Managing Compensation in a Changing Landscape

Transcription

1 Managing Compensation in a Changing Landscape October 23, 2014 Presented to:

2 Today s Presenter Andrew Lewis is a Principal and the West Region Manager of Sullivan, Cotter and Associates, Inc. Prior to joining SullivanCotter, Andy was a Partner at Mercer specializing in health care and other tax-exempt organization executive and broad based compensation. He is a specialist in helping health care institutions restructure their cash compensation programs to be more efficient and reflective of emerging market trends. Andy brings more than 19 years of consulting experience to SullivanCotter. In addition to his projects with traditional health care organizations, he has worked extensively for tax-exempt research institutions, including Federally Funded Research and Development Centers (FFRDCs) and national labs, as well as think tanks, membership associations, and foundations. Some recent client examples include: Andy Lewis Denver Office Phone: andrewlewis@sullivancotter.com Assisting the compensation committee of a large academic medical center on the design of a new employment contract for the CEO, development of change-in-control and severance agreements, and the design of a long-term incentive plan. Conducting an audit of the pay programs and policies of a renowned academic medical center in order to facilitate an ongoing clinical integration program across their various subsidiaries. Designing a new annual incentive plan for a regional health care system to better align goal difficultly with that of industry peers. Advising the board of a large tax-exempt research institution on a new long-term incentive plan design. Helping a community hospital to restructure their executive reporting relationships. Developing a new job family based salary program for the employees of a large Midwest health care system. Working with numerous compensation committees of health care institutions to ensure compliance with IRS Intermediate Sanctions legislation. Andy has a Bachelor of Arts in economics from The State University of New York at Geneseo and a Master of industrial and labor relations degree from Cornell University. 1

3 Our Resources Since our founding in 1992, SullivanCotter has grown its geographic presence and executive leadership offering clients local access with national reach. We draw from the deep technical expertise of over 160 seasoned team members. Actuaries Attorneys Certified Compensation Consultants Compliance Experts CPAs Health Care Operations/Finance/HR Specialists 2

4 Why We Are Unique Fresh perspective Unparalleled research and data Independence Responsive, locally accessible team Differentiators Practical solutions aligned with business needs Collaborative consulting approach Focus on best fit, not just best practices Consider strategic, market and governance factors 3

5 Discussion Topics The Changing Landscape Current Trends and Issues in Employee Compensation Delivering Effective Results Challenges in Mergers and Acquisitions Answering Your Questions 4

6 1. The Changing Landscape 5

7 Overview of Health Care Reform 6

8 Talent Shortages Physician Shortages Demand for physicians will intensify over the coming years. According to AAMC estimates, the United States faces a shortage of more than 90,000 physicians by 2020 a number that will grow to more than 130,000 by This shortage will have a cascading effect for all health care workers. 7

9 Employment Challenges The Health Care Industry The health care and social assistance industry is projected to create 28% of all new jobs created in the U.S. economy. This industry is expected to grow by 33%, or 5.7 million new jobs. Medical Assistant Registered Nurse Medical Records/ HIM Tech Nurse Aide +31% +26% +21% +20% Projected Growth 2010 to 2020 Source: Bureau of Labor Statistics, U.S. Department of Labor, Occupational Outlook Handbook, Edition. 8

10 Mergers and Acquisitions Despite a minor drop (5%) in transactions in 2013 from the previous year, merger and acquisition (M&A) activity in health care has been steadily increasing since 2009: 2013 MAJOR DEALS Tenet Healthcare acquired Vanguard Health System. Catholic Health Initiatives partnered with St. Luke s Episcopal Health. Community Health System, Inc., $7.6 Billion Acquisition of Health Management Associates (approved January 2014). Baylor Health Care System and Scott & White Healthcare. Source: PwC s Deals Practice March 2014 Analysis and Trends in U.S. Health Services Activity 2013 and 2014 Outlook. 9

11 Mergers and Acquisitions Large Health Care System ABC had experienced rapid growth, which outpaced the oversight needed to control its compensation programs. We didn t modify programs as we grew and didn t fully integrate new practices as we acquired them, reported the Vice President of Human Resources One hospital and approximately 25 clinics. Revenue: $800M. 500 employed physicians. Twelve hospitals and more than 150 clinics. Revenue: $2B. More than doubled employee and physician head count. 10

