The most recent OSHA rules or amendments this summer focusing on protecting employees from retaliation have re-surfaced the issue on whether or not safety has a place in employee incentives. While vague in their specifics, the newly adopted provisions do specifically address incentive programs.
Under 1904.35(b)(1)(iv) the filer must not discharge or in any manner discriminate against any employee for reporting a work-related injury or illness. That umbrella language included “…denying an employee any benefit [resulting from his/her reporting]”.
New Rules
These are in place in order to ramp up the enforcement of non-retaliation against employees who file accident, health, or related reports. So the broader issue related to compensation is not the fact that you have a safety component in your bonus plan, the issue is whether it has an adverse effect on an employee’s reporting of an incident.
In its discussions on inputs from filers, court cases, etc., OSHA condemns “incentive provisions” focused on safety-related incentive compensation programs—implying that the practice is a form of retaliation. This narrow perspective is not new—OSHA has had this philosophy for a number of years. The new rules have, however, raised a new level of concern in the C-suite since safety performance is a common performance measure in annual incentive plans and some long-term incentive programs. Incident rate, in the form of a Total Recordable Incident Rate-type formula, is a common award element for both employees and also the top executives.
What are the Implications to Top Management and the Board
A closer read of the regulations and comments makes it clear as stated above that, at its core, the aim is to not have any system, policy, or program that could promote retaliatory practices that serve to (directly or indirectly) discourage employees from reporting accidents. It does go on to say that safety incentives are acceptable practice if they encourage reporting and safe work practices. The practice of rewarding based upon incident rate or occurrence frequency, or severity then comes more into the spotlight. The bottom line is that the company must be cautious in program design to ensure that the incentive, through management practices, or policy, or even peer pressure at the worker’s team level, does not thwart reporting.
Addressing Risks in Accident Reporting as Part of the Board’s Risk Assessment Process
Safety bonus practices, whether they are monetary, uniforms, other safety points, etc., are an embedded part of many field or operations-based workplaces (e.g., rig, ship, construction site, mine, factory, etc.). Given the importance of that core competency and promoting a safe working culture, the focus should be on whether or not there are potentially material adverse risks in the incentive plan design that are significant enough to discourage reporting of accidents. From the board level, there are two issues: (1) having an effectively communicated corporate policy to prevent retaliation at any level for failure to report accident and health issues and (2) making sure that if safety awards that are based or partially based on accidents (lost time, medical only, etc.) that the program or its practice does not in any way discourage accurate and timely reporting of accidents.
Potential Actions
Since this renewed emphasis has clearly placed safety incentive practices on the annual risk assessment checklist, arguably for both the Compensation Discussion and Analysis (CD&A) and the Management Discussion and Analysis (MD&A), we recommend the following:
- Review the committee charters to make sure that they address the two main issues set out above (e.g., audit, HR, or compensation committee for item #1 and the compensation committee for item #2).
- Have the safety function present its loss prevention and control policies and procedures and confirm that any and all incentives that are tied to safety incidents are monitored to encourage reporting and ensuring job protection.
- Ask for an overview of any lost time accidents or incidents that were not reported in a timely fashion in the previous year with explanations.
- Assess the magnitude of the safety award as a component of W-2 for those impacted employees and how a loss or failure to meet safety reporting is layered into compensation for the team and up the organization (e.g., are teams individually impacted or all teams with certain losses or severity of losses?).
- Review the message from the top down. How focused is it on protection for timely and accurate reporting of losses, loss control procedures, and subsequent employee care from the perception of the field and underwriters?
- Does the structure of the incentives for management and the executives support accurate and timely reporting or just focus on total recordable incident rate (TRIR), number of lost times, costs of the program, or other cost factors?
- If any material adverse risks (practices or programs) are found or are potential risks are expected to exist, the typical process is to report the findings directly to the audit committee, informing any other committee of the actions. Independent experts may then be enrolled to work with management or the health/safety/environment (HSE) team to address the concerns.
- After completion of the initial audit(s), develop a checklist with help from internal HSE or safety management to use in the ongoing monitoring of this issue as with other variable compensation programs.
A number of industry associations have reacted to these rules and may offer insight. In addition to beefing up the risk assessment role of the compensation committee, if you come across any questionable areas, practices, or patterns of behavior (e.g., late reporting, under reporting, OSHA fines, etc.) or find questionable areas, reach out to your loss prevention carrier, labor lawyer, and your top HSE or safety professional for help in the assessment process.
Pearl Meyer is experienced in structuring risk checklists from an independence standpoint and will be recommending the steps outlined above to its clients.
