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The SESCO Report – April 2010

Are Annual Performance Appraisals a Waste of Time?

In our consulting practice, we are constantly counseling clients on how to "bring to life" the performance appraisal process. Frontline and middle management continue to be frustrated and dismiss traditional performance appraisal processes. Unfortunately, with this attitude and lack of commitment to the process, performance appraisals are becoming irrelevant and unhelpful and simply an "exercise" that many managers and employees alike feel is a "waste of time."

The critics of the performance appraisal process are those who either do not understand the importance, have not been trained, do not have an effective tool to process the appraisal or simply do not feel that they are meaningful. Many managers feel that they do not have the control and responsibility necessary to effectively manage performance appraisals to include disciplinary action up to and including termination or compensation adjustments increases. They feel separated from the process in that it is accounting and/or human resources' responsibility to "deal" with the results.

In addition, employees and managers have less face-to-face time. As such, relationships are eroding and accountability and performance management is left to personal employee commitment and/or peer pressure.

Rather than complaining about the time a performance review takes, being critical of the "form" and process or the inability to "motivate" certain employees, managers must buy into effective performance appraisals as ultimately, the manager and/or departmental functions and success are dependent upon employee efficiency and productivity.

So how does an organization "bring to life" the performance appraisal process and make them "meaningful" for managers and employees alike?

1. The manager and employee must develop a relationship and communicate effectively throughout the year. If the annual performance appraisal is the only time that the individuals sit down together for a meaningful, one-on-one discussion, then appraisals are stressful and uncomfortable for both employee and manager.

Therefore, meaningful and regular communications about work, goals, development, hopes, life, family — whatever, makes appraisals much easier because the individuals know and trust each other — there is a meaningful personal and professional relationship which reduces distress and uncertainties.

2. Managers ignore or put off difficult discussions until they become major issues.

3. If you are an employee with a shy or a boss that "doesn't have time," take the initiative and schedule an appointment. Ultimately, you are responsible for your own success, growth and development.

4. The organization must provide the necessary tools (job descriptions, forms, processes and training) for both employee and manager to have a meaningful and effective discussion and relationship.

5. Managers must prepare for the appraisal to include preparing employees.

6. Solicit employee feedback as to job understanding, previous year's accomplishments, goals for improvement for the coming year, personal and professional goals. This will provide a sound basis for discussion.

7. Discuss the employee's insight and "fill in the gaps" where necessary as to job responsibilities, past year's achievements and areas for improvement.

8. Discuss training, development and advice that will help the individual develop as a person — outside of job skills. Agree to specific objectives adhering to the SMARTER Rules Specific, Measurable, Agreed, Realistic, Time-bound, Enjoyable and Recorded.

9. Close positively always thanking the employee for their contribution to the appraisal process and their effort throughout the year. Always commit to mentoring them and assisting them in any way you can to achieve their personal and professional goals.

10. Finally, document, document and document.

Some contemporary discussion points that the employee should complete prior to the appraisal process may include:

1. How has been your performance this past year (good, bad, satisfactory) and why?

2. What do you consider to be your most important achievements this past year?

3. What elements of your job do you find most difficult?

4. What do you consider to be your most important tasks/goals in the coming year?

5. How can your manager assist you in achieving your professional goals?

SESCO develops compensation systems to include performance appraisal processes/forms and provides training and development to managers to help the organization "bring to life" the performance appraisal process and as such, an effective return on your largest single controllable expense — compensation costs.

How to Avoid Pay Compression

Changes in the economy and labor shortages/surpluses are obviously not within the control of human resources. However, companies can manage factors related to pay compression such as hiring practices, merit increase programs and salary structure guidelines. The following are SESCO staff recommendations to ensure that your compensation program remains credible and effective — even in tough economic times:

The system must protect yourself from yourself Hasty, reactive hiring decisions made to quickly fill vacancies often result in salary compression. This can be avoided by communicating to all managers the organization's pay philosophy and strategy so that managers understand the multiple negative effects of hiring employees at high rates.

Communicate with employees No organization's compensation philosophy and pay practices should be treated as a matter of interest to managers only, but promoted to all employees. As many companies have discovered, even the perception that people are being compensated unfairly can be as damaging to employee morale and performance as actual pay inequities. Employees must know that their employer recognizes and is employing effective tools and procedures to ensure that compensation is fair and equitable.

Performance-based pay Pay incentives tied to a performance matrix offer high performers an opportunity to earn more without creating base pay compression.

