Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

1. May 2003 Total Compensation: A Call for Action for Retaining NursesMaryland Statewide Commission on the Crisis in Nursing Retention Subcommittee Working Paper

2. Contents Executive Summary Background Rationale For This Paper Closer Examination Retention Subcommittee Recommendations

3. Executive Summary

4. Executive SummaryNursing Shortages are not New. . . . . .however, the shortage Maryland and the Nation are currently experiencing is projected to be more acute and longer lasting. . . • A combination of factors contribute to the unprecedented size and duration of the problem: • Aging baby boomers • Nurses themselves nearing retirement • Alternative career choices for women • The nurse compensation paper is essential at this time because: • Compensation is critical to attract and retain competent professionals • The elements of compensation can be puzzling and consequently, undervalued • Compensation discussions are too often secretive or shrouded in mystery • Employers aren’t maximizing the retention potential of the compensation dollars being spent

5. Executive SummaryNursing Shortages are not New. . . . . .and compensation has become a higher priority because “satisfiers” associated with their nursing profession have been woefully deficient. • At the same time the Commission’s other subcommittees are addressing these “satisfiers”, the Retention Subcommittee saw the need to focus on compensation • The paper’s objective is to educate all healthcare stakeholders as to how nurse pay can and should be used to maximize nurse commitment and employer returns • Compensation can be a powerful short-term retention tool if: • Delivered equitably, for the right reasons, and with the right messages and guidance • Compensation must be flexible and designed with a holistic approach to meet the varying needs of the diverse professional workforce

6. Background

7. BackgroundThe Perfect Storm Several converging factors are fueling the nursing supply shortage that could grow from 6% in 2000 to 12% by 2010 and to 29% by 2020. . . • An increasing and aging U.S. population • Aging nursing workforce as well • Medical advances heightening the need for baccalaureate-prepared RNs • Relative attractiveness of alternative careers • Wage shortcomings

8. BackgroundA National Crisis . . .and three 2002 research publications confirm it’s a national crisis. • 2002 Nurseweek/AONE Survey of Registered Nurses • AHA’s In Our Hands: How Hospital Leaders Can Build a Thriving Workforce • Nursing’s Agenda for the Future – a compilation of input from more than 60 national nursing organizations

9. BackgroundMaryland Statewide Commission The 46-member Commission was established on May 11, 2000. . . • To determine the extent and long-term effect of the growing nursing shortage • To develop and implement strategies and tactics to shrink the shortage • Through the effort of four subcommittees: • Recruitment • Education • Workplace Issues, and • Retention MD Statewide Commission Recruitment Education Workplace Issues Retention

10. BackgroundOther Subcommittee Work . . .with the three other subcommittees focusing on. . . • Industry collaboration, web dissemination and a recruitment toolkit • Education process, scholarships and financial aid issues, finance and marketing, and mentoring programs • Stress drivers, delivery models and quality of care, regulatory issues, participative decision making, scheduling and lifestyle issues Recruitment Education Workplace Issues

11. BackgroundAreas Retention Subcommittee to Address . . .while the Retention Subcommittee has identified its own three areas in which to concentrate its effort. • Adequate and flexible staffing protocols • Improved communications leading to greater respect and recognition, and • Competitive compensation and flexible benefits Retention

12. Rationale For This Paper

13. Rationale For This PaperUnderstand the Importance of All Compensation Compensation is rarely a “satisfier” in the spectrum of an employee’s overall work experience. . . • The real reasons for turnover are often neglect, distrust, burnout, lack of respect and other non-monetary factors • Compensation is important because perceived unfair pay can be the final straw – pay can be one more “dissatisfier” • The “right” compensation package can garner employers time to address other turnover factors

15. Rationale For This PaperClarify Compensation Elements . . .nevertheless, nurses must become more knowledgeable about the compensation they earn. • Nurses should understand compensation elements (e.g., forms of pay, benefits and work/life offerings) and their relative value because knowledge generates power • A grasp of the elements enable nurses to: • make rational, educated decisions regarding job changes or per diem agency employment • better prioritize what they want/expect from their work experience • represent themselves better in negotiations with their employer, and in personal discussions with spouse and family • A nurse compensation tool kit is in development to strengthen that understanding

16. Rationale For This PaperDefine Compensation Delivery Compensation progression shrouded in mystery can breed distrust that contributes to nurse turnover. . . • Nurses should not have to speculate how pay will progress over time, how their pay ranks internally and externally, and how work effort and accomplishment relates to their periodic rate increases and promotions • Compensation progression generally involves market driven components (base salary, benefits and periodic decisions on how to increase both) and variable pay components (recognition/reward programs and incentive compensation arrangements) • Total Compensation = Value + Process + Security + Efforts & Activities + Results

