Strategic Rewards®

and Pay Practices:The Need forExecution

2005/2006 Survey Report

W W W . W A T S O N W Y A T T . C O M

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EXECUTIVE SUMMARYOver the last few years, a difficult economyand rising benefit costs have prompted com-panies to look carefully at their approach to aligning rewards with business strategy. As economic and company performanceimproves, the challenge has moved to effec-tively implementing those reward strategies.

The 10th annual Strategic Rewards studyreveals that companies can improve the execution of their total rewards strategy(both monetary and non-monetary) — in particular, planning reward expenditures on atotal rewards basis. However, by increasingcollaboration among HR functions and opti-mizing their reward plans, employers can keeptheir best workers engaged and motivatedwhile increasing their return on investment.

Key findings■ Despite higher benefit costs, short-term

incentive (STI) plan funding and payoutsare reflecting improved economic condi-tions and company financial performance.High-performing firms funded STI programsat an average of 118 percent of target,compared with 93 percent of target for low-performing firms. At the same time, morethan half (54 percent) of the organizationsincreased their company financial perfor-mance targets, effectively raising the bar.

■ In light of stock option accountingchanges, nearly four in ten companies (39 percent) are still adjusting their stockprograms — reducing the size of and eligibility for their non-executive stockoption programs rather than abandoningthem entirely. For executives, changeshave focused on shifting the portfoliotoward greater use of restricted stock.

■ Poor performers receive on average a 2.5 percent annual pay raise, and more thana quarter (27 percent) of companies withSTI plans award bonuses to employees whodo not meet expectations — money thatmight be better aimed at the top performers.

■ Employers recognize that there is room toimprove their performance managementsystems, particularly in relation to providingperiodic performance discussions, helpingpoor employees improve and offeringcareer development/planning.

■ Fifty-eight percent of employers report atleast moderate difficulty attracting critical-skill employees in 2005, compared with40 percent in 2003.

TABLE OF CONTENTS

Executive Summary . . . . . . . . . . 1

About This Survey . . . . . . . . . . . 2

Total Rewards . . . . . . . . . . . . . . 3

Base Pay and Merit Budgets . . . 4

Short-Term Incentives . . . . . . . . 6

Long-Term Incentives . . . . . . . . 7

The 10-Year View . . . . . . . . . . . 8

Performance Management . . . . 9

Global Compensation . . . . . . . 10

Attraction and Retention . . . . . 11

Conclusion . . . . . . . . . . . . . . . 12

FEATURED FIGURES

FIGURE 2: Merit Increase Budgets Rise Slightly . . . . . . . . . 4

FIGURE 6: Average STI Funding Has Rebounded . . . . . . 6

FIGURE 9: Employers Continue to Make Changes to Their LTI Plans . . . . . . . . . . . . . . . . . 7

FIGURE 11: Significant Gap Exists Between Design andExecution of PerformanceManagement Systems . . . . . . . 9

FIGURE 13: Firms With a GlobalTotal Rewards Strategy MoreLikely to Monitor Programs . . . 10

HIGH-PERFORMING FIRMS VERSUS LOW-PERFORMING FIRMS

This report refers to high- and low-performing organizations. The distinction is based onself-reported — but validated — responses to the question “How well did your companyperform financially, compared with other firms in your industry over the past year?” In our analyses, we characterized companies that identified themselves as “substantiallyabove peer group” as high-performing organizations and those that said their performancewas below that of their industry peers as low-performing.

When linked to shareholder returns in publicly held companies, independent analyses of these responses show the measure to be valid. Specifically, firms identified as “high-performing” realized a three-year total return to shareholders of 117 percent, compared with 26 percent for those firms identified as “low-performing.”

TOP PERFORMERS VERSUS POOR PERFORMERS

For certain elements of this analysis, employees were divided into groups based on theirjob performance. The performance measure was a composite of the employee’s self-ratingand the rating received from his or her manager during the most recent review period.Those who reported the highest possible rating on both were considered “top performers.”Those whose combined employee/manager ratings were average or below were considered“poor performers.”

