Benefits and Compensation Orientation Guide 2015

Building an effective (and compliant) compensation and benefits program got a little bit harder this summer thanks to the Affordable Care Act.

On June 25, the U.S. Supreme Court affirmed, for the second time, the legality of the ACA, which means that all employers with 50 or more full-time-equivalent employees, or FTEs, will be required to offer health insurance to at least 70 percent of their full-time employees and dependents up to age 26 this year, and 95 percent beginning in 2016. Those who don’t comply will pay a fee per employee. “The question you have to ask yourself now,” said Robert Sheen, president of First Capitol Consulting Inc., “is whether the ACA ruling is applicable to your company.”

This Roadmap offers HR leaders a framework for building a competitive and productive compensation and benefits program that motivates employees and rewards top performers without breaking the bank.

That isn’t as easy to figure out as you might think. The tricky part is the term “full time equivalent,” which means you need to add up the hours worked by all part-time employees to determine if you hit the 50 FTE level — i.e., if you have two part-time employees who work 15 hours per week each, together they equate to one full-time employee. Thus an employer with 30 full-time employees and 40 half-time employees would be subject to the mandate to provide health insurance. “You need to look at your entire employee pool to do an accurate count,” he said. Small businesses that are owned by a bigger umbrella company may also fall under this ruling.

The challenge with the ACA is not only the cost of offering health care benefits, but also all the compliance requirements that go with it. “That’s what will trip up a lot of benefits managers,” said Jamie Walker, vice president of product and consumer engagement for PlanSource, a health exchange technology provider. Companies are required to electronically file 1094 or 1095 forms for every full-time employee to report on the health coverage provided.

Fast Track

FTE equivalent refers to the combined number of hours worked by all part-time employees, so if two employees each work 15 hours per week, they are the equivalent of one full-time employee.

“These forms are very complex and have dozens of codes to choose from,” Walker said. “It’s not something you can manage in a spreadsheet.” They also need to be able to prove to the Internal Revenue Service that coverage was offered to every eligible employee within 90 days of their start date — regardless of whether they accepted it.

Unfortunately, most software vendors don’t currently have the tools to mine and format this data for electronic filing, although they are likely to start adding ACA compliance apps in the near future, Walker said. In the meantime, companies will either need to figure it out on their own or hire an industry consultant.

Sheen urges benefits managers to talk to their lawyer or accountant on how to address the filing, and to prioritize creating an effective filing process. “If you don’t do this right, the penalties can be very high,” he said.

As time-consuming and costly as this ruling may be, companies can make the most of it by talking up their improved health insurance offerings to new hires, Walker said. She suggests highlighting wellness offerings to demonstrate commitment to work-life balance and defined contribution programs to show that employees are empowered to make the health care choices that best meet their needs. “Year over year, we see higher levels of job satisfaction among employees who have choice in their health care options,” she said.

New Era

For many companies, dealing with the ACA and the shifting health care benefits landscape is triggering a broader evolution in compensation and benefits, said John Bremen, Towers Watson & Co.’s managing director of talent and rewards. “As companies revisit their approach to health care, many are implementing a review of their total rewards bundle and the value proposition of their compensation, health care and retirement offerings to employees.”

Crossroads

The stock-option dilemma: Stock options can be a valuable incentive or a waste of money, depending on how you present them. If every employee is granted stocks, they will take them regardless of whether they value them, PricewaterhouseCoopers’ Scott Olsen said. But if you offer limited shares in exchange for salary, the employees who value stock options will take advantage of the program, and those who don’t won’t.

Many companies haven’t revamped their programs since before the economic downturn — and a lot has changed since then, he said. The economy is different, companies have moved into new markets, and there has been a significant generational shift in the workforce — all of which affects how compensation and benefits are viewed and valued.

Bremen said he thinks a lot more companies will embrace flexibility in their compensation and benefits programs through pay-for-performance, customized bonus and incentive programs, and a la carte health care options. Companies are also adapting how they spend their resources based on what employees say they want. “It used to be that you could have one comp and benefits program for everyone,” Bremen said. “Now, with the global workforce, different generations of workers and different types of employees, you need to be much more tailored to accommodate a diverse audience.”

Such flexibility is helping companies meet the needs of all employees without spending more money. Towers Watson’s “2013-14 Talent Management and Rewards Study” shows organizations that have an integrated approach to total rewards strategy are five times more likely to report that employees are highly engaged and twice as likely to report achieving financial performance compared to their peers.