12 Other Forces Driving Change The Changing Face of Health Care Delivery Future health care jobs will look different from those today as technology and cost pressures reshape the traditional roles into those that reflect the obligation to have people leveraging technology in new ways. Patient care may migrate significantly from inpatient to outpatient settings. All professionals will need to work to the top of their scope of practice. These changes will obligate a more nimble and flexible approach to total rewards planning. Cost and Efficient Allocation of Resources With the imperative to do more with less, health care institutions must understand where inefficiencies exist in their labor spend. In many health care institutions, the basic tenets of the compensation programs have been in place for over 10 years. With the seismic shift that has already occurred, such programs tend to waste resources and use inefficient methods (e.g., salary grades with ranges that are too wide; special pay practices that have outlived their objectives or morphed to departments for which they were unintended; etc.). 11

13 Other Forces Driving Change The Imperative to Consider Human Capital From a Strategic Perspective at All Levels of the Organization The health care industry has historically viewed labor costs in a compartmentalized manner seldom thinking about the interplay of health and welfare benefits, cash compensation, retirement, and other programs. Additionally, executive performance measures linked to incentive plans don t always cascade down through the organization. In order to perform at a high level, an organization must align its business strategy with its human capital strategy to drive the total rewards philosophy. The total rewards program should be tailored to specific needs vs. broad brush/one size fits all (e.g., unique incentive plans for advanced practice clinicians; benefits appropriate for physicians vs. other employees; market adjustments consistent with different market pressures for different job families; etc.). Employee Engagement While compensation and benefit programs may not be the main drivers of engagement or turnover, health care organizations need to analyze their employee survey data to understand the impact of the different elements of the total rewards program and then reconfigure them as needed to maximize engagement and mitigate cost. 12

14 2. Current Trends and Issues in Employee Compensation 13

15 Top Trends and Issues Advanced Practice Clinicians (APCs) Pay for Performance HR and Physician Compensation 14

16 APC Employment Projections APCs Will Outpace the Growth of Almost All Other Occupations in the U.S. Labor Force Physician Assistant Nurse Practitioner Nurse Midwives Nurse Anesthetists +38% +34% +29% +25% Projected Growth 2012 to 2022 Source: U.S. Bureau of Labor Statistics, Employment Projections program. 15

17 Upward Demand for APCs Increase in Employment and Pay Average projected employment increase of APC staff within the next year. Average projected pay increase of APCs (although may be higher). 16

18 3. Delivering Effective Results 17

19 Rethinking Pay for Performance Current State Pay for Performance 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Data from Integrated Healthcare Strategies 2013 National Healthcare Staff Compensation Survey (co-sponsored by the American Society of Healthcare Human Resources Administration): 638 participant organizations. 0% Gainsharing Group Incentive Merit 18

20 Rethinking Pay for Performance Considerations and Cautions When selecting goals for rewarding health care staff, it is critical that organizations can: Ensure performance can be measured. Communicate actions and behaviors required to improve performance. Link employees actions and behaviors to goals. Skill Set Time Commitment Culture Funding 19

21 Pay for Performance: Base Salary Considerations Approach Performance or Competency Assessment: Employee s are evaluated against pre-defined performance standards or competencies and salary increases are a direct reflection of these results. (e.g., Exceeds = 5%, Meets = 3%, etc.) Performance or Competency Assessment and Position in Range: Same as above, except an employee s increase is also affected by where their pay falls within their pay range. Perf Rating Position in Salary Range Lower Middle Upper Implications Standard and well understood approach. Focus is on link between performance and pay. Does not consider employee s current pay level. Standard and well understood approach. Considers employee s current pay level. Balances pay and performance. Can be viewed as overly restrictive and not popular among higher performers. 3 8% 6% 4% 2 6% 4% 2% 1 2% 0% 0% Target Pay: Using a competency-profile approach, define the expected competency profile and map into expected positioning within a pay range. For example, a higher level competency profile would suggest a target pay in the upper third of the pay range. Focus is on where in the pay range an employee should be paid. Looks at employee more broadly (body of work). Harder to manage. 20