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ABOUT THIS SURVEYThis year marks the 10th anniversary ofWatson Wyatt’s Strategic Rewards researchand the first time WorldatWork has collabo-rated on the report. The survey has evolvedover time, and as a special feature, this year’s report revisits certain items from theoriginal survey. While some things havechanged in 10 years, others have remainedstrikingly similar.

In all, 265 organizations with a minimum of 1,000 employees participated in this year’ssurvey. These organizations, employing morethan 2.6 million workers, represent all majorindustry sectors and geographic regions.This employer survey was complemented byan employee survey of 1,100 workers drawnfrom a nationally representative sample. Ourreport highlights the differences in employerand employee perspectives.

Manufacturing 28%

Wholesale/Retail Trade 8%

Finance/Insurance/Real Estate

19%

Health Services15%

Government2%

Other Services16%

Utilities/Transportation/Communication 13%

Industry

A TOTAL REWARDS STRATEGY — ALIGNMENT, VALUE AND COST

Effectiveness of rewards is defined by alignment, employee value and cost.

Alignment: Rewards that support — and help to produce — outcomes that are importantto the employer

Employee Value: Rewards that are meaningful to employees and influence their affiliationwith the organization

Cost: The current and projected cost and risk profile of rewards3

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TOTAL REWARDS The survey results show that 70 percent ofemployers have a total rewards strategy inplace and another 17 percent plan to adoptone. Although the majority of companies aremoving toward a total rewards focus, manyemployers — particularly low-performingcompanies — can improve their execution ofthis strategy.

AlignmentHigh-performing companies are more suc-cessful at aligning employee behavior withcompany goals; 71 percent reported thattheir reward plans are at least moderatelyeffective, compared with only 47 percent oflow-performing companies. Additionally,high-performing firms are more likely thantheir low-performing counterparts to believethat their reward system is linked to businessstrategy and encourages desired culture andbehaviors (Figure 1).

Employee ValueTo design effective reward programs,employers should factor in employee prefer-ences. Fewer than four in ten employers (38 percent) currently assess employee rewardpreferences, although the vast majority ofthese (90 percent) use this input in designingand modifying their plans.

Employers are also not effectively communi-cating their total rewards strategy. Half ofemployers (48 percent) think their employeesunderstand the value of their total rewardspackage only slightly — or not at all — andless than one-third of the employees surveyedsay their company has communicated a totalrewards strategy to them.

Not surprisingly, top-performing employeeshave a better understanding of the value oftheir rewards package. Nearly two-thirds (63 percent) of top-performing employeesindicate at least moderate understanding,versus 36 percent of poor performers.

61%37%

43%

44%24%

34%

High-performing firms

Low-performing firms

All firms

F I G U R E 1 : High-Performing F i rms Better A l ign Reward Programs With Bus iness Outcomes

Linked to business strategy

Encourages desired culture and behaviors

Percentage reporting “to a great extent” or “to a very great extent.”

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CostIn addition to achieving alignment and deliv-ering employee value, successful reward plansstrike a balance between effectiveness andcost. However, only 35 percent of employersformally measure the cost effectiveness oftheir total rewards program to a moderate orgreat extent. Additionally, nearly six in ten(59 percent) make at most slight modificationsto their programs to improve cost effectiveness.

With health care costs continuing toincrease, optimizing reward programs maybe critical to success. This survey reports anaverage 11 percent rise in health care costs(excluding employee contributions) for themost recent year. Continuing increases of thismagnitude suppress company performancemeasures and thereby inevitably affectemployee pay. For example, 60 percent ofemployers use operating income growth as a metric in determining funding for short-term incentive plans.

Yet, while nearly 60 percent of respondentsreport increased collaboration among com-pensation, benefits and finance functions indeveloping and managing reward systems,surprisingly few think that cost increases foremployee health care coverage (10 percent)and retirement benefits (8 percent) arerestricting expenditures for base pay orbonuses. Furthermore, slightly more than 70 percent of organizations say they manageincreases in base pay independently of thefunding for other reward programs. Onepossible explanation for these contradictoryfindings is that HR functions are not planningtotal rewards expenditures from an integratedpoint of view.

BASE PAY AND MERIT BUDGETSMerit increase budgets for 2005 rose from2004 and are projected to increase again for2006, albeit slightly (Figure 2).

