Critical Illness Insurance Overview

Critical illness insurance provides a lump sum payment to policyholders who experience one of a few serious medical conditions, like a debilitating stroke or certain cancers, that are specified in the policy. These medical conditions often create significant financial burdens beyond the costs that traditional health insurance will cover. For this reason, critical illness insurance is typically complementary to traditional health insurance coverage.Imagine a scenario in which a person is diagnosed with a potentially life-threatening illness. Even with the best possible health care coverage, that person is likely to experience additional financial strains that are well outside the scope of their traditional insurance policy.

For example, time away from work may lead to reduced or eliminated income. The illness itself may render the person incapable of taking care of dependents or even themselves, thereby requiring additional childcare and other assistance. Further, perhaps the treatment for the illness is not available locally and therefore requires extended travelling and accommodation expenses.

In the above scenario, critical illness insurance may serve as a crucial stopgap that enables a person who is experiencing unfortunate and often unfamiliar circumstances to maintain some semblance of financial security and normalcy, such as looking after their household and paying rent or a mortgage despite significant time away from their job or home.

How is Critical Illness Insurance Different from Traditional Health Insurance?

In some ways, critical illness insurance is similar to the traditional health insurance coverage that it supplements. For example, critical illness insurance policyholders will typically pay monthly premiums for coverage that extends to a finite list of conditions that are clearly outlined in the policy.

However, this is essentially where the similarities with traditional health insurance end. In fact, there are substantial differences in terms of what critical illness insurance covers as well as when and how claims are paid out.

Premiums

The premiums for critical illness insurance tend to be considerably smaller than the more expensive premiums that accompany traditional health insurance.

Depending on the size of claims payment outlined in the policy, premiums for critical illness coverage may only cost 10% or less of what a policyholder's traditional health insurance coverage costs.

Of course, the cost of the monthly premium is relative to the potential maximum claims pay out, with lower premiums earning lower maximum claims payouts while higher monthly premiums lead to larger maximum claims payouts.

Term of Coverage

Critical Illness policies are more akin to term life insurance policies than traditional health insurance when it comes to the policy term. For critical illness insurance, many if not most policies will only remain active until the policyholder reaches a certain age, at which point the policy will expire. This is often 70 to 75 years old.

Scope of Coverage

The list of conditions that critical illness insurance will cover is significantly smaller than the range of ailments that traditional insurance will cover, sometimes only including a handful of conditions.

Ailments and conditions that are commonly covered in critical illness insurance policies include:

• Organ failure or replacement complications
• Certain cancers
• Cardiovascular problems
• Strokes
• Lou Gehrig’s disease
• Other serious though not chronic conditions

Chronic conditions are typically excluded from critical illness insurance policy coverage because the continuing nature of such maladies is better served by types of insurance with other claims payout structures beyond the capped, lump-sum payout structure of critical illness policies.

Payment on Claims

Capped Lump-Sum Payments

Unlike traditional health insurance which typically pays out claims directly to health care providers, critical illness insurance pays out claims directly to policyholders in a lump sum once the policyholder has been diagnosed with a covered condition and has met the policy requirements.

Paying out critical illness insurance policies in lump sums allows policyholders to choose how best to allocate those financial resources to best meet their individual needs, which can include anything from paying a high deductible on their traditional insurance to taking a vacation if they deem rest and relaxation to be a prioritized step toward their recovery.

How the lump sum is spent is entirely in the policyholder’s discretion.

The amount of the lump sum can vary significantly from one policy to the next depending on the cost of the monthly premiums (higher premiums = higher lump-sum claims payouts) and the specific conditions that are covered by the policy. The size of capped payouts may range from $10k up to $100k and possibly even more in some circumstances.

There is a maximum amount for each lump-sum payout per condition that is covered under the policy. For example, assume that a given critical illness policy has a maximum payout of $30k and covers 5 conditions including strokes and coronary bypass. If a policyholder has a stroke and receives the full 30k lump sum payout, and then the same policyholder has a heart attack and needs a coronary bypass, most critical illness policies will then payout an additional 30k lump sum for the heart condition and treatment.

However, should that same policyholder then experience a second qualifying stroke or heart attack, the policy will no longer pay out a lump sum for those conditions. The policy would still pay out for the other 3 remaining conditions for which the policyholder had not yet made a claim.

Proportional Payouts Relative to the Severity of the Condition

Even when a patient experiences one of the handful of conditions that are covered by a critical illness insurance policy, full payment of the maximum lump sum requires that the condition in question meets a requisite degree of severity, as outlined in the policy.

For example, if cancer is covered in a critical illness policy that has a maximum lump-sum payout of $50k, that policy will likely stipulate that it will only pay out $10 to $15k if the cancer is stage 1 or stage 2, whereas stage 3 or stage 4 cancer might garner the maximum payout.

