A PICTORIAL UPDATE ON FLEXIBLE COMPENSATION

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP90-00530R000400730014-8
• Release Decision: RIFPUB
• Original Classification: K
• Document Page Count: 8
• Document Creation Date: December 22, 2016
• Document Release Date: August 27, 2012
• Sequence Number: 14
• Publication Date: January 1, 1987
• Content Type: MISC

Declassified and Approved For Release 2012/08/27: CIA-RDP90-00530R000400730014-8
1? -It
Hewitt Associates
Ike catiovjediv
January 1987
Outlook
A pictorial update on
flexible compensation
p.1
Spotlight
Ringing in the New Year ?
a review of flexible
compensation activity at...
? Mitchell Energy and Development
? FREEPORT-McMoRan
? Seafirst Bank
? Kaiser Aluminum and Chemical
? American Express TRS
? Pillsbury
? Mary Kay Cosmetics
? Cullen/Frost Bankers
? IMC
? Mallinckrodt
? Great Western Financial
? Mead
? Mazda
? Wolf Creek Nuclear Operating
Corporation
? St. Francis Hospital
? U S WEST Direct
? Northeast Utilities
? Hawaiian Electric
Upcoming
FLEXIBLE COMPENSATION
FORUM scheduled for
April 23-24
Copyright 4) 1987, Hewitt Associates
P-3
Change. Last year brought plenty of it.. .major tax overhaul
legislation.. .new health continuation rules.. .a plethora of
regulations.. .a resurgence of early retirement window and
other voluntary separation arrangements, sometimes in
industries considered "immune" to workforce reductions...
and mixed results on the health care cost management
front. Still, against this backdrop of major change in the
employee benefit field, flexible compensation continued
to register healthy growth.
Here in words and pictures is an update on flexible program
prevalence?by employer size, industry, and location.
The figures are based on 466 programs on line through 1986
and another 39 with January 1 implementation dates?
for a total of 505 programs currently in effect.
Flexible Compensation Programs
Number
Programs
600 ?
550 -7-
500
450 L-
400 T
350 --:
300
250 -7-
200
150
loo
50 ?
of
8
14
33
88
600+
466
356
216
iii
P.8
Pre-
Year 1980
1981
1982
1983
1984 1985 1986 1987 (E)
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Flexible compensation programs have been implemented by companies in
all size categories, but most of the recent growth has been fueled by
the "medium" size organizations?those with 1,000 to 10,000 employees.
Number of 300::
Programs 275 7
250 7
225
200 7
175
150
125
100 -7
75 -7
50
25 7
Flexible Compensation Programs
by Size of Employer
88
356
189
Year 1983
1985
505*
279
1987
84
111 Under 1,000 Employees r:LI 1,000-10,000 Employees
ElOver 10,000 Employees
* Based on flexible compensation programs in effect by January 1.
Among the very largest companies in the country, 29% of the Fortune 100
Industrials and 16% of the Fortune 500 had flexible programs in
effect by January 1. On the service side, 15% of the Fortune 500 Service
companies had implemented programs by January 1, including 34%
of the 100 largest commercial banks, 22% of the 50 largest life insurers,
16% of the 50 largest utilities, and 12% of the 50 largest retailers.
By industry, flexible programs are well represented across industry lines.
But concentrations of flexible programs appear in the following
industries ...
Flexible Compensation Programs by Industry*
Percent of Companies
Education 9%
Health Care 13%
Insurance 6%
Services 4%
Communication 4%
Mining/Petroleum 3%
Trade 3%
-- Utility 3%
Other 7%
Banking/Finance 18% ---
Manufacturing 30%
* Total-505 flexible compensation programs in effect.
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By state, the "Top 10" for flexible compensation programs include
Illinois (52 programs), Minnesota (47), New York (40), California
(36), Texas (31), Michigan (26), Pennsylvania (25), Ohio (24),
Wisconsin (19), and Colorado (18).
