Coronavirus Crisis as Catalyst: Change the Way You Look at Your Rewards Structure

I saw these words this morning: "Your brain isn't resistant to change; it is lazy." Can we extend that? Is your corporate rewards program -- the way that you reward your employees for working for you -- resistant to change? Or is that change somehow always on the back burner?

You've looked at the survey data. You've heard the cries for help from employees. But, your rewards program remains right down the middle.

Perhaps you've tried some innovative ways to become an employer of choice. You put the ping pong table and beer keg in the break room. Alas, it didn't reduce turnover. It didn't make your employees happier (except when they hit the beer keg too often). It didn't reduce their real stresses even if it did mask them for a few minutes.

But, the crisis caused by the coronavirus pandemic has forced you to change the entire compact between you and your employees. They've forgotten their office space. The fancy espresso maker you provided them sits idly as they become reaccustomed to the coffee they make quickly in their own home. At the same time, they've likely created their own custom background for their Zoom calls. All of this, they have managed. In fact, if you've kept them employed and had to cut their pay a little bit, most of them have probably managed how to live on a little less.

What they haven't learned though is how to feel secure. They haven't figured out how they are going to deal with a health catastrophe or disability, but maybe the federal government will come to the rescue. Where the federal government has not promised to come to the resuce, even in the most grandiose of campaign speeches is in helping your employees to retire.

You remember retirement. It's what your parents did. Either or both of them worked for a company for a long time. They retired with a pension. Supplemented by Social Security and perhaps some savings, somewhere in their early to mid-60s, they stopped the daily grind and pursued all the hobbies that had been given short shrift while they were working. It was part of the "American Dream."

Not for you? You can't even dream of it?

Look back at what I said a few paragraphs ago. Most of them have probably managed to live on a little less.

Let's do some oversimplified math to figure out how we are going to use this to become an employer of choice again. Consider Taylor, a good employee.

Pre-coronavirus, your basic costs for Taylor included:

• Base pay: 100,000
• Health benefits: 25,000
• Other non-retirement benefits: 5,000
• Retirement benefits: 4,000
• Total: 134,000

With coronavirus, you've had to cut Taylor's pay by $10,000. So, the equation now looks like this:

• Base pay: 90,000
• Health benefits: 25,000
• Other non-retirement benefits: 4,800 (a couple of benefits had a pay-related component)
• Retirement benefits: 3,600
• Total: 123,400

At some point, this crisis will end. And, during the crisis, Taylor may have learned to live on $90,000 instead of $100,000. She would love to get that full $10,000 back, but since she has learned to live on it, that's not what's keeping her up at night. 

During her new social distancing life, Taylor has taken to ever family search website she can find: 23 and Me, Ancestry, MyHeritage, and more. She's learned that going back four generations, the women in her family are long-lived. That's great news for Taylor, right?

Not really. As the she saw the stock market fall and her bank decrease the interest rate on her savings account to 0.01%, Taylor wondered how she can ever afford to retire. After all, she guesses, based on her genealogical research that she will probably live to be about 95. And, after she retires at age 62 (she learned she can start collecting Social Security then), that leaves her with a 33-year retirement. She's going to have to pay for it somehow.

As her employer, you can be the solution to her problem and be an employer of choice. After all, you don't want to lose a great employee like Taylor. And, you've committed that you are willing to spend $134,000 on her total rewards.

Before we do that, let's think about what Taylor is not good at. Like many in her age group and yours and mine and everybody else's, she's not good at financial planning. What you can do to help is to create a nest egg for her. And, don't do it so that some day, she gets a pot of cash from the company, give her lifetime income.

So, let's reconfigure the $134,000.

• Base pay: 95,000 (she learned to live on 90,000)
• Health benfits: 25,000
• Other non-retirement benefits: 4,900
• 401(k): 3,800
• Subtotal: 128,700

You have $5,300 left to spend. That's 5.5% of pay. 

I don't care what you call it, but now is the time to call it something. Take that 5.5% of pay and allocate it to Taylor's lifetime income. Sell it to your employees until you can't sell it anymore. Tell them you are giving them this plan because you want them for their careers. And, tell them you are giving it to them because some day, you want them to be able to gracefully exit their careers and to do so without fear of outliving that little 401(k) nest egg that isn't worth what it was before coronavirus hit.

Once they get that benefit, your best employees won't leave.

Make the best of the coronavirus crisis. Let it be a catalyst for a great change.

Thinking About Compensation -- Cash and Otherwise

Suppose someone asks you how much you get paid. Probably the first thought that comes to mind for you is something like that your base pay is some amount of money per year or that you earn some amount per hour. You might include bonuses in your thoughts, or if you are hourly paid, you might include some overtime that you typically get. Let's just say, hypothetically, and because it's an easy number to work with, that your base pay is $100,000 per year and that you are not bonus eligible.

You're pretty happy in your job, but one evening, you get a call out of the blue from a recruiter or headhunter, if you prefer, who tells you that she would like to talk to you about a job in your field that has a budget of $110,000 per year. My question for you would be whether relative to your $100,000, is that $110,000 a good deal?