17. Rationale For This PaperMaximize Retention Dollars . . .suggesting healthcare employers must rethink their compensation packages and delivery mechanisms if they’re to achieve a “win-win” employment relationship with their nurses. • Redesign could entail: • Eliminating one-size-fits-all benefit offerings • Introducing additional work/life enhancing benefits • Addressing pay compression concerns • Incorporating variable pay programs into the mix • Integrating career development support services into the package • Nurse involvement is key

18. Closer Examination

19. Closer ExaminationCompensation is Important Several professional viewpoints on the role of compensation include. . . • Mercer Human Resource Consulting’s research suggesting there are as many as 16 drivers of nurse turnover clustered into three dynamic and interactive categories • External Influences – labor market conditions, competition, location, and patients • Individual Influences – nurse’s past work patterns, nurse’s demographic information, and personal needs and preferences • Organizational Practices – employer’s business strategy, internal communications, culture and work environment, socialization opportunities, leadership and management performance, job characteristics, career development and growth, recruitment approach, and rewards

20. Closer ExaminationCompensation is Important . . .and the perspective of author, Frederick Herzberg. . . • An author of many books and research papers dating back to the 1960’s, Frederick Herzberg theorized that employee satisfaction stems from two issues: • Hygiene – working conditions, salary, job security, and company policies • Motivation – sense of achievement, recognition, responsibility, and opportunities for personal growth • Get hygiene wrong and motivation will decline • Get motivation right and employee commitment will grow • Herzberg was known to criticize companies who focused on hygiene over motivation

21. Closer ExaminationCompensation is Important . . .and finally, that of Dr. Michael N. O’Malley. • Dr. O’Malley wrote Creating Commitment and Are You Paid What You’re Worth. Dr. O’Malley advocates that employee commitment requires five conditions: • Fit and belonging, status and identity, trust and reciprocity, emotional reward, and economic interdependence • Pay becomes a higher priority when the follow conditions exist: • Career advancement is slow, unlikely, or nonexistent • Relationships have nothing else going for them • Organizations communicate only through money • Funding is scarce • Employees feel unfairly treated

22. Closer ExaminationCompensation-Related Actions to Retain Nurses While experts see compensation not as a “satisfier” but rather as a potential “dissatisfier”, nurses recently shared their thoughts on the top causes of turnover. . . Mercer HR Consulting. Attraction and Retention of Nurses Survey 2000.

23. Closer ExaminationCompensation-Related Actions to Retain Nurses . . .and the same survey shows though only two of the top 11 causes of turnover cited by nurses were compensation related, healthcare employers have used retention tactics weighted toward compensation. Very Somewhat Not Percent Retention Tactics Effective Effective Effective Considering Enhancing supplemental pay plans 29% 66% 5% 23% Flexible scheduling/shifts 29% 64% 6% 14% Enhanced continuing education 25% 65% 10% 13% Base pay increases 23% 73% 4% 13% Rotations/float pools to address staffing demands 23% 70% 8% 14% New clinical advancement programs 22% 55% 22% 21% Regular staff sensing/involvement initiatives 21% 67% 12% 7% Variable pay/incentives 21% 70% 9% 15% Leadership training 16% 76% 8% 18% Promote organizational mission, goals & initiatives 16% 54% 30% 7% New processes to assist in care delivery 15% 71% 14% 10% Change the patient care delivery model 15% 60% 25% 19% Retention bonuses 15% 67% 19% 31%

24. Components of a Compensation System Indirect Direct Base Pay Merit Pay Salary Wage Protection Programs Medical Insurance Life Insurance Disability Income Pension Social Security Services and Perquisites Recreational Facilities Car Financial Planning Low-Cost or Free Meals Deferred Pay Savings Plan Stock Purchase Annuity Incentive Pay Bonus Commission Piece Rate Profit Sharing Stock Option Shift Differential Pay for Time Not Worked Vacations Holidays Sick Leave Jury Duty Closer ExaminationElements are Puzzling and Undervalued Compensation takes many forms but can generally be grouped into “direct” and “indirect” categories. . . From Fisher, Schoenfeldt, and Shaw, Human Resource Management, Houghton Mifflin Company, 1996, p.506.

25. Closer ExaminationElements are Puzzling and Undervalued . . .or seen as including “market driven” and “variable pay” components as well as an element of change – shown as “process”.

