Agenda

Slide 3:Agenda

Current Challenges Recent Research Results The Human Capital Index� Strategic Rewards� Competitive Advantage of Top Performing Companies 4

Slide 4:Challenges in a Tight Labor Market

Critical challenges today: Attracting the right people at all levels Retaining (and motivating) them Focusing on top performers needs Engaging employees

Slide 5:Research

Human Capital IndexTM (HCI) Strategic Rewards� Survey of Top Performing Employees 6

Slide 6:The HCI Research Process:

Key Linkages to Organizational Value Recruiting Excellence Clear Rewards and Accountability Collegial, Flexible Workplace Communications Integrity Prudent Use of Resources 7

Slide 7:Human Capital Practices Create More Value

Source: Watson Wyatt�s Human Capital IndexTM (HCI) Research Median 5-Year Total Return to Stakeholders 53% 88% 103% Low HCI Companies Medium HCI Companies High HCI Companies (1/1/94-1/1/99)

Slide 8:Linking Human Capital and Value Creation

Source: Watson Wyatt�s Human Capital IndexTM (HCI) Research 0.00% -10.0% Prudent Use ofResources 4.0% Communications Integrity Expected change in market value associated with a significant (1 SD) improvement in HCI dimension 10.1% Recruiting Excellence 7.8% Collegial, Flexible Workplace 9.2% Clear Rewards andAccountability

Slide 9:Linking Recruiting and Value Creation

Source: Watson Wyatt�s Human Capital IndexTM (HCI) Research 0.00% 2.3% Professional new hires are well-equipped to perform duties 2.3% Recruiting efforts are specifically designed to support business plan 1.8% Company has established reputation as desirable place to work 1.7% Hourly new hires are well-equipped to perform duties 0.6% Formal recruiting strategyexists for hiring critical positions 1.4% Employees have input on hiring decisions Expected change in market value associated with a significant (1 SD) increase in HCI practice

Slide 10:Rewards and Accountability and Value Creation

Source: Watson Wyatt�s Human Capital IndexTM (HCI) Research 0.00% 1.8% Employees are eligible for stock plan programs 1.8% Company terminates employees who perform unacceptably 1.8% Company does a good job of helping poor performers improve 1.5% Top performers get significantly more pay than average performers 0.8% Company positions pay above market 0.4% Employee performance appraisals used to set pay 0.4% Employees participate in profit- sharing plan based on firm�s overall success 0.6% Pay is linked to company�s business strategy Expected change in market value associated with a significant (1 SD) improvement in HCI practice

Slide 11:Collegial, Flexible Workplace and Value Creation

Source: Watson Wyatt�s Human Capital IndexTM (HCI) Research Expected change in market value associated with a significant (1 SD) improvement in HCI practice

Slide 12:Communication Integrity and Value Creation

Source: Watson Wyatt�s Human Capital IndexTM (HCI) Research Expected change in market value associated with a significant (1 SD) improvement in HCI dimension 1.8% Employees have easy access to technologies for communicating 0.8% Employees have the opportunity to give ideas and suggestions directly to senior managers 0.8% Financial information is shared with employees 0.2% Business plans and goals are shared with employees 0.4% Employees have input into how the work gets done 0.00%

Slide 13:Prudent Use of Resources and Value Creation

Source: Watson Wyatt�s Human Capital IndexTM (HCI) Research 0.00% Employees have input in evaluating managers -3.9% Employees have input in evaluating their peers -2.5% Training is provided to employees for attaining higher level positions -1.9% Employees participate in profit sharing based on business unit�s success -0.8% Training programs are maintained even in less than favorable economic circumstances -1.0% Expected change in market value associated with a significant (1 SD) improvement in HCI dimension

Slide 14:The Good News: A Virtuous Cycle Exists

What High Performing Organizations are Doing is What Top Performing Employees are Asking For and it Helps Reduce Turnover of Top Performers and this Leads to Better Performance

Slide 15:Strategic Rewards�:

