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Companies that do business with the federal government have mostly taken a position of “see no evil, hear no evil” when it comes to internal pay equity. Their thinking has been that the government can’t accuse them of having poor processes in place for assessing internal pay equity if they don’t have any processes in the first place.

But that’s changed now. On June 16, the Office of Federal Contract Compliance Programs, the agency that monitors federal contractors for discrimination on the basis of gender and race, issued new standards for assessing “systemic compensation discrimination.”

This now means that when they are audited, the 16,000 U.S. companies that do business with the federal government have to provide information gathered from a compliance self-evaluation or else certify that they have such processes in place.

The regulations, which are effective immediately, mean that the companies don’t just have to have processes in place, but they need to have an executive, usually a senior HR person, attest to them, says Brian Levine, a principal with Mercer Human Resource Consulting.

Levine says the OFCCP came out with the rules because the agency was frustrated about not being able to make its claims regarding pay equity stick. By forcing companies to have a process in place, it makes the matter more clear-cut, he says.

Mercer is advising clients to adopt the OFCCP’s own methodology for assessing pay equity. The agency uses a statistical technique called multiple regression, which is “onerous,” to apply, Levine says. But by using this standard, companies can better anticipate any issues the OFCCP might come across during an audit, he says.

Levine doesn’t believe that companies should share their processes in the event of an audit. Instead, Mercer favors having an executive certify that processes are in place.

“We are telling clients not to share the information because there are many unresolved confidentiality and privileged information issues associated with sharing individual employees’ data,” he says.

—Jessica Marquez

Abandoning defined-benefit plans for defined-contribution plans will economically hurt U.S. companies in the long run, says the former chief of the PBGC.

Bradley Belt, in an interview with Pensions & Investments on his last day as executive director of the Pension Benefit Guaranty Corp. in Washington, D.C., said one of his chief concerns is that corporations will use pending pension reform and potential changes to the Financial Accounting Standard Board’s Rule 87 as excuses to switch to defined-contribution plans.

“I’m concerned that companies are being very shortsighted if they are putting all their eggs in the DC basket” and less in defined-benefit plans, Belt said in an interview on May 31, his last day after three years at the PBGC. “You’ll have a situation in which employees of those companies won’t save adequately and won’t participate in their companies’ match programs. Down the road, those companies will have a lot of 65-year-olds who don’t have adequate savings for retirement, and therefore are not going to be able or willing to leave the workforce. This would happen just as a company might want to manage those individuals out and bring in younger, lower-cost workers.”

Belt also underscored the importance of a defined-benefit plan to attract talent.

“Each company needs to determine what the optimal compensation structure should be,” Belt said. “They want to be able to recruit the most talented employees. Historically, DB plans have been a very effective compensation tool and, more importantly, one that could be used to manage the exit of older workers at appropriate times.”

The final version of the pension reform bill, which has been debated by members of Congress since February, could prompt many U.S. corporations with defined-benefit plans to switch to a defined-contribution model. That’s because the bill is expected to implement stricter funding rules, change the way corporations can calculate the discount rate used to calculate their liabilities, and decrease the number of years companies have to fund their pension plans.

Additionally, a proposed change to FASB 87 that would eliminate actuarial smoothing could make the value of pension assets of a corporation more volatile in conjunction with their liabilities.

On June 1, Labor Secretary Elaine Chao appointed Vincent K. Snowbarger, the PBGC’s deputy executive director, as its interim executive director.

Belt suggested his permanent successor “develop a thick skin and wear a hard hat.”

“He or she is taking actions and making decisions that will protect the greater set of core interests, but inevitably will adversely impact other parties,” he said.

Belt presided over the agency’s first flat-rate premium hike, which became effective January 1. It was not well-received.

“There was an understandable reluctance of having to pay higher premiums by U.S. corporations, but the fact of the matter is the premiums had not been raised since 1991,” Belt said. “And that hike brought in a little over $60 million in additional revenues to the PBGC each year. Our loss in the (UAL Corp.) bankruptcy was almost $7 billion, which is about 10 years’ worth of flat-rate premiums in one fell swoop, so the premiums were clearly inadequate to cover expected future claims.”

