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While organizations often struggle to find the right balance between rationalizing total rewards and maintaining employee engagement, there are needed-to-play programs and benefits that have a dramatic impact on attraction, retention and ongoing engagement -- and thus require special consideration and management regardless of economic climate. Towers Watson research and client experience show that organizations must look at both sides of the equation to keep employee productivity high. Understand how organizations can combine fundamentals (e.g., base pay and health care benefits) with less tangible factors such as challenging work, career growth, work environments that encourage healthy behavior and clear communication to better align employee and employer perspectives and create a more productive, effective and engaged workforce. For more information, please visit: towerswatson.com
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© 2012 Towers Watson. All rights reserved.
Client Ready
John BremenShelly WolffMarch 27, 2012
Managing Talent and Health Benefits For a More Effective Workforce
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 2
The presenting issue
Companies often struggle to find the right balance between rationalizing total rewards and maintaining employee engagement There are needed-to-play programs and benefits that have a dramatic impact on
attraction, retention and ongoing engagement
These programs require special consideration and management regardless of economic climate
Towers Watson research and client experience show that organizations must look at both sides of the equation to keep employee productivity high
Today, we’ll examine How organizations must combine fundamentals (e.g., base pay and health care
benefits) with less tangible factors such as challenging work, career growth, work environments, and…
How they use these fundamentals to encourage healthy behavior and clear communication to better align employee and employer perspectives and create a more productive, effective and engaged workforce
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 3
A New Era: ex-po-nen-tial (ek’spa nen’shal), adj. - rising or expanding at a steady and unusually rapid rateThe Pace and Intensity of Change is Relentless
Social and DemographicYounger population in developing world-shifting consumer and labor
markets; employee motivation/ attitudes about work
PoliticalIncreased regulation, health care
reform (U.S.), negative perceptions of key industries and executive pay
EconomicSlower economic growth, continued globalization, ferocious competition, Euro crisis
TechnologicalRelentless technology innovation disrupting commercial models and offering huge efficiency gains
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 4
Why Total Rewards and why now?
On the One Hand…
Global economic turbulence pushed companies to reduce programs in the name of cost management…but many are facing repercussions, raising concerns about how they will power growth
The complete “deal” has not been looked at even though the marketplace is changing at amazing speed. Many companies are facing the dichotomy of having a “2011 workforce” with “2008 programs
Pressure to manage costs remains intense
Yet…
Employers remain cautious about investing in their workforce, given volatile conditions and the unknown impact on labor markets
Health care reform in the United States adds the potential for a significant reshaping of the employee value proposition and total rewards strategy for many industry sectors
Strategic issues of competitiveness, alignment and engagement are rising to the forefront
Many employers are now challenged to update the optimal mix of total reward programs to meet evolving business and employee needs
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 5
Health care is a catalyst for rethinking Total Rewards
Continually mounting health care costs and the implication of health care reform are converging to ignite a new and different dialogue about health benefits within total rewards
CFOs must rethink health care within unit labor costs in our global economy and are considering reducing costs/volatility or exiting health benefits
HR leaders often see health care as crowding out other elements of total rewards and are increasingly receptive to more aggressive trend mitigation and workforce health improvement strategies
Wellbeing is a theme often heard with senior HR leaders. The concept ties work-life balance, work environment, financial security, health-wealth attainment and support resources to help employees in achieving their goals
With the advent of health reform, health care has become a total business issue
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 6
Health care spending is crowding out other workforce investments
2000 2009 Percentage ChangeCash 87.4% 84.1% - 3.7%Defined Benefit 3.4% 1.8% - 47.1%Defined Contribution 2.7% 3.5% +29.6%Retiree Medical 0.6% 0.2% - 66.6%Active Medical 5.9% 10.3% +74.6%
Benefits as a Percentage of Direct Compensation
Source: Towers Watson Client Data 2000 – 2009
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 7
For employees, this means a growing affordability gap — prompting anger about continuing benefit reductions
Source: 2011 Towers Watson Health Care Trend Survey (active employee data) and Bureau of Labor Statistics, seasonally adjusted data from the Current Employment Statistics Survey August to August, 2000 – 2010, and 2011 assumed to be the same as 2010.
0%
20%
40%
60%
80%
100%
120%
140%
160%
180%
200%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
188%
44%
AffordabilityGap
Affordability Gap: Cumulative Active Employee Health Care Costs vs. Wage Increases
Workers’ earningsActive employee health care costs
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 8
Health care benefits will continue to be core to EVPs in the next few years, with less certainty post-2014
Importance of Health Care Benefits in the EVP Over the Next Two Years Versus 2014 and Beyond (after the expected opening of the insurance exchanges)
8% 21%
81%
55%
1%
4% 14%
16%
1%
1 — Not at all important 2 3 — Somewhat important 4 5 — Very important Not sure
2012 and 2013
2014 and after
Source: Towers Watson 2011 Talent Management and Rewards Survey.
