It’s getting real expensive to provide benefits to employees.
The U.S. Chamber of Commerce Monday reported that employee benefits comprised more than a third of company payroll costs in 2001, up slightly from the previous year.
Benefit costs averaged 39 percent of total payroll costs among employers surveyed, an increase from the previous year (37.5 percent).
“The percentage of benefits employees received in 2001 increased despite a slow economic recovery,” said Bruce Josten, Chamber of Commerce executive vice president. “The increase in benefits shows that employers have continued to make benefits a priority and recognize the importance of benefits in retaining employees in their companies.”
It also shows that the cost of providing such benefits is on the rise.
The most common benefits offered by the 400 employers surveyed include health insurance, paid vacation, holiday benefits, and retirement and life insurance benefits.
Medical-related payments were the most expensive and the most common benefit offered. Medical benefits accounted for 11 percent of total gross payout, the largest share of employee benefit costs. And bear in mind, the Chamber of Commerce survey was for 2001. According to several different recent studies, premiums for employee health-care insurance went up by around 13 percent in 2002.
Last month union workers at General Electric went on strike to protest that company’s plan to shift more of its health-care costs to workers. Benefits experts believe that unions at other companies may follow suit, as workers are asked to shoulder a greater percentage of medical-benefit costs.
The Chamber of Commerce survey found that besides medical benefits, compensation for time off comprised the largest share of benefits costs to employers. Respondents said vacation time for workers averaged just over 10 percent of payroll costs.
Retirement and savings plan programs, which accounted for an average of 8 percent of payroll, came in third on the list.
Still, medical-benefit costs remain the biggest worry for employers.
They’re right to worry. According to Towers Perrin’s Health Care Cost Survey released in October, large companies will see double-digit increases in their health-care costs in 2003. That’s the fourth year in a row these companies have seen such increases.
And there’s more good news on the horizon. The average cost of benefit plans for large companies will jump 15 percent next year. That’s the highest year-over-year increase since Towers Perrin began conducting the survey in 1989—and that percentage is coming off a high base to begin with.
Medical insurance premiums are rising so quickly, in fact, that employers have little choice but to pass costs on to employees. According to Towers Perrin, workers will pay 19 percent of their health-care benefit costs for employee-only coverage in 2003. In 2002, that figure was closer to 17 percent.
In addition, employees will pick up 22 percent of the costs for family coverage next year, compared with the 21 percent they paid this year. Cost transfers are likely to come in the form of higher monthly contributions, deductibles, and co-payments.
(Editor’s note: To see how some companies are reining in runaway medical-benefit costs, read Health Benefit Costs: Up Up and Away, a CFO.com special report.)
Tech CFOs Being Phased Out
It’s musical chairs for a number of finance executives who oversaw astounding growth in their company’s stock price during the late-1990s tech bubble.
For example, JDS Uniphase Corp. said it found a replacement for Anthony R. Muller, who said last July he would retire at the end of February.
The new CFO will be Ronald C. Foster, who plans to join the optical-technology specialist next Monday.
Foster happens to be coming over from Novell Corp., where he was CFO, responsible for finance, tax, treasury, internal audit, information systems, investor relations, operations, and real estate. He will officially remain with Novell through Friday.
Foster joined Novell in 1998 and served as vice president and corporate controller before becoming CFO in July 2001. While at Novell, the company’s stock traded in the $40s. It closed Tuesday at $3.19.
Prior to joining Novell, Foster was vice president of finance for Applied Materials. Before that, he spent 12 years at Hewlett-Packard in various division, group, and corporate-finance roles.
The departing CFO, Muller, served as finance chief at JDS since 1998. During that period, he oversaw a dizzying expansion and acquisition program at the company. The high-voltage growth made JDS one of the darlings of Wall Street. In March 2000, the company’ stock price topped $146 (after splits). As of market close yesterday, its stock was trading at $2.61.
Novell said Joseph S. Tibbetts Jr. has been appointed its new senior vice president and CFO, effective February 10, 2003. Tibbetts spent more than 20 years in public accounting at Price Waterhouse (now PricewaterhouseCoopers), including 5 years as national director of the firm’s software services group.
Tibbetts also served as CFO and treasurer at two public technology companies: Lightbridge Inc. and SeaChange International Inc. He joined Novell’s board of directors in November 2002 and has served on its audit committee. He will resign from the Novell board immediately.
Meanwhile, Tellabs said executive vice president and chief financial officer Joan Ryan is resigning effective February 7 to become senior vice president and chief financial officer at SIRVA Corp., a provider of relocation services.
Ryan signed on as Tellabs’s CFO in 2000. In late 1999 and early 2000, the stock traded well into the $70s, before crashing to its current price of $7.36 per share.
Management at Tellabs, which provides bandwidth-management products to help carriers around the world move communications more efficiently, said it plans to conduct a search for a new CFO.
In the interim, Michael Smiley, Tellabs’s vice president of international finance and treasurer, will serve as acting CFO.
In other finance-executive news, Ford Motor Co. named Robert Pawelski general auditor, succeeding Barb Benson, who becomes director of the automaker’s health-care cost control and strategy group.
As general auditor, Pawelski will be responsible for managing the company’s global internal-audit activities and corporate-risk analysis. He will work with Ford’s senior leadership team and the audit committee of the board of directors to continue to improve the internal-audit process.
