hr innovation winter 2011

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HR innovation

Winter 2011

02

Is retirement an

endangered species?

08

Balancing the

pay-for-performance

equation

12

Determining the

value of employer-

sponsored Health

Improvement

Programs

20

Multiemployer

pension plans

in corporate

transactions:

How to obtain

a purchase price

adjustment for

plan decits

24

Is talent in the right

position for what’s

ahead?



Contents

Foreword

Scott Olsen, US Leader, Human Resource Services

Is retirement an endangered species?

Jim McHale

Balancing the pay-for-performance equation

Brandon Yerre

Determining the value of employer-sponsored

Health Improvement ProgramsRon Barlow and Don Weber

Multiemployer pension plans in corporate transactions: 2 How to obtain a purchase price adjustment for plan decits

Michael Sculnick

Is talent in the right position for what’s ahead?

Skills assessments help companies build the foundation

for better business benets

Sayed Sadjady and Jessica Dunham



The C-suite’s waiting. Your current

(and future) workforce is waiting.

Are you ready?



Foreword

The upshot: It’s a great, albeit chal-

lenging, time to be a part of HR, where

the people engine gets its juice and

the entity’s goals get their legs. The

workforce today is more complex than

ever. Gone are the days of one-earner

households, one-nation economies,

and one-company careers. HR is a

major player in a global economy that’s

changing with every tick of Big Ben,

every headline in Times Square, every

tweet, on every street, from Boston to

Beijing and beyond.

These changes affect not only opera-

tions, but people and the way they do

their work, leave their mark, and live

their lives. Our fates are intertwined—

whether that’s universally recognized

or not. It’s HR that helps drive the

critical connections between the orga-

nization, its objectives, and the people

who can make them happen.

What faulty assumptions, stale atti-tudes, or unasked questions might stand

in their way and yours? HR Innovations

will look at current trends and their

implications for meeting organizational

goals while cultivating and sustaining

an efcient, high-performing workforce

in a dynamic organizational culture.

Our authors will address HR matters

that run the gamut of today’s workplace

issues and ask some probing questions

to get at the answers you need

to move forward and pull ahead:

• Is retirement an endangered species?

• What makes performance click?

• Is your wellness program in

good health?

• How can you adjust for pension

plan decits?

• It’s 2012. Do you know where yourtalent is?

I hope you’ll take some time to read our

most current thinking on HR effective-

ness and excellence. Is your HR function

up to today’s tasks? As always, your

feedback and involvement is not just

welcome, but encouraged as we work

together to meet the challenges of your

enterprise and its talent.

The C-suite’s waiting. Your current(and future) workforce is waiting. Are

you ready?

1HR Innovation

HR Innovation offers advanced thinking about the challenges that should

be uppermost on the minds and agendas of organizations and their

Human Resources (HR) leaders. Today’s economic and operating envi-

ronment is fraught with risks and unknowns. It’s no place for the meek.

The good news: more than 80% of CEOs we recently surveyed1 recognize

the gravity of the situation and its implications for their people strategies.

1 PwC’s 14th Annual Global CEO Survey, 2011

Scott Olsen

US Leader, Human Resource Services



Is retirement an endangered species?

2

By Jim McHale

Will your employees outlive their 401(k)s? We all know the main

headline in the retirement arena of the last 20 years or so: the decline

of dened benet (DB) plans and the rise of dened contribution (DC)

plans as the main tool for nancing retirement. But this isn’t another

article lamenting that change or arguing that DB plans are more

efcient or more effective at delivering retirement security. Regardless

of whether that’s true, the fact remains that most employers in many

industries, having decided for a variety of reasons that DB plans and

the heartburn associated with maintaining them, aren’t sustainable,

have shifted to DC plans.



3HR Innovation

The result? Virtually all of the nancial

risks of retirement have been trans-

ferred to employees. And they’re signi-

cant: investment risk, longevity risk,

and ination risk of managing retire-

ment assets. And, although the risks of

nancing retirement have been trans-

ferred primarily to employees in many

industries, if they don’t or can’t manage

that risk effectively, workers will nd

they can’t retire when they want to.

While those putting in enduring careers with the same employer can deliver

many advantages to the organiza-

tions they serve, they also can disrupt

effective workforce succession—if they

continue to work only because they

can’t afford not to.

Where have all the savings gone?

What does this mean for employees as

they plan for retirement? Do employers

understand the size and shape of therisks they’ve transferred to employees

and the impact this might have on

their business? Do employees under-

stand how to plan for retirement in

this context? Do the many models and

tools available adequately measure

the risks involved? While it’s generally

believed that employees tend to invest

reactively and fail to save adequately,

what happens to those who follow the

guidance and do everything the “right”

way? To what extent will they control

the risk?

Let’s say a male employee targets 40%

income replacement from his 401(k)

plan, expecting that Social Security

benets and other savings will provide

the balance of spending needs in retire-

ment. To meet this objective, he needs

to decide on an investment strategy and

savings plan that takes into account the

length of his working career and life

expectancy. If we settle on a realisti-

cally ambitious savings period begin-

ning at age 30, retirement at age 60,

and a life expectancy for a 60-year-old

retiree to age 83, we have an accumula-

tion phase of 30 years and a draw-down

period of 23 years.

If we follow a typical retirement glide

path investing approach, which calls for

investing heavily in stocks at younger

ages and gradually moving to bonds and

ination-hedging assets to and through

retirement age, this retiree could expect

to earn 7%–7.5% annually before retire-

ment and 5.5%–6% after retirement.2

Based on these inputs, the employee

would have to save just over 10% of

earnings annually during his working years to nance 40% replacement

through his life expectancy. This amount

would include the employer’s matching

contribution to a 401(k) plan and could

be contributed and accumulated for

most workers on a pre-tax basis.

Sounds like a great plan, right? It may

be a good starting point, but the plan

assumes that everything will occur just

as expected. If the last decade of ups

and downs has taught us anything, it’s

that things too often fail to turn out

as expected. Even if markets return to

their norms over a long span of years

(and not all experts agree they will), we

still have a lot of volatility to deal with

along the way.

2 The expected returns used in the Monte Carlo simulation are based on the 2011 capitalmarket assumptions published by Callan Associates.



4

What risks does the employee in our

example bear and how can we measure

how these risks could affect his 30-year

plan? Before we get started, it’s impor-

tant to note that we deal here speci-cally with the nancial and longevity

risks, but workers deal with many other

risks as they near and enter retirement.

These include the cost and life issues

connected with healthcare, long-term

care, family situation (divorce and

death of spouse), living independently,

real estate, and securing and main-

taining employment. The mathematical

models we will use can tell us a lot

about the impact of the potential vari-

ability of life span and market uctua-

tions, but they don’t handle these less

tangible risks.

Sizing up retirement risks

To arrive at some answers, we used a

Monte Carlo methodology to generate

the results over 10,000 alternate

lifetimes; this is basically a type of

computerized coin-ip that looks at the

market results each year from age 30 todeath and the chance that a retiree will

live or die in each year of retirement.

After running these random trials, we

tabulated the results, looking at each

simulated lifetime and determining if

the employee was successful in funding

his retirement target.

