May 2003
Total Compensation: A Call for
Action for Retaining Nurses
Maryland Statewide Commission on the
Crisis in Nursing
Retention Subcommittee Working Paper
Contents
Executive Summary
Background
Rationale For This Paper
Closer Examination
Retention Subcommittee Recommendations
2
Executive Summary
Executive Summary
Nursing 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
4
Executive Summary
Nursing 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
5
Background
Background
The 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
7
Background
A 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
8
Background
Maryland 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
MD Statewide Commission
– Education
Recruitment Education
– Workplace Issues, and
– Retention
Workplace
Issues
Retention
9
Background
Other Subcommittee Work
. . .with the three other subcommittees focusing on. . .
Recruitment
– Industry collaboration, web dissemination and a
recruitment toolkit
– Education process, scholarships and financial aid
Education
issues, finance and marketing, and mentoring programs
– Stress drivers, delivery models and quality of care,
Workplace
Issues
regulatory issues, participative decision making,
scheduling and lifestyle issues
10
Background
Areas Retention Subcommittee to Address
. . .while the Retention Subcommittee has identified its own three areas
in which to concentrate its effort.
Retention
– Adequate and flexible staffing protocols
– Improved communications leading to greater respect
and recognition, and
– Competitive compensation and flexible benefits
11
Rationale For This Paper
Rationale For This Paper
Understand 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
13
14
Rationale For This Paper
Clarify 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
15
Rationale For This Paper
Define 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
16
Rationale For This Paper
Maximize 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
17
Closer Examination
Closer Examination
Compensation 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
19
Closer Examination
Compensation 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
20
Closer Examination
Compensation 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
21
Closer Examination
Compensation-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. . .
Percentage replying
Causes of turnover
Increased market demand
Primary reason
64
Secondary reason
30
Not a factor
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.
22
Closer Examination
Compensation-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%
23
Closer Examination
Elements are Puzzling and Undervalued
Compensation takes many forms but can generally be grouped into
“direct” and “indirect” categories. . .
Components of a Compensation System
Indirect
Direct
Base Pay
Salary
Protection
Programs
Medical
Insurance
Life Insurance
Disability
Income
Pension
Social Security
Merit Pay
Wage
Pay for Time
Not Worked
Services and
Perquisites
Incentive
Pay
Vacations
Holidays
Sick Leave
Jury Duty
Recreational
Facilities
Car
Financial
Planning
Low-Cost or
Free Meals
Bonus
Commission
Piece Rate
Profit
Sharing
Stock Option
Shift
Differential
Deferred Pay
Savings Plan
Stock
Purchase
Annuity
From Fisher, Schoenfeldt, and Shaw, Human Resource Management, Houghton Mifflin Company, 1996, p.506.
24
Closer Examination
Elements are Puzzling and Undervalued
. . .or seen as including “market driven” and “variable pay” components
as well as an element of change – shown as “process”.
Total Compensation Elements
Value
Process
Security
Opportunity
Performance
Entitlement
Base Pay
Increases
Benefits
Pay
Ranges
Market Driven
Efforts and
Activities
Results
One-time
Event
Accomplishments
Recognition
Reward
Incentive
Compensation
Variable Pay
Mercer HR Consulting
25
Closer Examination
Salary Trend
Historically, nurses’ salaries have lagged behind those of other
professions, and they have only seen marginal gains in real wages. . .
Actual and “Real” Average
Salaries of Full-Time
Registered Nurses,
1980-2000
Actual “Real”
1980 $17,398 $17,398
1984 $19,079 $23,595
1988 $28,383 $20,839
1992 $37,738 $23,166
$50,000
$40,000
$30,000
$20,000
$10,000
$0
1980
1984
1988
1992
1996
2000
1996 $42,071 $23,103
2000 $46,782 $23,369
Actual Avg. Salary
"Real" Avg. Salary
U.S. Department of Health and Human Services March 2000 National Sample Survey of registered Nurses
26
Closer Examination
Work/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
71%
71%
Retention
53%
54%
Morale
47%
Recruitment
38%
30%
Productivity
Commitment
2000
46%
28%
1998
31%
27%
Performance
13%
Attendance
0%
10%
20%
35%
23%
30%
40%
50%
60%
70%
80%
Bright Horizons Family Solutions / Mercer HR Consulting 2000 Survey of Work/Life Initiatives
27
Closer Examination
How 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
28
Closer Examination
Mysterious/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
29
Closer Examination
Pay 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
30
Closer Examination
Pay 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
31
Closer Examination
Benefits 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
32
Closer Examination
Variable 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%
33
Closer Examination
Variable 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
34
Closer Examination
Employers 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
35
Closer Examination
Employers Are Not Maximizing Their Returns
. . .and wake up to the “hidden cost” of turnover as their healthcare
organization continues to feel unrelenting financial pressures.
$64,000
$42,000
Hidden
Costs
Hidden Lost
Productivity
Costs
$10,800
24%
Typical
Accounting
Visible
Out-ofPocket Costs
Correct
Accounting
Med/Surg Nurse
$11,520
18%
Typical
Accounting
Visible
Costs
Correct
Accounting
Specialty Nurse
Source: 1999 The Advisory Board Company
36
Closer Examination
Age/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
37
Closer Examination
Employee 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:
Appreciation for
outstanding
performance
53%
Fair pay
57%
Working
conditions that
allow effective
work
62%
A supportive
supervisor
62%
– Flexibility to manage work
and personal responsibilities
– Programs to help with
personal stress
– Assistance with dependent
children and parents
Adequate health &
well-being benefits
67%
Job security based
on performance
68%
50%
55%
60%
65%
70%
38
Closer Examination
Employee 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
39
Closer Examination
Should 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
40
Nursing Commission Recommendations
Nursing Commission Recommendations
Commission’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
42
Nursing Commission Recommendations
Agencies’ 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 marketbased 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
43
Nursing Commission Recommendations
Employers’ 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.
44
Nursing Commission Recommendations
Nurses’ 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.
45