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© 2013 Towers Watson. All rights reserved.
Janaury 2014
Total Rewards OptimizationNational Association of Corporate Directors
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Total Rewards Optimization (TRO) is designed to inform Directors on whether the organization is making the most efficient use of corporate resources
Total $ Investment in Employees
Base Pay
Variable Pay
MedicalBenefits
Dental
Paid Time Off
Retirement
Recognition
Training
EquityManager Effectiveness
What is the best level ofinvestment in employees?
What is the best allocation of that investment to maximize
engagement?
Do the answers vary by employee segments, units, or other
demographic characteristics?
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Optimum Levelof Investment
Optimum Allocationof Investment
Segment-Specific Strategy
PortfolioOptimization
ConjointAnalysis
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 engagement/motivation by changing allocation while maintaining the current level of investment
Maintain current level of engagement/motivation at lower level of investment by changing allocation
Increase investment and engagement/motivation to economically efficient level
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
TRO combines conjoint analysis with financial optimization
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Compared to a traditional survey, TRO provides richer data insights to better inform programmatic decisions
Focus Groups
Traditional Survey
Conjoint Survey
Total Rewards Optimization
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
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Three Points on the Curve
1. To reduce total cost, the curve identifies which programs should be reduced to reallocate investments in other areas and maintain current levels of engagement
2. To maintain current investment levels, the curve identifies how to reallocate investment across programs to increase engagement without raising cost
3. To increase engagement dramatically and make the most of each reward dollar, the curve indicates the best ways to invest additional rewards funds
TRO “optimizes” employee preferences with investment implications
–$20mm 0 $10mm
Increase in Indicated Engagement from Current Level(Percentage)
–$10mm $20mm $30mm
Increase in investmentfrom current level
Decrease in investment from current level
2) Maintain current level of investment while increasing engagement
1) Maintain current level of engagementat lower investment
10%
20%
30%
40%
Current levels of engagement and reward investment
3) Increase investment and increase engagement
Each point along the curve represents the best allocation of the corresponding total investment:
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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
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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
EXAMPLE
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Example: Portfolio questions
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?
EXAMPLE
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"
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
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Research Output Example: Areas of Highest Perceived Value Improvements and Cost Implications
• In this example, increasing base pay and implementing a volunteering leave would yield the highest improvements in perceived value
Base pay: Increases by 5% $24M
Volunteering leave: Four weeks paid for full-time volunteering program after two years of service
$5M
AIP: Increases five percentage points $20M
LTI: Increases by 25% $25M
Pension contribution: Increases by 3% of pay $10M
Medical premiums: Decreases by 20% $2M
Wellness: Additional $1,000/employee $4M
Convenience: Additional $1,500/employee $6M
Change in Reward CostImprovements in Perceived Value
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Research Output Example: Areas of Highest Perceived Value Declines and Cost Implications
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• In this example, highest levels of negative sensitivity are a decrease in base pay and a full-replacement HDHP and HSA
Change in Reward Cost
$(24)M Base pay: Decreases by 5%
$(2)MMedical plan options: HDHP and HSA replaces PPO
$(10)M Pension contribution: Decreases by 3% of pay
$(50)M LTI: Grant value reduced by 50%
$(20)M AIP: Decreases five percentage points
$(2)M Medical premiums: Increases by 20%
$(4)MMedical OOP costs: Increase by $700 per individual ($1,500 per family)
$ - Medical plan options: HDHP and HSA added
Declines in Perceived Value
-6.4
-6.5
-7.0
-8.0
-9.0
-10.0
-12.0
-3.0
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VP’s and Above: There are opportunities to reallocate expenditure to increase the return on compensation investments
11.2%
9.5%
8.5%
8.2%
7.7%
6.8%
5.5%
4.8%
4.6%
2.5%
2.4%
-3.4%
-5.3%
-7.3%
-6.1%
-14% -12% -10% -8% -6% -4% -2% 0% 2% 4% 6% 8% 10% 12% 14%
Impact on Satisfaction (baseline = 72%)Program Change
* Individual impact on satisfaction assumes all other programs remain at current state (individual impact results are not additive).