Note that we recognize that the debate

over what constitutes an appropriate

target is not universally agreed upon

and is a personal matter that’s based on

an employee’s family situation, health,

prospects for working in retirement,

and many other factors. The focus

here is on looking at the chances that a

selected goal will be met and the vari-

ability of results; we should see similar

variability of results if we decided that,

say, a 50% goal was a better objective.

So, how did things turn out for our

sample employee and his 9,999 alter

egos? For starters, remember that a

male employee who retires at age 60 is

expected to live to age 83 on average, but

that happens only about 4% of the time.

There is an almost 20% chance that he

could live past age 90 and a more than

5% chance he could make it to 95. While

this is a nice problem to have, longer life

would create the need for signicantly

more retirement savings.

Moreover, average returns over the

working years also varied signicantly.

Although the average 30-year return in

the build-up period was 7.1%, there is a

20% chance the employee would earn

less than 4.6% and a 1% chance that theaverage 30-year return would actually

be negative. Of course, there’s an upside

to taking risk: 20% of the time, the

employee earned 9.5% or more, and in

the jackpot top 1% scenario, the port-

folio returns 14% or more per year.

All this adds up to a wildly varying

result in retirement: In some cases, the

employee ends up with hundreds of

thousands of dollars to leave to his heirs

(if he is “lucky” enough to have stronginvestment results while working but

then die young); in others, the retire-

ment income objective is not even

close to being achieved. The bottom

line: 55% of the time, employees end

up outliving their savings, despite

The bottom line: 55% of the time, employees

end up outliving their savings, despite following a

disciplined retirement savings regimen over their

lifetime and following industry rules of thumb

about sound retirement investing.



5HR Innovation

following a disciplined retirement

savings regimen over their lifetime and

following industry rules of thumb about

sound retirement investing.

Managing retirement risks

As bleak as this outlook sounds,

employees can avail themselves of

many options to manage this risk. We

looked at some of these and noted what

our sample employee would have todo to improve his chances of making

the retirement savings last. Note that

these options have to be initiated

ahead of time; if a retirement nest

egg is depleted at age 85, at that point

the retiree will have few avenues for

rethinking strategy. Here are some

things employees can do to hedge their

retirement risks:

• Save more. Increasing the 30-year

savings rate to 15% could reduce the

chances of outliving savings to 30%—

still a risky proposition. Risk manage-

ment processes often look at targeting

the 5% worst case, so we follow a

strategy that will allow us to weather

95% of outcomes and so be exposed

to only the worst 5%. To budget for all

but 5% of outcomes, a retiree would

have to save close to 30% of income

for a 30-year period, which would not

be feasible for most workers.

• Work longer. If an employee is beset

with sudden market drops near

retirement, he or she is often forced

to work longer than expected. This

can help in a small percentage of

cases, but what if the market drop

comes after retirement? An employee

may hedge the risk by planning to

work longer ahead of time in order to

accumulate a “reserve” for potential

longevity and poor market perfor-

mance. Our analysis shows that

working ve more years past age 60

could reduce the chances of outliving

savings from 55% down to 25%. Our

retiree would have to work to age 70

to meet the 5% standard.

• Reduce consumption in retire-

ment. If the market is not kind to an

employee, he or she can also realign

expectations to draw down savings

more slowly in retirement, based

on the size of the 30-year nest egg.

Financial advisors often suggest

an annual rate of withdrawal from

savings that is set conservatively

to allow a cushion for longevity

or down markets. For instance,

reducing the annual withdrawal in

retirement by 20% would reduce the

chances of outliving savings to 35%

in exchange for the belt-tightening.

To get to a 95% condence level that

he would not outlive his nest egg, the

retiree would have to live without

60% of the expected income.

• Work in retirement. Instead of

living with 20% less income, a

retiree could consider supplementing

income with a part-time job to make

up the difference. Note that this

is more realistic in the early years

of retirement (and under bettereconomic circumstances).

• Invest in less volatile assets. In

just about any current 401(k) plan,

employees can choose to allocate

their retirement savings to assets

that are expected to be less risky.



6

Conventional wisdom says that less

risk comes in exchange for a lower

expected long-term return. If they go

this route, employees need to do so

in conjunction with one of the other

hedges described earlier (save more,

work longer, or consume less to make

up the difference).

These approaches can be effective in

reducing the risk employees take for

their retirement, but they all involvea signicant adjustment to lifestyle

or workforce participation. Because

we started with what can be called a

reasonably ambitious expectation for

what a worker can save over a working

life, it would be difcult for many

workers to make these kinds of adjust-

ments. They might, therefore, remain

exposed to these risks as they enter or

consider entering the retirement years.

How employers can help

Many employees retiring today have

some form of dened benet annuity

guarantee, even if it comes from a

frozen plan, but as more and more

employees move into their pre-retire-

ment years with a DC-only portfolio,

the difculty that employees have in

managing retirement risk will have

a growing impact on employers.

Employers may nd they need to offer

their people more tools to manage this

risk. This can be done through:

Plan design

Innovations in plan design, such as

automatic enrollment, have helped

incentivize more employees to save

sooner. If employers can gain a betterunderstanding of the choices employees

are making, additional innovations may

also help. For instance, would providing

a smaller employee match percentage

on a larger dollar base incentivize more

employees to save at higher rates? How

high should the automatic enrollment

rate be?

Are 401(k) plans the most effec-

tive and overall efcient vehicles for

delivering retirement benets? Whilethey certainly will be the choice of

many employers going forward, some

employers may want to consider

hybrid design approaches that balance

risks in a different manner between

employees and employers. For instance,

Pension Preservation Plus (PPP), a PwC

Instead of living with 20% less income, a retiree could

consider supplementing income with a part-time job to

make up the difference.



7HR Innovation

innovation, provides elements of DB

and DC plans within the employer’s

retirement program. Market-rate cash

balance plans can operate in a nearly

identical manner to a DC plan in the

build-up phase, but operate as a DB plan

in the draw-down phase. Would such

designs strike a more realistic balance

for some employers?

Investment innovation

The conventional wisdom on retire-ment investing is constantly evolving

as practitioners understand the risks

better and experience the limitations

and pitfalls of discarded past para-

digms. Many employees want (or need)

less of the freedom offered by self-

direction and more ways to purchase

(for a reasonable cost) lifetime income

opportunities. Employees and retirees

have historically avoided traditional

annuities because of perceived high

cost and reluctance to commit a largepart of their savings irrevocably. To

address some of these concerns, many

providers are developing retirement

income or annuity purchasing options

that employers can introduce into

their DC programs. These include bulk

purchasing of annuities through a DC

investment choice option and managed

account alternatives that target and

maintain a stated income level from

the account. To get comfortable with

wide participation in these investment

vehicles, employees will need to under-

stand the tradeoffs and risks discussed

in this article.

Education

Building nancial literacy and invest-

ment education are important objec-

tives, but employees will need to

somehow understand the risk manage-

ment challenges of retirement. How

do their investment and life choices

interact with their long-term nan-

cial health? What’s a reasonable

cost or investment return trade-off

for reducing investment risk and

longevity risk in retirement? Right now,employees may have a pretty good idea

of the upside and downside of market

risk based on their experiences of the

past several years. But it will become

increasingly difcult to make informed

decisions as the range of choices

continues to expand. Moreover, just

because employees are educated about

how investment works, even if it helps

comply with regulations and avoid

lawsuits, it doesn’t mean the employees

will apply the knowledge consistently or that they are equipped with feasible

options to control their risks.

