselves.”

He called again for a limit on executive pay as a multiple of pay for the

rank-and-file, in the 15-to-1 to 20-to-1 range.

Interestingly, Drucker’s latter commentary occurred just as a 14-year stag-

nation of the stock market was turning into an 18-year bull market that

produced executive pay levels unimaginable in 1977 or 1984. Just as a rising

tide raises all boats, this same bull market created multitudes of millionaires

among those rank-and-file employees too, and thus the question lingered,

what is fair?

8 WorldatWork Journal

A FRAMEWORK FOR FAIRNESS

Compensation professionals are now asked not only whether executive pay is

competitive, linked to shareholder value, cost-effective, tax efficient and share-

holder-friendly, but whether that pay is “fair.”

Masson et al. (2009) cited three conceptual aspects of fairness:

Distributive fairness1 | — when everyone receives their fair share. This assumes

a fixed “pie” with everyone getting their fair slice. The distribution between execu-

tives and employees is not the only division — some shareholders and proxy

advisors have strict guidelines for how much of the pie can go to employees,

through the concept of dilution and the associated metrics of overhang and burn

rate (RiskMetrics 2010).

Procedural fairness2 | — when the process for allocating pay is effective and

transparent. In executive pay, this is the driver behind increased disclosure

requirements in SEC filings for public companies and in Form 990 filings for

tax-exempt organizations.

Interactional fairness3 | — when the condition of people being treated with

dignity and respect is applied.

The authors believe that the implicit theme behind the executive pay controversy

has roots in each of these.

DISTRIBUTIVE FAIRNESS: INTERNAL PAY EQUITY

Drucker had an immense influence on management practices in the United States

and around the world, but on this topic little progress was made. Throughout

the 1980s and 1990s, media accounts highlighted the large and growing amounts

of pay going to executives of public corporations in the United States. It wasn’t

until a few years ago, however, that the terms “pay disparity” and “internal pay

equity” moved to the forefront of the debate.

Over the past quarter century, the United States has moved from Drucker’s

sole cry for pay equity to a movement joined by academics, consultants, lawyers,

shareholders, proxy advisors, and politicians — including the U.S. president.

This year, a number of public corporations received shareholder proposals that,

if approved, would require them to disclose the total compensation packages,

including benefits, of their top executives and compare those values to the pay

of the company’s lowest-paid workers. This parallels the ongoing attitude toward

executive pay in the United States, using shareholder pressure and disclosure as

the strategy for executive pay reform rather than specific limits. Over the past year,

several bills have been introduced in Congress that would require disclosure of

and/or set specific pay limits for executives, expressed as a ratio to the lowest-paid

worker or the average pay of the company’s workforce.

The executive pay equity movement is gaining steam, indicating the need to

define what it is before we actually do something about it.


INTERNAL EQUITY FOR CEOS

In the press, internal equity as it relates to CEO pay is defined by the ratio of CEO

pay to direct reports or named executive officers (NEOs). When discussed in the

context of a broad segment of a company’s workforce, the term “internal equity”

generally refers to the state of multiple employees receiving comparable pay within

a common range of job size, job requirements, experience and performance. These

concepts of pay equity are embedded in legislation including: the Equity Pay Act

of 1963 (U.S.); Equal Pay Act of 1970 (UK); Directive 2006/54/EC (European Union);

and Pay Equity Act (Canada). This is generally a concept of horizontal equity, with

pay being comparable among jobs with similar requirements. At the executive level,

vertical equity also comes into play.

Many executive jobs are single-incumbent roles — a company has only one CFO,

one controller, one general counsel and so on. Multi-incumbent jobs include group

or division heads. But the ratio of CEO pay to NEOs is in large part influenced

by organization structure. A company with several groups reporting to the CEO

versus a company having one COO will find that market values and internal equity

ratio calculations will likely differ. Companies traditionally determine internal

equity through a combination of job-market pricing and use of a job-evaluation

plan that will typically focus on internal job structure in terms of the job’s inputs,

throughputs and outputs.

Internal equity has in more recent years been defined in terms that go beyond

job size and includes criteria such as executive performance and contribution.

Executive positions present another challenge to the extent that performance

should be a factor in pay determination and an element of equity — not

equality — in pay. The bulk of executive pay is determined by performance and

most, if not all, of the measurement of performance is based on company and/or

business unit results. When pay is primarily determined by company performance,

the only lever to pull for internal equity is the relative distribution of annual and

long-term incentive opportunity, which leads to further measurement complexi-

ties. This highlights the difficulty of attempting to apply fixed standards across

industry sectors that have very different pay and performance profiles. Should the

best performing CEOs in the companies creating the greatest shareholder value be

criticized for having the “highest ratio”?

PAY RATIOS

Still lacking is an empirical basis for determining what is “fair” in executive

pay. The difficulties posed by differences in organization size, form of organi-

zation and governance, business complexity, organization structure and other

factors — many of which were referenced in Drucker’s work — call for a meth-

odology that can resolve these questions and turn an emotionally laden debate

into a coherent analysis for corporate decision making.


There are a number of reasons that a single ratio, or even range of ratios, cannot

be unilaterally applied as a measure of the “fairness” of executive pay.

Company size.1 | There is general agreement that a CEO running a company with

$50 billion in revenue and 300,000 employees has a larger, more complex job than

the CEO of a company with $1 billion in revenue with 5,000 employees. Hay Group

captures this difference in its job measurement methodology through its manage-

ment breadth and accountability factors. But this influence dissipates further down

the organization structure and this effect is not present for most non-executive jobs.

The gap between pay of the CEO and a junior accountant at the $1 billion company

should not be the same at the $50 billion company. While the ratio can be adjusted

based on the revenue factor, other complexities are introduced.

Organization structure.2 | This is an especially critical factor when comparing

CEO pay to that of direct reports. In a flat organization structure with a dozen

positions reporting to the CEO, one would expect a bigger gap than in a company

where there is an heir-apparent COO reporting to the CEO. The same would be

true if comparing a company with a functionalized organization structure versus

one operating more as a holding company or organized in a matrix structure.

Degree of vertical integration.3 | One of the factors driving organization struc-

ture is the business model and degree of vertical integration. A business that is

fully vertically integrated with all operational and support functions under one

roof will have a very different structure than a virtual firm that outsources produc-

tion, distribution and many elements of its support functions, such as information

technology and human resources.

Degree of global operation.4 | A significant complexity that has not been

addressed in the pay ratio discussion is how a globally diverse company would

be assessed using a ratio devised from a U.S.-centric perspective. Clearly, a firm

with operations in many low-cost countries will likely report a higher CEO-to-

worker pay ratio. This, notably, will play to the anti-offshoring sentiment. Not only

does the degree of global operation distort the calculation due to differences in

labor costs in developed versus emerging economies, but other complexities such

as currency fluctuations, level of social benefits and tax rates make this a much

more complex topic than is currently acknowledged.

Form of organization and governance. 5 | Many discussions of pay ratios assume

that all comparators are of similar ownership and governance structure, such

as all publicly traded companies. While this group of firms is the easiest basis

for debate given the availability of data, it may result in skewed comparisons

compared to a company’s business competitors, who may be privately held, a

wholly-owned subsidiary of a domestic or foreign corporation, joint venture, or

pass-through organization, such as a partnership or limited liability company (LLC).

This would be of most concern if ratio-based rules make their way into the tax

code affecting all corporate filers, rather than merely a disclosure requirement

for public companies.


Defining executive positions.6 | Executive pay debates often center on the pay of

CEOs, and media attention is typically limited to the “top five” appearing in proxy

statements. There are competing definitions of the concept of “executive,” “officer,”

“executive officer,” “named executive officer,” “covered employee,” and “highly

compensated” among the various legislative and regulatory standards relevant to

executive pay. And there are inconsistencies within individual agencies’ various

rules. Even if limited to a CEO pay ratio, there are situations such as a chairman

paid more than a CEO, the existence of co-CEOs and other complexities.

Defining pay.7 | Analyses of executive-to-worker pay ratios often include an

“all-in” definition of executive pay — short-term incentives, long-term incentives,

and supplemental benefits and perquisites — and relate that to base salary of

workers. Given the relatively minor role of base salary in executive pay and the

great variation of pay elements for non-executive workers across industries, it

would be necessary to take a total compensation approach.

CEO PAY METRICS

Despite these difficulties in determining appropriate multiples and ratios, these

concepts are beginning to make their way into executive compensation culture

in the U.S. There are only a few companies that have implemented internal

equity guidelines, but two in particular are worth noting to show the variation

in methodologies:

Intel Corporation stated in its 2009 proxy statement, “The committee reviews the z

compensation of executive officers against the compensation of the top 100 highest

paid employees at Intel to monitor internal pay equity. The committee does not

use fixed ratios when conducting this analysis, but our CEO’s total compensa-

tion has typically been 1.5 to 3 times the total compensation paid to each of our

executive vice presidents.” No mention of these ratios appears in the 2010 proxy

statement, only a single comment that “Secondary considerations in determining

the level of compensation include internal pay equity” (RiskMetrics).

Whole Foods Market Inc. states in its 2010 proxy statement that “we endeavor z

to ensure that our compensation program is perceived as fundamentally fair to

all stakeholders” as a prelude to the discussion of the “salary cap” in effect at

the company In 2009, the cap was set at 19 times the average annual wage at

the company, which was $35,318 resulting in a salary cap of $671,050. The CEO

received a salary of $1 in 2008 and 2009 but was the highest paid officer in the

2010 proxy statement (RiskMetrics).

Some corporate governance organizations have adopted the concept directly

through adding a metric to their governance rating of companies. Audit Integrity

includes the ratio of CEO pay to CFO pay as an element of its Accounting

Governance Risk (AGR) rating, which has been empirically validated as more

predictive of negative corporate outcomes than other widely-used ratings services

(Price et al. 2010).


Unlike Whole Foods’ criterion of “fair to all stakeholders,” the pay equity move-

ment is primarily focused on shareholder outcomes. This brings us back to the

fundamental question about the notion of fairness.

PROCEDURAL FAIRNESS: FAIR TO WHOM?

In the growing body of literature around fairness and equity of executive pay,

the prevailing theme is fairness to shareholders — the alignment of executive pay

with shareholder value to ensure that shareholders are treated fairly with respect

to their returns versus payments to executives.

Many of the ongoing executive pay practice controversies can be construed as

being driven by the goal of greater fairness:

Option repricing and exchanges.1 | The practice of repricing stock options,

resetting the strike price to a lower point due to a decline in stock price, has

widespread opposition and has led to punitive accounting rules and corporate

governance policies. Repricing is often considered unfair to shareholders who

are unable to reset the price at which they invested in the company while the

employee optionees enjoy the value of the stock price’s rebound. More prevalent

now are option exchanges which often exclude executives and result in employees

receiving fewer repriced options.

Option backdating. 2 | While the backdating of stock options is not illegal (the

improper accounting treatment and related securities filings often were), the tone

of the scandal has been “not fair!” — primarily to shareholders who didn’t have

the opportunity to backdate their purchase price.

Discounted stock options.3 | Another controversial practice is the issuing of

options with a strike price discounted below the fair market value on the date

of grant. This is deemed “not fair” by many institutional shareholders and proxy

advisers who view this as a giveaway to employees and executives not available

to outside parties. This view has been reinforced by Section 409A of the Internal

Revenue Code, which excludes discounted options from the exemption other-

wise available for stock options (U.S. Internal Revenue Service 2010). In addition,

Section 162(m) deems such options to be nonperformance based and therefore

subject to loss of tax deductibility for grants to the NEOs. Such options are not

very prevalent in the marketplace.

Discretionary adjustments to executive incentive pools.4 | After the severe

economic crisis beginning in the fourth quarter of 2008, many compensation

committees chose to override the formula-driven outcome of executive incentive

plans that had produced little or no incentive pool due to the combination of

goals that were set pre-crisis and later the business performance levels resulting

from the economic downturn. The disclosures surrounding these decisions often

emphasized a tone of fairness for the executives who had “done a good job”

but were penalized due to results “out of their control.” Yet the interpretation

by shareholders, advisers, and even employees in some of those companies was


that the deal was “not fair” because executives were never asked to give back

windfall earnings during the preceding economic boom.

Pay of officers in light of employee pay freezes, pay cuts, layoffs and benefits 5 |

reductions. During the recent recession, there has been concern over executive

pay in companies that produced reasonable business results but had obtained

those results from employee layoffs, pay freezes and benefits reductions. The

debate centered on whether the executives had done their job by controlling

expenses during a business downturn or had just benefited personally from

the hardship imposed on employees.

Performance plans.6 | Such plans are becoming more prevalent because they

are performance based. Some critics argue, however, that the overall market

can impact stock price more significantly than executive performance and that

meeting financial objectives such as profitability may come at the expense of

employee job loss which in turn negatively impacts future growth prospects.

Finally, there is the possibility of plans resulting in significant payouts to

executives for achieving financial goals without any accompanying increase

in stock price.

These examples highlight another difficulty with the pay ratio approach to

equity: It’s not always the “how much” but the “how” that is the source of

perceived unfairness in executive pay.

INTERACTIONAL FAIRNESS: WHAT ABOUT OTHER STAKEHOLDERS?

Finally, the focus on fairness to shareholders leads to a broader discussion

about other stakeholders.

Employees.1 | If executives are overpaid, doesn’t that take away from pay avail-

able for the rank-and-file for salary increases, benefits funding and retirement-plan

contributions? This concern echoes the discussion about executive pay during the

recession but points to the broader issue regardless of economic events.

Customers and suppliers. 2 | To the extent that executive pay must be recouped

through raising prices to customers and/or putting pressure on suppliers to

reduce their prices, a pay fairness issue is raised for those parties. It likely

is impossible, however, to link an executive pay pass-through effect to these

stakeholders.

Taxpayers. 3 | While taxpayers may benefit from income taxes paid on executive

pay, it comes out of the other pocket as most executive pay is tax-deductible

to the company. A significant portion of executive pay in some companies is

structured to provide for deferral of taxation, thereby potentially reducing tax

revenues on compensation. In addition, the recent taxpayer-funded bailout of

teetering financial institutions heightened the awareness of how taxpayer subsi-

dies going to failing financial companies may have been fueled by executive

compensation practices with excessive risk. Many citizens view high risk-based

pay and protection from failure as “not fair.”


MEASURING THE FAIRNESS OF EXECUTIVE PAY

There is no right answer regarding how to measure fairness in executive

compensation, but the authors believe that we should examine past attempts

at legislating, regulating and lobbying for “fairness” before pursuing some of

the ideas being proferred today. If we are headed toward an era of executive

pay ratios, there are some principles that can and should be applied as policy

positions are developed.

Focus on job size when scrutinizing pay levels.1 | Pay should be related to the

relationship of job size on an internal basis as well as an external basis. Most

companies do not have a formal system for measuring jobs, making analysis and

communication of the “adjusted” pay ratio difficult or impossible. If a proxy for

job size — such as revenue, market capitalization or number of employees — is

used, caution must be exercised in translating scope into size and attempting to

apply pay ratios.

Integrate external competitiveness into notions of fairness.2 | In the much-

publicized Ben and Jerry’s pay philosophy, the two owner/founders were paid a

small multiple of the entry employee pay. The company had to move away from

this philosophy somewhat when going to the outside to recruit, but the funda-

mental philosophy remained, that of fairness in pay. An integrated market-pricing

methodology with a total compensation focus can ensure that a subgroup at the

top is not receiving more attention to pay competitiveness than others.

Consider pay mix and performance as a tool for assessing fairness.3 | Hay

Group’s research of Fortune’s Most Admired Companies reveals that the most

admired are not the highest paid — on salary at least. In fact, Most Admired

Company salaries tend to be about 5 percent lower than the rest when compared

on the basis of job size. Most Admired Companies tend to grow faster and promote

from within more frequently. The authors think is likely due to the fact that

responsibilities are increased more quickly and promotions occur more frequently

than in other organizations. Further, incentive pay, both short- and long-term, has

more value in these companies because of their higher performance.

Take a long-term view of long-term incentives.4 | These are valued in most

survey and proxy databases based on theoretical fair value on the grant date, not

realized gains from these programs. The market volatility of the past two years has

created difficulties in measuring the value of equity-based awards that can lead to

great distortions in total compensation measurement (Hay Group 2010). Because

CEO pay is dominated by equity compensation and in some sectors still domi-

nated by stock options, these complexities must be acknowledged and addressed.

Companies that distribute equity compensation to most or all employees will have

to consider this in the total compensation ratio analysis.

Use ratios cautiously. 5 | These may be used as guidelines but not as mechanical

tools to manage pay. There is mounting pressure to keep CEO pay reasonable

relative to direct reports, and manage pay differences based on the size of the job


relative to direct reports. As was discussed, when comparing ratios across organi-

zations, one must consider organization size, organization structure, governance,

business complexity, total compensation design and a host of other factors. To

the extent that public disclosure of ratios becomes mandated, these discussions

will be a critical investor relations strategy.

CONCLUSION

There is clearly a theme of fairness, or concerns about lack thereof, driving execu-

tive compensation trends. But there is no agreement on the definition of “fairness”

while there is a widespread belief that arbitrary metrics and ratios may do more

harm than good. It is important to relate these developments to those occurring

in legislative circles on employee pay and benefits, as these waves often converge

and fuel further regulatory action. z

AUTHORS

REFERENCES

Drucker, P. “Is Executive Pay Excessive?” Wall Street Journal, May 23, 1977.

Drucker, P. “Reform Executive Pay or Congress Will.” Wall Street Journal, April 24, 1984.

Hay Group. 2010. “Measuring Executive Pay in 2010 — the Equity Compensation Challenge.” The Executive Edition, February 2010. Viewed: June 13, 2010.

Interfaith Center on Corporate Responsibility. 2009. “Pay Disparity for Insurers.” Insurance Research Newsletter, Dec. 2. Viewed: June 13, 2010.

Masson R., T. McMullen, and M. Royal. 2009. “That’s Not Fair!” Journal of Compensation and Benefits 41 (2): 29-35.

Merriam-Webster Online Dictionary, .s.v. “Fair.” Viewed: June 12, 2010.

Price, R.A., N.Y. Sharp, and D.A. Wood. 2010. “Detecting and Predicting Accounting Irregularities: A Comparison of Commercial and Academic Risk Measures.” Feb. 2. Viewed: June 13, 2010.

RiskMetrics Group. 2010. 2010. U.S. Proxy Voting Summary. Viewed: June 12, 2010.

U.S. Internal Revenue Service. Internal Revenue Code, Section 409A. Viewed: June 12, 2010.

U.S. Senate. The Corporate Executive Accountability Act of 2010, 111th Cong., The Corporate Executive Accountability Act of 2010, 2d Session, 2010. S. 3049. Viewed: June 12, 2010.

Jim Bowers ( [email protected]) is a vice president and leader in Hay Group’s executive and strategic reward practice. He has broad industry experience, with concentration in life sciences, chemicals, energy and manufacturing sectors. He also leads the North American job-evaluation prac-tice. His consulting focus is to help clients achieve the highest possible return on its HR investment through culture change, performance management and rewards programs. He has written a variety of articles and book chapters on rewards strategy and effectiveness and executive compensation.

