Insperity Inc

NYSE:NSP

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Jane and I will be your conference operator today. I would like to welcome everyone to the Insperity First Quarter 2022 Earnings Conference Call.

At this time, I would like to introduce today’s speakers. Joining us are Paul Sarvadi, Chairman of the Board and Chief Executive Officer; and Douglas Sharp, Senior Vice President of Finance, Chief Financial Officer and Treasurer.

At this time, I would like to turn the call over to Douglas Sharp. Mr. Sharp, please go ahead.

[Douglas Sharp]

Thank you. We appreciate you joining us. Let me begin by outlining our plan for this evening's call. First, I'm going to discuss the details behind our first quarter 2022 financial results. Paul will then comment on the key drivers behind our Q1 results and our plan over the remainder of the year. I will return to provide our financial guidance for the second quarter and an update to the full year guidance. We will then end the call with a question and answer session. Now before we begin I would like to remind you that Mr. Sarvadi or I may make forward looking statements during today's call, which are subject to risks, uncertainties and assumptions. In addition, some of our discussion may include non GAAP financial measures years. For a more detailed discussion of the risks and uncertainties that could cause actual results to differ materially from any forward-looking statements, and reconciliations of non-GAAP financial measures, please see the company's public filings, including the form 8-K file today, which are available on our website.

Now, let's discuss our strong first quarter results in which we exceeded both our worksite employee growth and earnings expectations. We achieved adjusted EBITDA of $119 million, up 14% increase over Q1 of 2021 and adjusted earnings per share of $1.99. These results reflect growth in the average number of paid worksite employees above the high end of our forecasted range, pricing above target levels, effective management of our direct calls programs, and operating leverage. As for our growth metrics, the average number of paid worksite employees increased by 19.5% over Q1 of 2021. As most of you are aware of the year in transition from 2021 to 2022, in which we enroll new clients from our fall sales campaign, and renew approximately 45% of our existing clients was important to our 2022 starting point, and therefore our full year growth expectations.

We are were pleased to report a very strong year in transition, as demonstrated by a 3.6% sequential increase in the average number of paid worksite employees from Q4 of last year to Q1 of this year. As for the drivers of this growth, worksite employees paid for new client sales increased 37% over the first quarter of 2021. First quarter client attrition was near our historical low, totaling only 8.5% and an improvement over Q1 of 2021 attrition of 12%. And our clients continue to experience a robust hiring in spite of the current tight labor market. First quarter gross profit was managed above forecast on the outperformance in the worksite employee growth, pricing above target levels and a favorable contribution from our direct cost areas. As for our payroll tax area, while unemployment levels have fluctuated over the course of the pandemic, our state unemployment tax rates have remained below anticipated levels, resulting in a favorable contribution to gross profit.

Our workers compensation program continues to perform well as a result of our ongoing management of safety practices and claims. Workers compensation costs also include the favorable impact from the reduction in the number of claims due to the work from home status of many of our client employees. Q1 benefit costs came in at expected levels while benefit pricing allocation exceeded our targets. We continue to take what we believe is conservative approach in estimating our benefit cost trend at budgeted levels for the full year in what appears to be in an improving although still uncertain environment.

Now let's put the gross profit comparison to Q1 of 2021, in which we achieved 14% growth. Keep in mind that this is affected by the additional payroll tax surplus in the first quarter of 2021, including the receipt of prior period payroll tax refunds, and the quarterly fluctuations in health care costs related to the pandemic last year. Now look for our operating expenses. Our Q1 spend reflects the initiatives in our five year plan discussed in our previous earnings call. This spend includes investments in our service capacity relative to our worksite employee growth, national marketing initiatives and technology including the ongoing implementation of salesforce. We implemented a new quarterly incentive program for our BPAS during the quarter to drive further improvements in sales efficiency. We also made targeted adjustments to the compensation levels of our corporate staff given the current labor market dynamics and our ongoing management of recruiting and retention goals. And while making these investments, the overall leverage in our cost structure resulted in a 7% decline in operating expense for worksite employee from Q1 of 2021. Now our financial position and liquidity remains strong as we continue investment in our growth and provide returns to our shareholders. During the quarter, we repurchased 308,000 shares of stock at a cost of $27 million and paid out $17 million in cash dividends. We ended Q1 with $153 million of adjusted cash and $370 million of debt.