Employees do not think that employers are clearly differentiating salaries based onperformance. Twenty-eight percent of topperformers believe that their organizationpays employees who perform exceptionallywell the same as other employees. Less than10 percent say they are paid far higher.Interestingly, poor performers receive anaverage increase of 2.5 percent of pay(Figure 3) — money that might be betterspent on delivering larger increases to thetop performers.

F I G U R E 2 : Meri t Increase Budgets R i se S l ight ly

Year Merit increase budget

2006 (projected) 3.5%

2005 3.4%

2004 3.0%

F I G U R E 3 : Employers Can Better Di fferent iate Ra ises Basedon Employee Performance

Average raise last year

Top performers 5.6%

Average performers 3.5%

Poor performers 2.5%

All employees 3.7%

High STI/LTI High Salary

Salary as Percentage of Total Rewards

63% 79%

STI/LTI as Percentage of Total Rewards

13% 8%

3-Year TRS 44% 25%

TRS = total returns to shareholders = [stock price appreciation + dividends]/beginning stock price

Source: Watson Wyatt’s Human Capital Index report

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While differentiation is important, employeesgenerally view base pay increases as an entitlement. An overwhelming number ofemployers say that their employees regardannual pay raises as an entitlement either toa great extent (49 percent) or a moderateextent (46 percent). More top-performingemployees (63 percent) view annual payincreases as an entitlement to a great extent,versus 44 percent of poor performers. Withpoor performers continuing to receive meritdollars, it will be difficult to move away fromthe entitlement mentality and toward truepay for performance.

Our survey also found that employees —regardless of their performance — value payover other benefits. When presented withthe choice between pay or better health ben-efits, a better retirement plan, more vacationor a more flexible schedule, the majority ofemployee participants chose higher pay.Additionally, more than 80 percent preferreda higher salary to a lower salary plus a possi-ble bonus or possible stock or stock options.

Given employee views, employers are facedwith a difficult dilemma especially as theeconomy improves and attracting and retain-ing critical-skill employees becomes moredifficult. On one hand, they need to providecompetitive base pay packages. On the otherhand, firms that put more of their pay intoincentive programs versus high salaries out-perform others (Figure 4). In fact, our resultsshow that high-performing firms generallypay employees the same level salaries as low-performing firms (Figure 5).

F I G U R E 4 : F i rms That Put More Pay Into Incent ivePrograms Outperform Others

7%8%

11%11%

30%30%

29%29%

17%21%

11%8%

High-performing firms

Low-performing firms

Greater than 120%

110–119.9%

100–109.9%

90–99.9%

80–89.9%

Less than 80%

F I G U R E 5 : Dist r ibut ion of Employee Sa lar ies Does NotDi ffer by Company Performance

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SHORT-TERM INCENTIVESEmployers are increasing their reliance onvariable pay, raising both funding and payoutsfor short-term incentive plans. Twelve percentof firms have also increased STI eligibility fornon-executives. At the same time, however,companies continue to raise the bar byincreasing the targets for both company andindividual performance.

FundingAfter a dip in 2004, STI funding hasrebounded. Average funding as a percentageof target was 99 percent in 2005, up from 81 percent in 2004 and 91 percent in 2003

(Figure 6). High-performing firms continueto fund STI plans at a higher rate (median9.5 percent of net operating income) thanlow-performing firms (7 percent).

Funding metrics appear to differ slightly forhigh- and low-performing firms. The datasuggest that high-performing firms are slightlymore focused on revenue growth, while lowperformers focus more on operating incomegrowth and cash flow (Figure 7). High-performing firms are somewhat more likelyto include non-financial measures such ascustomer satisfaction and quality outcomes. The greater use of these measures indicates anunderstanding of their importance as driversof enhanced financial performance.

TargetsAs STI funding has increased, employershave also raised performance goals for bothcompany and/or individual success (54 percentand 28 percent, respectively). In particular,nearly two-thirds (64 percent) of high-performing firms have increased companyfinancial targets in the last 12 months, com-pared with 56 percent of low-performing firms.

Employees agree that the bar is being raised.Fifty-five percent think that it has becomemore difficult to earn a full bonus in the lastthree years.