Roadblock

What’s Your Vendor Plan? The technologies and vendors you choose will depend on your size, global footprint, plan design and existing systems. Some companies work with multiple vendors to administer different aspects of their compensation and benefits programs, but that adds unnecessary complexity, Towers Watson & Co.’s John Bremen said. “If you can find one vendor to manage as much as possible, it will likely provide the best cost-advantage and eliminate the need for you to be your own general contractor.”

Bremen worked with a life science company, for example, whose scientists were more interested in recognition and support for their research than higher base pay, so the company moved money from the compensation pool into a recognition program that provides the best research papers with additional funding and recognition. “The company saved a fortune, and the employees were more engaged,” he said.

In another example, a media company found that its younger workers didn’t really care about health care while older employees valued it. So they went with a private exchange allowing each employee to opt into the programs — and associated costs — that made the most sense for them. “It was a cost-neutral decision that gave everyone what they needed.”

Though such differentiated reward programs only generate value if they are regularly reviewed to ensure employees are offered incentives for the right behavior. Pay-for-performance programs can be very motivational, but only if they are managed well, said Lori Holsinger, a Mercer analyst. You need to decide what pay for performance means for your organization, what performance will receive merit increases, and how you will reward employees; otherwise it won’t be effective, she said.

Unfortunately that monitoring step rarely occurs. Mercer’s “2014/2015 US Compensation Planning Executive Summary” report shows that while 8 in 10 organizations said they have a “pay-for-performance philosophy,” just 22 percent measure the effectiveness of their programs, and only 30 percent believetheir programs are effective.

Companies looking to rework their comp and benefits program need to be willing to do things differently, Bremen said. “In the past we didn’t have the technology or processes to be flexible, but with HRIS technology, health exchanges and outsourcing options it is much easier to accomplish.”

Fast Track

Customizing your program to the unique needs of employees can help you generate more value for fewer dollars. For example, studies show most people are willing to trade an annual bonus for 75 cents on the dollar in salary, said Scott Olsen of PricewaterhouseCoopers. “That doesn’t mean you shouldn’t offer bonuses, but if you are going to give them, be sure it’s worth the incremental cost.”

They also need to talk to employees about what they want, and what they value, so that you can generate the most value. And don’t just think about what people want today. “Focus on where your organization is headed in the next five to seven years,” Bremen said. “Boomers will have retired, Gen X will be your leaders, and 80 percent of the company will be millennials and Gen Z, and they will all want different things.”

Plan

Get a number. The first step to building a balanced compensation and benefits program is understanding your budget and workforce management goals for the year, said Elissa Tucker, research program manager of the APQC. “Think about what you have to work with and what you want to achieve.”

Get a handle on the ACA. If there is even a chance that you meet the 50 FTE equivalent status, talk to your lawyer or accountant about whether it applies to you and what you need to do to be in compliance.

Don’t work in isolation.Whether you are revamping an existing program or building one from scratch, involve finance and legal from the outset to ensure the structure and administration of the program is both legal and affordable.

Ask employees what they want.Benefits usage data, employee satisfaction surveys, exit interviews and focus group discussions are all useful places to find out whether employees value your compensation and benefits programs, and what they would like to see changed. You should also ask whether they think the program is easy to use, fair and if there’s enough communication about the plan.

Review external research.To ensure your program is competitive, study market data and compensation surveys for your industry, region and key job titles. “Review reports at least yearly to identify new trends,” Tucker said. “And more often for hard-to-fill roles.”

Build a career framework.Having clearly defined jobs and job families for every department will give you a foundation to fairly compensate and promote employees, Holsinger said. Each job should include a job scope, required experience, and expected performance or outcomes. Then create levels within each job and job family to determine what level of compensation an employee should receive. “This creates consistency and fairness across the organization.”

Choose an incentive program and stick to it. Whether you implement pay-for-performance, bonuses or other incremental incentive programs, they have to be consistent, and employees need to understand them.

Do

Divvy it up.Based on your budget, goals, research and career framework, define salary ranges, bonuses and benefits for each job category and job level. Remember, they don’t all have to be the same across the company, Bremen said. “Very few companies today can offer to do everything to everyone.”

Use incentives to manage costs and spurproductivity.Annual incentive programs help employers maintain lower base pay increases, while allocating additional compensation to their high performers.