Belt said he was proud that he helped guide the agency through one of its more difficult periods, which included the high-profile bankruptcies of Houston-based Enron Corp. and UAL Corp. of Elk Grove Township, Illinois, as well as 120 distressed terminations of corporate pension plans in 2005 alone.

“We used the relatively limited set of regulatory tools and authorities at our disposal to achieve some positive outcomes for stakeholders,” he said. “Most notably, in the Enron bankruptcy we were able to be proactive and avoided taking any loss for the insurance program or any cutbacks in the benefits for participants. United Airlines, unfortunately, terminated its pension plan. But as a result of being proactive in the settlement agreements we entered into, our recovery rate was substantially in excess of what is typically the case for the PBGC.”

United Airlines’ $15.2 billion defined-benefit pension plan was underfunded by $10 billion when the company declared Chapter 11 bankruptcy in 2003. It is estimated that the PBGC assumed about $7 billion in liabilities when it took over the plan in 2004.

In the future, the PBGC must create a plan to deal with risks of a downward credit cycle or recession, Belt said.

“My concern is that the PBGC has had record growth in its deficit and a record number of terminations in a very strong economic environment (2004 to 2005). That raises the question of what are the risks to the insurance program in a less benign economic environment,” he said. “If you have a change in the credit cycle or a recession, there is the potential for additional losses, and we haven’t done anything to address those risks.”

For House and Senate conferees negotiating a compromise on pension reform, the greatest challenge is creating rules that would force corporations to disclose the actual funding levels of their pension plans.

“The real tragedy is that when companies terminate their pension plans, there are real-world impacts. When a plan gets terminated, there are workers and retirees who have their expectations of retirement security dashed,” Belt said. “You also have companies that have acted more prudently in terms of managing their pension plans that may be on the hook to pay higher premiums as a result of the pension plan terminations, and ultimately, if premiums are not the answer, then taxpayers would be called upon to rescue the insurance program.

“The solution is that there needs to be more rational and stronger funding rules and greater transparency,” he said. “The bottom line is that you wouldn’t have a need for high premiums if pension plan losses are minimal. We wouldn’t be having this conversation if United’s pension plan were underfunded by $10 million instead of $10 billion, or if Bethlehem Steel’s pension plan were underfunded by $4 million instead of $4 billion.”

—Vince Calio, Pensions & Investments

The decision last month by the Internal Revenue Service to revoke the tax-exempt status of 41 credit counseling organizations was a reminder for employers to check the backgrounds of the financial counselors they hire, even if the organization is registered as a nonprofit.

Consumer credit companies offer financial education and counseling to individuals burdened by credit card debt. Most collect fees by guiding consumers into debt management programs, which attempt to help people pay credit card debt. The IRS determined that the 41 organizations, whose identities have not been revealed, had inadequate counseling. As a result, some are under criminal investigation.

Employers looking to help employees get out from a heavy debt load often look to nonprofit credit counseling and education organizations in good standing with industry associations to teach financial management skills, a benefit that is often bundled as part of an employee assistance program.

Privacy laws, and corporate culture, generally limit companies from becoming directly involved in helping their employees manage their finances beyond providing education and counseling.

“Companies want to be at arm’s length,” says Kathy Stoughton, a financial specialist at ComPsych, an EAP provider based in Chicago. “They don’t want to become paternal.”

Federal law requires individuals who are preparing to file for personal bankruptcy to meet first with financial counselors. David Jones, president of the Association of Independent Consumer Credit Counseling Agencies, says most people simply need to be educated on how to change their spending habits.

“There are people living paycheck to paycheck who are spending $150 a month on Starbucks,” Jones says. “There are just bad spending patterns people need help, education and guidance with, and the great majority of people we speak to fall into that category.”