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 9
All this leads to one inescapable question for employers right now…
Is your employment deal sustainable going
forward?
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 10
Total Rewards is a key component of a company’s Employee Value Proposition (EVP) and stems directly from business strategy
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 11
Total Rewards builds from strategic objectives and takes a portfolio approach to deliver desired results
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 12
That portfolio is expressed in terms of the unique role of each reward in the broader value proposition
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 13
The need to engage employees around health and wealth is greater than ever
Employees may not recognize the “squeeze” health benefits have put on retirement plans
Employees are risk-averse and may not understand their retirement needs, or the value of the savings opportunities they have
Sources: Employee Perspectives on Health Care, November 2010; National Business Group on Health/Towers Watson Employer Survey on Purchasing Value in Health Care, 2010; Fidelity Investments, 2010; Towers Watson research on Fortune 100 companies.
of surveyed employees say they would be willing to pay more for more predictable health care costs, up 23 points from two years ago
42%of Fortune 100 employers offer traditional DB plans today vs. 74% 10 years ago
42%of employees, on average, who are eligible for account-based health plans are enrolled in those plans
15%…the amount an average couple will need to save for health care expenses in retirement (even with Medicare benefits factored in)
$250K
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 1414
Drivers of Attraction – The importance of time and health
All Employees High-Potential Employees
Rank Employers Employees Rank Employers Employees
1 Base pay Job security 1 Challenging work Job security
2 Organization’s mission, vision and values
Base pay 2 Career development opportunities
Base pay
3 Organization’s reputation as a great place to work
Health care benefits
3 Organization’s mission, vision and values
Career development opportunities
4 Career development opportunities
Length of commute 4 Base pay Promotion opportunity
5 Challenging work Vacation/PTO 5 Organization’s financial performance
Health care benefits
Employers underestimate the importance of “fundamentals” to attracting employees — even top talent
Employers underestimate the importance of “fundamentals” to attracting employees — even top talent
Source: Towers Watson 2011 Talent Management and Rewards Survey.
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 1515
Drivers of Retention – The role of stress
All Employees Top Performing Employees
Rank Employers Employees Rank Employers Employees
1 Base pay Work-related stress
1 Promotion opportunity Work-related stress
2 Promotion opportunity Base pay 2 Career development opportunities
Promotion opportunity
3 Relationship w/supervisor
Promotion opportunity 3 Base pay Base pay
4 Career development opportunities
Trust/confidence in management
4 Relationship w/ supervisor
Trust/confidence in management
5 Work-related stress
Incentive pay opportunity
5 Incentive pay opportunity
Length of commute
Work-related stress is the most commonly cited reason an employee would leave an organization – even for Top Performers
Work-related stress is the most commonly cited reason an employee would leave an organization – even for Top Performers
Source: Towers Watson 2011 Talent Management and Rewards Survey.
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 1616
Changing conditions and working hours
Source: Towers Watson 2011 Talent Management and Rewards Survey.
Of employers think employees have been working more hours than normal over the past three years 65%
Expect this to continue over the next three years 53%
This is especially true for senior managersand professionals
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 1717
And the increase in work place stress is a health and performance risk for employers
United States
Sources of stress2009 2011
Percentage-point
change
Excessive workload and/or long hours 78% 87% 9%
Lack of work/life balance 68% 79% 11%
Inadequate staffing 51% 68% 17%
Technologies that expand availability during nonworking hours 59% 63% 4%
Unclear or conflicting job expectations 46% 60% 14%
Fears about job loss 67% 56% -11%
Fears about benefit reduction/loss (e.g., lower value or loss of health care coverage, pension freeze) 48% 47% -1%
Low pay (or low increases in pay) — 44% —
Lack of supervisor support 34% 43% 9%
Lack of technology, equipment and tools to do the job 25% 34% 9%
Source: 2011/2012 Towers Watson/NBGH Staying@Work
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 18
High Effective Companies create a culture for human performance and worker effectiveness
Simplifying the employee experience and measuring effectiveness
Focus on absence, productivity and engagement drivers
Link to a culture of health that focuses on worksite support and external resources
Six pillars of an effective H&P framework
18
Designing an Effective Health and Productivity Framework
Health safety Social/psychological Health promotion Presenteeism management
Absence management Disability management Disease management
Incentive design Quality of care Physical environment Financial management Vendor management
Design Delivery Accountability
Alignment Health and
productivity support Change management
and performance
Organizational messages Personalized health Social media and tools
EffectiveH&P
Programs
Health Programs
Workforce Effectiveness
PREVENT RETURN SUPPORT
REWARD LEAD COMMUNICATE
Source: 2011/2012 Towers Watson/NBGH Staying@Work
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 19
Workplace drivers create concrete outcomes that deliver improved human capital and business results
19
[Engagement]
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 20
Numbers that matter - the financial advantage
Companies with the most effective H&P programs have:
2.0fewer days
(per employee
per year) in total
absence
>$1,000lower
medical costs per employee
1.3percentage
points lower
medical trends
18%difference in market premium
39%higher
revenue per employee