Evolving workforce paradigms

Currently, the average retirement age

in the United States is around 62, which

has been decreasing for decades. As

longevity increases, this means that

most workers will be spending over 20

years in retirement. Couple that with

declining birth rates and we will be

expecting an ever-shrinking workforce

to support growth and productivity. Is

this sustainable? Alternate approaches

to managing the transition to retire-

ment, such as phased retirement, have

been widely discussed but rarely imple-

mented. Can employers better tap the

skills of retirees or pre-retirees?

Imagining a better way forward

What happens to the workforce and

long-term sustainability and viability

if employees can’t retire? If workers

are thrown to the whims of forces far

beyond their control, how is succession

planning not also thrown into turmoil?

In today’s environment, it’s hard to

imagine how most employees will have

the resources necessary to reliably

manage the risks of nancing retire-ment. How will this impact broader

society, the economy, and the nancial

markets? In moving forward to a better

state for employers and employees

alike, greater availability of appropriate

tools (some of which have yet to be

developed) must help bridge this gap.

Employers may well nd a competitive

advantage to equipping their people

with such tools and the knowledge and

insight that will enable them to makegood use of them—and their retirement

years. But rst, organizational leader-

ship will have to come to grips with the

very real consequences of failing to take

action today.

Article contributor, David Cantor, PwC



8

By Brandon Yerre

Despite its familiarity in the workplace, the phrase “pay for

performance” likely means different things to different people. This

lack of clarity and understanding can keep employers from meeting

short- and long-term goals and employees from deriving satisfaction

in their roles and careers.

Balancing the pay-for-performance equation



9HR Innovation

For top management, performance has

most often been dened by metrics

commonly reported to public company

shareholders or otherwise easily calcu-

lated, such as earnings per share (EPS)

or total shareholder return (TSR). This

has afforded top management and

shareholders a clear view of the linkage

between pay and the nal measure of

performance. But unfortunately, the

means to achieving that end measure

of performance were not typically included as performance measures.

As for other employees, the metrics

used for linking pay to performance

were not always considered from a busi-

ness performance perspective. In some

companies, middle management and

lower-level employees might have been

incentivized based on overall company

goals, without knowledge of how their

role impacted the company as a whole.

In other cases, they were incentiv-ized based on individual performance

measures that had no direct linkage

to company performance, and during

years of poor company performance,

incentive pay was reduced or elimi-

nated—even for high performers.

Balancing your organization’s use of

pay and other rewards with meaningful

measures of individual performance

helps create a talented, engaged work-

force and an organization capable of

creating long-term value. This applies

to the entire organization, including top

management. A properly managed pay-

for-performance program should reect:

• What fuels individual performance

• What links individual performance

and organizational performance

• How to effectively use performance

goals to achieve short-term successes

and long-term objectives while

managing risk

Fueling individual performance

With talent management identied as

the number one focus of CEOs around

the globe,3 it’s critical that employers

weighing workforce strategies under-

stand and apply the behaviors that

enable them to attract, reward, and

retain pivotal talent.

The retirement savings hit inicted

by the economic downturn, combined

with longer life expectancies, have

kept many baby boomers in the work-

force beyond traditional norms. These

more deeply experienced workers now

contribute side-by-side with recent

college graduates and Generation

X, which is establishing itself as the

predominant workforce population.

Amid this diversity, no single approach

is likely to enable your organization to

achieve its talent management objec-tives. Baby boomers may be more highly

motivated by nancial rewards, while

Millennials (also known as Generation

3 PwC 14th Annual Global CEO Survey, 2011

4 Managing tomorrow’s people: Millennials at Work. PwC Survey 2009

Y), who entered the workforce during

the 21st century, are more likely to

respond to career advancement incen-

tives; in our interviews, this group

chose training and development as their

rst choice among benets three-to-one

over those who opted for cash bonuses.4

When considering the most effective

reward package for sparking individual

performance, your organization should

take into account the typical compo-nents of most reward programs: salary,

short-term incentives, long-term incen-

tives, benets (including health insur-

ance, retirement savings, and vacation

pay); training and development, and

recognition. Many organizations have

also been focusing on work-life balance

and offering new benets, such as ex-

ible work schedules, telecommuting

opportunities, and sabbaticals.

Although the “pay” in “pay for perfor-mance” can refer to any of the more

traditional components of reward

programs, your organization should

look beyond its current forms of remu-

neration and consider whether addi-

tional approaches might work best in

the long term. Regardless of the diverse

composition of your workforce today—

in experience levels, gender, location,

work style, or any number of vari-

ables—a solid understanding of what

launches top-ight individual contribu-

tions will be essential to developing an

effective pay-for-performance strategy.



10

Rewards that resonate

Compensating an employee with the

same amount of monetary value as

that created by the employee for the

organization is viewed by some as the

“holy grail” of compensation strate-

gies. But it’s rare that such value can

be measured. And value can be tough

to grasp, particularly when its creation

is not a direct, easily quantied objec-

tive, as is the case, for example, with

employees whose roles are to preserve

the organization’s value through public

relations or customer service.

For top management, responsible as it

is for the overall success of the orga-

nization, individual success can and

should be measured by organizational

success. Even so, determining the value

created by top management is no easy

task. Because TSR and other measures

based on share price don’t fully take

into account the effect of the market in

those measures, high-level managers

can wind up under- or overcompen-

sated. And, while measures of perfor-

mance that can be controlled, such asreducing operating expenses, provide

far superior linkage between individual

and organizational success, they’re still

not perfect.

With the lines between individual

performance measures and organiza-

tional performance often dotted, the

term “pay for performance,” while hardly

alien, isn’t always thoroughly understood

or effectively applied. To strike the right

balance, leaders need to understand

the behaviors of each employee groupresponsible for creating or preserving

organizational value and use that knowl-

edge to develop reward programs that

encourage those behaviors.

Consider, for example, a payroll

manager who’s responsible for timely

and accurate payroll submissions to

ensure that employees are paid as

expected. This manager’s contribu-

tion prevents loss of productivity if

employees discontinue work to deter-

mine why they weren’t paid on time.

High performers in this role might,

as a rule, effectively manage their

time, use proper planning, and ef-

ciently apply technologies. As such,

the payroll manager can be rewarded

based on having achieved measur-

able objectives in these categories. If

the payroll manager is a Millennial, a

company-sponsored trip to an annual

payroll conference, which sweetensthe package with Millennial-minded

training and recognition, can be a

crucial ingredient in rendering a reward

that resonates.

Your organization can fully assess its

linkage between individual and orga-

nizational performance by conducting

competency assessments and interviews

with critical stakeholders, with the

approval and support from appropriate

organizational leaders.

Performance goals boost short-

term successes and long-term

objectives, and manage risk

Once you have an organizational under-

standing of individual performance

boosters and the linkage between indi-

vidual and organizational performance,

individual goals should be established

with consideration as to how they’ll

support organizational goals. Choosing

the right short-term and long-term

goals without creating excessive risk

for the organization presents the nalchallenge in the mission to balance the

pay-for-performance equation.

Most organizations set short- and long-

term goals as part of their business

plan, providing the basis for individual

goals and incentive pay programs.

