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2009/2010 U.S. Strategic Rewards Report by Watson Wyatt

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Event hosted by Houston Compensation Association by Fred Crandall from Watson Wyatt - November 18, 2009

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2009/2010 U.S. Strategic Rewards Report by Watson Wyatt

  1. 1. Looking Toward Recovery: Realigning Rewards and Re-engaging Employees 2009/2010 U.S. Strategic Rewards Report Fall 2009
  2. 2. Discussion Outline <ul><li>About the Survey </li></ul><ul><li>Impact of the Recession on HR Programs </li></ul><ul><li>Current Landscape of Rewards </li></ul><ul><li>Impact of Recession on Employee Engagement </li></ul><ul><ul><li>Employee Value Proposition </li></ul></ul><ul><ul><li>Attraction and Retention </li></ul></ul><ul><li>The Path Forward </li></ul>
  3. 3. 2009/2010 U.S. Strategic Rewards Survey <ul><li>14th Annual Strategic Rewards study </li></ul><ul><li>Study fielded between April and May 2009 </li></ul><ul><li>235 U.S.-based companies participated </li></ul><ul><li>Cross-industry representation of organizations with at least 1,000 employees </li></ul><ul><li>Select data from the October and August issues of Watson Wyatt’s bimonthly survey series “Effect of the Economic Crisis on HR Programs” </li></ul><ul><ul><li>201 large U.S.-based companies participated </li></ul></ul><ul><li>Employee data reflect responses of 1,300 full-time workers at organizations with more than 1,000 employees </li></ul>
  4. 4. Impact of the Recession on HR Programs
  5. 5. Impact of recession has been widespread and is likely to linger
  6. 6. August 2009 June 2009 October 2009 With regard to the recession, when do you think your company's results will “bottom out&quot; and begin to improve? Impact of recession has been widespread and is likely to linger * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009
  7. 7. Key findings: Few companies have been immune to the effects of the downturn <ul><li>Organizational restructuring pervasive and deep </li></ul><ul><ul><li>Many rounds of layoffs since the downturn began </li></ul></ul><ul><ul><li>Cost-cutting measures employed to avoid layoffs and to augment them </li></ul></ul><ul><li>Reward programs affected </li></ul><ul><ul><li>Merit budgets low but expected to rebound </li></ul></ul><ul><ul><li>Annual incentive plan funding reduced </li></ul></ul><ul><li>Plans to begin reversing many cuts </li></ul><ul><ul><li>Most plan to begin within next 12 months </li></ul></ul><ul><ul><li>Restoration will be a long-term process </li></ul></ul><ul><li>Negative impact on employee engagement </li></ul><ul><ul><li>Greatest impact on high performers </li></ul></ul><ul><ul><li>Retention risks loom as we move toward recovery </li></ul></ul><ul><li>Adverse impact on Quality and Customer Service </li></ul><ul><ul><li>Employees believe recent changes affecting quality and customer service </li></ul></ul><ul><ul><li>Employers not as concerned </li></ul></ul><ul><li>Looking forward </li></ul><ul><ul><li>Restoring employee engagement can create a compelling bond </li></ul></ul><ul><ul><li>Companies must proactively address employee morale and productivity </li></ul></ul>
  8. 8. <ul><li>High-performing organizations took fewer actions </li></ul><ul><ul><li>Average of 3 actions versus an average of 4 actions for other firms </li></ul></ul><ul><ul><li>Laid off 7% of their workforce versus 9%, on average, for other firms </li></ul></ul><ul><li>Objectives for layoffs were to maintain profitability (84%) and size staffing to reflect future demand (66%) </li></ul>Companies took multiple actions aimed at minimizing layoffs Number of actions taken to minimize workforce downsizing On average, survey participants report taking 3.5 different actions to minimize or avoid layoffs .