Spotlight
Organizations continue to implement flexible compensation programs?
driven by different objectives and surrounded by unique circum-
stances. Moreover, the programs take various shapes?choicemaking,
spending accounts, or combination arrangements. Following is a
sampling of employers who launched or expanded flexible compen-
sation programs, effective January 1.
Mitchell Energy and Development Corporation, known for pioneering
the commercial/residential planned community of The Woodlands,
Texas (also the company's headquarters), needed to walk a fine line
between achieving immediate cost savings and preserving benefit
security for its 2,500-employee workforce. Mitchell undertook a
complete overhaul of the benefit program, including replacing high-
value comprehensive medical with a choice of three comprehensive
options (deductibles ranging up to $1,500); introducing choice-
making in other benefit areas, including allowing for vacation buying;
and adding flexible spending accounts. From the medical plan
restructuring (and other cost management features introduced at the
same time), Mitchell expects to achieve about a 20% reduction
in benefit costs by the end of the program's first year. As significant,
"Our employees feel they have a better program?one that's
accommodating of their broader benefit needs and still protective
in terms of financial security," notes Ralph Smith, Benefits Manager.
Separately, Mitchell implemented the flexible program in near-record
time?four months from start to finish. "We're used to moving
swiftly once we determine a course of action, but the breakneck speed
with which we implemented the flexible program outpaced even our
usual performance," notes Mr. Smith. "We couldn't have accomplished
what we did, as fast as we did, without the help of a committed and
motivated project team."
FREEPORT-McMoRan INC., an energy and mining company based
in New Orleans, implemented a flexible program for the "classic"
purposes of controlling costs and meeting the diverse needs of
employees. The company restructured existing medical to offer
comprehensive plan choices; introduced options in other insured-plan
areas; and implemented flexible spending accounts for health and
dependent care. As noted in an employee announcement: "FLEXPLAN
provides highly competitive benefits in a way that provides more
value to each employee and?at the same time?offers the company
better control of benefit costs" over the long term.
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Any unusual "snags" encountered along the way? Notes Marcy Cellos,
Employee Benefits Supervisor, Our implementation went as
uneventfully as we'd hoped it would?unless, of course, other
implementations include the conducting of employee meetings in
remote field locations and offshore properties."
At Seattle-based Seafirst Bank, a leading lending institution in the
northwest, a primary objective of the flexible program was to raise
the perceived value of benefits. Early focus group research with
employees indicated generally low levels of understanding of the
prior program and the value of the bank's expenditure on benefits.
Seafirst structured the flexible program to generate enough credits
to keep all employees whole, but set realistic price tags on the options
so employees could see the actual worth of benefits?and the
impact of selecting "up," "down," or "out" of the various coverages.
According to Kenneth Breen, Manager, Benefits and Payroll, "We
had a program that was already well designed from a cost management
perspective. But we wanted to impress upon employees the value
of benefits as a part of total compensation and encourage their
participation in making the benefit program 'work' to meet
individual needs."
The benefit program at Kaiser Aluminum and Chemical Corporation
went largely unappreciated by employees, even though Kaiser
contributed substantially to medical benefits?including heavy
subsidization (and utilization) of dependent coverage. Flexible
compensation provided a vehicle through which employees could
enhance the overall value of their benefit package by opting down
(or out) of medical coverage. Kaiser's program allows employees to
"buy back" prior medical coverage?reinforcing the company's "no
takeaway" posture. But, by offering other medical plan choices
(including a no coverage option if employees have coverage else-
where), Kaiser gave employees the opportunity to take unused credits
in cash or to fund a health care spending account.
American Express Travel Related Services, a New York-based
subsidiary of American Express Company, introduced flexible
compensation to provide a more tax-effective benefit package, and
ultimately, to improve employee perception of the value of benefits.
The program, which includes benefit choices and spending accounts,
was extended to about 18,000 employees across the country.
