Optimizing Rewards for Business Results and Greater Employee Engagement

Optimizing Rewards for Business Results and Greater Employee Engagement Lois Grubb, Vice President, Human Resources Elmhurst Memorial Hospital Eric Parmenter, Principal Towers Perrin August 4, 2009 © 2009 Towers Perrin

Presenters: Lois Grubb Lois Grubb is Vice President, Human Resources for a 400+ bed community hospital with more than 500 physicians and 3,000 employees. She reports to the CEO and manages a group of 17 HR professionals Prior to that, Lois was Senior Vice President, Human Resources for a $1.2 billion wholly owned subsidiary of AmerisourceBergen, a Fortune 24 pharmaceutical supply chain management company. Previously, she held HR leadership roles at Gundersen Lutheran Medical Center in La Crosse, WI; CNA Insurance; GD Searle and Co; and Mohr Development Lois has an M.A. in psychology from Temple University, a B.A. in psychology from Immaculate College and is an award recipient from the Academy of Women Achievers, YWCA, City of New York. Other credentials include the Executive Education Program in Finance, Wharton School of the University of Pennsylvania, and Executive Education in Strategy and Marketing, Tuck School of Business, Dartmouth © 2009 Towers Perrin 2

Presenters: Eric Parmenter Eric Parmenter is a Principal in Towers Perrin’s Health and Welfare practice. Located in the firm’s Chicago office, he has over 23 years’ experience helping employers develop innovative total reward strategies that align with their business objectives Eric is a recognized national leader in health care benefit design and delivery. He is a frequent moderator of panel discussions and speaker at seminars across the country. Eric is also an award-winning author of articles on human resource and employee benefit topics Prior to joining Towers Perrin, Eric was Midwest practice leader for compensation and benefit consulting at Grant Thornton LLP. He also owned his own benefit consulting, outsourcing and administration firm Eric holds a bachelor of arts degree in psychology from the University of Illinois, as well as multiple professional designations in underwriting, finance and human resources. Eric also holds an M.B.A. degree from the University of Chicago’s Graduate School of Business © 2009 Towers Perrin 3

Signs that the global downturn is abating… U.S. Consumer Confidence Index improved in March and April — and rose to an eight-month high in May Although unemployment reached 9.4% in the U.S. in May, the rate of job losses decreased relative to prior months DJIA and S&P 500 have advanced significantly since early March January – February losses were nearly offset Housing sales were up 11% in June © 2009 Towers Perrin 5

…haven’t eased corporate concerns and caution Most U.S. organizations in a recent Towers Perrin survey project 2009 revenue declines 52% expect decreases of more than 5% 33% anticipate a drop of 11% or more A Q1 Business Roundtable survey of 100 CEOs revealed pessimism 67% expect sales to decline in the next six months 66% plan to shrink capital spending 71% expect more job losses Health care providers are concerned about the economy and the implications of health reform both as an employer and as a provider Source: Towers Perrin Cost-Cutting Strategies in the Downturn, May 2009; Business Roundtable’s Q1 2009 CEO Economic Outlook Survey © 2009 Towers Perrin 6

Rising costs in a sinking economy mean employers and employees take a double hit Employees/Retirees Face… Employers Face… Shrinking income and purchasing power Unbudgeted cost increases due to Trade-offs between health care and increased utilization of medical other necessities and disability plans increasing numbers of covered Job stress dependents due to widespread layoffs Unemployment increased COBRA exposure Capital losses postponed retirements Delayed retirement Lower employee engagement Lower productivity New concerns about health reform © 2009 Towers Perrin 7

As a result of the economic crisis, employers are accelerating reward changes and/or moving in new directions… 53% are trying or considering benefit strategies they would not have considered otherwise 47% have closed their DB plans to new participants Although less than 10% have suspended their 401(k) match, another 20% are considering it 52% are increasing employees’ share of health care program costs 62% are tightening prescription drug coverage 38% of organizations are focusing more on cost reduction than talent management Most are holding the line on salaries by cutting merit budgets, freezing salaries or delaying planned merit increases (in that order) Source: Towers Perrin Compensation in Crisis Pulse Survey, January 2009; Towers Perrin Benefits in Crisis Pulse Survey, March 2009 © 2009 Towers Perrin 8

