The Employer Mandate... and Boneheaded Incentive Compensation

Jan 29, 2015

A recent op-ed piece by Catherine Rampell in The Washington Post, eloquently titled “Ditch this Obamacare mandate” in the print edition, observes that the employer mandate – as prescribed by the Affordable Care Act – is seriously flawed, which has provoked the Obama administration’s efforts to tinker with it, which has in turn spurred Congress’s efforts, for different reasons, to tinker with the Administration’s tinkering. The cause of all this is an example of one of the more boneheaded moves that often beset incentive compensation plans: excessively binary schemes.

The original problem is that the ACA requires all “large” employers to provide healthcare coverage for all “full-time” employees (i.e., at least 30 hours per week) or face penalties. This is a binary scheme, by which I mean that it’s either/or – either you provide healthcare or you don’t, to employees that are either “full-time” or they’re not, and there are no gradations or nuances at the margins. The result is incentives for bizarre and socially destructive behavior by employers, such as employers cutting back hours so some employees would no longer be considered “full-time.” Both the Administration’s and the Congress’s proposed tinkerings will only make things worse; but more than that, they’re nothing more than efforts to solve a problem that, but for poor crafting of legislation, shouldn’t have existed in the first place.

It’s not my intention to get in the middle of an ACA food fight. I simply want to observe that excessively binary schemes – whether they’re in corporate incentive compensation plans or legislation on public policy issues – have unintended, undesirable consequences. In my next post, we’ll see how this problem shows up in employee bonus plans. Stay tuned.

“Painting with Numbers” is my effort to get people to focus on making numbers understandable. I welcome your feedback and your favorite examples. Follow me on twitter at @RandallBolten.