PayoutsGiven the constraints of small merit budgetsand employee attitudes about base pay, short-term incentive plans provide an effective toolto differentiate individual pay based on performance. According to Watson Wyatt’sHuman Capital Index research, organizationsthat make the largest distinctions in top performer pay significantly outperform organizations that make smaller distinctions(Figure 8, opposite).

Although more dollars are currently given tothose employees who meet or exceed expec-tations, employers have the opportunity to

High-performing firms

Low-performing firms

All firms

2003 2004 2005

F I G U R E 6 : Average STI Funding Has Rebounded

25%21%

24%

59%53%

58%

54%62%

60%

21%35%

26%

34%21%

29%

High-performing firms

Low-performing firms

All firms

Revenue Growth

Operating IncomeGrowth

Cash Flow

Customer Satisfaction

Quality Outcomes

F I G U R E 7 : STI Funding Metr ics Di ffer by Company Performance

120%

100%

80%

60%

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make larger distinctions in employee bonuses.The median payout to employees meetingexpectations is 100 percent of the bonuspool, while employees who perform in thetop 10 percent receive only 5 percent more.Furthermore, more than a quarter (27 percent)of companies with STI plans indicate theypay bonuses to employees who do not meetexpectations.

The attitudes toward annual bonuses differconsiderably between top- and poor-performing employees. Nearly three-quarters(74 percent) of top performers say bonusesare very valuable, versus only 30 percent ofpoor performers. This may be because topperformers see the relationship between awardsand performance more clearly than poor performers (84 percent versus 61 percent,respectively). In addition, nearly 70 percent oftop performers say the amount of their bonusis based on factors within their control, versusroughly half of poor performers.

LONG-TERM INCENTIVESLong-term incentives (LTIs) continue to bean important reward vehicle for executivesand non-executives alike as 42 percent ofcompanies offer stock options to non-execu-tives, and 33 percent offer other long-termincentives. However, stock option accountingchanges have caused significant plan redesignsover the last two years, and 39 percent ofcompanies continue to make adjustments in2005 — reducing the opportunity for totaldirect compensation for non-executives andrebalancing total direct rewards for executives.

Roughly one-third of companies are still adjust-ing their stock programs for non-executives.Fifty-two percent of them have reduced thenumber of stock options granted for non-executives, 50 percent reduced eligibility and27 percent eliminated stock options entirely(Figure 9). Overall, 14 percent of organizationsreduced LTI as a percentage of total pay fornon-executives, and only 31 percent of these

boosted another pay element (e.g., short-termincentives) to compensate.

Thirty-seven percent of participating organi-zations offer an employee stock purchaseplan (ESPP) to non-executives, which allowsemployees to purchase stock at a discount(often with a look-back feature that providesadditional favorable pricing). Despite unfavor-able accounting treatment changes, only 9 percent of employers making changes haveeliminated their ESPPs in the last year fornon-executives (Figure 9).

High Differentiation Low Differentiation Companies Companies

STI Payout to Higher-Performing Employees vs. 4.7 2.1Lower-Performing Employees

3-Year TRS 47% –2%

Source: Watson Wyatt’s Human Capital Index report

F I G U R E 8 : F i rms That Make Sharper Dis t inct ions inBonuses Earn Super ior Shareholder Returns

Eliminated stock options

Reduced stock option eligibility

Reduced number of stock options granted

Replaced stock option grants with grants of restricted stock

Introduced cash long-term incentives

Eliminated ESPP look-back feature

Reduced ESPP discount

Eliminated ESPP

Increased ESPP discount

Percentage of those making changes.

14%27%

14%50%

46%52%

63%35%

20%10%

14%17%

Changes for executives

Changes for non-executives

F I G U R E 9 : Employers Cont inue to Make Changes toThe i r LTI P lans

8%13%

6%9%

0%3%

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In light of decreased eligibility among non-executives for other stock-based programs,the maintenance of an ESPP is well advised,given Watson Wyatt’s Human Capital Indexresearch, which found that organizations withbroad eligibility for stock-based programssignificantly outperform organizations withlimited eligibility.