…and reacting to changes in the economy North American employers tell us employees are Postponing retirement (68%) Requesting financial education or retirement planning (40%) Using employee assistance programs (35%) In the U.S. specifically, employers tell us employees are Moving to fixed-income investments (55%) Increasing loans and withdrawals from retirement savings plans (50%) — or reducing participation in these plans (44%) Source: Towers Perrin Benefits in Crisis Pulse Survey, March 2009 © 2009 Towers Perrin 9

The outlook for health care and hospitals Health care and education have been hit less than other U.S. industries with fewer job losses some hospitals are performing well given the economy others hospitals are experiencing flat or decreasing revenues Fewer dollars are being spent on elective procedures Accounts receivable are growing, with more defaults on outstanding bills Patients skip important screenings and tests due to insurance worries Charitable care is increasing Impending health care reform legislation creates significant uncertainties for the future © 2009 Towers Perrin 10

Today, hospitals face unprecedented demands and new challenges Employer Challenges Sustainable growth and improved performance Operating cost and risk pressures Innovation and quality improvement Employee engagement and patient satisfaction Flexible, “on demand” workforce to address talent shortages and gaps Public relations and network contracting New competition for labor Market Forces/Financial Pressures Demographic Forces Ballooning accounts receivables Aging workforce Reduction in elective care and some needed care Increasingly diverse workforce Intense competition and shrinking reimbursement Changing patterns of retirement Governance pressures and regulatory oversight Increased job mobility Mounting regulatory pressures and opportunities Talent shortages Transforming technologies and outsourcing Anticipated dearth of leadership Collective bargaining activities Consumerism payment strategies Transparency and quality Aging infrastructure and need to replace facilities Employee Needs Financial security Inspiring leadership Challenging work Involvement and control Information and knowledge Work/life balance Physician experience and engagement © 2009 Towers Perrin 11

Labor and related costs accounted for 62% of the expense growth for hospitals (from 2001 to 2006) Labor is now the single largest operating cost item typically equal to more than 40% of revenue Change in number of Wages, salaries and employee benefits services provided 41% 30% Costs of goods and services purchased 62% Prescription drugs 4% Professional fees 3% Intensity and other Professional liability insurance 2% 8% All other 12% Source: AHA analysis of 2001-2006 expense growth rates by category © 2009 Towers Perrin 12

The drivers of attraction, retention and engagement for employees in health care Top Attraction Drivers Top Retention Drivers Top Engagement Drivers Competitive base pay Satisfaction with the organization’s Senior management sincerely business decisions interested in employee well-being Competitive health care benefits Ability to balance my work/personal life Organization’s reputation for social responsibility Vacation/paid time off Understand potential career track within Seek opportunities to develop new organization knowledge/skills Flexible schedule Good relationship with supervisor Organization quickly resolves customer concerns Convenient work location Can impact customer satisfaction Organization rewards outstanding customer service Career advancement opportunities Fairly compensated compared to others Input into decision making in my doing similar work in my organization department Reasonable workload Organization quickly resolves customer Can impact quality of concerns work/product/service Caliber of coworkers Unit has skills needed to succeed Improved my skills and capabilities over the last year Reputation of the organization People in my unit work well together Unit has skills needed to succeed as a good employer as a team Competitive retirement benefits Senior management acts to ensure Competitive career development organization’s long-term success Source: Towers Perrin 2007 – 2008 Global Workforce Study, U.S. Hospital Cut, October 2007 © 2009 Towers Perrin 13

Elmhurst Memorial Healthcare (EMHC): Key issues Community hospital located in western suburbs of Chicago Three components to our business acute care not-for-profit hospital Elmhurst Clinic home health/hospice Compete in a crowded marketplace Challenge of building a new hospital © 2009 Towers Perrin 15

