what matters most: managing talent and health benefits for a more effective workforce - towers...

© 2012 Towers Watson. All rights reserved.

Client Ready

John BremenShelly WolffMarch 27, 2012

Managing Talent and Health Benefits For a More Effective Workforce

© 2012 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.towerswatson.com 2

The presenting issue

Companies often struggle to find the right balance between rationalizing total rewards and maintaining employee engagement There are needed-to-play programs and benefits that have a dramatic impact on

attraction, retention and ongoing engagement

These programs require special consideration and management regardless of economic climate

Towers Watson research and client experience show that organizations must look at both sides of the equation to keep employee productivity high

Today, we’ll examine How organizations must combine fundamentals (e.g., base pay and health care

benefits) with less tangible factors such as challenging work, career growth, work environments, and…

How they use these fundamentals to encourage healthy behavior and clear communication to better align employee and employer perspectives and create a more productive, effective and engaged workforce


A New Era: ex-po-nen-tial (ek’spa nen’shal), adj. - rising or expanding at a steady and unusually rapid rateThe Pace and Intensity of Change is Relentless

Social and DemographicYounger population in developing world-shifting consumer and labor

markets; employee motivation/ attitudes about work

PoliticalIncreased regulation, health care

reform (U.S.), negative perceptions of key industries and executive pay

EconomicSlower economic growth, continued globalization, ferocious competition, Euro crisis

TechnologicalRelentless technology innovation disrupting commercial models and offering huge efficiency gains


Why Total Rewards and why now?

On the One Hand…

Global economic turbulence pushed companies to reduce programs in the name of cost management…but many are facing repercussions, raising concerns about how they will power growth

The complete “deal” has not been looked at even though the marketplace is changing at amazing speed. Many companies are facing the dichotomy of having a “2011 workforce” with “2008 programs

Pressure to manage costs remains intense

Yet…

Employers remain cautious about investing in their workforce, given volatile conditions and the unknown impact on labor markets

Health care reform in the United States adds the potential for a significant reshaping of the employee value proposition and total rewards strategy for many industry sectors

Strategic issues of competitiveness, alignment and engagement are rising to the forefront

Many employers are now challenged to update the optimal mix of total reward programs to meet evolving business and employee needs


Health care is a catalyst for rethinking Total Rewards

Continually mounting health care costs and the implication of health care reform are converging to ignite a new and different dialogue about health benefits within total rewards

CFOs must rethink health care within unit labor costs in our global economy and are considering reducing costs/volatility or exiting health benefits

HR leaders often see health care as crowding out other elements of total rewards and are increasingly receptive to more aggressive trend mitigation and workforce health improvement strategies

Wellbeing is a theme often heard with senior HR leaders. The concept ties work-life balance, work environment, financial security, health-wealth attainment and support resources to help employees in achieving their goals

With the advent of health reform, health care has become a total business issue


Health care spending is crowding out other workforce investments

2000 2009 Percentage ChangeCash 87.4% 84.1% - 3.7%Defined Benefit 3.4% 1.8% - 47.1%Defined Contribution 2.7% 3.5% +29.6%Retiree Medical 0.6% 0.2% - 66.6%Active Medical 5.9% 10.3% +74.6%

Benefits as a Percentage of Direct Compensation

Source: Towers Watson Client Data 2000 – 2009


For employees, this means a growing affordability gap — prompting anger about continuing benefit reductions

Source: 2011 Towers Watson Health Care Trend Survey (active employee data) and Bureau of Labor Statistics, seasonally adjusted data from the Current Employment Statistics Survey August to August, 2000 – 2010, and 2011 assumed to be the same as 2010.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

188%

44%

AffordabilityGap

Affordability Gap: Cumulative Active Employee Health Care Costs vs. Wage Increases

Workers’ earningsActive employee health care costs


Health care benefits will continue to be core to EVPs in the next few years, with less certainty post-2014

Importance of Health Care Benefits in the EVP Over the Next Two Years Versus 2014 and Beyond (after the expected opening of the insurance exchanges)

8% 21%

81%

55%

1%

4% 14%

16%

1%

1 — Not at all important 2 3 — Somewhat important 4 5 — Very important Not sure

2012 and 2013

2014 and after

Source: Towers Watson 2011 Talent Management and Rewards Survey.


All this leads to one inescapable question for employers right now…

Is your employment deal sustainable going

forward?