For executives, changes have focused onshifting the portfolio toward greater use ofrestricted stock. While 14 percent of com-panies making changes this year eliminatedstock options for executives and 14 percentreduced eligibility, nearly two-thirds ofemployers (63 percent) offset these changesby replacing stock options with restrictedstock, and another 20 percent moved to cash-based LTIs.

43%35%

34%20%

30%27%

53%39%

64%49%

30%30%

2005

1996

F I G U R E 1 0 : Modest Changes in Employers ’ Tota l Rewards Perspect ive in the Last 10 Years

23%25%

21%20%

2%6%

49%52%

Reward system is linked to business strategy*

Reward system encourages desired culture and behaviors*

Reward systems are valued by employees*

Organization’s merit pool reflects good performance

Organization’s merit pool reflects poor performance

Areas of Improvement

Opportunities

THE 10-YEAR VIEW —COMPARISON TO 1996

The first Strategic Rewards survey wasconducted 10 years ago, and the similarities— and differences — in economic conditionsare striking. Both periods are marked by a

post-recession expansion and comparablelevels of unemployment, but today’s global-ization has created a dramatically differentsituation for American business. In particular,the current expansion differs from that of 1995–96 in terms of limited job creationdue to outsourcing and offshoring of jobopportunities as well as ongoing increasesin productivity.

On the positive side, a comparison of the1996 and 2005 results (Figure 10) suggeststhat organizations are making modeststrides in balancing all three total rewardselements (alignment, value and cost).Employers are improving alignment bylinking the reward system to businessstrategy and encouraging desired cultureand behavior. The modest improvement inalignment is also due to a stronger connec-tion between organizational performanceand merit pool determination.

However, employers have made little progressin articulating their compensation strategyand involving employees in the design andmodification of reward plans. The resultinglack of communication contributes to thepersistent view among employees that theyare entitled to merit increases. WatsonWyatt’s Communication ROI Study indicatesthat direct conversations with line managersduring ongoing performance managementdiscussions provide the best vehicle forcommunicating reward systems.

Compensation strategy is clearly articulated*

Employees understand reward plans*

Effectiveness of reward plans is measured on an ongoing basis*

Employees are involved in the designand modification of reward plans*

Merit increases are regarded as an entitlement**

* Percentage reporting “to a great extent” or “to a very great extent.”** Percentage reporting “to a great degree.”

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PERFORMANCE MANAGEMENTCompanies with strong performance manage-ment systems post significantly better financialresults, according to WorkUSA, Watson Wyatt’songoing study of U.S. employee attitudes.Unfortunately, while most employers reportthat their organizations have incorporatedbest practices in designing their performancemanagement programs, they have been lesssuccessful in executing the performancemanagement processes. Ninety-one percentsay they provide formal goal-setting linkedto business objectives, and 74 percent saymanagers are at least moderately effective atlinking the goals. But only 58 percent of top-performing employees indicate that theirmanagers provide a formal linkage to businessgoals. Moreover, only 31 percent of poor-performing employees say this is the case(Figure 11).

Despite difficulties in recruiting and retainingemployees, employers appear to struggle withways to improve and strengthen the performanceof their existing workforce — particularly theirpoor-performing employees. Nearly half ofemployers think that managers at their organi-zation are at most slightly effective at carryingout periodic performance discussions orhelping poor performers improve. Employeestend to agree: 53 percent of top performersand only 30 percent of poor performers saythat managers help poor performers improve.

Employers indicate part of program

Employers indicate managers effectively provide*

Top performers indicate manager provides*

Poor performers indicate manager provides*

91%74%

58%31%

64%38%

45%34%

75%57%

64%40%

36%23%

53%30%

91%57%

67%52%

98%91%

92%79%

82%37%

96%51%

Provide formal goal-setting linked to business objectives

Provide coaching and feedback to employees throughout the year

Provide formal midyear (or other periodic) performance discussion

Provide formal, written review and discussion at year end

Link pay decisions to results of review process

Provide formal career development and/or planning

Help poor performers improve

*Percentage reporting “to a moderate extent” or “to a great extent.”

