When Housing, Hiring Collide : Home Costs Likely to Force Severe Manpower Shortage

When the Orange County specialists at TPF&C; sat down to review the national compensation consulting firm’s latest survey on anticipated pay raise activity for 1990, they noted that there was little difference between what county firms were planning and what everyone else in the nation intended to do.

The bottom line, as accountants and consultants like to say, is that while Orange County is one of the most expensive housing markets in the nation, local pay practices do not differ markedly from the national norm. This, despite the fact that county employers already are experiencing employee shortages in some of the lower-paid service and clerical jobs because people cannot afford to take minimum-wage jobs and live here.

Lawrence Wangler, a principal with TPF&C; and head of the New York consulting firm’s compensation group in Irvine, says that Orange County employers are facing some potentially severe manpower problems 10 years or so down the road because of the housing situation here. TPF&C; is an international organization of consultants and actuaries specializing in pay and benefits.

Wangler says businesses so far are avoiding problems by using creative compensation plans that downplay regular pay and stress achievement-based incentives and bonuses.

A Southern California native, Wangler earned an MBA at Cal State Fullerton in 1968 and a master’s in industrial relations from USC in 1972. He was director of compensation for Avery International Inc., the Los Angeles label manufacturing giant, before joining TPF&C; in 1980.

In a recent interview with staff writer John O’Dell, Wangler discussed a variety of compensation issues including: how top level executives are paid; the impact of housing prices on pay practices here; recruiting problems facing local employers; and how employees increasingly are being asked to share in their employers’ financial risks.

Q. Let’s play “Lifestyles of the Rich and Famous” and talk about what goes into those executive benefit packages we hear about. Are we talking executive jets and weekends in Monte Carlo?

A. Nothing so exotic. They tend to be fairly mundane and, in recent years, have declined in use. A lot of them originally were provided for tax reasons, and virtually all the tax reasons for them are gone now. Good examples of what is left are company-provided autos or auto allowances, car phones, a fax at home and guaranteed first-class airline travel. The other popular thing is a supplemental executive retirement program. That is money set aside to boost retirement income to 50% of final pay. It is either put aside after paying taxes on it or is what the IRS considers “at risk” money. In other words, the company can say it will pay you at retirement, but if the company goes broke or gets acquired before the executive retires, then the executive may never see any of that money. Money at risk is taxable at distribution, not in the year it is put into the plan.

Q. What is the average you use when talking about pay for top executives in the county?

A. Pay is geared toward the size of the company. In an Orange County company with revenue of $100 million to $300 million, which would be good benchmark for a number of local firms, the average base pay for a chief executive officer might run in the $250,000 to $275,000 range.

Q. And then what?

A. On top of that, the executive would have an annual bonus potential of 50% to 100% of base salary and, of course, stock options and the various other executive benefits and perks. That annual bonus is an incentive typically linked to how well the company does in achieving its profit plan for the year.

Q. Do bonuses ever work backward? If you get $250,000 when the company does well, should you have to give the company $250,000 if it does lousy?

A. You can certainly make zero on your bonus, but never on your base salary. That would be an interesting system, though. And some companies come close to that by having lower base salaries and bigger bonuses. Maybe a $150,000 base and a potential for up to $350,000 as a bonus.

Q. How does pay in Orange County--for top executives and for others--stack up to the rest of the country, given the high housing costs here?

A. You really need to break that into senior executive-level pay and what I’d refer to as professional employee pay, or pay for engineers, middle managers and the scientific research and development people.

Q. OK. What about for senior executives?

A. What we’ve found in our surveys is that at the top executive level there really isn’t an appreciable difference between pay practices here and elsewhere in the United States. That’s not too illogical when you consider that most companies set their executive pay levels using statistics based on national norms and not local, geographic differences. Companies from throughout the nation participate in these surveys, so whether you work here or in Houston or Stamford, Conn., you are bound to be paid about the same.

Q. Is that because no company wants to be out in front of the pack on pay and none can afford to be behind the pack?

A. There’s a little of that. Businesses need to be competitive and to keep compensation costs reasonable.

Q. So how does the high cost of housing in Orange County come into play, or does it?

A. At that level you deal with a much more select population. Many of the executives may be people promoted internally rather than brought from outside, so the housing market isn’t as much a concern to them and doesn’t figure in their compensation package.

Q. But for those to whom the housing situation is critical?

A. What we do see at the executive level, particularly when a company is bringing someone in from outside the county, is an up-front cash bonus to help the individual ease into the housing market here, or, in some very restricted cases, a loan from the company to help an individual buy a home here. And when loans are made, they often have some type of forgiveness feature so that you repay less each year you work for the company and ultimately may not have to repay anything.

Q. How far down the corporate ladder does “executive” go when you use that term?

A. I would think down to the vice president level. In most companies in Orange County, those people should have the earning power to buy and stay in the market. They may not be able to live quite as well or buy quite as nice a house as they could in some other part of the country, but there is an assumption that a greater portion of your disposable income must go for housing if you want to live and work in this market. But you have to remember that a lot of these positions go to internal rather than external hires. The people are already here.

Q. And when we get out of the top executive levels?

A. That’s the area where companies really are finding a lot of stress today in terms of getting and keeping people--in that middle management and professional category. Let’s use an engineer as an illustration. If a company is trying to bring an engineer on board either from right out of school or from another employer, perhaps in the Midwest, it is virtually impossible for that person to come into the Orange County marketplace, buy a reasonable home and be able to live near work. They can live out in the Inland Empire somewhere and drive in, but it is very difficult to buy and live near work. And this is causing a lot of stress with employers in this area. Employers are caught in a bind because they cannot automatically pay that engineer $5,000 more to bring him into this market without enraging current employees. You don’t ever want to get into the position of paying the employees who have been with you longest less than your newer people. It disrupts employee morale.

