Towerswatson.com © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Total Reward.

towerswatson.com © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

Total Reward Strategies for the 21st CenturyA Quantitative Approach to Total Rewards

Lubca PaclikovaRichard Gendron

October 15, 2013


Today’s speakers

Lubomira (Lubca) Paclikova is a Senior Executive Compensation Consultant in Towers Watson's Washington, D.C. region. Lubca has 15 years of consulting experience, working with senior management and Board members to link human resources programs with the organizations’ business strategies. She focuses primarily on executive compensation analysis and design as well as global broad-based compensation. Lubca has worked with clients from different industries throughout Asia, Europe and the U.S., and spent a portion of her career working in Towers Watson’s European offices.

Richard Gendron is Senior Consultant in Towers Watson’s Washington, D.C. region, and has advised both domestic and foreign-owned public corporations, privately-held corporations and nonprofit healthcare and higher education organizations. Rich’s recent focus has been on Total Rewards and Employee Value Proposition supported by a strong background in the management, design, valuation, compliance and administration of retirement and welfare benefit plans. Rich has also consulted on strategic workforce effectiveness issues such as rewards optimization, workforce planning, financial effectiveness of programs, management of workforce risk and employee communication issues.

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Today’s discussion

Why Total Rewards…Now? Insights from our research Getting started Total Rewards Optimization Case studies Questions

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The classic employer-employee deal is becoming extinct

It’s unaffordable. Rising costs, especially for health care, concerns about existing or new legacy obligations, slow growth and continuing economic uncertainty require employers to rethink both the size and structure of their reward investments

It’s outmoded. Long-established workplace practices are increasingly inadequate to meet the needs and support the performance of a technologically mobile and digitally savvy workforce

It’s ineffective — and inefficient. A rewards strategy that’s not aligned with the way a company creates value for its customers — or optimized to channel investment where it will have the most impact — will struggle to deliver desired performance or meet key financial and talent objectives

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Companies face serious challenges when it comes to attraction, retention and engagement of talent. Our research reveals what it takes to get it right

5Xmore likely to report their

employees are highly engaged

2Xmore likely to report achieving

financial performance significantly above their peers

Companies that have adopted an increasingly integrated approach to Total Rewards strategy, design and delivery decisions — supported by

an overarching Employee Value Proposition — are:

*Source: Towers Watson 2012 Talent Management and Rewards Study – Global. 5


What is an effective Employee Value Proposition?

Benchmarks of an effective EVP include Total Rewards elements include Developing a formal EVP

Effectively communicating the EVP to employees

Aligning the EVP with what the organization stands for in the marketplace

Delivering on EVP promises

Differentiating the company from competitors in the labor market

Designing customized EVPs for critical employee segments

Articulating a Total Rewards strategy aligned with the business and HR strategy

Using business strategy and objectives to inform talent management and reward programs

Creating specific objectives for each talent management and reward program to align them with the EVP

Employing organizational analytics (i.e., business performance and analytics, workforce demographics, workforce performance data) to test the effectiveness of Total Rewards programs

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The evolution of an effective EVP and Total Rewards strategy

Have formally articulated an EVP and adopted a Total Rewards approach

Greater focus on an integrated strategy for managing rewards and talent management

Have stated objectives for each reward and talent management program

Have not progressed in formally articulating an EVP or in developing a total rewards strategy

Have effectively communicated their EVP to employees and delivered on their EVP promises

Tactical

Integrated and Strategic

Communicating and Delivering

Have differentiated their EVP from other organizations with whom they compete for talent

Have customized EVPs for critical workforce segments

More likely to employ organizational analytics to test the effectiveness of total rewards programs

Segmenting and Differentiating

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A Total Rewards framework provides the roadmap to update rewards strategy and align it with business needs

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The specific elements will vary based on a company’s business, economics, culture and demographics

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Mismatches remain between what matters to employees… and what employers think matters…