Employer View Employee View

F I G U R E 1 1 : S ign i f i cant Gap Ex i s t s Between Des ign and Execut ion of Per formance Management Systems

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One step toward improving managerial effec-tiveness may be to provide managers withthe appropriate training. Only 36 percent oforganizations have a formal training programfor managers to enhance their ability toeffectively manage rewards. However, thosethat provide them are better able to manageemployee performance (Figure 12).

GLOBAL COMPENSATIONThe majority (61 percent) of organizations in the survey have operations outside of theirhome country, and 30 percent have opera-tions in more than 10 countries — yet only29 percent have implemented a global totalrewards strategy. These companies have doneso in order to create a common culture (46percent), encourage internal equity (40 per-cent), and provide a consistent link betweenrewards and results (40 percent).

Companies with global total rewards strategiesalso report more progress in monitoring thedesign and delivery of reward programs acrossglobal operations — particularly in terms ofalignment and cost (Figure 13). While thesecompanies are more likely to make sure thattheir program appropriately reflects the market,only 11 percent of those with a global totalrewards strategy report checking on the valueof rewards to employees to a great extent.

33%10%

35%3%

52%21%

43%13%

Have global total rewards strategy

No global total rewards strategy

F I G U R E 1 3 : F i rms With a Globa l Tota l Rewards St rategyMore L ike ly to Moni tor Programs

Monitor Design and Delivery of Global Reward Programs for:

64%53%

57%48%

58%46%

Have formal training program

No formal training program

F I G U R E 1 2 : F i rms With Formal Manager Tra in ingPrograms More Effectively Manage Employee Performance

Alignment with organizational goals

Alignment with global total rewards strategy

Total cost

Appropriate relationship to market

Percentage reporting “to a great extent.”

Provide coaching and feedback to employees throughout the year

Provide formal midyear (or other periodic) performance discussion

Help poor performers improve

Percentage reporting to “to a moderate extent” or “to a great extent.”

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ATTRACTION AND RETENTIONIn a competitive job market, low-performingfirms have an uphill battle in recruiting andretaining top employees. Only 58 percent ofemployees at low-performing firms say theirfirm offers promotion/advancement opportu-nities, compared with 81 percent of employ-ees at high-performing companies. Similarly,more employees at high-performing firmssay they have an opportunity to influenceand earn a bonus (Figure 14).

With a strengthening economy, attractingcritical-skill employees has become increas-ingly difficult in the last two years. Nearlysix in 10 employers (58 percent) report atleast moderate difficulty, compared with 40 percent in 2003. Employers are havingmore success retaining critical-skill and top-performing employees, which may be con-tributing to the problem. While the overallvoluntary turnover rate of 10.6 percent hasremained relatively stable since 2003 (Figure 15), voluntary turnover is substantiallylower for critical-skill and top-performingemployees (5 percent and 4 percent, respec-tively) regardless of company performance.

Many employers (58 percent) formally trackthe reasons that top performers leave theirorganizations. Consistent with past years’results, the top three reasons (cited by bothhigh- and low-performing companies) arepromotion opportunities (54 percent), inade-quate pay (33 percent) and inadequate careerdevelopment (30 percent).

Looking deeper, differences in culture andmanagement style in high-performing versuslow-performing firms may also affect whyemployees leave. Twenty-seven percent ofhigh-performing companies versus 15 percentof low-performing companies cite work/lifebalance as a reason that top performers leave,possibly because of the company’s focus onresults coupled with resource constraints.Problems with management are more of anissue at low-performing firms than high-performing firms (32 percent and 20 percent,respectively), perhaps indicating a lack ofmanagement training or constantly evolvingmessages and tactics to address financial performance.

50%84%

62%

60%42%

46%

81%74%

79%

High TRS firms

Low TRS firms

All firms

F I G U R E 1 4 : Employees at High-Performing F i rmsPerce ive More Promot ion/Advancement Opportun i t ies

F I G U R E 1 5 : Voluntary TurnoverRate Remains Stab le

Year Voluntary turnover rate

2005 10.6%

2004 11%

2003 9.6%

It has become more difficult to earn a full bonus over the last 3 years

My bonus amount is based on factors within my control*

Bonus awards vary based on employee performance*

*Percentage reporting to “to a moderate extent” or “to a great extent.”

