1. The Talent Management and Rewards Imperative for 2012 Leading Through Uncertain TimesThe 2011/2012 Talent Management and Rewards Study, North America

2. By articulating and documenting their employee value proposition (EVP) and their total rewards strategy, and then applying the three key principles of integration, segmentation and agility to their reward and talent management model, organizations can significantly improve their human capital risk management and the return on their investment in talent. 3. The Talent Management and Rewards Imperative for 2012Leading Through Uncertain TimesThe 2011/2012 Talent Management and Rewards Study, North America Table of Contents Executive Summary and Key Findings 2 Introduction 4Principles for Sustainable Reward and TalentManagement Program Design and Delivery 11 Integration 11 Segmentation14 Agility 16 Conclusion21 About the Survey22 Key Terms and Definitions 23The 2011/2012 Talent Management and Rewards Study, North America 1 4. Executive SummaryDespite a volatile economy and high unemployment, almost 60% ofNorth American companies are having trouble attracting critical-skillemployees, an increase over 2010. In addition, organizations willcontinue to face strong pressure to manage costs in the comingyear as they experience slow growth in productivity and sales.These are some of the top findings of the 2011/2012 TowersWatson North American Talent Management and Rewards Survey,conducted in early summer 2011. Findings also showed that amajority of employers are responding to the economy by expectingemployees to work longer hours than before the recession andsharply decreasing the rate of increase of merit budgets.This report focuses on trends in reward and talent managementprograms, accompanied by our related insights to drive effectivedesign and delivery. We encourage you to consider these conceptsin the broader context of your organizations EVP and total rewardsstrategy.Note: To put employer views in context, this report sometimescompares responses to this survey with responses to an unpublished2011 survey of over 10,000 full-time employees in North America ontopics such as total rewards, communication and other work-relatedissues.Key FindingsAttraction and retention Aligning programs with objectives Almost six in 10 companies have difficulty Organizations with reward and talent managementattracting critical-skill employees. programs that support their business goals are Only 11% have trouble retaining employeesmore than twice as likely to report being high-generally, but those struggling to retain critical-skill performing companies (28% versus 12%).employees increased by five percentage points in Those with reward and talent managementthe U.S. (from 31% to 36%) and four percentage programs that support their attraction andpoints in Canada (from 35% to 39%) since 2010. retention goals are less likely to report having trouble attracting critical-skill employees (52%The changing employment deal versus 68%) or retaining critical-skill employees (29% versus 43%). Most organizations (65%) expect employees to Those whose programs support the desiredwork more hours than before the recession, and culture are more than twice as likely to reportover half (53%) expect this to continue. having a high-performance work culture (56% Organizations underestimate the effect work- versus 26%).related stress and work/life balance have onemployee retention, and do not recognize thesignificance of job security in attracting top talent. Many employees suffer from change fatigue,leading to greater retention risks.2 towerswatson.com 5. Integration of reward and talentAgilitymanagement programs Short-term incentive (STI) programs provide greater Only 36% of organizations with a competency flexibility because payouts can rise or fall dependingmodel have linked it to their reward programs.on business conditions. Funding for STI programs Most organizations have been unable to effectivelyincreased sharply last year, from 88% to 111% ofleverage their investment in HR technology. target as profits increased, and employers expect tofully fund STI programs in 2011.Segmentation Only 44% of organizations formally identifyemployees with critical skills. Fully 68% identify high potentials, but only 28%inform those employees who have been identified.The Changing Face of Total RewardsJust as a business cant stand still, neither candrive the right behaviors, deliver high perceiveda rewards model. An effective total rewardsvalue to employees and improve return onprogram aligns with business strategy and givesinvestment.shape to the broader EVP which defines the, This report focuses on trends in reward andgive and get between employer and employee. talent management programs, accompanied byA total rewards framework allows anour related insights on ways to drive effectiveorganization to identify the right combination design and delivery. We encourage you toof rewards for its workforce. Reward elementsconsider these concepts in the broader contextinclude the foundational (e.g., pay or retirement),of your organizations EVP and total rewardsperformance-based (e.g., incentives), andstrategy. For more information, please contactcareer and environmental (e.g., training and your Towers Watson consultant, or visit us atdevelopment programs). The organization must towerswatson.com.allocate its budget among them in ways that Towers Watson Total Rewards Model ee Value Propos ploy itio Em n lPe na rfs Optimize Rewdatio or Rew d ma ards arRBusiness Strategy nBusiness Results Organizational Context Employee PerformancenceFou Total -BasedRewardsHuman Capital StrategyFinancial Performance A li iv e gn DrBrand Promise Customer EngagementEnv ir o C a r e e r a n d r d sn m e n t a l R e wa The 2011/2012 Talent Management and Rewards Study, North America 3 6. Introduction Economic conditions have slightly improved in but are reluctant to make more capital expenditures North America since 2009 as the GDP has grown or increase staffing levels. In fact, many companies somewhat and unemployment rates have declined have spent the past three years paying off debt. marginally. Corporate profits rebounded in 2010 and In addition, employees have been reluctant to continued to improve through the first two quarters change jobs, which has helped organizations reduce of 2011, reflecting sales growth and the continuedunwanted turnover, and led to stronger balance savings from cost management and cost-cutting sheets and increased financial flexibility. activities. In Canada, productivity growth has stagnated at While 2011 has been a good year for corporate less than 1% per year from 2009 to 2011. In the profits, overall economic conditions in Canada andU.S., productivity has increased faster than labor the U.S. have not been robust. GDP growth rates costs, contributing to profit growth. Although hiring are below what would