Organizational goals, which often

Regardless of the diverse composition of your workforce

today…a solid understanding of what launches top-ight

individual contributions will be essential to developing

an effective pay-for-performance strategy.



11HR Innovation

pertain strictly to nancial perfor-

mance, are used to set similar nancial

goals for the workforce. But armed with

the knowledge of how employee behav-

iors fuel organizational performance,

you can determine individual goals that

will encourage positive behaviors that

will propel the enterprise toward its

strategic objectives.

When setting short-term goals for

employees, the focus should be trained

on what’s tangible and achievable. A

goal of increasing EPS by a specic

percentage for the year will be more

effective and better support a high-

performing culture when rewards

reect achievements that fall within

their span of control.

Long-term employee goals should

parallel and contribute to the organiza-

tion’s vision for sustainable nancial

success. For example, since CEOs

place talent management at the top of

the corporate agenda, the successful

implementation of a strategy to attract,

reward, and retain pivotal talent should

be viewed as a long-term goal of top

management. Although this strategy

might not provide staggering return in

the short-term, it can position the right

workforce and the enterprise to deliver

on long-term goals. The success of this

goal can be measured statistically using

workforce metrics such as the turnover

rate of priority talent and employee

engagement survey feedback.

The goal-setting process should also

take into account the importance

of risks and rewards. On the one

hand, risk management can help

keep the process consistent with the

company’s risk prole and contain

and reduce behaviors that might bedeemed excessively risky. On the

other hand, performance goals that

languish without achievement-based

rewards can quickly lose impact and

relevance. A performance-funded plan

is an effective way to make sure that

monies will be available to recognize

employee achievement. This kind of

funding mechanism can serve as an

operational self-fullling prophecy by

setting performance goals and payout

levels based on formulas that depend on

corporate success.

Keeping it simple

Many factors contribute to establishing

and maintaining a meaningful and

effective pay-for-performance program.

But program management needn’t

be overly complicated. A successfully

designed plan should be meaningful

and simple.

It won’t always be feasible or cost effective

to set specic goals for every employee,

or even every employee group. But if yourorganization understands and commu-

nicates the linkage between individual

performance and organizational perfor-

mance, you can create a sense of concrete

continuity for employees, management,

and investors alike.



12

By Ron Barlow and Don Weber

Over the last decade, employers, led by those with more than 5,000

employees, have been instituting a variety of health management

programs designed to improve employees’ (and their dependents’)

health and productivity. These Health Improvement Programs,

ranging from worksite wellness, on-site clinics, health coaching and

advocacy, disease management, and clinical management, have

vastly expanded during the last three to ve years, even though their

value is still often not fully understood.

Determining the value of employer-

sponsored Health Improvement Programs



13HR Innovation

Among large employers, 88%

responding to the 2011 PwC Health

and Well-being Touchstone Survey 5

said they offer some type of “well-

ness” program, and 86% offer disease

management programs to healthcare

benet program participants. While

respondents tended to doubt program

effectiveness, most planned to double

down on their investment: 55%

believed their wellness programs were

minimally or not effective, but 66% were planning to increase their invest-

ments in this area.

This raises a crucial question: How,

exactly, is program effectiveness being

measured? According to a 2010 joint

National Business Group on Health

and Fidelity Investments survey,6 only

one-third of employers have measur-

able goals/targets for their Health

Improvement Programs, and 59% of

employers don’t know their returnon investment (ROI). Determining

a “CFO-credible” methodology of

measuring the cost savings, health

improvement, or an overall ROI in these

programs has been complex, confusing,

and at times, simply non-existent. Many

CFOs and other business leaders ques-

tion the value of these investments and

are asking for proof of a positive ROI and

clear, understandable, and defensible

analyses that demonstrate such proof.

The problem is that most HR depart-

ments either have simply not measured

their savings or ROI, or they’re

depending on the healthcare vendors

to do so—vendors who have a vested

interest in the programs. Often, these

vendor-provided ROI demonstrations

use either overly simplied method-

ologies or extremely complex meth-

odologies, both of which produce

questionable results. In addition, most

of these demonstrations rely on a singlemeasurement or a very limited set of

measurements, which increases the risk

of producing inconclusive results.

The good news? Recent advances in

data/information availability, together

with advanced data analytic methods,

can result in a solid set of ROI measure-

ments, provided companies are willing

to invest not only in the wellness

programs, but in measurement efforts

that effectively gauge their merit.These approaches can be as simple

as measuring the reduction in nega-

tive medical events, such as hospital

admissions or emergency room visits for

those enrolled in a condition-specic

disease management program. Or, they

can be more complex, population-wide

comparisons. Choosing the right meth-

odology for your company will depend

on the Health Improvement Programs

being evaluated, data and resources

available, and the degree of precision

desired by management.

5 PwC Health and Well-being Touchstone Survey, 2011

6 Joint National Business Group on Health/Fidelity Investments Survey, 2010



14

Measurement methodologies

At their core, ROI measurements hinge

on the determination of savings. For

Health Improvement Programs, savings

can be based on medical claims cost

only or more holistically estimated to

include items such as productivity or

other business results. Simply put, if it

can be demonstrated that the effects

of a particular healthcare program

reduced the company’s costs over what

they would have been without theprogram, we have measureable savings

and the basis for a valid ROI measure-

ment. However, the real challenges lie

in knowing what the costs would have

been without the program and knowing

whether observed changes represent a

true “cause and effect” impact.

There are many methodologies in use

today to measure the effectiveness

of Health Improvement Programs,

with varying degrees of applicability.Generally, we can group them into the

following four categories:

1. Test/control group methods

(participant vs. non-participant)

One general category of measure-

ments is based on the comparison of the

change in costs (i.e., trend rate) or other

statistics between a Test Group and a

Control Group. The Test Group repre-

sents those members who participated

in the particular Health Improvement

Program under review and the Control

Group usually comes from those who

did not. As described in the followingchart, the Control Group can be adjusted

in various ways to arrive at a better

comparison. Correct determination of

the Control Group is one key to arriving

at a successful measurement under the

Test/Control Group analysis method.

Techniques for determining the Control

Group have evolved in recent years

as additional data elements and more

advanced analytic methods are deployed.

Unadjusted Aggregate

Method (simpler/less

accurate)

Compares the emergingtrend rate of those using theprogram vs. those who don’t

use the program, with thesavings being the differencein trend rates

Control Sub-Group

Method (complex/more

accurate)

Creates a sub-group fromthe control group that bestmatches the characteristics

of the test group, normalizingthe two populations, and thencompares the emerging trendrates of each group

Demographically

Adjusted Aggregate

Same as prior approach,except the groups areadjusted based on age/sex and other demographicfactors



15HR Innovation

The most basic and common method is

what we call the Unadjusted Aggregate

Method. This method uses the observed

trend in the Control Group to adjust

the Test Group results, which are then

compared to the Test Group actual results

to determine savings. Exhibit 1 demon-

strates how this conceptually works.

Essentially, this method assumes that

the change for the Control Group (those

who did not participate) is an accuratepredictor of what would have happened

to the Test Group (those who did partic-

ipate) without the program in place.

This approach requires the least

amount of information, but ignores

what could be signicant differences

between the two groups in terms of age,

gender, and other demographic factors.

Exhibit 1: Example of Unadjusted Aggregate Method

(Assume a 1/1/2010 eective date or the employee-only Health Improvement Program anda one-year beore & ater look.)