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CONCLUSIONOrganizations have a significant opportunityto improve their return on human capitalinvestments by aligning reward plans withbusiness strategies and by enhancing thevalue delivered to critical workforce segments.As a first step, employers can review their totalrewards packages and evaluate their strategyfrom an integrated point of view, withincreased collaboration among the compen-sation, benefits and finance functions.

While companies have made modest improve-ments in balancing alignment, value and costas critical elements of a total rewards programin the last 10 years, they still have opportu-nities to improve in key areas: understandingemployees’ needs and preferences, linkingrewards and organizational performance, andcommunicating clearly and directly aboutthese programs. By making reward plansmeaningful to employees — and then com-municating the programs — organizationscan improve the perceived value of theircompensation packages.

Differentiating base and variable pay byemployee performance is also critical.Organizations that make the largest distinc-tions in how they allocate rewards significantlyoutperform organizations that make smallerdistinctions. The most successful organiza-tions also continually raise the bar on bothcompany and individual performance. Thisin turn helps them increase the funding forperformance-based variable pay plans andattract top-performing employees.

As attracting and retaining top performersand critical-skill employees becomes increas-ingly difficult, performance managementtakes on additional significance — especiallyin linking goal-setting to business objectivesand pay decisions to review results. Thoseemployers who effectively use performancemanagement systems to create alignment andhelp their workers improve will be betterpositioned for success.

The bottom line is that a well-designed, well-executed and well-communicated totalrewards program will motivate employees,improve competitive position and strengthenshareholder returns.

ABOUT WATSON WYATT

Watson Wyatt Worldwide (NYSE: WW) is a global human capital

and financial management consulting firm. We specialize in

employee benefits, human capital strategies, technology solutions,

and insurance and financial services. Watson Wyatt has more

than 6,000 associates in 32 countries.

ABOUT WORLDATWORK ®

WorldatWork is the world’s leading not-for-profit professional

association dedicated to knowledge leadership in compensation,

benefits and total rewards, and focuses on human resources

disciplines associated with attracting, retaining and motivating

employees. For more information, visit us at www.worldatwork.org

or call 877/951-9191.

FOR MORE INFORMAT ION on how to align your

strategic rewards program, call Watson Wyatt at 800/388-9868

or visit www.watsonwyatt.com.

Divisions and Subsidiaries

RESEARCH AND INFORMATION CENTERS

WATSON WYATT DATA SERVICES

WATSON WYATT INVESTMENT CONSULTING

For More Information

Visit www.watsonwyatt.com

or call 800/388-9868.

Copyright © 2005 Watson Wyatt Worldwide.

All rights reserved.

Catalog # W-865

Locations

ASIA-PACIFIC

Auckland • Bangkok • Beijing • Delhi •

Hong Kong • Jakarta • Kolkata •

Kuala Lumpur • Manila • Melbourne •

Mumbai • Seoul • Shanghai • Shenzhen •

Singapore • Sydney • Taipei • Tokyo •

Wellington

CANADA

Calgary • Kitchener-Waterloo • Montréal •

Toronto • Vancouver

EUROPE

Amsterdam • Birmingham • Bristol •

Brussels • Budapest • Dublin • Düsseldorf •

Edinburgh • Eindhoven • Leeds • Lisbon •

London • Madrid • Manchester • Milan •

Munich • Nieuwegein • Paris • Redhill •

Reigate • Rome • Rotterdam • Stockholm •

Welwyn • Zürich

LATIN AMERICA

Bogotá • Buenos Aires • Montevideo •

Mexico City • San Juan • Santiago • São Paulo

UNITED STATES

Atlanta • Boston • Charlotte • Chicago •

Cincinnati • Cleveland • Columbus • Dallas •

Denver • Detroit • Grand Rapids • Honolulu •

Houston • Irvine • Las Vegas • Los Angeles •

Memphis • Miami • Minneapolis • New York •

Philadelphia • Phoenix • Portland •

Rochelle Park, N.J. • St. Louis • San Diego •

San Francisco • Santa Clara • Seattle •

Stamford • Teaneck, N.J. • Washington, D.C.

W W W . W A T S O N W Y A T T . C O M