Gaining Indirect Value from PHI Investments

The emphasis of PHI is on productivity, performance, and employee value contributions improvement as much as on health per se. For this reason, it makes sense to consider the direct and indirect effects of pay-for-performance systems on both health and performance. The Health as Human Capital Foundation blog (hhcf.blogspot.com) offers a number of discussion of the impact of employers’ compensation and benefits policies and practices on worker absences, productivity, performance, and turnover, for example. It also includes examples of the indirect effects of P4P on health, as workers who are paid more for higher productivity or better performance tend to take better care of their health, as a result.

Analyses by HHCF staff have found that property values are strongly linked to obesity rates, for example, suggesting that people with more money take better care of their health. [“Money Matters. What Do Skinny People in Big Houses Have to Do with Flu Shots and Bonus Pay?” Entry 11 - 2008. May 26 2008] Incentive systems that augment the value to workers of better self-management of their own health are linked to better health status. “There are Wellness Incentives, and then There Are Incentives that Increase the Importance of Being Well” Entry 13 – 2007 June 17, 2007] By contrast, explicit health improvement efforts often fail to yield desired results. [“Getting Real: The Reasons Companies Rarely Find Actual Dollar Savings with Health-Improvement Programs” Entry 26 2009 Dec 21, 2009}

Paying employees explicitly and significantly for higher productivity and better performance can serve as a strong motivator to get them enrolled and significantly engaged in health improvement efforts sponsored by employers or insurance plans. And because P4P incentives are only paid to those whose health improvement efforts actually yield value to the employer, it is a simple matter to ensure that incentives only go to those who succeed in their health and performance improvement efforts, rather than wasting money on incentives that yield only participation in particular elements of a PHI initiative. Employers can scale performance incentives to ensure that they yield a positive ROI simply by making them gainsharing amounts.

Enabling employees to gain greater compensation, whether raises or bonuses linked to performance can also have an indirect impact through altering the mix of low, average and high performing workers in the employee population. When Safelite switched from hourly pay to “piece rate” compensation for its windshield replacement staff, for example, it found that turnover rates among low performers went up dramatically, while rates for high performers went down. Over time, such an effect will significantly alter the proportions of high vs. low performers, and thereby yield added value for employers. [E. Lazear “Performance Pay and Productivity” American Economic Review 190:5 Dec 2000 1346-1361]

The use of P4P systems will also tend to alter the mix of recruits that employers attract, whenever there are similar competing jobs available that do not pay more for high performance. As the mix of job applicants shifts toward higher percentages of top vs. average or low performers, this will add a separate, though related impact to that affecting current members of the workforce. Examples such as Safelite demonstrate how profitable such effects can be – it achieved a 44% improvement in productivity for only a 10% increase in overall compensation paid to its workers.

Yet another indirect effect is the tendency for P4P systems to motivate workers eligible for performance-based pay or bonuses to stimulate efforts among “back-office” support staff. In the Safelite example, a common problem that had accepted as part of the support system was that of inventory staff delivering the wrong windshield to installers. This meant having to make two trips for installations at customers’ locations. Once the P4P system was introduced, installers began pressuring the inventory staff to get it right the first time, since every mistake cost the installers valuable time. As a result, errors declined dramatically, adding to customer satisfaction, as well as to installers’ and the company’s revenue and profits. [B. Hall, E. Lazear, et al. “Performance Pay at Safelite Auto Glass” Harvard Business School Dec 6, 2001 (Case Studies 9-800-291 & 292]

Such indirect impact can be enhanced by including support staff in the P4P system, though this was not part of the Safelite example. It would be a relatively simple matter to include performance pay or bonuses to support staff based on their delivering the correct items to installers, though this would tend to reduce the amount of money available to pay installers. In a gainsharing system, the more people are eligible for P4P compensation, the further gains must be shared, though in the Safelite example, with 44% greater revenue potential vs. only 10% more compensation, there would have been plenty of room for more workers to share, while still enabling the employer to keep the lion’s share, or at least an equitable share, of the gains.

While the usual approach to PHI is to initiate health and wellness programs separately, it may work better if P4P systems are introduced or augmented at the same time. To the extent that performance incentives will serve as sufficient motivation for many workers to engage in healthier behaviors, they will reduce dependence on participation incentives and reduce overall costs of PHI strategies. Moreover, because performance incentives can be scaled to the level of performance and value improvement achieved, they can increase the likelihood that PHI investments will yield a positive and admirable ROI.