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

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Page 1: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

Retention Subcommittee Working Paper

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

May 2003

Page 2: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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Contents

Executive Summary

Background

Rationale For This Paper

Closer Examination

Retention Subcommittee Recommendations

Page 3: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

Executive Summary

Page 4: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 5: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 6: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

Background

Page 7: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 8: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 9: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Recruitment Education

RetentionWorkplace

Issues

MD Statewide Commission

Page 10: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

WorkplaceIssues

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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

Page 12: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

Rationale For This Paper

Page 13: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

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Page 15: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 16: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 17: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 18: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

Closer Examination

Page 19: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

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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

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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

Page 22: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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. . .

Causes of turnover

Percentage replying

Primary reason Secondary reason Not a factor Increased market demand 64 30 6

Workload/staffing 43 41 16

Better pay elsewhere 39 46 16

More flexible scheduling elsewhere 24 36 40

Better career/developmental opportunities elsewhere 17 49 34

Employment out of direct care nursing 17 45 38

Inadequate managerial skills 9 41 50

Better benefits elsewhere 8 36 56

More desirable work culture elsewhere 7 37 56

Physician relationships 2 36 61

Better employer reputation elsewhere 2 17 82

Mercer HR Consulting. Attraction and Retention of Nurses Survey 2000.

Page 23: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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%

Page 24: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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Compensation takes many forms but can generally be grouped into “direct” and “indirect” categories. . .

Indirect Direct

Base Pay Merit Pay

Salary Wage

Protection Programs

Medical InsuranceLife InsuranceDisability IncomePensionSocial Security

Pay for Time Not Worked

VacationsHolidaysSick LeaveJury Duty

Services and Perquisites

RecreationalFacilitiesCarFinancial PlanningLow-Cost or Free Meals

Incentive Pay

BonusCommissionPiece RateProfit SharingStock OptionShift Differential

Deferred Pay

Savings PlanStock PurchaseAnnuity

Components of a Compensation System

Closer ExaminationElements are Puzzling and Undervalued

From Fisher, Schoenfeldt, and Shaw, Human Resource Management, Houghton Mifflin Company, 1996, p.506.

Page 25: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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”.

Mercer HR Consulting

Total Compensation Elements

Pay Ranges

ValueOpportunity

ProcessPerformance

Efforts andActivities

One-timeEvent

Accomplish-ments

ResultsSecurityEntitlement

Variable Pay

Base PayIncreases

Benefits RecognitionReward

IncentiveCompensation

Market Driven

Page 26: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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Closer ExaminationSalary Trend

Historically, nurses’ salaries have lagged behind those of other professions, and they have only seen marginal gains in real wages. . .

$0

$10,000

$20,000

$30,000

$40,000

$50,000

1980 1984 1988 1992 1996 2000

Actual Avg. Salary "Real" Avg. Salary

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

Page 27: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

31%

46%

54%

71%

13%

27%

30%

47%

71%

38%

23%

35%

28%

53%

0% 10% 20% 30% 40% 50% 60% 70% 80%

Attendance

Performance

Commitment

Productivity

Recruitment

Morale

Retention

2000

1998

Bright Horizons Family Solutions / Mercer HR Consulting 2000 Survey of Work/Life Initiatives

Page 28: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 29: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

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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

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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

Page 32: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 33: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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:

Prevalence Objectives Low Neutral High

89% Focus employees on improving performance 10% 20% 70%

89%Align employees’ interests with organizational goals

12% 28% 60%

64% Focus employees on cost containment 11% 44% 45%

54% Increase pay opportunity without touching base pay 40% 33% 27%

50% Contain the rate of base pay increases 57% 21% 22%

43% Increase employees’ business literacy 25% 58% 16%

18% Improve customer satisfaction 20% 20% 60%

Page 34: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

Page 35: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

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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.

18%18%24%24%

$42,000

$64,000

HiddenCosts

VisibleCosts

Hidden LostProductivityCosts

VisibleOut-of-Pocket Costs

$10,800$11,520

Typical Correct Typical Correct Accounting Accounting Accounting Accounting

Med/Surg Nurse Specialty Nurse

Source: 1999 The Advisory Board Company

Page 37: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

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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

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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

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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

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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

Page 41: Retention Subcommittee Working Paper Total Compensation: A Call for Action for Retaining Nurses Maryland Statewide Commission on the Crisis in Nursing

Nursing Commission Recommendations

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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

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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

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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.

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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.