Let’s Get Flexible

By Apr 1, 2007
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HR Magazine, April 2007 Despite challenges, companies are getting more flexible with their total compensation packages.

The idea of making all elements of employees’ total compensation packages flexible is very attractive to employers and employees. If employees could trade off their employer’s contribution to a health care plan for higher allocation to their retirement plans, or simply take the cash, that flexibility would allow compensation and benefits dollars to stretch a little further. And, giving employees a greater say in the design of their compensation packages would lead to more satisfied, more productive workers, experts believe.

“From a philosophical point of view, it makes sense,” says Randall Abbott, a Boston-based senior consultant with Watson Wyatt.

As more organizations operate both virtually and internationally, a flexible approach to compensation enables them to offer a wider range of benefits that should better meet the varying needs of their increasingly diverse workforces, yet still is affordable. And employers would have greater confidence that their salary and benefits dollars are going to those programs most appreciated by employees.

In its purest sense, total flexible compensation, as the concept usually is called, can be described as a compensation package in which employees have the ability to determine how they receive their pay package, subject to applicable regulations, says Abbott. If a position typically pays $50,000 and includes an additional $20,000 worth of benefits, the total value of the position would be $70,000. The employee could take it all in cash, or determine some split between salary and different benefits. The idea emerged in the 1980s, Abbott adds.

Despite its theoretical appeal, however, total flexible compensation has yet to show up with any frequency in U.S. workplaces. “I’ve not come across one company that’s yet implemented what is truly a total flexible compensation plan,” says Michael Hannah, the Dallas-based owner and principal of Cool River Consulting, an HR consultancy. While high-level executives often negotiate the details of their compensation packages, few other employees do.

Over the past few years, human resource professionals at a few companies have considered extending a greater level of flexibility in compensation to more employees, Hannah notes. Most of these organizations are in the high-tech arena, and their workforces span several generations, he adds. As a result, they offer a range of benefits that will appeal to employees at varying stages of their lives.

There are implications to consider if you want to pursue a total flexible compensation scheme, ranging from taxes to health care enrollment percentages to simple logistics. But some companies are inching closer to gaining flexibility over their compensation plans to recruit and retain talent in certain tight labor markets.

Obstacles

Rajiv Burman, vice president of human resources at the Thornhill, Ontario, location of Griffith Laboratories Worldwide Inc., says he has explored total flexible compensation, but the challenge is the amount of work that would be required to track compensation by individual employee, rather than by job level, as is currently done. “It becomes quite complex,” Burman says, noting that he has yet to come across a software package that would automate this task.

In addition, allowing employees to opt out of the company’s retirement plan may result in lower participation by employees who are not highly compensated. That would reduce the amount that could be contributed either by or on behalf of employees who are highly compensated, notes David Wray, president of the Profit Sharing/401(k) Council of America, a national, nonprofit association in Chicago.

According to tax regulations, contributions by or on behalf of highly compensated employees is conditioned on minimum levels of contributions by or on behalf of lower-paid employees; without these contributions, the plan could face sanctions from the Internal Revenue Service.

Another employer concern regarding flexible total rewards is health insurance. Many plan providers require employers to agree that at least some percentage of eligible employees will enroll in the company’s health care policy. The providers are concerned that if employees are free to opt out, only those who are most in need of insurance would sign up for a policy. Then, the risks of insuring a company’s employee base would not be spread across both healthy and less-than-healthy workers and dependents, which would boost costs.

“There may be a backlash from the carrier in either increased premiums or other contractual requirements,” notes Lisa Borden, partner with Baker, Donelson, Bearman, Caldwell & Berkowitz PC, a law firm in Birmingham, Ala.

In addition, if employees take as cash the amount that their employer otherwise would contribute to their health care plans, the money is subject to income and payroll taxes, which may not be as appealing to employees, notes Eric Darr, chief financial officer at Harrisburg University of Science and Technology in Harrisburg, Pa.

Flexibility in Practice

The interest in flexible total compensation persists. The willingness of employees to manage their own total rewards budget and pay for a higher portion of benefits plan coverage was one of the top five priorities for 61 percent of 422 HR executives polled in the 13th Annual Top Five Total Rewards Priorities Survey conducted by Deloitte Consulting and the International Society of Certified Employee Benefit Specialists. The No. 1 priority remains the cost of health care benefits, as it has been for years, but edging closer to taking over the top spot was the ability to use total rewards to attract, motivate and retain talented employees.

Because of the challenges to total rewards flexibility, employers have introduced elements of tailoring pay to individual employees and compensating them based on the job they’re performing and the value they contribute to the organization.

