VideoCompanies that don't provide health-care insurance could soon get a wake-up call. That's because an increasing number of states — 23 at recent count, according to the National Conference of State Legislatures — are considering so-called pay-or-play bills that would force employers either to provide some coverage or pay a penalty.
One of those states, Maryland, passed the first such law in January. The Fair Share Health Care Fund Act requires companies with more than 10,000 employees in the state to dedicate at least 8 percent of their labor costs to providing employee health care, or pay the difference to the state. The act was aimed squarely at Wal-Mart Stores Inc., which has been widely criticized for its benefit practices. With more than 16,000 employees in Maryland, Wal-Mart is the most notable company affected by the law.
Other states, including New York, Tennessee, New Jersey, and California, have also introduced bills that would require employers with 10,000 or more employees to contribute at least 8 percent of payroll to employee health care, or pay the difference to the state. (Nonprofits would generally be allowed to contribute less.) Rhode Island has introduced a pay-or-play bill aimed at employers with 1,000 or more employees.
And in a move that pits small business against big companies, Massachusetts is considering health-care reform that could require employers that do not offer health insurance to pay an initial $295 per employee annually into the state's free-care pool. The proposal, which is supported by many large companies in the state, is meant to help pick up the health-care tab for the more than 500,000 uninsured individuals living in Massachusetts.
Not surprisingly, small businesses are fighting the Massachusetts proposal. "I'm all for private and public health-care coverage, but not the way they're doing it," says Chris Stone, president and CEO of StreamServe Inc., a Burlington, Mass.-based maker of enterprise document presentment software. While StreamServe does provide health insurance, Stone says the move would hurt small businesses that can't afford it. "Think of the small contractors, the welders, and the service stations," he adds.
Wal-Mart, which provides health care to less than half of its employees, took exception to being singled out. "There are 786,000 uninsured people in the state of Maryland, and less than one-half of 1 percent work for Wal-Mart," said a spokesperson in a statement. (Wal-Mart recently announced plans to expand its health coverage by shortening waiting periods for, and expanding availability of, its low-cost health plans.)
Michael L. Blau, a partner at law firm McDermott Will & Emery LLP, says employers that don't provide health-care coverage should brace for change no matter what state they do business in. "If Massachusetts does impose the $295 assessment on employers, other states are going to be watching to see how effective it is," he says. Likely, they will be ready to impose penalties of their own. — Laura DeMars
Taking Stock of SARs
Some companies are spreading SARs, and their executives couldn't be happier.
With FAS 123R making stock options increasingly unpopular, a growing number of companies are resurrecting an old form of incentives known as stock appreciation rights, or SARs. Like options, SARs reward employees based on the increase between a set strike price and current market price. The compensation vehicle gives the right to the monetary equivalent of the appreciation of share price over a specified time, but no stock or options are actually granted at the time the right is offered. Since they cover only the marginal gain, however, SARs can be fulfilled using cash or fewer shares of stock than options require, reducing dilution.
"A lot of companies are looking at [SARs] right now, up from about zero interest a few years ago," says Bruce Ellig, an executive compensation consultant. Aviall Inc., a Dallas-based parts distributor for the aerospace, defense, and marine industries, granted SARs for the first time this year. "The advantage has switched considerably from straight-up stock options to SARs because of the onerous accounting for options and the dilution factor," says David Leedy, director of investor relations. Aviall replaced its options packages with SARs that vest in equal installments over three years (except for the CEO's SARs, which vest in four years).
SARs have been around since at least 1934, says Ellig, but fell out of favor because of the variable cost accounting they required. Compensation consultancy Frederic W. Cook & Co. reports that only 3 percent of 250 large companies used stock-settled SARs in 2005, up from 1 percent in 2003. But now that 123R requires options to be expensed, and allows for stock-settled SARs to be expensed as a fixed cost, the two are much more comparable in terms of accounting and tax treatment. (Cash-settled SARs still require variable accounting.)
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