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Would Performance-Based Compensation Improve Your Workforce?

By: Paul R. Dorf,

In today's dynamic business environment, CCRC's have had to modify the way they have traditionally operated, from the methods in which they conduct and market their businesses, to the manner in which they compensate employees. Board members and directors must continually reassess and realign operations to ensure they continue to support the business objectives.

In order to remain competitive, you need qualified and motivated staff members to effectively run your business. Although advances in medical and computer technologies have required a more educated workforce, the renewed focus on service quality and delivery has required superior skills, attitudes and abilities. Additionally, the low unemployment rate and tight labor market have created additional challenge in attracting, retaining and motivating these qualified individuals.

Tailoring the compensation objectives to support the CCRC's strategies should be a top priority for boards to effectively utilize its human resources. Employees can be influenced to work more efficiently and effectively by linking pay directly to performance.

Data from the US Bureau of Labor Statistics and the Bureau of Economic Analysis show that from the years 1981 through 1990, the Employment Cost Index, which tracks changes in labor costs, for wages and salaries increased at an average of 4.7% for wages and salaries. During this same period, the Consumer Price Index, a valid indicator of inflation, was 4.4%. And this was before considering benefit costs which would increase labor costs substantially. Although it appears that wage increases are closely aligned to inflation, increases should be based more on performance.

From a business optimizing perspective, one can reduce compensation and benefit costs, or increase output. In order to remain competitive in the current labor market reducing compensation and benefits is not a viable alternative. The smart alternative is to increase productivity by tying pay to performance so that the output is accelerated to acceptable levels. As a result, performance based pay systems have increased in popularity during the last decade. Our expectation is that this trend will not only continue, but it will increase dramatically as organizations continue to streamline their operations in an effort to control cost and remain competitive.

A survey of 1,600 U. S. companies revealed that more companies are adopting a pay-for-performance compensation strategy where merit increases are linked to individual, team or organizational performance. Annual merit increases have become a benefit that workers strive for, rather than an entitlement that was traditionally expected. Both our experience working with CCRCs and other healthcare providers as well as data obtained in Hospital and Healthcare Compensation Service's 1998 AAHSA Continuing Care Retirement Community Salary & Benefits Report and Nursing Home Salary & Benefits Report which we conduct, indicate that there is a definite shift in basing compensation on performance. This is a major change in an industry that traditionally provided general, or across the board increases of paid based on length of service.

But, does a performance based pay structure actually improve your workforce? The answer is a resounding, "YES !!!" A well-constructed performance-based pay system can be viewed as an interactive process that translates the overall strategic initiatives into daily actions, with quantitative and attainable rewards provided to employees who accomplish their goals. Studies as well as our experience have consistently shown that recognition for a job well done is the top motivator of employee performance. Performance based programs tap into the purest source of human potential. With performance based pay systems employees assume more responsibility for end results, as well as a clearer understanding of the overall business objectives.

Healthcare has been very slow to change, being one of the last holdouts that pays based on length of service. This is rapidly changing and performance based systems are becoming more prevalent throughout healthcare, including CCRC's.

Linking pay to performance should be a top priority for Board members. CCRC's Boards and Directors need to change the view of compensation as the "cost of doing business" to a functional tool that supports the organization's business plan. Compensation then becomes a financial investment applied in a manner designed to maximize its return. And because a pay-for-performance compensation system is contingent upon performance, it should fund itself.

While the specific plan design will vary between company and industry, and be based on culture, management style and overall objectives, the basic outcome is the same. Improved "bottom line" results, measured in dollars, reduced turnover, and increased patient satisfaction.

Paul R. Dorf is a Principal and the Director of Consulting of Hospital & Healthcare Compensation Service in Upper Saddle River, NJ. He is responsible for directing consulting services in all areas of Executive Compensation, Short and Long Term Incentives, Sales Compensation, Performance Management Systems, and Pay for Performance Salary Administration. Mr. Dorf is widely quoted in newspapers and business publications, and has appeared on a number of televised business programs. He has been a featured speaker at numerous conferences throughout the United States and internationally.




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