Non-monetary rewards (psychic compensation) Programs like flexible work schedules, time off, training and development and other non-monetary rewards offer low-cost ways to enhance the total reward package without compression.

Address salary structures annually and make necessary adjustments to hire and mid-points when necessary.

Market competitiveness Keep your eye on competitive market rates to ensure that pay is competitive, of course based on your ability to pay.

SESCO specializes in developing effective compensation systems ensuring equity and efficient management.

SESCO Staff Recommendation — Regulating Off-Duty Conduct Social Media

Employees' personal and professional lives are constantly blending, especially in the age of happy hours, Smart Phones and social media such as Twitter and Facebook. Employees' actions are more visible to the world more than ever before and this includes clients, colleagues and employers. The question arises, "Should employers implement off-duty conduct policies to regulate employees' behaviors outside the workplace?"

SESCO believes that employers should be proactive but must balance the fact that employees have privacy rights regarding what they do in their free time. Policies must be tied to actions that could have a negative impact on the employee's job or their employer. When crafting off-duty conduct policies, there is no need to distinguish between the various forms of social media employees are turning to both on and off the clock. A simple, general policy is easiest to communicate and enforce. SESCO recommends that the policy focus on employee behaviors taken in any form of social media or behaviors that could become public that would bring disrepute to the individual or embarrassment to the company.

When policy is properly crafted, employers can reduce the potential of employees crossing the line in their personal lives, especially through social media sites. SESCO has drafted and recommends off-duty conduct and social media policies. Contact SESCO should you need a complete revision to your manual or wish to discuss developing a properly worded and effective off-duty conduct policy.

SESCO Staff Recommendations

Employees need to be warned that posting proprietary and confidential company information, discriminatory or harassing statements regarding co-workers, management, customers or vendors, or other defamatory statements regarding the company, its employees, customers or competitors or vendors will not be tolerated.

Employees are expected to comport themselves professionally on and off duty.

Managers should be prohibited from using any informal review systems on social networking sites.

Company policies governing the use of corporate logos need to be developed.

Employees must comply with all policies with respect to electronic communications.

The company should reserve the right to take disciplinary action against an employee for violating electronic communication policies.

Notice to employees that monitoring of sites will occur in order to reduce an employee's expectation of privacy.

Healthcare Unions Growing

A number of medical personnel covered by collective bargaining agreements is edging up according to the Bureau of Labor Statistics. This is partly due to the healthcare sector growing and employing more people than traditionally unionized industries such as manufacturing. However, this trend marks a backlash against some of the healthcare organizations that are not immune to the recent economic downturn. Healthcare, whether acute, long-term care or physician practices are having to manage key work life factors such as staffing, compensation, benefits, patient service ratios and other cost-cutting measures. As such, licensed professionals and other healthcare workers feel a loss of control in their jobs and the care that they are providing to their residents and patients.

Union membership as a whole has been declining for decades. Unionization peaked at nearly 21 million members or 24% of all workers in 1979. However, in 2009, the numbers dipped to 15.3 million members or 12% of all employeers (private, for propfit, not for profit and public employers). When removing public sector workers, this percentage drops to almost 9%.

However, during this same period of time, union membership in the category called "Healthcare Practitioner and Technical Occupations (Major Group)" appears to be countering this trend. Nearly one (1) million healthcare workers were unionized in 2009. The overall percentage of unionized workers has increased to 13.6% in 2009 — mostly in a hospital setting.

SESCO's healthcare clients need to be aware that the industry has been targeted and as such, be aware of internal vulnerability. Also, clients should conduct employee surveys and train management. Contact SESCO to discuss both employee surveys and management training.

Special Thanks to SESCO Clients!

Adams-Green Funeral Home
Herndon, VA

Minnesota Funeral Directors Association
Maple Grove, MN

Tennessee Bankers Association
Nashville, TN

Peabody Retirement Community
North Manchester, IN

Lexus of Richmond
Richmond, VA

Richmond Ford Lincoln Mercury
Richmond, VA

SESCO Client Inquiry Staff Response

Question: The COBRA subsidy regulations state that former employees are eligible for the COBRA premium subsidy if their separation of employment is due to an "involuntary termination." What is considered to be an "involuntary termination?"