Annual survey of Strategic Rewards� practices Attraction & retention - HR programs that make a difference Employer practices survey among 400+ companies in North America Survey of top performing employees among 3,600 star performers

Slide 16:ALL Companies are Having Difficulty Attracting and Retaining ALL TALENT

83% have difficulty attracting critical skill employees 65% have difficulty in retaining critical skills - regardless of industry But now significant increases have resulted in: Over 50% of employers having difficulty attracting non-critical skills and 43% having difficulty retaining non-critical skills and its now worse outside of high-tech Source: Strategic Rewards� 2001

Slide 17:And the Trend Will Continue

Source: Strategic Rewards� 1999/2000 * Demand for labor is increasing at 2 percent per year (or roughly 20 percent for ten years), which, combined with an almost 12 percent drop in the absolute number of workers age 25-44, yields a 30 percent shortfall. -3.1% 55.1% 71.3% 22.3% -8.6% 25 - 34 35 - 44 Age of Worker 24.8% Change in Labor Supply 30 Percent Shortfall* of Younger Workers Over the Next Decade

Slide 18:Top Performers Have Accepted the New Employment Deal in a Major Way

New Employment Deal From fixed pay to variable based on performance From lifetime employment to an opportunity to contribute From a predictable career to individual opportunity and investment in self Top Performers Demand High levels of compensation and ability to build wealth Opportunities for advancement, job redesign, and new skill acquisition Career development, investments toward business literacy Source: Strategic Rewards� 1999/2000, Supplemental Survey of Top-Performing Employees

Slide 19:What Motivates Top Performers?

Source: Strategic Rewards� 1999/2000, Supplemental Survey of Top-Performing Employees

Slide 20:What Managers Don�t Know May Hurt ThemThe Perception Gap in Attracting Pay Approaches Perceived as Very Effective

6% 6% 21% 15% 31% 30% 33% 31% 35% 44% 47% 51% 53% 72% 0% 10% 20% 30% 40% 50% 60% 70% 80% Exempt overtime (cash) Exempt overtime (time off) Technical pay premiums Group incentives Sign-on bonuses Stock grant programs/stock options Paying above market Percentage of Respondents Top Performing Employees Employers (Percent responding "very effective") Source: Strategic Rewards� 1999/2000, Supplemental Survey of Top-Performing Employees 13% 40% Project incentives

Slide 21:What Managers Don�t Know May Hurt ThemThe Perception Gap in RetainingPay Approaches Perceived as Very Effective

35% 5% 24% 20% 18% 29% 36% 38% 44% 46% 54% 69% 0% 10% 20% 30% 40% 50% 60% 70% 80% Retention/�stay bonus" Exempt overtime (time off) Project incentives Group incentives Spot bonuses Paying above market Percentage of Respondents Top Performing Employees Employers (Percent responding "very effective") Source: Strategic Rewards� 1999/2000, Supplemental Survey of Top-Performing Employees 32% 51% Stock grant programs/stock options 26% 41% Technical pay premiums 9% 26% Exempt overtime (cash)

Slide 22:Effectiveness of Non-Compensation Reward Plans in Attraction and Retention

Percentage Responding Percentage of Companies  Reward Plan �Very Effective� with Plan 76% ? 68% ? 27% ? 45% 73% ? 43% ? 27% ? 8% Employers� Opinions Top Performing Employees� Opinions Source: Strategic Rewards� 1999/2000 and 2001, Supplemental Survey of Top-Performing Employees 26% 16% 65% 53% Learning new skills in current job Use of competencies for career path/development 30% 79% Opportunities for advancement 20% 57% Career development (non-promotional) 29% 56% Flexible work schedules 28% 36% Work at home 30% Reduced work week 36% 26% Sabbaticals 29% ? Significant Increase +10% ? Moderate Increase +5%

Slide 23:Do Technology Companies Do Anything Different?