be expected coming out ofrates have increased somewhat, unemployment in a major recession, and they are expected to slowboth the U.S. and Canada remains relatively high for the remainder of the year. Market volatility has(Figure 1). increased sharply. Many corporations are cash-rich Figure 1. Economic conditions in North America have improved from the lows of 2008 and 2009 20112012 2007200820092010 (projected) (projected) U.S. 1.9%0.0% 2.6%2.9% 1.8%2.5%GDP growth Canada 2.7%0.4% 2.5%3.1% 2.7%2.6% U.S. 2.8%3.8% 0.4%1.6% 3.0%2.2%Inflation Canada 2.0%2.1%0.3%1.6% 2.8%2.1% U.S. 4.6%5.8%9.3%9.6% 9.0%8.7%Unemployment Canada 6.0%6.1%8.3%8.0% 7.2%*Growth in corporateU.S. 6.1% 16.4% 0.4% 29.2% 6.6%5.3%profitsCanada 10.3% 1.7% 19.3% 49.4% Source: Blue Chip Economic Indicators, August 7, 2011, and Stats Canada *As of July 20114 towerswatson.com 7. Excluding critical-skill employees, employers are notbe 1.6% to 1.8%. But it is actually closer to 2.3%,having a difficult time retaining employees. There suggesting that 600,000 to 900,000 vacancies areare currently 4.6 unemployed people for everyattributable to the greater-than-normal mismatchjob opening in the U.S. more than double the between the skills employers seek and those thattypical range of 1.5 to 2.5. Before the recession, are available in the market (Figure 3).approximately five million U.S. employees per month Perhaps as a result of high levels of unemploymentleft their jobs, but fewer than 3.5 million people per (and despite the difficulty of attracting critical-skillmonth have changed jobs over the past two years employees), organizations are making a number of a 30% drop caused by the decline in voluntary notable changes. These include lower rates of meritturnover and improved retention rates (Figure 2). pay increases, longer work hours and because ofHowever, more U.S. companies are having difficulty uncertain economic conditions less job security.attracting employees with critical skills. Companies While these factors may contribute to short-term ROIare taking longer to fill these positions, and moreimprovements, they could have negative long-termremain open. At the current U.S. unemployment rate effects on employers ability to attract and retain(approximately 9%), a typical job opening rate would employees.Figure 2. Easing retention difficulties reflect declining quit rates U.S. Canada2004 20052006 2007 2008 2009201020112010 2011 Critical-skill employees* 30% 39%43%49%47% 16%31% 36% 35% 39% Top-performing employees* 27% 30%36%40%37% 14%25% 28% 35% 31% All employees*17% 20%20%27%19%5%11% 11% 12% 11% Quit rate1.8% 2.0% 2.1%2.1%1.9%1.2% 1.3%1.3%n.a. n.a. Number of quits 2.52.93.1 3.12.71.71.81.9 n.a. n.a. per month (in millions)Source: Data on quit rates and number of quits per month come from the U.S. Bureau of Labor Services. Other data are from Towers Watsonsurvey data.*Percentages indicate the percentage of companies that are having difficulty retaining each group of workers to a moderate or great extent.Figure 3. Organizations are having more difficulty attracting critical-skill employees despite the abundanceof potential employees U.S. Canada 2004 2005 2006 2007 2008200920102011 20102011 Critical-skill employees*46%58%63%64%66%28%52% 59%61% 57% Top-performing42%48%53%60%54%25%45% 42%57% 43% employees* All employees* 18%22%29%34%28% 8%15% 13%22% 20% Number of unemployed 2.20 1.96 1.52 1.492.14 6.13 5.334.63 n.a.n.a. per job openingSource: Data on number of unemployed per job opening come from the U.S. Bureau of Labor Services. Other data are from Towers Watsonsurvey data.*Percentages indicate the percentage of companies that are having difficulty attracting each group of workers to a moderate or great extent.The 2011/2012 Talent Management and Rewards Study, North America 5 8. Our view: Successful organizations develop andand talent management programs would be tooimplement human capital strategies and EVPs great to achieve a positive ROI.that are sustainable through the ups and downsThe key is to find a balance between costsof the business cycle, allowing them to effectively(both hard-dollar costs and the cost of missedmanage risks and deliver a positive return onopportunities) and risks (including both the upsideinvestment (ROI). The key risks addressed by aof potential returns and the downside of losseshuman capital strategy and EVP are related toin the event of changing business conditions).attraction and retention, engagement, lost time dueThree key principles can guide organizations asto absenteeism or presenteeism, and decreasedthey design and implement their reward and talentinnovation due to the inability or unwillingnessmanagement programs to manage risks and improveof employees to be creative or take risks.ROI: integration, segmentation and agility (Figure 4).Organizations cannot afford to eliminate all theserisks, however, because the investment in rewardFigure 4. Creating a sustainable reward and talent management approachUse these three principlesIntegrationto improve Risk Managementand achieve Segmentation SustainabilityReturn on Investment Agility Principles for Creating a Sustainable Talent Management and Reward Model Creating a sustainable talent management and reward model Integrate programs with each other. incorporates three basic principles: Leverage the performance management process across a range of programs. Principle 1 Integration: Aligning reward and talent Integrate your competency model with other reward and management programs with each other and within the larger talent management programs. framework of the businesss strategy and objectives: Leverage technology to deliver reward and talent Align your reward and talent management programs withmanagement programs. what you stand for both in the market (your company brand) and your EVP (your employment brand). Align your reward and talent management programs with your strategic objectives.6 towerswatson.com 9. Principle 2 Segmentation: Delivering a different employeePrinciple 3 Agility: Adjusting or adapting programs toexperience to employee segments in order to meet their needs changing business or economic conditions in order to morecost effectively:effectively manage risks and improve performance: Define workforce segments, and differentiate the Use more flexible reward programs.employment deal. Monitor program effectiveness to make data-driven Meet the execution challenge (execution is key). decisions. Drive diversity (diversity is not an accident). Manage change effectively. Be on the lookout for emerging segments. Use managers to deliver your programs to meet employee needs. Communicate with employees and then let them have more self-direction. Develop leadership capability.Changes in the employee-employer Figure 5. Merit budget increases have been reduced sharply since 2007deal Median merit increases U.S.Perhaps as a result of the large pool of available