26. Closer ExaminationSalary Trend Historically, nurses’ salaries have lagged behind those of other professions, and they have only seen marginal gains in real wages. . . Actual and “Real” Average Salaries of Full-Time Registered Nurses, 1980-2000 Actual“Real” 1980 $17,398 $17,398 1984 $19,079 $23,595 1988 $28,383 $20,839 1992 $37,738 $23,166 1996 $42,071 $23,103 2000 $46,782 $23,369 U.S. Department of Health and Human Services March 2000 National Sample Survey of registered Nurses

27. Closer ExaminationWork/Life Programs . . .so healthcare employers have begun to increase their benefit offerings, move away from “one-size-fits-all” packages and even facilitate “employee-pay-all” programs. • As shown below, their motivation hasn’t solely been altruistic Bright Horizons Family Solutions / Mercer HR Consulting 2000 Survey of Work/Life Initiatives

28. Closer ExaminationHow to Interpret Employee Benefit package Concentrate on the three most expensive programs employers provide. . . • Paid time off • Mercer/Marsh 2001 Survey of Employer’s Time Off and Disability Programs found that employers spent 13.5% of pay on time off plans • Health plans • Average covered employee annual cost was $5,500 in 2001 per a Mercer/A. Foster Higgins Survey of Employer-Sponsored Health Plans • Retirement programs • Most midsized healthcare employers in Maryland spend another 3% to 6% of pay on their retirement programs; some spend more . . .and construct a side-by-side checklist of other benefit offerings, take notes and ask questions, be alert for flexible benefit designs and what for more information on the Retention Subcommittee’s upcoming online total compensation toolkit

29. Closer ExaminationMysterious/Flawed Delivery Process Pay secrecy policies often exist because employers believe. . . • Compensation information should be private • They reduce their exposure to perceived inequality claims • Pay differences can be complicated to explain, even when justifiable • They can protect underperforming/underpaid employees from embarrassment • It give managers more freedom in administering pay . . .while others argue that open pay policies are advisable because: • Open communications about such a sensitive issue can build trust between management and staff in other areas • They keep management alert and sensitive to compensation issues • Favoritism is less likely to win out over performance • Secrecy risks breaking the link between pay and performance

30. Closer ExaminationPay Inequity Equity is the perceived balance between an individual’s rewards and his or her contribution, compared to the rewards of others relative to their contributions. . . • Internal equity exists when “fairness” is perceived among the compensation levels of jobs within an organization • External equity compares similar jobs from different companies • Individual equity refers to balance among persons in the same job within the same organization • According to a 2001 survey by the Commission: • Only 35% of responding RNs and LPNs felt there was internal equity at their employer; 29% said there was none and another 35% weren’t sure • One in five respondents indicated their employer’s inadequate approach for rewarding education and experience would cause them to leave

31. Closer ExaminationPay Compression . . .leading to the premise that solutions to the new hire/ incumbent pay compression issue should be based on two assumptions. . . • A need exists to align pay for average to high performers with external market rates • A need exists to have a pay system that enables managers to move employees through their salary range/band in a way that keeps them in line with the external market . . .and might include four possible actions: • Standardize pay progression through the pay grade or band • Make equity adjustments afterwards • Define critical success factors for the position • Align salary structure movement and pay increases consistently with the external market

32. Closer ExaminationBenefits Cost Transparency Nurses may soon know more about their total benefits value/cost as many employers move to change the cost-sharing paradigm. • According to a 2002 survey by the International Society of Certified Employee Benefit Specialists (ISCEBS): • Controlling runaway healthcare costs has displaced employee attraction and retention as organizations’ top priority • 62.7% of respondents cite cost control/reduction as the key driver of benefits policy and design • Only 15% said attraction and retention was their #1 priority • Companies are beginning to get employees more involved in cost control • Consumer Directed Health Plans (CDHP) are getting a foothold in an attempt to mitigate medical trend and demand for discretionary care • CDHPs offer greater choice, education and decision support

33. Closer ExaminationVariable Pay Because of their visibility, variable pay programs can decrease the secrecy surrounding compensation. . . • According to a Mercer HR Consulting 2000 survey of 145 healthcare organizations, 82% of the employers with variable pay programs used a gain-sharing or profit-sharing design. • The leading stated objectives for variable pay included:

34. Closer ExaminationVariable Pay . . .but because of that same visibility, variable pay programs need to be well designed/planned or run the risk of public collapse. • Keys to variable pay success include: • Do it for the right reasons • Identify the right performance drivers • Design the right type of plan • Create line of sight and communicate • Stay the course but be prepared to revise/redesign • In healthcare, the most prevalent measures of performance include: • Gross revenue, net revenue, market share, margins, budgeted expenses, aggregate controllable costs, patient/customer satisfaction, quality of care index