If a proportional payout is made due to the limited severity of the condition experienced by a policyholder, the policy will still pay lump sums for that same condition up to the amount of the capped maximum lump sum.

For example, assume a given policy has a $10k maximum capped lump sum for certain cancers, but will only pay out 10% of the maximum lump sum in cases where the cancer is in stage 1. In this instance, if a policyholder is diagnosed with stage 1 of a qualifying cancer, they would then be paid out $1k. However, if that same policyholder is later diagnosed with stage 4 cancer, they could then be paid out the remaining $9k to reach the amount of the maximum capped lump sum in accordance with the policy.

Timing of Payouts

Even when a policyholder is diagnosed with or experiences one of the conditions explicitly covered in a critical illness insurance policy, the lump-sum payment, proportional to severity or otherwise, may not necessarily be immediately forthcoming.

For example, some critical illness insurance policies have explicit delays in payment to make sure that the policyholder survives the initial onset of the condition (i.e. stroke victims may have to wait a period of several weeks as outlined by the policy to ensure they survive their stroke before their claim will be paid out).

Do I Need Critical Illness Insurance and Should I Offer it to My Employees?

A 2018 article from the Society of Human Resource Management states that 25% of employers offer some form of critical illness insurance as an opt-in benefit for their employees. This was 8% higher than the number of employers that offered critical illness insurance in 2017 and 10% higher than 2014.

Given the trend, it’s likely that even more employers are offering CI benefits today.

There are many advantages to critical illness coverage, including relatively cheap premium payments for what can be a windfall of financial support when it’s needed most. Further, that financial support is flexible in terms of allowing the policyholder to focus those resources where they are most needed.  

The most obvious negative aspect of critical illness coverage, however, is that the small number of conditions that a given policy will cover means that there are a wide variety of significant and sometimes catastrophic medical issues that a policyholder may experience for which their critical illness insurance policy will be of absolutely no help whatsoever.

That said, from the perspective of the employer, there is little downside to offering critical illness insurance on an opt-in, voluntary basis.

Given the relatively low premiums, these policies are typically affordable both for the employer (in the somewhat rare event that employers are making contributions) and for the employees, even if they’re paying their own premiums entirely out-of-pocket.

Top Questions You Should Ask Your Broker about Critical Illness Insurance

• What conditions does this policy cover?
• How does the severity of each condition affect the lump sum claims pay out?
• What are the monthly premiums?
• How much is the maximum capped lump-sum claims payout for each condition?
• When does the critical illness insurance policy term expire?
• What triggers the expiration?
• How long after a covered condition is diagnosed or a claims-triggering event occurs before the claim can be filed and paid out?
• Will higher maximum lump-sum claims payment policies require any additional family history or medical examination requirements for policyholders?

How to Get Critical Illness Insurance

To get critical illness insurance, you should start by talking to your insurance broker. Ask them the questions above to ensure you receive the policy that best fits your specific needs.

If you don’t have a broker already or need a broker who has experience and expertise with critical illness insurance, Mployer Advisor can help. We make it easy to find and compare top-rated insurance brokers in your area.

Search for brokers with critical illness insurance expertise near you, and see reviews, ratings and more to help you find the best fit. Start your search now on Mployer Advisor.Find Insurance Brokers Near You

About Mployer Advisor

At Mployer Advisor, our focus is creating transparency in the insurance and insurance broker, consultant and advisor space to the advantage of the employer. Analytics is our core and we will bring to light new information, tools and resources to aid employers in making more cost-effective decisions. As a phase I, we are here to help employers find the right broker or consultant and the right insurance company for them. Giving choice and initial transparency is a first step in creating an employer centric insurance marketplace.

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Is It Time for a New Broker?

Do you question whether you are getting the most value from your insurance broker? Are you doing everything possible to keep costs down and or feel that your benefit package is a commodity and not necessarily an employee retention tool?

Are you starting from scratch and need a new insurance broker?

The best first step is an insurance broker Request For Proposal, or RFP.

What is an RFP?

The first step when seeking health insurance for your company or commercial insurance coverage for your business whether you’re purchasing coverage for the first time or whether you’re considering changing policies, brokers, or carriers – usually starts with sending out RFPs to several insurance brokers and/or brokerage firms.

As the name implies, RFPs are simply requests made on behalf of the company which are typically sent to multiple brokerage firms in order to begin the process of vetting potential brokers with which the company may be interested in working.

While RFPs are in many ways synonymous with getting ‘quoted a price,’ these proposals often include additional information beyond merely the cost of services and coverage, which can be greatly beneficial in determining the range of services offered as well as the benefits (and potential detriments) of working with the particular brokerage firm providing each proposal.