NonexemptNonexempttalent, employers have sharply reduced their meritExecutiveManagementExempt salariedhourlybudget increases since 2007, according to Towers2008 3.7%3.5%3.5%3.5%3.4%Watson data. Merit increase budgets declined by 2009 3.3%2.9%2.8%2.8%2.8%nearly a full percentage point from 2008 to 20102010 3.0%2.8%2.8%2.7%2.7%and rose only modestly this year. This action has2011 3.0%3.0%3.0%2.9%2.8%helped employers remain profitable, although it2012could have a negative impact on long-term retention(projected)3.0%3.0%3.0%3.0%3.0%(Figure 5). Source: Towers Watson Data ServicesNevertheless, although organizations are underpressure to improve ROI from limited merit budgets,Median merit increases Canadamost still give significant increases to employees Administrative/who only partially meet expectations (Figure 6). Executive Management ProfessionalSupport Hourly2008 3.5%3.4% 3.3% 3.2%3.0%2009 3.2%2.9% 2.8% 2.8%2.8%2010 2.5%2.5% 2.7% 2.6%2.5%2011 3.0%3.0% 3.0% 3.0%2.9%2012(projected)3.0%3.0% 3.0% 3.0%3.0% Source: Towers Watson Data Services Figure 6. Employers differentiating pay increases based on performanceHigh- Low-What is the average merit increase as a percentage ofperformingperformingsalary for each employee group at your organization?organizations organizationsEmployees who did not meet expectations 0.0%0.0%Employees who partially met expectations1.0%0.7%Employees who met expectations2.8%2.5%Employees who exceeded expectations 4.0%3.1%Employees who far exceeded expectations 5.0%4.5% The 2011/2012 Talent Management and Rewards Study, North America 7 10. Whats more, while employees seek factors such as In addition, there are significant differences between job security, good base pay, benefits, time off and employees reasons for leaving a company and shorter commutes, companies emphasize factors what employers think cause departures (Figure 8). such as reputation, values, career developmentEmployers tend to overestimate the importance opportunities and challenging work. In short, there employees place on their relationship with their is a disconnect between what employers think will supervisor while underestimating the lack of trust attract critical-skill employees and what employees and confidence in senior management, work-related themselves say they want (Figure 7). These EVPstress, production expectations and long work mismatches will not prevent employers from fillinghours. Indeed, employees report that work-related most openings today, but they could present big stress and poor work/life balance are key reasons challenges in the future. for leaving their organizations.Figure 7. Organizations underestimate the importance of job security in attracting top talent All employees High-potential performersU.S.Canada U.S. CanadaRank Employers EmployeesEmployersEmployeesEmployers EmployeesEmployers Employees Career ChallengingChallenging1 Base pay Job securitydevelopmentJob securityJob security Job security work work opportunity OrganizationsOrganizations Career Career Career reputation as a2 mission, visionBase pay Base pay developmentBase paydevelopmentdevelopment great place toand values opportunityopportunityopportunity workOrganizations Organizations Careerreputation as aHealth care ChallengingHealth care3mission, visiondevelopment Base pay Base paygreat place to benefitswork benefits and values opportunityworkOrganizationsCareer Length ofChallenging Promotion reputation as aChallenging4 developmentBase payBase pay commuteworkopportunity great place to workopportunitywork OrganizationsChallenging Length of Health care PromotionHealth care5Vacation/PTOJob securityfinancialworkcommute benefitsopportunitybenefits performance*Rank represents the frequency the item was selected as one of the top five reasons an employee would join an organization, from a list of 23 items.Figure 8. Employers are not always aware of the reasons employees would change jobs All employeesTop performersU.S.Canada U.S. CanadaRank Employers EmployeesEmployersEmployeesEmployers EmployeesEmployers EmployeesCareer Work-relatedPromotionWork-related PromotionWork-related Work-related1 Base paydevelopment stressopportunitystress opportunitystress stressopportunity CareerPromotionRelationship Promotion PromotionPromotion Base pay Base pay developmentopportunitywith supervisoropportunity opportunityopportunity2opportunity CareerRelationship PromotionPromotion Relationship development Base pay Base pay Base paywith supervisoropportunityopportunity with supervisor3opportunityCareer Trust/ Trust/Trust/ Trust/ RelationshipdevelopmentConfidence in Base pay Confidence in Confidence in Base pay Confidence in with supervisor4 opportunitymanagement managementmanagement managementWork-related Incentive pay Work-related Incentive payIncentive payLength of Work-related Job security5 stress opportunity stress opportunityopportunitycommute stress*Rank represents the frequency the item was selected as one of the top five reasons an employee would leave an organization, from a list of 23 items.8 towerswatson.com 11. There is no question that organizations have placed additional burdens on employees since the beginning of this recession. Have organizational changes created Figure 9. More changes to key programs are on the way new risks? HavePlan toNo changesBecause of recent organizational changes,alreadychangemade Almost two-thirds of all organizations have madehave you already redesigned or do you made over nextor significant changes in the HR area as a result ofanticipate redesigning any of the following? change 24 monthsanticipated broader organizational changes, and many expectOrganizational structure 51% 17% 32% to continue to do so (Figure 9).Talent management strategy 31% 35% 34% There is no question that organizations have Reward (compensation) strategy 23% 39% 39% placed additional burdens on employees since theJob leveling or job evaluation process 19% 32% 49% beginning of this recession. Almost two-thirds ofCompetencies 22% 33% 45% organizations report that employees have been working more hours over the past three years, andMade some changes to at least one of these 66% 65% 70% over half expect this to continue over the next three (Figure 10); many also report employees have been taking less time off. Figure 10. The employment deal has shifted to require more hours from senior managers and professionals But employee attitudes on these issues vary significantly by job level, with people in senior or Employees will Employees haveEmployees havebe expectedbeen using less mid-level managerial roles most likely to agree been workingto work moreof their vacation that expectations have shifted toward acceptance more hours thanhours thanor personal time of longer working hours and fewer vacation days, normal over thenormal over the off over the past and almost half reporting taking less time off.past three years next three years three years