It seems obvious, doesn't it? You'd be getting a raise. But, it's not really that simple. Your current employer has a defined benefit pension plan and a 401(k) plan. They also provide you with a good health care program, four weeks of vacation per year, and some other benefits that probably don't seem like they will make a difference to you. Your potential new employer just has pretty basic health care and a garden variety 401(k) plan. They will start you at two weeks of vacation, but you work your way up to four weeks after ten years with the new company.

What should you do?

To people who often read my blog, the analysis is pretty simple, but to the average person, it's not. They often don't understand the value of these various benefits. And, that's why they tend to look at pay alone and perhaps the amount of vacation time that they are getting and whether or not their work schedule or work site (office versus home) will have any flexibility. That's work in 2016.

Suppose you are the employer and you happen to be the employer that offers good benefits, but doesn't pay quite as much as some of the employers against whom you compete for talent. I have an idea for you. Suppose you created a tool, or model if you prefer, to help prospective employees to compare what they are currently receiving with what you are offering them. It sounds like you've already made the commitment that you're not going to win on pay alone, so you have to find a way to make them understand the value.

Let them input all these various components side-by-side and see which one is the winner, especially if the pay you are offering is sufficient for them to live on. If you want to get even more sophisticated, you could tax-effect it.

Interestingly, the same concept works in executive compensation.

A company recently asked me to benchmark their executive retirement benefits (of course, those benefits are pay related). So, if their plans are 50th percentile, but their pay is only 40th percentile, then in reality, their plans fall short (50th percentile applies to 40th percentile gets you to somewhere less than 50th percentile retirement value), and conversely if you pay above the 50th percentile and provide 50th percentile retirement benefits.

It's surprising to me how often looking at things this way is a revelation. Perhaps you need that revelation.

Future Shock Meets 1984

I remember reading both of the books. Everyone seems to have read or be familiar with George Orwell's "1984." Fewer recall Alvin Toffler's "Future Shock." While Toffler's was more about the psychological aspects of reacting to rapid change, I am using my blog-owner's license to use it hear.

So, this is a blog usually devoted to benefits and compensation. What does this have to do with these two books by these two authors?

I'm going to take you into a future world. Perhaps it will never occur, perhaps it will occur sooner than you think. As Orwell suggested, Big Brother knows more about you than you would care to believe. Today, Big Brother is not just the government or the Thought Police, it's Google, Amazon, your credit card company, your favorite place to buy groceries, Netflix, and the like.

There are two approaches that you can take. You can hate it. Many people do not like the intrusion. Many people do not like the lack of privacy. But, you know what? This is going to happen to you whether you like it or not. It is virtually impossible in today's world to avoid this intrusion and lack of privacy. So, the second approach is to embrace it.

When Future Shock meets 1984, your identity will live on a chip. As far as my vision can take me, that chip currently lives in your smartphone, but perhaps it will be somewhere else by the time we get there. Perhaps it won't be a chip at all, but that's not the point here.

By this time, Congress has gotten its act together (wow, that seems like it must be far, far in the future) and reformed or eliminated the Tax Code as we know it. This will be important because this new model will require much more flexibility and customization.

So, you start your new job and instead of negotiating your pay, you negotiate your total worth to your new employer, The Third Wave, Inc. (TTWI). [Those who get the reference are pretty literate, by the way.] On your first day with TTWI, you go into a meeting with Winston Smith, the head of all things people. At TTWI, Winston is not even a person, but a drone leading up the people function.

As you walk into the meeting room, your chip activates and based on all the data on your chip, Winston instantly produces a recommended benefits and compensation package for you. Winston knows that you have a mortgage to pay monthly, he knows how much your spouse earns, and he knows about your family. He also knows that you have a proclivity for collecting autographed original vinyl 45s of one-hit wonders and that you need additional cash to cover that.

You look at the flexible design that Winston has provided you, make one small change because Winston didn't know that you plan to accelerate your mortgage payments starting in two months, and you are on your way.

So, what do you think? Are you bothered? Did you like how smoothly the process went? Did you like not having to read hundreds of pages of legalese? Did you like getting recommendations that were customized to you?

It's coming -- maybe not in my lifetime, but it's coming.

Rewardsball -- Where HR Meets Moneyball

I'm sure that many of you read Michael Lewis' excellent book Moneyball. Whether you have or not, it's the true story of the Oakland Athletics baseball team with a focus on their General Manager, Billy Beane and his focus on the value that players actually deliver. It's the story of how a smaller-market baseball team without a lot of money uses its money wisely to be competitive without a lineup full of superstars. It's a story that instructs that certain statistics are undervalued and that certain other statistics are overvalued. It's a story that tells us how to efficiently use our payroll budget to achieve the best results.

That seems like a really cool idea. It seems so simple, doesn't it? All we have to do is to develop a simple set of metrics and apply them to our company and we will use our payroll more efficiently than our competitors, generate more profits for our shareholders and pay all of our employees commensurate with their contributions to our profitability.

Wow, John, that is a fantastic idea. You should start a business, preach this to the masses, make millions of dollars implementing it, go on the banquet circuit and eat lots of really bad chicken.