  9. 9. Actions taken and their effectiveness at minimizing layoffs All organizations Very effective/moderately effective High-performing organizations All other organizations
  10. 10. Layoffs have tapered off, but are continuing <ul><li>If you have made or are planning to make layoffs, what percentage of your employee population is affected? </li></ul>* As reported in the Effect of the Economic Crisis on HR Programs – Update: August 2009 Respondents have laid off an average 8.4% of their workforce and expect to lay off an average 1.9% over the next 12 months Already laid off (median) Expect to lay off in next 12 months (median)
  11. 11. As of October, companies beginning selective hiring 96% Yes – In last 3 months 93% Yes – In next 3 months The most commonly hired positions were professional, non-managerial – those with specific domain expertise. Companies making offers to new hires in the last 3 month or in the next 3 months * As reported in the Effect of the Economic Crisis on HR Programs – Update: August 2009 Administrative/clerical/manual Other First-line supervisor/team leader Director/manager/middle management Professional, non-managerial Senior manager/executive
  12. 12. Financially high-performing firms were better prepared for a recession <ul><li>78% of high-performing firms indicated existing contingency plans effective in responding to recession versus 56% for other firms </li></ul><ul><li>More high-performing firms used a formal workforce plan to make layoff decisions </li></ul><ul><ul><li>57% for high-performing firms versus 47% for other firms </li></ul></ul><ul><li>High-performing firms more-often rated performance management systems as effective in evaluating which employees to lay off </li></ul><ul><ul><li>53% for high-performing firms versus 45% for other firms </li></ul></ul><ul><li>Performance was a critical factor in layoff decisions </li></ul><ul><ul><li>71% of all companies used performance as a factor in layoff decision making </li></ul></ul><ul><ul><li>73% used functional skills as a factor as well </li></ul></ul>
  13. 13. Current Landscape of Rewards
  14. 14. June 2009 (median) August 2009 (median) In October, 40% reported a 0% increase for 2009, and 10% reported a 0% increase for 2010. The median merit increase of those who did give raises was 3.0 October 2009 (median) Merit budgets remain low for 2009 but are expected to have some rebound in 2010 * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009
  15. 15. Recession has reduced funding for annual incentive plans for broad-based employees <ul><li>STI funding down over the past 2 years </li></ul>STI funding levels down from 99% of target in 2007 * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009 79% 79% Median STI funding 68% 71% Mean STI funding Expect to fund this year Funded last year
  16. 16. Of those reversing hiring freezes, 70% will retain them for selected groups (business units, locations, job families, etc.). The percentage of respondents planning to roll back salary freezes in the next 6 months has increased by 21 percentage points since August (33%). Most companies plan to reverse salary freezes, hiring freezes and salary reductions over the next 12 months * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009 56% Salary freeze 15% Salary reduction 56% Hiring freeze Percentage that made change
  17. 17. Of those reversing reductions to 401(k) matches, 70% will restore the match to its previous level, 17% will vary based on profits, and 13% will be reinstated to a new, lower level. Retirement savings and health care programs will be treated differently * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009 25% Reduce employer 401(k)/403(b) match 42% Raise percentage employees pay for health care premiums Percentage that made change
  18. 18. Recession has lingering impact on retirement savings <ul><li>Changes in participant activity in 401(k) or 403(b) plans in the last two months </li></ul>* As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009 2% 58% 40% Rate of hardship withdrawals 3% 55% 42% Rate of lending to participants 32% 65% 3% Percent of pay contributed by participants 35% 56% 9% Percent of assets invested in equities Decreased Stayed the same Increased
  19. 19. 71% of respondents have made some change to their 2010 health care plan due to the economy. * As reported in the Effect of the Economic Crisis on HR Programs – Update: August 2009 Anticipated changes to 2010 health care plan as a result of the economic downturn Recession has lingering impact on health care plans Increase deductibles, co-pays or out-of-pocket maximums Increase percentage of premiums paid by the employee Consolidate or eliminate plans Add/increase spousal surcharges Consolidate vendors Add restrictions on eligibility No changes planned Introduce a total replacement CDHP Reduce/eliminate wellness programs Other Reduce co-pays on preventive services/primary care visits
  20. 20. The post-recession landscape Anticipated changes in 3-5 years * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009 17% 73% 11% Employer contributions for pension plan 8% 41% 51% Development programs for employees 3% 41% 55% Difficulty retaining critical-skill employees 4% 47% 50% Difficulty attracting critical-skill employees 11% 82% 7% Employer contributions for defined contribution plan 4% 25% 72% Percentage of health care costs paid by employee 1% 17% 83% Employees working past their desired retirement age 43% 27% Decrease 29% 38% No change 28% Staff sizes 35% Salary increase levels Increase
  21. 21. Impact of Recession on Employee Engagement
  22. 22. Employees are cognizant of the EVP <ul><li>Employers and employees have opposite perspectives on the EVP: </li></ul><ul><ul><li>Only 28% of employers state their EVP is formal, however… </li></ul></ul><ul><ul><li>74% of employees indicate their company has a formal EVP </li></ul></ul><ul><li>Only 20% of employers that took 4 or more actions related to the reward program believe changes negatively impacted the EVP </li></ul><ul><li>42% of top-performing employees believe cost-cutting and/or restructuring resulted in significant changes to their EVP </li></ul>EMPLOYEE VALUE PROPOSITION (EVP) <ul><li>EVP encompasses the collective array of programs the organization offers in exchange for employment </li></ul><ul><li>EVP is influenced by the organization’s brand, values, culture, leadership, environment, talent and reward programs </li></ul><ul><li>Employees determine the worth or value of their experience and determine whether to join, stay or give discretionary effort </li></ul><ul><li>Employers can shape the organizations EVP through talent and reward program design that is aligned with both their culture and current/future employee expectations </li></ul>