All Employees

Employer Responses Employee Responses

1 Challenging work 1 Base salary

2 Base salary 2 Job security

3 Career advancement opportunities


4 Health/wellness benefits 4 Organization reputation

5 Organization values 5 Convenient work location

6 Organization reputation 6 Learning opportunities

7 Organization performance

7 Health/wellness benefits

High-Potential Employees

Employer Responses Employee Responses

1 Challenging work 1 Career advancement opportunities

2 Ability to impact performance

2 Base salary


3 Job security

4 Base salary 4 Challenging work

5 Organization values 5 Organization reputation

6 Organization performance

6 Learning opportunities

7 Job autonomy 7 Convenient work location

Source: Towers Watson 2012 Global Workforce Study, 2012 Talent Management and Rewards Study — United States.10


Health care reform complicates the Situation, affecting both reward costs and workforce dynamics

HCR Provisions Financial ImplicationsWorkforce Implications

Excise Tax

Increased costs beginning as early as 2018

Further pressure to reduce health care trend rate

Plan redesign could reduce benefits Excise tax cost could be shared with

employees Impact on Total Rewards and EVP

New Groups Require Coverage

Increased costs beginning in 2014 related to part-time, seasonal, contract employees

Examine alternative play or pay strategies

Job and work hour redesign Alternative staffing models Outsourcing/job relocation Impact on Total Rewards and Employee

Value Proposition (EVP)

Availability of Public Options

Reduced importance of employer-sponsored health care for lower paid employees (e.g., employees no longer view coverage as valuable for employment and accompanying communication challenges)

Impact on Total Rewards and EVP

Lower paid employees may prefer public options; loss of employer control/penalties

Examine alternative play or pay strategies

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2014 2015 2016 2017 2018 2019 2020 $500

$600

$700

$800

$900

$1,000

$1,100

Sin

gle

Co

ve

rag

e M

on

thly

Ra

te Defer excise tax by lowering the value of

the plan

Companies that do not improve efficiency will likely reduce the value of benefits to contain cost and avoid excise tax

* Excise tax threshold indexed at 4% for 2019 and 3% per year thereafter.

NOTE: Results depicted are for illustrative purposes only based on single coverage monthly rate for ‘median efficiency’ plan and assumed savings/trend reduction.

HIGH-PERFORMING GROUP

OR PRIVATE EXCHANGE

Avoid excise tax by lowering long-term cost trends using

thoughtfully-designed incentives, optimal care management,

consumerism, engagement and

other health activities

EXCISE TAX THRESHOLD*

‘MEDIAN EFFICIENCY’ SELF-INSURED

GROUP PLAN

towerswatson.com12


Sample Plan Value Comparison

Current Program Illustrative Program0.5

0.55

0.6

0.65

0.7

0.75

0.8

0.85

0.90.86

0.750.78

0.7 HMOPPO

Mitigating health care reform cost impact – plan design only

Significant plan value reduction is required to mitigate the health care reform cost impact

Illustrative

If Design is reduced by… Est. Savings

-5% $22M

-10% $45M

-12% $55M

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Health insurance exchange

Platinum (90% Value)

Gold (80% Value)

Silver (70% Value)

Bronze (60% Value)

Plan Offerings

* All subsidies based on Silver (70%) Value Plan. All dollar amounts are annual figures.

Family Incomeas % of FPL

< 138% 138% - 150% 150% - 200% 200% - 250% 250% - 300% 300% - 400% > 400%

* Max Family SalarySingle/Family of 4

$15,856 / $32,499 $17,235 / $35,325 $22,980 / $47,100 $28,725 / $58,875 $34,470 / $70,650 $45,960 / $94,200 N/A

* Max Premium Costas % of Income

2% 3% - 4% 4% - 6.3% 6.3% - 8.05% 8.05% - 9.5% 9.50% N/A

* Max Premium $ AmountSingle/Family of 4

$317 / $650 $689 / $1,413 $1,448 / $2,967 $2,312 / $4,739 $3,120 / $6,394 $4,159 / $8,525 N/A

* Max Out of Pocket(Single/Family)Actuarial Value

$1,983 / $3,96794%

$1,983 / $3,96794%

$1,983 / $3,96785%

$2,975 / $5,95073%

$2,975 / $5,95070%

$3,987 / $7,97370%

N/A

Employer Penalty in 2015 +

None $3,000 per employee N/A

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Other requirements: guarantee issue; no medical underwriting; no pre-existing condition limits; essential health benefits; preventive care at 100%; no lifetime or annual limits; maximum out-of-pocket limits $6,350/$12,700


