The most efficient weight-loss book would have only two chapters, each with one sentence: Chapter One – “Eat less.” Chapter Two – “Exercise more.” There'd be a similar book for improving your company’s financial health: Chapter One – “Reduce costs.” Chapter Two – “Increase revenues.”
This article will show how implementing a rigorous safety culture does more than keep your employees safe and healthy; it also has financial benefits that keep you company healthy, too.
Reducing Costs and Increasing Revenues
The first and most obvious area where cost savings can be achieved is with Workers Compensation insurance.
Many business owners don’t realize how much control they have over their experience modification rate (EMR or Mod Rate), which is used to adjust the “book rate” for Workers Comp premiums. A company’s EMR is based on how its claims experience compares to the industry averages in its classifications, with a 1.0 rating representing the average. As Mark Oldham, executive consultant in risk management for Fireman's Fund, points out, "Insurance costs are controllable costs—they're not a fixed expense." That's good news, since insurance is a significant percentage of the overall cost of business (just add up your Workers Comp, liability, automobile, property, inland marine, umbrella, professional liability, and employee benefits to see what I mean). “It’ll have a disproportionate impact when costs can be lowered,” Oldham adds, “Insurance trades fixed costs for unknown costs, and premiums are directly influenced by prior experience and control over operations.”
In fact, Workers Comp operates like a line of credit insofar as the insurer spreads the cost of a company’s predicted future losses over time. This means that premiums are, in essence, just a way of financing a company’s cost of accidents and injuries. So, obviously if a company can reduce its claims over time, it will reduce its cost of doing business.
This can translate to a measurable effect on the bottom line. The example below illustrates the difference in premiums between an EMR of .80 and an EMR of 1.20 for just one of a contractor’s job classifications:
|Payroll||Rate per $100||Premium|
|Class Code: 5610||$600,000||$8.60||$51,600|
Table 1: EMR .80 Modified Premium Rate
|Payroll||Rate per $100||Premium|
|Class Code: 5610||$600,000||$8.60||$51,600|
Table 2: EMR 1.20 Modified Premium Rate
Modifiers are also applied to a company’s general liability and auto insurance, but the EMR is a key indicator of a company’s performance. Oldham notes that “It’s used as a litmus test of how you run your business. If you can’t work safely, you can’t produce a quality product.”
Many insurance carriers will meet with a prospective client before offering a quote, and perform a loss control survey to gather information on its operations. This will help the underwriters understand what the company does and how well it does it. Underwriters make empirical decisions based on these tangible factors to determine debits and credits against the book rate, so their assessment of your company has a direct bearing on the cost of your insurance. The carriers will also advise the client on how to control losses, identify risks, and develop appropriate action plans and follow up on them properly.
Fireman’s Fund also provides its clients with consulting services if warranted. They will help prepare a mutual action plan with specific objectives and timelines for the risk consultant and the client. Then, they execute the plan in concert. At the conclusion, the desired reduction in hazards and risk factors should be clear enough for the client to give an “as a result” statement. If the client can’t, the plan was simply a disconnected series of actions rather than a strategic effort.
For those contractors that don’t have a full-time safety department (or even those that do), Oldham suggests taking advantage of the many services that insurance carriers offer, such as subscriber-only content on their websites, which can include things like training programs, educational resources, and topics for safety meetings.
Great Video on Contractor and Supplier Prequalification: http://bit.ly/2j6iPQl
Oldham emphasizes that successful companies are engaged (learn about The Importance of Employee Engagement and Its Impact on Your Bottom Line). There’s an awareness of the true costs of risk, an understanding of what drives risk, and there are mechanisms to control the cost of risk (such as diligent hiring practices, strong training programs, aggressive injury investigation and correction efforts, and claims management like bringing injured employees back to work ASAP).
When Fireman’s Fund performs a loss control survey, Oldham says they look for employers who “get it.” Those are the ones who don’t just focus on the cost of insurance premiums. They understand that accidents and injuries affect their other business costs (such as the state unemployment compensation billing, which increases with the turnover rate) and they understand why.
Creating and Maintaining a Safety Culture
Some contractors use incentive programs as a way to reduce injuries and accidents. But, according to Dianna Wiggins, an independent loss control consultant, “There’s a place for safety incentives after you’ve changed the safety culture—by developing a really good safety program.”
Implement a Good Safety Program
First, stop the injuries and accidents by implementing a good program with excellent training and management (see The Journey to Zero! for a discussion of zero-accident workplaces). And a prerequisite to safety culture change is a genuine, highly visible, unwavering commitment from the very top of the organization. Because good safety practices can be perceived as slowing down productivity, there is a natural tendency for line employees to view them as arbitrary and annoying rules that are imposed by “the office.” This isolates the safety personnel, who are peers, putting them in the role of “safety police” (with all the associated avoidance behaviors that accompany that mindset). A key part of the visibility shown by management is giving active and vocal support to the safety staff.
“After the accidents stop, employees can get complacent,” Wiggins states. “Two to three years after instituting culture change, safety incentives can help sustain the performance.” In a previous position as Safety Manager for a medium-sized manufacturing company, Wiggins implemented a highly successful safety program that helped reduce the company’s EMR to .76. This reduced the Workers Comp premiums by almost 60%, which translated to hundreds of thousands of dollars saved per year. Once that was achieved, she maintained that level of performance with clever incentive programs (costing only around $10,000 per year), and the company won over 30 national safety awards (see Your Incentives Are Compromising Safety Culture for advice on using incentives the right way).
Adopt an Early Return-to-work Policy
Wiggins also advocates for an early return-to-work policy, which can help reduce the cost of Workers Comp. This policy allows injured employees to return to work in a light or modified position until they’ve fully recovered and can resume normal work duties (find out How a Phased Return to Work Is Beneficial for the Employee).
Everything that can be done to reduce the claim cost and get the employee back will have a positive impact on the cost of running the business. Justin Cremers, a Safety Coordinator for the safety consulting firm SMI, counsels his clients on the benefits of implementing an early return-to-work policy, stating that “The type of claims experienced and what’s done to control the cost of claims has a significant effect on Mod Rates.” Claims for medical treatment only are usually less severe and are reduced by 70% before they’re applied to the formula. Cremers urges his clients to take advantage of this by ensuring that injured employees return to work as soon as possible, noting that “This is where an effective claims management and return-to-work program can have a dramatic effect.”
“It’s critical that a job description should include what kind of physical demands are placed on the employee,” emphasizes Wiggins. That document should be given to the doctor so they’ll know what light-duty or modified work the injured employee can perform while recuperating, which will make it more likely that they’ll approve a quick return rather than keeping the employee off work (a key point to remember is that the employee must have signed the policy). She further suggests that “You can even get your employees to work at a not-for-profit location, and write it off as a charitable contribution."
Avoid Reporting Non-recordable Incidents
Another factor affecting costs can be the OSHA 300 log and 301 Incident Report. Wiggins says that many companies have a high incident rate because they’re recording things that they shouldn’t—they don’t realize that first aid, visits to a doctor for x-rays or blood tests, and even drilling a fingernail or toenail to relieve pressure are not recordable. “The effect of that,” she points out, “can be losing business with companies that don’t allow contractors with an incident rate higher than the national average.”
Similarly, opportunities to perform work for the government and large companies that have rigorous safety standards are only open for companies with an EMR below 1.0, and the chances improve the lower the Mod Rate gets. But this is only part of the equation. If your firm becomes noted for safety excellence, your customer base is much more likely to increase and repeat—precisely what happened during Wiggins’ tenure.