Should CFOs Care About Workers’ Comp?

The case for finance chief involvement in workers’ compensation risks is buried in cash-flow and income statements, as well as balance sheets.

Relative to the rest of corporate expenses, workers’ compensation costs may often look like chump change.

For the typical company in a sample of 2,939 non-financial public issuers with current market caps of $50 million or more, studied by the Georgia Tech Financial Analysis Lab, workers’ comp insurance is under 1 percent of the company’s base pay rate, estimates Charles Mulford, the lab’s director and a Georgia Tech accounting professor.

What’s more, for companies that buy workers’ comp insurance rather than self-insure the risk, the effect on cash flow isn’t terribly volatile. In comparison to the risk of a super storm or a cyber-attack, the claims payments that may occur are more predictable — and a good deal lower.

To be sure, if companies choose to fully insure workplace hazards, the premiums represent “an immediate, recurring drain on cash flow,” says Mulford. But annoying as workers’ comp premium payments may be — especially if they’re rising the way they are now – they are perfectly predictable.

Because the insurance payments can be so predictable, many finance chiefs may feel that their companies’ workers’ comp concerns can be largely delegated to the company’s risk manager.

Indeed, in their cost-containment efforts, CFOs should analyze all of a corporation’s expense generators, rate them by size and then “start on the biggest ones and work down,” says Bill Zachry, vice president of risk management at Safeway Inc. “And if workers’ compensation … is not one of the bigger costs that you have, then you should have the right experts to control that while you’re focusing on something bigger.” (See “The Safe Way to Slash Workers’ Comp Costs.”)

Analysis_Bug3But for big labor-intensive companies like Safeway, the food and drug retailer, workplace related risks and costs must rise to the top of mind in the C-suite. And because every company is required to cover its employees for medical costs and lost compensation resulting from a workplace injury, CFOs are inevitably aware of the expense.

In short, it’s hard for a CFO to completely avoid this area of risk. And if workplace hazards are “a big cost driver for you,” says Zachry, “then you should make sure that the focus is there to help bring down that cost.”

Lurking in the Shadows
One reason finance chiefs may not be paying much attention to workers’ comp costs and liabilities is that they tend to be undetectably buried in broader categories of financial reporting. “They’re just not something broken out in annual reports,” says Mulford.

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