Fred Whittlesey, CCP, CEP ([email protected]) is a senior consultant and leader of the West Coast executive compensation practice at Hay Group. He specializes in compensation strategy, director and executive compensation and equity-based compensa-tion. He has been published in compensation books, journals, periodicals and Web sites and has presented his ideas at conferences around the world. He is co-founder of Global Equity Organization and past Chair of the Advisory Board for the Certified Equity Professional Institute at Santa Clara University.

http://www.haygroup.com/us/Downloads/Misc.aspx?ID=22111

http://www.haygroup.com/us/Downloads/Misc.aspx?ID=22111

http://www.isn-inc.com/news/news.aspx?nid=1882&cid=1

http://cbr.sagepub.

http://www.merriam-webster.com/dictionary/fair

http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1546675

http://www.riskmetrics.com/search/node/2010 U.S. Proxy Voting Guidelines Summary

http://www.irs.gov/taxpros/article/0,,id=98137,00.

http://www.govtrack.us/congress/bill.xpd?bill=s111-3049

http://www.govtrack.us/congress/bill.xpd?bill=s111-3049

mailto:[email protected]

mailto:

mailto:

HISTORICAL VIEW OF WORK-LIFE INITIATIVES IN

THE FEDERAL GOVERNMENT

The discussion of the current state of work-life practices

in the federal government would be incomplete without

an historical review. HR professionals within a number

of federal agencies experimented with workplace flex-

ibility long before such innovation was introduced into

private industry. An early, limited menu of flexible work

options were practiced during the early 1970s within

some federal agencies. The benefits of doing so were

sufficient enough to precipitate the Federal Employees

Flexible and Compressed Work Schedules Act (FEFCWA)

and the Federal Employees Part-Time Career Employment

Acts in 1978, the former being permanently authorized

by Congress in 1985 (Georgetown 2008).

In 1989 Congress required the Office of Personnel

Management (OPM) to establish a formal job-sharing

program. This led OPM to establish the Federal Flexible

Workplace Pilot Project in conjunction with the General

Services Administration (GSA). The next year, Congress

passed the Treasury, Postal Service and General

Government Appropriations Act, which funded federal

Work-life Programs: Attracting, Retaining and Empowering the Federal Workforce

Kathleen Lingle, WLCPAlliance for Work-Life Progress at WorldatWork

Third Quarter 2010




“flexiplace” arrangements and received permanent funding in 1995. As a point of

comparison, it wasn’t until the early 1990s that flexible work arrangements began

to be adopted by some businesses in the United States; most of this activity was

inspired by the federal Clean Air Act of 1990.

The Obama Administration has demonstrated a dedication to advancing work-life

initiatives within the federal government and the private sector as demonstrated

by the establishment of the White House Council on Women and Girls and by

hosting the White House Forum on Workplace Flexibility, held in March 2010 and

attended by leaders from across all sectors.

CURRENT STATE OF WORK-LIFE EFFECTIVENESS IN THE FEDERAL

GOVERNMENT AND THE PRIVATE SECTOR

Over the past 35 years, most, if not all, federal agencies have developed an impres-

sive variety of supports to help workers manage their dual agenda throughout

the career lifecycle. What is striking today is that for the most part, the federal

sector is not harnessing the full power of work-life effectiveness, as part of total

rewards, as the most inexpensive and intrinsically motivating driver of attraction,

engagement and retention available in the 21st century.

The notable gap in the federal environment is a failure to deploy work-life

as an overarching organizational strategy, one that has a demonstrated capacity

to engage the minds and hearts of any labor force. In private industry today,

employers compete to be perceived as best in class because such employee-

friendly behavior pays itself many times over: higher productivity; more profitability;

greater attraction and retention of the kind of talent required for success; excel-

lence in operations; better corporate citizenship; and even more positive mental

and physical health outcomes. The discrepancy between the private and public

sectors has little to do with the specific work-life programs available in both

environments, which are ample.

The work-life portfolio, seven categories of support for the life events that are

predictably encountered by everyone who works, encompasses a broad array of

programs, policies, resources and leadership practices that recognize the employee

as someone who functions simultaneously in multiple roles — as a contributor in the

AWLP EXECUTIVE DIRECTOR TESTIFIES BEFORE SENATE SUBCOMMITTEE

The Senate Subcommittee on Oversight of Government Management, the Federal Workforce, and

the District of Columbia invited Alliance for Work-Life Progress Executive Director Kathleen Lingle

to testify at its hearing titled, “Work-life Programs: Attracting, Retaining and Empowering the

Federal Workforce.” The hearing examined how the federal government can improve employee

engagement and satisfaction through the use of work-life programs. Lingle’s testimony focused

on the ways in which work-life initiatives make sense from a business perspective.

View the Web cast.

http://www.mercer.com


workplace, within a family and in the community that the employee and employer

share (Alliance for Work-Life Progress 2008). The categories of support are:

Caring for dependents (policies and services for reconciling family obligations 1 |

and employment)

Creative uses of paid and unpaid time off 2 |

Proactive approaches to health and wellness3 |

Workplace flexibility 4 |

Financial support5 |

Community involvement – internal (caring for each other as a community) and 6 |

outreach to the external community

Managing cultural challenges.7 |

Each employer takes a somewhat different approach to addressing one or more

of these work-life issues, based on the composition and needs of its workforce,

clients, business model and organizational culture.

As employees use more work-life options in response to the numerous and

predictable work-life conflicts encountered in the course of a typical career, the

greater the benefits that can be documented for the business, workforce and other

key stakeholders, such as clients and shareholders, families and communities

(Alliance for Work-Life Progress 2008).

Category 1: Caring for Dependents (Children and Aging Parents)

This category of support encompasses policies and services that are designed to

reconcile parenthood, other unpaid care giving, and employment, for men as well

as women. There are more than 1,000 free federal child-care centers sponsored

by various federal agencies for use by federal employees (Office of Personnel

Management 2010). The Department of Defense (DoD) Child Care System provides

child care in more than 800 Child Development Centers alone. On a daily basis,

DoD cares for more than 200,000 children in centers, family child-care homes and

school-age care programs. In addition, the U.S. Coast Guard offers new parents a

one-time leave of up to two years, access to nine onsite child-care centers, training

for non-working spouses as family daycare providers, the donation of time off to

coworkers, and adoption aid and flexibility scheduling.

In the private sector, Abbott sponsors a massive onsite child-care center at the

firm’s Abbott Park, Ill., headquarters to look after children from birth through

kindergarten. In addition, all parents receive discounts at more than 2,600 U.S.

child-care centers, generating a total of $280,000 in savings last year. Parents

may save part of their salary in a pre-tax account to help pay for child care

(Abbott 2010).

Some companies that do not offer onsite care will contract with child-care facili-

ties, such as the Kellogg Co., which has contracted with a child-care facility near

its Battle Creek, Mich., headquarters that offers priority access to full-time care for

Kellogg employees (Kellogg 2010).


There are companies that go a step farther. TriHealth in Ohio offers onsite camps

with cooking, sports and science lessons when school is out in addition to year-

round discounts at local child-care centers and emergency caregivers available for

sick children for only $2.50 per hour (TriHealth 2010).

Category 2: Creative Uses of Paid and Unpaid Time Off

With workers experiencing a time crunch due to the competing demands of

work and life, finding enough time to spend with family, on one’s self and

in the community is the most fundamental work-life need. Some of the more

innovative private sector policies in this category include: paid family leave for

new fathers as well as mothers; sabbaticals; paid or release time for community

service; responsive shift-work policies; paid-time-off leave banks (PTO); extreme

travel compensatory time; and after-hours e-mail policies. At the Dow Corning

headquarters in Michigan, employees who want to further their education are

allowed to take up to four years off (Dow Corning 2010). And in a nod to those

balancing work and motherhood, Dow Corning just expanded leave for adoptive

parents to six fully paid weeks from five.

Category 3: Proactive Approaches to Health and Well-being

Reduction of stress is the central promise of work-life effectiveness. Because

the negative impact of stress-related illness has been shown to cost companies

$50-$150 billion annually (Sauter, Murphy and Hurrell 1990), a focus on this

category of work-life support holds the most promise of contributing to the

reduction in the escalating cost of health care. Today, many employers are trying

to encourage individual employees to engage in behavioral change that includes

healthier options. Some of the most popular programs in this area are on-site gyms

or subsidized gym memberships, along with monetary incentives for participating

in health screenings and on-site wellness programs.

One company in Hawaii, Kaikor Construction, has gone beyond this for the past

two years by hiring a personal trainer for twice weekly circuit and weight training

sessions during working hours. All full-time staff members have participated in

this program (Kaikor 2010).

The federal government is also making strides in this area with the opening of

the new work-life campus shared by OPM, General Services Administrations (GSA)

and the Department of the Interior. It offers to 5,000 federal employees services

such as blood pressure screenings, influenza and H1N1 vaccinations, body mass

index measurement, health education and blood glucose screenings (OPM 2010).

Category 4: Community Involvement

Community involvement is one domain where employers’ and employees’ interests

are closely aligned, because both the labor force and customers usually come from

the community in which the organization operates. Corporate social responsibility


is expanding to include not only new types of external community outreach, but

also a renewed focus on building a strong internal sense of community. Formal

ethics programs, shared (or catastrophic) leave banks, and disaster relief funds

are some of the creative ways of employers engaging in their community.

The Alliance for Work-Life Progress (AWLP 2010) awarded an Innovative Excellence

Award to Hospital Corporation of America’s (HCA) Caring for the Community

program. HCA, with locations across the country including Colorado, Louisiana,

Hawaii and South Carolina, engages employees by allowing an employee to take

up to 24 hours of paid volunteer leave each year. When the employee adds just one

more hour of personal time, HCA provides a $500 contribution to that organization

in recognition of the 25 hours donated. HCA added a giving campaign match of

up to $750 to a charity of the employee’s choice.

Another demonstrated best practice in this area comes from the American Savings

Bank in Hawaii, whose employees serve on the boards of more than 100 local

nonprofits and who have since 2005 contributed more than 7,800 total volunteer

hours to schools and nonprofit organizations on various Hawaiian islands through

the company’s Seeds of Service program (American Savings Bank 2010).

Category 5: Financial Support (Self and Family)

Providing financially for oneself and family from career entry through retirement

is basic to work-life effectiveness. In this arena, benefits, compensation and work-

life professionals collaborate to create non-traditional policies where appropriate

and find compelling ways to communicate the value of financial offerings. Some

examples of programs and services of value to employees today include: personal

financial planning; adoption reimbursement; dependent and health-care flexible

spending accounts; discounted pet/auto/home insurance; mortgage assistance;

group discounts on a variety of retail products; and workplace convenience

services, such as dry cleaning and parking lot oil changes.

Category 6: Workplace Flexibility

Workplace flexibility refers to a leadership practice that facilitates the customization

over when, where and how work gets done by individuals and teams. There are

many tools and approaches employed to enhance workplace flexibility, including

flexible career strategies, flexible benefit options, management flexibility training,

flexible work scheduling and work redesign that streamline essential processes

and continually identify and eliminate low-value work.

Flexibility is one of the most powerful drivers of retention and engagement today.

It has no fixed cost. It is the work-life initiative most sought after by employees,

especially top performers. It is empirically linked to higher levels of productivity,

resilience and shareholder value (Flexpaths 2009).

It is ubiquitous among “employers of choice,” who are significantly more profit-

able than their less flexible peer group. Hundreds, if not thousands, of companies


have policies and tools to support it. It continues to be the most popular topic at

national work-life conferences and in the media. Some examples of the variety of

best practices in this area include:

Procter & Gamble. z Employees at headquarters in Ohio engage in quarterly

FlexLife sessions to help them determine whether they’re living balanced lives

and how to create action plans for change, if needed. Overall, 60 percent of all

employees adjust their hours or telecommute, and compressed schedules have

quadrupled since being introduced to hourly workers last year.

Northwest Memorial Hospital. z Nurses and imaging professionals at the Chicago

hospital can choose their own hours online and are able to adjust them every

six weeks (Northwest 2010).

Kellogg Co. z At corporate headquarters, regular educational seminars are held to

explain to employees how to apply for and manage flexible schedules. There are

online training providing managers with a template for creating a balanced work

environment. At least 30 percent of employees now use formal flex arrangements

and all workers use flextime. Ninety percent of professionals worked from home

at least once (Kellogg).

U.S. Patent and Trademark Office.z The office has developed a work-from-

home program for examining attorneys who review trademark applications. The

program features spaces to work and the necessary equipment to establish a

secure connection to the agency’s network. Automated systems enable users to

complete all of their examination duties electronically. This program has become

a model for the federal government and allowed the trademarks team to maintain

86 percent of normal workday production during a February 2010 blizzard (U.S.

Patent 2010).

Category 7: Managing Cultural Challenges

Creating organization-wide support for work-life effectiveness is often a complex

and difficult undertaking that requires strong leadership in culture change manage-

ment. In order to combat the very real barriers to the full engagement and

productivity of every contributor in the workforce, it is usually necessary to

engage in specific culture change interventions to demonstrate the positive busi-

ness case for these programs. Over the years, the author has observed a strong

link between work-life effectiveness, diversity initiatives, women’s advancement,

mentoring and networking.

BENEFIT OF A COHERRENT WORK-LIFE STRATEGY

Not only are there numerous best practices from which to model a coherent

strategy for federal work-life programs, there are also numerous studies that docu-

ment the variety of benefits that come with a successful work-life portfolio. Many

studies have shown that the quality of workers’ jobs and the supportiveness of

their workplaces are key predictors of workers’ job productivity, job satisfaction


and commitment to employers. Work-life initiatives are also predictive of an

employer’s ability to retain workers.

A successful work-life portfolio can result in tangible increases to reten-

tion and attraction (WorldatWork 2007). A majority of companies reported

moderate to high impact on attraction and retention for most work-life programs,

including all those listed under the categories of workplace flexibility, paid and

unpaid time off, culture change initiatives, coaching/mentoring, and learning

and advancement opportunities.

The evidence for flexibility’s prowess in this regard comes from several sources,

one of which is reflected in Watson Wyatt’s Human Capital Index research,

which has established the link between superior human capital management and

equally superior shareholder value. Excellence in five key HR areas is associated

with a definable increase in bottom-line performance. One of these clusters is

labeled “Collegial, Flexible Workplace,” which centers on management practices

and support for flexible work arrangements and the concomitant trust and shared

values that are required for successful implementation. This cluster of eight

specific human capital practices creates 9 percent of shareholder value. The

company’s support for flexible work options alone contributes the most with 3.5

percent (Watson Wyatt 2002).

There are also numerous benefits to the employees themselves. Employees in

more flexible and supportive workplaces are more effective, more highly engaged

and less likely to look for a new job in the next year (Eby, Galinsky and Peer

2009). Those employees also enjoy better overall health, better mental health

and lower levels of stress.

The Families and Work Institute (FWI) found that 41 percent of employees

report experiencing three or more indicators of stress sometimes, often or very

often. However, twice as many employees in organizations defined as “highly

effective” (based on criteria that include economic security, autonomy and work-

life fit) reported being in excellent health than employees in “low effectiveness”

organizations (Aumann and Galinsky 2009).

There is data that show similar outcomes for public-sector employees. According

to the Best Places to Work in the Federal Government report, work-life balance and

a family-friendly culture are among the key drivers of engagement and satisfac-

tion for employees in the federal workforce, as shown by the fact that these are

two of the “Best in Class” categories used to rank federal agencies (Partnership

for Public Service 2009).

Finding a good work-life balance is important to all demographic groups.

From experienced workers ages 50-65 to students just graduating from college,

work-life programs appeal to workers in multiple generations, which is especially

important with four generations currently working today. Nearly 50 percent of

workers between the ages of 50 and 65 find flexible work schedules ‘‘extremely

appealing’’ (Partnership for Public Service 2008). On the other end of the


spectrum, attaining a healthy work-life balance was an important career goal

of 66 percent of students graduating in 2008 (Partnership for Public Service and

Universum 2009).

And although some still identify work-life as programs that women want, men

are showing a preference for flexibility in their work schedules. Men in their 20s

and 30s and women in their 20s, 30s and 40s identified a work schedule that

allows them to spend time with their families as the most important job char-

acteristic for them (Radcliffe 2000). Also, data from the 2008 National Study of

Employers show that for the first time ever men are experiencing more work-life

conflict than women (Galinsky, Aumunn and Bond 2009).

There is also strong evidence that work-life programs, such as workplace flexibility,

have a large impact on commitment and retention among both low- and high-wage

workers. Corporate Voices (2005) found that workers, both low- and high-wage,

who had access to flexibility and the freedom to use it without repercussion expe-

rienced significantly less burnout than those who did not. It is increasingly clear

that this is an issue that cuts across all demographic characteristics.

RECOMMENDATIONS

The notion that the federal government should be America’s model employer is a

familiar refrain. Twenty years ago, Congress required OPM to establish a Federal

Flexible Workplace Pilot Project in conjunction with GSA. However, OPM has also

recently launched another Workplace Flexibility Pilot project. It feels like we are

trying to remake the wheel instead of making forward progress toward the goal

of serving as an employer-of-choice role model.

The most straightforward path out of this maze is to do as OPM Director John

Berry said: consider the big picture (Berry 2009). Instead of pursuing one discrete

work-life program after another, in relative isolation from each other, the author

recommends that the entire exercise be ratcheted up a notch and considered in

its entirety as one coherent people strategy. Using the work-life portfolio as the

well-tested roadmap it has become for employers everywhere, all of the compo-

nent elements of policy and practice required to meet the dual agenda of federal

workers throughout their career lifecycle will fall into place. Any important missing

pieces will become evident and can be developed as necessary.

A few immediate tactics will make this task easier:

Apply a consumer lens, viewing the work environment from the perspective of z

the people who work there. Organize all benefits, policies and practices around

the most common life events experienced by everyone who works, from career

entry, such as marriage, buying a home, having children, suffering an illness,

caring for elders and preparing for retirement. This methodology automatically

builds and reinforces the work-life portfolio, making it obvious what work-life

conflicts are not sufficiently addressed for specific populations or subgroups

within the workforce.


Revise the Federal Employee Viewpoint Survey to better reflect actual experience z

within the work environment. One enhancement would be to ask about ease

of access to and usage of work-life initiatives instead of relying on satisfaction

scores without verifying that respondents are commenting based on first-hand

knowledge. Allow the best work-life researchers to partner in analyzing data from

the current 2010 survey to help clarify questions of most value for flexibility data

and other work-life issues, based on appropriate national norms and scales.

Consider conducting a one-time work-life needs assessment in between the 2010 z

and 2012 administrations of the Federal Employee Viewpoint Survey, with the

objective of eliciting what is working and not working in terms of support for

work-life conflict across all of the categories of the work-life portfolio, by agency,

demographic group, etc. In addition, it would be useful to conduct a government-

wide work-life needs assessment to determine how well employees are being

supported, as well as perform gap analysis and define necessary enhancements

for each agency to achieve its mission. The combination of these data points

would provide a much fuller picture of how each agency is positioned within

the work-life portfolio.

Consider establishing a national Web site that would serve as a repository of z

work-life resources, data, best practices, tools and other expertise.

