Insuring the Effectiveness of Variable Pay May 2018 Prepared by Talent, Rewards & Performance Presentation to WorldatWork 2018 Total Rewards Conference & Exposition
Insuring the Effectiveness of Variable Pay May 2018
Prepared by Talent, Rewards & Performance
Presentation to WorldatWork 2018 Total Rewards Conference & Exposition
Proprietary & Confidential | BBC/Speeches/WaW. PPTx/TRP-LS-04029 05/2018 2
Today’s Discussion Topics
Context for Variable Pay As the Preferred Pay for Performance Choice
Insuring the Effectiveness of Variable Pay Plans
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Context for Variable Pay As the Preferred Pay for Performance Choice
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USA TODAY
The Washington Post
The Wall Street Journal
24/7 Wall Street
Sorry, you are probably not getting a raise next year
Many Workers Will Get Tiny Raises in 2018
The Latest Headlines
Your chances of getting a bigger raise or bonus in
2018 just went down
Your next big raise? Don’t hold your breath,
some economists say
Proprietary & Confidential | BBC/Speeches/WaW. PPTx/TRP-LS-04029 05/2018 5
2018 Compensation Planning Snapshot Salaried-Exempt Employees
2.7% 2.8% 2.9% 2.9% 2.9% 2.8% 2.9% 3.0%
2011 2012 2013 2014 2015 2016 2017 2018Projected
Perc
enta
ge o
f P
ayro
ll
Salary
Increases
11.6% 12.0% 12.0% 12.7% 12.9% 12.8% 12.7% 12.5%
2011 2012 2013 2014 2015 2016 2017 2018Projected
Perc
enta
ge o
f P
ayro
ll
Variable
Pay
Source: Aon Survey—U.S. Salary Increases 2017/2018.
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Disposable Income Growth
Historical Real Disposable Personal Income Growth Rates
-0.4%
1.0%
2.5%
3.1%
-1.4%
3.6%
4.2%
1.4% 1.2%
-2%
-1%
0%
1%
2%
3%
4%
5%
2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Bureau of Economic Analysis
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Impact of The Tax Cut & Jobs Act?
120+ companies announced cash changes
70%+ provided one time bonuses, from $500-$5,000
40%+ announced/ paid $1,000 bonuses
Nearly 40% increased wages, most common to $15 per hour
In addition, nearly 20 announced changes to retirement plans
About 50% are permanent increases to match formula
Other 50% are discretionary/ one time changes
50%+ are in the financial industry
1 provided benefit via cash balance vehicle
Other Other announcements to fund pension, reduce rates at utilities, charitable
contributions, and stock
Bonus &
Compensation
Increases
Retirement
Increases
Source: Aon analysis of public sources March 2018
Public Companies Announcing Compensation or Benefit Changes
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A Dramatic and Ongoing Shift in Pay Mix
4.3% 2.9%
3.6%
12.7%
1993 2017
Overall Base Salary Increase Budget Variable Pay Spending
Change in the Total Compensation Budgets and Spending for Salaried-Exempt
Employees (1993–2017)
Why?
Fixed vs. variable
costs
Need to focus and
drive behaviors
Need to create
alignment
Perceived control
Shareholder/
analysts value it
Source: Aon Survey—U.S. Salary Increases 2017/2018.
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About Our Sources
SIS
Aon U.S. Salary Increase Survey 2017 and
2018
– 41st annual report
– Fortune 1000 companies
– 1,062 participants in 2017
• Merit/overall salary increases
• Salary structure movement
• Variable compensation
• Pay practices
• Data effective as of June/July 2017
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About Our Sources
VCM
Broad-Based Plans
Created in 1996
– More than 240 cash variable pay plans
– 38% of participants have more than 20,000
employees and only 5% of participants have
less than 1,000 employees
– 44% of participants have a revenue scope of
up to $3 billion and 56% of participants have
revenues o $3 billion or more
Plan characteristic driven database
– Prevalence
– Effectiveness
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Prevalence of Broad-Based Variable Pay
Broad-based variable pay is a key component of companies’ total compensation programs
Use of broad-based variable pay is widespread and stable
61%
68%
60% 59% 61%
67%
72% 70%
78% 81% 80%
77% 78% 78% 80%
90% 90% 88% 89%
92% 90% 90% 91%
93% 89% 88%
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Perc
enta
ge o
f O
rganiz
ations
Organizations With at Least One Broad-Based Variable Pay Program
Source: Aon Survey—U.S. Salary Increases 1992–2017.