Greenville Hospital System University Medical Center in South Carolina has found that more precisely tailoring employees’ pay to the job they’re performing has helped tremendously with recruiting and retaining satisfied employees. In 2001, the organization was, like many other health care organizations, having a difficult time attracting acute care nurses or those who work directly with patients in the hospitals, says Mike Casteel, SPHR, director of employee services.

As a result, Casteel and his colleagues revamped the compensation structure for nurses. They created a schedule that takes into account each nurse’s years of experience and the type of work he or she performs. New nurses—that is, those without previous nursing experience—earn “experience increases” after their second year on the job; this is in addition to their merit increases. In addition, nurses that work in the hospital, which operates 24/7 and requires more demanding nursing care, earn more per hour than nurses working in the clinics or outpatient centers.

Carefully explaining this change in the salary structure to all nurses was critical, Casteel says. Nursing leaders, accompanied by HR professionals, stressed to the nursing staff that while all their contributions are valued, the nurses in the hospitals face challenges that those working in other areas of the medical center don’t.

To administer the program, Casteel and the nursing leadership developed Excel spreadsheets that show the pay ranges for the different nursing positions, and the different amounts within those ranges that nurses with varying levels of experience could earn.

Maintaining equity between nurses in similar positions, even with varying amounts of experience, also is key, Casteel says. To ensure this, the organization no longer pays merit increases when doing so would put a nurse over the top for his or her range; previously, this could happen on occasion. Instead, the individual receives the increase in the form of a one-time merit bonus.

Implementing this matrix approach to nurses’ compensation, as well as boosting the level of pay for nurses overall, has helped Greenville Hospital System cut its nursing turnover rate from about 18 percent in 2000 to its current rate of 10 percent. In addition, while employees used to regularly request individual salary reviews, they rarely do any more, Casteel says.

Another example of flexibility comes from Harrisburg University of Science and Technology. The school is one of just three universities (not counting online institutions) started in the United States in the past decade or so, Darr says. As a result, it faces challenges in attracting talented employees from more established institutions.

Harrisburg currently has about 50 employees, ranging from recruiters in their 20s to professors between the ages of 40 and 60. The older employees place greater importance on retirement programs, while the younger ones are more interested in health care benefits.

To recruit employees and meet the needs of a diverse workforce, all while keeping benefits costs in check, since mid-2005 Harrisburg University has provided a flat benefit amount to each employee. The amount is the same regardless of the employee’s position with the university, and the employee receives it the day he or she starts.

An employee can allocate his or her benefit allowance in any way to the university’s retirement plan, its health care plan or among several other benefits, such as disability or long-term-care insurance. Employees also can take the allowance or any part of it in cash, although they have to pay income and payroll taxes on the amount. Most people split their dollars between health care, retirement and other benefits; fewer than 10 percent take all cash, Darr says.

Before putting the plan in place, Darr and his colleagues worked with attorneys and tax advisers to ensure that the plan complied with applicable laws and contract provisions. For example, the university must ensure that a certain percentage of its employees enroll in the health care plan. To date, even though employees can opt out of the plan, Harrisburg has been able to meet this provision, Darr says. In part, this may be because the university’s plan generally is more affordable than those offered by other employers in the area.

And, when budgeting, Darr and his colleagues continually need to balance the amount that will go into the benefits allowance vs. the amount that will be used to adjust compensation, all while staying within the overall budget for salaries and benefits. Typically, lower-paid employees prefer more in their paychecks, while higher-paid employees want more benefits.

Darr works with the university’s president, provost and executive vice president, all of whom provide input on employees’ needs and complaints, to determine the appropriate budgeting split.

The Benefits of Flexibility

While offering employees the ability to tailor their own rewards packages has its challenges, it also offers significant benefits. “The flexible approach to benefit selection provided to employees at Harrisburg University has allowed us to recruit top faculty and staff talent from more established institutions,” Darr says.

Employees from other universities, such as Pennsylvania State, Old Dominion University and Xavier University of Louisiana, often mention the breadth of compensation and benefits choices available as a reason for their decision to come to Harrisburg University, he says.

It appears that Harrisburg’s experience will become more common.

“We definitely have seen an increase in organizations implementing more flexible compensation frameworks and programs for their employee populations,” says Hannah.

This trend is likely to continue, given the changing demographics of the workforce and employers’ focus on controlling expenses even as they try to attract talented employees. Flexible compensation programs typically are cost-neutral for employers. And companies that offer some flexibility in their compensation programs can gain an edge in recruiting and motivating employees.

Karen M. Kroll is a Minneapolis-based freelance business and financial writer. Her work has appeared in AARP: The Magazine, Inc. , American Way , CFO , Continental and other publications.​

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