Test Group (2010 Program

Participants)

Control Group (2010 Program

Non-Participants)

Number of employees 1,000 9,000

2009 costs per employee per year $12,000 $8,000


Actual trend rate 5.0% 8.5%

Estimate of what the 2010 costswould have been, absent the program =$12,000 x 1.085

$13,020

Estimated savings: $13,020 – $12,600 =$420 per employee per year

$420

Estimated total savings: $420 x 1,000 =$420,000

$420,000

For example, if only young, single

employees choose the program, and we

see a large cost trend difference when

compared to older employees who have

families and who did not participate,

then the measured savings may not

be an accurate reection of program

effectiveness alone.

Accounting for differences in demo-

graphics between the Test and Control

Groups adds a degree of precision inthe Aggregate Method. This is accom-

plished by adjusting the change in costs

being measured based on the average

demographic indicators. Demographic

differences are usually accounted for by

using standard actuarial values to reect

differences in age, gender, family status,

and sometimes geography. Exhibit 2

shows how this conceptually works.

Even when the Control Group is

adjusted for differences in demo-

graphics, differences can be present due

to other factors, most notably health

status and selection. Two people with

exactly the same demographic prole

can have markedly different health

statuses and therefore signicantly

different cost and trend levels. Also,

voluntary participation introduces an

element of selection. Often, someone

who chooses to participate in a well-ness program might be predisposed to

making lifestyle changes based on a

desire to improve health status; this can

make it seem as if the program is more

effective than it really is.



16

Group with the Test Group for an

accurate assessment of the impact of

the Health Improvement Program.

The Control Sub-Group Method can be

expected to yield a better measurement

of the true effects of the healthcare

program than the Unadjusted Aggregate

Method or Demographically Adjusted Aggregate Method. However, the Control

Sub-Group Method is more data- and

labor-intensive. In some cases, where the

necessary data is not available or the size

of the population is not large enough, the

Control Sub-Group Method may simply

not be feasible.

Exhibit 2: Example of Demographically Adjusted Aggregate Method

(Assume a 1/1/2010 eective date or the employee-only Health Improvement Program anda one-year beore & ater look.)


Participants)

Control Group (2010 Program

Non-Participants)

Number of employees 1,000 9,000



Actual trend rate 5.0% 8.5%

Demographic factors:

2009 demographic actor2010 demographic actorDemographic impact on trend

1.2141.2624.0%

0.9761.0113.6%

Adjusted trend to apply to test group =(1.085 x 1.040 ÷ 1.036) – 1

8.9%

Estimate of what the 2010 costs wouldhave been, absent the program =$12,000 x 1.089

$13,066


$466

Estimated total savings: $466 x 1,000 =$466,000 $466,230

Accounting for such factors can be

complicated. Some of the latest tech-

niques involve using multivariate

regression analysis to determine which

factors are most closely correlated with

the cost levels or other items being

measured. Then using the results, a

new Control Group is created from the

non-participating population that best

replicates how the Test Group would

have performed if the program had

not been in place. Factors that can beconsidered in the multivariate regres-

sion analysis are:

• Age

• Gender

• Family status

• Level/salary

• Risk score

• Total healthcare costs—

medical

• Total healthcare costs—

prescription drugs

• Health risk assessment (HRA)

completion and results

• Biometric measurements

• Chronic condition category

• Co-morbidities

• Preventive services used

This new Control Group is a subset of

the initial Control Group population

that best replicates the underlying

tendencies of the Test Group, apart

from the inuences of the healthcare

program being evaluated. Some degree

of “experimentation” may be necessary

to nd the best set of factors and the

match thresholds (i.e., ve-year age

buckets instead of exact year match for

age) that will be used to create the sub-

group. See Exhibit 3 as an example.

Short of a pure randomized clinicalsampling, which is not a viable solu-

tion for most employers, no test/control

group method is scientically perfect.

But if the data is available, this multi-

variate regression method appears to

do the best job of aligning the Control



17HR Innovation

2. Population-wide analyses (also

called historical control analyses)

Population-wide analyses usually look

at trends in undesirable health utiliza-

tion statistics across the entire popula-

tion. Also referred to as a Measurement

of Negative Medical Events, this

methodology uses the population-wide

analysis of events, such as hospital

admissions or emergency room visits,

to measure the value of specic Health

Improvement Programs. It can alsoinclude measurement of changes in the

number of health risks or occurrences

of certain disease states. Care should

be taken to adjust for differences in

population levels, demographics, plan

changes, and other factors from year to

year that can impact observed trends.

Comparison to previous years’ events

for the identied groups, or normative

data, if available, can also be helpful

in determining whether the observed

trends represent a measurable reduc-

tion in cost.

The types of healthcare statistics that

can be included in the population-wide

analyses and tracked over time include:

• Medical claims

• Average risk scores

• Number of sick days

• Number of hospital admissions• Number of hospital readmissions

• Number of ER visits

• % of members having a

physical exam

• % of members getting

immunizations

• Number of new diabetic cases

• Number of new renal failure/

dialysis cases

• Number of new cardiovascular

disease cases

• Number of heart attacks

• Number of strokes

• Number of back surgeries

• Number of knee replacements

• Number of diabetes-related

complications, such as amputations

• Number of screening tests

completed, such as HbA1c, foot

exams, lipid panels, or cancer

screenings

• Wellness program participation rates

• HRA completion rates

• Number of health risks identied

through the HRA

• Biometric results, such as weight,

BMI, waist size, blood pressure,

cholesterol levels, etc.

Exhibit 3: Example of Control Sub-group Method

(Assume a 1/1/2010 eective date or the employee-only Health Improvement Program and a one-year beore & ater look.)


Participants)

Initial Control Group (2010 Program

Non-Participants)

Adjusted Control Group(Sub-group o 2010 Program

Non-Participants)

Number of employees 1,000 9,000 1,000

2009 costs per employee per year $12,000 $8,000 $11,800

2010 costs per employee per year $12,600 $8,680 $13,100

Actual trend rate 5.0% 8.5% 11.0%

Estimate of what the 2010 costswould have been, absent the program =$12,000 x 1.110

$13,322


$722

Estimated total savings: $722 x 1,000 =$722,000

$722,034



18

3. Longitudinal studies of

participants (also called

pre-post cohort analyses)

In this methodology, members working

to manage a given condition, such as

diabetes, can be analyzed by use of

certain identied statistics or medical

events (see list above) during a base

period; the impact of the program is

then determined by analyzing the same

group after program implementation

to determine if there was a reductionin the identied medical events. The

average cost of the medical events can

be calculated using the employer’s own

data or normative data.

The methodology does require the

employer and the vendor to work

together to identify the group to be

measured, the diagnostic codes to be

used, and the events to be measured.

For this measurement, care needs

to also be taken to ensure that theresults observed are not signicantly

inuenced by regression to the mean

(dened below).

4. Qualitative assessments

In addition to the quantitative analyses

described above, it may often make

sense to also include a qualitative

analysis that assesses such factors as

program features, activities, accomplish-

ments, employee feedback surveys, andself-reported results. The qualitative

analysis is important to complement

and explain the numbers and to suggest

alternative directions for the quantita-

tive analyses as well as provide insight to

possible program renements.