Re-constitute a viable, staff-level Interagency Family-Friendly Workplace Working z

Group in coordination with the White House Council on Women and Girls. Make

representation mandatory in every federal agency and ensure the Working Group

will be sustainable and permanent by housing it within an agency, such as OPM

or the Women’s Bureau. Carefully define roles and responsibilities and make

the function of serving on this working group a career-enhancing service to the

government. It would be advantageous to provide professional facilitation for

this group to ensure neutrality, continuity and sustainability. It would be helpful

to identify and emulate existing best practices within the federal government,

as well as importing those from other sectors as appropriate. The most stellar

example the author is aware of is the WorkLife team at the National Security

Agency (NSA), which has been amplifying and expanding the work-life portfolio

in all of its manifestations for decades.

Increase the depth and breadth of work-life and total rewards competency across z

the entire spectrum of HR professionals in the federal government. This will

help solidify the role of government as a model employer, because both private

industry and academia are struggling to produce/replace enough work-life exper-

tise to successfully engage a 21st century workforce. The federal government can

lead the way, by virtue of its sheer size and impact.

Reinforce and publicize what a strong employment value proposition the idea of z

service in the federal government represents today vis a vis private industry.

Expand current perceptions and practices surrounding flexible work arrange-z

ments to encompass the more important and strategic capacity for organizational


agility, working to de-layer cumbersome decision making, streamlining processes,

and empowering people to take greater control and accountability for the condi-

tions of their own work. Make the federal government a more nimble, proactive,

flexible set of organizations, united around a coherent set of people practices.

Require every agency to describe and monitor its current version of the work-z

life portfolio. Use work-life needs assessment data to address the issue of how

well employees are being supported. Perform gap analysis and define necessary

enhancements for each agency to achieve its mission.

Contrary to the popular perception, the federal government has many of the

tools needed to create a successful work-life portfolio, ranging from the desire

to change to programs and policies already in place to support employees’

various needs. These tools just need to be pulled together into a comprehensive

strategic framework. z

EDITOR’S NOTE

The article is adapted from May 4, 2010 written testimony of Kathleen Lingle, executive director of the Alliance for Work-Life Progress at WorldatWork, before the Senate Homeland Security and Government Affairs Subcommittee on the Oversight of Government Management, the Federal Workforce and the District of Columbia.

AUTHOR

Kathleen Lingle, WLCP, ([email protected]) leads Alliance for Work-Life Progress (AWLP). An entity of WorldatWork, AWLP advances work-life effectiveness as a high-performance business strategy that integrates work, family and community.

Lingle is a member of the Conference Board’s Work-Life Leadership Council, for which she served as co-chair for several years. She serves on the AWLP Strategy Board and is a former member of the steering committee of the Boston College Work-Life Roundtable. Prior to her current position at WorldatWork, Lingle served as National Work-Life Director at KPMG LLP where she was the primary

architect of KPMG’s historic Work Environment Initiative, a multi-year culture change initiative that continues to evolve.

Lingle also is the recipient of the 2007 FWI Work-Life Legacy award for her leadership in the work-life profession. She is often quoted in The New York Times, Wall Street Journal, Fortune, Working Mother, Boston Globe, Washington Post, Chicago Tribune, and broadcast media. She has a master’s degree in Child Development and Family Systems from The Ohio State University and a bachelor’s degree in Diplomacy and World Affairs from Occidental College in Los Angeles.


REFERENCES

Abbott. 2010. “U.S. Benefits: Work-Life Programs.” Viewed: June 29, 2010.

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Patricia A. Herlihy, Ph.D., RNRocky Mountain Research

Max Heirich, Ph.D.Institute for Research on Labor, Employment and the Economy, University of Michigan

Roland Zullo, Ph.DInstitute for Research on Labor, Employment and the Economy, University of Michigan

H ow have employee assistance (EAP), work-

life and wellness programs changed in the

businesses that were recognized as “family

friendly” 15 years earlier? Harsh economic conditions

have threatened discretionary benefits that positively

affect talent recruitment, retention, employee produc-

tivity and corporate image over this very same time

period (Smyth et al. 2009). Thus, the authors investigated

these changes in three progressive benefits programs

in light of the economic and sociological changes that

had occurred in the interim. EAPs provide counseling

for substance abuse and other mental health issues;

work-life encompasses programs that help employees

balance the demands of family and work; while wellness

programs aim at improving employees’ overall physical

health with the goal of decreasing health-care costs. The

label “family-friendly” is used throughout this paper for

benefits plans involving some mix of EAP, work-life and

wellness offerings.

Prior literature has sought to identify the motives for

adopting family-friendly policies (Davis and Kalleberg

2006; Bond et al. 2002; Glass and Fujimoto 1995).

A Longitudinal Lens on the Evolution of EAP, Work-life and Wellness Benefit Programs

Third Quarter 2010




A logical extension to this scholarship is to ask how such programs, once adopted,

are shaped by factors both within and external to the organization. Changing

conditions, especially fiscal stress, may lead to the adulteration or elimination of

benefits (Kelly et al. 2008). Firms adopt family-friendly policies when attracting

or retaining committed staff (Csiernik 2005; Davis and Kalleberg; Osterman 1995).

Thus, it follows that these benefits may be reduced or terminated as firms down-

size. A plausible, alternative scenario is that the noneconomic factors supporting

family-friendly benefits protect these programs when companies hit hard times.

The study’s findings are based on ethnographic data collected via telephone

interviews from 28 companies designated as family-friendly in 1993 (Herlihy 1997).

The survey instrument was designed to compare recent practices and policies of

EAP, work-life and wellness programs with the responses from a 1993 Boston

University study that surveyed firms ranked most family-friendly by Working

Mother magazine. The authors inquired about the status of the benefits, changes

in the scope and structure of the benefits, internal and external factors influencing

these changes, and an explanation of the strategic choices made by management

in response to those factors.

SAMPLE AND METHOD

The data are based on semi-structured telephone interviews of EAP, work-life

and wellness professionals employed by those organizations ranked most family-

friendly 15 years earlier. In 1993, a Boston University team surveyed 79 of these

100 exemplars. Only 30 organizations existed at the time of the authors’ 2008 study.

Mergers, reorganizations and bankruptcies explain most of the attrition. One firm

refused to participate while another did not complete all three phases. In all, the

authors interviewed 47 benefits administrators from 28 of the original corpora-

tions. Respondents agreed to participate with the understanding that all comments

would remain anonymous. Table 1 summarizes the comparisons between the 1993

sample and the remaining companies available for the 2008 study.

Respondents were asked a common set of questions, and were encouraged

to elaborate. Deviations from the questionnaire were allowed, provided that the

testimony was relevant to the provision of family-friendly benefits. One advantage

of the informal approach is that respondents are permitted to give qualitative

input. For this research, the semi-structured interviews made it possible to gather

ethnographic detail on the idiosyncratic histories of benefits, internal and external

factors shaping benefits policy, and the decision-making processes. The authors

especially sought a fuller understanding of the non-economic factors that shaped

courses of action. Directors or account managers of all three programs were

approached individually or collectively, depending on the company’s wishes. The

interviews ranged from 30 to 60 minutes.

The data were examined for evidence of common themes. Each member of the

research team independently sorted and reviewed the data for factors shaping


the content and administration of family-friendly benefits. The research team

convened to identify patterns of decision-making within firms and pressures

external to firms that reportedly affected the provision of these benefits. The

authors reached a consensus on six main themes, which are discussed in the

following sections.

THEME 1: FAMILY-FRIENDLY BENEFITS RESILIENCY

Many respondents expressed concern for the continuance of family-friendly

benefits; layoffs were frequently mentioned as a triggering event. However, all

firms retained some semblance of the benefits programs from 15 years earlier.

Program resiliency suggests that personnel find value in, and grow accus-

tomed to, these benefits, and that employee expectations for benefit longevity

constrain top-level managers or new owners from diluting or terminating these

programs. Respondents described several competing factors that both threat-

ened and supported family-friendly benefits.

Two factors were identified as a threat. The first threat revolved around

fiscal stress due to an erosion of profitably caused by a loss of market share or

declining business climate. Here the experience was not uniform as some firms

were affected by the broad downturn in the economy, while others were more

strongly affected by the shock of 9/11, Hurricane Katrina and other disasters.

For the latter, the crises presented an opportunity to showcase the value of EAP,

work-life and, to a lesser extent, wellness programs. Still, despite this visibility,

several firms negatively affected by 9/11 or Katrina resumed fiscal restructuring

once the crisis period passed. Respondents described a loss of support for

family-friendly benefits a year or two after these catastrophic events.

The second threat to benefits policy was leadership volatility caused by CEO

turnover, mergers and acquisitions. Occasionally a new CEO would strive to

preserve family-friendly benefits. Two of the 28 firms that grew through acqui-

sitions adopted the “best practices” of the consumed entities, resulting in an

incremental upgrade in benefits. More often a merger or acquisition threatened

family-friendly programs, as new corporate leaders demanded a re-evaluation

TABLE 1 Sample Comparisons Between 1993 and 2008 Study

1993 Boston U. Study (N=79) 2008 Study (N-28)

Top 100 family-friendly companies (Working Mother) were approached

Approached same 79 Companies from 1993 Boston University Study

Only companies with 1,000 or more employees were approached

29 of 79 of original companies researchers were unable to locate

All 100 companies approached were based in the United States

20 of 79 original companies had merged 3x or more times, thus deemed inappropriate for comparison

79 of 100 companies completed the entire interview process. N=79

Remaining 30 companies were approached: One declined and another didn’t finish the entire process. N=28


of benefits policies, which frequently resulted in the downgrading of some of

those services.

Nonetheless, every firm that experienced a CEO turnover, merger or acquisition

retained core elements of their benefits programs. Incoming CEOs would frequently

demand quantifiable evidence of program effectiveness, and HR departments

would comply, but programs were never fully abandoned. Instead, respondents

described benefits as reshaped by a new CEO, usually with the objective of

cutting costs. A major reason for benefits continuation was pressure by internal

stakeholders to sustain benefits. Benefits administrators, at times in concert with

supportive mid-level managers, lobbied to preserve programs, and new CEOs

acquiesced to secure employee cooperation.

Another factor that helped sustain and shape family-friendly policy was the

relationship between program administrators and professional associations, such

as the Employee Assistance Professionals Association (EAPA), Alliance for Work

Life Progress (AWLP) at WorldatWork and International Health and Productivity

Management (IHPM). Professional associations give benefits administrators a forum

to interact with peers and share information on the latest ideas for improving

cost-effectiveness of these programs. The authors observed that active membership

in professional associations roughly correlated with corporate program emphasis.

In addition, the researchers found employers that had a large global presence

frequently participated in both international and local organizations based in the

host countries.

Another explanation for program continuity is the desire to protect corporate

image. Becoming recognized as a leader in providing progressive employment

policy creates an indefinable amount of goodwill that helps to lure talent and

build loyalty among employees. In one instance, benefits expanded after a

misstatement by a new CEO, which triggered intense national negative publicity

and a demand from employees for better services. In that context, benefit

administrators secured large funds to upgrade the work-life program.

Benefits stability was especially strong where workforces were unionized. For

those firms with labor unions (46 percent of sample), respondents report near

universal support for family-friendly programs by labor leaders. The codifica-

tion of family-friendly benefits into a labor agreement stabilizes benefits during

times of fiscal stress or CEO transitions. Collective bargaining also affects the

introduction and modification of benefits. In numerous cases, new benefits

were initially negotiated with unions, which later served as a blueprint for the

non-union workforce.

A fifth factor that has aided program longevity is Web-based technology. One

option during a financial downturn, or when a new management team demands

that a program demonstrates cost-effectiveness, is to find a less expensive

method of delivering services. Consistent with Sharar and Hertenstein (2006),

Web-based and telephonic services were perceived as appropriate media for


general information dissemination and less intensive types of counseling, and

were adopted by some firms. Respondents indicated that Web-based tech-

nology reduced benefits cost and provided a solution to fiscal stress that falls

short of program elimination (Murphy et al. 2009). Several respondents did

however express concern that Web-based technology might lead to benefits

being viewed as superficial commodities.

Resiliency Theme: Key Findings

Family-friendly benefits utilization rates are countercyclical in relation to the z

fiscal health of the firm, which aids in the short-term survival of benefits.

Family-friendly benefits are more vulnerable to program cutbacks in cases of

a protracted retrenchment.

New CEOs and owners hesitate to dramatically alter or terminate family-friendly z

benefits because these benefits become valued by personnel. Sustaining bene-

fits helps ensure employee cooperation during leadership transitions.

Benefits administrators with active relationships with EAP, work-life and well-z

ness professional associations tend to be early adopters of innovations and

have stronger program resiliency.

Family-friendly programs were more stable and had greater longevity in situ-z

ations where the labor force has greater power, either because of skill levels

or labor unions.

Firms under fiscal stress are more likely to adopt Web-based benefits applica-z

tions. Web-based services potentially increase access and utilization; however

an over-reliance on Web-based technology may lower the quality of services.

THEME 2: TARGETED VERSUS STANDARDIZED BENEFITS

Numerous respondents indicated that family-friendly benefits are becoming

more targeted in application. In some cases, targeting is caused by the need to

recruit and retain highly skilled employees. Some examples include: tailoring

programs for military families; parents with disabled children and dependent

elders; and gay and lesbian families. Firms with a significant international

presence modified family-friendly programs in response to cultural, ethnic and

religious contexts. All these forms of targeting were motivated by a perceived

need to expand or diversify family-friendly policies.

An alternative form of targeting is motivated by a desire to achieve a higher

return on investment (ROI). Several respondents reported moving to a less-

expensive, Web-based model for general inquiries, and being more selective

when administering intensive “high-touch” counseling. A wellness program, for

instance, might offer general health advice through the Web, and supplement

this service with one-on-one training for employees with high-risk physical

conditions such as diabetes, obesity and cardiac issues. Targeting of the first

type, creatively meeting the unique needs of populations, was more frequent


with growing firms or those with international operations. Targeting of the

latter type, a reach for cost-effective programming, was likely under conditions

of fiscal stress or when ROI criteria were imposed by management. Either form

of targeting provides fertile ground for family-friendly benefits innovation.

One constraint on the targeting strategy intended to lower service cost was

the presence of labor unions. Two explanations were given. First, unions typi-

cally demand equal access to benefits for members, and thus oppose plans

that allow management to select benefits recipients. Once benefits are codi-

fied, labor unions will educate members in order to promote high utilization;

any rule or procedure that restricts access is counter to this goal. Second,

family-friendly benefits are always part of a larger negotiation package, and

any proposal to shift from “high touch” to “low touch” might be perceived as

a concession. In such cases, substantive changes to the benefits will require

bilateral negotiation. In this way, the institutional role of organized labor

imposes standards and on-going stability for family-friendly benefits.

Finally, Davidson and Herlihy (1999) found responses that hinted of an asso-

ciation between corporate culture and the degree of benefits standardization,

which was consistent with findings of the original Boston University study.

Companies that operate based on a command-and-control model, such as

that found in the military, are more likely to standardize benefits programs. A

uniform application of benefits implies fairness and clarity of policy. Companies

featuring less hierarchy, or firms that rely on unsupervised employee coopera-

tion, are willing to allow family-friendly benefits to vary among employees. A

flexible application of benefits recognizes unique individual contexts or group

characteristics, and may be consistent with pluralistic management models.

Standardized benefits are a disappearing entity due to the promotion of

“flexibility” in the workplace, which is a prevalent issue in the benefits world.

But there was one of the 28 companies that had very standardized models

throughout all three branches of service. The respondent called it a “one-size-

fits-all” approach. As suspected and mentioned earlier, this was entirely related

to the long-standing corporate culture of this particular company.

Targeted Versus Standard Programs: Key Findings

Growing companies innovate with family-friendly programs that address diverse z

family arrangements, obligations, social norms and culture.

Companies under pressure to develop cost-effective programs, either because z

of fiscal stress or new management, will innovate by using technology to more

efficiently inform and service employees.

The presence of labor unions will standardize and stabilize benefits.z

Benefits policy is shaped by corporate culture. Command-and-control opera-z

tions favor standardized benefits; decentralized operations favor variation in

benefits application.


THEME 3: GLOBALIZATION OF FAMILY-FRIENDLY PROGRAMS

Over the intervening 15 years, many firms expanded family-friendly bene-

fits to their international operations. In some circumstances, there was a

deliberate corporate strategy of extending benefits to a growing segment of

non-Western countries in Asia and the Middle East. Respondents indicated

that U.S.-based programming was insufficiently equipped to serve the needs

of non-Western families.

Firms used two strategies to fill this void. The most common was to contract with

nation-based firms to create a hybrid benefits package that was consistent with

overall corporate company policy, yet sensitive to religious, ethnic identities and

cultures of the host country. An alternative approach, adopted by one firm, was

to empower constituency groups from various cultures by allowing employees to

provide input for refining a generic benefits program. The intent behind asking for

employee input was policy acceptance and higher utilization rates. Both methods

required contractors from a host nation to administer the benefits.

In general, respondents in companies that were expanding their global operations

sought to refine family-friendly benefits through the assistance of professionals

from the host country and by participating in local associations of that country.

Globalization: Key Findings

International firms are more likely to diversify family-friendly benefits in response z

to the cultural, religious and ethnic contexts of the various host countries.

The policy to adopt culturally diverse benefits can come from corporate leader-z

ship, or occasionally, from the international employees themselves.

The most common method for cultural diversification is to outsource family-z

friendly benefits administration to a nation-based provider.

THEME 4: COST-BENEFIT JUSTIFICATION

Verifying a financial return to the firm was increasingly necessary in order to

protect or acquire program resources. An acceptable method for assessing the

ROI of family-friendly programs would aid administrators in making the case for

growing benefits (Sharar and Hertenstein). Such an endeavor is complicated.

Measurement is a serious obstacle to establishing an ROI methodology. The

“investment” component is relatively easy to compute by totaling costs; assessing

the “return” is problematic because the returns from family-friendly programs

accrue at the firm, family and social levels. Personnel-related statistics, such as

absenteeism, tardiness, and turnover, can be quantified and analyzed. Far more

difficult is measuring the value of the benefit on personnel and society. How

does one, for instance, quantify the positive effects of EAP counseling on family

well-being? What about effects that emerge over a longer time horizon, such as

the three-to-five year time period required for a reduction in cardio-vascular

disease attributable to an effective wellness program? Or the generational returns


to society when a work-life program enables single mothers to spend time with

their children?

At issue is whether the return from a program is narrowly restricted to include

corporate interests or whether the return should factor in the improvement in

the lives of affected personnel. The distinction and choice have implications.

Measuring returns, while never easy, is comparatively straightforward when

returns are to the business only. Absenteeism, tardiness and turnover incur

quantifiable costs. Likewise, changes in employee productivity are measurable.

A firm that desires to test ROI can calculate the administration of family-friendly

benefits across work units to assess whether the benefits reduce costs or increase

productivity. Innovations, such as Web-based applications, can be similarly tested

using experimental methods to refine benefits.

However, this approach would clearly understate program returns because

it fails to quantify the value of the benefits to employees and their families.

Respondents that expressed discomfort with the ROI criteria sent down by top

management were sensitive to this limitation. Benefits administrators witness

how family-friendly programs improve the lives of employees and families, and

know that such outcomes are not captured by standard ROI formulas. Likewise,

programmatic shifts from one-on-one counseling to less expensive Web-based

advice have negative implications for benefits quality that will escape detection

in most evaluations. A worthy, challenging assignment for family-friendly prac-

titioners is to develop an evaluation method that reaches beyond a typical ROI

approach in order to incorporate changes in the value of benefits to affected

employees and families.