One in four American workers suffers from serious financial worry, according to a report published last year titled “Financial Distress Among Americans.” Conducted by E. Thomas Garman, a professor emeritus of personal finance at Virginia Tech University, the report estimates that 30 percent to 80 percent of employees spend time at work worrying about their finances, at a cost in annual productivity of $450 to $2,000 per employee.

Companies looking to hire a credit counselor to educate employees should make sure the company is in good standing with the industry’s two associations, the National Foundation for Credit Counseling and the Association of Independent Consumer Credit Counseling Agencies, both of which require their members to be federally tax-exempt organizations.

“The counseling and the education organizations do with consumers is what makes this a nonprofit service,” Jones says. Employers can also contact their state’s attorney general’s office or better business bureau to verify a credit counseling organization’s good standing.

Consumer credit organizations say the crackdown by the IRS was long overdue and anticipated. Many of the organizations whose tax-exempt status was revoked can nonetheless operate as non- profit organizations under state charters or as for-profit companies in states that allow them. At for-profit debt settlement companies, consumers stop paying their credit card debt while the company negotiates a reduced principal with the creditor. The companies charge a hefty fee, often as much as 30 percent of the principal owed.

The National Conference of Commissioners on Uniform State Laws recently drafted a law aimed at regulating both nonprofit credit counseling organizations and for-profit debt settlement companies. The group’s legislative director, John McCabe, says the law would rein in for-profit companies currently operating without oversight.

Others worry that the advice of a financial counselor would be tainted by the desire to make a profit. Employers should be aware of such conflicts of interest when hiring a financial counseling service. Organizations that make money through referrals to debt management companies should not be hired.

“Make sure you are clear on how they are compensated,” Stoughton says. “If it’s commission-based, there is a conflict of interest.”

—Jeremy Smerd

The backdating of stock options at UnitedHealth Group has set off a widespread regulatory investigation into the practice and elicited outcry from shareholders and doctors, but barely a whimper has been heard from those employers for whom rising health care costs are among their biggest concerns.

In late May, for example, the New York Business Group on Health, an organization that counts IBM, Pitney Bowes, the Bank of New York and Verizon among its 175 members, met with a senior team from UnitedHealth Group as part of the group’s ongoing effort to measure the performance of health plans based on standardized metrics. The compensation issue, however, did not come up, says Laurel Pickering, the New York group’s executive director.

“Employers feel very far removed” from the creation of compensation standards at the health insurance giant, Pickering says. Plus, Pickering speculates, most executives at large companies are used to hefty compensation packages. “Among the pressing issues going on in health care, it’s not one of the main things employers are talking about or trying to fix.”

Instead, employers in her group are focused on the problems they believe they can fix, such as measuring and improving quality and reducing cost.

For its part, UnitedHealth Group has communicated via letter, e-mail and phone to employers and shareholders alike, reiterating some of the efforts the company has undertaken to reduce its executives’ compensation, UnitedHealth spokesman Tyler Mason says. The company has eliminated equity-based compensation for most senior management and eliminated post-retirement health insurance for CEO William McGuire and COO Stephen Helmsley. The board of directors also has reduced its own pay, Mason says.

Executive compensation and benefits, of course, are costs that are ultimately passed on to employers, says Carolyn Brancato, director of corporate governance at the Conference Board.

“With any corporation, executive pay is the cost of doing business,” says Brancato, who does not comment on specific companies but was speaking more generally on corporate governance. “Backdating stock options doesn’t seem like a very direct way of linking pay to performance.”

This was a point not lost on physician groups around the country. They are among the most vocal critics of insurance companies and view them as bent on underpaying doctors for their services.

Physician group administrators on an e-mail listserv facilitated by the Medical Group Management Association expressed dismay almost immediately after news broke in April that UnitedHealth Group’s CEO had received part of his $1.6 billion in unrealized gains on options he exercised at or near the stock’s quarterly low points.

Among the group’s 20,000 members, a handful of administrators were particularly incensed.

