Reframing Total Rewards for the New Business Environment - Towers Watson

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In the wake of health care reform and its implications for shifts in benefit coverage, companies are increasingly looking at any changes to their reward programs from a holistic perspective – taking into account the broad array of monetary and non-monetary investments they make to attract retain and engage the people they need to operate successfully. This comprehensive view helps companies allocate those investments in optimal ways – a key goal right now amid increasing economic pressures, a complex legal and regulatory climate, and heightened talent needs and risks.

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Reframing Total Rewards for the New Business Environment - Towers Watson

  1. 1. Reframing Total Rewards for the New Business Environment Towers Watson webcastRandy AbbottLaury SejenNovember 30, 2011© 2011 Towers Watson. All rights reserved.
  2. 2. Why Total Rewards and why now? The recession pushed companies to reduce programs in the name of cost management…but many are facing repercussions, raising concerns about how they will power growth At 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 a significant reshaping of the employee value proposition and Total Rewards strategy for many industry sectors Strategic 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 needstowerswatson.com 2 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  3. 3. A confluence of factors is changing the employer/employeerelationship and with it, the structure, nature and mix ofrewards General paring back of rewards levels and spend Total Rewards Looking beyond compensation to attract and retain top talent Increased focus on optimizing reward spend and segmenting the workforce Base pay has been flat for the past five years Compensation Globally, aggregate bonus funding levels remain flat Increasing attention to external competitiveness 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 enjoyed Benefits Health 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 termSource: 2010 Towers Watson Talent Management and Rewards Survey Report and 2010 Towers Watson Workforce Health Strategies —A Multinational Perspective.towerswatson.com 3 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  4. 4. In the face of continuing economic uncertainty, merit payremains flat While business results have been improving in many sectors, recent fluctuations in the market create questions regarding the sustainability of the improvement Salary growth remains relatively flat U.S. Merit Budget Increases* Nonexempt Nonexempt Year Executive Management Exempt Salaried Hourly 2008 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% Salary Increases 2011P 3.0% 3.0% 3.0% 2.9% 2.8% Still Well Below ’08 Levels 2012F 3.0% 3.0% 3.0% 3.0% 3.0% P = Projected; F = Forecast.*Data represents median merit increases. Includes participants providing no merit increases. Source: Towers Watson Data Services towerswatson.com 4 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  5. 5. Health care spending is crowding out other workforceinvestments Benefits as a Percentage of Direct Compensation 2000 2009 Percentage Change Cash 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%Source: Towers Watson Client Data 2000 – 2009.towerswatson.com 5 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  6. 6. For employees, this means a growing affordability gap —prompting anger about continuing benefit reductions Affordability Gap: Cumulative Active Employee Health Care Costs vs. Wage Increases 200% 188% 180% 160% 140% 120% Affordability 100% Gap 80% 60% 40% 44% 20% 0% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Active employee health care costs Workers’ earningsSource: 2011 Towers Watson Health Care Trend Survey (active employee data) and Bureau of Labor Statistics, seasonally adjusteddata from the Current Employment Statistics Survey August to August, 2000 – 2010, and 2011 assumed to be the same as 2010.towerswatson.com 6 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  7. 7. Retirement benefits have changed over time Fortune 100 Retirement Plan Prevalence 87 80 83 78 71 67 64 63 64 59 58 60 53 53 47 47 41 42 40 36 37 36 33 29 22 20 17 13 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Traditional DB pension plans Account-based plans(hybrid and DC) n = 100Source: 2011 Towers Watson research on Fortune 100 companiestowerswatson.com 7 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  8. 8. But across most industries, total* retirement benefitsare fallingPercentage of Pay 14% 12.1% 1998 2003 2008 12% 11.2% 10.7% 10% 9.0% 9.0% 9.2% 9.3% 9.1% 8.1% 8.1% 8.3% 8% 6.4% 6.4% 6.3% 6.1% 5.7% 5.4% 5.8% 5.5% 6% 5.2% 4.9% 4.2% 4.3% 3.8% 4% 2% 0% Retail and Manufacturing Gas, energy, Pharmaceuticals High-tech Financial Health care Services wholesale natural services resources and electric% change -33% -29% -24% -13% -10% -9% -4% +3%*Total retirement benefits include DB, DC, retiree medical and retiree life insurance plans. towerswatson.com 8 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  9. 9. Benefit plans remain important to employers in attractingnew employees DB Plan DC Only Feb. June June Feb. June June 2009 2010 2011 2009 2010 2011 My company’s retirement 31% 33% 51% 21% 21% 26% program was an important reason I decided to work for my current employer My company’s health care N/A 36% 52% N/A 28% 43% program was an important reason I decided to work for my current employer My company’s retiree health N/A N/A 48% N/A N/A 32% program was an important reason I decided to work for my current employerSource: 2010 Towers Watson Retirement Attitudes surveyNote: Percentages indicate responses of “somewhat agree” or “strongly agree.”towerswatson.com 9 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  10. 10. Worsening the problem, employees are suffering from“change fatigue”— adding to rising levels of disengagementConstant organizational changescreate retention risk 41 % Of employees indicate their co-workers are suffering from change fatigue Of those employees who say their co-workers are suffering from change fatigue… 35 % Stay because they think they have toSource: Towers Watson 2011 Talent Management and Rewards Survey.towerswatson.com 10 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  11. 