To meet the demands of health care reform, benefit tradeoffs must be explored to meet overall objectives

Based on Towers Watson’s 2013 Health Care Changes Ahead Survey, 46% of respondents will evaluate health care in a Total Rewards context

Approaches may vary, however, initial considerations are consistent What trade-offs are you willing to make in order to accomplish objectives? What are the tradeoffs outside of the benefits plans that can be used to balance your

business/workforce objectives? Who will drive the reward mix: Employer and/or employees?

Sample Initial Principles Sample Tradeoff Considerations

Provide affordable and comprehensive coverage

Employer’s cost vs. employees’ cost ? What’s the breaking point?

How will Employers prioritize members? Employee vs. spouses vs. children? Refine by job category? Plan design vs. surcharge?

Continue market-based approach to benefit offerings

National consistency (one plan) vs. market-specific (optimize by market) How are markets targeted for evaluation today? Resources requirements due to administrative complexities vs. cost savings?

Align benefit offerings to market risk profile

Strategy vs. labor sensitivities? How fluid are these market risk profiles? Frequency of reassessment?

Choice may be limited in order to provide comprehensive coverage

Current benefits level vs. adding a lower cost option? Employer sponsorship vs. public/private exchange?

What if it subjects the organization to the $3,000 penalty? Will your strategy differ by market or segment?

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Total Rewards Optimization (TRO) is designed to help organizations answer key questions

Base Pay andCash Incentives$929.8 million

What is the best level ofinvestment in employees?

Benefits$81 million

What is the best allocation of that investment to maximize

desired behavior (e.g., retention, motivation)?

Do the answers vary by organization

level, geography, business unit, other demographic characteristics?

Rewards Optimization can be applied to compensation, benefits and non-financial rewards (work/life balance, for instance) or to any combination of reward categories

Base Pay

Bonus

Medical

Dental

Retirement

RecognitionOther

Total $ Investments in Selected Rewards ILLUSTRATIVE

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TRO is a means to address critical questions and offer customized solutions for the workforce

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 in balancing cost management and workforce management objectives?3

Are you optimizing your cost/value for key reward 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)?

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

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Compared to a traditional survey, TRO provides richer data insights to better inform programmatic decisions

Focus Groups

Traditional Survey

Conjoint Survey

Total Rewards Optimization

Directional information on understanding and importance of programs Information on employee awareness and understanding of current programs Quantitative information on the most important rewards Accurate information on various employee segments Data and analysis on how specific rewards changes/trade-offs will affect employees Data and analysis on what specific rewards changes will cost ROI for specific rewards changes or reallocations Ability to test cost-benefit of different rewards and demographic scenarios with modeling tool

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Example: trade-off questions

In the conjoint section of the survey, employees are presented a series of combinations of reward elements

These questions, presented as pairs (or trios) of elements which elicit trade-offs, determine the respondents’ preferences

The respondent will be asked to rate his or her preference for two different combinations of rewards, holding all other things equal

Survey questions vary for each respondent based on their responses to prior survey questions

If these two combinations were identical in all other ways, which would you prefer?

Your annual merit pay increase opportunity is increased to x%

The company contribution to your retirement plan is reduced by x% of your eligible pay

Your annual merit pay increase opportunity remains unchanged at x%

The company contribution to your retirement plan is increased by x% of your eligible pay

EXAMPLE

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Example: portfolio questions

How motivated are you to perform consistently at your highest level to help ABC Company fulfill its mission if your rewards package included the following?