Answer: For purposes of eligibility for the COBRA subsidy, the IRS has defined "involuntary termination" as follows:

Layoff with right to recall or furlough or other suspension of employment.
Termination of employment for cause (except in cases of gross misconduct).
Voluntary acceptance of severance programs (buy-out) if employer has indicated that additional terminations are likely after the buy-out election period ends.
Employee's voluntary resignation or retirement, if facts and circumstances indicate that absent such resignation or retirement the employee knew that he or she would otherwise be terminated by the employer.
Employee-initiated termination if termination is due to the employer's action that causes a material negative change in the employment relationship.
Employee's voluntary termination in response to employer-initiated reduction in hours if it's a material negative change in the employment relationship.
Employee's resignation due to material change in employment geographic location.
Employee is called to military duty for service exceeding 30 days.
Employer's action to end employee's employment while employee is absent due to a disability.
Employer's failure to renew employee's contract upon expiration if employee is willing to continue in employment.

Special Insert — Health Care Reform What Does It Mean For Employers?

Recent passage of the Affordable Care Act (the Senate bill) and the Health Care Reconciliation Act mark the most significant change to the nation's health care laws in at least four decades. Following are some of the important consequences for employers and their group health plans.

Health Benefit Exchanges

Effective in 2014, state-based American Health Benefit Exchanges and Small Business Health Options Program (SHOP) Exchanges are established and administered by a governmental agency or non-profit organization, through which individuals and small businesses with up to 100 employees can purchase qualified coverage. States may form regional exchanges or allow more than one exchange to operate in a state as long as each exchange serves a distinct geographic area.

Small Employer Subsidies

Beginning this year, employers with no more than 25 employees and less than $50,000 in average wages are eligible for a tax credit for employer-provided health coverage. Through 2013, the tax credit is up to 35% of the employer's contribution if the employer contributes at least 50% of the premium. After 2013, available for two years, there will be a tax credit of up to 50% of an eligible small employer's contribution for health coverage purchased through an exchange.

Coverage Mandates

Effective six months after the law is enacted, health plans must treat children up to age 26 as eligible dependents. Beginning January 1, 2014, health plans may not impose annual limits on the dollar value of coverage. Also, beginning 2014, the new law starts setting maximum out-of-pocket costs for participants.

Tax Withholding and Reporting

A health plan reporting requirement will be imposed, requiring employers to report the aggregate value of medical benefits, vision, dental, and supplemental insurance coverage. It is expected that this requirement would apply to Forms W-2 for the year 2011 that are made available to employees in January 2012.

Effective January 1, 2013, the Medicare portion of the FICA tax increases to 2.35% (from 1.45%) for earnings over $200,000 for individuals ($250,000 for couples).

Also in 2013, these "high income" earners will be required to pay a Medicare surtax of 3.8% on investment and other passive income, including rents, interest, dividends, royalties, and capital gains.

Changes to Flexible Spending, Health Savings, and Health Reimbursement Arrangements

Beginning with 2011, the new law prohibits tax-free reimbursements for over-the-counter drugs. Effective January 1, 2013 it caps annual pre-tax contributions to health flexible spending accounts at $2,500, subject to adjustments for inflation.

Employer "Pay or Play" Mandate

Beginning January 1, 2014 employers with more than 50 employees will be required to offer health care coverage to employees or pay a penalty. The penalty for failure to provide coverage applicable if at least one full-time employee receives government-subsidized exchange coverage is $2,000 per full-time employee in excess of 30 employees.

Automatic Enrollment in Employer Plan and Individual Mandate

Beginning in 2013 an employer with more than 200 employees must automatically enroll its employees in the employer's group health plan. An employee may opt-out of the employer's group health plan coverage and either obtain other coverage or pay the individual penalty.

The new law requires individuals to purchase health insurance coverage or pay a tax penalty beginning in 2014. The penalty, which is phased in, starts at $95 or 0.5% of income per individual in 2014 and increases to $695 or 2.5% of income in 2016. The penalties for families would be capped at $2,085. Individuals are exempt from the tax penalty if their income is below the tax filing threshold.

Retiree Health Care

Effective in 2013, the law eliminates the tax deduction for employers who receive Medicare Part D retiree drug subsidy payments.

"Cadillac Coverage" Excise Tax

Beginning with 2018, employers must pay a 40% excise tax on single coverage, to the extent the value (i.e. the total employee and employer cost) is in excess of $10,200, and family coverage with a value in excess of $27,500. Higher thresholds will apply to certain "high-risk" occupations.

SESCO will continue to monitor the changes to health care and will inform you as additional details about health care reform are available.