Of course, in order to send out these RFPs, a company must first have identified potential brokers that they believe may be a good fit for assisting in their insurance coverage acquisition process and from which they attain more information.

Learn what makes a good insurance broker and see how to identify ones best suited to the needs of your business.

How Regularly Should I Be Sending Out New RFPs?

The short answer to this question is that RFPs should be sent out anytime your business is considering new or different commercial insurance coverage, but there are a number of other considerations that should be taken into account as well as potential events that may serve as good catalysts to trigger the need for change in an insurance broker and the accompanying issuance of new RFPs.

• Company Size: Often the most important consideration to evaluate when reconsider your company’s insurance brokerage needs is simply the relative size of your company. Operational efficiency is the primary consideration here, as larger companies tend to have greater institutional controls in place and a more regimented system that requires the use of resources that could otherwise be repurposed to another endeavor more immediately necessary for the furtherance of the company’s core business interests. Simply put, your HR team or whomever may be running the RFP process presumably has other responsibilities to attend to beyond endlessly reevaluating your insurance and benefits packages. Additionally, larger companies typically have more stakeholders with a greater variance of interests that need to be accounted for, which can take time and additional resources to properly survey.
• For larger companies (over 1,000 employees is a good benchmark for these purposes) without any other specific catalyst that triggers a reevaluation of your insurance needs/coverage a good timeline to adhere to, with an accompanying issuance of RFPs whenever that reassessment leads to the desire to explore additional options.
• For smaller companies, the process of insurance and broker evaluation is usually much simpler and can be conducted more regularly without encountering the degree of inefficiency that larger companies often face. In such cases, the 3 year timeline between broker reevaluation mentioned above would be on the longer end of the spectrum, with annual or biennial reevaluations often being appropriate.
• Other Catalyzing Events: Beyond company size and a regular brokerage reevaluation schedule, there are a number of events that often indicate that it’s a good time to reassess your company’s insurance coverage and potentially issue a new round of RFPs.
• Strategy: The most proactive reason to reconsider your company’s insurance is for strategic purposes. With cost cutting as a motivation for seeking cheaper insurance options falling on one end of the strategy continuum, the other end of that is occupied by comprehensive benefit strategies that have become critical tools for attracting and retaining top talent. In pursuit of such a comprehensive benefit strategy, an annual survey of employees needs and satisfaction-level with current coverage and benefits options can be very helpful in making sure your company stays highly competitive in the talent market.
• Change: While not as deliberately proactive as reevaluating your company’s insurance needs for strategic reasons, there are a number of changes that can serve as opportune catalysts for just such a reevaluation. Change in your company’s HR manager tends to be a good time to reassess the insurance coverage. Also, change in personnel at your brokerage firm, especially with your company’s direct contact or trusted advisor, might be a good time for a reassessment. Finally, and not to be understated, change in your level of satisfaction with your insurance coverage may be the most important catalyst for reevaluating your insurance coverage needs.

With all these considerations in mind, it’s also important to note that aside from the potential inefficiencies involved with the time and resources required to do so, there is no bad reason to reevaluate your insurance coverage and business insurance broker. The desire to refresh a policy that may feel otherwise stale or outdated is more than enough reason to look into making a change. Such decisions should always be made on a case-by-case basis and with the needs and context of your individual company in mind at the forefront.

How Many RFPs From Different Brokers Should I Request?

Because RFPs are non-committal, there is theoretically no cap on the number of RFPs that a given company could issue, but there are practical limitations and efficiency considerations that should be accounted for when deciding how many proposals are requested.

A good analogy might be requesting quotes from multiple contractors for the construction of a new warehouse. In such a scenario, your company could (in principle) request as many quotes as there are contractors, but of course that would be a ridiculous and excessive time-wasting exercise in practice. Instead, you would be wise to narrow your search at the outset based on which factors are most important to your business, including local proximity, specific expertise (i.e. warehouse construction experience), recommendations/reputation, or any other factors you may wish to weigh in order to set the parameters of your search criteria as narrowly as desired before requesting quotes from the contractors deemed most likely not to waste your time.

The process of pre-vetting potential brokers in advance of sending out RFPs is an equally valuable preliminary step that can optimize the scope of your company’s search as well as allocating your time, energy, and resources more efficiently and effectively. To identify and locate a group of strong brokerage candidates in the pre-vetting phase of this process prior to sending out formal RFPs, search Mployer Advisor today.

About Mployer Advisor

At Mployer Advisor, our focus is creating transparency in the insurance and insurance broker, consultant and advisor space to the advantage of the employer. Analytics is our core and we will bring to light new information, tools and resources to aid employers in making more cost-effective decisions. As a phase I, we are here to help employers find the right broker or consultant and the right insurance company for them. Giving choice and initial transparency is a first step in creating an employer centric insurance marketplace.