Now at this time, I'd like to turn the call over to Paul.

[Paul Sarvadi]

Thank you, Doug. And thank you all for joining our call. My comments today will address three key areas for Insperity stakeholders. First, I'll provide specifics regarding the momentum drivers behind our strong Q1 results. Second, I'll comment on how this momentum and our key initiatives provide confidence in raising our guidance for the balance of 2022. Then I'll finish by providing some color around the extraordinary shareholder return opportunity of our recently launched five year plans. Our strong Q1 performance was the result of continuing momentum in all our growth drivers, namely new client sales, retention and client hiring. Our dramatic 37% increase in worksite employees paid from our successful conversion of book sales from our fall campaign into new clients and near historical high retention from our successful campaign, combined with continued strong hiring in our client base to drive nearly 20% unit growth.

New book sales in the first quarter continued this strong momentum, with both core and mid-market sales coming in over 120% of sales budget. Book sales came in 28% higher than the comparable period last year, with 3% fewer business performance advisors demonstrating significant increase in sales efficiency over 30%. In the first quarter, BPAs tiered levels were determined based upon final 2021 sales levels. Sales Management was successful last year in increasing the number of BPAs at tier three or above by 18%. This movement in our most experienced and productive BPAs was a significant contributor to the sales efficiency gain. This strong sales momentum also flowed over into book sales of our traditional employment solution, workforce acceleration coming in at 126% of sales budget, and 140% increase over the comparable period last year. The traction we've gained in this initiative is evident increasing the revenues on this service 39% over the same period one year ago.

Several key initiatives are behind these strong sales results, including recent marketing success, capitalizing on increased demand in the marketplace for our sophisticated HR solutions. Both worksite employees sold for marketing programs were up 29% over Q1 of 2021. Inbound leads converted into book sales, increased 34% and worksite employees’ books from these inbound leads more than doubled. Sales efficiency for marketing assisted deals booked in the quarter increased 36% contributing to the overall sales efficiency improvement. Another key driver of these impressive sales results is the recent implementation of a new quarterly bonus component of BPA compensation. BPA is now have quarterly targets based upon their respective tier levels and earn a bonus for achieving and exceeding these targets. This first quarter showed immediate signs of validation of this approach in generating excitement, extra effort and strong results. Another highlight of the quarter was the excellent client satisfaction and retention from the fall campaign that continued throughout the quarter.

Our service team and all those that support them across the country have done an outstanding job serving clients and meeting their needs in the face of this considerable growth. Client net hiring was also impressive in Q1 despite the tight labor market, our clients are continuing to do well in the battle to recruit and retain employees with the support of our services. Demand for employees continues to be high driving wage increases within our client base over 7% and overtime was above 11% of base pay. Commissions and bonuses paid to employees at client locations also provide some insight to the sales success in the small to medium sized business community and efforts to compensate to retain staff. Both measures were significantly higher in the first quarter than we have seen historically. At the same time, business owner competence has been weakening somewhat with inflation concerns moving to the top of the owner significant issues list in the recent NFIB survey.

At this point, the real time metrics we have, as the HR department for over 11,000 businesses across the country do not reflect a slowdown in hiring. So for now, it appears to be more of a general concern small business owners have about the future. Another welcome highlight from this quarter was the contribution from gross profit drivers, including slightly higher surpluses than forecasted due to effective management of price allocations and cost. The noise we've experienced in the health care plan during the pandemic appears to have waned somewhat. And we believe our conservatism in pricing allocations and cost estimation is appropriate. As Doug mentioned, we also saw significant operating leverage in the quarter, which is also an important factor in our business model. So all-in, the first quarter was an excellent start to 2022.