20Source: 2011/2012 Towers Watson/NBGH Staying@Work
Additional results: Lower turnover, fewer lost days for disability and improvement in targeted lifestyle risks
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 21
And higher employee *exponential engagement is related to higher employee health outcomes
Engagement Ratio of High to Low
Health Outcomes
2X Presenteeism
2X Better Health
1.5X Exercise
2 Lower stress, anxiety, chronic health conditions
1.7X Have taken action to improve health
Source: 2010 Towers Watson Employee Benefits and Work Attitudes Survey*Exponential Engagement = Enablement (Results from local work environments that support productivity) + Energy (Results from physical, interpersonal and emotional well-being at work)
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 22
Total Rewards strategy is business driven and fact based to facilitate the path forward
PIVOTAL INSIGHTSIssues
OpportunitiesDirections for Change
Provides insight regarding workforce engagement, demographics and performance
Workforce Perspective
Provides insight regarding trends and industry process and program practices
External BenchmarkingProvides insight regarding current workforce programs and processes
Process and Program Diagnostics
Provides insight regarding future vision, business strategy, corporate culture and presenting issues
Leadership Perspective
Provides insight regarding current business plans, priorities and performance
Business Plan/ Performance
People ● Process ● Programs
Interventions ● Timing ● Measurement/ROI
Philosophy ● Guiding Principles ● Objectives
STRATEGY
GAP ANALYSIS
CHANGE PLAN
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 23
External influences on Total Rewards: compensation and benefits trends
Total Rewards Compensation
General paring back of Total Rewards levels provided by employers
Looking beyond compensation to attract and retain top talent, relying instead on other aspects of their EVPs
Increased focus on optimizing reward spend and segmenting the workforce to improve return on investment in Total Rewards
The real value of base pay has been flat for the past five years
Aggregate bonus funding levels in most regions of the world are approximately unchanged from previous year
Significant disparities in rewards provided to high performers versus average employees
Increasing attention to external competitiveness, given increasing difficulty attracting and retaining critical talent and pay actions/freezes of recession
Benefits
Movement from traditional DB to account-based DC plans Paternalistic attitude of employers — which predominated in earlier eras — has now disappeared in many sectors Governments looking for new sources of revenue have been targeting the favorable tax treatment that benefit plans
have traditionally enjoyed Controlling costs of employee health programs and addressing emerging health risks and incentives to improve
employee wellness are top priorities Comprehensive Health Care Reform legislation passed in the U.S. creates opportunity and uncertainty in how
employers will deliver health care coverage in the future
Source: 2010 Towers Watson Talent Management and Rewards Survey Report and 2010 Towers Watson Workforce Health Strategies —A Multinational Perspective.
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 24
A holistic total rewards strategy drives employee behaviors proven to ultimately influence business outcomes
Linkage Methodology
Demonstrates how employee behaviors affect customer behaviors and company financial performance
Identifies the specific employee programs and policies that drive desired employee behaviors, customer behaviors and financial performance
Allows employers to assess reward effectiveness and make better investment decisions
Linkage Model
Engagement Retention Productivity Customer Service
Employee Behavior
Customer Behavior
Customer satisfaction Customer attraction Customer retention
Financial Performance
Labor cost Operating costs Operating margin Controllable margin Revenue growth ROIC TSR
Total Rewards Components
Performance-Based Rewards
Career and Environmental Rewards
FoundationalRewards
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 25
With knowledge of employee preferences, employers can test allocation and investment level mixes to identify the optimal portfolio…
Optimum Level of Investment
Optimum Allocation of Investment
Segment-Specific Strategy
PortfolioOptimization
What matters to employees —
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 desired
behavior/result (e.g., retention) by changing allocation and keeping current level of investment
Maintain current behavior/result at lower level of investment by changing allocation
Increase investment and desired behavior/result to economically efficient level
+ = Survey tool 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
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 26
…and allocate investment to more effectively support strategic business and workforce objectives
Three Points on the CurveEach 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 levels of retention
2) To maintain current investment levels, the curve identifies how to reallocate investment across programs to increase retention without raising cost
3) To increase retention dramatically and make the most of each reward dollar, the curve indicates the best ways to invest additional rewards funds –$20mm 0 $10mm
Increase in Indicated Retention 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 retention
1) Maintain current level of retention at lower investment
10%
20%
30%
40%
Current levels of retention and reward investment
3) Increase investment and increase retention
ILLUSTRATIVE
© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 27
Top 5 takeaways for employers
1. Align with employee value proposition and total rewards strategy2. Engage leaders and employees regularly and act on feedback3. Measure results in context of business outcomes 4. Connect the dots between physical, emotional and financial
health5. Understand level and sources of workforce stress
Organizations that are looking to improve employee productivity and the return on their investments in health care should leverage the link between organizational and employee health and the link to engagement
27
Source: 2011/2012 Towers Watson/NBGH Staying@Work