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Everyone Wants a Good Insurance Broker

The first step toward determining what makes an insurance broker good is to define what it means to be a good insurance broker in the first place.

As with most qualitative assessments, what constitutes ‘good’ in this context may vary widely depending on one’s perspective. For example, from the perspective of insurance providers, a good broker might largely be defined as a great salesman who maximizes client satisfaction and retention while simultaneously minimizing claims paid out.

On the other hand, from the perspective of the company engaging a broker in order to procure commercial insurance coverage for their business and employees, the definition of what makes a broker good might be the polar opposite from the attributes and skills that the insurance provider is looking for in a good broker.

For our purposes here, the focus will remain on evaluating brokers from the perspective of the companies who are procuring insurance coverage. However, what makes for a good insurance broker can still vary considerably depending on a number of factors, including the size, market, preferences, and the specific insurance needs of any given business.

The Broker That Can Get You the Best Price

Many companies view insurance coverage as an expense to be minimized on their balance sheet, unrelated to the functioning operation of their core business. These particularly price-conscious insurance shoppers who prioritize low rates above any other consideration might define a good broker as the one who can get their company the best insurance deal possible.

Of course, how to define the ‘best’ deal requires some parsing out, as well, given the best deal in the short term may not be the best deal in the long term. Defining the ‘best deal’ would also depend upon a given company’s risk tolerance and what claims are ultimately made over the life of the policy, etc.

For the sake of simplification, however, let’s assume that ‘best deal’ means the lowest possible upfront rates for standard coverage.

Even with this simplified definition, however, merely finding the best rates may be trickier than anticipated. In some markets, for example, where businesses are seeking standard types of insurance protection with little to no company-specific customization required in their coverage plans - those companies may be surprised to find that they keep getting the same quotes from brokers representing the same payers with little price or coverage fluctuation.

In those circumstances, these standardized coverage options have become essentially commodified, which means finding a good insurance broker (or at least one that is relatively better than other available options) will require using other criteria by which to evaluate potential new insurance brokers.

The Broker Who Can Get You the Most Comprehensive Coverage

On the opposite end of the spectrum from the broker who can quote the cheapest rates is the broker who can offer the most comprehensive coverage.

Of course, implicit in the notion of comprehensive coverage is that the coverage, while thorough, is tailored to suit the specific needs of your company and not superfluous or excessive in the operation of your business. Few would label a broker as ‘good’ simply because they sold you any and every type of insurance imaginable whether you needed it or not.

Therefore, the key to a good broker offering comprehensive coverage is the ability of that broker to accurately and specifically identify the needs of your business in order to shape an insurance coverage package that addresses all of your business’s areas of concern without going overboard into the unnecessary.

In this light, a good insurance broker might be one who is thoroughly versed in your industry. This could be either through direct experience or from comprehensively learning the space in order to provide the appropriate guidance to your company.How Can a New Insurance Broker Help My Business?

The Broker Who Can Be Your Champion and Advocate

The other main idea implicit in the concept of comprehensive coverage is that you will in fact be covered and paid out for the events and incidents to which your company wished to limit its exposure. After all, what appears to be comprehensive coverage when crafting the policies initially may be of little value in situations when the insurance provider disputes that an event in question is actually covered.

Here, a good insurance broker might be defined by their ability to accurately anticipate and explain the scope of coverage so that there is no misunderstanding about when and how that coverage either will or won’t apply.

This definition of a good broker again harkens back to their experience or learned knowledge of your company’s industry and risk exposure. It also brings up a new consideration: the role of an insurance broker as an advocate for their clients, even when promoting a position adversarial to the position being taken by the payer in a given instance.

To be a good insurance broker in this regard is to put the client’s interests first and to champion their clients whether it be in seeking payment for claims, in making a case for reduced premium rates, and in any other cases where the interests of the clients and the providers may conflict.

For those companies interested in whether or not their current or potential broker meets this particular definition, it might be wise to simply ask for examples of when that broker has taken a position on behalf of their clients against the payer’s interest and gotten favorable results to their clients’ benefit.

The Broker Who Keeps Their Clients Satisfied

Perhaps the most important attribute when defining a good insurance broker, and not coincidentally the only aspect listed that overlaps with an insurance provider’s definition of a good broker, is a broker that keeps their clients satisfied.

Presumably, client satisfaction is encompassed in all the good broker qualities discussed here thus far. For example, if a broker can’t get their clients a good rate quote, isn’t knowledgeable about their client's business, is therefore unable to tailor a comprehensive coverage package, and won’t be an effective advocate for their client's interest – then it’s unlikely that broker meets the threshold to be considered good in this context.