Now as we look ahead to the balance of the year, our confidence in raising guidance is due to our expectation of many of these recent positive trends to continue. We expect our growth to be fueled by our higher starting point and paid worksite employees, BPA performance at their current tiers and continues to draw retention. Now we're cautious about private hiring continuing at recent levels due to the tightness of the labor market, and business owner concern about inflation in the economy. We still expect some client hiring, but we believe it's prudent to build in a lower rate going forward. Our confidence in our rate profitability expectations is based upon the combination of this higher growth, and our gross profit contribution and operating leverage trends. This profitability is consistent with how our model has performed in historical periods of high worksite employee growth.

We also have key initiatives that support these expectations, including a clear focus on sales efficiency, effective pricing, and growing our service organization. This quarter, we're implementing some new incentives to our sales management compensation, which we believe will continue the sales efficiency improvements and new business pricing priorities. In addition, the marketing and business development team applied the learnings from the successful fall marketing campaign in 10 markets to enrich the spring program further expanding into all Insperity markets. We recently launched a fully integrated marketing program in all 41 markets in an effort to continue this momentum. We're also going live this quarter on our salesforce implementation across our growth organization, which we believe will improve our efficiency going forward. We expect to implement the implementation across the rest of the company early next year.

Another important initiative we have over the balance of this year is an aggressive corporate recruiting plan to add both service and sales staff. We've also felt the effects of the tight labor market and have made enhancements that we believe will allow us to achieve staffing targets to support our growth and client retention priorities. So it's apparent we're off to an excellent start for our first quarter of our five year plan. And our guidance implies a strong first year in 2022. Also, our key initiatives are laying the groundwork to capitalize on the growth and profitability outlook we see ahead. This new five year plan has extraordinary potential beyond what we have seen in previous successful five year runs. For example, from 2014 to 2019, our compound annual growth rate and paid worksite employees was over 12% and an adjusted EBITDA was over 24%. Our total return to shareholders was even more remarkable at 434% over that period, quarterly dividends increased an average of 27% each year, and the share price increased more than fivefold. This was not surprising over that period because our business model is designed to produce double digit unit growth, slightly higher gross profit growth and some operating leverage producing adjusted EBITDA growth north of 20%.

Historically, this double digit growth has been fueled by increasing the number of BPAs at a double digit pace. For example, in the period I just described, the compound annual growth rate for BPA growth was 12%. The five year plan we've just launched has three significant distinctions that I believe can drive adjusted EBITDA growth rates even higher. The first distinction is the marketplace demand I've described over the last several quarters. The impact of the pandemic. And all the after effects drove home the importance and the direct connection between a sophisticated HR function and business survival and success. We have seen this reaction in our clients’ prospects and those who invest in small to medium sized businesses. This increase in demand and receptivity is the initial reason we thoroughly developed and implemented this plan. I believe it is a significant industry specific wave we can capitalize on over the next five years.

The other two distinct differences are within our business model. First, the traction we have with our traditional employment solution workforce acceleration has the potential to add to gross profit in a way we have not seen before. Small increases in gross profit for worksite employee and our model drives significant increases in adjusted EBITDA. This source of gross profit also is not healthcare cost dependent, and if it were to grow significantly, could help to mitigate our overall volatility. Workforce acceleration has the potential to improve our sales efficiency, lower BPA turnover and enhance our customer for life strategy for long-term client retention. The second distinctive difference in our business model for this five year plan is the sales efficiency gain we have begun to see and will strive to further improve. This creates the potential for us to grow faster, with a BPA growth rate below the unit growth rate, which would add operating leverage we have not seen before. So I see the potential if we are successful on this five year plan to grow faster, add to gross profit for worksite employee and have more operating leverage than our last run.

This could mean significantly higher adjusted EBITDA growth, which we believe could create extraordinary returns to shareholders. Insperity is laser focused across the company on the 10 critical success factors expected to drive home the goals of this new five year plan. We are off to a great start and hopeful for a bright future for all Insperity stakeholders.

At this point, I'd like to pass the call back to Doug.