Christopher Francis, an administrator for Waco Surgical Group, a six-surgeon practice in Waco, Texas, read the news on his computer and thought about how difficult it was to get reimbursed by the health insurer.

“My immediate reaction was ‘Why is it so difficult to contract with UnitedHealth when they obviously have the resources to pay their executives?’ ” Francis says.

Francis’ criticisms are aimed not just at UnitedHealth, but at all insurers.

“A provider may fight for a small increase on a contract,” he says. “To have that be so difficult to achieve and then turn around to see what they are doing on the compensation for their own folks, it’s hard to reconcile.”

Though Francis says only a small portion of the physician practice’s revenue comes from UnitedHealth Group, most doctors are afraid to speak out against UnitedHealth. As the country’s second-largest health insurer, behind Wellpoint, it dominates most markets, says Elizabeth Johnson, a spokeswoman for the Medical Group Management Association.

“In any market there may only be a couple of insurers, so our members really don’t have a choice and they need to be careful about what they say,” she says.

The Securities and Exchange Commission has broadened its investigation into the backdating of stock options to include at least 26 companies. Health care companies included in the probe are Caremark Rx, a pharmacy benefit manager; Medarex, a Princeton, New Jersey, bio-pharmaceutical company; and Renal Care Group, a Nashville, Tennessee, company that offers dialysis services.

A low-key but potentially powerful constitutional issue is delaying movement in the House-Senate talks about immigration legislation.

The Senate bill, approved just before Congress departed for the Memorial Day recess, contains a provision that would require illegal immigrants to pay back taxes in order to start on a path toward naturalization.

Revenue measures are supposed to originate in the House, according to the Constitution. A House member in the conference committee could declare that the Senate bill is unconstitutional, squelching negotiations to reconcile House and Senate immigration legislation.

Traditionally, the chairman of the House Ways and Means Committee, currently Rep. William Thomas, R-California, would point out the problem and “blue slip,” or kill, the Senate bill. Thomas has not commented publicly on whether he intends to do so.

In order to remedy the constitutional technicality, Senate Majority Leader Bill Frist, R-Tennessee, has proposed that the Senate take a tax bill previously approved by the House and add the Senate language on immigrant back taxes.

That measure would be approved by unanimous consent in the Senate and go to the House, where the House immigration bill would be attached. Then the House would vote to proceed to conference.

A Frist aide asserts that Senate Minority Leader Harry Reid, D-Nevada, is insisting that the Senate and House go directly to the conference committee with the bills as each chamber has approved them.

But a spokeswoman for Frist says that taking that route would mean “the bill is dead” because a House member would declare it unconstitutional.

“We’re at a standstill,” says Carolyn Weyforth, Frist’s press secretary. For Democrats, “this is a campaign issue. They don’t want to address (immigration) until after the election.”

On June 6, Reid indicated that he fears that attaching the Senate immigration bill to a House tax measure would open the flood gates for tax policy changes in conference. He said that he would drop his objections if Republicans assure him that they won’t use the immigration bill as a vehicle for non-immigration tax reform, according to published reports. He also said that it is up to Bush to prevent House Republicans from “blue-slipping” the Senate immigration bill.

In December, the House approved an immigration bill that focuses on border security and workplace enforcement. The Senate passed a comprehensive bill that contains enforcement provisions as well as a guest worker program and a path to naturalization for most of the country’s approximately 11 million illegal immigrants. The bills must be combined into a final measure that would be voted on again in each house.

“If we can get to conference, differences can be worked out,” Weyforth says.

—Mark Schoeff Jr.

Regulators may not yet be finished with the string of rules affecting how companies determine and disclose executive compensation, thanks to the recent scandal involving companies that have allegedly backdated their stock option grants to executives.

This year, the Securities and Exchange Commission released a proposal requiring companies to disclose more clearly every aspect of executive compensation. The backdating of options wasn’t addressed then, but it surely will be now, compensation experts say.

