Total Rewards Strategies in a Down

Market

DEBORAH MARSHDecember, 2002

Total Rewards Strategies in a Down MarketWhat’s in store in 2003?

Deborah Marsh,

Nightly News

Tough economy Depending on who you talk to, not as bleak as

before Market still down

Stock options still underwater in most companies

Unemployment still high

Nightly News (cont.)

Demographic shifts continue Retirement delayed Mothers with preschoolers make up the

fastest growing segment of the workforce Technological advances continue to

create new ways of working Telecommuting Flexible work hours

Still only a finite number of the required talent!

What does this mean to Managers?

Concern about cash and equity plans and the ability to continue to remain competitive in the labor market

Total Reward budgets are tight, so we need to use them wisely while still achieving the goals of attraction, retention, and motivation

Continue to search for ways to set the company apart in a cost effective manner

More than ever, need to communicate Total Rewards Philosophy and elements

Continue to search for administrative efficiencies Employee Self Service Outsourcing

What’s Happening?- Compensation Continued focus on market Time between increases is up (18 months) Annual increases are down but not as much as

we thought From 4 – 4.5% for past five years to 3.7 – 4.0%

according to WorldatWork 2002 Salary Budget Survey Fewer employees will receive an increase this

year 94% in 2001 vs. 85% today

Performance is king!

Pay for Performance

More of a reliance on pay for performance Companies striving to provide the lion’s share of

rewards to top performers Attempts to rid employees of “entitlement”

mentality Efforts to revamp performance management

systems Ranking “in” Efforts to reward based on what people bring to the

organization rather than current activities Caution – Little faith on the part of the workers

that such systems work

Incentive Pay

Trend has been to increase variable pay to make compensation contingent on organization’s ability to pay

Deadly behavior: pay out anyway! Many organizations revamping targets

mid-year Lots of explaining to do!

Compensation Strategies

Utilize pay for performance whenever possible

Use your total rewards budget wisely—pay your top performers as top performers in the labor market

Correct distortions in compensation mix created by outdated “hot skills” premiums or salary structures ahead of market

Lose your “closed” compensation system

Keith’s Quote:

“After the lay-offs, they want me to work twice as hard for half the compensation”

What’s Happening? - Stock Options Companies are increasingly tying stock option grants

to performance* The goals of stock option programs have not changed

since 2000 Attraction, retention, and motivation of employees Creating an ownership culture

Even Companies with a drop in option value have not changed pattern of use Of those that experienced a decline in stock price

the most common strategy was increasing grant size

Companies awarded the same number of options in 2002 as 2000, however the overall value of options was less

*From WorldatWork/Segal Sibson Hot Topic Survey

Stock Option Strategies

More grants Accelerate future stock option grants into the

current year More frequent granting schedules Cancel and reissue 6 months later Performance based vesting Reduce maximum option term Shift from economic value approach (such as

Black-Scholes) to a flat-share guideline approach Restricted stock swaps

Stock Option Strategies (cont.)

Before you take out your eraser evaluate your total compensation program: What is the business outlook for the future? What challenges, if any, are you facing in

recruitment and retention? What is the recent history of all compensation

payouts? If your industry or market is permanently altered,

or your total compensation program was never effective, it may need to be revised

If over the long-term, your stock option strategy still works, tweak or keep

Stock Option Strategies (cont.)

COMMUNICATE!

What’s Happening? - Benefits

Even with all of the attention and scrutiny post-Enron, use of company stock in

401(k) programs remains the same Focus is on education

Some employers are questioning benefit “fit”

Most attention in company programs has been on medical plans

What’s Happening? - Work Environment

The last component of “Total Rewards” Now, more than ever, can be used to set

yourself apart inexpensively Demographic changes, especially large

number of women in the workforce, has generated the need for work/life programs More women earning professional and graduate

degrees More women starting businesses Women are increasingly becoming the

breadwinner

What’s Happening? - Work Environment (cont.)

However… The number of Americans living alone

surpassed the number of married couples What singles want is parity in benefits

Shifts since 9/11 Changing sense of individual material success Shift of priorities to family, community

What’s Happening? - Work Environment (cont.)

What Employees Want… o 70 percent of employees don’t think there’s a healthy balance

between work and personal life (True Careers survey, 2002) o 70 percent of employees say that family is their most important

priority. This compares to 54% in 2000 (Ranstad North America survey, 2002)

o 61 percent of adults say they would give up some of their pay

for more time with their family (Radcliffe Public Policy Center, 2000)

o Employees say that finding time for family is a more pressing concern than layoffs (32 percent vs 22 percent). This compares to 25 percent in 1999 (Office Team 6/02 Survey)

o 36 percent of workers say they’d be willing to take a pay cut of

10 percent or more for a shorter commute (Career Builder, 2000)

What’s Happening? - Work Environment (cont.)

Percent of Employers offering Work/Life Benefits (by year)1998 1999 2000 2001 2002

Flextime 56% 54% 52% 59% 64%Compressed work weeks 23% 26% 28% 32% 33%Bring child to work in emergency 19% 23% 22% 24% 30%On-site child care center 4% 6% 3% 5% 6%Company-supported elder care center 1% 1% 1% 2% 1%Vaccinations on-site (example flu-shot) 58% 62% 66% 63% 61%Health screening programs 46% 49% 42% 38% 42%Gym subsidy 22% 23% 25% 26% 28%On-site fitness center 19% 20% 20% 21% 26%Casual Dress days (every day) 37% 44% 45% 51% 53%Food services/subsidized cafeteria 31% 38% 31% 28% 29%Dry-cleaning services 8% 12% 11% 13% 15%Massage therapy services at work 8% 8% 13% 12%Concierge services 2% 4% 4% 3% 4%*Source: Adapted from 2002 Benefits Survey, SHRM

Work Environment Strategies

Something for everybody How much does it cost to implement

telecommuting? Flexible schedules?

Opportunities exist now more than ever to provide trade-offs (traditional compensation and benefits for work environment)

Be sure to evaluate your own demographics and culture first

Putting it all together…

Don’t squander your Total Rewards budget Evaluate fit Is it still meeting your goals for attraction,

retention and motivation? Pay for Performance!

Make sure your top performers get the lion’s share of increases, incentive payments, and equity

Make sure your performance management system works and is understood!

Putting it all together…

Guarantee less—offer more! Don’t forget the work environment

component

Communicate, communicate,

communicate!