Source: Strategic Rewards� 2001

Slide 24:Top Performing High Technology Employees

Source: Strategic Rewards� 2001, Supplemental Survey of Top-Performing Employees

Slide 25:Top Performing Employees� Responses Vary

All Secretarial/Clerical/ Production Professional/ technical Managers/Directors/ Sr. Managers Men 1. Compensation 1. Benefits 1. Opportunity to develop skills 1. Compensation 1. Compensation 2. Benefits 2. Job security 2. Compensation 2. Benefits 2. Benefits 3. Opportunity to develop skills 3. Compensation 3. Benefits 3. Type of people/culture 3. Opportunity to develop skills 4. Opportunity for promotion 4. Vacation/PTO 4. Freedom to work independently 4. Opportunity to develop skills 4. Opportunity for promotion 5. Vacation/PTO 5. Opportunity to develop skills 5. Vacation/PTO 5. Opportunity for promotion 5. Freedom to work independently Women Earn $100K+ Earn Under $30K Age 50+ Under Age 30 1. Benefits 1. Compensation 1. Job security 1. Benefits 1. Opportunity to develop skills 2. Opportunity to develop skills 2. Type of people/culture 2. Benefits 2. Compensation 2. Opportunity for promotion 3. Compensation 3. Benefits 3. Compensation 3. Freedom to work independently 3. Compensation 4. Vacation/PTO 4. Opportunity to develop skills 4. Opportunity to develop skills 4. Job security 4. Vacation/PTO 5. Freedom to work independently 5. Opportunity for promotion 5. Vacation/PTO 5. Opportunity to develop skills 5. Type of people/culture Source: Strategic Rewards� 2001, Supplemental Survey of Top-Performing Employees

Slide 26:Technology Companies are More Strategic!

Despite the traditional view that technology companies place an inordinate premium on speed over thoughtfulness 65% of Technology companies have a formal recruitment strategy Compared with only 47% of non-technology companies But only 25% of Technology companies have a retention strategy This still exceeds the 16% of non-technology companies with a formal approach to retaining employees Source: Strategic Rewards� 2001

Slide 27:Are High Performing Companies Different?

High performing companies are winning the war for talent Turnover rates are decreasing Recruiting costs between 70% and 200% of annual salaries Resulting in a median 17.8% five year return High performing company program designs are based on: Performance Improvement Communication Flexibility Involvement Measurement Source: Strategic Rewards� 2001

Slide 28:Performance Improvement

Significantly more high performing organizations approach their reward programs as a means of engaging people in improving business performance Starting from this clearly articulated premise helps prevent programmitis - ie. programs du jour that don�t drive results Source: Strategic Rewards� 2001

Slide 29:Performance Improvement

Performance measurement � measuring performance against a specified set of job-related competencies: Providing tools for employee development tied to rewards and geared toward enhancing organization success Rapid identification of performance issues Coaching and mentoring programs � providing non-direct report with contacts within the company to assist employees with direction and career-planning Inplacement/Redeployment Retrain to learn new skills Utilize systematic web-based staffing processes Best Practice Wal-Mart focuses intensively on how employees adapt during their first 90 days by assigning veteran employees as mentors. They go on to assess each new hire�s progress at 30-, 60-, and 90- day milestones. Results: reduced attrition rates by 25%. Chevron�s IT unit provides efficient web-based staffing reallocation databases designed to match skills, growth opportunities and project team needs

Slide 30:Communication

The best reward strategies and programs will not achieve their full potential if they are not Clearly articulated and Understood by employees Source: Strategic Rewards� 2001

Slide 31:Communication

Communication � systematic strategy and processes for keeping employees in the loop Making sure they believe the value the company places on them Making sure they understand the value of what the company provides to them (benefits, opportunities, development, etc.) Exit interviews � conducted by department managers, focus on underlying issues, find trends, implement recommendations Best Practices Scient appointed a Chief Morale Officer who is responsible for fostering a positive culture, bringing people issues to the top of the company�s agenda, leading morale-building efforts, organizing company rallies, roundtable luncheons, employee recognition and awards. Results: a low 11 percent turnover compared to the 35 percent industry standard and a great recruiting-oriented website. . Toys �R Us identifies listening and acting upon their employees dissatisfiers in exit interviewers as one of the key reasons they were able to reduce turnover by 35 percent.