35. Closer ExaminationEmployers Are Not Maximizing Their Returns If healthcare employers are to maximize the return on their significant human capital investment, they need to send the right signals which will be conveyed, more than anywhere else, through their compensation/reward practices. . . • Supervisors often skew performance review scores if they see little correlation between performance ratings and resulting wage adjustments • Optimum turnover occurs when an organization convinces its poor performers to leave and all others to stay • The wrong rewards system can cause an organization to spread resources too evenly throughout the workforce

36. $64,000 $42,000 Hidden Costs Visible Costs Hidden Lost Productivity Costs Visible Out-of- Pocket Costs $11,520 $10,800 18% 24% Typical Correct Typical Correct Accounting Accounting Accounting Accounting Med/Surg Nurse Specialty Nurse Source: 1999 The Advisory Board Company Closer ExaminationEmployers Are Not Maximizing Their Returns . . .and wake up to the “hidden cost” of turnover as their healthcare organization continues to feel unrelenting financial pressures.

37. Closer ExaminationAge/Gender Differences “Employers of Choice” often provide total rewards that anticipate the shifting values of both the organization’s current and future workforce. . . • High-level observations from a 2000 Mercer HR Consulting Employee Value Survey revealed that: • Pulling some dollars out of traditional benefits and redirecting them to more immediate rewards can influence employee satisfaction • As work demographics change, so does the value of many traditional benefits • In addition to salary and healthcare coverage, employees are seeking career opportunities and work/life balance • In response, employers might: • Evaluate benefits in view of business conditions and shifting worker attitudes • Align with employees’ priorities by understanding what they want/need • Redefine benefits to include appropriate work/life offerings • Repackage and communicate benefits to improve perceived value

38. Closer ExaminationEmployee Value Survey Details . . .and according to 3,200 responses to the 2000 Mercer HR Consulting Employee Value Survey, the following top six qualities help distinguish an Employer of Choice. • Other qualities included: • Flexibility to manage work and personal responsibilities • Programs to help with personal stress • Assistance with dependent children and parents

39. Closer ExaminationEmployee Value Survey Details While benefit preferences are evident between generations of workers, the survey revealed certain issues that transcended two or more age groupings *. • Staying healthy is an issue for all respondents • Worrying about saving for retirement applied to the 40 & above groups • Saving for a home and a child’s education is more critical for the under 40 groups • Accumulating assets to meet short-term and long-term needs is a priority for all respondents. * Groupings include age 18 - 29, 30 - 39, 40 – 54, and 55 & above

40. Closer ExaminationShould I Stay or Should I Go Now? The 2000 Mercer HR Consulting Employee Value Survey also compared and contrasted factors that employees consider in deciding whether to join, or stay with, an organization. • Factors that equally affect recruitment and retention include: • Pay/financial issues • Location • Comfortable work environment • Cultural fit • Factors that are more important to retention than to attraction include: • Reputation/brand of the organization • Benefits offered • The challenge of the job

41. Nursing Commission Recommendations

42. Nursing Commission RecommendationsCommission’s Role The Commission should encourage employers to. . . • Develop salary structures that assure appropriate market-based compensation for all nurses • Introduce flexible benefit options to allow nurses to have greater control over salary and benefits • Provide total compensation statements to all nurses indicating the full value of salary and benefits • Incorporate retention incentives into compensation packages that keep nurses with expert clinical skills at the point of care • Sponsor internships for new nurses and experienced nurses wanting to change specialties • Offer scholarship programs • Establish tuition payback programs (with advance funding in some situations) • Consider incentives for “hard to fill” shifts/clinical specialties

43. Nursing Commission RecommendationsAgencies’ Role . . .and the Commission should encourage funding and rate-setting agencies such as the HSCRC to do the following: • Provide adequate resources for providers to maintain true market-based salaries for nurses • Develop and implement mechanisms to manage rapid changes in market-based salaries for nurses, other health care professionals, and related support staff • Identify and provide alternative sources of funding for recruitment and retention initiatives such as: • Grant programs, • Tax credit based on years of service as a nurse, and • Lifting of the Social Security cap on hours a nurse age 62 to 65 can work without losing benefits

44. Nursing Commission RecommendationsEmployers’ Role Employers should give serious consideration to the recommendations forthcoming from the Maryland Statewide Commission on the Crisis in Nursing and heed the advice on how to maximize the return on the total compensation expenditures.

45. Nursing Commission RecommendationsNurses’ Role Nurses should become more knowledgeable about their current benefits coverage and weigh carefully whether opting out of some or all benefits is a sound short-term/long-term decision.