Not so fast.

Baseball is a relatively ideal forum for the concept of Moneyball. There are 30 teams. Each team has the same rules. Each team's goal is to win as many games as possible of 162. Each team wins games by scoring more runs than its opponent. Each team scores a run when a player safely crosses home plate. So, a player who generates a lot of runs for one team is highly likely to generate a similarly large number of runs for another team (if he is traded).

Tell me two companies that play by the same set of rules. That's tougher, isn't it? In order to have the same set of rules, they need to have similar goals. Perhaps they need to offer similar products and services. We could argue that they need to have similar financial situations, but we know that the Oakland Athletics and New York Yankees do not have similar financial situations. Yet, the Athletics with a payroll often dwarfed by what the Yankees pay their starting infield currently sit five games ahead of the Yankees.

Even McDonald's and Burger King, though, have different jobs. They have different products. They have different locations. Presumably, they have different goals.

But, let's take a different approach that can be applied to any company. Suppose a company currently spends $1 million per year on its health care benefits for employees (and their families). Perhaps $800,000 is the minimum that they could spend. What is the value of that additional $200,000? Does the company get a good return on its investment for the additional $200,000? If not, should they cut benefits or enhance them.

This is actually what I am referring to as Rewardsball although I think I can come up with a better name. It's an interesting concept, isn't it?

Call me. Write me. +1 this post. Re-post it. Re-tweet it. Help me out please.

Public Pensions Are Not the Problem

I hear it all the time: public pensions are a big problem. On TV, I hear that "we" just have a 401(k) plan, why should government workers have a pension plan? I'll answer that question and talk about the real problem that public pensions have been made to become.

Understand as I write this that I am a fiscal conservative by nature. While there is a place for some benefits that are more socialized than some others might think, I don't, for example, espouse that our employers, public or private, should be responsible for our entire welfare.

That having been said, let's consider a young potential worker, Kelly (I figured I would use an androgynous name because I haven't decided yet if I want to make Kelly male or female, or if I even care). Kelly is considering two job offers, one with a private employer and one with a public employer. This may not be an unusual scenario.

The private employer offers Kelly a nice package to start with. It includes all this:

• $60,000 base pay
• 2 weeks paid vacation and 10 paid holidays
• A consumer driven health plan (Kelly doesn't know what that means, but does know that it is a health plan) where the employer pays 75% of the total cost
• A 401(k) plan with a match of 50 cents on the dollar for the first 6% of pay that Kelly contributes

Assuming that she (I decided to make Kelly female) elects the health plan and defers at least 6% of her pay to her 401(k) plan, the total annual employer cost of the package being offered to Kelly is approximately $60,000 (base pay) + $4,615 (paid time off) + $4,500 (health plan) + $1,800 (401(k)) = $70,915.

The public employer offers Kelly a very different package. It includes all this:

• $50,000 base pay
• 3 weeks paid vacation and 15 paid holidays
• A traditional indemnity health plan for which the employer pays 90% of the total cost
• A defined benefit pension plan that if funded ratably over a full career for Kelly will cost the employer (on average) about 5% of pay

Again, assuming that she elects the health plan, the total annual employer cost of the package is about $45,000 (base pay) + $5,769 (paid time off) + $9,720 (health plan) + $2,500 (pension plan) = $67,989.

NOTE: I have taken fairly wild guesses on the costs of the health plan. They should not be used as representative of any particular plans nor should the be used as representative of the costs of any particular plans.

The values of the two packages are close enough that Kelly may have some career and lifestyle choices to make. But, we will leave Kelly for the moment as her career decision does not really matter to us.

The first thing that does matter, however, is that the two potential employers have similar costs of employment, however, they choose to allocate those costs very differently. The second thing that matters is the pension plan. Note that I said that the public employer was going to fund that benefit ratably over a full career. When this is done on a percentage of pay basis, it typically comes from an actuarial cost method known as (Individual) Entry Age Normal. In this case, the 5% of pay is what is known as the normal cost, or the annual cost of the benefits being allocated to the present year.

Wow, that was an earful. I'll slow down the technical stuff.

My point is that a public pension plan, at least in every jurisdiction of which I am aware, can be funded rationally. As part of that rational funding, the plan sponsor (whoever represents the sponsor) must first allow the plan's actuary to choose reasonable actuarial assumptions, including those for discount rate, salary increase rate, rates of termination, disability, retirement, and death, and any others that are appropriate to the plan and its population. Second, the plan must be funded using an actuarial cost method that takes into account future pay increases and is reasonable in its allocation of benefits to an employee's past service, current service, and future service with the employer. Third, regardless of the leeway allowed by the law, the sponsor must ensure that the plan is funded rationally every year. The cost is the cost. You don't take a year off from funding so that you can build a new skate park, especially since the mayor's son is a competitive skateboarder. 

The problem is that most public plan sponsors have not taken this approach. They have been neither reasonable nor rational. Much like the US government, especially under the last two presidents, public plan sponsors have taken the approach of running up obligations that perhaps could have been paid for as they were accrued, but were instead left for a future generation.

Therein lies the problem. The public pension is only its face.