Employment Cost Index:
Compensation Consultants: 1Q Wages Retreated on Battered Economy
Cost-Cutting Seen Key to Surviving Downturn; All Facets of Compensation Affected
Big Changes Ahead for Health Benefit Plans as Old Systems Fall Apart
Suspecting a Bottom, Employers Seek to Retain Workers to Ready for Coming Upturn
By Gary Rosenberger
SALT LAKE CITY (EconoPlay) April 23 - Employers pounded away at wage and benefits costs in the first quarter in response to declining revenues and a beaten down economy - but are turning away from mass layoffs as a stopgap of first resort, compensation consultants say.
Instead they're turning toward less draconian measures, including shorter hours, unpaid furloughs, wage freezes, wage cuts, and terminating matching contributions to 401(k) plans, among other "adjustments."
The biggest transition of all could be the approaching demise of the traditional, employer-based health benefit system, which now has all the hallmarks of obsolescence and failure.
The move toward unpopular high-deductible plans is now almost complete - and onerous enough to invalidate many of the old arguments once inveighed against a single-payer system.
But for all the ugliness still out there, there is a sense of a bottom and companies are beginning to ready themselves for the possibility of an upturn.
"Six months ago all the questions from my clients were around severance. Three months ago that morphed into can we freeze wages - and how can we cut wages and hours or create furloughs and four-day workweeks," observed Steve Gross, employee compensation leader for Mercer Human Resources Consulting, at his Philadelphia office
That does suggest employers "are starting to think they may have hit bottom and want to conserve as much of their workforce as they can for the eventual upturn," Gross said. "The big lesson they learned from the last downturn was how long it took for them to rebuild staff."
Less Hours, Less Pay
Companies have made their pay decisions for 2009, and the increases are down sharply from the traditional mid-3% levels. But just how far down is a matter of interpretation, he said.
Gross's survey of some 850 companies released this week indicates one third of companies have frozen wages - and almost half have frozen wages at the executive level.
"The actual increases, including the zeros, averaged out to 2.3 percent. The problem is how do you measure the one third of companies that froze wages? If you did manage to get an increase, it was probably closer to 3.2 percent," Gross said. "But wage freezes distort the reporting. Until this year, very few companies had freezes."
Another distortion is created by shorter workweeks. "How do you measure for reduced work hours?" he asks. " If you reduce the workweek by 20 percent and leave hourly wages intact, is it a wage cut?"
There is no clear pattern in the cost cutting. "Some companies might choose to continue their 401(k) matching contributions while instituting wage freezes, choosing social responsibility in helping people save for retirement," he noted. "Other companies say our first priority is to get out of this recession - so we'll keep the salary increase so that our employees can start spending, and we'll worry about contributing to their 401(k) later."
For all that, he senses reprieve. "Employers are feeling more optimism than they did three months ago, when it was all gloom and doom," Gross said. "Now it's more of a feeling that this too shall pass."
"There is enormous pressure on companies to hold the line on salary adjustments and bonuses right now," said Paul Gavejian of Total Compensation Solutions in
Some of his banking clients are freezing pay adjustments and bonuses or limiting them to TARP approved levels (presuming they are taking TARP funds). "The more fortunate financial institutions are granting increases ranging from 3.5 to 3.9 percent, depending on their assessment of the market and economic conditions," Gavejian said. "Property and casualty and special risk insurance companies are granting full salary adjustments of 4 percent and granting target-level bonuses because they've had a relatively good year."
But in the healthcare sector, where costs have continued to skyrocket, management is asking employees to "share in the pain" by reducing annual salary increases to amounts ranging from 0 to 3%. "The same applies to most industry sectors, where about one-third of all employers have reconsidered their salary adjustments for 2009 and revised them downward by about one percentage point," Gavejian said.
The reality is that most of his clients aren't even sure if it's safe to go back in the water. "They're waiting to see if banks will free up some capital, if consumers will start to spend, and if the government will stop paying for the mistakes of several financial companies that seem to be the genesis of the current crisis," he said.
