© 2013 towers watson. all rights reserved. janaury 2014 total rewards optimization national...

© 2013 Towers Watson. All rights reserved.

Janaury 2014

Total Rewards OptimizationNational Association of Corporate Directors

towerswatson.com © 2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.

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?

2


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

3


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

4


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:

5

Ch

an

ge

in E

ng

ag

em

en

t


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

6

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


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

7


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

8


Research Output Example: Areas of Highest Perceived Value Declines and Cost Implications

9

• 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


10

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)


11

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


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

12


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

13


14

Total Rewards Measurement


Why is total rewards measurement important?

15

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


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

16


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?

17


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

18


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

19


20

© 2013 towers watson. all rights reserved. janaury 2014 total rewards optimization national...

Documents