A balanced scorecard approach

Unfortunately, there is no “silver

bullet.” There are pros and cons for

each of the analytic methods described

above. As such, it may make sense to

include some or all of the methods

into a set of measurements that collec-

tively can provide a balanced assess-

ment of the effectiveness of the Health

Improvement Programs.

Using multiple analyses reduces the risk of having inconclusive or misleading

results. And aggregating results from

various analyses into one report or

scorecard can be helpful in under-

standing the big picture, especially

when monitoring progress over time. In

this effort, it’s important to clearly lay

out and understand the strengths and

limitations of each method used, which

may vary based on the data and the

programs in place. Corporate leader-

ship, including the Finance Departmentin particular, should be involved when

deciding the overall structure of the

measurement and ROI reporting.

Measurement considerations

These areas should be considered when

conducting an analysis of the effective-

ness of Health Improvement Programs:

1. Data sources—Depending on

the type/scope of the HealthImprovement Program and the

extent of the measurement analysis,

data sources can include medical and

prescription drug claims extracts,

health risk appraisal information,

biometric screening data, risk

scores (calculated from the other

data), eligibility data, absence and

disability claims extracts, and other

business results data.

2. Data credibility —Credibility should

be a primary consideration in any

analysis of healthcare claims data.

The more data that’s available and the

“cleaner” it is, the more credible will

be the results of the analysis and the

more precise your savings estimate.

3. Years to be included in the study —It’s

preferable to have two years of data

prior to the Health Improvement

Program implementation date as a

sound basis for measurement. This

is especially true if the number of

participants is not enough to be

considered fully credible with one

year alone. At least one year of

post-implementation data is usually

needed to draw any signicant

conclusions on the effectiveness of

the Health Improvement Program,

and multiple years are preferred for

observing lasting effects.

4. Populations to be included in the study —Generally speaking, all

employees and dependents who have

access to the Health Improvement

Program and are therefore consid-

ered eligible should be included in

the study.

5. Outliers—When analyzing claims

data, outliers (high-cost claims) may

sometimes skew results. Establishing

a claims amount threshold, say

$50,000 per year, and then exam-ining the results with and without the

claims capped at this threshold can be

benecial in determining the extent

to which outliers are affecting results.

6. Savings criteria—Reductions in

medical claims paid is commonly

used to measure savings. However,

other measures can include change

in certain health utilization stats

(e.g., hospital admissions), change



19HR Innovation

in certain health indicators (e.g.,

risk scores or BMI), reductions in

the number of persons with chronicconditions (e.g., diabetics), or changes

in productivity or other business

measures. Generally speaking,

the use of changes in utilization

is preferred over changes in costs

because Health Improvement

Programs are primarily designed to

affect healthcare utilization. Focusing

on utilization also minimizes the

effects of outliers (high-cost claims),

changes in provider reimburse-

ments, and healthcare ination. If

we think of costs as being expressed

by the simple equation Total Cost =

Utilization x Unit Cost, then focusing

our measurement analyses on the

changes in healthcare utilization can

still be translated into cost savings at

the end of the day.

7. Criteria for Health Improvement

Program participation —Health

Improvement Programs often reect

multiple levels of involvement. Forsome eligible members, participation

may go no further than receiving an

initial contact; others might have

responded with some interest, be

fully engaged, or have “graduated”

from the program. Performing

several iterations at various levels

of the participation criteria may

be warranted.

8. Diagnoses to be excluded, such as

maternity and delivery —As with

outliers, the inclusion of members who have certain diagnoses or

conditions can sometimes skew

results. These conditions, such as

maternity and delivery or accidents,

are usually unrelated to the Health

Improvement Program. Again, it may

be benecial to examine results with

and without the members who have

these identied diagnoses.

9. Regression to the mean—In statistics,

regression to the mean is the phenom-enon that if a variable is extreme on

its rst measurement, it will tend to

be closer to the average on a second

measurement. For analysis of health

outcomes, this comes into play, for

example, when looking at a closed

group of members in a particular

disease category. In the rst year,

high claims could have triggered

program participation. But a look at

these same individuals in the second

year will show that some naturally tend to have more average claims.

Without an inux of new high-cost

members in the second year, it will

appear as if improvement in costs

occurred. Care must be taken in any

analysis of Health Improvement

Programs to ensure that this phenom-

enon is not skewing results.

Analytics provide the path

to tracking value

The measurement of HealthImprovement Program value can be

a daunting task for any plan sponsor;

often, a purely scientic approach is

simply not possible because what is

being evaluated is often something that

did not occur. In a post-reform era of

employer health plans, designing cost-

effective programs will remain a top

priority, and by applying the analytic

approaches described here, employers

can begin to produce at least a reason-

able estimate of the value of various

programs. In most cases, the use of

several methods and multiple iterations

under varying sets of assumptions is

useful in understanding the range of

possible results. The use of an inde-

pendent advisor to provide a qualied

“second opinion” can often be helpful

in determining the correct method-

ology and deriving assistance with

calculations.

But these analytic techniques can

deliver more than a calculation of

savings and ROI. Thoughtful analytics

can also provide you with a framework

for the continual tracking and improve-

ment of the value of your programs and

for determining which programs should

be enhanced, altered, or discontinued.

The use of an independent advisor to provide

a qualied “second opinion” can often be

helpful in determining the correct methodology

and deriving assistance with calculations.



20

By Michael Sculnick

Deal professionals should proceed with caution when evaluating

businesses that participate in multiemployer dened benet pension

plans. Many plans face huge unfunded liabilities and have mandated

higher contributions for the next 10 to 15 years in an attempt to

improve their nancial status. In addition, multiemployer plans (MEPs)

carry greater risk than single-employer plans because the stronger

participating employers in a plan may have to pay the costs for weaker

employers who become unable to pay their required contributions.

Multiemployer pension plans in corporatetransactions: How to obtain a purchase price

adjustment for plan decits



21HR Innovation 21

About multiemployer

pension plans

MEPs are typically established by a

union with which employers in the same

industry have collective bargaining

agreements. These plans have the

advantage of enabling employees

to earn benets and become vested

while working for various companies.

The arrangements are prevalent in

the building and construction trades,

trucking, certain manufacturing sectors,grocery stores, and other service-related

industries. About 10.4 million partici-

pants are currently covered under some

1,460 plans throughout the United

States, according to the 2010 Annual

Report of the Pension Benet Guaranty

Corporation (PBGC).7

MEPs have suffered from the same

problems as single-employer plans, but

their “all for one, one for all” structure

presents its own distinctive challenges.Lower than expected rates of return

of assets in MEPs, smaller numbers of

active employees supporting the plans,

benet improvements from earlier

years, and other actuarial losses all

conspire to adversely impact their

funding ratios. About one-third of all

MEPs are now less than 65% funded.

Unfunded liabilities in MEPs are the

measure of an employer’s withdrawal

liability: the amount of the “exit”

payment that’s required when an

employer ceases to participate in the

plan due to plant closings or substantial

reductions in employment levels. If a

participating employer fails to pays its

withdrawal liability due to bankruptcy,

the other remaining employers become

responsible for paying the benets

promised to all participants, including

those of the bankrupt employer. Thus,

employers that participate in MEPs are

not in full control of their own nancial

destiny. The PBGC, a federal agency,

acts as an insurer of last resort to provide

liquidity to plans that are insolvent or

that undergo a mass termination.