Some companies "phase in" flexible compensation to "test the waters"
with employees. The Pillsbury Company, based in Minneapolis,
adopted a phased approach for a different reason.
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Pillsbury was anxious to introduce a full flexible benefit program as a
tool to recruit and retain employees (particularly for the company's
highly competitive restaurant groups), and to manage the long-term
cost of benefits. However, the payroll and human resource systems
needed to administer salary-driven options posed a barrier to 1987
implementation. The solution? Pillsbury decided to move ahead
with a 1987 launch of the health benefit portion of the program?
including choices in medical and dental, plus a spending account?
and fold disability, life insurance, and other benefits into the program
at a later date.
Two companies established "stand-alone" spending accounts for
employees.
Dallas-based Mary Kay Cosmetics, Inc. introduced health care
spending accounts to expand the range of covered health care
expenses, and to take the edge off an increase in the company's medical
plan deductible. Mary Kay is providing an annual contribution of
$100 to each account which employees may supplement with up to
$400 per month on a pre-tax basis. Employees also may take
advantage of a new dependent care spending account.
In an effort to expand the scope of coverage of their "traditional"
benefit package, Cullen/Frost Bankers Inc., a major bank holding
company headquartered in San Antonio, introduced health and
dependent care spending accounts to 2,100 employees throughout
Texas.
Several companies used flexible compensation to combine benefit
programs after a merger or acquisition.
For Northbrook, Illinois-based International Minerals & Chemical
Corporation (IMC), extension of "FlexSecurity" to newly acquired
Mallinckrodt, Inc., a major chemical and health care products
manufacturer in St. Louis, seemed a natural fit. IMC's flexible
program (implemented in 1985) remains popular among employees and
continues to help control benefit costs. While FlexSecurity helped
blend the two organizations' benefit programs, Mallinckrodt
"fine-tuned" their version by pricing benefits to reflect subsidies
similar to levels employees received in the past, and preserving certain
features?such as vision care?from the prior program.
Through a series of acquisitions, Great Western Financial Corporation,
headquartered in Los Angeles, quickly grew into one of the nation's
largest savings and loan associations. With 10,000 employees across the
country, Great Western used flexible compensation to "standardize"
benefits for employees nationwide. The program combines broad
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choicemaking with flexible spending accounts. Says Patricia Benninger,
Manager, Human Resource Services, "Flexible compensation opened
the door to a complete overhaul of our employee benefit program,
including a move to self-funding and an updated benefit adminis-
tration system."
Another acquisition posed challenges of timing. At The Mead
Corporation, a Dayton-based paper products manufacturer,
meeting employee benefit needs and heightening employee involvement
in benefit decisions provided the underpinnings for the company's
new flexible program. The program offers 7,000 employees a wide
range of insured-plan choices, flexible spending accounts, and both
the buying and selling of vacation time. Then, as details were being
unveiled to employees, Mead acquired the 1,500-employee distri-
bution group of another paper company. What to do about incor-
porating the new employees? According to Ronald Carzoli, Vice
President of Human Resources, "Although it took some special effort
at the eleventh hour and a lot of cooperation, we decided to extend
choicemaking to the new operating unit. We wanted our new employees
to feel part of the team from the outset."
Flexible compensation often holds appeal for start-up or spin-off
operations.
Mazda Motor Manufacturing, which starts production in the United
States out of Flat Rock, Michigan in September, 1987, introduced a
flexible program for 200 current employees, but expects the program to
cover more than 3,000 employees by 1988. Mazda implemented a
broad choicemaking program with options in medical, dental, group
life, and disability, plus flexible spending accounts. "We favored a
choicemaking program because it offers the flexibility and versatility
we'll need as we grow," says Charles E. Corbett, Director, Employee
Benefits. "The flexible program also reinforces our desire to encourage
employee involvement, an important component of our corporate
operating philosophy."