[Douglas Sharp]

Thanks Paul. Now let me update our guidance which we are raising our 2022 growth and earnings expectations based upon our outperformance in Q1 and an improvement in our growth and profitability outlook over the remainder of the year. We're now forecasting 15.5% to 17.5% worksite employee growth for the full year and improvement over our initial guidance of 14.5% to 16.5% growth. This expected increase is based upon our higher starting point going into Q2, continuing sales momentum, maintaining client retention at our budgeted high levels and continuing net hiring by our clients however slightly below recent trends given the potential impact of a further tightening in the labor market and inflationary pressures on the business environment. We are forecasting Q2 paid worksite employee growth of 18% to 19% over Q2 of 2021.

We also now expect 2022 gross profit to be higher than our initial budget based upon the Q1 outperformance and the recent positive trends in both pricing and direct costs. We continue to be mindful of the ongoing uncertainty associated with the pandemic and therefore continue to forecast the benefit cost trend over the remainder of the year in line with our initial budget. While we expect to get some further upside from the payroll tax and workers compensation areas, keep in mind that our performance in the payroll tax area is largely concentrated in Q1 as we earn a surplus prior to worksite employees reaching their state unemployment tax wage limits. Our forecasted operating costs continue to reflect our 2022 plan of investing in our five year plan initiatives with the expectation of achieving overall operating leverage at our expected work site employee growth rates. And we are now estimating a 2022 effective income tax rate of 28%. So when taking into account these factors we have raised and narrowed our range of 2022 adjusted EBITDA from initial guidance of $251 million to $311 million to our updated guidance of $285 million to $327 million. As for full year 2022 adjusted EPS we are now forecasting a range of $4.31to $5.09, up from our previous guidance of $3.74 to $4.86.

As for Q2, we are forecasting adjusted EBITDA in a range of $60 million to $73 million and adjusted EPS from $0.88 to $1.12, which takes into account our typical quarterly earnings pattern. As you may recall, our Q1 results are typically higher than subsequent quarters as we earn a higher level of payroll tax surplus prior to worksite employees reaching their taxable wage limits. And benefit costs are typically lower in Q1 and step up over the remainder of the year as deductibles are met.

Now at this time, I'd like to open up the call for questions.

[Operator]

[Operator Instructions]

Our first question comes from the line of Andrew Nicholas of William Blair.

[Andrew Nicholas, William Blair]

Hi, good morning. Thank you for taking my questions. First one is just on kind of salesforce productivity. Obviously, it seems to be increasing at a relatively strong rate. I'm wondering how much of that is a consequence of a longer tenure or longer average tenure in the salesforce? And maybe kind of within that, have you seen any change in retention levels or I guess the opposite being attrition within your salesforce? Obviously, it is a tight labor market. You're seeing that in your client base as well, just wondering how you're thinking about retaining that talent and how big of a component that is to productivity growth.

[Paul Sarvadi]

Yes, thanks for the question, it is a very important aspect of our effort to improve sales efficiency. And within the numbers I talked about today, you can kind of see the picture there because we had about 30% improvement or increase in sales efficiency. And we have 18% increase in the number of BPAs that are in tier level three and above. So that's a big chunk of the natural effect of sales efficiency gained from more experienced BPA growth. Now, the other balance of that, the other 12% came from a combination of other things, the marketing results that were so strong in terms of bringing qualified leads in, for example, but also the recent compensation tweak that we put in place that allows for each BPA within their tiers to have targeted objectives each quarter, and earn bonuses each quarter. But it also drives them to try to work hard to get to the next tier level, where the bonuses are higher, for being in that tier.

So we just have a lot of things that are really, I would say they're just tracks that lead to improved sales efficiency. And this is a perfect time for that because the overriding thing that is allowing all these to gain traction earlier, I think is just the demand we see in the marketplace at large and the doors that are open to go see prospects and the opportunity for BPAs to have enough repetitions. I think the other factor that's key is the way that we have really optimized the remote selling element. And we'll be mixing back in face to face visits at the right time to further enhance the closing rate. So those are all factors and this is why we're really excited about the longer term, great strides already in sales efficiency, but many things that we believe will continue that trend.