The impact of pension reform

The Pension Protection Act of 2006

mandated a host of new MEP require-

ments. The funds must now monitor

their current and projected funding

status and determine whether they’re

in endangered or critical status,

commonly referred to as red or yellow

zone; a plan is considered green zone if

it’s neither endangered nor critical. If an MEP is in the yellow or red zone, it

must adopt a funding improvement or

rehabilitation plan that calls for a mix of

increased employer contributions and

reduced benet accruals.

Additional disclosure requirements

also make it easier for participating

employers (and prospective buyers) to

assess the current and future nancial

status of the plans. Recent action by the

Financial Accounting Standards Board

(FASB) will impose additional foot-

note disclosures in generally accepted

accounting principles (GAAP) nancials

that enable users to nd the information

7 Pension Beneft Guaranty Corporation 2010 Annual Report

they need to assess more accurately the

impact of MEPs on the business. Roughly

equal numbers of plans were considered

to be red, yellow, or green zone plans in

2011, although many green zone plans

achieved that status by taking advantage

of funding relief enacted by Congress the

previous year.

Implications for deal

professionalsBuyers have traditionally attempted to

secure a purchase price reduction equal

to the potential withdrawal liability,

arguing that the withdrawal liability

represents a fair measure of the under-

funded status of the plan up to the date

of sale. Sellers argue that withdrawal

liability is purely contingent on a future

event within the control of the buyer,

and thus an inappropriate basis on

which to adjust purchase price. PwC’s

experience has been that an argumentbased solely on withdrawal liability has

limited success in obtaining a purchase

price reduction from sellers, especially

if the buyer intends to continue oper-

ating under the collective bargaining

agreement and make contributions into

the plan, or the plan is relatively well

funded (green zone).

Buyers can employ two better

approaches to arguing for a purchase

price adjustment for an underfunded

MEP: one based on a debt-like (enter-

prise value) analysis and the other based

on a quality-of-earnings adjustment.



22

Enterprise value: The rst approach is

to estimate the employer’s “net” funding

liability by calculating the company’s

share of the plan’s long-term funding

decit, reduced by the deal value of theportion of the employer’s contribution

that’s used to pay off the decit.

This approach treats the company’s

participation in an MEP in the same

way that buyers typically approach

single-employer plans.

Assume, for example, that the company’s

share of the funding decit is $10 million

[(A) in the chart], measured using

long-term funding assumptions and the

market value of assets. Annual employercontributions of $1 million per year

are used 40% for new benets (service

cost) and 60% to pay off the decit [(B)

current decit funding of $0.6 million].

At a deal multiple of 7, the enterprise

value of the current decit funding is

$4.2 million, and buyers should argue

for a purchase price adjustment of

$5.8 million, rather than the full $10

million decit [(D) “net” funding

liability] on the theory that $0.6 million

is already included in the P&L above the

line and should be treated as interest on

the decit. Note that this amount is on a

pre-tax basis, so any adjustment may be

tax-effected. A similar approach is to add

back (B) from the P&L if a discounted

cash ow model is being used.

The price-adjustment approach basedon quality of earnings asserts that

current earnings are overstated to

the extent that future contributions

will signicantly increase under the

terms of a funding improvement plan.

Although there’s no consensus on how

to measure the extent to which earn-

ings are overstated, we’ve used the

practice of estimating the steady-state

level of contribution increase needed

immediately to achieve the same level

of funding improvement as called for inthe more gradual funding improvement

plan (where contributions increase each

year on a compounded basis over the

term of the funding improvement plan).

For example, assuming that a one-

time increase of 100% is needed—

not uncommon for poorly funded

plans—ongoing contributions would

be $2 million per year instead of

$1 million (as in the earlier example)

on a pro forma basis. At a sample deal

multiple of 7, a buyer will argue for

a $7 million reduction to purchase

price. Note that this gure would not

be adjusted for taxes. If the buyer were

using a discounted cash ow analysis,

future earnings should be reduced to

the extent that future employer contri-

butions are required to increase.

The quality-of-earnings approach will

usually not meet with any success when

a plan is in the green zone, absent any

authoritative measure of required

future contribution increases. Also, if

projected contribution increases are notmaterially higher than the level of ina-

tion projected for the cost of goods sold

in the valuation model, no purchase

price adjustment will be warranted.

Getting the right purchase

price adjustment for

underfunded MEPs

With a convergence of actuarial losses

adversely affecting MEP funding ratios,

buyers need to carefully assess theirapproach to seeking MEP purchase

price adjustments. They should closely

examine the funded status of MEPs and

the prospect for increased contributions

required under a funding improvement

plan. No single approach is generally

accepted for achieving a purchase price

reduction. But by looking through the

lens of a variety of approaches, the

parties can more easily reach an agree-

ment reecting the reality that poorly

funded MEPs should not be ignored in

transactions.

$ in millions A B C D

XYZ multi-employer plan

Fundingliability

Current decitfunding

Deal multiple*(B)

“Net” fundingliability (A–C)

10.0 0.6 4.2 5.8



23HR Innovation 23

How carefully are you dealing

with the MEP in your deal?



24

By Sayed Sadjady and Jessica Dunham

Companies need the right talent in the right places.

This has always been true, but it has never been more critical.

Companies must reinvent themselves to survive, compete, and

grow. Without key talent in the right positions, companies may

fumble or miss opportunities to innovate, create value, and

differentiate themselves from competitors.

Is talent in the right position for what’s ahead?Skills assessments help companies

build the foundation for better business benets



25HR Innovation

The talent landscape is

changing—quickly

Many companies are already grappling

with the global talent crisis, discov-

ering that the skills that were critical

for success just a few years ago are

not the skil ls needed today. For many

companies, there’s a mismatch between

where demand is and where critical

talent resides. Company leaders need to

make sure they’re placing talent where

they can be most effective and createthe most value. First, they need to know

what skills and competencies existing

workers have. The stakes are high, as

the market slowly recovers and the pace

of mergers and IPOs gains momentum.

A proper skills assessment can help an

organization understand its employees’

competencies and identify current and

possible future skill gaps. This can help

companies align their talent and work-

force development plans to businessobjectives and promote greater ef-

ciency, productivity, and retention.

After a period of cost cutting, hiring

freezes, and budget constraints, compa-

nies are seeing new opportunities to

grow, innovate, and compete. However,

many leaders—in the executive suite,

in the human resources function, and

at the head of business units—fear

their organizations won’t have the right

people with the right skills to execute

day-to-day operations and plan for the

future. Talent is a major concern among

CEOs, according to PwC’s 14th Annual

Global CEO Survey: 83% of CEOs say

their companies will make “some” or

“major” changes to their strategies for

managing people.8

While we applaud leaders for putting

the talent crisis at the top of their

agendas, we still believe that many

companies do not understand how to

create a sustainable talent management

strategy that will serve their companies

over the long term.

Many talent discussions center on

rewards and incentives for keeping

current talent engaged, reducing the

risk that employees will leave as the job market improves and new opportu-

nities emerge. But how do companies

address these concerns when they

don’t have an accurate understanding

of who their talent is? We believe that

companies should begin by asking two

very basic questions:

1. What skills does the company need

to advance its business objectives?

2. Does the key talent reside within

the organization—and, if so, is it

in the right positions?