That said, beyond these previously discussed considerations, there are a number of other factors that brokers will likely have to meet in order to keep their clients satisfied. Managing communications comes to mind first and foremost, both in terms of regular communications under normal circumstances as well as communications in times of emergency when claims are being filed, which tend to be a regular occurrence in the insurance industry and require a greater sense of urgency.

Beyond the timing and effectiveness of communications, the tone of communications can be very important and speaks to other issues like culture, emotional intelligence, and the importance of building a productive working relationship between broker and client for maximum client satisfaction. This can be tricky when not all clients have the same expectations about the ideal form that such a relationship ought to take.

Recap: What Makes an Insurance Broker Good?

A good insurance broker will most likely get you a rate quote that you’re happy with, which may be fairly simple and commodified or relatively intricate and complex depending on your particular business.

A good broker will certainly be experienced in your field or at the very least eager to learn and independently research the area in order to make sure your coverage is appropriately comprehensive without making you pay for overkill coverage that you don’t really need.

Also, a good broker will certainly be a strong advocate on behalf of their clients whenever there is conflict with the insurance provider. Additionally, a good broker will keep their clients satisfied with their services through effective communication, culture, and relationship-building.

Most importantly, what you need is not a ‘good’ broker in the first place. What you need is an insurance broker that’s best for you.

There is no one-size-fits all definition of a good broker that will apply in any and all cases. With these ideas in mind, the best way to determine the broker that can best serve your company in administering your insurance needs is to first identify what aspects and attributes are most important to your company. Then, start narrowing your search by the criteria that you’ve chosen to prioritize by asking a lot of questions of as many brokers as you see fit.

How to Find the Best Insurance Broker for Your Company

To search for insurance brokers by geography, specialty, rating, provider affiliates, customer satisfaction or other relevant criteria you may have deemed to be important, search Mployer Advisor.

We help employers find top-rated insurance brokers for their needs. In addition to broker listings, Mployer Advisor showcases customer reviews and feedback to help employers compare and evaluate different brokers. Start your search today.Find Top-Rated Brokers Near You

About Mployer Advisor

At Mployer Advisor, our focus is creating transparency in the insurance and insurance broker, consultant and advisor space to the advantage of the employer. Analytics is our core and we will bring to light new information, tools and resources to aid employers in making more cost-effective decisions. As a phase I, we are here to help employers find the right broker or consultant and the right insurance company for them. Giving choice and initial transparency is a first step in creating an employer centric insurance marketplace.

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According to new data from Willis Tower Watson’s 2023 Salary Budget Planning Report, overall salary increases in the U.S. will rise to 4.6% in 2023. The predicted 4.6% increase is 0.4% higher than increases in 2022.  

Interestingly, survey data from the new report found that 77% of companies reported being motivated to boost earnings due to inflationary pressures, whereas 68% said they were motivated by the tight job market.  

What’s more, 57% of respondents hired candidates higher in the relevant salary range, while a further 76% adjusted or are considering adjusting salary ranges more aggressively, increasing ranges by 2% to 5%.  

Similarly, more than two-fifths of organizations have adjusted or are considering adjusting salaries more aggressively; 90% of organizations making or considering salary increase adjustments are doing two adjustments per year, according to the report.  

In addition to pay pressures, 75% of respondents noted problems with attracting and retaining talent—a figure that has nearly tripled since 2020. In fact, the tight labor market was an influencing factor in the decision of nearly seven in 10 companies (68%) to increase salary budgets.

In a release, Hatti Johannson, a Research Director of Reward Data Intelligence at Willis Towers Watson said: “As inflation continues to rise and the threat of an economic downturn looms, companies are using a range of measures to support their staff during this time. Organizations should prioritize their actions based on the needs of both employers and employees and pay close attention to market data to inform any changes.”

Looking for more exclusive content? Check out what’s trending on the Mployer Advisor blog, or tune in to listen to the latest episode of “This Week in Benefits.”

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New research from people management platform Gusto shows that employer-sponsored 401(k) offerings dramatically increase employee retention and—even better—pay for themselves several times over in lower staff turnover.

Even more compelling, researchers found that offering a retirement plan can save small-and-medium-sized businesses (SMBs) more than $100,000 annually in reduced employee turnover costs.  

The data from Gusto also revealed that retirement benefits led to better retention across all industries. In fact, employees were 40% less likely to leave during their first year if they were extended retirement benefits. In some positions, that figure jumped to 54%.  

On average, employees with an active 401(k) were also 32% less likely to leave their job in any given month.  

What’s more, most SBMS don’t offer retirement benefits of any kind. Overall, 22% of SMBs on Gusto’s platform extend retirement benefits. Specifically, for businesses with fewer than 10 employees, retirement plans for available to 15% of employees. However, 65% of employers with more than 100 employers were offered access to retirement benefits.  