Measurement Issues: Key Findings

The development of an accepted methodology for assessing ROI would further z

the growth of family-friendly benefits.

In computing ROI, the return to the firm is easier to quantify and evaluate using z

experimental methods than are returns to employees and families.

There is often tension between top corporate management and benefits admin-z

istrators over ROI criteria. Corporate managers favor ROI criteria that assess

returns to the firm, measuring changes in factors such as absenteeism, tardi-

ness and turnover. Benefits administrators prefer an ROI model that includes a

broader set of criteria, one that includes returns to employees and families.

Moving beyond standard ROI models to capture the effect of family-friendly z

benefits on firms, employees and families will include an inherently subjective

component to the valuation of benefits.

THEME 5: OUTSOURCING VERSUS IN-HOUSE

A fifth strategic dimension was whether employees of the firm administered the

family-friendly benefits (in-house program) or whether the firm hired contractors


(outsourcing) to deliver services. Related was the issue of whether a contract was

with one provider or multiple providers. A few firms adopted a mix of contracted

and in-house capacity, which was referred to as a hybrid model.

Most firms contract for all or some of their family-friendly benefits. Nonetheless,

satisfaction with vendors varied greatly. Numerous respondents indicated that they

had to shop among vendors to either find a good fit with corporate culture or to

control costs. Aside from cost and quality, choosing to outsource involved several

considerations. Listed high as a reason to outsource was access to Web-based

services or some other service specialty. A few respondents also perceived

contracting as advantageous for shielding the company from liability for breeches

in client confidentiality. Firms that chose in-house programs frequently cited the

need to be responsive to particular needs of employees who deal with sensitive

materials and are in highly stressful situations that might affect public safety.

Firms that opted for a mix of outsourced and in-house programs blended these

considerations. For instance, one firm with extensive international operations

had in-house programs for domestic sites, yet contracted with benefits providers

specializing in the culture of the appropriate nation for international offices.

Another kept the most intensive aspect of its EAP benefit, psychological counseling,

as an in-house program for certain specified employees while contracting with

a vendor for less-intensive, Web-based service for other employees. These firms

were attempting to optimize benefits by combining the strengths of in-house and

contracted operations.

A preference for outsourcing was affected by the department home for the

benefits. While EAP, work-life and wellness share a common purpose of enabling

employees through intervention and accommodation, the three benefit types

achieve this goal in different ways. As such, the three programs are not always

administered through the same corporate department. When there was a split, it

was more common for EAP and wellness to be paired in the same department,

reflecting perhaps a shared emphasis on mental and physical health. Table 2

represents the various models of partnering that were reported by the respondents.

Note: 25 percent claimed that all three services were collaborative partners.

TABLE 2 Various Combinations of Collaborative Models

Internal EAPs* 18%

EAP & Work-life 62%

EAP & Wellness 23%

W/L & Wellness 15%

EAP, Work-life & Wellness 25%

Reported Collaborative Efforts Percentages based on responses of 47 interviews*

NB:* (1) Slightly higher level of Internal EAPs in this sample (2) Some companies reported different alliances dependent on who in that company was being interviewed


Outsourcing of services was more likely when multiple departments were respon-

sible for various family-friendly benefits. Respondents indicated that it is easier to

consolidate the three benefits as in-house functions, or contract the programs to one

vendor when the benefits are administered from the same department.

Outsourcing Versus In-house: Key Findings

Companies that place a priority on Web-based technology for the delivery of z

family-friendly benefits are more likely to outsource.

Companies that place a priority on benefits quality and security will more likely z

provide benefits with internal staff.

Companies that try to optimize benefits through a mix of internal and external z

providers will select the most familiar or intensive aspects of a service for internal

delivery, and contract the less familiar and less intensive service aspects.

Outsourcing is more frequent when separate corporate departments administer z

family-friendly benefits.

THEME 6: INTEGRATION OF FAMILY-FRIENDLY BENEFITS

Because of recent interest in the integration of EAP, work-life and wellness

programs (Attridge et al. 2005), the survey asked how the coordination of benefits

changed over the past 15 years. Many respondents mentioned consolidating the

three benefits within a single department, or “administrative integration.” Less

common were arrangements where a department served as a point of entry for

professional assessment and referral of individuals to benefits providers. Rarer

still were models that allowed the referral of persons across service providers, or

“functional integration.” Responses clearly reflected a range of conceptions for EAP,

work-life and wellness collaboration. Figure 1 illustrates the dramatic growth in

the concept of reported integration over the past 15 years.

Outsourcing to multiple firms for EAP, work-life and wellness services partially

FIGURE 1 Levels of Reported “Integration” in 1993 and 2008

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%1993 2008

10%

25%

60%

Three Services

Two Services


explains why functional integration is rare. Vendors tend to guard their operations

and have a disincentive to refer a client to another vendor. Moreover, benefits

administrators often prefer that vendors do not share client information to protect

client confidentiality. Finally, with functional integration, measuring individual

program effectiveness and utilization becomes more complex, which in turn

makes the task of holding separate contractors accountable more challenging. For

these reasons, several respondents preferred to keep EAP, work-life and wellness

programs operationally independent. The most functionally integrated examples

were when the firm contracted with a sole benefit provider for all three benefits,

or when in-house staff delivered all three services.

One factor encouraging greater levels of integration is the consolidation of

benefits providers in the field. The purchase of smaller niche providers by larger

firms allows prospective vendors to offer a more comprehensive menu of benefits

options for businesses. Those businesses, in turn, can lower transactions costs

when there is one contractor. These collaborations frequently involved a hybrid

model of in-house and vendor contracts, especially on the work-life portion of

these family-friendly benefits.

A final, program-related factor that inhibited benefits integration was the history

and treatment aspects of the benefits. Although all three programs are family-

friendly, EAP, and to a lesser extent wellness, are burdened by negative connotations

relating to individual weaknesses or over-indulgence. One respondent preferred

to keep EAP and wellness functionally and administratively separate to shield

work-life offerings from stigmatization.

Integration: Key Findings

Administrative integration of family-friendly benefits has clearly increased over z

the past 15 years (from 10 percent in 1993 to 85 percent in 2008). This might be

due to a growing appreciation for the shared mission for these benefits, corporate

reorganization or industry consolidation.

Functional integration is less common. One obstacle to functional integration z

grows out of turf concerns from the three professions, a limitation that is exac-

erbated when separate contractors provide the services.

Benefits administrators are usually responsible for evaluating programs and z

protecting employee confidentiality. Functional integration complicates this task,

and for this reason, many administrators prefer to have family-friendly compo-

nents operate independently.

Functional integration is more easily instituted when in-house staff provides z

benefits or when one vendor supplies all three services.

A final obstacle to functional integration is the stigma frequently associated z

with EAP services, and at times, with wellness programs aimed at dealing with

unhealthy behaviors. Administrators occasionally separate work-life benefits from

EAP and wellness to prevent the transfer of a stigmatization.


CONCLUSION

This research was conducted with a retrospective lens to understand changes over

time in these family-friendly benefits, specifically EAP, work-life and wellness

programs. The discussion part of this paper describes in depth the six themes

that emerged from the process or re-interviewing these companies 15 years later.

The three most important points to walk away with from this data are:

Resiliency.1 | EAP, work-life and wellness programs are here to stay, perhaps

in different configurations but nonetheless they have become part of the

corporate landscape.

Integration.2 | On the surface, it appears that integration or collaboration of

services has mushroomed in the intervening years (10 percent in 1993 and

currently 85 percent). But when one scratches the surface, it becomes clear that

administrative integration was common, but functional or operational integration

is still fairly rare.

Globalization.3 | This was the most frequent concern of all respondents. Most

companies today are operating in a global environment. They report significant

challenges in how to provide these employee benefits in all their numerous coun-

tries and yet retain their own cultures while altering programs to fit the needs

of the host country.

Therefore, the challenge for the next research project is to explore the area

of delivery of benefits service models in a global society. Of specific interest is

exploring various models available to provide these services in an effective, effi-

cient manner while respecting both the host country as well as maintaining the

company’s core corporate culture. z

AUTHORS’ NOTE:

The authors thank Value Options, Chestnut Global Partners and Com Psych, which were the initial sponsors of this research, as well as the University of Michigan’s Institute of Labor, Employment and the Economy for its donation of time and wisdom.

AUTHORS

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Roland Zullo, Ph.D., ([email protected]) is an assis-tant research scientist at the Institute for Research on Labor, Employment and the Economy at the University of Michigan. Zullo researches union strategy, privatiza-tion, outsourcing and collective bargaining. His work has been published in several labor relations and public administration journals. He received his Ph.D. in indus-trial relations from the University of Wisconsin.

Patricia A. Herlihy, Ph.D., RN, ([email protected]) is the CEO of Rocky Mountain Research and is a psychi-atric clinical nurse specialist with more than 35 years of experience. She was an assistant professor at Boston University’s Graduate Psychiatric Nursing Program; systems manager for Digital Equipment’s Employee Assistance Program, and principal investigator for six international studies on benefits delivery service models. Herlihy has published numerous chapters and articles and co-authored Integration of EAP, Work/life and Wellness Programs. She received her Ph.D. in social

policy from the Florence Heller School of Social Policy at Brandeis University.

Max Heirich, Ph.D., ([email protected]) is the director of the Worker Health Program at the University of Michigan’s Institute for Research on Labor, Employment and the Economy. A research scientist and professor emeritus at the University of Michigan, he has been designing, introducing and evaluating worksite wellness programs for more than 20 years. Heirich has consulted on prevention for numerous committees and chaired a group of 19 national organizations that authored guide-lines for worksite health promotion. He co-founded the University of Michigan’s Health Policy Forum and was the first chair of the university’s Medical School Center for Integrated Medicine. He has written several books, including Rethinking Health Care: Innovation and Change in America, and numerous articles.

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http://www.questia.com/googleScholar.qst;jsessionid=MGTKc1VF77YKp2ykSQdwkF0cmdYcpZN6bMTwLyLvzmkNhvJ11qxx!-2083947951!-1484893878?docId=5001656825

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Was Our Initial Confidence in the Total Rewards Concept Justified?

In 2000, when WorldatWork introduced its version of

total rewards concept, research demonstrating how

effective nonfinancial rewards were for attracting,

motivating and retaining employees was in short supply.

And little was known about the relative importance of all

of the total reward elements for each of these objectives

and how they interact to affect an employee’s behavior.

During the past 10 years, this gap in knowledge has

been narrowed by the intelligence gained from employee

surveys and field studies done by HR consulting firms

and organizational psychologists.

This article examines the evidence to see if the early

confidence in the total rewards concept was justified.

The first section reviews the total rewards concept. The

second section discusses the results of various employee-

attitude surveys used by consultants and organizational

psychologists to determine what attracts, motivates and

retains employees. The third summarizes field studies by

organizational psychologists who have applied scientific

methods to experimentally examine what influences

employee turnover and performance in the real world.

The final section is an analysis and summary.

Frank Giancola

Third Quarter 2010




TOTAL REWARDS CONCEPT

The total rewards approach calls for HR professionals to consider all aspects

of the work experience of value to employees, not just a few such as pay and

employee benefits, when developing a strategy to attract, motivate and retain

employees. The WorldatWork Total Rewards Model contains three categories of

rewards: pay, benefits and the work experience. The work experience includes

performance feedback, employee recognition, work-life balance, organizational

culture, employee development, the job and company (WorldatWork 2000).

EMPLOYEE SURVEYS

Managerial Satisfaction

McKinsey & Co. achieved notoriety for coining the term, “War for Talent.” The

research behind the term has contributed much to the understanding about

how managers achieve satisfaction at work.

In 2000, McKinsey surveyed 6,900 corporate officers, senior and midlevel

managers, working for 54 large and midsized U.S.-based companies. The goal

was to determine what managers look for when deciding which company to

join and stay with.

Using the survey responses, McKinsey identified 16 elements that have a

strong casual relationship with job satisfaction for managers. In addition to

compensation and wealth elements (for example, high annual cash compen-

sation and substantial wealth creation opportunity), which accounted for 25

percent of the total, managers were also very interested in the intangible

elements of work.

The following is a list of elements that managers felt were instrumental to

their job satisfaction:

Well-managed company: 91 percent z

Company committed to me: 86 percent z

Growth and advancement opportunities: 84 percent z

Culture and values of openness, trust and performance orientation: 83 percent z

Great leadership: 81 percent z

Rewards and wealth: 79 percent z

Exciting, challenging work: 78 percent.z

The results show that complex rewards packages are necessary to satisfy

managers. Intangible elements, such as working for a well-managed company

and organizational culture, were deemed as important or more important for

many managers than compensation. These elements comprised one of the

three key elements of the total rewards model, “the work experience,” which

made the total rewards new and different. This finding challenged the stereo-

type of managers as being primarily driven by compensation and provided a

solid rationale for creating employee value propositions for managers based

on the total rewards concept (Michaels et al. 2001).


Employee Motivation

In 2009, McKinsey & Co. surveyed 1,047 executives, managers and employees

from around the world, to learn what motivates employees. McKinsey found that

three noncash motivators are no less, or even more effective motivators than the

three highest-rated financial incentives. The noncash motivators were praise from

immediate managers, leadership attention (for example, one-on-one meeting) and

a chance to lead projects. The financial incentives included base-pay increases,

cash bonuses and stock or stock options.

McKinsey believes these three motivators play critical roles in making

employees feel that their companies value them, take their well-being seriously,

and strive to create opportunities for career growth. It claims that these themes

appear frequently in most studies on the ways to motivate and engage employees

(Dewhurst et al. 2009).

Attraction, Retention and Engagement

In the early 2000s, Towers Perrin (now Towers Watson) began performing surveys

with tens of thousands of employees with the focus of determining the important

drivers of employee engagement. The survey data also were analyzed to isolate

the specific elements in the work experience that are most important for attracting

and retaining employees.

The 2003 survey results made it clear that differences existed across the three

areas: attraction, retention and engagement. While overlaps existed, no single

reward element or combination of reward elements significantly influenced all

three areas. This general pattern also holds true for the most recent survey of

2007, as shown in Figure 1.

Towers Watson divides the work experience into four elements: pay, benefits,

learning and development, and the work environment. Learning and development

includes challenging work, career development and advancement opportunities,

and skill improvement. The work environment includes a company’s reputation,

leadership, job design, caliber of co-workers and work-life balance.

Attraction

In both the 2003 and 2007 surveys, the two most important drivers of attraction

were competitive pay and health-care benefits. About half of the 10 most influ-

ential recruitment factors were in the pay and benefits categories.

Retention

Employee retention presents a substantially different picture. In the 2003 survey,

competitive pay was the sixth most important driver of retention, and satisfac-

tion with benefits was the 10th most important driver, which arguably was due

in part to the period’s recessions, layoffs and pay cuts. In 2007, both elements

were not among the top 10 drivers of retention. The surveys revealed that the


learning and development and work environment categories included the most

important retention drivers — career advancement opportunities was the single

most important driver in both years.

Engagement

The list of the top 10 drivers of engagement in both years did not include pay and

benefits. As is true for retention, learning and development and work environment

elements dominate the engagement list. In both years, senior-management interest

in employees was the most influential engagement driver.

These surveys made important contributions to substantiating the validity of the

total rewards concept, by showing that employers must employ a broad range of

rewards in order to attract, engage and retain employees. They also show that

rewards elements take on greater or lesser importance, and that nonfinancial

rewards can be more important than financial rewards, depending on the objec-

tive. Prior to this time, HR practitioners did not have prioritized lists of rewards

to guide their thinking. As Towers Perrin has noted, knowing what counts to

employees and when can make a big difference in designing an effective total

rewards program (Towers Perrin 2003; Towers Perrin 2007).

Attraction, Retention and Motivation of Accountants

A recent study of 633 early-career accountants at the Big 4 accounting firms

confirmed the relevance of the total rewards concept in explaining what attracts,

FIGURE 1 2007 Top Ten Drivers of Attraction, Retention and Engagement

Top Ten Attraction Drivers Top Ten Retention Drivers Top Ten Engagement Drivers

Competitive base pay Have excellent career advance-ment opportunities

Senior management sincerely interested in employee well-being

Competitive health-care benefits Satisfaction with the organization’s business decisions

Organization’s reputation in community

Vacation/paid time off Good relationship with supervisor Improved my skills and capabilities over the last year

Convenient work location Organization’s reputation as a great place to work

Appropriate amount of decision-making authority to do my job well

Flexible schedule Ability to balance my work/personal life

Organization quickly resolves customer concerns

Career advancement opportunities

Fairly compensated compared to others doing similar work in my organization

Seek opportunities to develop new knowledge/skills

Challenging work Unit has skills needed to succeed Have excellent career advancement opportunities

Reputation of the organization as a good employer

Understand potential career track within organization

Can impact quality of work/product/service

Competitive retirement benefits Work in environment where new ideas are encouraged

Organization’s reputation for social responsibility

Caliber of co-workers Satisfaction with the organization’s people decisions

Senior management acts to ensure organization’s long-term success

Source: Towers Watson 2007 Global Workforce Study — United Sates. Copyright Towers Watson. Used with permission.


retains and motivates these employees. The study, based on group surveys from

pre-recruiting to post-hire of graduates from Texas A & M University, found that

the relative influence of elements in the total rewards model varied by behavioral

outcome. Career development was most important for attracting candidates, and

work-life and performance and development were most important for motivating

and retaining them. Researchers found that the results were not enhanced or

influenced by individual differences.

They also noted that the importance of a reward often changed depending

on the stage in the job search process. For example, compensation became less

important as the job search process progressed. This finding and the noted differ-

ential importance of rewards for attraction, retention and motivation suggests a

complex and dynamic role for rewards in driving important work behaviors. The

role extends across one’s relationship with a given employer and perhaps over

one’s career, according to the researchers. (WorldatWork 2010)

FIELD STUDIES

Job Embeddedness

Some organizational psychologists are breaking away from the use of surveys

that rely solely on the measurement of employee attitudes to assess employees’

intentions to stay and the likeliness of turnover. They have introduced a new con-

cept — employee job embeddedness, which is related to the total rewards model.

These psychologists believe that a totality of forces, many of which are nonattitu-

dinal and nonorganizational, keep employees from leaving their jobs. It represents

a new perspective on why people stay with their organization, by recognizing and

measuring the importance of off-the-job factors in reducing turnover. To determine

the degree of an employee’s embeddedness, surveys were developed to measure

employees’ fit and links with their community and the sacrifices they would make

in leaving it. On-the-job measurements are also made, but it is the off-the-job

measurements that make the approach different and relevant.

By directing some of the focus to the community in which employees live,

these psychologists believe our ability to predict turnover would improve. Their

surveys ask “community fit” questions, such as whether employees like where

they live, consider the community as home, whether it is family oriented and

offers sufficient leisure activities. They also assess “community links” with

questions relating to spouse employment, home ownership, and family roots

in the community. “Community sacrifice” is determined with questions such as:

“Would leaving this community be very hard?”. (Lee et al. 2004).

Research with a cross-section of 464 grocery store and community hospital

employees (excluding doctors) found that enhancing employees’ fit and links

to the community can reduce their intentions to leave and actual leaving. The

researchers believe that organizations need to be concerned with employees’

lives both on and off the job and should consider providing resources and


support for community activities and involvement. Work-life professionals

include the same message in the main tenets of their field (Alliance for Work-

Life Progress 2008). Thus, the embeddedness concept supports the inclusion

of a key nonfinancial element, work-life balance, in the total rewards model

(Mitchell et al. 2001).