Employers give stock options to top executives as part of their incentive pay. Usually, the exercise price of these options, or the price at which the executives can purchase the options, is determined by the fair market value of the company stock on the date the options are granted.

According to the allegations, grants at several firms, including UnitedHealth Group, occurred right before drastic jumps in the stock price. That pattern led the SEC and the U.S. Justice Department, as well as the U.S. attorney for the Southern District of New York, to investigate whether these companies set the date of the exercise price back to a date when the options were priced at their lowest. By backdating the options to a day before a stock run-up, companies could give their executives higher returns from the options.

If firms didn’t disclose that the options were backdated, and thus granted the options at a discount, they will have to pay huge accounting and tax charges. The companies also may have violated securities laws if they did not disclose the practice to shareholders.

The incidents highlight a need for more governance in this area, says Patrick McGurn, executive vice president at Institutional Shareholder Services, a Rockville, Maryland, company that advises institutional investors on how to vote on proxies.

Some analysts predict that the SEC might mandate that the exercise price of stock option grants be equal to the fair market value of the company’s stock on the day they are granted. Whether the agency takes this action or not, companies should be doing this as a best practice, says compensation consultant Jack Dolmat-Connell. Very few employers backdate options, but several choose dates in the future, he says.

“This is usually because if a company is dealing with a large grant, they have a lot of administrative (work) and communications to do before they actually make the grant,” he says. Dolmat-Connell says that the options-award contracts for executives shouldn’t be sent to the board “until you are ready to grant the options.”

But Russell Miller, a senior client partner in the New York office of Korn/ Ferry, doesn’t think the SEC will go as far as mandating grant dates. “The SEC has generally stated that it doesn’t want to get involved in managing companies,” he says.

At a minimum, the investigations into backdating will affect how the SEC’s final rule on executive compensation disclosure turns out, analysts say.

One of the controversial provisions in the proposal, which is expected to become a rule by year’s end, would require companies to add a new “Compensation Discussion and Analysis” section to their filings with the SEC.

These documents would explain the metrics companies use to determine compensation. As part of that, firms will have to explain how they determine the exercise price of their stock option grants to executives.

Many executives have written letters to the SEC complaining about putting that kind of analysis into a filed document. They feel that including such details in their SEC filings makes them liable for every minute piece of informa- tion, some of which they might not normally oversee.

“That argument is going to look pretty weak now,” McGurn says. “The SEC will want to put everyone on the hook.”

Democrats are objecting to language in the House pension reform bill that they say would allow insurance companies to take a cut of lawsuit awards before the injured victim receives money.

Although the pension reform conference committee commenced its work in early March, Democrats says they’ve just learned of the insurance facet. The disagreement could complicate the already protracted wrangling over the pension reform bill.

“This provision is a special interest fix that was slipped into the House bill at the last minute without public hearing or debate,” says Sen. Edward Kennedy, D-Massachusetts and ranking member of the Senate Health, Education, Labor and Pensions Committee. “This is an indication of greed that is not entirely unexpected in this conference but should not be tolerated.”

Rep. Rob Andrews, D-New Jersey, says the measure would override laws in many states that require the weakest claimant to be paid first. He says changing such rules would deny victims the money they need to cover medical bills.

Andrews, a conferee, asserts that the measure is not germane to a pension bill. “This is a question of insurance law and health care law,” he says. “It should never have been in there in the first place.”

Proponents of the House language argue that the intent is to clarify existing law that allows a plan sponsor to be reimbursed for payment of medical expenses after a victim recovers damages from a negligent third party.

Recently, the Supreme Court ruled that a company has a right to such recovery as long as the funds are in the possession of the victim.

If a sponsor can’t get its money back, the participant would receive double payment, potentially leading to an increase in health insurance premiums, according to advocates of reimbursement. If the money is returned to the insurer, it can be restored to the plan and lower premiums.

On June 8, both House Majority Leader John Boehner and Senate Majority Leader Bill Frist called for the pension conference to conclude by the July 4 congressional recess.

—Mark Schoeff Jr.