Offering Retirement Benefits Dramatically Increases Employee Retention

In a recent article, Luke Pardue, an economist at Gusto, explained that the time spent finding new workers can be a time-consuming and expensive endeavor for employers.  

“One of the best ways a company can avoid those costs is by offering a 401(k) retirement plan for its employees,” he wrote. “Our calculations show a 401(k) plan can lead to annual cost savings of more than $100,000 in reduced employee turnover costs alone or a 2x return on the initial costs of offering a 401(k).”

For many working Americans, the importance placed on financial security has always been high; however, this sentiment was further exacerbated during the tumultuous ups and downs of the market due, in large part, to the COVID-19 pandemic.  

As a result, millions of Americans chose to leave their jobs for better-paying positions with competitive benefits packages, resulting in what many refer to as the Great Resignation.

In fact, according to the Pew Research Center, in September 2022 there were two job openings for every unemployed person, and the rate at which workers were leaving jobs for more attractive positions hovered near historic records.  

Additionally, it’s worth noting that more than 40 million employees currently do not have access to retirement benefits. If those workers could access a 401(k) through their employers, they’d be able to save as much as $5.7 trillion in 20 years.

Looking for more exclusive content? Check out what’s trending on the Mployer Advisor blog, and be sure to catch the latest episode of Mployer Advisor’s new podcast “This Week in Benefits.”

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Editor’s Note: To access your SHRM credits for listening to this podcast episode, click here.  

Welcome to This Week in Benefits, a new biweekly podcast from Mployer Advisor, the company that is changing the way employers search, evaluate, and select insurance advisors online.      

In each episode, our team will bring you the latest news and industry updates in the world of employee benefits. We will break down top headlines, bring you interviews with industry insiders, and highlight market trends and stories we’re following.    

In case you missed Episode 16, click here to listen and to access the show notes.    

Show Notes      

Date: November 30, 2022  

Episode Season and Number: Season 1, Episode 17    

Episode Title: In this week's episode, Abbey Dean and friend-of-the-pod Jeff Reinke (Editorial Director for Industrial Equipment News) discuss Ford’s decision to offer longtime employees with performance issues the option to voluntarily leave the company with a severance package rather than go through a performance enhancement plan.  

To listen to Episode 17 of This Week in Benefits, click here.      

Additional Recommended Reading    

Ford Offers Easy Exit to Underperforming Workers, SHRM

Ford to Offer Some Underperforming Workers Choice of Severance or Performance Improvement, The Wall Street Journal

Ford Gives Underperforming Employees Option to Take Severance Package, The Detroit News  

‘We Absolutely Have Too Many People’: Ford Ready to Wield the Axe as U.S. Economy Slips into Technical Recession, Fortune

Industrial Equipment News  

Connect With Jeff Reinke

Episode Transcript

Abbey Dean: Hi everyone, and welcome to this week's episode of This Week in Benefits, a podcast from the team at Mployer Advisor where we discuss all things in employee benefits. I hope everyone had a wonderful Thanksgiving. We're still getting out of the post Thanksgiving haze, but to help me do that, we have back on the podcast today, my friend and former boss, Jeff Reinke of IEN. And we are going to be discussing an interesting new policy that Ford Motor Company announced earlier this, well, I guess it was a few weeks ago now, but it started November 1st. So we are going to look back at that headline, dig into the kind of meat of the story, and Jeff is going to give some interesting perspectives on what this might mean and also what it could indicate for the larger manufacturing industry. So stay tuned and take a listen to my conversation with Jeff.

Hi everyone, and welcome to another episode of This Week in Benefits. We have a return friend of the podcast on today, Jeff Reinke of IEN. Thanks for coming on again, Jeff.

Jeff Reinke: My pleasure, Abbey. Thanks for having me.

Abbey Dean: Of course, always. Again, just any sort of excuse to talk to you. So <laugh>,

Jeff Reinke: Just trying to relive this Wisconsin weather from South Tennessee.

Abbey Dean: You know, I honestly am so it's a win-win for me.

Jeff Reinke: Well, hey, a couple months we can go ice fishing if you really want to get back into it.

Abbey Dean: Jeff, I never went ice fishing even when I lived there.

Jeff Reinke: Well see. There you go.

Abbey Dean: Would you actually take me?

Jeff Reinke: If you would make the track up here to do it, I would definitely take you on the ice, I think especially because you would last maybe 90 minutes and we'd be done. So <laugh>,

Abbey Dean: Okay, so this is recorded so you can't back out.

Jeff Reinke: I'm in, I'm in.