[Andrew Nicholas, William Blair]

That's very helpful. Thank you. And then maybe as a follow up to the last part of your answer. In terms of the new sales momentum. Are you seeing any material difference in kind of the competitive nature of the market? Or are you seeing better win rates coming against other competitors? I'm just curious if this is primarily execution on a large runway for growth, or if there are some competitive takeaways and higher win rates as a consequence of some of those other items you mentioned. Thank you.

[Paul Sarvadi]

Well, another very good question. And I'll just tell you, this is more an intuitive answer than it is supported by a lot of detail information. But what I see happening is that the result of the pandemic period and all these after effects really drove home, the need to know both for survival and to really succeed to have a very sophisticated HR function. And what's unique about Insperity is that we are the premium service in the marketplace, differentiated by the breadth of our services, the depth of our services, and the level of care, those three things add up to an incredibly sophisticated HR function. So I believe that we have our competitive advantage, it's always been there is highlighted in a dramatic way right now, because that type of service is what companies really want and need. And I think that's an uphill climb for a lot of other companies in our space that have, they have good services to either reduce cost or to reduce administrative effort. Those are good things, too. But that really sophisticated, complete HR function is really something that we're a category of one.

[Operator]

Next question comes from the line of Tobey Sommer of Truist.

[Tobey Sommer, Truist]

Thanks Paul. I was wondering if you could give us an update on how the benefit trends progressed during the quarter post Omicron. Or at least the first Omicron variant. And whether you think that the effects of that are sort of clearly visible to you, or we still have a couple of months of data to be collected from United to kind of have a real clear picture about how that unfolded.

[Paul Sarvadi]

Yes, let me let Doug give you some details, more details about it. But from my perspective, what we've seen is pretty clear that you had the two variants that drove up COVID related cost. We talked a lot about that last period. And we trended off of those high results, just to be conservative. And we've seen some waning, as I discussed in the COVID related areas. But we're also just cautious about the potential for acute issues and other things that are longer-term effects from the pandemic that can still come in. So we're just going to continue to be conservative about that. But I'll pass it on to Doug there.

[Douglas Sharp]

Yes, I think as you're probably aware, Tobey, in the fourth quarter, we had the convergence of delta and the beginnings of Omicron as we moved into the first quarter, you still have some hangover effect of Omicron at least through the month of January, probably part of February, as a result of that increased testing, some increased vaccination during those months. I think since then, we have seen it wane a little bit, as it relates to that. And so I think that's good news. But as we look forward for the remainder of the year, I think there's still uncertainty as to whether utilization, whether it be care that was previously deferred, particularly elective surgeries or things like that have to have some catch up that replaced the waning effect of COVID and COVID costs will it replace it or not? Will there be some upside? We're hopeful that there will be but I think it's prudent right now, with still quite a bit of level of uncertainty to continue to forecasts that our initial budgeted levels on the cost side. But the other important takeaway is on the pricing side, so we're doing an effective job of pricing at least really through the whole pandemic stage. We've talked about this in past quarters, how we've looked through the pandemic have priced over the long term, over the two years ‘20 and ‘21. Our pricing was fairly matched with those two periods on the benefit cost side, and as we move forward into 2022, our first quarter pricing and cost levels were matched very well. And I think we're position that for the remainder of the year is in fact, the utilization doesn't replace COVID costs, and we don't have another wave on the COVID side. We're hopeful that there could be some upside. It's just too early to tell.

[Tobey Sommer, Truist]

Okay, thank you. I appreciate all the color. And then I wanted to ask a question about your total addressable market and how you think about that. Several years ago, you started offering some non-co employment options and now the pandemic, as you said, a lot of a knock off effects highlighted the value of the PEO service. How do you think about your addressable market and whether or not it's sort of grown? Because certainly the volume growth and WSEEs is pretty remarkable. Thank you.

