Transcript Reinventing Total Rewards and the EVP - HRA-NCA
Total Reward Strategies for the 21
st
Century
A Quantitative Approach to Total Rewards
Lubca Paclikova Richard Gendron
October 15, 2013
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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 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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Today’s discussion
Why Total Rewards…Now?
Insights from our research
Getting started
Total Rewards Optimization
Case studies
Questions
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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 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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Companies face serious challenges when it comes to attraction, retention and engagement of talent. Our research reveals what it takes to get it right
Companies that have adopted an increasingly integrated approach to Total Rewards strategy, design and delivery decisions — supported by an overarching Employee Value Proposition — are:
5X
more likely to report their employees are highly engaged
2X
more likely to report achieving financial performance significantly above their peers *Source
: Towers Watson 2012 Talent Management and Rewards Study – Global.
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What is an effective Employee Value Proposition?
Benchmarks of an effective EVP include
Developing a formal EVP Effectively communicating the EVP to employees Aligning the EVP with what the organization stands for in the marketplace Delivering on EVP promises Differentiating the company from competitors in the labor market Designing customized EVPs for critical employee segments
Total Rewards elements include
Articulating a Total Rewards strategy aligned with the business and HR strategy Using business strategy and objectives to inform talent management and reward programs Creating specific objectives for each talent management and reward program to align them with the EVP Employing organizational analytics (i.e., business performance and analytics, workforce demographics, workforce performance data) to test the effectiveness of Total Rewards programs 5 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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The evolution of an effective EVP and Total Rewards strategy
Tactical
Have not progressed in formally articulating an EVP or in developing a total rewards strategy
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Segmenting and Differentiating Communicating and Delivering Integrated and Strategic
Have formally articulated an EVP and adopted a Total Rewards approach Greater focus on an integrated strategy for managing rewards and talent management Have stated objectives for each reward and talent management program Have effectively communicated their EVP to employees and delivered on their EVP promises Have differentiated their EVP from other organizations with whom they compete for talent Have customized EVPs for critical workforce segments More likely to employ organizational analytics to test the effectiveness of total rewards programs 6 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
A Total Rewards framework provides the roadmap to update rewards strategy and align it with business needs
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The specific elements will vary based on a company’s business, economics, culture and demographics
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Mismatches remain between what matters to employees… and what employers think matters…
All Employees Employer Responses
1 Challenging work
Employee Responses
1 Base salary 2 Base salary 2 Job security 3 Career advancement opportunities 4 Health/wellness benefits 3 Career advancement opportunities 4 Organization reputation 5 Organization values 6 Organization reputation 7 Organization performance 5 Convenient work location 6 Learning opportunities 7 Health/wellness benefits
High-Potential Employees Employer Responses
1 Challenging work
Employee Responses
1 Career advancement opportunities 2 Ability to impact performance 2 Base salary 3 Career advancement opportunities 4 Base salary 3 Job security 4 Challenging work 5 Organization values 6 Organization performance 7 Job autonomy 5 Organization reputation 6 Learning opportunities 7 Convenient work location Source
: Towers Watson 2012 Global Workforce Study, 2012 Talent Management and Rewards Study — United States.
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Health care reform complicates the Situation, affecting both reward costs and workforce dynamics
HCR Provisions Workforce Implications Financial Implications 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 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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Companies that do not improve efficiency will likely reduce the value of benefits to contain cost and avoid excise tax
$1 100 $1 000 Defer excise tax by lowering the value of the plan $900 $800 $700 $600 Avoid excise tax by lowering
long-term
cost trends using thoughtfully-designed incentives, optimal care management, consumerism, engagement and other health activities $500 2014 2015 2016 2017 2018 2019 2020
* 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.