Job Performance

Up to this point, the focus has been on measuring employee attraction, motiva-

tion and retention through surveys. Also important in establishing the validity of

the total rewards concept are studies that show how the various total rewards

elements influence employees’ job performance. Field studies by psycholo-

gists provide the best information on the relative importance of financial and

nonfinancial rewards. One defining characteristic of the total rewards concept

is that a variety of rewards affect an employee’s desire to contribute at work

(WorldatWork 2000).

In a 2008 review of compensation research for the past century, University of

Notre Dame Business School Professor Matt Bloom made this observation: “The

limited empirical research on total returns does support the notion that noncash

returns, such as social recognition and performance feedback, are important

determinants of individual and group performance” (2008). Two studies by orga-

nizational psychologists cited by Bloom are summarized in this article. The first

is a study of individual performance and the second is of group performance.

Individual Performance Study

The purpose of the first study was to determine the relative effects that money,

social recognition and performance feedback have on the performance of indi-

vidual employees. The study took place at the operations division of a large

company, located in one metropolitan area. The employees in the study worked

at two separate facilities performing identical work — processing and mailing

credit card bills. Performance data were recorded in real time by a meter at

each employee’s workstation.

One of the three incentives (money, social recognition or performance feed-

back) was applied for a month to a group of about 50 employees, according

to their assignment to one of three work shifts. The groups were comparable

on important dimensions, including age, education, experience, training and

full-time employment status.

Manager Training

Managers were separately trained to apply one of the three incentives. However,

all received training using a behavioral modification approach which required

them to identify, measure and analyze key critical behaviors and outcomes;

apply one incentive; and evaluate critical performance.


Financial Incentives

The specific financial incentives used in the study were not identified, but were

discussed with the employees to ensure they were commensurate with the required

extra effort. Throughout the study, supervisors provided help and coaching to

employees on the specifics of the program and reminded them that financial

incentives were contingent on engaging in certain critical behaviors.

Social Recognition

In the social recognition group, supervisors were trained to make remarks that

let employees know that they were performing behaviors specifically identified as

important to performance. Supervisors were told to avoid sugary praise or a pat

on the back. Proper feedback would be comments, such as “When I was walking

through your area, I saw you making a sequence check. That’s what we’re really

concentrating on.”

Performance Feedback

In the performance feedback group, supervisors developed charts and other

written and verbal objective information, usually quantitative, concerning the

frequency of the critical performance behaviors. The workers did not receive any

form of personal recognition.

Results

The performance improvement for each of the three groups and types of incen-

tives was as follows:

Money: 32 percentz

Social recognition: 24 percentz

Performance feedback: 20 percent.z

In terms of the effects on performance, the results followed the predictions of

the researchers, based on these premises:

Money would be perceived as having the most value, given the workers’ relatively z

low wage level.

Recognition could be perceived as indicating potential upcoming rewards, such z

as a pay raise or transfer, and would rank second.

Performance feedback does not include any form of reward, provides limited z

value in performing routine tasks, and would rank third.

Researcher Comments

The researchers made the following observations about how the motivators would

apply to professional and managerial workers:

The ordering of motivators found in this study would be different for complex z

tasks found in professional and managerial work settings. Feedback probably

would have the strongest effect, followed by recognition, and then money.


Complex tasks tend to be ambiguously defined and may lack objective perfor-z

mance measures. Given the emphasis on informative content in, and the

multifaceted nature of, professional and managerial jobs, feedback would be

most effective in providing the varied information needed for the successful

execution of complex tasks.

Self-confidence, which in part is derived from social recognition, is a major z

predictor of performance on complex tasks

Money usually produces increased effort, which on its own does not seem z

sufficient for the successful performance of complex professional and mana-

gerial tasks (Stajkovic and Luthans 2001).

Group Performance Study

The researchers state that the following study is the first to explore and

demonstrate that both financial and nonfinancial incentives, systematically

administered by trained managers, significantly improve business-unit outcomes,

as opposed to individual performance outcomes.

Groups and Participants

The study’s purpose was to examine the impact of financial and nonfinancial

incentives on the business unit outcomes of 21 fast-food stores, which were

located within about a 100-mile area in the Midwest. Each unit had an average

of two managers (median age 40.2, 15.6 years of education and 3.6 years in

the current position) and about 25 subordinates (median age 24.7, 11.4 years

of education and 1.7 years on the current job). There were no substantial

differences between the managers in terms of age, education, time on the job

and managerial style. The stores were divided in three groups for the study —

financial incentives group, nonfinancial incentives group and control group.

Critical Behaviors

Managers identified critical, observable and measurable behaviors that were

currently deficient and would significantly impact on improving store perfor-

mance in key areas. Examples included speed of service delivery and repeating

orders back to customers for accuracy. Managers received six hours of training

so they could identify, measure and analyze key behaviors and outcomes; apply

one of the interventions; and evaluate critical performance.

Financial Incentives

In the financial incentives group, all employees received the same lump-sum

payment at the end of each month, provided they collectively engaged in the

critical behaviors. A scale of incentives was developed, based on employees’

beliefs as to the amount of money necessary to drive higher performance.

Managers used sampling techniques to note and record behaviors. During the


month, if up to 50 behaviors were observed, a lump-sum payment of $25 was

made; 50-100 behaviors, $50 payment; and over 100 behaviors, $75 payment.

Payments averaged $70 per employee in the final three months of the six-month

study period and $450 for the entire period.

Nonfinancial Incentives

Two nonfinancial incentives were applied to one group of employees at the

same time. To administer the performance feedback incentive, managers

posted charts of the frequency of the group’s performance on key measures

(for example, drive-through times) near the time clock. For social recognition,

managers were trained to give positive recognition to individuals and the group

for performing the identified behaviors.

Results

Following are the outcomes for each group:

Store profitsz :

Financial incentive group: 30-percent increase -

Nonfinancial incentives group: 36-percent increase -

Drive-through time:z

Financial incentive group: 19-percent decrease -

Nonfinancial incentives group: 25-percent decrease -

Employee turnover:z

Financial incentive group: 13-percent improvement -

Nonfinancial incentives group: 10-percent improvement. -

All incentive groups out-performed the control group.

Researcher Comments

Following are some researchers’ comments about their study:

Although the nonfinancial incentives had less initial impact than the financial z

incentive, they have a steady, sustainable impact.

One limitation of the study is that the setting — a specific fast-food z

chain — limits the ability to generalize the findings to other service firms

and nonservice sectors. The young age of the workers and low complexity

of their tasks were not representative of most organizations. Most of the

workers considered the job as a short-term option or were less qualified for

higher-level work

The use of performance feedback and social recognition to improve worker z

performance is not as widely used as it should be given its minimal direct costs,

which primarily involve manager training (Peterson and Luthans 2006).

In general, both field studies show that recognition and performance feedback

are potent influences of job performance that rival or exceed money, which

justifies their prominence in the total rewards concept.


SUMMARY

Since WorldatWork endorsed the total rewards concept in 2000, notable advances

in research to support the concept have been made to increase our understanding

of what makes people join, remain with and contribute their best efforts to

organizations.

Through its surveys, McKinsey provided important information about the nonfinan-

cial elements in the work experience that satisfy managers and motivate employees.

Towers Perrin arguably has made the most significant contribution to substanti-

ating the total rewards concept by identifying the elements in the work experience,

in order of importance, for attracting, engaging and retaining employees and by

tracking the changes in these areas for most of the decade. These studies clearly show

that compensation and benefits are most important to employees when employees

make a decision to join an organization, and that the “soft” elements in the total

rewards model are dominant for engaging and retaining them, at least through 2007.

Elements and priorities may change due to the impact on workers of the recent

recession and demographic changes in the composition of the workforce.

WorldatWork sponsored research with new accountants confirmed the differential

importance of the various elements in the total rewards model for the attraction,

retention, and motivation of this particular group.

By using employee surveys, organizational psychologists have identified the

importance of nonwork factors in employees’ lives, such as community involvement,

that cause them to stay with their current employer. This work helps to bolster the

prominent place of work-life in the total rewards model.

Field studies by organizational psychologists show that employee recognition

and performance feedback are strong forces for improving employee performances,

which have exceeded the power of financial incentives in certain circumstances.

In summary, survey research and field studies support the use of the total rewards

concept. Additional research is required to understand what influences the job

performance of professional, managerial and other employees who do complex

work. With respect to financial incentives, Bloom noted that “gaps remain in our

understanding of the motivational effects of incentives, especially when work is

complex, difficult to prescribe and dynamic, such as is often the case with profes-

sionals, knowledge and creative workers, and the like” (Bloom 2008).

Finally, as employees’ attitudes are dynamic, surveys and field studies must be

conducted regularly to stay abreast of the latest societal and economic conditions

affecting employees’ lives and attitudes about work. The possibility that employees

will re-prioritize their reward preferences, at least temporarily, cannot be ruled out

due to the effects of the recession. The “bread-and-butter” rewards of compensation,

benefits and job security could have greater value now than the softer rewards that

have dominated the list of drivers for engaging and retaining employees for most

of the past decade. z


AUTHOR

REFERENCES

Alliance for Work-Life Progress. 2008. Categories of Work-Life Effectiveness. Viewed: Feb. 28, 2010.

Bloom, M. 2008. “A Century of Compensation Research.” The SAGE Handbook of Organizational Behavior, Volume 1. Julian Barling and Cary L. Cooper, eds., Thousand Oaks, CA: SAGE Publications: 300-317.

Dewhurst, M., M. Guthridge, and E. Mohr. 2009. “Motivating People: Getting Beyond the Money.” McKinsey Quarterly Online. Viewed: Feb. 24, 2010.

Lee, T.W., T.R. Mitchell, C.J. Sablynski, J.P. Burton, B.C. Holtom. 2004. “The Effects of Job Embeddedness on Organizational Citizenship, Job Performance, Volitional Absences, and Voluntary Turnover.” Academy of Management Journal 47:5, 711-722.

Michaels, E., H. Hanfield-Jones, and B. Axelrod. 2001. The War for Talent. Boston: Harvard Business School Publishing.

Mitchell, T.R., B. C. Holtom, T.W. Lee and M. Erez. 2001. “Why People Stay: Using Job Embeddedness to Predict Voluntary Turnover.” Academy of Management Journal 44:6, 1102-1121.

Peterson, S. J. and F. Luthans. 2006. “The Impact of Financial and Nonfinancial Incentives on Business-Unit Outcomes Over Time.” Journal of Applied Psychology 91:1, 156-165.

Stajkovic, A.D. and F. Luthans. 2001. “Differential Effects of Incentive Motivators on Work Performance.” Academy of Management Journal 44:3, 580-590.

Towers Perrin. 2003. “Working Today: Understanding What Drives Employee Engagement.” The 2003 Towers Perrin Talent Report. Viewed: Feb. 28, 2010.

Towers Perrin. 2007. 2007-2008 Towers Perrin Global Workforce Study. Viewed: Feb. 28, 2010.

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WorldatWork. 2010. “The Relative Influence of Total Rewards Elements on Attraction, Motivation and Retention.” Viewed: May 30, 2010.

Frank Giancola ([email protected]) has more than 40 years of HR experience, 25 years with Ford Motor Co., primarily in various compensation and benefits positions, and 23 years with the active and reserve components of the United States 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 in industrial relations from Wayne State University in Detroit. He is a regular contributor to WorldatWork publications and Online Community.

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E ffective rewards strategies result in programs

that are individually and in aggregate: (1) inter-

nally equitable; (2) externally competitive; (3)

well administered; (4) affordable; (5) acceptable to

employees; (6) a good fit to the organizational culture

and the workforce culture(s); and (7) contributors to

organizational success.

If conflicts arise among these characteristics, an optimal

balance must be achieved. For example, to be competi-

tive with prevailing market levels, a hospital may have

to pay IT personnel at levels that are viewed as inequi-

table by its most critical medical professionals, such as

nurses and technicians. Pay relationships that are not

acceptable to the very employees the organization most

relies on to deliver its core services may lead to painful

turnover. Although IT capabilities may be viewed as

necessary by management and by medical staff, they

are often not perceived as “critical” to hospital perfor-

mance, as the culture accords higher status to medical

personnel than to “support” functions. The competitive

IT pay levels may also strain financial resources, making

them unaffordable. In this case, competitive pay levels

Internal Equity and External Competitiveness: Critical Components of Effective Rewards Strategies

Robert J. Greene, Ph.D., CCP,

CBP, GRP, GPHR, CPHRCReward Systems Inc.

Third Quarter 2010




for the IT personnel result in a failure to meet a critical characteristic of an effec-

tive pay program — affordability. The resolution of such a dilemma requires

that organizations achieve the optimal balance between strategy/program char-

acteristics, accepting the reality that not all seven of the “ideal” results may be

realized. This article focuses on the balance between internal equity and external

competitiveness.

ACHIEVING INTERNAL EQUITY AND EXTERNAL COMPETITIVENESS

Reconciling internal equity with external competitiveness is the dilemma rewards

practitioners often find to be the most challenging when designing and admin-

istering programs. A single-minded concentration on one or the other is rarely

desirable. Instead, what is required is a way to achieve a balance between these

objectives in a manner best serving the organization. Equity and competitiveness

could be viewed as two opposing poles. This point of view leads a quest to find

the point in between “all equity” and “all competitiveness” that produces the

best result. But this is an “either/or” mindset — more of one means less of the

other — in a fixed-sum game. Another approach, involving the Chinese concept

of Ying-Yang, suggests that a better mindset is “both internal equity and external

competitiveness.” Figure 1 illustrates the latter approach. Adopting this more

appropriate perspective recognizes an interaction between the two. Achieving

one without the other is an empty victory.

During the past few decades, an increasing number of U.S. organizations purport

to emphasize market competitiveness over internal equity. Some have claimed

that job evaluation and internal equity are passé, or even dead. They believe that

a viable organization must focus solely on “meeting the market.” The rationale

for this belief is that pay structures and pay levels must be competitive with the

levels prevailing in the relevant labor markets if organizations are going to succeed

in getting and keeping the skills and knowledge necessary for their success. But

although competitiveness is a key consideration, a sole concentration on market

FIGURE 1 Equity and Competitiveness

Internal Equity

External Competitiveness


levels is unlikely to produce direct pay strategies and programs that serve some

organizations well. As with most trends, practitioners should not rush to adoption

without considering the fit to their own organizational context (Greene 2008).

Even within a single organization a sole reliance on market levels to estab-

lish pay structures and pay targets may fit some types of employees or specific

functions/business units and not others. Organizations are increasingly complex,

employing a broader range of employees, so using the same rewards strategies

for all employees often does not work (Greene 2010). For example, skilled-trades

personnel often will expect that the organization recognizes the accepted pay

relationships among job titles, such as “Machinist,” “Tool & Die Maker” and “Tool

Designer.” For pay levels to be acceptable, they must also be, and/or believed to

be, competitive with prevailing rates in the local market. But acceptance comes

only if they are also consistent with the expected relationship across jobs. There

may also be an expectation that pay rates for these jobs will progress based on

specific time schedules, indifferent to relative performance, which has histori-

cally been common in the skilled trades. And pay systems that are acceptable

to professional and managerial personnel will be likely to differ from those for

skilled-trades personnel. Managers and professionals will almost certainly expect

individual pay differences, based on relative performance. The result is different

philosophies within the same organization.

Figure 2 is a tool for gauging the appropriate balance between equity and

competitiveness. It can be applied at the organizational level, if a common strategy

FIGURE 2 Determining the Balance Between Equity and Competitiveness

Characteristics Focus On Internal Equity Focus On Competitiveness

Nature of work skills/knowledge

• Rate of change in qualifications

• Degree of interdependence with work of others

• Probable duration of role

– Impact of work on unit/org

– Supply/demand in labor market

– Ability to determine market rates through surveys/research

Skills/knowledge are specific to the organization.

• Slow, over long periods

• High; cooperation required

• Stable jobs; long term

– High

– Ample supply

– Low

Skills/ knowledge, that transport across organizations

• Rapid and frequent

• Low; independent actions

• Project work; variable

– Low

– Short supply

– High

Nature of workforce longevity; career aspirations

• Amount of turnover

• Value of retaining

• Cultural orientation

Long service employees; expect to spend career with organization

• Low

• High

• Collectivist

• High power distance

Short service employees; always evaluating options

• High

• Low

• Individualistic

• Low power distance

Staffing/development philosophy of the organization

Hire for potential; develop people internally; promote internally

Recruit to fit current needs; replace people when no longer needed


is to be used for all employees. It can be applied at the occupational level, if there

are different strategies by occupation. Finally, it can be applied at the individual

level, if incumbents of the same occupation/job vary in what they do and the

organization is willing to differentiate on that basis. The impact of each contextual

characteristic is examined by using examples from the author’s experience.

Nature of the Work

For many years, an envelope manufacturer customized the equipment used in the

plant so significantly that the equipment manufacturer’s service people could not

repair or maintain it. As a result the organization’s maintenance people became

critical to performance. Envelopes are commodities and competition is based solely

on price, making efficiency the principal competitive advantage. The equipment

modifications resulted in machines with efficiency levels their competitors could

not match. This reality made the skilled-maintenance personnel among the most

valuable in the organization, and they were paid as much as the engineers. No

market-survey data would suggest such a pay relationship, but as the survey data

was invalid for the organization’s maintenance personnel, an assessment of relative

internal worth was the primary basis for setting pay levels.

Another example of a context that resulted in a focus on internal equity was a

water utility with a more than 200-year-old distribution system. The field people

were long-service employees with detailed knowledge of the system and how to

keep it operating. Their knowledge was specific to the organization and highly

valued. Because of their longevity, an emphasis on internal equity existed. And

even experienced field personnel from other utilities required long training periods,

making it important for the organization to retain its key people. It was also neces-

sary to reward senior field employees for rendering their tacit knowledge explicit

and transferring it to less experienced coworkers. As a result, the relative value of

senior field personnel was greater than survey data would support.

Yet another example of dealing with the equity and competitiveness issues

was an organization that had as its core capability managing huge infrastruc-

ture projects globally. People with specific skills came and went continuously,

based on project requirements. Attracting qualified contractors who could meet

the requirements of each project segment necessitated a focus on competitive

compensation packages rather than on internal equity. As the project environment

tended to appeal to those who preferred going from one challenge to another, their

concerns about internal equity were much less pronounced than those related to

competitiveness. It should be noted that in this case there was also a concern

about the work performed and whether it offered “state-of-the-art” technology,

as contractors were concerned about their longer-term viability/marketability and

their current earnings.

A final example involves the scientific community in the national research labs.

The labs’ work focuses on creating new knowledge and dealing with unique

55 Second Quarter | 2010


scientific and engineering challenges. This often requires a breadth of scientific

knowledge that no one person could possess. A research unit might consist of

a physicist, a chemist, a metallurgist, a computer scientist and a mathematician.

Even though many incumbents have knowledge overlapping multiple scientific

disciplines, the work requires a knowledge depth in each discipline that only a

specialist could possess. This reality necessitates a team structure, as well as a

pool of intellectual capital including great breadth and great depth. Without such

a rich pool, the challenges could not be met.