Additionally, a plurality of other professionals say Employers 65% 53% 31% they have been expected to work more hours Senior and and will continue to do so. These numbers aremiddle57% 47% 44% significantly lower for supervisors, team leaders or managers people in administrative, clerical or manual labor First-line positions. supervisorsand teamleaders 35% 32% 27%Employees Professionalindividualcontributors46% 40% 30%Administrative/Clerical/Manual labor37% 33% 24%Exempt50% 43% 33%Nonexempt 35% 31% 25% Note: Values are the percentage of employers or employees who agreed or strongly agreed with these statements. The 2011/2012 Talent Management and Rewards Study, North America 9 12. U.S. employers are more concerned today thanA majority of companies in the U.S. and 48% in Canada are concerned about the long-term effect they were in 2010 about the effect of organiza- that changes they instituted to remain profitable are having on employee work/life balance (Figure tional changes on employees productivity and 11). U.S. employers are more concerned today than willingness to take risks. they were in 2010 about the effect of organizational changes on employees productivity and willingness to take risks. However, respondents have less Figure 11. Organizations are concerned over the long-term risks of the changesconcern about the negative impact of change on they have madeengagement, which could cause problems now by increasing absenteeism and later by increasingPercentage reporting adverse impact ofU.S.Canada retention risk.changes at their organization on: 2010 201120102011Employee productivity 34%39%30% 29% As a result of organizational changes, employees may begin to suffer from change fatigue. Forty-Quality20%15%23%*23%* one percent of employees who report that theirCustomer service 21%13%coworkers are suffering from change fatigue areEmployee willingness to take risks28%37%18% 18%themselves retention risks, either because theyOverall employee engagement 58%43%56% 46%intend to leave, or because they feel they have toEmployees ability to have a healthy balance stay. On the other hand, 73% of employees who62%56%50% 48%between work and their personal livessay their coworkers are not suffering from changeEmployees desire to remain with the fatigue are staying with their organizations by choice n.a.46%n.a.27%organization when the labor market improves(Figure 12). *In 2010, the item combined quality and customer service. Over the past few years, there have been 10 million Values represent the percentage of organizations indicating the changes have had an adverse impact in that area.fewer people per year leaving their organizations voluntarily. But the voluntary turnover rate is likely to increase by at least 45% when the economy returns Figure 12. Three out of 10 employees are staying with their organizationto normal. Only 6% of employees intend to leave because they have totheir organization over the next year, while anotherEmployees at the organization are Stay because 29% are soft stays people who could depart ifsuffering from change fatigueStay by choice they have toIntend to leavea comparable job becomes available elsewhere.Employees who agree59% 35% 6%Our view: Companies that address their concernsEmployees who disagree 73% 21% 6%over the long-term risks that recent changes mayAll employees65% 29% 6%have created will position themselves to compete effectively by attracting and retaining key talent as the economy begins to improve. By articulating their total rewards strategy and EVP, and applying the guiding principles of integration, segmentation and agility to their reward and talent management model, organizations can significantly improve the return on their human capital investments and enhance business performance. 10 towerswatson.com 13. Principles for Sustainable Reward and TalentManagement Program Design and DeliveryTo better manage human capital risks and improve 18% less likely to report having trouble retainingROI in reward and talent management programs, top-performing employeesorganizations should focus on three reward and 18% more likely to report performing significantlytalent management principles: better than their peers1. Integration. Aligning reward and talentIntegrated programs can also help reduce the overall management programs with each other andspend on reward and talent management, while within the larger framework of the businesssdelivering a compelling employee experience. strategy and objectivesAlign reward and talent management2. Segmentation. Delivering a different experienceprograms with your strategic objectives to employee segments to meet their needs costOur view: Organizations that align their reward and effectivelytalent management programs with their strategic3. Agility. Adapting programs to changingobjectives achieve better results. Companies with business or economic conditions in order toreward and talent management that support their more effectively manage risks and improvebusiness goals are more than twice as likely to performancereport being high-performing companies (28% versus12%). In addition, those that align these programsIntegrationwith their attraction and retention goals are lessIn our 2008 study, we found that organizations with likely to report having trouble attracting critical-skillintegrated reward and talent management strategiesemployees (52% versus 68%) or retaining critical-were: skill employees (29% versus 43%). Finally, thosecompanies that align talent and reward programs 20% less likely to report having trouble attractingwith their desired culture are more than twice ascritical-skill employeeslikely to report having a high-performance work 25% less likely to report having trouble attractingculture (56% versus 26%). Integrating these keytop-performing employeeselements can also increase organizational efficiency 33% less likely to report having trouble retainingand the effectiveness of other programs, includingcritical-skill employeesperformance management.The 2011/2012 Talent Management and Rewards Study, North America 11 14. IntegrationLeverage performance management torecommendations for alignment with the companysfacilitate integrationpay-for-performance philosophy. Fewer than halfMost organizations have a formal performanceof respondents say they complete a calibrationmanagement process. About half of respondents process. Most do not include assessments ofthink their managers are somewhat effective atpotential or review recommended pay increases, andusing the performance management process to only one-quarter review recommended bonuses.conduct career development discussions and setIntegrate the competency model with otherdevelopment plans, providing direction and boostingreward and talent management programsengagement (Figure 13).Aligning performance Most organizations (70%) have implemented aOur view: Aligning performance management