Begin with an integrated strategy framework Business Context Strategic Talent Workforce Management Employee Engagement Planning Measuring engagement Understanding drivers of engagement Rewards and Recognition Understanding linkage between Ensuring consequences for performance and behavior engagement and financial results Understanding what different Recruitment segments value Setting principles to guide decisions Performance Training and Management Development © 2009 Towers Perrin 16

Positioning for business results: It’s really about alignment The Employment Deal Monetary Total Rewards HR Pay (base and incentives) Strategy Benefits Nonmonetary Total Rewards EMHC’S Communication Mission, Vision and Values Performance Management Work Environment/Culture Recognition Leadership Career Development High levels of trust, commitment and loyalty Employer-of-choice status Outside recognition/awards © 2009 Towers Perrin 17

The first step in EMHC’s journey: Focus on rewards benchmarking and optimization Human Capital Optimization Cost/Risk Reduction Reduce expenditures and growth rate for fixed-cost rewards Eliminate programs with low perceived value Streamline reward practices for greater efficiency Rewards Optimization Performance Enhancement Increase the variable component of rewards Redirect the overall reward spend toward pivotal roles Ensure transparency of reward system practices Strengthen manager effectiveness and support system © 2009 Towers Perrin 18

The chosen reward changes and implementation plan will be based in part on the answers to a series of questions Considerations Framing the Issues Is the reward mix Is EMHC’s current emphasis on fixed-cost rewards hampering business appropriate for performance and flexibility? Do employees appreciate the level of security employees and provided? Would greater emphasis on variable pay better attract critical skills? the company? Are employees behind the curve in preparing for retirement and taking responsibility for their health? How competitive are What is the desired competitive position for rewards overall, and by component? EMHC’s rewards Are there reward trends that could help attract and retain critical talent? versus the market? Is EMHC within acceptable cost levels versus competition for customers? Do rewards align Are metrics underlying incentives consistent with goals for growth with desired and profitability? business Do employees have a clear line of sight to what drives business performance, performance? and do rewards reinforce the right behaviors and decisions? Is the distribution of reward spend across roles reflective of their pivotal nature? What workforce How will reward changes impact employee engagement? Given key disruption risks engagement drivers, can we navigate change to minimize disruption? are acceptable? Can the reward portfolio be restructured to balance cost and employee perceived value? © 2009 Towers Perrin 19

Understanding what attracts employees and the key elements of the work experience that motivate employees will be critical to success Age Ages Ages Ages Age 55 Attraction Drivers Under 25 25 to 34 35 to 44 45 to 54 or Older Competitive base pay 1 1 1 1 2 Competitive health care benefits 8 5 2 2 1 Vacation/paid time off 2 2 3 3 6 Flexible schedule 3 3 4 4 8 Career advancement opportunities 4 4 7 5 — Competitive retirement benefits — — — 8 3 Source: Towers Perrin 2007 Global Workforce Study ⎯ U.S. Hospital Industry Top Motivation for Work Overall Top Motivation for Work — Hospitals Having good work/life balance (69%) Having good work/life balance (70%) Having a secure position for the long term (61%) Having a secure position for the long term (63%) Having adequate benefit protection (58%) Having adequate benefit protection (63%) Doing exciting, challenging work (49%) Doing exciting, challenging work (50%) Maximizing earnings (47%) Maximizing earnings (48%) Note: Percentages represent percentage of respondents including item in their top 5. Source: Towers Perrin 2007-2008 Global Workforce Study, — U.S. and U.S. Hospital Cut, October 2007 © 2009 Towers Perrin 20

The challenge is to build people programs that create competitive advantage Optimal reward programs will attract, retain and engage employees and drive quality and operational performance 2008 Focus — Transactional Rewards People Programs Employee Patient Satisfaction/ Operational and Processes Behaviors Quality of Care Performance Attracting the right Loyal Improved productivity talent Informed consumer Improved financial and Pay Benefits Engaging talent in the clinical performance Effective decision right behaviors aligned making/compliance benchmarks with a desired culture with care Reduced costs Motivating talent to be Consistent with the Competitive advantage Learning healthy and productive hospital’s clinical and Work Retaining the right and quality initiatives Environment talent Development (quality, safety and cost-effectiveness) 2009 Focus — Relational Rewards © 2009 Towers Perrin 21