  23. 23. Employee engagement shows a sharp decrease from 2008 <ul><li>Employee engagement down from last year </li></ul><ul><li>Top-performing employees substantially less engaged than before the recession </li></ul><ul><li>Decline in engagement poses significant attrition risk! </li></ul>Drop in employee engagement since 2008 -23% -9% * 2008 score set as baseline Score on Watson Wyatt’s Engagement Index Percentage change 92 91 2009 100 All employees 2008* Top-performing employees 119
  24. 24. Significant decline in line of sight among top-performing employees <ul><li>Significant declines in line of sight indicators for top performers </li></ul><ul><ul><li>43% believe the performance bar for earning bonus has been raised </li></ul></ul><ul><ul><li>32% indicate company financial performance expectations have increased </li></ul></ul>-24% -37% -20% Drop in line of sight for top-performing employees (2009 vs 2008) Percentage change My performance objectives are motivating My supervisor ties my rewards (compensation) to organizational performance My performance goals are linked to company’s strategy and goals
  25. 25. Top performers’ satisfaction declines <ul><li>Top performers view their company more negatively </li></ul><ul><ul><li>36% say company situation has worsened </li></ul></ul><ul><ul><li>20% decline in recommending others take jobs at the company </li></ul></ul>-14% -28% -26% -31% Drop in top-performing employees’ satisfaction with key indicators of the employee value proposition Prefer to remain with company rather than take comparable job elsewhere Satisfaction with organization culture Satisfaction with opportunities for advancement -30% Percentage change Company aligns the employment deal with what it stands for in the market Company lives up to the employment deal
  26. 26. Restructuring and cost-cutting actions have had a adverse impact on business and employees Changes have had an adverse impact on: There is a large disconnect between employers and employees on the adverse impact on quality and customer service. 48% 59% 42% 69% Ability to manage work-related stress 65% 76% 57% 79% Workload 47% 54% 37% 49% Loyalty/commitment to the company 41% 47% 34% 17% Quality/customer service 64% 36% Employer 44% 52% 36% Ability to have a healthy balance between work and personal life EMPLOYEE EXPERIENCE 44% All employees 56% Employees in organizations who took 4 or more actions 36% Productivity Employees in organizations who took less than 3 actions BUSINESS IMPACT
  27. 27. Attraction challenges reported at historic lows Trend in difficulty attracting employees Challenges attracting critical-skill employees have not been this low since 2002 when they reached 45% All employees Critical-skill employees Top-performing employees
  28. 28. Retention challenges are also at historic lows Trend in difficulty retaining employees Challenges retaining critical-skill employees have not been this low since 2002 when they hit 26% All employees Critical-skill employees Top-performing employees
  29. 29. Concern about retention has continued to increase since August 2009. August 2009 October 2009 Retention risk for key employee groups is recognized * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009
  30. 30. Drivers of attraction have shifted in light of the recession <ul><li>Top reasons employees join an organization </li></ul>Health care benefits 22% Career development opportunities 26% Base pay 29% Company culture 30% Employer reputation 40% Employers Career development opportunities 21% Retirement benefits 22% Employer reputation 21% Health care benefits 27% Health care benefits 25% Base pay 33% Base pay 30% Job security 33% Job security 37% Nature of work 37% Nature of work 41% Top-performing employees All employees
  31. 31. Drivers of retention have also shifted relative to prior years <ul><li>Top reasons employees leave an organization </li></ul>Work/life balance 24% Promotion opportunity 35% Career development opportunities 39% Base pay 39% Relationship with supervisor/manager 43% Employers Trust/confidence in management 23% Trust/confidence in management 22% Job security 23% Work/life balance 23% Work/life balance 22% Promotion opportunity 23% Promotion opportunity 29% Base pay 32% Stress levels 31% Stress levels 38% Base pay 35% Top-performing employees All employees
  32. 32. The Path Forward
  33. 33. Positioning talent for economic recovery <ul><li>Significant declines in productivity and customer service exacerbated by top performer attrition </li></ul><ul><li>Economic recovery will mean greater demand for key talent </li></ul><ul><li>Re-engaging top performers with focus on promotion and competency development is key to retention </li></ul><ul><li>Re-build thoughtfully for future success through the EVP and integrated reward and talent management programs </li></ul>An Employee Value Proposition can create a compelling bond
  34. 34. Actions taken to keep employees engaged * As reported in the Effect of the Economic Crisis on HR Programs – Update: August 2009 Addressing employee engagement Only a small percentage of respondents are using recognition and special compensation programs that can help keep high performers engaged. Increasing communication Changing roles to expand responsibilities Holding additional employee forums, town halls, etc., to address concerns related to the economy Increasing focus on coaching and mentoring Increasing opportunities for special project assignments Providing additional development opportunities Other Creating special compensation programs for high performers and/or at-risk employees Expanding use of recognition programs Providing new opportunities for job rotation Giving more frequent performance feedback
  35. 35. Use of Recognition Plans May be Increasing Companies that have encouraged managers to make increased use of recognition plans in light of cutbacks on other reward programs because of the recession. Use of recognition plans may increase * As reported in the Effect of the Economic Crisis on HR Programs – Update: August 2009 1% To a great extent 7% To a significant extent 43% To a small extent 3% Not at all 45% To a moderate extent To what extent have managers increased the use of recognition plans compared to before program cuts began? 1% No 64% Yes 35% Don’t know Do you expect managers to continue the increased use of recognition after other reward programs have been restored?
