Reframing Total Rewards for the New Business Environment - Towers Watson

© 2011 Towers Watson. All rights reserved.

Reframing Total Rewards for the New Business EnvironmentTowers Watson webcast

Randy AbbottLaury SejenNovember 30, 2011

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Why Total Rewards and why now?

The recession pushed companies to reduce programs in the name ofcost management…but many are facing repercussions, raising concerns about how they will power growthAt the same time, employers remain cautious about investing in their workforce, given volatile conditions and the unknown impact on labor markets Health care reform in the United States adds the potential for asignificant reshaping of the employee value proposition and Total Rewards strategy for many industry sectorsStrategic issues of competitiveness, alignment and engagement are rising to the forefront — even as pressure to manage costs remains intense

Many employers now face the challenge of updating the mix of Total Rewards programs to meet evolving business and employee needs


A confluence of factors is changing the employer/employee relationship and with it, the structure, nature and mix of rewards

Source: 2010 Towers Watson Talent Management and Rewards Survey Report and 2010 Towers Watson Workforce Health Strategies — A Multinational Perspective.

General paring back of rewards levels and spend Looking beyond compensation to attract and retain top talent Increased focus on optimizing reward spend and segmenting the workforce

Total Rewards

Base pay has been flat for the past five yearsGlobally, aggregate bonus funding levels remain flatIncreasing attention to external competitiveness

Compensation

Continued movement from traditional DB to account-based DC plans Governments looking for new sources of revenue have been targeting the favorable tax treatment that benefit plans have traditionally enjoyedHealth care reform legislation creates opportunity and uncertainty in how employers will deliver health care coverage in the future More and more employers shifting accountability to employees for managing (and partly funding) their “health and wealth” now and over long term

Benefits


In the face of continuing economic uncertainty, merit pay remains flat

While business results have been improving in many sectors, recent fluctuations in the market create questions regarding the sustainability of the improvementSalary growth remains relatively flat

Year

U.S. Merit Budget Increases*

Executive Management ExemptNonexempt

SalariedNonexempt

Hourly2008 3.7% 3.5% 3.5% 3.5% 3.4%

2009 3.3% 2.9% 2.8% 2.8% 2.8%

2010 3.0% 2.8% 2.8% 2.7% 2.7%

2011P 3.0% 3.0% 3.0% 2.9% 2.8%

2012F 3.0% 3.0% 3.0% 3.0% 3.0%

Salary Increases Still Well

Below ’08 Levels

P = Projected; F = Forecast.*Data represents median merit increases. Includes participants providing no merit increases.Source: Towers Watson Data Services


Health care spending is crowding out other workforce investments

2000 2009 Percentage ChangeCash 87.4% 84.1% - 3.7%Defined Benefit 3.4% 1.8% - 47.1%Defined Contribution 2.7% 3.5% +29.6%Retiree Medical 0.6% 0.2% - 66.6%Active Medical 5.9% 10.3% +74.6%

Benefits as a Percentage of Direct Compensation

Source: Towers Watson Client Data 2000 – 2009.


For employees, this means a growing affordability gap — prompting anger about continuing benefit reductions

Source: 2011 Towers Watson Health Care Trend Survey (active employee data) and Bureau of Labor Statistics, seasonally adjusted data from the Current Employment Statistics Survey August to August, 2000 – 2010, and 2011 assumed to be the same as 2010.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

188%

44%

Affordability Gap

Affordability Gap: Cumulative Active Employee Health Care Costs vs. Wage Increases

Workers’ earningsActive employee health care costs


Retirement benefits have changed over time

Fortune 100 Retirement Plan Prevalence

n = 100

6459 58

5347

40 37 36 33 2922 20 17 13

3641 42

4753

60 63 64 67 7178 80 83 87

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Traditional DB pension plans Account-based plans(hybrid and DC)

Source: 2011 Towers Watson research on Fortune 100 companies


*Total retirement benefits include DB, DC, retiree medical and retiree life insurance plans.