Abbey Dean: Okay, awesome. So anyway, aside from ice fishing, today, what we are talking about is some news that came out of Ford a few weeks ago. Basically what the news is, is that Ford is giving long-time employees with job performance issues, the option to voluntarily leave the company under a policy update that went into effect officially on November 1st. So what it's doing is it's altering its approach to addressing white collar employees, of which they have around 30,000 who are deemed under performers. And they're telling managers that some of those workers must choose between severance, or a performance enhancement program, and that's internally known as the performance enhancement plan, or PEP. So there's sort of like Jeff, we talked about this a little bit before, but this isn't a new type of plan. There's a lot of sort of structures out there that are similar.

But what is different about this is that the plan before has been in place for U.S. salaried workers with at least eight years of service experience at Ford? So I'm, I'm just very interested in this. Basically, Ford is giving white collar workers who have been flagged for underperformance the option to have weekly check-ins with managers and have new objectives over a six week-ish period. Or they can just go ahead and say, hey, you know, I don't think this is working out for me and take a severance check. So it's very interesting, and I wanna touch on this a little bit but Jeff, when you first heard this news, what was your reaction?

Jeff Reinke: Well, Ford's had a lot of interesting developments going on internally with the way that they're structuring or restructuring their company. And a lot of this, and they're not alone, is based on the fact of just the impact of the electric vehicle market. Earlier this year, I wanna say it was March, they came out with an announcement basically saying they were going to split the company into what they're describing as two interdependent companies.

You're going to have Ford Blue, which is the internal combustion engine production focused vehicle company, and then you're also going to have Ford Model E, which is obviously focused on the production of electric vehicles. So to me, when I first saw this, it seemed like they were taking additional steps to get their company the right size and with the right people to move forward with really going after the electric vehicle market. They've also made announcements by hopefully having, I think 16 electric vehicles within the next three or four years out on the market, which is very aggressive, especially cause right now they're nowhere near that. So a lot of, I think this just to me it reading between the lines, even though they didn't say anything specific, this was another move focused on electric vehicle development

Abbey Dean: Right and then a lot of the coverage I saw surrounding this, they were very clear that this is not I think there was some rumors going around that they might announce another round of layoffs. And so when this news came out, they were like, no, no, no, no, we're actually <laugh> trying to make sure we have the best people in the business who want to be here. And so it's kind of an interesting approach. Actually, the Wall Street Journal they interviewed someone named Liz Weber who's a management consultant, and she said quote, she's "never come across an approach to performance management like Ford's new policy." She also called it "impressive and very gracious, and a move that demonstrates Ford's commitment to supporting underperformers within its white collar ranks." So I don't know about all of that, but it is a very interesting approach.

Jeff Reinke: I think she's being very gracioU.S.there. I think this is kind of a half glass full approach. Basically, Ford is weeding out some of their underperformers, because the dynamic with producing marketing servicing electric vehicles is very different. Now, the supply chain is similar in many respects, but you've got a customer that's going to have to take on a real paradigm shift. You've got different design specifications, you've got just completely different production processes and models. Those models really depend on a little bit more automation fewer hands on the vehicle while it's being made potentially, and leveraging a lot of these new production technologies. So when you're looking at really refocusing so many elements of your internal operation, there's no way that can impact the folks working in the front office who are involved with designing those vehicles, marketing those vehicles, selling those vehicles, dealing with dealerships, dealing with customers.

All of those things are going to be impacted as well, especially because Ford has also taken steps in with their supply chain in terms of developing a lot of their own battery factories especially in the southeastern part of the country. So when you look at an internal combustion engine versU.S.a battery pack, the number of suppliers is less, the design elements are less. So that's going to impact things in the front office as well. And again, I think that's where a lot of this is coming from, identifying these underperformers and getting people in there that are going to be better suited to their EV business.

Abbey Dean: I should also say that I could not find any numbers anywhere about how many underperformers Ford usually has in this existing program too. So I don't know how big of a program this is or how big of a change but it is an interesting policy. Jeff, do you know of other automakers or manufacturers who do have similar programs or initiatives like this?

Jeff Reinke: Well, I mean, the buyout dynamic is not new. We've seen that a lot. But typically it was related to sort of time at the company, maybe certain positions that were being eliminated as opposed to them transferring somebody to a different job. They gave them the option of a buyout. So when it was downsizing or again, letting people retire early, essentially those things are not new for it to be directly tied to a performance program or a performance, for lack of a better word, rating program or ranking program. Yeah, that's very different. Typically, you would see automakers maybe being a little more aggressive depending on the type of job we're talking about now we're talking about front office folks as opposed to UAW workers on the plant floor. So that's a different dynamic too. But again, typically it'll be more about weeding them out more I think in a more democratic way. This is unique to look at performance.

Abbey Dean: Ford also clarified that the updated policy allows, they kind of clarified what you're talking about, what the actual severance payouts would be based on, and apparently it's based on, as you kind of said, length of employment, continuation of benefits, and then also career transition services. I don't know what that part means. Honestly, I think there's, yeah, I know. Yeah, and maybe or maybe there is a position, maybe you could move up elsewhere. I don't know. Maybe that's a different part of this that they didn't go into as much too but the process they say would remain unchanged for those who opt to go into a PAP program rather than leave. So they could be subject determination without severance if they fail to turn around their performance. So I mean it is it an interesting carrot they're putting out there?