[Paul Sarvadi]

Yes, that's a great question, Tobey, no, we still see clearly within the data that we're able to evaluate that there's over 600,000, what I'd call perfect fit clients that fit the demographic and psychographic profile of the 11,000 clients we have. So we see a huge market that we have a long time to keep penetrating. But what's exciting to me is now we also have clients that we're offering the workforce acceleration to that, where we can cast the net wider into that 600,000 target customers, and bring them in and also have customers that are on the co-employment model that sometimes want to move off of that can go back to the traditional employment solution. So I think our long-term view and ability to bring them in, have a move up or have across into other services is really strong. And so that, again, is part of why when I look at even this five year plan, I really see the potential grow our core business at historical double digit rates, but adding also the, I should say, above of historical double digit rates, and have the traditional employment service and sales add to our gross profit in a strong way. So that's what I talked about those two distinctive elements of our model that are different for this five years, growing at a faster rate with a lot fewer BPAs having a contribution from the workforce acceleration that drives our gross profit. And of course, with the operating leverage, both in the service and sales side, that means adjusted EBITDA at higher rates than our previous run.

[Operator]

Next question comes from the line of Jeff Martin of ROTH Capital Partners.

[Jeff Martin, ROTH Capital Partners]

Thanks. Good morning. Paul, I was just curious if you could talk about the concentration of the BPA and various tiers? How many are at tier three or above? And what kind of progression timeline is there for that? It sounds like the incentive changes that you put in place are having a significant impact there.

[Paul Sarvadi]

Yes, thank you we have, as we've talked about in the past, the typical length of time for a new BPA coming on to reach that tier two level is about a 12 to 18 month period, we want them in tier one is that was what they're in early on. And to get to tier two, typically, it's around that 18 month to a couple year period, but we're seeing folks be able to do that earlier. So that's a good sign. But we're looking at the entire flow and moving as many as possible at very much at an individual level. Now over the balance of this year we will be growing our BPA team, again, starting to ramp up growth. We're expecting to get to around round 700 or so BPAs at the end of the year. So we get back to maybe around 10% growth in the number BPAs early next year sometime. And that is the right rate for the sales efficiency gain to put us into the mid teens double digit growth on an ongoing basis, which is our target to get where we want to go. But a lot of this is really dependent on this focus that we have of moving individual BPAs up through the tiers. What's exciting about where we are now is we have real alignment on that goal throughout the sales organization, not just sales management trying to do their job of moving those folks through there. But now, the BPAs are so connected to that through the new compensation system, and really all across the company, one of our 10 key success factors in this five year plan. Critical success factors is the improvement in sales efficiency. So there's a tremendous focus on that across the company that I believe will have a nice effect going forward.

[Jeff Martin, ROTH Capital Partners]

Okay, great. And then I was curious if you could speak a little bit more to the mid-market, it looks like it grew in line with the rest of the business. Are there specific initiatives in the mid-market that you're putting in place to have that success there? And maybe compare that to over the past 12 months, what you've seen in the mid-market, from a sales potential?

[Paul Sarvadi]

Yes, I appreciate the question. I'm very excited about what's happening in mid-market right now. And it's really the fact that core sales, mid-market and workforce acceleration are now a real understanding across the sales organization, that it's three prongs, that all are significant, important equally committed to across the company. And in mid-market this year we've already are off to a great start. And we're, the pipeline is way ahead of last year already, because so much alignment around all three of those. So our leads for midmarket come out of our BPA team, and now the alignment within how they're compensated. And how they work together on these larger accounts is, I think, a very smooth operation now. And, again, it's the alignment issue that I think makes the biggest difference. So we're off to a great start, pipelines in great shape. Keep in mind, it's still the smaller part of the business. And there's some -- they're bigger pieces when they come and go, but I really do see more consistency coming in that area of our business. And that will really be helpful on the sales efficiency front as well.

[Operator]

Next question comes from the line of Mark Marcon of Baird.