Percentage of Pay

But across most industries, total* retirement benefits are falling

5.7%

9.0%

12.1%10.7%

9.1%8.1%

9.2%

5.5%

8.1%

6.3%4.9%

6.4%

4.2%5.8%

11.2%

5.4%4.3%

6.1%

8.3%

5.2%

9.3%9.0%

6.4%

3.8%

0%

2%

4%

6%

8%

10%

12%

14%

Retail andwholesale

Manufacturing Gas, energy,natural

resources andelectric

Pharmaceuticals High-tech Financialservices

Health care Services

1998 2003 2008

% change -33% -29% -24% -13% -10% -9% -4% +3%


Source: 2010 Towers Watson Retirement Attitudes surveyNote: Percentages indicate responses of “somewhat agree” or “strongly agree.”

DB Plan DC OnlyFeb. 2009

June 2010

June 2011

Feb. 2009

June 2010

June 2011

My company’s retirement program was an important reason I decided to work for my current employer

31% 33% 51% 21% 21% 26%

My company’s health care program was an important reason I decided to work for my current employer

N/A 36% 52% N/A 28% 43%

My company’s retiree health program was an important reason I decided to work for my current employer

N/A N/A 48% N/A N/A 32%

Benefit plans remain important to employers in attracting new employees


Worsening the problem, employees are suffering from “change fatigue”— adding to rising levels of disengagement

Source: Towers Watson 2011 Talent Management and Rewards Survey.

Of employees indicate their co-workers are suffering from change fatigue

Stay because they think they have to

Of those employees who say their co-workers are suffering from change fatigue…

41%

35%

Constant organizational changes create retention risk


In a buyer’s market for talent, does this matter? Much more than many think…

While unemployment remains around 9% — indicating an abundance of available workers — employers say they are having problems attracting critical skill and high-performing employees

Percentage of Companies That Are Having Difficulty Attracting WorkersEmployee Group 2004 2005 2006 2007 2008 2009 2010 2011Critical skill employees*

46% 58% 63% 64% 66% 28% 52% 59%

Top-performing employees*

42% 48% 53% 60% 54% 25% 45% 42%

All employees* 18% 22% 29% 34% 28% 8% 15% 13%

# of unemployed per job opening

2.20 1.96 1.52 1.49 2.14 6.13 5.33 4.63

*Data represents U.S. employees only.Source: Data on number of unemployed per job opening comes from U.S. Bureau of Labor Services. Other data are from Towers Watson survey data.


…and the picture is similar for retention because ultimately it’s all about the “who”

With quit rates at historical lows since the recession began, employers have few concerns about retention for employees in generalBut their concern jumps significantly for key groups such as critical skill and top-performing employees

Percentage of Companies That Are Having Difficulty Retaining WorkersEmployee Group 2004 2005 2006 2007 2008 2009 2010 2011Critical skill employees*

30% 39% 43% 49% 47% 16% 31% 36%

Top-performing employees*

27% 30% 36% 40% 37% 14% 25% 28%

All employees* 17% 20% 20% 27% 19% 5% 11% 11%

# of quits per month (millions)

2.5 2.9 3.1 3.1 2.7 1.7 1.8 1.9

*Data represents U.S. employees only. Source: Data on number of unemployed per job opening comes from U.S. Bureau of Labor Services. Other data are from Towers Watson survey data.