withcompetency model for all employees (Figure 14). management with otherother reward and talent management programs Along with an organization-wide job-leveling system reward and talent manage-requires calibration across departments and and career framework, competency models help ment programs requires functions. This includes reviewing performanceemployees understand expectations and rewards, calibration across depart- ratings for consistency against the companys and serve as a solid foundation for integratedrating definitions, and auditing base pay and bonus reward and talent management. ments and functions.Figure 13. Most organizations performance management processes do not effectively incorporate careerdevelopment or competencies High- Average- Low-performingperforming performing All firms firms firmsfirms My organizations performance management process is effective 53%56% 53% 43% at incorporating career development My organizations performance management process is effective 63%75% 59% 60% at incorporating competencies Managers at my organization are effective at conducting career 54%60% 53% 39% development as part of the performance management process Managers at my organization are effective at utilizing performance results to determine development plans57%67% 54% 55%Note: Values indicate the percentage of respondents that said their organization was at least somewhat effective in their action.Figure 14. Most organizations have some form of competency model(s) they use for employees Percentage of Our organization has: companies agreeing Implemented an enterprise-level competency model that applies to all employees70% Implemented function-specific competency models that apply to the employees in a function 51% (e.g., finance or engineering) Implemented technical competency models that apply to a specific set of employees in a 41% job or role Aligned our development plans with the knowledge, skills and abilities outlined in our competency model59%Note: Values indicate the percentage of companies that agree or strongly agree with this statement. 12 towerswatson.com 15. IntegrationA significant majority of organizations with aFigure 15. Most organizations have linked their competencies to their talentcompetency model have integrated it into theirmanagement programsperformance management process. By and Our competencies are tied to: Percentage of companies agreeinglarge, these organizations have also tied their Performance management89%competencies to career development plans,succession planning, selection and assessments,Career development70%but only 36% tie it to their pay decisions (Figure 15).Succession management 68% Assessment (e.g., 360-degree feedback)68%Aligning reward and talent managementprograms with company and employee brandsSelection 65%Fewer than four in 10 respondents think theirReward programs 36%organization does a good job communicatingNote: Values indicate the percentage of companies that agree or strongly agree with this statement.the employment deal to employees (Figure 16).Delivering on the employment deal can have apowerful impact on both employee engagement and Figure 16. High-performing organizations offer a good employment deal andcompany performance, and aligning these EVP-deliver on itrelated programs with the brand communicates an HighAverage Lowintegrated and consistent message to employees.All firmsperformersperformersperformersHowever, this strategy requires a strong partnership Our organization does a good jobbetween HR and marketing.communicating the employment 38%40% 38% 32% deal to employeesLeveraging technology to deliver rewardand talent managementOur organizations employment deal is clearly aligned with what53%56% 54% 53%Technology helps organizations align and deliver we stand for in the marketplacetheir reward and talent management programs more Our organization has doneefficiently and cost effectively. While organizationsa good job delivering on thehave increased investments over the past few years44%51% 46% 32% employment deal over the pastto improve their program delivery, most respondentsthree yearssay they have not been able to use these investmentsNote: Values indicate the percentage of companies that agree or strongly agree with this statement.to improve their reward programs (Figure 17). Theyfeel they are somewhat better at using technology toFigure 17. Organizations have not been able to effectively leverage theirdeliver talent management programs such as learninginvestments in HR technology in delivering their talent management andand development opportunities.reward programs Our organization effectively leverages technology Percentage of companies to deliver our: agreeing Base pay programs 40% STI programs39% LTI programs30% Sales compensation programs 27% Recognition programs29% Performance management programs 41% Leadership development41% Competency models 44% Career management 17% Learning and development47%Note: Values indicate the percentage of companies that agree or strongly agree with this statement. The 2011/2012 Talent Management and Rewards Study, North America 13 16. Segmentation Segmentation Figure 18. Less than half of employers are identifyingcritical-skill employees or informing high potentials Defining segments and differentiating the employment deal Percentageof companies Our view: Employee segmentation reducesThe company: agreeing ineffective spending on human capital programs. Formally identifies employees with By understanding which employees have the most44% critical skills impact on the bottom line and customizing talent Formally identifies high-potential management and reward programs to retain and68% employees engage them, employers can maximize ROI. Formally identifies top-performing 71% The first step is to identify the most strategicallyemployees important segments of the employee population Informs employees who have been 28% those that have the greatest impact on business identified as high-potential employees performance. Surprisingly, only 44% of respondents Note: Values indicate the percentage of companies that agree orstrongly agree with this statement. identify critical-skill employees. However, most companies formally identify top performers, and 68% formally identify high potentials. However, only After identifying employees in key segments, and 28% actually inform employees identified as high informing them when appropriate, organizations potentials (Figure 18). This is a lost opportunity toneed to recognize the contribution they make. enhance engagement and reduce retention risks. Very few companies offer customized employmentdeals for pivotal employee segments. They shouldFigure 19. Many organizations do not differentiate their programs for criticalconsider investing more resources to differentiateemployee segments their offerings to them.For each HR program listed below, does your organization invest more