Background

On December 16, 2009 by a 4-1 vote, the SEC adopted new rules mandating increased disclosure about a public company’s compensation, corporate governance and risk policies. The new rules have an effective date of February 28, 2010 with changes to financial reporting applying for fiscal years ending on or after December 20, 2009.

Over the next few months, we will provide Action Steps that should be taken for effective management of executive and Board compensation practices in concert with the new “rules of the road”.

Action Step 1- Own the Process

The executive team plays a crucial role in communicating the company’s business strategy and challenges to both the Board of Directors and the employees. They should also consistently implement and communicate their Compensation Philosophy which enhances trust and shared values to the Board and employee base. Although many organizations do a decent job of communicating their business goals & objectives—–there is often a decrease of effectiveness of company leadership effectively and consistently communicating their philosophy on compensation. 

The use of compensation consultants has attracted significant attention recently. Many Board compensation committees use the same consultant that the management team uses, while several others opt to select their own consultant in addition to the one used by management. In the new rules enacted by the SEC, public organizations will need to identify any compensation consultant that provides counsel in excess of $120K per year in the company financial statements.  This new ruling creates a conflict-of-interest scenario when the executive consultant retained by a compensation committee is part of a larger human resources consultancy that derives significant revenue from work for company management.

 External advisors such as compensation consultants and legal counsel are essential to the increasingly complex work of compensation committees. We recommend that compensation committees take an “ownership” role in the selection of these advisors as opposed to them being selected by executive management. Advisors should clearly understand that they receive their assignments from and report to the committee. In addition to advising on technical compensation issues, consultants and legal advisors who are experts on compensation matters can assist committees to ensure that all relevant issues are raised and improve the way the committees operates. It is also important to remember that simply doing project work for management does not automatically disqualify a consultant from working on executive compensation. But the committee needs to be aware of and approve other work in which the consultant engages. 

Key Summary Recommendations

• Board compensation committees should assert control over the executive compensation process, but give management a voice.
• Ensure all outside advisors doing work for the committee are selected by and report to the compensation committee or the full Board.
• Share a single consultant with management, as long as the committee controls the relationship.
• Do not automatically disqualify the executive compensation consultants from working for the compensation committee just because they are doing project work for management.

Is 2011 the year we will finally see a rebound in the economy? 

The financial strains have prevented HR professionals from implementing initiatives that have been tabled until organizational purse strings loosen up.  Even though positive economic expectations are in the air, experienced HR professionals know their departments may be one of the last to see increased budget allowances. 

Proactive HR teams are considering projects that can create an immediate ROI and long-term cost savings. 

Here are a few suggestions that your HR team might consider in 2011:

Total Benefit Costs

More and more HR professionals are realizing the benefits of evaluating the much more than just the cost of insurance plans.  While cost is obviously important, how about considering other factors that can create immediate ROI, such as;

• How many vendors are currently providing administrative services for your plans, and would consolidating some of those vendors/services result in lower fees?
• Are you evaluating brokerage fees, commissions, and overrides to maximize the value these vendors are providing? With brokerage fees totaling approximately 5% to 10% of overall plan costs, it is vital to hold service providers accountable for the innovation, expertise and results delivered to your organization and its employees.

 We would encourage benefit teams to perform a Cost/Benefit Analysis for every vendor associated with running your benefit programs – you may find multiple savings opportunities! 

Dependent Eligibility Audits

For years, employers have somewhat blindly believed that dependents covered on the group’s health insurance plans are eligible.  The insurance company is monitoring dependent eligibility, right? NOT BASED ON OUR EXPERIENCE. 

Industry averages indicate that in excess of 10% of covered dependents are not eligible according to Plan rules!  Typical scenarios include married children, over age children, divorced spouses, unmarried spouses, and the occasional neighbor, nephew, grandchild, grandmother, gardener… you get the idea!  There are effective ways to remove these ineligible dependents from the Plan without creating an adversarial environment with your employees.  Potential savings are obvious – and your due diligence as the Plan Sponsor is a critical element of overall plan compliance.

Improve Employee Engagement  Now

Now is the perfect time to focus on shoring up your employee engagement initiatives.  There are creative ways to establish / enhance / refine the ways you communicate with employees about the company’s mission, and the individual role and value each employee plays in accomplishing corporate objectives.  As the economy improves, your organization may quickly move into a hiring mode.  According to a recent survey by Robert Half and CareerBuilder, 55% of respondents plan to make a career change, seek out new employers, or go back to school, and 28% plan to ask for a raise!  

Once the ‘Now Hiring’ signs start to go up, retaining current talent will be a key factor in how well employers are positioned to take advantage of the marketplace, while reducing the significant costs related to turnover.

As we move towards economic recovery, projects that impact your organization favorably will help demonstrate the overall strategic value that the HR Department provides.

 Happy holidays from all of us at P&B Live.

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