He will report to Allan Gilmour, vice chairman and chief financial officer. As CFO.com reported last month, Gilmour is rumored to be retiring this year.
“Bob is a seasoned audit professional who will continue the process of building of a world-class audit team at Ford,” said Gilmour in a statement. “And Barb will take on a role critical to the company in this era of rapidly increasing health care costs.”
A certified auditor, Pawelski has worked for Ford for 29 years, holding a variety of accounting and finance positions within corporate staffs, manufacturing, and financial services. He’s a 12-year member of the Institute of Internal Auditors and is a past member of the Institute’s International Standards Board.
Administaff, Alliant Energy Face Accounting Issues
Administaff said it has been asked by the Securities and Exchange Commission to revise its annual report for 2001 and quarterly statements for 2000 due to the way the company recognized revenue.
The personnel-management company added that if it makes the change, it could result in a material change in its reported revenues and direct costs, but would have no effect on its previously reported net income, cash flows, or net working capital.
The company indicated that in a comment letter, the SEC has stated it believes Administaff should revise the way it presents revenues and payroll costs of its worksite employees.
Administaff said in a press release that its way of presenting the revenues and costs is appropriate and more accurately reflects the operations of its business model.
In another SEC-related matter, Alliant Energy Corp. said it has asked its current independent auditor, Deloitte & Touche LLP, to reaudit the financial statements of Alliant Energy, and two utilities its owns: The Interstate Power and Light Co. and Wisconsin Power and Light Co.
The company added the reaudits could result in adjustments to its 2002 financial results.
Alliant said the reaudit stems from its decision to sell several businesses in 2003.
It explained that under generally accepted accounting principles, Alliant would need to reclassify the businesses as discontinued operations in its financial statements for the years ended 2002, 2001, and 2000. However, since its auditor at the time, Arthur Andersen, no longer audits publicly-held companies, the company is required to have another firm reaudit those financial statements.
Insurance CFOs Raise Concerns
The weak economy is making it hard for life insurance CFOs to achieve their company growth, profit, and risk objectives, according to a recent Tillinghast-Towers Perrin (Tillinghast) survey.
In fact, 63 percent of insurance CFOs believe the economic environment is their top impediment, and nearly 90 percent rank the economy among their top three challenges.
Just 23 percent of CFOs feel they are well prepared to meet this challenge.
“CFOs—and their companies—are expected to perform in a very complex environment, with lower profit margins, increased competition from unconventional sources, advancing technology, evolving distribution systems, and increased regulator and investor scrutiny,” said Rick Berry, Tillinghast principal. “The weak economic environment exacerbates these challenges as CFOs begin 2003.”
What did insurance CFOs say were the biggest obstacles to preparedness? The difficulty of integrating cross-functional or cross-business efforts and resources, ineffective decision-making, inadequate control of distribution channels, and reduced access to capital.
This said, insurers are trying to do something about the impediments. Sixty percent are working to improve their financial discipline, including risk and capital management practices, while 57 percent report they are reducing operating expenses.
Others are altering their business strategies by refining their marketing and distribution strategies, or expanding into new products or markets.
Life insurance CFOs were also asked how they are responding to potential regulatory and legislative threats, including the Sarbanes-Oxley Act.
More than half (53 percent) said they are enhancing their ERM practices, 43 percent are participating in industry task groups, and 37 percent are refining business strategies to meet emerging requirements.
Apparently, everyone is looking to outsource these days—even governments in war-torn countries.
Management at BearingPoint Inc. said it has helped the Islamic Transitional State of Afghanistan to successfully install and operate the Afghanistan Financial Management Information System (AFMIS) as part of a $3.95 million contract to help the government upgrade its accounting system.
The ongoing, two-year project, financed by the World Bank, is viewed as a critical step to ensuring accountability for processing and reporting the government’s operating budget, which is largely financed by international contributions, the company said.
An estimated $4 billion in international aid is expected to flow to the Islamic Transitional State of Afghanistan, some of which AFMIS will help track as the system’s coverage grows to include grants for donor-funded projects.
“This project is an essential step in developing the governance infrastructure necessary to support the reconstruction effort in Afghanistan,” said Michael Vlaisavljevich, a managing director with BearingPoint’s international public services practice. “The ability to accurately and efficiently manage these funds will help the Afghan government provide much-needed food, housing, health care, education, roads, and utilities to its people.”
BearingPoint, formerly KPMG Consulting Inc., is serving as the project’s program manager, responsible for the design and operation of the core accounting system for the Ministry of Finance. In addition, the company is providing systems integration and financial-management services.
The system will be implemented in two phases, with the immediate phase creating the capability of electronically recording expenditures, producing checks, and generating disbursement reports. BearingPoint will also assist the Ministry of Finance in recruiting and training employees on the new system.
The project reportedly recorded its first milestone on November 23, when the Treasury Department of Afghanistan successfully completed its first month of computerized operation, producing some 4,700 checks through a system designed by FreeBalance Inc. of Ottawa.
The full system is expected to be functioning in March 2003, six months after project initiation. BearingPoint employees will continue to help maintain the system after that date.
That, of course, assumes that a full-scale civil war doesn’t break out in Afghanistan anytime soon.