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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
0,9 0,85 0,8 0,75 0,7 0,65 0,6 0,55 0,5 0,86 0,78 0,75 0,7
Illustrative
If Design is reduced by… -5% -10% -12% Est. Savings $22M $45M $55M HMO PPO Current Program Illustrative Program 12 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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Health insurance exchange
Plan Offerings 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 Family Income as % of FPL * Max Family Salary Single/Family of 4 * Max Premium Cost as % of Income * Max Premium $ Amount Single/Family of 4 * Max Out of Pocket (Single/Family) Actuarial Value < 138% $15,856 / $32,499 2%
$317 / $650
$1,983 / $3,967
94%
138% - 150% $17,235 / $35,325 3% - 4%
$689 / $1,413
$1,983 / $3,967
94%
150% - 200% $22,980 / $47,100 $28,725 / $58,875 $34,470 / $70,650 $45,960 / $94,200 4% - 6.3%
$1,448 / $2,967
$1,983 / $3,967
85%
200% - 250% 6.3% - 8.05% $2,312 / $4,739 $2,975 / $5,950 73% 250% - 300% 8.05% - 9.5% $3,120 / $6,394 $2,975 / $5,950 70% 300% - 400% 9.50% $4,159 / $8,525 $3,987 / $7,973 70% Employer Penalty in 2015 +
None $3,000 per employee
> 400% N/A N/A N/A N/A N/A 13
* All subsidies based on Silver (70%) Value Plan. All dollar amounts are annual figures.
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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?
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Sample Initial Principles Provide affordable and comprehensive coverage Continue market-based approach to benefit offerings Align benefit offerings to market risk profile Choice may be limited in order to provide comprehensive coverage
Sample Tradeoff Considerations
Employer’s cost vs. employees’ cost ? What’s the breaking point?
How will Employers prioritize members? Employee vs. spouses vs. children?
Refine by job category?
Plan design vs. surcharge? National consistency (one plan) vs. market-specific (optimize by market) How are markets targeted for evaluation today?
Resources requirements due to administrative complexities vs. cost savings?
Strategy vs. labor sensitivities?
How fluid are these market risk profiles? Frequency of reassessment? Current benefits level vs. adding a lower cost option?
Employer sponsorship vs. public/private exchange? What if it subjects the organization to the $3,000 penalty? Will your strategy differ by market or segment?
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Total Rewards Optimization (TRO) is designed to help organizations answer key questions
Total $ Investments in Selected Rewards ILLUSTRATIVE Recognition Other Benefits $81 million Medical Base Pay Dental Base Pay and Cash Incentives $929.8 million Bonus What is the best level of investment in employees?
What is the best allocation of that investment to maximize desired behavior (e.g., retention, motivation)?
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 towerswatson.com
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TRO is a means to address critical questions and offer customized solutions for the workforce
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? 16 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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Compared to a traditional survey, TRO provides richer data insights to better inform programmatic decisions
Directional information on understanding and importance of programs Information on employee awareness and understanding of current programs Quantitative information on the most important rewards Accurate information on various employee segments Data and analysis on how specific rewards changes/trade-offs will affect employees Data and analysis on what specific rewards changes will cost ROI for specific rewards changes or reallocations Ability to test cost-benefit of different rewards and demographic scenarios with modeling tool
Focus Groups
Traditional Survey
Conjoint Survey
Total Rewards Optimization
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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 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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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" towerswatson.com
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TRO combines conjoint analysis with financial optimization
Conjoint Analysis
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
+ Portfolio Optimization
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 Level of Investment Optimum Allocation of Investment Segment-Specific Strategy 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 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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Total Rewards can be optimized by evaluating the financial and employee impact of specific program design changes
Improvements in Perceived Value Merit Increases —
Above avg performers +50%
Base Pay —
+3%
Time Off —
+2 days
Wellness Incentives —
Premiums -10% upon achievement of health milestones
STD —
60% base pay & weekly max of $1,500
Retirement Contribution —
5% of base pay
Medical Deductible —
-25%
Bonus —
3% target/change in target weighting (execs & directors)
Life Insurance —
2X base pay & $200k max
Retirement Match —
$0.50 up to 8% & 4-year vesting 0.4
1.6
2.9
2.5
2.8
2.2
2.5
2.5
3.7
4.5
Change in Pay and Benefits Cost ($000)
$3,153 $23,358 $5,989 $647 $1,277 $4,935 $635 $14,943 $300 $31
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).