The scientists do focus on the competitiveness of their rewards package relative

to the external market. Yet they also are concerned about equity. They assess

equity, or lack thereof, based on how they are classified into the levels within

defined scientific ladders. Each level within a ladder is assigned to a separate grade,

with a competitive range. But as scientists often start and end their career as scien-

tists (except those migrating into management roles) their progression through the

levels in the occupational ladder becomes a symbol of their accomplishment and

status in their field. So internal equity is measured based on individual compari-

sons, that is, who occupies levels below, at and above the level in which the subject

employee is classified. Even though the labs typically have detailed descriptions

of each level and classify individuals based on those, the employees make their

decisions about equity based on who populates each level.

There is also another form of the internal equity versus market competitiveness

challenge confronting most organizations. That challenge is how to ensure that

pay ranges for management personnel are in the appropriate relationship to those

of professional and technical employees. Market data for senior professionals may

indicate their pay should average more than department heads. But there must

be a reasonable inducement to take on the management responsibilities that are

critical to organizational performance. Many professionals view managing others

as a frustrating activity, for which they rarely have received adequate training.

Management also requires administrative work that professionals, particularly

technical professionals, view as a nuisance and a distraction. Most organizations

have some form of dual ladder system (one branch of the ladder for management

and one for technical) to facilitate career management. However, several issues

present themselves. If management roles are paid too large a premium relative to

the top professional level in the career ladder, then employees who don’t belong

in management roles will be motivated to seek them. Even though they don’t want

to manage and may not be good at management, the economic incentive is strong.

On the other hand, if senior-level professionals are compensated at higher levels

than those who are supposed to be managing them, this discourages those most

suited for management to follow that path. And if the two branches of the dual

ladder are out of synch, it impedes future mobility, even though fluctuating work

demands and career interests might result in people moving laterally from manage-

ment to technical or vice versa. If the relative pay levels for the two branches are


set based solely on market data, they may frustrate career development and result

in the wrong people filling roles.

The relationship between supply and demand in the relevant labor market also

influences the relative relationship between equity and competitiveness. The “Y2K”

event was an example of turbulent labor markets, precipitated by major supply-

demand imbalances for people with specific IT skills. The organizations that

waited too long to begin the work required to become Y2K compatible were forced

into an impossibly tight IT labor market for specialized skills. This was due to the

reality that there was insufficient time to retrain their mainframe system employees

so they were sufficiently skilled to replace legacy systems with new systems. Few

organizations wanted to patch their mainframe systems at great expense only to

be forced to convert to new systems shortly thereafter. Much of the inflation in

pay levels for those possessing the scarce skills was due to a lack of planning.

The results of supply-demand imbalances of Economics 101 could not be avoided,

given the conditions caused by this lack of workforce planning. And even after

the conversion crisis was behind them, organizations were not “out of the woods.”

They had to face the inequities between people hired at premium rates and those

who had kept the legacy systems running through conversion. This brought to

mind the commercial with the mechanic selling scheduled servicing with the line

“pay me now or pay me later.”

A final issue impacting the amount of emphasis placed on external competi-

tiveness is the degree to which an organization can price its roles in the market.

The envelope manufacturer cited as an example previously found it difficult to

find relevant market data for its specialized mechanics, causing it to focus on the

value of those employees to the organization. The data available for IT network

specialists in the late 1990s was so chaotic that surveys were out of date before

they were compiled, forcing rewards practitioners to base offers on what it took

to get someone. There is also the reality that no matter how much survey data

is available, there is no market rate that can be determined. Instead, a range of

prevailing rates exist. The author managed a large national survey with 250,000

rates on IT personnel, supplied by more than 2,000 companies. Analysis of that

enormous database showed at least a plus and minus 5-percent variation caused

by random factors, making it difficult for a rewards manager to support findings

such as “we are 2.9 percent below market” or “3.2 percent over market.” A finding

that the organization is paying in the lower or upper part of the prevailing range

of market rates is more supportable and more believable.

Nature of the Workforce

The characteristics of the work performed will determine the type of employee

who will be qualified to perform the work. However, the work’s nature may

change in a manner making the current workforce ill-suited to perform it. For

example, an organization with a high percentage of long-service, highly skilled


employees is likely to have a relatively expensive workforce mix. Senior-level

people will usually be classified into the higher grades in the pay structure and/

or paid in the upper part of their pay ranges. But if competition has turned the

organization’s products into commodities, it will be forced to compete on price

... with an expensive workforce mix.

Even in those organizations that compete based on quality or brand and do not

have to compete on price will find that a workforce mix that is out of line with the

work mix impacts effectiveness. Many organizations celebrate their low turnover

and the longevity of their workforce. But they may have a workforce mix mismatch.

That is, highly skilled people might be used for work not requiring their level of

skill and/or lower skilled people asked to perform work they are unqualified to

do. Thus, a large portion of the time, employees may be dissatisfied with the type

of work they are doing, and boredom or extreme stress may result in the work

being done poorly. And if the workforce is too expensive for the work being done

or if the work demands more skill than employees have, the organization’s ability

to provide a competitive product will be compromised.

The cultural orientation of the workforce is also a consideration when deciding

whether to stress equity or competitiveness. As the cultural diversity in most

organizations increases, due to people becoming globally mobile, what employees

will view as appropriate becomes more varied. For example, employees from

collectivist cultures will often be concerned about equity relative to their peers,

while those from more individualistic cultures will more often be more concerned

about how their own pay compares with market levels. Employees from high-

power distance cultures will expect to see greater pay differences based on level

in the organization, while those from low-power distance cultures will expect a

more egalitarian relationship (Trompenaars and Hampden-Turner 1994). Although

employees sharing a cultural background may not all behave similarly, the way

people are socialized and educated can have a profound effect on their beliefs,

values and priorities. Global organizations must find a way to accommodate the

differences in cultural orientation, as pay systems that are unacceptable will result

in dissatisfaction and perceptions of inequity. Fons Trompenaars has suggested

organizations follow the 3Rs of cross-cultural management: (1) Recognize that

there are differences; (2) Respect the rights of people to hold different beliefs and

perceptions; and (3) Reconcile the issues raised by those differences (Trompenaars

and Hampden-Turner 2004). The reconciliation has become more challenging as

workforce diversity increases.

A related consideration when balancing equity and competitiveness is the organi-

zation’s staffing and development philosophy. Some organizations hire entry-level

people who they view as having high potential and develop them, with promo-

tional ladders providing for extended careers within the organization. McKinsey

is an example of this approach, as was IBM during its halcyon days in the

’60s, ’70s and ’80s. Other organizations prefer to consider current needs and


mix internal promotion and external recruiting to meet them. Both strategies are

costly. If entry-level people are hired, their pay levels will be lower, but more

resources will be required for development. If fully qualified people are hired, the

development costs are reduced but the payroll will be larger. Neither approach

fits all organizations. Rarely does one approach fit all types of employees within

a single organization.

TOOLS FOR EMBRACING INTERNAL EQUITY AND EXTERNAL

COMPETITIVENESS

As every organization attempts to find the appropriate balance between equity

and competitiveness, the obvious question is “how?” Base-pay structures and rates

ideally are both internally equitable and externally competitive. But as mentioned

earlier, the relative concentration can vary even within an organization. The

earlier observations about skilled-trades personnel and software designers suggest

that the former will expect a stronger focus on internal equity and the latter

will demand more attention be paid to competitiveness. Mobile people tend to

worry less about their pay relative to others in the organization. However, equity

theory predicts that they will at the least be concerned about the relationship of

their rewards to peers doing similar work and whom they interact with regularly.

People who expect their career advancement to occur within an organization will

be more concerned about internal equity and will judge their pay progression to

see if it is aligned with their career progression.

One occupation presenting particular challenges in balancing equity and competi-

tiveness is engineering. As with other professionals, engineers tend to relate to

their field more than a specific organization (Greene 2010). The national research

lab example cited earlier discussed the issue of classification of incumbents into

career ladders. Most organizations using this type of role definition will place each

level within a ladder into a grade in the pay structure. The pay ranges for each

grade should be externally competitive based on market data. But there are several

disciplines within engineering (for example, mechanical, electrical, chemical, nuclear,

systems, facilities). Market data, when available by discipline, often shows prevailing

pay levels that differ by as much as 15 percent to 20 percent across disciplines. If

a senior electrical engineer has an annual market value of $100,000 and a senior

facility engineer a market value of $85,000, how can both internal equity and

external competitiveness be achieved if the organization places all senior engineers

in the same grade in the pay structure? One answer is to place them into separate

pay structures. Another is to use a range with a midpoint of $92,500 for both (the

average of the two market rates). A third approach is to use the same range but to

set different control points for each discipline. (Of note: a control point is the rate

that fully qualified, fully satisfactory performers should on average be paid).

Although many organizations treat the midpoint as the control point for all jobs

in a grade, this does not mean the control point cannot vary by discipline. The


use of control points is particularly useful for organizations with incumbents from

several different disciplines and who choose to place all senior engineers in the

same grade. The reality is that supply–demand relationships for different disci-

plines cause market rates to vary from each other, typically on two- to three-year

cycles. When word gets back to engineering students that the jobs are plentiful,

hiring rates are high and supply is short for specific disciplines, some students in

their first two or three years will change their majors. So control points can be set

yearly for each discipline, and budgets for salary adjustments within each discipline

can vary to ensure pay rates remain competitive. Internal equity is maintained and

pay rates are maintained at competitive levels. Organizations must be careful not

to overreact to short-term spikes in market rates. But if pay adjustments are based

on compa-ratios that are calculated on control points rather than midpoints, the

magnitude of adjustments will not be so great as to run the risk of overshooting

the market for disciplines that are “hot.”

It should be recognized that base-pay adjustments have limitations when

attempting to cope with turbulent market rates. The base-pay adjustment given in

one year is tantamount to a career annuity and rarely are increases withdrawn at

a later date (the past two years being an exception for many organizations). The

trend toward increased use of variable compensation offers greater promise for

remaining competitive while preserving internal equity. If revenues drop while

payroll costs remain fixed, the effect on profitability is predictable. Or, if an

organization is already uncompetitive based on labor costs, it is difficult to find

the funds to reward those contributing at high levels. Pay freezes punish those

deserving of more, but do not adversely impact those who are overpaid. But if

half the employees are overpaid by 10 percent and half underpaid by 10 percent,

how is an organization to react? The “Robin Hood approach” (taking from those

with too much) has proven impractical in most instances. By compensating high

performers with variable pay the organization increases the chances of being able

to reward contributions in the current year without exacerbating the high payroll

problem (Greene 2009). Contributions by individuals, teams and organizational

units can be rewarded using well-conceived incentive plans, enabling the organiza-

tion to measure and reward performance at the appropriate level.

CONCLUSION

Balancing internal equity and external competitiveness is one of the most signifi-

cant challenges for designers of rewards strategies and programs. It is also one

of the most critical factors in determining whether strategies and programs are

effective, appropriate and acceptable to employees. Perhaps the most difficult part

of achieving this balance is assessing the context of the organization (mission;

culture; internal and external realities; strategy and structure) and deciding what

best fits that context. And within a specific organization the correct balance must

be determined for each part of that organization.


Claims that job evaluation is not useful are unfounded. Focusing on competi-

tiveness alone is rarely a good approach. But so is focusing on internal equity to

the point that jobs with significantly different market rates are grouped into the

same grades and pay ranges. Producing a meaningless average of dissimilar values

is folly. Yet if the organization’s culture dictates that internal equity trumps market

value, the jobs may appropriately be placed in the same grades and have the same

pay ranges.

Rewards practitioners need to operate with a “both, and” mindset, rather than

an “either, or” mindset. Internal equity across jobs should be achieved by creating

a grade structure that captures true relative internal value, no matter whether a

point-factor job evaluation is used or some other approach is employed. Internal

equity across individuals should be achieved by administering pay rates in an

appropriate manner, whether that be a merit pay system or a time-based step

system, as long as the approach fits the nature of the work and of the workforce.

External competitiveness should be achieved by identifying relevant labor markets

for all types of employees, formulating an appropriate competitive posture relative

to market and creating one or more pay structures that fit the context. If internal

values and market values across occupations vary dramatically, then organizations

may reconcile differences differently.

The overarching principle is that when equity and competitiveness consider-

ations provide conflicting results, the best that can be done is to achieve a balance

fitting the organization and enabling the organization to get and keep the kind

of workforce that contributes to its success. How that is done will vary across

organizations. What works is what fits. ❚

AUTHOR

REFERENCES

Greene, R.J. 2010. Rewarding Performance: Guiding Principles, Custom Strategies, Florence, KY: Routledge.

Greene, R.J. 2009. “Rewards Strategies and Programs.” WorldatWork Journal 18(1): 55-64.

Greene, R.J. 2008. “Human Resource Management Strategies: Can We Discover What Will Work Through Benchmarking.” WorldatWork Journal 17(2): 6-15.

Trompenaars, F. and C. Hapden-Turner. 2004. Managing People Across Cultures, Oxford, England: Capstone.

Trompenaars, F. and C. Hampden-Turner. 1994. Riding The Waves Of Culture: Understanding Diversity in Global Business. Burr Ridge, IL: Irwin.

Robert J. Greene, Ph.D., CCP, CBP, GRP, GPHR, CPHRC, is the CEO of Reward Systems Inc. in Glenview, Ill. He has published more than 100 arti-cles and book chapters and was awarded the first Keystone Award for attaining the highest level of

excellence in the field. He has designed and taught certification courses and seminars for numerous professional associations around the world and his book Rewarding Performance was published in April 2010.

http://www.workldatwork.org/waw/adimlink?id=31702

http://www.worldatwork.org/waw/worldatworkjournal/html/journal-2ndQ08-htmlsec

R etiree benefits are comprised of pension and

related retirement income plans and “other

post-retirement employee benefits” (OPEB)

consisting mainly of health insurance and closely related

benefits such as dental, vision, long-term care and some-

times life insurance policies. While a number of state

and local jurisdictions face serious unfunded liability

problems with their pension plans, most had recovered

from the devastations of the 2001 recession and were

in relatively good shape prior to the 2008–09 recession.

Whether public-sector pension plans will recover, as they

did between 2003 and 2007, is open to debate. In some

cases, they may be unsustainable. In any event, the timing

of the 2008–09 recession, and its impact on governmental

pension plans, is terrible for OPEB funding.

Pension plans are prefunded and, if the actuarial

assumptions are reasonable, fairly good forecasts can

be made of future liabilities. Public-sector OPEBs are

generally not prefunded. They are largely financed on a

pay-as-you-go (PAYGO) basis from current-year revenues.

Moreover, some of the assumptions upon which OPEB

actuarial valuations are based are problematic.

Funding Public Sector “Other Post-Retirement Employee Benefits” (OPEBs)

John G. Kilgour, Ph.D.California State University, East Bay

Third Quarter 2010




Public-sector OPEBs have also been subject to less stringent accounting and

disclosure requirements than pensions. Until recently, most state and local govern-

ments paid little attention to how much they owed to future and current retirees

for such non-pension retirement promises.

Public- and private-sector retirement benefits differ in a number of important

respects. In the private sector, they are covered by the Employee Retirement

Income Security Act of 1974 (ERISA) with its important funding requirements for

defined benefit pension plans, which were strengthened recently by the Pension

Protection Act of 2006. Government plans are exempt from ERISA and there are

no comparable federal funding requirements.

ERISA does not require the prefunding of health and other retiree non-pension

benefits. However, in 1990 the Financial Accounting Standards Board (FASB)

approved FAS 106, effective Dec. 15, 1992. It requires private-sector employers to

account for unfunded employee benefits in their financial statements. FASB has no

authority to require employers to take action; however, quantifying and disclosing

large unfunded liabilities had a major impact on the net worth of many companies,

which affected their credit and bond ratings. FAS 106 and other factors, especially

escalating health-care costs, caused many private-sector employers to reconsider

post-retirement health and other benefits. Private-sector, post-retirement health

benefits declined from 22 percent of the workforce for early retirees and 20 percent

for Medicare-eligible retirees, to 13 percent for both groups between 1997 and 2002

(Fronstin 2005). No doubt they have continued to decline since then.

GASB 45

The public-sector equivalent of the FASB is the Governmental Accounting Stan-

dards Board (GASB). It also cannot require employers or plans to take action. It

only issues standards of “generally accepted accounting practices” (GAAP) that

auditors apply. Many state and local jurisdictions mandate that audits be compliant

with GAAP and GASB standards. Bond-rating agencies take them into account as

well (U.S. GAO 2008).

In June 2004, the GASB issued standard number 45 document, applicable to

employers that sponsor OPEBs. A month earlier it had issued standard number 43,

applicable to OPEB plans and trusts. The two documents are similar in content and

purpose and became fully effective for all state and local government employers

and plans by Dec. 15, 2008.

GASB 45 follows FAS 106 dealing with retiree health benefits in the private

sector, as well as GASB 25 and 27, two earlier standards dealing with public-sector

pension plan funding. FAS 106 and GASB 45 effectively require that OPEBs in the

private and public sectors, respectively, be accounted in the same way as pension

plans. The present value of unfunded liabilities must be quantified and disclosed

in financial statements to provide transparency for investors, taxpayers and others.

OPEBs, like pensions, are deemed deferred compensation that should be paid for by


the taxpayers who benefit from the services provided. The cost of such employee

benefits should not be passed on to future generations via PAYGO financing.

LEGALITY

An early U.S. Supreme Court decision held that pension benefits were a “gratuity”

and a “mere expectancy” rather than a right and thus, they could be changed or

rescinded by the employer at any time (Pennie v. Reis 1889). ERISA effectively

ended this doctrine, at least for vested participants and beneficiaries. While the

Supreme Court’s ruling has never been changed at the federal level, almost all

states have rejected the “gratuity theory” in favor of an “implied-in-fact unilateral

contract theory” (Baker et al. 2008). The important exception is Texas, where it

is argued that GASB 45 does not apply since retiree benefits can be reduced or

eliminated at any time (Daley and Coggburn 2008).

In 17 states, public-sector pension plans are protected by provisions in the state

constitution, and in most others by statute or judicial interpretation. Local govern-

ments often have similar protections for public pension plans (U.S. GAO 2007).

In general, while governmental pension arrangements may be changed for newly

hired employees, retirement benefits once accrued are almost sacrosanct and may

not be withdrawn by the employer. OPEBs, on the other hand, seldom share this

status and are more easily amended. Many states have done so and more will in

response to GASB 45.

Two recent decisions have upheld a state’s right to change post-retirement health

benefit plans. In 2003, the Alaska Supreme Court ruled that retiree health benefits

could be modified, provided that the change resulted in equivalent coverage and

that individuals who would suffer serious hardship as a result are allowed to

remain under the existing plan. In 2005, the Michigan Supreme Court held that

health-care benefits were not an accrued benefit and did not constitute a contrac-

tual right (U.S. GAO 2007). It will be interesting to see if other state courts adopt

similar positions as GASB 45 unfolds.

State and local government employees are much more likely to be represented

by unions than private-sector employees. In 2008, 40.7 percent of public-sector

employees were represented by unions: 35.1 percent for state employees and 46.1

percent for local government employees (U.S. Department of Labor 2009). This

compares to only 8.4 percent of private-sector wage and salary workers, Where

OPEBs are the result of collective bargaining, they cannot be changed unilaterally

during the life of the memorandum of understanding (MOU). They may, of course,

be renegotiated with the union upon expiration of the agreement.

