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Total Reward Strategies for the 21 st Century

Total Reward Strategies for the 21 st Century. A Quantitative Approach to Total Rewards. Lubca Paclikova Richard Gendron October 15, 2013. Today’s speakers.

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Total Reward Strategies for the 21 st Century

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  1. Total Reward Strategies for the 21st Century A Quantitative Approach to Total Rewards • Lubca Paclikova • Richard Gendron • October 15, 2013

  2. 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. 1

  3. Today’s discussion • Why Total Rewards…Now? • Insights from our research • Getting started • Total Rewards Optimization • Case studies • Questions 2

  4. 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 3

  5. Companies face serious challenges when it comes to attraction, retention and engagement of talent. Our research reveals what it takes to get it right 5X Companies that have adopted an increasingly integrated approach to Total Rewards strategy, design and delivery decisions — supported by an overarching Employee Value Proposition — are: more likely to report their employees are highly engaged 2X more likely to report achieving financial performance significantly above their peers 4 *Source: Towers Watson 2012 Talent Management and Rewards Study – Global.

  6. What is an effective Employee Value Proposition? 5

  7. The evolution of an effective EVP and Total Rewards strategy Segmenting and Differentiating Communicating and Delivering Integrated and Strategic Tactical 6

  8. A Total Rewards framework provides the roadmap to update rewards strategy and align it with business needs 7

  9. The specific elements will vary based on a company’s business, economics, culture and demographics 8

  10. Mismatches remain between what matters to employees… and what employers think matters… Source: Towers Watson 2012 Global Workforce Study, 2012 Talent Management and Rewards Study — United States. 9

  11. Health care reform complicates the Situation, affecting both reward costs and workforce dynamics Workforce Implications Financial Implications • HCR Provisions New Groups Require Coverage • Job and work hour redesign • Alternative staffing models • Outsourcing/job relocation • Impact on Total Rewards and Employee Value Proposition (EVP) • Increased costs beginning in 2014 related to part-time, seasonal, contract employees • Examine alternative play or pay strategies 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 Excise Tax • Plan redesign could reduce benefits • Excise tax cost could be shared with employees • Impact on Total Rewards and EVP • Increased costs beginning as early as 2018 • Further pressure to reduce health care trend rate 10

  12. towerswatson.com Companies that do not improve efficiency will likely reduce the value of benefits to contain cost and avoid excise tax EXCISE TAX THRESHOLD* Avoid excise tax by lowering long-termcost trends using thoughtfully-designed incentives, optimal care management, consumerism, engagement and other health activities ‘MEDIAN EFFICIENCY’ SELF-INSURED GROUP PLAN HIGH-PERFORMING GROUP OR PRIVATE EXCHANGE * 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. 11

  13. Mitigating health care reform cost impact – plan design only • Significant plan value reduction is required to mitigate the health care reform cost impact Sample Plan Value Comparison 12

  14. Plan Offerings Health insurance exchange Platinum(90% Value) Gold (80% Value) Silver (70% Value) Bronze (60% Value) 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 13 * All subsidies based on Silver (70%) Value Plan. All dollar amounts are annual figures.

  15. 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? 14

  16. Total Rewards Optimization (TRO) is designed to help organizations answer key questions Total $ Investments in Selected Rewards ILLUSTRATIVE What is the best level of investment in employees? Benefits $81 million What is the best allocation of that investment to maximize desired behavior (e.g., retention, motivation)? Base Pay and Cash Incentives $929.8 million 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 15

  17. 1 Are you optimizing your Total Rewards investments to achieve the right cost, behavior and performance outcomes? 2 Do your Total Rewards programs attract, retain and engage the talent you need across your business, at all levels? 3 What are the key cost/value tradeoffs in balancing cost management and workforce management objectives? 4 Are you optimizing your cost/value for key reward programs and the Total Rewards portfolio overall? 5 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)? 6 Do your employees understand and recognize the value of your Total Rewards portfolio? TRO is a means to address critical questions and offer customized solutions for the workforce 16

  18. Compared to a traditional survey, TRO provides richer data insights to better inform programmatic decisions 17

  19. 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 EXAMPLE 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 18

  20. Example: portfolio questions EXAMPLE 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? 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 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" 19

  21. TRO combines conjoint analysis with financial optimization Optimum Levelof Investment Optimum Allocationof Investment Segment-Specific Strategy Conjoint Analysis Portfolio Optimization + = • 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 • 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 20

  22. 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). 21

  23. Division A Division B Understanding what employees value — opportunities for improving employee perceived value and associated costs 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 83.2 for A respondents and 79.1 for B respondents (among valid conjoint respondents). 22

  24. Division A Division B Understanding what employees value — identifying cost savings and the associated decrease in employee perceived value Declines 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. 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). 23

  25. Program improvement Program reduction Creating a Total Rewards portfolio that reduces cost In light of budgetary constraints and health care reform while maintaining/increasing program perceived value 24

  26. Portfolio optimization analysis Increase in Indicated Perceived Value from Current Level (Percentage) 3) Increase investment and increase perceived value Three Points on the Curve Each point along the curve represents the best allocation of the corresponding total investment 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 dramaticallyand make the most of each reward dollar, the curve indicates the best ways to invest additional rewards funds 40% 2) Maintain current level of investment while increasing perceived value 30% 1) Maintain current level of perceived value at lower investment 20% Current levels of perceived value and reward investment 10% –$20mm –$10mm 0 $10mm $20mm $30mm Decrease in investment from current level Increase in investment from current level 25

  27. Case study #1: health care organization Situation Actual Results • 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 • 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 Actions Projected –vs– Actual Results • 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 • 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 26

  28. Case study #2: customer service organization Situation Actual Results • 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 • 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 Actions Projected –vs–Actual Results • 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 • The optimization model projected a 19% drop in turnover, while actual results produced at 30% reduction 27

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  30. 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: 703.258.8270lubomira.paclikova@towerswatson.com Richard GendronSeniorConsultant 901 North Glebe Road | Arlington, VA 22203 Phone: 571.445.0661rich.gendron@towerswatson.com 29

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