  36. 36. Five steps to re-engaging employees <ul><li>Understand business drivers and objectives in new economic environment and implications for human capital management </li></ul><ul><li>Redefine EVP for relevance and strategic alignment with business objectives </li></ul><ul><li>Identify and implement changes to reward and talent management programs that the business can support </li></ul><ul><ul><li>Reinstate salaries as quickly as business results will allow </li></ul></ul><ul><ul><li>Return merit increases to pre-recession levels and differentiate as much as possible based on performance </li></ul></ul><ul><ul><li>Review STI metrics for alignment with modified business priorities </li></ul></ul><ul><ul><li>Review career development and performance management programs to align with new business landscape </li></ul></ul><ul><ul><li>Differentiate bonus awards based on performance </li></ul></ul><ul><li>Promise and deliver on the EVP </li></ul><ul><li>Establish and track EVP-related metrics to identify additional actions required </li></ul>
  37. 37. Questions?
  38. 38. Appendix
  39. 39. Changes that affected hours are expected to be reversed * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009 17% Reduced workweek 15% Mandatory shutdown Percentage that made change
  40. 40. Impact on training, travel Anticipated timing to reverse/reinstate changes * As reported in the Effect of the Economic Crisis on HR Programs – Update: October 2009 75% Add/increase restrictions to company travel policy 41% Eliminate or reduce training programs Percentage that made change
  41. 41. 2009 annual holiday parties affected 70% Yes – 2007 47% Yes – 2008 37% Yes – 2009 (planned) Holiday party budgets decreased from 2007 to 2008 and are expected to decrease again in 2009. Did your organization host a holiday party? 8% 32% 51% 7% 1% 2008 54% The same 4% Slightly higher 20% Slightly lower 1% Significantly higher 2007 Our 2009 Holiday Party budget is: Significantly lower 21%
  42. 42. Legislative changes <ul><li>The Lilly Ledbetter Fair Pay Act redefines the statute of limitations on discrimination </li></ul><ul><ul><li>Restarts every time someone receives a paycheck or other remuneration that has been affected, in some way, by a prior discriminatory decision </li></ul></ul><ul><ul><li>71% of organizations indicate they plan to review their HR programs in light of the act </li></ul></ul><ul><ul><li>53% have already begun planning a response </li></ul></ul><ul><li>Employers should take a proactive approach to ensure their pay programs are credible, rational, defensible and bias-free. Best practices include: </li></ul><ul><ul><li>Job classification </li></ul></ul><ul><ul><li>Pay audit </li></ul></ul><ul><ul><li>Reward plan governance </li></ul></ul>
  43. 43. Job classification <ul><li>65% of respondents indicate they have a systematic, organization-wide job leveling process in place </li></ul><ul><li>Of these, 55% continue to rely on market-based job slotting to develop the job hierarchy </li></ul><ul><li>Organizations might consider a hybrid approach that balances internal equity with market value to ensure like jobs can be easily organized by level </li></ul>
  44. 44. Pay audit <ul><li>52% of respondents report they conduct pay audits to review pay programs on an annual basis, and another 33% indicate they do so but at no set time </li></ul><ul><li>Organizations are currently: </li></ul><ul><ul><li>Auditing competitiveness of pay (93%) </li></ul></ul><ul><ul><li>Assessing the way jobs are assigned to levels (39%) </li></ul></ul><ul><ul><li>Conducting statistical analyses of base pay difference by demographic group (38%) </li></ul></ul>
  45. 45. Reward plan governance <ul><li>The Lilly Ledbetter Fair Pay Act requires that companies retain records regarding pay decisions </li></ul><ul><ul><li>70% of respondents say their organization is working to improve governance procedures related to gathering, storing and monitoring data in the United States </li></ul></ul><ul><ul><li>73% are implementing consistent tools, processes and/or technology to improve governance procedures </li></ul></ul>

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