CURRENT PRACTICES

The adoption of GASB 45 has required public employers to identify and disclose

the extent of their post-retirement liabilities and their methods of funding them.

Of the 46 states for which data are available, 30 operate solely on a PAYGO basis,


15 report some prefunding and one is fully funded. (See Table 1). The GAO puts

aggregate state and local government unfunded OPEB liability at between $600

billion and $1.6 trillion (U.S. GAO 2008). A more recent estimate places it at $1.5

trillion and likely to grow to $2 trillion (Miller 2009b).

A few states will be little affected by the new standards as they either do not

provide significant OPEBs or they largely prefund them. Most of the others have

serious problems. As reported in Table 2, New Jersey has the largest unfunded

OPEB liability ($68.8 billion) followed by New York ($49.7 billion) and California

($47.9 billion). This is somewhat misleading. The real impact of the OPEB liability

is a function of the size of the state’s population and budget as well as other

indebtedness.

In relative terms, New Jersey is still in the worse shape with a per capita

unfunded liability of $7,947. New York and California, with their much larger popu-

lations and state budgets, are in relatively good shape with per capita unfunded

liability of $2,578 and $1,331, respectively. Similar relationships are found when

unfunded OPEB liabilities are related to state budgets and the employer’s annual

required contribution (ARC). Connecticut, Louisiana and North Carolina, on the

other hand, have big problems. All three states also have large governmental

pension unfunded liabilities, as do many others.

ALTERNATIVES

Public-sector employers confronted with the requirements of GASB 45 have a

range of options from which to choose. Any measure taken to reduce or shed

OPEB costs reduces unfunded liability and the employer’s required contribution.

This may involve curtailing coverage entirely by ending sponsorship of all non-

pension post-retirement benefits, or partially by ending employer funding of such

features as vision care or dental care. Coverage can be reduced or eliminated for

particular groups of beneficiaries, such as dependents, Medicare-eligible retirees

and beneficiaries or pre-Medicare eligible retirees (under age 65). The employer

contribution to OPEBs can also be reduced by shifting more of the cost to the

employees and future retirees in the form of adding or increasing co-insurance,

Benefits Number of States

Entirely pay-as-you-go 30

Partial prefunding 15

Fully funded 1

Retiree Health-Care Coverage 46

Require Retiree to Enroll in Medicare 38

Health Benefits Available to Newly Hired 45

TABLE 1 Current Other Post-retirement Benefits (OPEBs) Offered by States and Their Funding Arrangements (Daley and Coggburn 2008)


co-payments, deductibles and more stringent eligibility requirements (Thoen and

Wade 2008).

Another approach is to use OPEB obligation bonds (OPEBOB), similar to pension

obligation bonds (POB). The idea is that a state or local government can sell

bonds at a low interest rate, invest the funds at a higher rate of return, and use

the proceeds to finance unfunded liabilities. They were first used in 1985 when

Oakland, Calif., issued such tax-exempt bonds. The Internal Revenue Service (IRS)

prohibited using tax-exempt bonds for such arbitrage in 1986. Since then, more

than $50 billion in taxable POBs have been issued by various state and local

governments. Some, especially New Jersey, have lost a considerable amount of

money. For POBs and OPEBOBs to work, they must be issued near the bottom or

during the early stage of recovery of the stock market. (Miller 2009a).

COMPARATIVE COSTS

As of 2008, health benefits cost state and local government employers substantially

more than private-sector employers (Ford 2009). For management, professional

and related (MPR) workers, governmental employers paid $6,470 in health-

care premiums compared to $5,905 by private-sector employers. (See Table 3).

That is, the public sector paid $565 (9.6 percent) more than the private sector.

Even more pronounced was the differential for service workers and, by exten-

sion, other less-skilled workers. It cost public-sector employers $4,954 for such

employees compared to $1,549 in the private sector. That is over three times

as much or a difference of $3,405. Given that there are usually more low- and

semi-skilled workers than there are managers and professionals, this is an impor-

tant difference.

One reason for the difference is that the employer share of the insurance premium

is significantly higher in the public sector for both occupational categories. When

total premium costs are compared, the differential disappears for MPR workers.

Unfunded Actuarial Accrued Liability

ARC* Assumed Total Percent of As a Percent Interest (billions) Per Capita Budget of Budget Rate

New Jersey $68.8 $7,947 139.7% 11.9% 4.5%

New York 49.7 2,578 36.3 2.8 4.2

California 47.9 1,331 22.8 1.7 4.5

North Carolina 23.8 2,742 60.3 6.1 4.3

Connecticut 21.7 6,224 107.4 7.9 4.5

Louisiana 19.6 4,360 91.6 9.7 4.0

Texas 17.7 774 21.7 1.9 6.0

* Employer’s “Annual Required Contribution.”

TABLE 2 Total and Relative Unfunded OPEB Liabilities, Selected States, 2005 (Kearey et al. 2009)


For service workers, it remains. Note that the employers’ share of the premium is

significantly lower for service workers compared to that of managers and profes-

sionals in the private sector.

A second reason for the difference between the sectors is the degree of partici-

pation in the health-care plan. Among management, professional and related

workers, it is higher in the public sector: 79 percent compared to 74 percent in

the private sector. And, among service workers, there is a striking differential: 71

percent for government plans compared to 31 percent in the private sector. This

is likely due to the lower employer contribution rate and the lower wages of many

service jobs.

Information on local governments’ pensions and OPEBs is less available than

for state governments. Presumably, their experience reflects that of the states and

lessons drawn from state data apply to them as well.

BENEFITS PROVIDED

Starting in 2006, state and local governments typically provided health benefits to

current employees and on average paid 90 percent of the cost for a single employee

and 80 percent for family coverage (U.S. GAO 2008). All states provided access to

group health benefits for pre-Medicare eligible retirees (under 65). Fourteen paid

the full cost, 22 paid part of the cost, and 14 paid nothing. For Medicare-eligible

retirees in 2003, 17 states paid the full cost, 20 states paid part of the cost, and

11 made no contribution. Two states offered no plan and made no contribution

(Wisniewski and Wisniewski 2004).

Pre-Medicare-eligible retirees are expensive. For most retirees age 65 and over,

Medicare is the primary payer of health-care costs and the employer’s plan is the

secondary payer. This significantly reduces the cost to the employer. Prior to age

65, the employer’s plan may bear the full cost.

Another cost of pre-Medicare-eligible retirees occurs when they are pooled

Annual Employer Cost Employer Share Total Participation Per Employee of Premium Premium Cost* Rate

Public Sector

Management, Professional $6,470 89% $7,182 79% and Related Workers

Service Workers 4,954 89% 5,499 71%

Private Sector

Management, Professional 5,905 78% 7,204 74% and Related Workers

Service Workers 1,549 73% 1,968 31%

* Calculated by author before rounding

TABLE 3 Cost Per Employee, Employer Contribution Rate and Employee Participation Rate in Health-care Plans in the Public and Private Sectors, 2008 (Ford 2009)


with the employer’s active employees. This results in an “implicit subsidy” for the

retirees to the extent that the employer pays all or some of the cost. Given that

the retiree population is older than the active employees, its premium would be

higher if the two groups were not pooled. Medicare-eligible employees are not

pooled with the active employees. GASB 45 requires that such implicit subsidies

be accounted as OPEBs (U.S. GAO 2007).

It should be noted that the additional costs to the employer associated with

implicit subsidies may be cost-effective if the objective is to encourage early

retirement to reduce the size of the workforce or to replace older employees with

lower-wage younger ones. There are also some occupations in which retirement at

a relatively young age is necessary or desirable, such as police officers, firefighters

and, until recently, airline pilots.

ELIGIBILITY

The eligibility requirements for full retiree health benefits vary considerably. A

number of states have tightened their requirements and more are likely to do so.

For example, in California, state employees hired before 1985 had full coverage

from the date of hire. For those hired between 1985 and 1989, the state’s contribu-

tion was 10 percent for each year of credible service, attaining full employer-paid

health benefits after 10 years. For those hired in 1989 or after, the state pays

50 percent of the premium after 10 years of service and then increases its contri-

bution by 5 percent per year until it reaches 100 percent after 20 years of service

(Kearey et al. 2009).

California also requires that an individual be eligible for health-care benefits

before retirement, eligible for California Public Employee Retirement System

(CalPERS) pension benefits, and that he/she retire within 120 days of separation.

This precludes former employees with vested pension benefits from years ago from

claiming retiree health benefits when they claim their pensions.

In contrast, until recently, San Francisco provided full lifetime health benefits

after five years of service with no linkage to retirement. An individual who worked

for the city for five years decades ago may claim full lifetime health benefits at

retirement age. Moreover, an employee who had worked for another public-sector

employer, with whom the city had a reciprocity agreement, could count that time

toward the five-year threshold. Consequently, San Francisco has a population of

former vested employees and their spouses or domestic partners, who are entitled

to employer-provided retiree health benefits for life. (California PEBC 2008). In

addition to the considerable cost, this adds to the difficulty of estimating the city’s

unfunded OPEB liability.

In June 2008, the voters repealed this provision for employees hired after

Jan. 10, 2009. The employer contribution for new employees will be 0 for those

with less than 10 years of service, 50 percent for 10 to 15 years, 75 percent for

15 to 20 years, and 100 percent for 20 or more years (League of Women Voters


2008). Since incumbent and former employees remain under the old rules, this

cost will continue far into the future.

PREFUNDING

Another option for an employer is to prefund its OPEB benefits. A number of

jurisdictions have begun to do that to some extent and others are considering it.

In prefunding, employer and employee contributions are placed in a trust and used

only to pay for the designated employee benefits and administrative expenses.

Most of our experience with prefunding has been with pension plans.

Unlike the private sector, public-sector employees are usually required to

contribute to their pension plan at a rate typically set by law at from 1.25 percent

to 10.5 percent of earnings (U.S. GAO 2007). The employer contribution rate fluc-

tuates with the funded status of the plan. This is measured by the “funded ratio,”

which is usually the actuarial value of assets (AVA) divided by the present value

of the actuarial accrued liability (AAL). The funded ratio is usually expressed as

the percent funded. If AVA equals AAL, the funded ratio is 100 percent and the

plan is fully funded. If AAL is larger than assets, the funded ratio will be less that

100 percent and the difference is referred to as the unfunded actuarial accrued

liability (UAAL). If liabilities are less than assets, the plan has a surplus and a

funded ratio greater than 100 percent.

Actually, it is more complicated than that. There are two ways to measure assets

(market value and AVA) and five ways to measure liabilities. This need not detain us

here beyond recommending caution when comparing funded ratios among plans.

Some financial economists think that public pension funds should be measured

by the market value of assets (MVA) divided by the market value of liabilities

(MVL). Others disagree and point out that adopting this approach would produce

pension fund surpluses as the financial markets improve. This would result in

benefit enhancements for future public employees at the expense of today’s

taxpayers (Miller 2009c).

ASSUMPTIONS

The AAL, or actuarial accrued liability, is based on a number of important assump-

tions. They include workforce demographics such as age structure, turnover and

retirement rates, and mortality of retirees and spouses. Others include interest

and discount rates used to calculate earnings on investment and present value,

expected rate of medical inflation, and that the plan’s provisions will remain

unchanged. Four of these assumptions are of particular interest:

The mortality assumption reflects life expectancy. As indicated in Table 5, between 1 |

1950 and 2005, life expectancy at birth increased from 68.2 to 77.8 years. That is an

additional 9.6 years or 14.1 percent. More important for retiree benefit purposes, life

expectancy at age 65 grew from 13.9 to 18.7 years: an increase of 4.8 years or 34.5

percent. While women live longer than men, the differential declines with age.


We all want to live longer. However, additional years of life after retirement 2 |

means that retirees will be entitled to pension and health benefits for a longer

period of time and this represents a substantial cost to plan sponsors. In all

likelihood, people will live even longer in the future. There is a certain irony

here. By providing health benefits, retirees live longer which adds to the cost of

providing health benefits.

The interest rate assumption is particularly important in OPEB calculations. The 3 |

lower the rate used, the higher the unfunded actuarial accrued liability. Conversely,

a higher rate lowers the UAAL, and the employer’s required contribution. A curious

outcome of prefunding is its impact on the interest rate assumption allowed by

GASB. If OPEBs are pay-as-you-go financed, GAAP require that actuaries use a

short-term interest rate, say 4 percent. If pre-funded, they may use a rate derived

from the return on long-run investments, say 8 percent. If partially funded, the

rate will be something in between (Binder 2008). Thus, prefunding will reduce

UAAL and the resulting employer-required contribution.

Future medical costs, with medical inflation, are difficult to forecast. For at least 4 |

the last 20 years, medical costs have increased at twice the rate of general infla-

tion as measured by the Consumer Price Index (Clark 2008b). This has been due

to the many advances in medical science, increasing longevity of retirees and the

aging of the U.S. population. All financial statements assume that future medical

inflation will moderate and approach the level of general inflation at some point

(Clark 2008a). However, no objective reason supports the assumption. Medical

inflation could even increase given that the leading edge of the Baby Boom has

just attained retirement age and health-care reform will increase the number of

insured and significantly increase the demand for health-care services. If it is

assumed that medical inflation will abate, and it does not, the unfunded OPEB

liabilities could be grossly underestimated.

An important distinction between pension and OPEB prefunding is that retiree 5 |

health-care plans may, and no doubt will, be reduced for current employees and

even for retirees and beneficiaries in the next few years. (See Table 4). If one

assumes that the benefits will remain unchanged, and they decrease, this will

reduce unfunded liabilities.

These questionable assumptions make calculating the UAAL of OPEBs more 6 |

problematic and uncertain than for pension plans.

PREFUNDING COSTS

GASB 45 will encourage many state and local governments to adopt prefunding

of OPEB obligations in addition to taking measures to reduce benefit costs and

to shift them to the plan participants and beneficiaries. Prefunding will be more

expensive in the short run since state and local governments will have to pay for

the amortized portion of the UAAL in addition to the current year’s normal cost.

In the longer run, however, prefunding will save money relative to continuing


with a PAYGO approach. As funds accumulate, more of each year’s benefit costs

will be paid for by earnings on investments. For example, between 1988-89

and 2007-08 (pre-meltdown), two-thirds of CalPERS’ income came from return

on investment, 19.8 percent from employer contributions and 13.9 percent from

employee contributions. That is how prefunding is supposed to work. While

there are major differences between pensions and OPEBs, prefunding should

convey the same benefits on the latter if state and local governments have the

Adopted Recently/ Will Adopt in Next 5 Years Increase/introduce(d) Last 5 Years Very Likely Somewhat Likely

Retiree premium contributions 33 states 17 states 21 states

Dependent premium contributions 34 13 23

Retiree deductible amounts 23 8 24

Family deductible amounts 25 9 22

Coinsurance rates 13 3 22

Co-payment amounts 28 9 22

Co-payments for prescription drugs 36 9 26

Cap on out-of-pocket expenses 17 4 15

Catastrophic plan + MSA* 4 0 7

End prescription drug coverage 2 0 5

Increase age for OPEB availability 3 2 8

Increase years for OPEB vesting 7 5 15

Limit subsidies for future retirees 5 2 15

End OPEBs for future retirees 1 0 1

End subsidies for current employees 0 0 3

* Medical Saving Account

TABLE 4 Current and Planned Cost-sharing and Cost-shedding Measures (Daley and Coggburn 2008)

Both Sexes Male Female Year At Birth At 65 At Birth At 65 At Birth At 65

1950 68.2 13.9 65.6 12.8 71.1 15.0

1960 69.7 14.3 66.6 12.8 73.1 15.8

1970 70.8 15.2 67.1 13.1 74.7 17.0

1980 73.7 16.4 70.0 14.1 77.4 18.3

1990 75.4 17.2 71.8 15.1 78.8 18.9

2000 77.0 18.0 74.3 16.2 79.7 19.3

2005 77.8 18.7 75.2 17.2 80.4 20.0

Additional Years 9.6 4.8 9.6 4.4 9.3 5.0

Percent Increased 14.1 34.5 14.6 34.4 13.1 33.3

TABLE 5 Life Expectancy in the United States at Birth and at Age 65, 1950-2005 (U.S. Department of Health Services 2009)

J19V3.indd 71 12/15/10 6:38:13 AM


financial ability and discipline to make the appropriate contributions. Given the

current economic climate, that is a big “if.” It may be many years before most

state and local governments are in a position to adopt meaningful prefunding of

their OPEB obligations.

VOLATILITY

As we know from pension plans, one of the problems of prefunding is volatility

of required employer contributions. The employer’s annual required contribution

is the sum of the plan’s “normal cost” (benefit and administrative expenses for

the current plan year) plus an amount allocated to pay for a portion of the UAAL,

typically amortized over 30 years. That is the maximum allowed by GASB 45.

In addition to the size of the ARC, employers are concerned about its volatility.

Asset values can change markedly as the financial markets go up and down. When

the equity market contracts substantially, as it did beginning in 2000 and again

in 2008, the value of plan assets decline, as does the funded ratio. This increases

the employer’s required contribution. Alternately, when asset values increase, the

employer’s required contribution declines. Indeed, if they increase to the point

that they exceed liabilities and create a surplus, the ARC may drop to zero, as

happened in a number of governmental pension plans during the late 1990s. This

created major problems when the economy contracted after 2000 and employer-

required contributions mushroomed. While it will be years before OPEB plans

experience this problem, state and local governments would be well advised to

contribute at least the normal cost each year.

Some public-sector pension plans have strived to reduce volatility by smoothing

asset values over a longer period of time. For example, in 2005, CalPERS increased

its smoothing of asset gains and losses from three to 15 years (California PEBC).

DISCUSSION

GASB 45’s regulations have forced everyone involved to examine the magnitude

and complexity of funding past and future state and local government prom-

ises. There is a tendency to lump governmental pension liabilities with OPEB

liabilities. This is understandable. They both pertain to public sector retirees.

A liability is a liability and they are ultimately the responsibility of the state or

local legislative bodies and the taxpayers. However, pensions and OPEBs are

quite different. Pensions are generally prefunded and OPEBs are not. In most

cases, the pension UAALs, the unfunded liabilities, will shrink as the financial

markets improve and asset values and funded ratios increase. That will not

happen with OPEBs.

Pensions and OPEBs are related in another way. The same dollar cannot be

spent on pensions, OPEBs and on other government programs. Since pension

funding and many government services (police, fire, education) and entitlement

programs (welfare, Medicaid, unemployment compensation) are long-established


demands on government funds, prefunding OPEB obligations will be hard to sell

to elected officials, at this time.

Most public-sector pension plans were in pretty good shape as of 2007. There

were exceptions, of course. Some have serious long-run funding problems. All

have been ravished by the 2008–09 recession, as have the revenues of the govern-

ments that sponsor them. However, it appears that the recession had bottomed by

late 2009 and that pension assets and funded ratios are starting their climb back.

The U.S. Government Accountability Office (GAO) calculated that the aggregate

state and local government unfunded pension liability as of 2006 could have been

eliminated by increasing aggregate contributions, which at the time ranged from

9 percent to 9.3 percent of payroll (U.S. GAO 2008). That was achievable.

In most cases, the OPEB funding problem can be fixed as well; although it will

take more money and more time. The underlying question is: who is going to

pay for it, this generation or the next? The governmental services provided and

financed by unfunded liabilities were enjoyed by a previous generation of taxpayer.