The need to engage employees around health and wealth is greater than ever

Employees may not recognize the “squeeze” health benefits have put on retirement plans Employees are risk-averse and may not understand their retirement needs, or the value of the savings opportunities they have

Sources: Employee Perspectives on Health Care, November 2010; National Business Group on Health/Towers Watson Employer Survey on Purchasing Value in Health Care, 2010; Fidelity Investments, 2010; Towers Watson research on Fortune 100 companies.

of surveyed employees say they would be willing to pay more for more predictable health care costs, up 23 points from two years ago

42%of Fortune 100 employers offer traditional DB plans today vs. 74% 10 years ago

42%of employees, on average, who are eligible for account-based health plans are enrolled in those plans

15%…the amount an average couple will need to save for health care expenses in retirement (even with Medicare benefits factored in)

$250K


Health care benefits will continue to be core to EVPs in the next few years, with less certainty post-2014

Importance of Health Care Benefits in the EVP Over the Next Two Years Versus 2014 and Beyond (after the expected opening of the insurance exchanges)

8% 21%

81%

55%

1%

4% 14%

16%

1%

1 — Not at all important 2 3 — Somewhat important 4 5 — Very important Not sure

2012 and 2013

2014 and after



Most employers expect to “play” by retaining a medical program for actives after 2014

“Play” options

“Pay” options

Finance: 67%

HR: 67%

Finance: 15%

HR: 13%

Source: 2011 Towers Watson-Forbes Survey: Opportunity to Align Cost and Talent Objectives?.

18%

2%

2%

11%

11%

10%

8%

38%

18%

0%

6%

9%

6%

15%

20%

26%

HR n=104 Finance n=201

Provide employer-sponsored health coverage for the long term

Don't know

Provide employer-sponsored health coverage, but structure contributions and communication to encourage low-wage…

Provide employer-sponsored health coverage until the excise tax is triggered

Provide employer-sponsored health coverage until an inflection point other than the excise tax

Adopt a defined contribution (DC) approach by providing monetized value to employees, pay penalties, and direct

employees to ExchangesExit employer-sponsored health coverage, pay penalties,

and direct employees to Exchanges

Other action


Those who opt to “pay” are divided on how they might adjust employee compensation

Plans to Adjust Compensation for Employees (Make Them Whole) in the Event of Exiting Health Care Coverage in 2014

1%

6%

2%

2%

1%

20%

Increase salary by full value of coverage eliminated

Increase salary by a partial value of coverage eliminated

Increase the value of other benefits

Offer additional wellness incentives

Other

Not sure



58%

6%9%

14%

13%

58%

6%9%

13%

14%

Whether they play or pay, they anticipate virtually no change in their current rewards mix

Current Cost Allocation

Expected Cost Allocation in 2 – 3 Years

Is this realistic?


Base payBonus or incentive payHealth care benefitsRetirement benefitsOther monetary rewards


All this leads to one inescapable question for employers right now…

Is your employment deal sustainable going

forward?


The portfolio allows employers to align what they expect and reward with what employees want and have to deliver

Aligns with business strategyIs optimized to deliver the right ROI for the right level of cost and riskDrives required employee behaviors

Total Rewards and EVP

Employee Gives

EmployeeGets


Total Rewards builds from strategic objectives and takes a portfolio approach to deliver desired results


That portfolio is expressed in terms of the unique role of each reward in the broader value proposition


Understanding what really matters — in different parts of the workforce — is essential to attracting employees

All Employees High-Potential Employees

Rank Employers Employees Rank Employers Employees

1 Base pay Job security 1 Challenging work Job security

2 Organization’s mission, vision and values

Base pay 2 Career development opportunities

Base pay

3 Organization’s reputation as a great place to work

Health care benefits

3 Organization’s mission, vision and values

Career development opportunities

4 Career development opportunities

Length of commute 4 Base pay Promotion opportunity

5 Challenging work Vacation/PTO 5 Organization’s financial performance

Health care benefits

Employers underestimate the importance of “fundamentals” to attracting employees — even top talent



Employers consistently misread cues — with adverse implications in workforce retention

All Employees Top Performing Employees

Rank Employers Employees Rank Employers Employees

1 Base pay Work-related stress

1 Promotion opportunity

Work-related stress

2 Promotion opportunity

Base pay 2 Career development opportunities

Promotion opportunity

3 Relationship w/supervisor

Promotion opportunity

3 Base pay Base pay

4 Career development opportunities

Trust/confidence in management

4 Relationship w/ supervisor

Trust/confidence in management

5 Work-related stress

Incentive pay opportunity

5 Incentive pay opportunity

Length of commute

Employers do not completely understand what would cause employees to leave — especially their top performers