financial or other About two-thirds of organizations are investingresources in the following employee groups than in other groups?more in leadership development and successionNotCritical-skill High Topmanagement for high-potential employees, but Programdifferentiated employeespotentials performers only slightly more than half are dedicating extra Base pay34% 45%39% 57% resources to coaching, mentoring, career pathing STIs47% 26%27% 49% and planning. About half allocate more resources LTIs53% 25%29% 37% to base pay (57%) or STIs (49%) for top-performingemployees, and only 37% dedicate additional Coaching or mentoring 42% 15%55% 29%resources to long-term incentives (LTIs) for top- Recognition programs74%9%11% 24%performing employees (Figure 19). For critical- Recruiting and selection50% 46%23% 17% skill employees, the focus is on recruiting and Career pathing and planning 47% 19%51% 32% selection as well as extra base pay, but only one Employee learning andin four organizations dedicates extra resources to 58% 21%37% 27% developmentsuccession management for this segment. Leadership development31% 16%65% 40% Succession management 30% 26%65% 44%14 towerswatson.com 17. SegmentationThe challenge: Execution is key Look out for emerging segmentsMany companies differentiate rewards based on Many older employees are delaying retirement,individual performance to increase the return onnecessitating the development of approaches tocompensation resources and retain key employees deal with workers who are past their expected(Figure 20). Nonetheless, payouts are more skewed retirement dates. Other groups may consist of high-to lower-performing groups than intended. Payouts potential employees whose career advancement isare targeted so top performers will receive 120%blocked due to a lack of opportunities, as well asmore than employees who only partially meet younger employees from the graduating classes ofexpectations, but they typically only get about 70% 2009 or 2010 who have been passed over in themore. job market and are unemployed or underemployed.Some of these groups represent a relatively recentDifferentiating pay for performance is not new, butemployee segment and a different managerialemployees frequently cite lack of incentive paychallenge. Organizations can gain a competitiveopportunities as a reason to leave. Organizationsadvantage by addressing this issue.segment the employee population by performancelevel, and provide processes and tools to facilitatedifferentiation, but the concept is not socializedFigure 20. Organizations are not differentiating as much on STI payoutsthroughout the organization to overcome the as targeteddisinclination of many managers to treat differentTarget fundingActual fundingemployee groups differently. Employees recognizetheir organizations failure to execute theseEmployees who did not meet expectations 0%0%programs well, with fewer than half reporting a clearEmployees who partially met expectations60%74%link between job performance and individual pay. Employees who met expectations 100%100% Employees who exceeded expectations112%112%Drive diversity It doesnt happen on its ownFewer than half of respondents use specificEmployees who far exceeded expectations133%128% (e.g., top 10%)programs to drive diversity in their organizations.The most common programs are employee learning Differentiation*2.2%1.7%and development, and a targeted acquisition *The ratio of payouts to employees who far exceed expectations relative to those who partially metstrategy, but they have utilization rates below 50%expectations(Figure 21). Organizations need to employ targetedtalent acquisition strategies, as well as address Figure 21. Organizations use a combination of programs to support theirshortcomings in development and retention through diversity goalsprograms that help employees grow and move Percentage of companies that usethrough the organization.program to support diversity goals Coaching or mentoring 44% Career pathing and planning 32% Network of employee resource groups 44% Employee learning and development 48% Leadership development44% Succession management 40% Targeted talent acquisition strategy46% Engagement surveys40% Action planning (developing targeted actions based on findings of engagement surveys or43% other employee feedback) The 2011/2012 Talent Management and Rewards Study, North America15 18. Agilityflexible benefits, comp time, alternative work schedules or remote work arrangements. VariableAgility means having the flexibility to make changes pay programs promote agility by altering fundingquickly, being the first to seize opportunities andlevels to reflect business performance and settingbeing resilient in the face of difficulties. There are targets as a percentage of net income (Figure 22).several ways that organizations can use rewardand talent management programs to supportSTI programs can enhance organizational agility byorganizational agility.adjusting performance targets up or down based on past and expected performance. In 2006 and 2007,Flexible reward programs roughly half of organizations increased their financialOur view: The simplest way to create agile rewardperformance targets, while in 2009, only one out ofand talent management programs is to build insix raised their targets (Figure 23).Figure 22. Organizational funding for short-term incentives varies dramatically with performance 2005 20062007 2008 200920102011 (projected)Average funding (as a percent of target) 91%102% 78%82% 88% 111%101%Figure 23. Organizations adjust organizational performance targets and individual performanceexpectations frequently to reflect changing conditionsHow have you adjusted these features ofyour STI program over the past 12 months? 2006 2007 2008 200920102011Organization financial performance targetsDecreased4% 3%11% 19%16% 4%Stayed the same 39%51%51% 64%55%56%Increased 56%46%39% 17%29%40%Individual performance expectationsDecreased2% 0% 1%3% 3% 1%Stayed the same 69%68%69% 78%74%77%Increased 28%32%30% 19%23%22%16 towerswatson.com 19. AgilityMonitor program effectiveness to make data-Communication is a key lever of effective changedriven decisions management. Other levers include:Our view: Organizations can also increase their agility Employee learning through changeby tracking the effectiveness of programs and makingRecognition programs Project managementadjustments. Most organizations monitor leadership Measuring the effectiveness of change can have a very highdevelopment programs, base pay and STI because Involving employees in change ROI. Because they arethey generate significant hard-dollar costs, but only Leading changeone in four monitors career management programs. timely, they have a large Supporting changeRecognition programs can have a very high ROI. impact on behavior andBecause they are timely, they have a large impactOur view: Senior leaders and managers play a