Jeff Reinke: Well, it also allows them to move more rapidly. Hopefully we can get these folks essentially off the books. Part of this may also be trying to leverage the fact that there's been a lot of layoffs in the tech industry. Yeah. When you look at social media companies, even some of the more technologically focused companies like Cisco and Microsoft laying off a lot of people right now, Amazon's another one. Maybe Ford is looking at those types of individuals. When you look at data scientists and artificial intelligence people and other developers of different types of technologies, they may be real appealing and this allows them to, pardon the term, just sort of cut some dead weight and move on to get the right people in place. Again, I think this is really focused on advancing their electric vehicle business.

Abbey Dean: And that was going to be my next question, if this change signals anything to you about the state of Ford, but also just large, more largely speaking about the state of the industry right now and all the kind of changes and curve balls that everyone has been hit with this year.

Jeff Reinke: Well, it's unique in the fact that automotive, and again, we're looking more at the plant floor when I say this as opposed to the front office, but labor shortages have been real. I mean, especially in automotive, they've had a very difficult time finding enough workers. So to hear about a program where they're basically allowing those who have come up on the shorter end of the evaluation stick to leave with some money in their pocket is unique. That's different. We haven't heard, we haven't seen that before, how this impacts automotive going forward. I think every one of these companies is embracing the transition to the electric vehicle marketplace in a different way. Some people have gotten out way in front of it. Ford has been a little bit more, I would say, gradual in their approach. They've started with the F-150 Lightning, they started with the Mustang in electrifying those vehicles, which are two of the most popular vehicles on the planet.

I mean, the F150 has been the number one selling vehicle in the U.S.for 40 years. So their approach has been different, but I think that's what you're going to see with a lot of automakers around the world, seeing what they need to do to get the right people in place to really push these electric vehicle programs forward because they have some extremely aggressive goals in terms of the percentage of their portfolio that they want to be electric and the goals that they have in place for making sure the mass majority of the vehicles they produce are EVs.

Abbey Dean: Is there anything else you think we should touch on that's interesting about this or important to mention?

Jeff Reinke: Well, I think what's interesting, remember Ford is obviously the oldest automaker in the U.S. so when they do things, people still pay attention. I think geographically, it's also very interesting with them still being very focused on Detroit. They've been one of those that has not had as strong a move away from sort of the Midwest, although they have opened, they've got a big truck plant, they've got a lot of facilities in Kentucky. So again, and they're even this year, the way that they've done things in terms of the job cuts, we heard about 3000 cuts earlier in the spring, another 8,000 that were rumored this summer. But then we've seen huge investment again in that Kentucky facility where they make trucks, where they're hiring upwards of 500 or more auto workers. So I think everybody does watch a company like Ford and sees what they do, not necessarily to emulate them, but to get a feel for what may or may not work in their plans as well. So it'll be interesting to see how this plays out, and I could see other automakers potentially taking this route in terms of, here's an easier way to, again, get the right people that we need in transitioning towards electric vehicles.

Abbey Dean: Awesome. Well, I hope they maybe do some updates. I'm assuming if it goes well, we'll hear about it. If it doesn't, then maybe we won't.

Jeff Reinke: Yeah, I, and then you kind of feel bad for these folks who didn't take the initial offering. Oh, I know. They're not able to improve their performance level, and they're letting go anyway, and I kind of feel like that Ford is going to be, even though they wouldn't say it in any type of press release or external statement, I think they're pushing these folks to take the deal,

Abbey Dean: Yeah, I bet so too. Okay. Well, thank you, Jeff, Reinke, for all of your insight and expertise. We'll have to have you back on soon. Either that or I'll just come to Wisconsin and we'll go ice fishing.

Jeff Reinke: That would be wonderful. Abbey Dean, thank you so much for having me on your podcast.

Abbey Dean: <laugh>. Awesome. Thank you, Jeff.

Jeff Reinke: All right, see you later.

Abbey Dean: And that wraps up today's episode. Thanks so much to everyone for tuning in. Now, if you have not yet, please subscribe to the podcast. If you leave us a review, I would be forever grateful. Don't forget too, that you can leave us a voicemail message if you want to send along ideas or have follow up questions to past episodes. Also, something that you guys may not be aware of, but if you are an HR professional and you need some SHRM credit, this podcast does qualify for SHRM credit, so be sure to check out our show notes to learn more about how to access that. In the meantime, I hope everyone is doing well, getting into the holiday spirit, and I will see you all next time.

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