Total Rewards is a key component of a company’s Employee Value Proposition (EVP) and stems directly from business strategy


Total Rewards builds from strategic objectives and takes a portfolio approach to deliver desired results


That portfolio is expressed in terms of the unique role of each reward in the broader value proposition


The need to engage employees around health and wealth is greater than ever

Employees may not recognize the “squeeze” health benefits have put on retirement plans

Employees are risk-averse and may not understand their retirement needs, or the value of the savings opportunities they have

Sources: Employee Perspectives on Health Care, November 2010; National Business Group on Health/Towers Watson Employer Survey on Purchasing Value in Health Care, 2010; Fidelity Investments, 2010; Towers Watson research on Fortune 100 companies.

of surveyed employees say they would be willing to pay more for more predictable health care costs, up 23 points from two years ago

42%of Fortune 100 employers offer traditional DB plans today vs. 74% 10 years ago

42%of employees, on average, who are eligible for account-based health plans are enrolled in those plans

15%…the amount an average couple will need to save for health care expenses in retirement (even with Medicare benefits factored in)

$250K


Drivers of Attraction – The importance of time and health

All Employees High-Potential Employees

Rank Employers Employees Rank Employers Employees

1 Base pay Job security 1 Challenging work Job security

2 Organization’s mission, vision and values

Base pay 2 Career development opportunities

Base pay

3 Organization’s reputation as a great place to work

Health care benefits

3 Organization’s mission, vision and values

Career development opportunities

4 Career development opportunities

Length of commute 4 Base pay Promotion opportunity

5 Challenging work Vacation/PTO 5 Organization’s financial performance

Health care benefits

Employers underestimate the importance of “fundamentals” to attracting employees — even top talent

Employers underestimate the importance of “fundamentals” to attracting employees — even top talent



Drivers of Retention – The role of stress

All Employees Top Performing Employees

Rank Employers Employees Rank Employers Employees

1 Base pay Work-related stress

1 Promotion opportunity Work-related stress

2 Promotion opportunity Base pay 2 Career development opportunities

Promotion opportunity

3 Relationship w/supervisor

Promotion opportunity 3 Base pay Base pay

4 Career development opportunities

Trust/confidence in management

4 Relationship w/ supervisor

Trust/confidence in management

5 Work-related stress

Incentive pay opportunity

5 Incentive pay opportunity

Length of commute

Work-related stress is the most commonly cited reason an employee would leave an organization – even for Top Performers

Work-related stress is the most commonly cited reason an employee would leave an organization – even for Top Performers



Changing conditions and working hours


Of employers think employees have been working more hours than normal over the past three years 65%

Expect this to continue over the next three years 53%

This is especially true for senior managersand professionals


And the increase in work place stress is a health and performance risk for employers

United States

Sources of stress2009 2011

Percentage-point

change

Excessive workload and/or long hours 78% 87% 9%

Lack of work/life balance 68% 79% 11%

Inadequate staffing 51% 68% 17%

Technologies that expand availability during nonworking hours 59% 63% 4%

Unclear or conflicting job expectations 46% 60% 14%

Fears about job loss 67% 56% -11%

Fears about benefit reduction/loss (e.g., lower value or loss of health care coverage, pension freeze) 48% 47% -1%

Low pay (or low increases in pay) — 44% —

Lack of supervisor support 34% 43% 9%

Lack of technology, equipment and tools to do the job 25% 34% 9%

Source: 2011/2012 Towers Watson/NBGH Staying@Work


High Effective Companies create a culture for human performance and worker effectiveness

Simplifying the employee experience and measuring effectiveness

Focus on absence, productivity and engagement drivers

Link to a culture of health that focuses on worksite support and external resources

Six pillars of an effective H&P framework

18

Designing an Effective Health and Productivity Framework

Health safety Social/psychological Health promotion Presenteeism management

Absence management Disability management Disease management

Incentive design Quality of care Physical environment Financial management Vendor management

Design Delivery Accountability

Alignment Health and

productivity support Change management

and performance

Organizational messages Personalized health Social media and tools

EffectiveH&P

Programs

Health Programs

Workforce Effectiveness

PREVENT RETURN SUPPORT

REWARD LEAD COMMUNICATE



Workplace drivers create concrete outcomes that deliver improved human capital and business results

19

[Engagement]


Numbers that matter - the financial advantage

Companies with the most effective H&P programs have:

2.0fewer days

(per employee

per year) in total

absence

>$1,000lower

medical costs per employee

1.3percentage

points lower

medical trends

18%difference in market premium

39%higher

revenue per employee

20Source: 2011/2012 Towers Watson/NBGH Staying@Work

Additional results: Lower turnover, fewer lost days for disability and improvement in targeted lifestyle risks


And higher employee *exponential engagement is related to higher employee health outcomes

Engagement Ratio of High to Low

Health Outcomes

2X Presenteeism

2X Better Health

1.5X Exercise

2 Lower stress, anxiety, chronic health conditions

1.7X Have taken action to improve health

Source: 2010 Towers Watson Employee Benefits and Work Attitudes Survey*Exponential Engagement = Enablement (Results from local work environments that support productivity) + Energy (Results from physical, interpersonal and emotional well-being at work)