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0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.9% 4.5% 4.2% 3.8% 5.7% 5.9% 6.4% 7.6% 7.5% 7.6% 8.0%
10.0% 8.4%
6.2% 6.2% 6.0% 5.3% 4.8% 5.0% 5.3% 5.5% 5.0% 4.6% 4.3% 4.0% 4.0% 3.9% 4.0% 4.2%
1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Perc
enta
ge o
f P
ayro
ll
Variable Pay Awards for Salaried Employees 1981–1998 Variable Pay
Salary Increase
Dramatic Shift in Pay Mix
Source: Aon Survey—U.S. Salary Increases 1980–2018.
9.7% 10.8% 10.5%
8.8% 9.5%
11.4% 11.2% 11.8%
10.8% 12.0%
11.3% 11.6% 12.0% 12.0% 12.7% 12.9% 12.8% 12.7% 12.5%
4.3% 4.3% 3.6% 3.4% 3.4% 3.6% 3.6% 3.7% 3.7%
1.8% 2.4% 2.7% 2.8% 2.9% 2.9% 2.9% 2.8% 2.9% 3.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Projected
Perc
enta
ge o
f P
ayro
ll
Variable Pay Awards for Salaried Employees 2000–2018 Variable PaySalary Increase
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Aon U.S. 2017/2018 Salary Increase Survey— Variable Pay Budgets by Employee Group
12.0%
6.0% 5.4%
4.8%
6.7% 6.1%
5.6%
12.9%
6.4%
5.4%
12.8%
6.8% 6.1%
5.5%
12.7%
6.8% 5.8%
5.1%
12.5%
6.8% 6.0%
5.4%
Salaried Exempt Salaried Nonexempt Nonunion Hourly Union
Pe
rce
nta
ge o
f P
ayro
ll
Variable Pay 2013 Actual
2014 Actual
2015 Actual
2016 Actual
2017 Actual
2018 Projected
Source: Aon Survey—U.S. Salary Increases 2017/2018.
13.0%
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Industry Variable Pay Outlook for 2018 Salaried-Exempt Employees
20
0
15
10
5
Pe
rcen
tage o
f
Pa
yro
ll
Energy (Oil & Gas)
Food/Beverage/
Tobacco Banking/Finance
17.6 16.3 16.4
Telecommunications
9.6
Industry
Source: Aon Survey—U.S. Salary Increases 2017/2018.
25
Computers and
Related Products
14.0
12.5
5.3
Health Care/Medical Services
Insurance (P&C)
10.8
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Industry Comparisons
2.8% 2.8% 3.1% 2.9% 3.0% 3.2% 3.1%
5.3%
17.6%
5.8%
16.4%
10.4%
14.0% 16.3%
Health Care Energy (Oil/Gas) Not for Profit Banking/Finance Retail Computers and RelatedProducts
Food/Beverage/Tobacco
2018 Total Cash Compensation Budgets
Variable Pay Budget
Base Salary Increase Budget
Source: Aon Survey—U.S. Salary Increases 2017/2018.
8.1% 8.9%
19.3%
13.4%
17.2% 19.4%
20.4%
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Historical and Projected Participation In Variable Pay
4% 6% 9% 13%
17%
8%
20%
30%
40%
60%
25%
50%
65%
75%
100%
85%
100% 100% 100% 100%
1950 1970 1990 2010 2020 Projected
Hourly
Nonexempt
Exempts
Executives
Pa
rtic
ipatio
n L
eve
l
Year
Source: Aon Historical Data.
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Eligibility for Variable Pay
14% 15% 13% 17%
14% 15%
25%
43% 47% 45% 43%
53% 51% 53%
73%
93% 92% 93% 94% 96% 95%
2011 2012 2013 2014 2015 2016 2017
Nonunion Hourly
Nonexempt Employees
Exempt Employees
Pe
rce
nta
ge
Elig
ible
Year
Source: Aon Survey—U.S. Variable Compensation Measurement™ (VCM™) 2017.