11. In a buyer’s market for talent, does this matter? Much morethan 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 Workers Employee Group 2004 2005 2006 2007 2008 2009 2010 2011 Critical skill 46% 58% 63% 64% 66% 28% 52% 59% employees* Top-performing 42% 48% 53% 60% 54% 25% 45% 42% employees* All employees* 18% 22% 29% 34% 28% 8% 15% 13% # of unemployed 2.20 1.96 1.52 1.49 2.14 6.13 5.33 4.63 per job opening*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.towerswatson.com 11 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  12. 12. …and the picture is similar for retention because ultimately it’sall about the “who” With quit rates at historical lows since the recession began, employers have few concerns about retention for employees in general But their concern jumps significantly for key groups such as critical skill and top-performing employees Percentage of Companies That Are Having Difficulty Retaining Workers Employee Group 2004 2005 2006 2007 2008 2009 2010 2011 Critical skill 30% 39% 43% 49% 47% 16% 31% 36% employees* Top-performing 27% 30% 36% 40% 37% 14% 25% 28% employees* All employees* 17% 20% 20% 27% 19% 5% 11% 11% # of quits per 2.5 2.9 3.1 3.1 2.7 1.7 1.8 1.9 month (millions)*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.towerswatson.com 12 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  13. 13. The need to engage employees around health and wealth isgreater 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 have42 % 15 % 42 % $250Kof surveyed employees of employees, on average, of Fortune 100 employers …the amount an average couplesay they would be willing to who are eligible for offer traditional DB plans will need to save for health carepay more for more account-based health today vs. 74% 10 years ago expenses in retirement (evenpredictable health care plans are enrolled in those with Medicare benefitscosts, up 23 points from plans factored in)two years agoSources: Employee Perspectives on Health Care, November 2010; National Business Group on Health/Towers Watson Employer Surveyon Purchasing Value in Health Care, 2010; Fidelity Investments, 2010; Towers Watson research on Fortune 100 companies.towerswatson.com 13 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  14. 14. Health care benefits will continue to be core to EVPs in thenext 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) 1% 2012 and 2013 4% 14% 81% 1% 2014 and after 8% 21% 55% 16% 1 — Not at all important 2 3 — Somewhat important 4 5 — Very important Not sureSource: Towers Watson 2011 Talent Management and Rewards Survey.towerswatson.com 14 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  15. 15. Most employers expect to “play” by retaining a medical program for actives after 2014“Play” Provide employer-sponsored health 26%options coverage for the long term 38% Provide employer-sponsored health coverage, but structure 20% contributions and communication to encourage low-wage… 8% Provide employer-sponsored health coverage until the 15% excise tax is triggered 10% Finance: 67% Provide employer-sponsored health coverage until an 6% HR: 67% inflection point other than the excise tax 11%“Pay” Adopt a defined contribution (DC) approach by providing 9% monetized value to employees, pay penalties, and direct 11%options employees to Exchanges Finance: 15% Exit employer-sponsored health coverage, pay penalties, 6% HR: 13% and direct employees to Exchanges 2% 0% Other action 2% 18% Dont know 18% HR n=104 Finance n=201 Source: 2011 Towers Watson-Forbes Survey: Opportunity to Align Cost and Talent Objectives? . towerswatson.com 15 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  16. 16. Those who opt to “pay” are divided on how they might adjustemployee compensation Plans to Adjust Compensation for Employees (Make Them Whole) in the Event of Exiting Health Care Coverage in 2014 Increase salary by full value of 1% coverage eliminated Increase salary by a partial value of 6% coverage eliminated Increase the value of other benefits 2% Offer additional wellness incentives 2% Other 1% Not sure 20%Source: 2011 Towers Watson-Forbes Survey: Opportunity to Align Cost and Talent Objectives?.towerswatson.com 16 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  17. 17. Whether they play or pay, they anticipate virtually no changein their current rewards mix Is this realistic? Current Cost Expected Cost Allocation Allocation in 2 – 3 Years 6% 6% 9% 9% 13% 14% 58% 58% 14% 13% Base pay Bonus or incentive pay Health care benefits Retirement benefits Other monetary rewardsSource: 2011 Towers Watson-Forbes Survey: Opportunity to Align Cost and Talent Objectives?.towerswatson.com 17 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  18. 18. All this leads to one inescapable question for employers rightnow… Is your employment deal sustainable going forward?towerswatson.com 18 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  19. 19. The portfolio allows employers to align what they expect andreward with what employees want and have to deliver Employee Total Employee Gives Rewards Gets and EVP Aligns with business strategy Is optimized to deliver the right ROI for the right level of cost and risk Drives required employee behaviorstowerswatson.com 19 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  20. 20. Total Rewards builds from strategic objectives and takes aportfolio approach to deliver desired resultstowerswatson.com 20 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  21. 21. That portfolio is expressed in terms of the unique role ofeach reward in the broader value propositiontowerswatson.com 21 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  22. 