When Kansas Gas and Electric Company established one of its
operating units as an independent company this year, the result
was Wolf Creek Nuclear Operating Corporation. The staff and
day-to-day operations remained virtually unchanged at Wolf Creek,
but management had the opportunity to develop a separate and
distinct benefit program. "We were starting from scratch," says
Sonya Wright, Compensation and Benefits Coordinator, "so we
decided on a flexible program to underscore our commitment to
quality and innovation. The flexible program couples broad choice-
making with spending accounts, and offers employees benefit
opportunities comparable to (or better than) those received under the
prior program."
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Some organizations extended their flexible programs to part-time or
union employees in addition to their salaried, full-time workforce.
At St. Francis Hospital in Colorado Springs, flexible compensation
provided a way to allocate benefit dollars more equitably to all
employees. Under the new flexible program, part-timers?who account
for 25% of the 600-employee population? receive half the credits
provided to full-time employees, and all the same benefit choices
including options in medical and dental, plus health and dependent
care spending accounts. Notes Sarah Butz, Vice President, Human
Resources, "Through the flexible program, we are able to recognize
all employees, including part-timers who are a valuable component of
our workforce."
Negotiations between the International Brotherhood of Electrical
Workers (IBEW), and U S WEST Direct, a telephone directory
publisher headquartered in Denver, resulted in over 300 bargaining-unit
members being included in a flexible program similar to the one
implemented last year for the company's 560 management employees.
Through the "ChoicePlus" program, union members can "buy
back" prior coverages; or rearrange benefits in medical, dental, vision,
and life insurance; plus establish spending accounts for health or
dependent care expenses. According to Dennis Schroeder, Director
of Employee Relations, "Positive reviews about ChoicePlus from
management employees spilled over to other employee groups. In
accepting the program, the IBEW reacted to the wishes of its
members who wanted to be able to tailor benefits to individual needs."
At the same time, U S WEST Direct also extended ChoicePlus to
100 nonrepresented hourly employees.
Some notable "firsts" in flexible compensation . . .
Northeast Utilities Service Co., a major provider of electricity and
gas to Connecticut and other New England states, is the first organi-
zation to implement the Hewitt Associates Installable FlexSystem?
administrative software on its IBM mainframe computer. "Our
systems environment and resources permitted us to support the
processing of flexible administration in-house," says Christine
Snow, Senior Employee Benefits Analyst. "We're pleased with the
outcome. Employees now have the flexibility to choose the benefits
they need from a wide array of options, and Northeast Utilities
maintains greater control over day-to-day administrative activity,
as well as the system software."
Hawaiian Electric Company, headquartered in Honolulu, became
the first Hawaii-based employer to implement a "full-flex"program.
Hawaii is unusual in that it is the only state to mandate employer
provision of medical coverage?the equivalent of base-plus-major-
medical protection, at least 50% company paid. (Alternatives must
satisfy a comparability of benefits test.)
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Hawaiian Electric's program, covering 500 nonbargaining-unit
employees out of a 2,000-employee workforce, offers flexible
spending accounts (health, dependent care, and legal), plus choices in
most insured-coverage areas, including within medical a
comprehensive ($200 deductible) option. According to Bill Brown,
Director, Compensation and Benefits, "Our primary goal was to
introduce choicemaking so employees could better meet individual
benefit needs. But another objective was to move closer to the
principles of 'insuring' for medical?providing well for a catastrophic
event, but less so for the minor ailments such as colds and flu.
From a cost management perspective, we wanted to gain greater
control over the incidental expenses that were driving up our
medical costs."
Upcoming
Hewitt Associates
On April 23-24 in our office in Lincolnshire, Illinois, Hewitt Associates
will be sponsoring the sixth annual FLEXIBLE COMPENSATION
FORUM. Last year, nearly 150 participants gathered to share
information and discuss common concerns about flexible program
operation. To maximize the benefit for FORUM participants, attendance
is limited to companies who have programs in effect (or very near
implementation). For details or an invitation, contact Marilynn Cooney
at 312/295-5000.
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specializing in the design,
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compensation programs
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