Total Rewards strategy is business driven and fact based to facilitate the path forward

PIVOTAL INSIGHTSIssues

OpportunitiesDirections for Change

Provides insight regarding workforce engagement, demographics and performance

Workforce Perspective

Provides insight regarding trends and industry process and program practices

External BenchmarkingProvides insight regarding current workforce programs and processes

Process and Program Diagnostics

Provides insight regarding future vision, business strategy, corporate culture and presenting issues

Leadership Perspective

Provides insight regarding current business plans, priorities and performance

Business Plan/ Performance

People ● Process ● Programs

Interventions ● Timing ● Measurement/ROI

Philosophy ● Guiding Principles ● Objectives

STRATEGY

GAP ANALYSIS

CHANGE PLAN


External influences on Total Rewards: compensation and benefits trends

Total Rewards Compensation

General paring back of Total Rewards levels provided by employers

Looking beyond compensation to attract and retain top talent, relying instead on other aspects of their EVPs

Increased focus on optimizing reward spend and segmenting the workforce to improve return on investment in Total Rewards

The real value of base pay has been flat for the past five years

Aggregate bonus funding levels in most regions of the world are approximately unchanged from previous year

Significant disparities in rewards provided to high performers versus average employees

Increasing attention to external competitiveness, given increasing difficulty attracting and retaining critical talent and pay actions/freezes of recession

Benefits

Movement from traditional DB to account-based DC plans Paternalistic attitude of employers — which predominated in earlier eras — has now disappeared in many sectors Governments looking for new sources of revenue have been targeting the favorable tax treatment that benefit plans

have traditionally enjoyed Controlling costs of employee health programs and addressing emerging health risks and incentives to improve

employee wellness are top priorities Comprehensive Health Care Reform legislation passed in the U.S. creates opportunity and uncertainty in how

employers will deliver health care coverage in the future

Source: 2010 Towers Watson Talent Management and Rewards Survey Report and 2010 Towers Watson Workforce Health Strategies —A Multinational Perspective.


A holistic total rewards strategy drives employee behaviors proven to ultimately influence business outcomes

Linkage Methodology

Demonstrates how employee behaviors affect customer behaviors and company financial performance

Identifies the specific employee programs and policies that drive desired employee behaviors, customer behaviors and financial performance

Allows employers to assess reward effectiveness and make better investment decisions

Linkage Model

Engagement Retention Productivity Customer Service

Employee Behavior

Customer Behavior

Customer satisfaction Customer attraction Customer retention

Financial Performance

Labor cost Operating costs Operating margin Controllable margin Revenue growth ROIC TSR

Total Rewards Components

Performance-Based Rewards

Career and Environmental Rewards

FoundationalRewards


With knowledge of employee preferences, employers can test allocation and investment level mixes to identify the optimal portfolio…

Optimum Level of Investment

Optimum Allocation of Investment

Segment-Specific Strategy

PortfolioOptimization

What matters to employees —

ConjointAnalysis

Reflects cost constraints on investment

Develops an efficient frontier of optimum allocation of investments

Determines optimum investment level on the basis of program costs and turnover cost savings

Optimum solution may be to: Improve desired

behavior/result (e.g., retention) by changing allocation and keeping current level of investment

Maintain current behavior/result at lower level of investment by changing allocation

Increase investment and desired behavior/result to economically efficient level

+ = Survey tool to capture

subjective preferences Asks employees to make

trade-offs among program features as opposed to assessing the features individually

Is a more reliable forecast of behavior than traditional survey methods


…and allocate investment to more effectively support strategic business and workforce objectives

Three Points on the CurveEach point along the curve represents the best allocation of the corresponding total investment

1) To reduce total cost, the curve identifies which programs should be reduced to reallocate investments in other areas and maintain current levels of retention

2) To maintain current investment levels, the curve identifies how to reallocate investment across programs to increase retention without raising cost

3) To increase retention dramatically and make the most of each reward dollar, the curve indicates the best ways to invest additional rewards funds –$20mm 0 $10mm

Increase in Indicated Retention from Current Level(Percentage)

–$10mm $20mm $30mm

Increase in investmentfrom current level

Decrease in investment from current level

2) Maintain current level of investment while increasing retention

1) Maintain current level of retention at lower investment

10%

20%

30%

40%

Current levels of retention and reward investment

3) Increase investment and increase retention

ILLUSTRATIVE


Top 5 takeaways for employers

1. Align with employee value proposition and total rewards strategy2. Engage leaders and employees regularly and act on feedback3. Measure results in context of business outcomes 4. Connect the dots between physical, emotional and financial

health5. Understand level and sources of workforce stress

Organizations that are looking to improve employee productivity and the return on their investments in health care should leverage the link between organizational and employee health and the link to engagement

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what matters most: managing talent and health benefits for a more effective workforce - towers...

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