22 Aligning Your Practices with Best Practices A compensation and benefits review is a systematic process wherein an organization seeks to diagnose its issues: Effectively catalogue and understand the various types of compensation and benefits programs. Determine whether the current state/strategy is effectively aligned with the organization s business strategy. Determine if there are cost efficiencies that can be obtained. Determine if the administrative protocols, rules, policies and procedures used to administer the programs are being followed. Define the ideal compensation and benefits program designs taking into consideration typical and best practices along with the organization s business strategy, mission, financials, talent market, and growth trajectory. 21

23 Aligning Your Practices with Best Practices The review focuses on achieving better outcomes in four key areas: Program efficiency, consistency, value/cost, and alignment with market typical and/or best practices. Plan documentation and employee communications. Internal processes. Regulatory compliance (for benefits). 22

24 Aligning Your Practices with Best Practices Catalogue and confirm Assess alignment with strategy Assess alignment with policies Identify costs and savings Define the ideal state 23

25 Understanding Where You Are Health care, more than any other industry, uses special pay programs to reward employees for a variety of behaviors, activities and actions. Special pay programs are often not well defined or documented. The cost of the programs can range from 1% to 5% of the total wage expense. Example of a total wage expense summary: 2.5% 1.2% 1.1% 1.0% Base 4.9% 9.9% 79.3% Paid Time Off / Leave Special Pay Other Cash Overtime Base and Differential Home Health Summary of Annual Payroll Dollars Earnings Type Total Dollars % of Total Base $118,983, % Paid Time Off/Leave $14,804, % Special Pay $7,301, % Other Cash $3,824, % Overtime $1,854, % Base and Differential $1,714, % Home Health $1,556, % Grand Total $150,040, % Outside of overtime, special pay in excess of 5% can be viewed as a red flag and a signal to explore further. 24

26 Why You Need a Strategy Special Pay Example It may or may not be effective to vary the types of special pay provided to Physician Assistant specialty, but in the case below, there was no articulated strategy and Human Resources was unaware of some components of pay and the distribution. $200,000 Other $180,000 $160, % 2.7% 6.2% 4.9% Bonus $140, % $120,000 $100, % 5.4% 10.6% 12.1% Special Pay $80, % 6.8% 7.0% Leave $60,000 $40,000 $20, % 71.8% 82.2% Regular $0 Physician's Assistant - Surg (EEID 2) PA - Hospitalist Regular (EEID 3) Physician Assistant (EEID 5) Physician Assistant (Average) 25

27 Labor Force Efficiency Opportunities Pay Policy/Procedure Special Pay Programs Certification Pay Differentials Overtime Issue/Observations Do these programs meet a business need or simply supplement non-competitive pay levels? Key objective is to eliminate eligibility in multiple programs. Do the certifications add value to the work performed? Key objective is to eliminate payment for certifications that are not required to enhance the performance of value added responsibilities. Are they paid as a flat rate versus a percent of base salary? Movement is to flat rates for cost control. Have you reviewed the market need for all differentials? Is the organization still using the 8 and 80 rule or some variation? Movement is to use the standard 40 hour work week based on current staffing models. 26

28 Labor Force Efficiency Opportunities Pay Policy/Procedure Pay Structure Issue/Observations Do traditional pay structures make sense in a time where the distribution of pay in the market is narrow? Are you still using ranges with 40%-60% range spreads? Some organizations are narrowing ranges to better reflect market pay distributions (pharmacy). On-Call Clinical Ladders Other organizations are adjusting minimums at a different rate than maximums. Are there positions receiving on-call pay that should not? Movement is to eliminate on-call pay for positions that are not called in. Do they result in a more efficient and effective delivery models or just higher pay? Movement is to ensure that advanced skills are regularly used and that there are measurable results (higher levels provide mentoring, take charge, take on projects, etc.). 27