EXAMPLE

Please indicate how motivated you are to perform consistently at your highest level to help ABC Company succeed on a scale of 0 to 100 where:

0 represents "Not At All Motivated"

100 represents "Very Highly Motivated"

ABC Company increases its investment in flexible work options by 20% to improve programs. Programs/policies will be applied more consistently, with management

support

Your annual merit pay increase opportunity is increased to x%

The company contribution to your retirement plan is reduced by x% of your eligible pay

You receive 5% more than current annual base pay (with ongoing annual increase opportunity)

No change in your supervisor’s effectiveness

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Optimum Levelof Investment

Optimum Allocationof Investment

Segment-Specific Strategy

PortfolioOptimization

ConjointAnalysis

Reflects cost constraints on investment

Develops an efficient frontier of optimum allocation of investments

Determines optimum investment level on the basis of program costs and turnover cost savings

Optimum solution may be to Improve retention/motivation

by changing allocation while maintaining the current level of investment

Maintain current level of retention/motivation at lower level of investment by changing allocation

Increase investment and retention/motivation to economically efficient level

+ = Is a surveying method

used for many years in marketing to capture subjective preferences

Asks employees to make trade-offs among program features as opposed to assessing the features individually

Is a more reliable forecast

of behavior than traditional survey methods

TRO combines conjoint analysis with financial optimization

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Change in Pay and Benefits Cost ($000)

Merit Increases — Above avg performers +50% $3,153

Base Pay — +3% $23,358

Time Off — +2 days $5,989

Wellness Incentives — Premiums -10% upon achievement of health milestones $647

STD — 60% base pay & weekly max of $1,500 $1,277

Retirement Contribution — 5% of base pay $4,935

Medical Deductible — -25% $635

Bonus — 3% target/change in target weighting (execs & directors) $14,943

Life Insurance — 2X base pay & $200k max $300

Retirement Match — $0.50 up to 8% & 4-year vesting $31

4.5

3.7

2.9

2.8

2.5

2.5

2.5

2.2

1.6

0.4

Total Rewards can be optimized by evaluating the financial and employee impact of specific program design changes

Improvements in Perceived Value

Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the “portfolio effect.” Modeled impact assumes all other programs stay the same. Improvements in perceived value are increments to current perceived value of 82.3 (among valid conjoint respondents).

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Understanding what employees value — opportunities for improving employee perceived value and associated costs

Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the “portfolio effect.” Modeled impact assumes all other programs stay the same. Improvements in perceived value are increments to current perceived value of 83.2 for A respondents and 79.1 for B respondents (among valid conjoint respondents).

Division ADivision B

4.4

3.6

2.9

2.7

2.4

2.3

2.1

2.0

1.5

-0.2

4.9

4.0

3.2

3.0

3.4

3.9

2.7

3.1

2.0

2.6

Improvements in Perceived Value Change in Pay and Benefits Cost ($000)

Merit Increases — Above avg performers +50%

$3,153

Base Pay — +3% $23,358

Time Off — +2 days $5,989

Wellness Incentives — Premiums -10% upon achievement of health milestones

$647

STD — 60% base pay & weekly max of $1,500 $1,277

Retirement Contribution — 5% of Base Pay $4,935

Medical Deductible — -25% $635

CARE/Bonus — 3% target/change in target weighting (execs & directors)

$14,943

Life Insurance — 2X base pay & $200k max $300

Retirement Match — $0.50 up to 8% & 4-year vesting

$31

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-4.2

-4.5

-4.7

-6.6

-7.1

-7.4

-7.6

-8.1

-2.2

-4.2

-4.6

-5.0

-6.8

-6.9

-7.5

-7.8

-8.6

-1.1

Change in Pay and Benefits Cost ($000)

($4,635) Medical Premiums — +20%

($570) Medical Copays — +25%

($360) Prescription Copays — +25%

($5,989) Time Off — -2 days

($1,452) Medical Deductible — +25%

($473) Medical Copays — Coinsurance of 20%

($294)Prescription Copays — Coinsurance of 20%

($1,670)Wellness Incentives — Premiums +10% upon failure to meet health milestones

($3,750) CARE/Bonus — Eliminated

Understanding what employees value — identifying cost savings and the associated decrease in employee perceived value

Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the “portfolio effect.” Modeled impact assumes all other programs stay the same. Declines in perceived value are decrements to current perceived value of 83.2 for A respondents and 79.1 for B respondents (among valid conjoint respondents).