engagement.on behavior and engagement. Recognition programs key role in communicating and managing change.are often underutilized, and fewer than half of allEarly in the change management process, seniororganizations monitor their effectiveness (Figure 24). leadership sponsorship and direction are essential. Over time, organizations rely more on managers andManage change supervisors to drive change. After implementation,Both effective communication and change employees should take on more ownership of themanagement are associated with significant process through the improving phase.increases in organizational performance. Goodchange management comes about through a four-stage process: Planning Building Implementing ImprovingFigure 24. Organizations are monitoring leadership development, base pay and STI programs but notcareer management Our organization monitors the implementation of programs to make sure they are consistent with program objectives and guidelines Percentage of companies agreeing Base pay72% STIs75% LTIs54% Sales force compensation64% Recognition 46% Leadership development77% Competencies54% Career management 26% Learning and development49%Note: Values indicate the percentage of companies that agree or strongly agree with this statement.The 2011/2012 Talent Management and Rewards Study, North America 17 20. AgilityUse managers to deliver programs to meet Communicate with employees, and allow moreemployee needs self-directionManagers are the front line in delivering most Towers Watson research has shown that employeesprograms or changes, but have limited flexibilityhave more favorable views of programs theyto adjust programs and apply policies to create aunderstand. Improving communication can have acompelling employee experience. Not surprisingly,greater effect on program utilization and satisfactionrespondents have very mixed views on how wellthan making programs richer and at a much lowerprograms are executed. Most (59%) believe theircost.managers are effective in executing sales force Nevertheless, organizations do not believecompensation programs, but only 43% think they employees understand most programs very well,are effective in managing base pay programs, and and the percentage of employees who say their49% for managing STI programs. Only 14% believe organization does a good job explaining their rewardmanagers execute career management programs and talent management programs tends to be low.well (Figure 25). But while 22% of companies have a negative view ofFigure 25. Organizations do not think managers employees understanding of career management,are executing programs wellroughly two-thirds of employees think their managers are effective at explaining the skills they need to Percentage succeed, and over 40% think their organization does Our managers execute ourof companies programs well agreeinga good job regarding career management (Figure 26). Base pay43% Our research shows that employees are taking STIs49% advantage of self-directed learning opportunities, or LTIs32% external job search tools or networks, to manage their career development and advancement. This Sales force compensation59% approach can greatly facilitate agility as employees Recognition 35% become willing to take on new roles and are better Competencies40% able to adjust more quickly. Career management 14%Note: Values indicate the percentage of companies that agree orstrongly agree with this statement.Figure 26. Employees and employers agree on understanding and communication of most programs Our employees understand our programsCompanies U.S. employees Canada employees Base pay 44% 49% 50% STIs 58% 45% 40% LTIs 31% 36% 34% Recognition46% 41% 38% Competencies 46% 65% 61% Career management22% 41% 39%Note: Values indicate the percentage of companies that agree or strongly agree with this statement.18 towerswatson.com 21. AgilityMost organizations (54%) want a balanced careers and those who believe it expects a mix ofapproach where employees and managers have employee-manager ownership. In fact, roughly onejoint responsibility for career development. Althoughin five employees expect their managers to guideonly 2% of organizations want managers to guidetheir careers, despite the solid claim that an agileemployees careers, employees are relatively evenlyorganization requires flexible employees who takedivided between those who think their organization responsibility for their own advancement (Figure 27).expects employees to take ownership of their ownFigure 27. Most employees understand their responsibility for managing their own career At our organization, we want: Companies U.S. employeesCanada employees Employees to take ownership of their own careers 45% 41%37% Employees and managers to have joint ownership 54% 38%44% Managers to guide employees careers 2%21%19%Note: Values in each column may not add up to 100% due to rounding. The 2011/2012 Talent Management and Rewards Study, North America 19 22. AgilityFigure 28. Organizations utilize a variety of learning approaches to build Develop leadership capabilityleadership capabilityDeveloping effective leaders means giving them a Which of the following activities or programs are included in thePercentage ofbroad understanding of the business and investing leadership development programs at your organization? companies in their capabilities (Figure 28). This includes Assessment using formal instruments 69% formal education programs and simulations as well as project assignments and action learning, or 360-degree evaluation 72% rotational assignments that help develop a variety Simulations 31% of skills and deliver different experiences. Coaching Rotational assignments31% and mentoring are also very effective. Project assignments 62% Successful organizations develop programs to Action learning 48% prepare leaders for new roles before they need to University executive education46% fill them. When companies identify high potentials Leaders teaching leaders47% and link talent programs to the succession Internal coaching 66% management process, they develop leaders who can External coaching 55% handle critical new assignments effectively or make Mentoring 51% organizational changes quickly (Figure 29).Figure 29. Implement effective succession planning processes to continuallydevelop new leaders Strongly Neither Stronglydisagree/agree noragree/ Our organization has: disagreedisagreeagree Linked our succession management process with16%35% 49% other talent programs Implemented an effective process to identify high-23%27% 49% potential employees Created talent pools for key organizational roles as part of our succession planning process 30%22% 48%20 towerswatson.com 23. ConclusionThree years after the financial crisis of 2008, Segmentationorganizations are more profitable and performing Segment. Identify and communicate withbetter. Nevertheless, companies are remaining