29 Labor Force Efficiency Opportunities Pay Policy/Procedure Pay Increase Procedures Working to Top of License/Expanding Scope of Practice Issue/Observations Does it make sense to provide pay increases to employees who are paid high in their range or the market? Some organizations provide pay increases as a percent of midpoint to mitigate. Is timing of market and merit causing pay inflation? If merit increases follow market adjustments, total increases may well exceed market norms and inflate salary costs. Does it make sense to continue to use RNs for surgical first assist when Surgical Techs can do this work? Should there be a pay difference between RN Case Managers and BSW Case Managers? Should a job be valued on unique skills and training (example: training in neonatal transport) by increasing base pay or salary ranges, or should the reward be provided only when the skill is used (i.e., a differential for hours spent in transport)? There are no data to guide answers to these decisions HR needs to be a true business partner in guiding its organization to the correct response. 28

30 Labor Force Efficiency Opportunities Pay Policy/Procedure Alignment of Benefits Salary Program Administration Issue/Observations Does it make sense to provide the same level of benefits to positions in outpatient (clinic) settings as in a hospital? As hospitals/health systems acquire physician practices, this issue is becoming increasingly important. Frequently, actual pay levels in a clinic setting may not differ greatly from the levels for the same jobs in acute care, but most physician-owned practices have much less generous benefits. The costs for providing the same benefits for all may make the acquisition less attractive. Do you still provide across-the-board increases? For people at their salary range maximum, do you provide a lump sum increase? Do you have any people above the range maximum? 29

31 4. Compensation Challenges in Mergers and Acquisitions 30

32 Key Components for Successful Integration 31

33 Compensation Questions for HR in M&A How will we address shared staff? Will we create shared services and when? What is our retention/severance plan? What are best practices for special pay? How quickly should we align key compensation components? What other programs need to be aligned? Who will develop/own the communication plans? 32

34 Aligning Special Pay In aligning programs, it s critical to consider the employee relations impact as well as costs/savings. Typical Market Practice or Prevalence Charge pay is typically found only in nursing areas. While prevalence in nonnursing areas is not usual, creep may move into support and ancillary areas. A good practice is to review eligibility and utilization every year or every other. IHS (2011): South Central; charge pay is prevalent in 77% of reporting organizations, with 92% having flat rates, 50 th percentile is $1.25, average is $1.30. GroupOne (2011): 75% report compensating RNs for taking charge duties. The average reported rate is $1.45 per hour (ranges from $.50 to $2.50 per hour). 52% report compensating non-rns for taking charge duties. The average reported rate is $1.33 per hour (ranges from $1.00 to $2.00 per hour). Observations/Comments/Recommendations Current Practice In Charge differential at XYZ is $1.50 per hour and has been effective since June 12, Only staff who work in a bedside department are eligible for charge pay: However, there are instances the Team reports where charge pay is used in nonclinical areas to compensate individuals who function as a team lead and this appears to be the case based on review of the payroll database. Charge differential at ABC is $1.25 per hour; no history of the differential is available. Charge pay at ABC is within market practice but lower than XYZ. SullivanCotter also recommends aligning ABC with XYZ: If they are aligned at $1.25 per hour charge, the system will save approximately $181,000. If aligned at $1.50 per hour, the system will incur a net cost of about $60,000. (Assumes no change in Charge Pay utilization). 33

35 Savings Costs Aligning Special Pay Eliminate Weekend Differential at Hospital A $350,000 $300,000 Eliminate CCL $250,000 & EP Incentive $200,000 $50,000 Standardize On-Call Rates Align Charge Rates ($50,000) ($150,000) $150,000 $100,000 $50,000 ($50,000) ($100,000) Align Call Back Eliminate Shift Diff on PPL & ESL Align Shift Differential Eliminate On-Call Stacking Eliminate Call Back Add On Align Holiday Hours Premium Definition $ Negative Impact on Employee Relations or Improved Administration ($250,000) ($350,000) ($450,000) ($550,000) ($650,000) Positive Impact on Employee Relations or Improved Administration Align Weekend Differentials The relationship between savings and costs identified in a special pay analysis to the impact on employee relations or improved administration. 34

36 Parting Thoughts Several years of limited or no increases, with little attention paid to staff compensation. Decreasing reimbursements and increasing costs drive the need to evaluate the effectiveness of salary dollars, a significant portion of operating expenses. Special pay programs contribute to a significant portion of payroll $ and need to be carefully understood. Pay for performance driven programs will continue to increase. M&A activity drive the need to attain synergies and cost efficient operations. 35

37 5. Your Questions 36