Declines in Perceived Value

Division ADivision B

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Creating a Total Rewards portfolio that reduces cost In light of budgetary constraints and health care reform while maintaining/increasing program perceived value

Reward Scenario #1 Scenario #2

Merit-Based Pay Increases Above average performers +50% Current

Bonus Eliminated Eliminated

Base Pay Current Current

Medical Deductible +25% Current

Medical Premiums Current +20%

Medical Copays +30% Current

Prescription Drug Copays Current Current

Wellness Outcome Incentives Premiums -10% Upon achievement of health milestones Current

Life Insurance 2X base pay & $200k maximum 2X base pay & $200k maximum

Short-Term Disability 60% base pay & weekly maximum of $1,500 60% base pay & weekly maximum of $1,500

Company Match to Retirement Plan $0.50 up to 8% & 4-year vesting $0.50 up to 8% & 4-year vesting

Retirement Plan Current Current

Time Off -2 days -2 days

Portfolio Perceived Value 84.3 82.1

Change in Perceived Value +2.0 -0.2

Change in Pay and Benefits Costs ($5,889,000) ($8,316,775)

Program improvementProgram reduction

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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 level of perceived value

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

3) To increase perceived value 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 Perceived Value 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 perceived value1) Maintain current

level of perceived value at lower investment

10%

20%

30%

40%

Portfolio optimization analysis

Current levels of perceived value and reward investment

3) Increase investment and increase perceived value Each point along the curve

represents the best allocation of the corresponding total investment

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Case study #1: health care organization

Situation

12,000 employees, ten hospitals, five clinics Acute, long-term and home health care 33% annual turnover among nurses, technicians, and

support services Many millions spent on contract labor due to high turnover

and volatile staffing requirements Labor shortage and agency market preventing competition

for labor based solely on pay Desire to avoid “silver bullet” approaches to reducing

unwanted turnover

Actions

Conducted focus groups in each facility to develop the survey; invited all employees to participate in online survey

Analyzed results by position and service offering to determine optimum rewards portfolios

After corporate review, presented/discussed results with facility leadership to build the case for change and discuss next steps

Implemented changes to training, leadership development, dental plan, tuition reimbursement, PTO, and medical insurance

Actual Results

Turnover dropped from 33% to 21% (a 36% improvement over three years)

Turnover dropped even as area turnover was increasing

Recommended changes to rewards generated an ROI of $4M in year one, contributed to system’s stronger financial performance

Gallup scores increased from 3.46 to 3.8 Avoided large-scale pay increase with a

negative return on investment

Projected –vs– Actual Results

The optimization model projected a 10% drop in turnover, while actual results produced at 12% reduction

Please note, this kind of comparison is directional rather than exact. As is common, how organizations implement a number of rewards changes to address employee turnover issues varies, which could include some changes that were not modeled in the TRO analyses

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Case study #2: customer service organization

Situation

72 contact centers, operating in 19 countries, interacting in 25 languages

1.5 million contacts per day

Roles ranging from Customer Service Representative to Technical Support/Help Desk

Zero to 300% turnover, depending on site and role

Actions

Enhanced performance management and career development systems, addressing job security issues as well as broader career development needs

Implemented team manager training and development program

Tracked changes and results with a rigorous goal-setting and measurement system

Actual Results

Retention increased more than 30 percentage points in 13 out of 17 business units worldwide within six months

Within nine months, all but one business unit had achieved monthly retention rate of 92% or greater

Savings exceed $10 million annually

Projected –vs– Actual Results

The optimization model projected a 19% drop in turnover, while actual results produced at 30% reduction

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For More Information

To learn more about Towers Watson’s Total Rewards Optimization and related research, please follow

(http://www.towerswatson.com/en/Services/Services/total-rewards-optimization)

Please also contact: Lubomira (Lubca) PaclikovaSenior Consultant

901 North Glebe Road | Arlington, VA 22203 Phone: [email protected]

Richard GendronSenior Consultant

901 North Glebe Road | Arlington, VA 22203 Phone: [email protected]

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Towerswatson.com © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only. Total Reward.

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