The current generation should pay for the services from which it benefits. Is it fair,

however, to require the current generation also to pick up the tab, in the form of

additional taxes or reduced services, for the services provided to past generations?

Would it be more appropriate to shift the costs forward to future generations in the

form of continued unfunded liabilities or OPEB obligation bonds? To a consider-

able extent, the OPEB problem is a question of the intergenerational transfer of

wealth and debt. Note that most government capital improvement programs whose

benefits are long run in nature, such as new school or library buildings, are usually

funded by voter-approved bond measures.

There is also an intergenerational issue among public-sector employees. Should

current public employees be subject to reduced benefits and/or higher employee

contributions to pay for benefits enjoyed by earlier employees and current

retirees? Or should the obligations be shifted forward one way or another to

future generations?.

These are difficult questions. In theory, each generation should pay for the

services it uses. However, services used, benefits enjoyed and promises made in

the past are largely irretrievable. The OPEB unfunded liabilities exist and have

become impossible to ignore.

The eventual solution will require compromise. If the present generation is to

pay for already acquired unfunded liabilities, it should be allowed to transfer some

of the current expenses forward. Or, if the current generation pays for itself, some

of the past obligations should be shifted forward via partial prefunding, OPEB

obligation bonds or other mechanisms.

A related question is whether the cost should be borne by the taxpayers or by

the public-sector employees. That is largely a value judgment and where one

stands may depend on where one sits. The employees and their union representa-

tives naturally want to retain the benefits they have. This implies that unfunded


liabilities should be financed with additional taxes, OPEB bonds or cuts in other

programs. One way or another, the taxpayers would foot the bill. Critics of the

status quo would adopt cost shedding and cost sharing. That would shift the

burden to the public employees and retirees.

Cost shedding involves the elimination or reduction of benefits. That may take

the form of extending eligibility requirements, limiting services covered, such as

alcohol and drug rehabilitation, psychiatric counseling, or placing or lowering a

cap on program use. It may also involve eliminating a dental plan, vision plan or

prescription drug coverage.

Cost sharing involves shifting some or more of the cost of medical services to

the employees and retirees in the form of co-insurance, higher deductibles and

co-payments. One approach is for the employer to provide a high-deductible

program coupled with an employee-funded medical savings account.

These measures may be applied to new employees, current employees and/or

retirees. Unions and current employees are inclined to favor the first group. Those

yet to be hired do not have a say or a vote on the matter. The problem with it is

that it will take a long time to realize significant savings, especially at this time

when many state and local governments have a population of laid-off workers

with recall rights.

Taking benefits away from, or shifting costs to, existing employees is more

difficult. They are involved in the debate and they vote in union elections and on

MOU ratifications. OPEBs, especially health care, are considered an entitlement

that is highly valued, though too often taken for granted. Cost-shedding and cost-

sharing measures are tantamount to a pay cut. The employees and their union

representatives will almost always resist such measures. In some jurisdictions,

there are constitutional or statutory constraints that make adopting such changes

more difficult.

Retirees and their dependent beneficiaries do not vote in union elections and

contract ratifications. However, they may participate in the debate in alliance with

current employees and their unions individually or through retiree associations.

Their position carries a certain moral weight and possible additional legal protec-

tions. The idea of cutting the benefits of retired police officers, firefighters and

teachers is seldom popular with legislators or voters.

CONCLUSION

Solving the OPEB problem will not be easy. All of the options available from

prefunding to cost shedding and cost sharing are difficult. Yet, to continue at the

current level of benefits on a PAYGO basis may no longer be feasible. The cost of

providing retiree health benefits is growing rapidly and the cost of servicing the

“debt” of unfunded benefit liabilities is unsustainable. All of the parties at interest

would prefer that someone else pay the bill. That will not work because of its size.

The only workable approach is to spread the pain so that each group accepts the


arrangement as equitable. That will require leadership and communication from

elected officials, plan trustees and union leaders. z

AUTHOR

REFERENCES

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John G. Kilgour, Ph.D., ( [email protected]) is professor emeritus in the Department of Management and Finance at California State University, East Bay. He holds a bachelor of arts in economics from the University of Connecticut and a Master of Industrial and Labor Relations (MILR) degree and Ph.D. in industrial and labor relations from Cornell University. Kilgour has published two

books and numerous articles on transportation, labor-management relations, and various compensa-tion and benefits topics. Kilgour has also authored seven electronic white papers for the Society of Human Resources Management (SHRM), is an EBRI fellow, and is on the advisory board of Compensation and Benefits Review. He is a long-time member of WorldatWork.

http://www.jonesday.com/everything-you-always-wanted-to-know-about-a-public-employers-ability-to-modify-retiree-benefits-but-were-too-afraid-to-ask-08-12-2008. Viewed: Sept. 5, 2008.

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http://www.bls.gov/news.release/pdf/union2.pdf.

http://www.gao.gov/news.items/d08223.pdf




U.S. Government Accountability Office. 2007. Report to the Committee on Finance, U.S. Senate. State and Local Government Retirement Benefits: Current Status of Benefit Structures, Protections and Fiscal Outlook for Funding Future Costs. Nov. 15. GAO Document No. 07-1156.

Wisniewski, S. and L.Wisniewski 2004. “State Government Retiree Health Benefits: Current Status and Potential Impact of New Accounting Standards.” Workplace Economics Inc. 2004-08. Commissioned by the AARP Public Policy Institute.



http://www.nasra.org/resources/medical/AARP Health Benefits and OPEB.pdf

http://www.nasra.org/resources/medical/AARP Health Benefits and OPEB.pdf

Published Research in Total RewardsA review of total rewards, compensation, benefits and HR-management research reports.

(Compiled by the editors from the WorldatWork Newsline column at www.worldatwork.org.)

Quarter of High-potential Employees Plan to Leave Within the YearThe business world’s rising stars are increasingly disengaged and actively seeking new employ-

ment opportunities, concluded an employee engagement study.

The study, from the Corporate Executive Board, found that 25 percent of employer-identified

high-potential employees plan to leave their current companies within the year, as compared to

10 percent in 2006. It also revealed that 21 percent of employees today identify themselves as

highly disengaged. This group has increased nearly three-fold since 2007. Based on its findings,

the Corporate Executive Board thinks that businesses must place greater emphasis and urgency

around leadership succession planning to ensure success and preserve the bottom line.

One-fourth of Plan Sponsors Cut Contributions The recession has had a significant impact on retirement plans as 26 percent of employers either

scaled back their contributions or eliminated the company match altogether in 2009, according

to the sixth annual Retirement Plan Survey by Grant Thornton LLP, Drinker Biddle & Reath LLP

and Plan Sponsor Advisors. Among those who decreased contributions, 53 percent have not yet

decided whether to return to previous levels and 33 percent have no plans to do so.

More Than 75 Percent of Employees Work when SickMore than three-quarters of workers go in to the office or work from home when they are sick,

rather than resting at home to recuperate. About one in three (35 percent) of 33,684 people

surveyed by Monster said they were too busy to miss work when sick while 28 percent said they

went to work sick because they were afraid to lose their job in this economy.

One-third of CFOs Plan to Increase Hiring in the Next Six MonthsNearly one-third of CFOs and senior comptrollers indicated in a Grant Thornton survey that they

plan to increase hiring in the next six months while 2 percent plan to decrease. It found that hiring

plans are weaker in Fortune 500 firms as 31 percent plan a decrease in hiring over the next six

months, while 23 percent plan an increase.

Wellness Programs’ Popularity Steadily Increasing The popularity of wellness programs continues to slowly increase among employers. MetLife’s 8th

annual Employee Benefits Trends Study found that 37 percent of employers offer wellness programs,

up from 33 percent in 2008 and 27 percent in 2005. Among employers with 500 or more employees,

61 percent now offer a wellness program, up from 57 percent in 2008 and 46 percent in 2005.

About half (48 percent) employers that have wellness programs say that they are very effective

at improving productivity.

CEO Pay Declines for Second Straight YearMedian total annual compensation for North American CEOs declined for the second straight

year, concluded a study from The Corporate Library. Researchers analyzed CEO compensation

data for fiscal 2009 drawn from 823 proxy statements filed in the United States between July 1,

2009, and March 25, 2010.

Median total annual compensation for all CEOs in the study declined by 2.78 percent from 2008

to 2009 with more than half (56 percent) seeing a decrease in their annual compensation.

Third Quarter 2010



http://www.grantthornton.com/portal/site/gtcom/menuitem.484ecb29dfc23197f22c5b10633841ca/?vgnextoid=58f68afcf691b010VgnVCM100000308314acRCRD&vgnextfmt=default

http://www.monster.com

http://www.GrantThornton.com

http://www.metlife.com/trends2010

http://www.thecorporatelibrary.com/reports.php?reportid=320&keyword=


Employees Lack Trust in Managers, Survey FindsEleven percent of employees surveyed said they “strongly agree” their managers show consistency

between their words and actions. The poll, conducted by Maritz Research, concluded that employees’

trust toward their workplace has been severely damaged, with employees across all industry segments

citing a lack of trust in not only senior leaders, but direct managers and co-workers.

The poll found that 7 percent of employees strongly agree they trust senior leaders to look out

for their best interest, also 7 percent strongly agree they trust their co-workers to do so. About

one-fifth of respondents disagree that their company’s leader is completely honest and ethical.

Most 401(k) Balances Fall Short of Pre-Recession LevelsWhile workers were able to recover a significant portion of the losses they sustained in 2008

by participating in their 401(k) plan, most were unable to get their balances back to their pre-

recession levels.

A report from Hewitt Associates about the 401(k) saving and investing behaviors of nearly 3

million employees across 120 large companies discovered that despite the market volatility, 16.2

percent of employees made fund transfers in 2009, down more than 3 percentage points from

19.6 percent in 2008. Participation rates and contribution rates remained virtually unchanged

from 2008, at about 74 percent and 7.3 percent, respectively.

The study found that average 401(k) plan balances rose significantly in 2009, primarily due to

strong market returns. The median rate of return was 24.3 percent, a stark contrast to 2008 when

the median return was negative 28.3 percent.

Green Workplace Initiatives Add to Bottom LineCompanies that have “green” programs in the workplace may make more money, based on the results

of a Buck Consultants survey. Buck’s second annual Greening of the American Workplace 2009 survey

showed 53 percent of employers have green programs in place, an increase from 43 percent in 2008r.

Nearly two-thirds of respondents reported cost savings in paper use and electricity.

Global Employee Confidence DownGlobal employee confidence has dropped compared to fourth quarter 2009, a Kenexa Research

Institute survey found. Its employee confidence index score in March was 93.8, a decrease

from the score of 98 in the fourth quarter. March index scores included: China, 99.8; Italy, 98.6;

Canada and Brazil, 97.5; United States, 92.4; France, 92.2; Japan, 91.8; and United Kingdom,

91; United States, 92.4.

80 Percent of U.S. Workers Expected to Fall Short of Financial Retirement GoalsFour out of five workers are expected to fall short of meeting all their financial needs in retirement

unless they take action to improve their savings habits or retire at a later age, determined analysis

by Hewitt Associates. Researchers estimate average U.S. employees will need 15.7 times their

final pay in retirement resources to maintain their current standard of living during retirement.

While this estimate hasn’t worsened, meeting projected retirement needs has become a greater

challenge for many individuals who experienced decreases in their retirement accounts over the

past two years.

In Europe, 55 percent of workers believe they will have to delay their retirements because of the

current economic climate, according to Aon Consulting. The French (74 percent) and Germans

(73 percent) are the most pessimistic, followed by the Irish (65 percent), the Swiss (67 percent),

and the British (67 percent).



WorldatWork Research Report Examines What Workers WantWorldatWork research observed that compensation became less important during recruitment

while other total rewards elements, such as career development opportunities, because more

important to job applicant.

The Relative Influence of Total Rewards Elements on Attraction, Motivation and Retention,

examined the relative influence of the five elements of the WorldatWork Total Rewards model —

compensation, benefits, work-life, recognition and career development — on employee attraction,

motivation and retention. The study focused on accounting students. After several months on the

job, motivation was significantly related to satisfaction with work-life rewards.

“This new research has implications for organizational recruiting and retention,” said Ryan

Johnson, CCP, vice president of research for WorldatWork. “The findings present opportunities

for companies to rethink their reward elements, to prioritize, integrate and communicate them in

ways that achieve desired outcomes.”

More Than Half of U.S., UK Women Say They Have Work-Life BalanceResearch conducted in the United States and United Kingdom show that more than 60 percent

of women in both countries say they have work-life balance.

The studies, conducted by the Kenexa Research Institute, found the 61 percent of the 10,000

U.S. women surveyed said they can meet their career goals and still devote sufficient attention

to their personal lives, 1 percentage point less than the 62 percent of UK women polled.

For all female workers studied, working in an organization that supports work-life balance has a

significant, favorable impact on how these workers rate their pride in their organization, willing-

ness to recommend it as a place to work and their overall job satisfaction. Additionally, female

employees who report having a balance between work and personal responsibilities state a much

lower intention to leave the organization, the research found.

Some Employers Expect Health-Care Reform to Add at Least 3 Percent to Plan CostsOne-quarter of companies expect that compliance with the first round of health-care reform legis-

lation will add at least another 3 percent to their projected 2011 plan costs, with about one in 10

expecting an additional 5 percent or more, surmises a survey of nearly 800 employers by Mercer.

The survey found that 41 percent predict a relatively modest increase of 2 percent or less under new

rules from the Patient Protection and Affordable Care Act (PPACA) in 2001 while 3 percent said their

plans are already in compliance. The remaining 30 percent declined to estimate the impact

Despite Record Unemployment, Talent Shortage PersistsDespite high unemployment numbers globally, 31 percent of employers worldwide reported having

difficulty filing key positions, Manpower’s fifth annual Talent Shortage Survey found.

That’s a 1 percent point increase from 2009 with the hardest to fill jobs still being skilled trades,

sales representatives, technicians and engineers.

Employees having the most difficulty finding the right people to fill jobs are those in Japan (76 percent),

Brazil (64 percent), Argentina (53 percent), Singapore (53 percent), and Poland (51 percent).

Americans Support Enhancing 401(k) Retirement Plans with Guaranteed Income SolutionThree-quarters (77 percent) of U.S. adults support the concept of modifying the 401(k) retirement

plan system to specify that employer contributions be used to provide a guaranteed stream of

income, according to a survey released by Nationwide Financial Services Inc. Younger adults (ages

18 to 44) were even more likely (85 percent) to say they supported such a retirement plan.

The survey also revealed that 72 percent of U.S. adults agree that the 401(k) system should be

adapted to include features that offer guaranteed income at the point of retirement. Nearly 4 in

10 (38 percent) or respondents reported having a 401(k) account and, of those without one, 41

percent said it is because their employer does not offer a 401(k).

http://www.manpower.com/investors.releasedetail.cfm?releaseid=471751


U.S. Base Salary Increases Slightly Higher as Economy StabilizesPlanned salary increases for 2011 are at 3 percent and reflect a sustained uptick relative to the low

point in March 2009, when salary increases were at 2 percent for most employee groups and 0

percent for executives, according to research released by Hay Group. After factoring in annualized

consumer price index (CPI) growth for 2010 at 2 percent, the result is a “real” gain of 1 percent.

Temporary Reinsurance Program May Deflate Two Years Early, Study FindsA $5-billion temporary reinsurance program designed to help employers maintain health benefits

for early retirees likely will be exhausted within two years, well before the 2014 termination date

for the program, predicts a study by the Employee Benefit Research Institute (EBRI).

The reinsurance program is part of the Patient Protection and Affordable Care Act of 2010 (PPACA).

One goal of the program is to provide an incentive for employers to maintain retiree health benefits

and assist retirees with their costs for health coverage, according to EBRI.

Work-life Issues Being Addressed Don’t Track with Most Serious Employee ConcernsThere is a steady commitment to work-life initiatives among senior management in a wide range of

industries. However, according to The State of Work-Life 2010, a survey by WFD Consulting and

Alliance for Work-Life Progress (AWLP), there is a mismatch between the most serious workforce

issues identified by companies and where they are investing their resources.

When asked to identify the top two work-life issues facing their companies this year, employers

most frequently cited stress/burnout, excessive workload, and employee engagement/commit-

ment. While half of the companies in the study expect to address employee engagement/

commitment, few seek to resolve the root causes of workload and stress/burnout, opting instead

to address the symptoms of those problems with wellness/resilience/energy programs and flex-

ibility policies. Nearly half of the companies will address career management in 2010, while 15

percent viewed it as a serious issue.

The survey found a widespread dedication to general work-life issues, with 83 percent of respon-

dents saying senior leadership commitment to work-life issues at their company has increased

or held steady.

Canada: Drug Cost Increases “Stubbornly High”Insurers are expecting overall health-care costs for Canadian employer plans to rise 15 percent in

2010, the highest growth rate in five years, according to a Buck Consultants survey. This overall

health-care cost includes prescription drugs, medical plans, hospital coverage and dental care.

The 2010 Canadian Health Care Trend Survey analyzes the health-cost trend assumptions that

factor into the premium rate setting of 13 major Canadian insurers. Pharmaceuticals, which

represent 60 percent to 70 percent of health expenditures, remain the fastest increasing expense

paid by group insurance plans, with an expected increase of 15.8 percent in 2010.

EMEA Employers Plan to Reshape Talent Programs as Economy LiftsEmployers in Europe, the Middle East and Africa (EMEA) indicate they are planning to reshape

talent programs as the global economy shifts out of recession. However, less than 10 percent

of respondents in both regions have the confidence that their organization is very effective at

measuring the effect of their talent decisions and investments. The data comes from Mercer’s

“Future of Talent Management” survey, compiled from responses from 290 multinational organiza-

tions across EMEA (200 in Europe, 90 in the Middle East/Africa).

More than half of respondents indicated their organization has emerged or is emerging from the

recession while 45 percent in the Middle East and 24 percent in Europe said their organizations

were never out of a growth mode.


Nearly Half of Workers Have Gained Weight at Current JobMore than four in 10 workers (44 percent) said they have gained weight in their current job, up

slightly from 43 percent in 2009. Half of the workers (49 percent) questioned by CareerBuilder

said that sitting at a desk most of the day contributed to their weight gain while one-third (32

percent) cited stress as a contributor.

21 Percent of Job Candidates Removed From Consideration After Reference ChecksA strong resume and interview might place job seekers in the running for a job, but a survey from

OfficeTeam found that the results of a reference check can be the real deal maker, or breaker.

Interviewed managers reported that one in five candidates is removed from consideration after

speaking to their professional contacts. When asked what they are looking for when speaking

to references, 36 percent of hiring managers said they are most interested in getting input on

an applicant’s past job duties and experience. Learning about the individual’s strengths and

weaknesses came in second, with 31 percent..

Companies Now Consider Work-life Initiatives Integral to Total RewardsA survey of 741 multinational companies by WorldatWork and Mercer discovered that more than

half of companies now consider work-life initiatives a staple of total rewards.

The State of Total Rewards Integration survey was conducted to explore how far companies

have come in adopting total rewards. When asked to define total rewards, 59 percent of respon-

dents included work-life (flexible work schedules, extra vacation and sabbaticals) in addition to

compensation (base salary, incentives and guaranteed payments) and benefits (retirement and

medical). When asked what types of changes were made to workplace programs in the past 12

months, 40 percent said they enhanced or added wellness programs to the total rewards mix;

21 percent added flexible work arrangements.

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