Don’t give them too many incentives.The goal of incentives is to motivate people, but if you try to offer incentives for too many behaviors or outcomes, people can’t prioritize. “The magic number for incentives is three,” said Xactly Corp. founder and CEO Christopher Cabrera. “After that, the level of performance can go down because the incentive program becomes too complicated.”

Take advantage of technology.According to Mercer’s 2015 study, half of respondents are currently implementing or planning to implement technology-based solutions to manage compensation. The best tools will integrate with your existing human resource information system.

Communicate. “Communication is a huge piece of the comp and benefits program, but it often gets forgotten,” Tucker said. That can put all of your hard work to waste. HR needs to communicate frequently and consistently with employees about how the compensation benefits program works, how it compares to market standards and what they can do to take advantage of it. “Consistency of message is key,” said Scott Olsen, U.S. leader of PricewaterhouseCoopers’ Human Resource Services. When employees understand the value and can see how their behavior impacts their incentives, it becomes more motivating.

Review

Summarize results for leadership.The C-suite doesn’t need to get deeply involved with compensation and benefits administration unless there are problems or big changes afoot, Olsen said. Instead, tie comp and benefits reporting to broader workforce management meetings, sharing results in conjunction with performance management outcomes, employee satisfaction surveys and future workforce planning initiatives.

Plan, Do, Review

Plan

• Make a plan to meet Affordable Care Act requirements, including generating an audit trail and filing with the Internal Revenue Service.

• Consider a program revamp to better meet employee needs with the same pool of resources.

• Gather internal and external research on what employees want and what’s competitive for your industry.

• Determine your budget and what business strategies you want to offer incentives through benefits and compensation.

Do

• Use technology to gain transparency, ease of use and compliance.

• Limit the number of outcomes for which you offer incentive to maximize performance.

• Communicate about the program with employees about how the program works. Let them know how they can take advantage of it, and what they can do to improve their benefits performance.

Review

• Regularly review your ACA compliance strategies to ensure you are meeting all requirements.

• Revisit internal and external data about the program to identifyany pain points and ensure your offerings are still competitive.

• Tie compensation and benefits reporting to broader workforce planning reports.

• Don’t make changes to the program unless they are absolutely necessary.

Keep track of ACA compliance.Ensure you can prove insurance coverage was offered to all full-time employees to begin within 90 days of employment, and that you have the time and resources in place to manage all IRS filings.

Review internal and market data.At least once a year, re-evaluate your program based on employee feedback, satisfaction surveys, turnover rates and external market research to ensure your program remains competitive and is driving the right behavior. “A program may look great on paper, but you have to monitor it in the field to see how people respond,” Tucker said.

Leave it alone. Don’t make changes unless something is actually broken. When you constantly tweak your program, people become suspicious and assume they are getting the short end of the stick, Olsen said. If you must make adjustments, change one element at a time, and map its impact on the entire program before you implement it. “You’ve got to look through a broad lens because a lot of codependences exist.”

Get a number. The first step to building a balanced compensation and benefits program is understanding your budget and workforce management goals for the year, said Elissa Tucker, research program manager of the APQC. “Think about what you have to work with and what you want to achieve.”

Get a handle on the ACA. If there is even a chance that you meet the 50 FTE equivalent status, talk to your lawyer or accountant about whether it applies to you and what you need to do to be in compliance.

Don’t work in isolation.Whether you are revamping an existing program or building one from scratch, involve finance and legal from the outset to ensure the structure and administration of the program is both legal and affordable.

Ask employees what they want.Benefits usage data, employee satisfaction surveys, exit interviews and focus group discussions are all useful places to find out whether employees value your compensation and benefits programs, and what they would like to see changed. You should also ask whether they think the program is easy to use, fair and if there’s enough communication about the plan.

Review external research.To ensure your program is competitive, study market data and compensation surveys for your industry, region and key job titles. “Review reports at least yearly to identify new trends,” Tucker said. “And more often for hard-to-fill roles.”

Build a career framework.Having clearly defined jobs and job families for every department will give you a foundation to fairly compensate and promote employees, Holsinger said. Each job should include a job scope, required experience, and expected performance or outcomes. Then create levels within each job and job family to determine what level of compensation an employee should receive. “This creates consistency and fairness across the organization.”

Choose an incentive program and stick to it. Whether you implement pay-for-performance, bonuses or other incremental incentive programs, they have to be consistent, and employees need to understand them.

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