Q. Is there any talk about company housing for employees, at any level?

A. None that I’ve ever heard.

Q. And do any firms maintain homes for their chairmen or presidents, like many universities do?

A. I don’t know of any. I think that’s because housing here appreciates rapidly and the executives want to participate in that appreciation. But we are beginning to hear talk about equity participation by companies in home purchases. The company would help buy the employee’s home and then would share in the profit when it was sold. It is an interesting concept, but it has some drawbacks. It ties up capital and may lock in the employee too strongly. It may make some employees feel resentful and afraid to leave because of the company’s equity in the home. And one other problem is equal treatment. What you do for one employee, you should do for all. But whatever people are talking about as means of beating the county’s high housing costs, I haven’t seen a lot of action yet.

Q. Is this because the situation hasn’t gotten to the crisis stage yet?

A. Yes. We are good at solving crises but not so good at finding answers before the crises develop. And we may not see the housing situation create an employment crisis for another 10 years. This is a dynamic economy, and we have a large segment of the population moving through the employment levels in our companies now. But behind this current generation is a real dearth of employees. In 10 years we are going to see some real interesting things happen around here because there won’t be enough people to service the market. I can see an age crunch coming too. You need to be in a high-income bracket or have a two-income professional family to afford a home in Orange County, and that pushes younger people out of the area. Still, I’m not pessimistic. You can’t forget that this area still has a tremendous attraction as a place to live. People are knocking at the doors to get in and are willing to go through a lot of economic pain and suffering to get here. And once they’re here, most of them don’t want to leave.

Q. So they need lots of compensation to be able to afford their mortgages. The rule of thumb used to be that the indirect benefit package added 30% to 50% to the value of an employee’s pay. Is that still the case?

A. I would use a range of 35% to 45% in this market. You don’t find too many companies with benefit packages that hike pay more than 40%, only the very large and very progressive ones. And you find virtually no one below 30% because the basic costs of things like medical insurance are expensive.

Q. Are you seeing much change in what goes into a benefits package?

A. There have been tremendous alterations in the past few years. Companies have scrutinized the design of their medical programs--that is really where the big costs are--to try to structure them to encourage employees to use the least costly alternatives, to shop more effectively for health care. And there has been a shifting of costs over the years so that employers, who traditionally paid 100% of the costs, increasingly are asking employees to pay bigger shares, in some cases to share as much as half the cost. That would have been unheard of five years ago.

Q. Is that added employee payment for benefits made up for with a corresponding increase in base pay? Or are we seeing a net reduction in compensation, especially for those who don’t have bonuses and incentive plans?

A. Yes, there is a reduction in pay. I don’t know of a company that we’ve worked with in the last five years that hasn’t done it at least once and maybe more frequently. It is happening nationwide. Most companies try to phase it in, and many have their employees pay only a share of increased costs. What most companies are trying to do is to stop increases, not roll costs back.

Q. Dropping down the list to incentives, what are long-term incentives?

A. Usually they come in at the level of upper middle management, people making $60,000 or more a year. They might include annual stock options and one that is getting popular is the long-term performance plan that sets up objectives for a three-year period. If you meet them, you get a cash bonus. In private companies, there is also phantom stock. It looks and smells and tastes like real stock, but you only get the appreciation of value, not real equity ownership in the company.

Q. And short-term incentives?

A. They come from plans that measure objectives annually, or even more frequently. They are usually cash or stock and are given to people in middle management. And then there are what we call alternative reward systems, based on productivity, that go all the way down to, say, the file clerk. We are seeing a strong interest in them by most companies. They generally involve cash payments that are linked to specific things the company can measure, like cutting costs, increasing product quality, increasing sales. . . . In middle management programs, these could add 10% to 50% to annual income. And in the productivity programs that everybody participates in you might see payments ranging from 3% to 5% of salary.

Q. Do Orange County companies stand out in any way from the pack for the kind of compensation programs they use?

A. Because so many companies here were started by entrepreneurs, there are more variances from the norm than you would see in most areas of the country. Companies here are much more creative and willing to do things differently.

Q. What might you see here that you wouldn’t see elsewhere?

A. Multiple bonus programs, where one company might be running three to five incentive plans, three or four middle management plans and one or two productivity-based programs all at the same time.

Q. And all open to all employees?

A. Some might participate in all, others in just one or two. There is much more willingness to experiment and try new things here. Look, for example, at Carl Karcher Enterprises. They are using an educational assistance plan to reward their front-line employees.

Q. Does greater use of incentives make it easier for employers to deal with employees on a one-to-one basis rather than treating everyone equally?

A. The plans, over time, don’t give the companies as much flexibility as you would think. There are pressures to be equitable. You can’t be dramatically different from one employee to another because that creates animosity in the workplace. But in some cases these programs become very institutionalized, and that is a danger because then you lose the incentive impact.

Q. So people no longer are working to get the bonus, they are simply putting in time and expecting it?

A. Yes. That’s what happened with the old profit-sharing plans in the 1960s. They paid out every year and everyone expected it. Even in bad years, most companies paid out and that sent a confused message to employees.

Q. The key thing here is that companies are using incentives to keep regular payrolls down and thus keep the bottom line as low as possible?

A. Yes. The business world is so competitive that companies do anything they can to create a cost advantage, and they are now asking all employees to participate in creating those advantages.

Q. By sharing in the risks, as you put it?

A. Yes. By much more participation in the corporation’s risks, both directly and indirectly.