Optimum Level of Investment

Optimum Allocation of Investment

Segment-Specific Strategy

PortfolioOptimization

What matters to employees —

ConjointAnalysis

Reflects cost constraints on investmentDevelops an efficient frontier of optimum allocation of investmentsDetermines optimum investment level on the basis of program costs and turnover cost savings

Optimum solution may be to:Improve desired behavior/result (e.g., retention) by changing allocation and keeping current level of investmentMaintain current behavior/result at lower level of investment by changing allocationIncrease investment and desired behavior/result to economically efficient level

+ =Survey tool to capture subjective preferencesAsks employees to make trade-offs among program features as opposed to assessing the features individuallyIs a more reliable forecast of behavior than traditional survey methods

With knowledge of employee preferences, employers can test allocation and investment level mixes to identify the optimal portfolio


The process provides fact-based perspective to answer important questions…

Rewards optimization can be applied to direct and indirect forms of rewards, including base pay, incentives, employee benefits and other non-financial rewards (e.g., work/life balance) or to any combination of reward categories

Total $ Investment in Selected Rewards

What is the best level ofinvestment in employees?

What is the best allocation of that investment to maximize

desired behavior (e.g., attraction, retention, motivation/engagement)?

Do the answers vary by job function, department, other demographic characteristics?

ILLUSTRATIVE

Base Pay

OtherRecognition

Medical

Dental

Retirement

Bonus


…and allocate investment to more effectively support strategic business and workforce objectives

Three Points on the Curve

1) To reduce total cost, the curve identifies which programs should be reduced to reallocate investments in other areas and maintain current levels of retention

2) To maintain current investment levels, the curve identifies how to reallocate investment across programs to increase retention without raising cost

3) To increase retention dramatically and make the most of each reward dollar, the curve indicates the best ways to invest additional rewards funds

–$20mm 0 $10mm

Increase in Indicated Retention from Current Level

(Percentage)

–$10mm $20mm $30mm

Increase in investmentfrom current level

Decrease in investment from current level

2) Maintain current level of investment while increasing retention

1) Maintain current level of retention at lower investment

10%

20%

30%

40%

Current levels of retention and reward investment

3) Increase investment and increase retention

Each point along the curve represents the best allocation of the corresponding total investment:

ILLUSTRATIVE


A holistic Total Rewards strategy drives employee behaviors proven to ultimately influence business outcomes

Linkage MethodologyDemonstrates how employee behaviors affect customer behaviors and company financial performance Identifies the specific employee programs and policies that drive desired employee behaviors, customer behaviors and financial performanceAllows employers to assess reward effectiveness and make better investment decisions

Linkage Model

EngagementRetentionProductivityCustomer Service

Employee Behavior

Customer Behavior

Customer satisfactionCustomer attractionCustomer retention

Financial Performance

Labor costOperating costsOperating marginControllable marginRevenue growthROICTSR

Total Rewards Components

Performance- Based

Rewards

Career and Environmental

Rewards

FoundationalRewards


Total Rewards: Key questions for consideration

Are you optimizing your Total Rewards investments to achieve the right cost, behavior and performance outcomes?1

Do your Total Rewards programs attract, retain and engage the talent you need across your business, at all levels?2

What are the key cost/value tradeoffs for your organization in balancing cost management and workforce management objectives?3

Are you optimizing your cost/value for key compensation and benefit programs and the Total Rewards portfolio overall?4

Do your Total Rewards programs reinforce the desired “deal” with your employees (i.e., aligning employee behaviors with key business needs and direction of the company)?5

Do your employees understand and recognize the value of your Total Rewards portfolio? 6


Questions

Randy [email protected] [email protected]

Reframing Total Rewards for the New Business Environment - Towers Watson

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