The latest salary budget survey from WorldatWork, an association of compensation professionals, reconfirms that employers have reduced average increases to 3.1% in 2009 from 3.8% in 2008. The survey further indicates that 10% of respondents will be freezing pay for exempt salaried employees in 2009.
"Clearly as long as job cuts continue, employees will see continued pressure on salaries in many forms, from lower merit budgets to freezes, to mandatory unpaid time off. As always, in-demand skills will be the exception. But, as a general rule, 2009 will not be a memorable year for earning power," said Jim Stoeckmann, senior compensation practice leader for WorldatWork.
"The avalanche, an unfortunately apt description, will no doubt begin to slow as the unprecedented fiscal and monetary stimulus begins to hit
"Until consumer confidence turns the corner and businesses begin to see an increase in sales numbers, hiring is unlikely to turn around. We are bound to see a similar pattern to the 2001-2002 recovery, when job creation lagged significantly behind the general economic recovery," he predicts.
Healthcare in Tumult
Aaron Berg, president of Health Plan Manager Corp. in
"I'm feeling a compression in the rate structures - and a heavy, heavy push to high-deductible plans," he said.
"What is happening is exactly what we all saw coming. It's a continuance of the cost shift to employees because employers can't afford it anymore," Berg said.
"I myself put in an HRA plan for my 22 employees and I'm funding 100 percent of their maximum exposure. I don't expect anyone to max out, so I'll save money. The way it's set up, the worst-case scenario would cost me about the same as the renewal would have cost me," he said.
He believes the political winds have turned in favor of a single-payer system and that the Obama administration is ready to pounce on the opportunity. "My first impression of Obama's rhetoric in the campaign was that we would keep the system as is, and he would build incentives to get more people covered," Berg said.
"But there's enough momentum now, and Obama has enough support, that he can pull off the single-payer scenario, even though in the campaign it did not look like that was his goal," he added.
One big clue into the political thinking in
"Right now an employer pays $1,800 a month to insure the average worker. If the government can supply the same benefit for $1,200, why would that be bad for employers?" Berg asks. "The insurance company arguments against a single-payer system are obsolete. The issue of choice hasn't been a reality for years. The phrase 'socialized medicine' just isn't scary to people anymore."
The entire insurance brokerage industry "is holding its breath" to see how it all unwinds because it could be put out of business overnight. "It would affect my business, even though a lot of what I do is administering benefits," Berg said. "Insurance companies would have to come up with a whole new business model."
Berg sees a lot of "tumult" over the issue of health benefits in the next few years. "The Republicans are throwing all the old arguments at us but they no longer resonate," he said.
On the other hand, he sees obvious flaws in the changes to COBRA benefits for laid-off workers passed as part of the American Recovery and Reinvestment Act of 2009 (ARRA).
In it, government is to reimburse businesses now responsible for paying 65% of COBRA premiums with laid-of workers responsible for the remainder. It's "an irresistible deal" for workers, who were formerly responsible for the entire amount. Theoretically, businesses should only have been hurt to the degree that they have to wait to get reimbursed, Berg said.
The problem for businesses is that there is no mechanism to reimburse them on the deductible when laid-off workers actually use their insurance - a very costly oversight in a world of high-deductible plans, he noted.
In some situations, workers that are still employed actually pay a greater share of the HRA premiums and deductibles than the employees who got laid off, a disincentive to work and one that raises "intrinsic issues of fairness," Berg argues. "I don't think the government intended to lay that kind of expense on employers. But it tells me the plan was devised too quickly with very little thought behind it."
"We're seeing unprecedented downward pressure on both compensation and benefits across the broad spectrum of industries that we serve," said Jim Watt, president of Employee Benefit Solutions in
At the same time, the overall cost of healthcare tends to spike in hard times as workers and their dependents rush the system before losing their jobs and health benefits, he argues.
"Moreover, President Obama's modification to the COBRA rules has also enabled increased utilization of healthcare benefits and services by the unemployed," Watt said.