[Mark Marcon, Baird]

Good morning, and thanks for taking my questions. Really strong growth with regards to the worksite employees. I'm wondering, can you comment on two aspects? One what are you seeing Paul, with regards to the broadening of the acceptance of the PEO concept outside of your biggest states? To what extent are we starting to see increased adoption in some of the less established states and the response to some of your marketing efforts?

And then secondly, when we take a look at the fee revenue per worksite employee, can you talk a little bit about what you're seeing from a pricing perspective? And to what degree is your fee revenue per worksite employee directly tied to the level of compensation for the employees?

[Paul Sarvadi]

Great. That's -- those are both good questions. So first of all and what we're saying I think I would have to say that the biggest difference in seeing this receptivity all across the country, there's two components to it. One, of course, I mentioned in remarks, which was about our marketing effort that we went through last fall focused on localized marketing plans, every market has different aspects to what drives the awareness in that market. And so we've not done that across all 41 markets for this spring, but you can see our revenue growth across the country we were over 20% revenue growth in all of our regions. So things are happening broadly. Why is that? I think one of the biggest things that is impressive to me, that gives confidence about the future is the way that investors, board members, whether it's venture capital or private equity, folks that used to be kind of a stumbling block or a hurdle for us to close a piece of business, we would try to go through the selling process with the CEO, and then they'd go to their investors. And there were a lot of folks that didn't like the idea of investing funds into that HR function. But now the awareness of how important this is, and how it actually helps the profitability and the building value in that company, I think that's really made a difference across the board. So now on the pricing side, let me just say that I think we're all over that. And one of the other critical success factors. And that of the 10 factors that we had the company focused on, is the issue of the potential for inflation to have a dramatic effect over these next several years.

Now, we also believe it's really important to make sure we're doing everything we can to recruit and retain the right people. Because that's obviously super important to us, we can't help others take care of their people if we don't do a great job of taking care of our home. So we've already, as Doug mentioned, in his remarks, we've already made investments internally on the compensation side. And so we have a tight connection between what we do on the operating side of the business and how all that flows due to pricing. So we have a pricing plan that within our both new and renewing business in that part of our organization have a game plan going forward for this year that we believe is fully appropriate, and reflects the fact that it is a marketplace where price increases need to be passed on. And also we are -- I mentioned in my remarks that we have some sales management compensation tweaks that also help them be in concert with that same approach for this year. So I think we're in great shape on that front. And the last thing I would say on that is that when wages are going up like they are in the marketplace, our increases that are passed on that are reflected as a percentage of the wages we can actually pass on more, and it just looks and feels like less, because it doesn't move the percentage up very much. So we think we have a very good environment for being effective at passing appropriate increases along.

[Mark Marcon, Baird]

That's great. And then can you talk a little bit more about just the benefit, your benefit cost expectation for the balance of the year? Are you assuming that there will be some sort of increase in terms of elective surgeries that were deferred? Or how are you thinking about that?

[Paul Sarvadi]

Yes, I think just to kind of reiterate a little bit of with Doug's comments, we -- when we looked at the going forward for the balance of the year, even though we're seeing some of the cost drivers wanes, especially related to the COVID, direct COVID related costs we felt like it was still important to stick with our cost trend that we established just a couple of months ago. Because even if there's a waning of the COVID cost, you have the possibility, both acute care cost and/or deferred cost from elective surgeries and stuff that can come through over the balance of the year. So another quarter out, we're going to have a little bit better view into that. If those don't come in, absolutely, there'd be more upside than what we've forecasted. I think it's only prudent to be in a position to be expecting some of those things and who knows if another variant is going to come out or whatever. So it's just too early to tell. And so we're sticking with the higher trend that we adopted early this year in our budget.

[Operator]

Thank you. I would like to turn the call over to Paul Sarvadi for closing remarks.

[Paul Sarvadi]

Once again, I would just like to thank everybody for being on the call today. And while we look forward to continuing the success throughout this year and in year one of our five year plan that we believe would provide extraordinary shareholder return opportunity. Thank you again for your participation. And we look forward to providing information next quarter.

[Operator]

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect. Have a great day.