Cash award where you receive 75% of the usual stock option value in cash over a period of time (e.g., 3 years)
Restricted stock program where the number of shares granted is equal to 1/3 of the usual number of stock options
granted
Performance-based restricted stock program where the number of shares granted is equal to ½ of the usual number of
stock options granted
Opportunity to receive up to 25% more of actual annual bonus based on individual performance
Cash award where you receive 50% of the usual stock option value in cash over a period of time (e.g., 3 years)
Restricted stock program where the number of shares granted is equal to 1/4 of the usual number of stock options
granted
Performance-based restricted stock program where the number of shares granted is equal to 1/3 of the usual number of
stock options granted
25% more than the current annual bonus target
Opportunity to receive up to 15% more of actual annual bonus based on individual performance
25% more than the usual merit increase
25% more than the usual stock option grant value
25% less than the usual stock option grant value
25% less than the usual merit increase
25% less than the current annual bonus target
No stock option grant
Cost Impact
$29,352,438
$36,900,208
$55,909,406
$1,290,217
$19,568,292
$27,954,703
$36,900,208
$4,300,724
$774,130
$488,719
$9,784,146
$(9,784,146)
$(488,719)
$(4,300,724)
$(39,136,584)
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Optimization Analysis -VPs and Above Considering the objectives of maintaining a focus on shareholder value, greater alignment with competitive trends and higher perceived value for VPs, ABC may want to consider:
A 50%/50% mix between stock options and restricted stock and Increased bonus up to 25% based on individual performance
Restricted stock will provide more direct alignment with shareholder value compared to cash and higher perceived value then stock options
Reward Category Option/RS Rationale
Base pay (annual increase)
UnchangedABC is currently competitive and should not add fixed pay
Annual Bonus Target UnchangedCurrently competitive on TCC basis
Annual Bonus (Individual performance)
Up to 25% more bonus based on individual
performance
Individual bonus is key satisfaction and performance driver – lower cost element
Long-term Cash No program No ownership value
Performance based Restricted Stock
No program Not as highly perceived as restricted stock
Restricted Stock ¼ exchange (50% of options)
Lower cost – higher perceived value than 100% options
Stock Options Reduced by 50% Legacy program
Reward Cost Impact ($000) -$8.3M
Satisfaction Impact +11.2%
Modeled reward portfolios that would improve employee engagement and maintain/reduce cost
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Understanding the impact of various changes to the “portfolio”
Reward Portfolio #1 Portfolio #2 Portfolio #3
Wellness Premiums +15% for not participating
Premiums -5% for participating
Premiums -5% for participating
Medical and Pharmacy Cost
Current Current Current
Merit Pay Current Current Current
Short-Term Disability Reduced to 50% of pay, with option to buy increased levels
Eliminated, buy option replacing 67% of pay
Reduced to 50% of pay, with option to buy increased levels
Employee Incentive Plan Eliminated Current Current
Paid Time Off Buy up to 40 hours Buy up to 40 hours Buy up to 40 hours
Career Development Current Online career tools Increased manager training
Tuition Assistance Current Includes certifications Current
401(k) Match 5% match 5% match 5% match
Portfolio Engagement 79.1 88.2 89.6
Change in Engagement -6.5 +2.6 +4.0
Change in Reward Costs -$23.9M -$12.0M -$0.5M
Program improvement Program reduction
Based on a current portfolio engagement score of 85.6ILLUSTRATIVE
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While the research may point to the most efficient portfolios, optimization overlays other factors including business objectives and change management impact
Current spend Cost/savings
of alternatives
Total RewardsOptimization
Supports reward philosophy and business alignment
Meets cost constraints Appropriately drives employee
attraction, engagement and engagement of key segments
Leadership interviews Business Driver Analysis Rewards Subject Matter Input
Competitive Compensation and Benefits Analyses and Summaries
Prevalence of programs
Program Costs and Cost Implications
EmployeeDemographics& Preferences
CompetitivePositioning Of
Rewards
LeadershipStrategy &Rewards
Philosophy
Conjoint survey Employee
Comments Demographic
analysis
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Total Rewards Measurement
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Why is total rewards measurement important?
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Helps to track the return on reward investment decisions
Provides decision making framework for priorities and future investment
Serves as a link to performance management for HR
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Top 10 barriers to effective total rewards scorecards
1. Excessive number of measures
2. Difficulty establishing link between business and TR strategies
3. Absence of benchmarking data
4. Adoption of external benchmarking data as targets
5. Internal data to evaluate metrics are not readily accessible and/or not tracked on consistent basis
6. Metric is within the control of a very limited number of people
7. Little room to improve measures
8. Metrics track completion/progress of organizational initiatives rather than the achievement of the total rewards objective and business performance
9. Measures are unnecessarily complex and difficult to understand
10.Significant administrative resources required to maintain scorecard
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Total rewards scorecard considerations
Will the scorecard be standalone or part of a broader business scorecard?Type of
Scorecard
Measures and Weights
Level of Measures
Standards
Timing
Use
How will the scorecard be used for business and people decision-making? Should it be part of the annual planning process? Should it be linked to pay decisions? Other talent management decisions?
What measures will be tracked and communicated? Should the measures be weighted? What are the weightings?
At what organization level should measures be tracked (i.e. corporate, LOB, geography, function, department)?
How will standards be set (i.e. external benchmarks, internal budgets, statistical analysis, growth)?
Should ranges used or a singular target?
Should measures be tracked annually, semi-annually, quarterly, monthly? Should long-term forecasts be used?
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5 steps for developing an effective total rewards scorecard
Define total rewards objectivesStep 1
Step 2
Step 3
Step 4
Step 5
Conduct diagnostics to identify areas of measurement
Define metrics by total rewards objective
Assign weights and develop performance standards
Create action plans based on priorities
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26 Potential Indicators of TR Effectiveness (External, Internal and Functional Metrics)
Externally focused Revenue per employee Expense per employee Income per employee Human capital ROI Human capital value added Customer satisfaction
Internally focused Regular employee management ratio Exempt turnover Nonexempt turnover Voluntary turnover Engagement
Function-focused HR FTE ratio HR service score
Staffing Cost per hire Time to fill Time to start Accession rate Internal accession rate
Rewards Compensation per employee Variable as a % of comp Labor cost expense Benefit cost per employee Benefit cost as % of payroll Health care cost per employee
Talent Management Training hours per employee Training cost per employee
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