The rewards landscape: The evolution Transactional Rewards Pay Benefits Short-term focus Critical to attracting top talent Relational Rewards Learning and Work Long-term focus Development Environment Critical to retaining top talent In the long run, relational rewards provide a higher ROI % ROI Maximizing Return on Reward Investments Investment in Relational Superior Returns Rewards ⎯ Work Environment and Learning and Development Investment in Transactional Competitive Returns Rewards ⎯ Pay and Benefits $ Investment Fair/Reasonable Additional Investment Investment © 2009 Towers Perrin 22

Getting started at EMHC: Employee engagement survey findings Input from the employee engagement survey provided focus to the strategy and implementation For EMHC — input about pay and benefits led us to conduct an analysis of EMHC’s base-pay practices Towers Perrin conducted a review of EMHC’s benefits and their market competitiveness © 2009 Towers Perrin 23

On the pay front, how does EMHC compare with other local health care organizations? Base Pay Of the 50 EMHC Positions Surveyed, the Majority Were Either at Market or at the High End of Market Higher end of market At market Lower end of market Source: Metropolitan Chicago Healthcare Council (MCHC) © 2009 Towers Perrin 25

All EMHC benefit programs were benchmarked against the market Benefits Medical Dental Vision Short-Term Disability Long-Term Disability Basic Life/AD&D Voluntary Life/AD&D Pension 403(b) Savings EAP Paid Time Off Lower end of market At market Higher end of market Source: Towers Perrin Competitive Benefits Review, 2008 © 2009 Towers Perrin 26

EMHC tactics/program changes reflect the strategy, employee input and program performance assessment Pay Pay Benefits The Learning Deal Work and Environment Development Pay and Benefits — Transactional Rewards focus for 2008 and early 2009 Learning and Development and Work Environment — Relational Rewards focus for the balance of 2009 and 2010 Early results of engagement pulse survey are promising © 2009 Towers Perrin 27

Early results of engagement pulse survey are promising My supervisor used the feedback to make changes 59% favorable EMHC 57% favorable healthcare norm All in all, I’m satisfied with my job 80% EMHC 2009 69% EMHC 2007 73% healthcare norm I understand how my benefits compare 64% favorable 62% healthcare norm I understand how my wages compare 61% favorable I understand how my performance impacts the organization’s performance 91% favorable © 2009 Towers Perrin 28

Introduce a new employer-employee partnership Hold employees accountable In return, provide Together, to perform, based a comprehensive we will deliver on company values total rewards program stellar results Outstanding clinical quality/outcomes Partnership Pay Benefits Exceptional patient Respect satisfaction Integrity You Strong financial Determination performance Learning Excellence and Work Significant market Environment Development growth Safety at the core of all we do © 2009 Towers Perrin 29

Key learnings: Managing the partnership and moving forward together Create a comprehensive strategy Develop a total rewards strategy that supports business needs, and align programs accordingly Communicate and manage change Commit to regular dialogue about total rewards and what it means for employees Provide transparency Provide information about pay and benefit levels, and how they correlate with employee performance Move from transactional rewards to relational rewards Pay and benefits must be competitive; you must pay to play, but you win through exceptional learning and development and work environment gains © 2009 Towers Perrin 31

Our contact information Lois Grubb Vice President, Human Resources Elmhurst Memorial Healthcare lgrubb@EMHC.org Eric Parmenter Principal Towers Perrin Chicago Office 71 South Wacker Drive Suite 2600 Chicago, IL 60606 eric.parmenter@towersperrin.com © 2009 Towers Perrin 33

Optimizing Rewards for Business Results and Greater Employee Engagement

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