22. Understanding what really matters — in different parts of theworkforce — is essential to attracting employees Employers underestimate the importance of “fundamentals” to attracting employees — even top talent All Employees High-Potential Employees Rank Employers Employees Rank Employers Employees 1 Base pay Job security 1 Challenging work Job security 2 Organization’s Base pay 2 Career development Base pay mission, vision and opportunities values 3 Organization’s Health care 3 Organization’s Career reputation as a great benefits mission, vision and development place to work values opportunities 4 Career development Length of commute 4 Base pay Promotion opportunities opportunity 5 Challenging work Vacation/PTO 5 Organization’s Health care financial performance benefitsSource: Towers Watson 2011 Talent Management and Rewards Survey.towerswatson.com 22 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  23. 23. Employers consistently misread cues — with adverseimplications in workforce retention Employers do not completely understand what would cause employees to leave — especially their top performers All Employees Top Performing Employees Rank Employers Employees Rank Employers Employees 1 Base pay Work-related 1 Promotion Work-related stress opportunity stress 2 Promotion Base pay 2 Career development Promotion opportunity opportunities opportunity 3 Relationship w/ Promotion 3 Base pay Base pay supervisor opportunity 4 Career Trust/confidence in 4 Relationship w/ Trust/confidence in development management supervisor management opportunities 5 Work-related Incentive pay 5 Incentive pay Length of commute stress opportunity opportunitySource: Towers Watson 2011 Talent Management and Rewards Survey.towerswatson.com 23 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  24. 24. With knowledge of employee preferences, employers can testallocation and investment level mixes to identify the optimalportfolio Optimum Level of What matters to Investment employees — Conjoint Analysis + Portfolio Optimization = Optimum Allocation of Investment Segment-Specific Strategy Survey tool to capture Reflects cost constraints Optimum solution may be to: subjective preferences on investment Improve desired Asks employees to make Develops an efficient behavior/result (e.g., trade-offs among program frontier of optimum retention) by changing features as opposed to allocation of investments allocation and keeping current assessing the features Determines optimum level of investment individually investment level on the Maintain current Is a more reliable forecast basis of program costs behavior/result at lower level of behavior than traditional and turnover cost of investment by changing survey methods savings allocation Increase investment and desired behavior/result to economically efficient leveltowerswatson.com 24 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  25. 25. The process provides fact-based perspective to answerimportant questions… ILLUSTRATIVE Total $ Investment in Selected Rewards Recognition Other What is the best level of investment in employees? Medical What is the best allocation of that investment to maximize Base Pay desired behavior (e.g., attraction, Dental retention, motivation/engagement)? Retirement Bonus Do the answers vary by job function, department, other demographic characteristics? 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 categoriestowerswatson.com 25 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  26. 26. …and allocate investment to more effectively support strategic business and workforce objectives Increase in Indicated Retention ILLUSTRATIVE from Current Level (Percentage) Three Points on the Curve 3) Increase investment Each point along the curve and increase retention represents the best allocation of the corresponding total investment: 40% 1) To reduce total cost, the curve identifies which programs should be reduced to reallocate 30% investments in other areas and maintain current levels of 2) Maintain current level retention1) Maintain current of investment while level of retention 20% increasing retention 2) To maintain current at lower investment investment levels, the curve identifies how to reallocate Current levels of investment across programs to 10% retention and increase retention without reward investment raising cost 3) To increase retention dramatically and make the –$20mm –$10mm 0 $10mm $20mm $30mm most of each reward dollar, the curve indicates the best ways to Decrease in investment Increase in investment invest additional rewards funds from current level from current level towerswatson.com 26 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  27. 27. A holistic Total Rewards strategy drives employee behaviors provento ultimately influence business outcomes Linkage Model Total Rewards Employee Customer Financial Components Behavior Behavior Performance Performance- Engagement Customer satisfaction Labor cost Foundational Based Retention Customer attraction Operating costs Rewards Rewards Productivity Customer retention Operating margin Customer Service Controllable margin Career and Revenue growth Environmental ROIC Rewards TSRLinkage Methodology Demonstrates 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 performance Allows employers to assess reward effectiveness and make better investment decisionstowerswatson.com 27 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  28. 28. Total Rewards: Key questions for consideration Are you optimizing your Total Rewards investments to achieve the right cost, behavior and 1 performance outcomes? Do your Total Rewards programs attract, retain and engage the talent you need across your 2 business, at all levels? What are the key cost/value tradeoffs for your organization in balancing cost management 3 and workforce management objectives? Are you optimizing your cost/value for key compensation and benefit programs and the Total 4 Rewards portfolio overall? Do your Total Rewards programs reinforce the desired “deal” with your employees (i.e., aligning 5 employee behaviors with key business needs and direction of the company)? 6 Do your employees understand and recognize the value of your Total Rewards portfolio?towerswatson.com 28 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
  29. 29. Questions Randy Abbott randall.abbott@towerswatson.com Laury Sejen laura.sejen@towerswatson.comtowerswatson.com 29 © 2011 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

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