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Growth in Total Compensation Spending
9% 9% 8%
9% 9% 10% 8%
10% 10%
14% 14%
16%
0%
5%
10%
15%
20%
25%
1990 2000 2010 2018
Nonunion Hourly
Nonexempt Employees
Exempt Employees
To
tal S
pen
din
g a
s
Pe
rce
nt o
f P
ayro
ll
Year
Source: Aon Survey—U.S. Salary Increases 1990–2018.
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25.0%
60.0%
15.0%
1.0% 0.0%
Helped Somewhat Helped Had No Effect Somewhat Hindered Hindered
Impact of Variable Pay on Business Results P
erc
en
tage o
f C
om
pa
nie
s
Impact on Business Results
Source: Aon Survey—U.S. Variable Compensation Measurement™ (VCM™) 2017.
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Prevalence of Variable Compensation Plans By Type
1996 2006 2017
Business Incentives—Plans with combined financial and/or operating measures or
company, business unit, department, plant, and/or individual performance 55% 81% 81%
Cash Profit Sharing Plans—Plans that make equal payment (as a flat- dollar amount or
percent of salary) to all or most employees based on organizational profitability 22% 15% 15%
Individual Performance Plans—Plans whose payouts are based solely on individual
performance criteria; payout amount typically varies from one individual to another 17% 28% 18%
Gainsharing/Productivity Plans—Plans designed share a percent of cost savings of a
group, unit, or organization; the gains are typically shared uniformly among all participants 16% 6% 3%
Team Awards—Plans that provide incentives to individuals on a project or work team 13% 8% 7%
Special Recognition Plans—Plans that are designed to recognize special individual or
group achievements with small cash awards or merchandise 44% 53% 50%
Stock Option Plans—Plans under which stock options are granted to employees below the
executive level 21% 34% *
Patent Awards—Award given to an individual or group of employees involved in developing
an idea, product, or invention that received a patent * * 14%
*Broad-based stock option plans were significantly reduced in prevalence and as a result were removed from the survey starting in 2010
Source: Aon Survey—U.S. VCM 1996–2017.
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Impact of Pay For Performance
Academic research studies tell us….
There is overwhelming evidence that incentives drive behavior and that the effect is substantial
Organizations placing more emphasis on pay for individual performance perform better on average
High individual performers are more likely to join and stay with organizations that more strongly pay for
individual performance
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Design With Strategic Intent
Incentive Effect Sorting Effect
Bonus
Behaviors
Individual
Incentive
Results
Group
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Strategic Impact By Plan Type
Plan Type
Incentive
Effect
Sorting
Effect Bonus Incentive Behaviors Results Individual Group
Business
Incentives
Cash Profit
Sharing
Individual
Performance
Gainsharing
Team Awards
= Primary impact
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Evolution of Variable Pay
Break away from a one-size-fits-all approach to broad-based variable pay that includes a common set of
metrics and weights for all covered employees
– More plans that have a small common enterprise-wide measurement component and varying
measures and weights intended to better measure the performance of a business unit, function, or
department
Calibrated plans that are more tailored to the needs of the business will take the place of homogenous
plans
More “winners” and “losers” within the same organization based on different levels of achievement
Greater use of qualitative measures
Almost all broad-based variable pay plans will provide a way to increase or decrease bonus payouts
based on individual performance achievement
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Insuring the Effectiveness of Variable Pay Plans
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Employee
Organization
Shareholder
Variable Pay Value Proposition
Enhanced pay for
performance
Enhanced cost control—shift
from fixed to variable
expenses
Focus employees’ on desired
behaviors
Market competitiveness
Companies with lower fixed
costs (e.g., with variable
pay) are more attractive
investments
Employees aligned with
shareholder interests
Additional earnings
opportunity
Greater control over rewards
Clarification of expectations
Market competitiveness
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Funding
Allocation
Award Form
Delimiters
Plan
Stretch Governance
Line of
Sight
Performance
Period
Objectives Measures
Anatomy of Variable Pay
Elig
ibility
Targ
ets
Plan
Documentation
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Variable Compensation Management Pulse Survey
How satisfied is your company with how well the current short-term incentive plan(s) performed?