Yet despite all the cost pressures on employers, he does not anticipate a voluntary end to the employer-based system - "unless President Obama is successful in his quest to introduce a nationalized healthcare system."
'More Cost than Benefit'
Lenny Sanicola, benefits practice leader for WorldatWork, agrees that there could be a "spike" in healthcare claims as worried workers and their dependents begin to scheduled elective procedures while they still receive benefits.
"But since most employer plans require a certain amount of employee out-of-pocket costs, one could also argue that with current economic conditions as they are, people may choose to spend less on healthcare," Sanicola said.
The larger conundrum facing the system is that "the cost shifting of health benefit premiums, co-pays and deductibles can only go so far before healthcare becomes more cost than benefit to workers."
Dr. Louis May, a gastroenterologist in private practice in
"Nothing's changed with the insurance companies. It's still 'we cannot pay you for services rendered because you left out Mrs. Smith's middle initial or her zip code.' They look for any excuse not to pay you," May said. "It's been that way for a long time."
It also pains him the way insurance companies incrementally reduce reimbursements to doctors. "Last year it was 3 percent. This year it's 2 percent and next year it will be 2 percent. You don't really notice until you reach the point where you realize they're giving you half of what they gave you a few years ago," May said.
If he decides not to participate in the plan, he risks losing patients who are forced to go elsewhere. "You learn to adjust," he said. "You work longer hours. You work harder and faster. You see more patients and learn to be very efficient with every patient you see. Sometimes it feels like you're churning in and churning out."
Then there's the problem of Medicaid. "It doesn't cover my gas expenses. They pay $7 a visit," he said. "Medicare has better coverage. And they don't annoy us as much. You submit the bill and they pay you. In some ways they provide better coverage than a lot of insurance companies do."
Some Very Ugly Truths
What he finds most infuriating is the refusal of experts and politicians to get at the truth of why medical care costs so much in the
"Doctors I speak with, who've been in practice 15 or 20 years, commonly tell me 50 percent of their practice involves unnecessary, defensive medical care - but I think it's more like 25 percent," he said.
May gave the example of one patient who was prescribed a week of bed rest and felt dizzy when he finally got up. "Of course, dizziness is normal after a week in bed. But they called for a neurologist consultation just to be sure," he said.
Another patient was given a CAT scan after being diagnosed with a digestive disorder. A second CAT scan was performed when the patient said he was feeling better. "When he said he felt okay, he got a third CAT scan to confirm he was okay," May said.
"That was two unnecessary CAT scans that exposed the system to a lot of added expense and exposed the patient to tons of ionizing radiation that could cause cancer,' he added.
"The other big issue that people don't hear about, and should, is end of life care," he continued. "Every doctor and nurse in the hospital might know the patient has two weeks left no matter what procedures are performed - and yet the family says who are you to play God?"
The patient "might be 92 and lost all his faculties, but he's on a heart machine, a breathing machine, a kidney machine and is surrounded by specialists - and we're paying $150,000 to keep that person alive for another three weeks," May said. "Between futile medical care and unnecessary, defensive medical care, it's become a circus."
'Down is Down'
David Leach of Strategic Apex Group, executive compensation consultants in Santa Monica, California, had just finished a meeting with an executive compensation committee when he spoke with us. "They were very sensitive to the concerns of shareholders and the public. I think they're doing a better job of disclosing what they're doing and being more open about executive compensation," he said.
"Everyone is feeling the effects of recession. You see it in the withdrawal of golf tournament sponsorships. That kind of stuff used to bring in business. Now it just upsets people. Compensation committees are not exactly giving in to the new populist mood, but they're not ignoring it either," Leach said. "Companies are doing things proactively on corporate governance to avoid regulation."
Overall executive compensation is down, but it's difficult to quantify by how much. "Salary is so easy to quantify. But add in bonuses, stock plans, perquisites and other benefits and it gets very complicated," he said. "Also bonuses for financial services is very different these days from high tech. All I can tell you is that it's down, and down is down."
The
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