employees who have critical skills or highcautious, and budgets are tight as companies face potential. Make special opportunities availablean uncertain future and the possibility of anotherto them, and emphasize the total rewardsrecession. Meanwhile, they expect employees tocomponents that are important to them. Jobwork longer hours, and they continue to squeeze security is a key driver of attraction for high-merit increases. While high unemployment haspotential employees, and a lack of security isresulted in a big job pool, employers say they areoften a source of work-related stress. Whilehaving a difficult time attracting top talent.companies cannot offer assurances aroundjob security, they can seek to maintain stableIn this environment, companies need to develop abusiness results that will signal the potential forsustainable reward and talent management model.job growth and career development.Although budgets will remain tight as organizations Differentiate. Increase differentiation in meritcontinue to emphasize cost management, employersincreases and bonus payouts by reallocatingcan still reduce human capital risks and increasefunds from below-average and average performersthe ROI on their reward and talent managementto top performers.programs. Some top strategies:AgilityIntegration Energize. Reduce work-related stress; provide Align. Review the alignment of your reward andthe resources employees need to be effective,talent management programs with your businessand allow opportunities to provide input.objectives, desired culture, EVP total rewards,Consider using alternative work schedules andstrategy, and attraction and retention goals.opportunities to work remotely, and encourage Integrate. Promote a high-performance cultureemployees to use their vacation days to reduceby incorporating bonus and pay reviews into thepresenteeism.performance management calibration process, Adapt. Lead employees through all four phases ofand competencies into reward programs.the change management process. Stress effective Leverage. Use technology to deliver programscommunication by senior leaders, and reinforcemore efficiently, and provide more and bettermessages through managers and supervisors.information to managers and employees withgreater speed.The 2011/2012 Talent Management and Rewards Study, North America 21 24. About the SurveyThe 2011 North American Talent Management and Respondents represent a variety of industries.Rewards Study is based on a survey of organizations Financial services firms, including insurance,conducted in May and June 2011. The survey wasaccount for 17% of all responses (Figure 31). Othercompleted by HR professionals with responsibilities industries with a significant number of responsesencompassing a broad array of organizationalinclude manufacturing, high tech, retail, and energyprograms across 316 organizations, 218 in the U.S.and utilities.and 98 in Canada. Over half of survey respondentsTo be included in the survey, U.S. companies had to(51%) represent organizations that are domestic,have at least 1,000 employees, and Canadian firmswith the remainder from international (22%) orhad to have at least 250. Most survey respondentsglobal (27%) companies.were from significantly larger companies, and 38%had 10,000 employees or more (Figure 32).Figure 30. Survey respondents have responsibility Figure 31. Industry breakdown of survey respondentsfor a broad array of HR programs Sector PercentageWhich areas are you responsibleFinancial Services17%for within your organization?(Please check all that apply.) PercentageManufacturing 16% Wholesale and Retail15%Base pay programs 81% IT and Telecom14%STI programs75% Energy and Utilities14%LTI programs53% General Services9%Sales force compensation programs 39% Health Care 9%Recognition programs54% Public Sector and Education 6%Leadership development programs 36%Competency models and associated34% Figure 32. Survey respondents by sizeapplicationsCareer management programs34%Number of employeesPercentageSuccession planning programs39% Greater than 10,000 38%Coaching or mentoring programs32% 5,000 10,00022%Learning or development programs32% 2,000 4,999 25%Other (please specify)20% Less than 2,000 15%22 towerswatson.com 25. Key Terms and DefinitionsUsed in the ReportHigh-performing organizations. This report Presenteeism. Presenteeism occurs when andifferentiates financially high- and low-performingemployee is physically at work but not fullycompanies based on self-reported responses toproductive because of physical or mental healththe question, How well did your total organizationconditions or stress related to job, personal orperform financially compared with other firms in financial matters.your industry during the past year? Respondents Change fatigue. Change fatigue can be experiencedwere given five choices, ranging from substantially by organizations that undergo too much changebelow peer group to substantially above peer at once. It is characterized by a drop in employeegroup. Companies that identified themselves engagement or lack of participation by keyas substantially above peer group are high- stakeholders.performing, and those that said their performancewas slightly above peer group or about theEmployee value proposition. The term employeesame as peer group are average-performing. Thevalue proposition, or EVP refers to the collective,remainder was characterized as low performing. array of programs that an organization offers in exchange for employment. The EVP includes pay,Critical-skill employees. Critical-skill employees are benefits (perquisites), work environment andthose who possess skills the organization needs career opportunities. It is also referred to as themost to compete. employment deal.Top-performing employees. Top-performing employeesare those whose performance was rated farexceeds expectations (i.e., in the top 10%) by theirsupervisors in their most recent performance review.The 2011/2012 Talent Management and Rewards Study, North America 23 26. About WorldatWorkThe Total Rewards AssociationWorldatWork (www.worldatwork.org) is a global human resourcesassociation focused on compensation, benefits, work-life andintegrated total rewards to attract, motivate and retain a talentedworkforce. Founded in 1955, WorldatWork provides a networkof nearly 30,000 members in more than 100 countries withtraining, certification, research, conferences and community.It has offices in Scottsdale, Arizona and Washington, D.C. 27. About Towers WatsonTowers Watson is a leading global professional servicescompany that helps organizations improve performance througheffective people, risk and financial management. With 14,000associates around the world, we offer solutions in the areasof employee benefits, talent management, rewards, and risk andcapital management.Copyright 2011 Towers Watson. All rights reserved.TW-NA-2011-19957towerswatson.com