3%
40%
57%
0% 0%
20%
40%
60%
80%
ExtremelyDissatisified
MostlyDissatisified
Mostly Satisfied ExtremelySatisfied
Source: Aon Pulse Survey.
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Variable Compensation Management Pulse Survey
How did your company perform against its goals?
6%
12%
24%
35%
9%
15%
0%
20%
40%
> 50%Below Goal
25% BelowGoal
10% BelowGoal
At Goal 10% AboveGoal
> 10%Above Goal
Source: Aon Pulse Survey.
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Variable Compensation Management Pulse Survey
What was your average award payout as a percent of payout target?
17%
6%
20%
26%
9%
23%
0%
20%
40%
> 50% BelowGoal
25% BelowGoal
10% BelowGoal
At Goal 10% AboveGoal
> 10% AboveGoal
Source: Aon Pulse Survey.
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Variable Compensation Management Pulse Survey
How do you rate the relationship between the benefits of the plan and the costs?
6%
11%
49%
23%
11%
0% 20% 40% 60% 80%
Costs Outweight Benefits of Plan
Costs Somewhat Outweigh Benefits
Benefits are Equal to Costs
Benefits Somewhat Outweigh Costs
Benefits Outweigh Costs of Plan
Source: Aon Pulse Survey.
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High-Level Definitions of Design Elements M
easuring P
lan E
ffectiveness
Measures
Eligibility
Funding
Alignment
Line of Sight
Plan Mechanics
Targets
Participation
Requirements
Communication
Plan Administration
Identifies factors (financial, nonfinancial, and individual) to determine performance
Must be controllable and relevant to business
Considers eligibility for both exempt and nonexempt employees
Be as inclusive as possible
Means of funding and spend on variable pay as a percent of key financial parameters
Should be accrued, reflective of actual business results and sufficient
Analyzes ability of the individual to impact the performance measures
As much direct influence on outcomes as possible
Determines the degree of inclusiveness across all employee groups
Checks for common goals and clear linkages
Evaluates levers on which the plan operates
Reflective of pay philosophy and culture, balanced between realistic, and challenging
Assesses payout targets and degree of stretch built into target level of performance
Competitive with appropriate pay at risk given line of sight and role
Explores clauses associated with a variable pay plan
Clauses under which participation and payouts can be denied
Considers frequency, methods, and details of plan features that are communicated
Understandable and communicated goals, timing, and updates
Time required to evaluate performance, payouts, and frequency of review
Should include assessment of continuous improvement
Aon | Talent, Rewards, & Performance
Proprietary & Confidential | January 2016 33
Ineffective | 0-250
Partially Effective | 251-500
Effective | 501-750
Highly Effective | 750-1000
Inef
fect
ive
Zone
Partially
Effective Zone Effective Zone
Highly Effective Zone
Min
229.5
Max
775
Median
555
P25
455
P75
624
Lower Upper
0 1000
Average Database
Score
2015 to 2017 Overall Effectiveness Scores
Overall Effectiveness of VCM Database Plans
2015
532
2016
547
2017
496
525
34
Overall Effectiveness of the Plan by Component
Variable Pay Index™ Scorecard 2015 2016 2017 Maximum Score
Measures 69 76 69 150
Eligibility 59 68 55 100
Funding 51 53 44 100
Alignment 51 63 57 100
Line of Sight 49 45 38 100
Plan Mechanics 30 33 32 100
Targets 49 38 27 100
Participation Requirements 64 67 59 100
Communication 64 57 61 100
Plan Administration 45 47 46 50
Source: Aon Variable Pay Index™ (VPI™).
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Funding
Allocation
Award Form
Delimiters
Plan
Stretch
Line of
Sight Performance
Period
Objectives Measures
Opportunities For Insuring Effectiveness
Elig
ibility
Targ
ets
Plan
Documentation
Yellow
Governance
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Questions
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For Further Information
Ken Abosch
Compensation Strategy, Development and Marketing Leader
Talent, Rewards & Performance
1.847.442.3580
Proprietary & Confidential | BBC/Speeches/WaW. PPTx/TRP-LS-04029 05/2018 38
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