Answering these critical questions

will help companies create a sustain-

able talent management framework

that improves retention, engagement,

and productivity. But the reality is that

many companies do not understand

who their key talent is, and have no

systematic methodology for analyzingskills and aligning them to business

objectives.

8 PwC 14th Annual Global CEO Survey, 2011



26

What’s at stake?

As we emerge from the recent reces-

sion, companies likely do not know

where their talent is. What’s more, key

talent may feel it is time to leave for

new opportunities. After years of salary

freezes and layoffs, many workers now

feel stretched and demoralized. We are

beginning to see signs that workers are

reaching their limits—non-farm busi-

ness sector labor productivity decreased

at a 0.7% annual rate during the secondquarter of 2011.9 And even though

unemployment remains high, voluntary

turnover is rising in the high-performer

category, increasing from 3.7% in 2009

to 4.3% in 2010.10

At the same time, these early days

of economic recovery will be critical

for companies eager to rebound from

the recession.

The market for mergers, acquisitions,

and new public offerings seems to be

recovering from the lull of previous years.

Investors expect nearly $15 billion in

initial public offerings in 2011, compared

with slightly over $5 billion in 2010.11

Merger and acquisition activity rose14.2%, from $773 billion to $833 billion,

from 2009 to 2010, following two years

of declines.12

When new opportunities arise, will

companies have the right talent in the

right place to seize them? Will they

discover too late that they haven’t

taken steps to retain workers with key

skills or to ll skills gaps through hiring

and training?

9 Bureau o Labor Statistics, Productivity and Costs, Second Quarter 2011(Non-Farm Business), September 1, 2011

10 PwC Saratoga 2011/2012 US Annual Human Capital Eectiveness Report, 2011

11 PwC Private Equity Sector Trends Analyst Briefng, March 2011

12 Ibid

Major change > 31%

No change > 17%

Some change > 52%

CEOs who anticipate changing strategies for managing talent over the next 12 months,

according to PwC 14th Annual Global CEO Survey



27HR Innovation

Real clients, real value: Setting the path for future growth

Issue: An international power company needed to assess its talent skills in

advance of a major corporate and finance function realignment.

Action: PwC helped develop competency models and performed one-on-one

assessments. We reported back to more than 750 individuals, 30 leaders,

the CFO, and the audit committee. We made clear recommendations about

functional processes in leadership and finance.

Impact: With PwC’s help, the company was able to identify the gaps in itscollective skill set and fill them through strategic hires and employee develop-

ment. The company also began taking steps toward succession planning and

identified key talent in pivotal roles for strategic rewards. PwC worked closely

with the company to develop a new training curriculum for senior manage-

ment that aligned to organizational goals and the new competency models.

Real clients, real value: Saving $50 million a year

Issue: A top health insurance company needed to redesign the talent

management model in its procurement function for greater efficiency,

compliance, and savings.

Action: PwC helped assess the client’s organizational state, design a new

model, create a roadmap for improvement, and craft a clear governance policy

with control procedures. We also helped define job descriptions. The skills

initiative played a large role in this effort, as it helped identify talent and

evaluate existing workers’ suitability for newly designed jobs. We assessed

what skills the client had and what talent it needed to add through strategic

hiring or internal development.

Impact: The organizational restructuring saved the company $50 million a

year and created new job opportunities, both for people within the organiza-

tion and outside talent. The organization now has clear metrics for measuring

its performance.

The case for skills assessments

To be resilient in the face of change,

every organization needs an accurate

inventory of the capabilities of their

talent and how those capabilities align

with their business and functional

strategies.

A skills assessment is a comprehensive

program of interviews, tests, bench-

marking analyses, and other services

designed to help a company assess theskills and capabilities—the talent—

possessed by its people.

Leading companies use skills assess-

ments to:

• Make sure the talent in pivotal roles

aligns with the organization’s leader-

ship competencies

• Identify opportunities for training

and development

• Identify talent gaps that may be

lled through hiring or internal

development

• Benchmark the organization against

its peers

• Prepare for business combinations or

organizational structures

• Validate development strategy



28

How do I know which skills

and talents are important to

my company?



29HR Innovation

How skills assessments ft into

overall talent strategy

Skills assessment is the analysis that

allows an organization to build a

stronger, smarter, more sustainable talent

strategy. When an organization knows

where its talent is, it can begin asking

(and answering) questions such as:

• What are the pivotal roles in our

organization?

• Do we have talent in those pivotalroles? If not, how do we get talent

there?

• How can we tap and develop talent

pools from key demographics,

Millennials, for our long-term

growth?

• How do we measure return on

investment from talent?

• Where are we losing key talent?

• How do we keep talent engaged?

• How do we reward talent?

• What non-nancial rewards are we

using to retain talent?

How do I know what skills and talents

are important to my company? Just as

no two companies are the same, no two

companies will require the same skills

from its talent and leadership.

Important leadership

competencies

While specic companies will need

their unique set of leadership compe-

tencies, below you will nd some

high-level competencies to consider

when performing a skills assessment of

leadership:

• Ability to set direction

• Innovative

• Strong communication skills

• Motivational and inspiring to people

• Decisive

• Trusting and good with relationships

These exercises are not easy, calling as

they do for intense organizational intro-

spection, short- and long-term strategic

outlooks, and challenging questions. An

objective perspective can be a critical

ally in making the right calls amidcomplicated changes, turbulent times,

and committed competition. Where does

your organization stand? Now is a good

time to get some answers. A solid skills

assessment is a good place to start.



30

As a leading provider of HR consulting services, PwC’s Human Resource Services’ global network of 6,000 HR practitioners

in over 150 countries brings together a broad range of professionals working in the human resource arena—retirement,

health & welfare, total compensation, HR strategy and operations, regulatory compliance, workforce planning, talent

management, and global mobility—affording our clients a tremendous breadth and depth of expertise, both locally and

globally, to effectively address the issues they face.

PwC is differentiated from its competitors by its ability to combine top-tier HR consulting expertise with the tax,

accounting, and nancial analytics expertise that have become critical aspects of HR programs.

PwC’s Human Resource Services practice can assist you in improving your performance across all aspects of the HR and

human capital spectrum through technical excellence, thought leadership, and innovation around ve core critical HR

issues: reward effectiveness and efciency; risk management, regulatory, and compliance; HR and workforce effectiveness;

transaction effectiveness; and global mobility.

To discuss how we can help you address your critical HR issues, please contact us.

Scott Olsen

Principal

US Leader, Human Resource Services

(646) [email protected]

Ed Boswell

Principal

US Leader, People and Change

(617) [email protected]

Billy Owens

Partner

Global Leader, International Assignment Services

(704) 347-1608 [email protected]

About PwC’s Human Resource Services (HRS)

HR Innovation Contributors

Jim McHale

(646) 471-1520

[email protected]

Brandon Yerre

(214) 999-1406

[email protected]

Ron Barlow

(312) 298-3056

[email protected]

Don Weber

(678) 419-1417

[email protected]

Michael Sculnick

(312) 298-4060

[email protected]

Sayed Sadjady

(646) 471-0774

[email protected]

Jessica Dunham

(617) 530-5760

[email protected]

Please visit our website at www.pwc.com/us/hrs

or scan this QR code:



www.pwc.com/us/hrs

hr innovation winter 2011

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