Slide 32:Flexibility

The most successful firms are more likely to report reward plan flexibility The impact of the need to operate at internet speed requires a nimble response Source: Strategic Rewards� 2001

Slide 33:Flexibility

Multiple Incentives Its not just about options Adjust to evolving conditions through other forms of incentive Vary short-term objectives vs. mid and long-term Adjust to People Needs Flexible scheduling/ Job shares Floating hours at either end of the business day, split workday, shift, work week Address demographic changes Virtual office/telecommuting Productivity generally remains the same or increases - overcome hesitancy to provide Rockwell instituted a new innovation program designed to celebrate and reward with stock options not only patents but business process improvements. A key goal is to harvest the innovations currently unidentified. Silicon Valley Bank developed a concept of an full lifestyle portal for their employees on the company HR-intranet. Designed to address all life events - it acts as a concierge on the web for employees. The result is a closer relationship between the Bank and its employees, a better understanding across functions of many of the bank�s services and improved productivity due to reduced distractions and hassles in trying to resolve problems. Best Practice

Slide 34:Employee Involvement

Employee involvement in reward plan design is essential if programs are to be customized to target audiences This approach is utilized by a minority of organizations - but it is much more common among high performing companies Source: Strategic Rewards� 2001

Slide 35:Employee Involvement

Recognition and rewards usage and design Employee design of cash and non-cash awards given to individuals or teams based on performance Implement innovative employee ideas Recognition motivates top performers Social communities Encouraging the development of social ties among key employees binds employees to a social network at work Separate locations for technical/creative groups Off-site, think tank environment Harley-Davidson increased employee participation and challenged employees at the same time when it asked them to take an active part in building a better motorcycle. Through this effort, many innovative worker-designed items are now utilized throughout its plant. Scitor, near the top of the Top 100 Best Places to Work, communicates its unique environment internally and externally. Scitor takes the position that all benefit and reward programs belong to the employees and should provide the best possible benefits. Scitor seeks thorough employee input in all proposed changes. Best Practices

Slide 36:Measurement

High performing organizations are much more likely to measure their reward plan results The old adage of what gets measured gets accomplished is directly relevant Source: Strategic Rewards� 2001

Slide 37:Measurement

Measurement - Asking early and often: Retention is a critical business measurement but it is rarely a part of a manager�s performance metrics Company culture, people practices, policies shape an employee�s commitment level and retention Research consistently validates the significance of management�s role in employee retention Find out what issues exist before the turnover begins, make adjustments based on the feedback to the work environment and to management style Prudential established their �Building Management Capability� program, centered around a planning model that projects skill/talent needs and attrition rates. This program enables managers to develop targeted retention initiatives and more cost-effective succession plans for filling skill/talent gaps. UPS identified their drivers as hot skill employees and expensive to bring on board due to the huge learning curve in getting familiar with their routes. After analyzing the reasons drivers left, it determined that the number one reason was the task of loading packages before each run. To reduce turnover, they eliminated the loading task from the driver�s job and hired a new group to load them. Driver turnover rate fell dramatically. Of course, turnover in this new position is astronomical, but it is fairly simple to learn and recruit for this position. Best Practices

Slide 38:Key Strategic Rewards� Messages

Top performers are self-motivated and recognize their value as free agents. Take money off the issues table by paying above market for top-performers - engage them through their primary motivators. They will leave for money but it isn�t the primary driver. Competitive differentiation comes from understanding and capitalizing on individual employee�s needs. Non-Technology companies are closing the gap in the war for talent The old advantages of stock and casual, non-bureaucratic work styles have been adopted across industries Technology companies lead by maintaining a strategic people vision

Slide 39:Key Strategic Rewards� Messages

Play to win The future will be created by Human Capital High performing companies have gained competitive advantage by insuring their compensation programs are: Performance-Oriented Well-Communicated Flexible Based on employee involvement and Measured.