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Understanding what employees value — opportunities for improving employee perceived value and associated costs
Improvements in Perceived Value Merit Increases —
Above avg performers +50%
Base Pay —
+3%
Time Off —
+2 days
Wellness Incentives —
Premiums -10% upon achievement of health milestones
STD —
60% base pay & weekly max of $1,500
Retirement Contribution —
5% of Base Pay
Medical Deductible —
-25%
CARE/Bonus —
3% target/change in target weighting (execs & directors
) Life Insurance —
2X base pay & $200k max
Retirement Match —
$0.50 up to 8% & 4-year vesting -0.2
3.6
4.0
2.4
2.9
3.2
2.7
3.0
3.4
2.3
3.9
2.1
2.7
2.0
3.1
1.5
2.0
4.4
4.9
2.6
Division A Division B
Change in Pay and Benefits Cost ($000) $3,153 $23,358 $5,989 $647 $1,277 $4,935 $635 $14,943 $300 $31
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
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Understanding what employees value — identifying cost savings and the associated decrease in employee perceived value
Declines in Perceived Value Change in Pay and Benefits Cost ($000) ($4,635) Medical Premiums —
+20%
($570) ($360) ($5,989) ($1,452)
-8.6
-8.1
-7.8
-7.6
-7.5
-7.4
-6.9
-7.1
-6.8
-6.6
Medical Copays —
+25%
Prescription Copays —
+25%
Time Off —
-2 days
Medical Deductible —
+25%
($473) ($294) ($1,670) ($3,750)
Division A Division B -5.0
-4.7
-4.6
-4.5
-4.2
-4.2
Medical Copays —
Coinsurance of 20%
Prescription Copays —
Coinsurance of 20%
Wellness Incentives —
Premiums +10% upon failure to meet health milestones -2.2
-1.1
CARE/Bonus —
Eliminated
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
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Creating a Total Rewards portfolio that reduces cost In light of budgetary constraints and health care reform while maintaining/increasing program perceived value
Program improvement Program reduction
Reward Merit-Based Pay Increases Bonus Base Pay Medical Deductible Medical Premiums Medical Copays Prescription Drug Copays Wellness Outcome Incentives Life Insurance Short-Term Disability Company Match to Retirement Plan Retirement Plan Time Off Portfolio Perceived Value Change in Perceived Value Change in Pay and Benefits Costs towerswatson.com
Scenario #1
Above average performers +50% Eliminated Current +25% Current +30% Current Premiums -10% Upon achievement of health milestones 2X base pay & $200k maximum 60% base pay & weekly maximum of $1,500
Scenario #2
Current Eliminated Current Current +20% Current Current Current 2X base pay & $200k maximum 60% base pay & weekly maximum of $1,500 $0.50 up to 8% & 4-year vesting $0.50 up to 8% & 4-year vesting Current -2 days
84.3
+2.0
Current -2 days
82.1
-0.2
($5,889,000) ($8,316,775)
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Portfolio optimization analysis
1) Maintain current level of perceived value at lower investment
–$20mm –$10mm Decrease in investment from current level 0
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Increase in Indicated Perceived Value from Current Level (Percentage) 40% 30% 20% 10% 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 $10mm
2) Maintain current level of investment while increasing perceived value Current levels of perceived value and reward investment
$20mm $30mm Increase in investment from current level 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 dramatically
and make the most of each reward dollar, the curve indicates the best ways to invest additional rewards funds 25 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Case study #1: health care organization
Situation
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
Actions
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
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Actual Results
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
Projected –vs– Actual Results
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 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Case study #2: customer service organization
Situation
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
Actions
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
Actual Results
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
Projected –vs– Actual Results
The optimization model projected a 19% drop in turnover, while actual results produced at 30% reduction 27 © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
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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) Paclikova Senior Consultant
901 North Glebe Road | Arlington, VA 22203 Phone: 703.258.8270
Richard Gendron Senior Consultant
901 North Glebe Road | Arlington, VA 22203 Phone: 571.445.0661
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