Reinventing Total Rewards and the EVP - HRA-NCA

Report
Total Reward Strategies for the 21st Century
A Quantitative Approach to Total Rewards
Lubca Paclikova
Richard Gendron
October 15, 2013
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Today’s speakers
Lubomira (Lubca) Paclikova is a Senior Executive Compensation Consultant in Towers
Watson's Washington, D.C. region. Lubca has 15 years of consulting experience, working
with senior management and Board members to link human resources programs with the
organizations’ business strategies. She focuses primarily on executive compensation
analysis and design as well as global broad-based compensation. Lubca has worked with
clients from different industries throughout Asia, Europe and the U.S., and spent a portion
of her career working in Towers Watson’s European offices.
Richard Gendron is Senior Consultant in Towers Watson’s Washington, D.C. region, and
has advised both domestic and foreign-owned public corporations, privately-held
corporations and nonprofit healthcare and higher education organizations. Rich’s recent
focus has been on Total Rewards and Employee Value Proposition supported by a strong
background in the management, design, valuation, compliance and administration of
retirement and welfare benefit plans. Rich has also consulted on strategic workforce
effectiveness issues such as rewards optimization, workforce planning, financial
effectiveness of programs, management of workforce risk and employee communication
issues.
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Today’s discussion

Why Total Rewards…Now?

Insights from our research

Getting started

Total Rewards Optimization

Case studies

Questions
2
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The classic employer-employee deal is becoming extinct
It’s unaffordable. Rising costs, especially for health care, concerns
about existing or new legacy obligations, slow growth and continuing
economic uncertainty require employers to rethink both the size and
structure of their reward investments
It’s outmoded. Long-established workplace practices are increasingly
inadequate to meet the needs and support the performance of a
technologically mobile and digitally savvy workforce
It’s ineffective — and inefficient. A rewards strategy that’s not
aligned with the way a company creates value for its customers — or
optimized to channel investment where it will have the most impact —
will struggle to deliver desired performance or meet key financial and
talent objectives
3
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Companies face serious challenges when it comes to
attraction, retention and engagement of talent. Our research
reveals what it takes to get it right
5X
more likely to report their
employees are highly
engaged
Companies that have adopted an
increasingly integrated approach to
Total Rewards strategy, design and
delivery decisions — supported by
an overarching Employee Value
Proposition — are:
2X
more likely to report achieving
financial performance
significantly above their peers
*Source: Towers Watson 2012 Talent Management and Rewards Study – Global.
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What is an effective Employee Value Proposition?
Benchmarks of an effective EVP include

Developing a formal EVP

Effectively communicating the EVP to
employees

Aligning the EVP with what the
organization stands for in the
marketplace

Delivering on EVP promises

Differentiating the company from
competitors in the labor market

Designing customized EVPs for critical
employee segments
Total Rewards elements include

Articulating a Total Rewards strategy
aligned with the business and HR
strategy

Using business strategy and objectives to
inform talent management and reward
programs

Creating specific objectives for each
talent management and reward program
to align them with the EVP

Employing organizational analytics (i.e.,
business performance and analytics,
workforce demographics, workforce
performance data) to test the
effectiveness of Total Rewards programs
5
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The evolution of an effective EVP and Total Rewards strategy
Segmenting and
Differentiating
Communicating and
Delivering
Integrated and Strategic
Tactical
 Have not progressed in
formally articulating an
EVP or in developing a
total rewards strategy
 Have formally
articulated an EVP and
adopted a Total
Rewards approach
 Greater focus on an
integrated strategy for
managing rewards and
talent management
 Have stated objectives
for each reward and
talent management
program
 Have effectively
communicated their
EVP to employees and
delivered on their EVP
promises
 Have differentiated their
EVP from other
organizations with
whom they compete for
talent
 Have customized EVPs
for critical workforce
segments
 More likely to employ
organizational analytics
to test the effectiveness
of total rewards
programs
6
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A Total Rewards framework provides the roadmap to update
rewards strategy and align it with business needs
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The specific elements will vary based on a company’s
business, economics, culture and demographics
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Mismatches remain between what matters to employees… and
what employers think matters…
High-Potential Employees
All Employees
Employer Responses
Employer Responses
Employee Responses
Employee Responses
1 Challenging work
1 Base salary
1 Challenging work
1 Career advancement
opportunities
2 Base salary
2 Job security
2 Ability to impact
performance
2 Base salary
3 Career advancement
opportunities
3 Career advancement
opportunities
3 Career advancement
opportunities
3 Job security
4 Health/wellness benefits
4 Organization reputation
4 Base salary
4 Challenging work
5 Organization values
5 Convenient work location
5 Organization values
5 Organization reputation
6 Organization reputation
6 Learning opportunities
6 Organization
performance
6 Learning opportunities
7 Organization
performance
7 Health/wellness benefits
7 Job autonomy
7 Convenient work
location
Source: Towers Watson 2012 Global Workforce Study, 2012 Talent Management and Rewards Study — United States.
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Health care reform complicates the Situation, affecting both
reward costs and workforce dynamics
Workforce Implications
HCR Provisions
New Groups
Require Coverage

Job and work hour redesign

Alternative staffing models

Outsourcing/job relocation

Impact on Total Rewards and Employee
Value Proposition (EVP)

Reduced importance of
employer-sponsored health care for
lower paid employees (e.g., employees
no longer view coverage as valuable for
employment and accompanying
communication challenges)
Availability of
Public Options
Excise Tax
Financial Implications

Increased costs beginning in 2014
related to part-time, seasonal, contract
employees

Examine alternative play or pay
strategies

Lower paid employees may prefer public
options; loss of employer
control/penalties

Examine alternative play or pay
strategies

Impact on Total Rewards and EVP

Plan redesign could reduce benefits


Excise tax cost could be shared with
employees
Increased costs beginning as early as
2018

Further pressure to reduce health care
trend rate

Impact on Total Rewards and EVP
10
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Companies that do not improve efficiency will likely reduce the value
of benefits to contain cost and avoid excise tax
Single Coverage Monthly Rate
$1,100
$1,000
Defer excise tax by
lowering the value of
the plan
$900
$800
Avoid excise tax by
lowering long-term
cost trends using
thoughtfully-designed
incentives, optimal
care management,
consumerism,
engagement and other
health activities
$700
$600
$500
2014
2015
2016
2017
2018
2019
2020
* Excise tax threshold indexed at 4% for 2019 and 3% per year thereafter.
NOTE: Results depicted are for illustrative purposes only based on single coverage monthly rate for ‘median efficiency’ plan and assumed savings/trend reduction.
11
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Mitigating health care reform cost impact – plan design only

Significant plan value reduction is required to mitigate the health care
reform cost impact
Sample Plan Value Comparison
0.9
0.86
Illustrative
0.85
0.8
If Design is reduced by…
Est. Savings
-5%
$22M
-10%
$45M
-12%
$55M
0.78
0.75
0.75
0.7
0.7
0.65
HMO
PPO
0.6
0.55
0.5
Current Program
Illustrative Program
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Health insurance exchange
Plan Offerings
Platinum
(90%
Gold
(80%
Value)
Value)
Silver
(70%
Value)
Bronze
(60% Value)
Other requirements: guarantee issue; no medical underwriting; no pre-existing condition limits; essential health
benefits; preventive care at 100%; no lifetime or annual limits; maximum out-of-pocket limits $6,350/$12,700
Family Income
as % of FPL
< 138%
138% - 150%
150% - 200%
200% - 250%
250% - 300%
300% - 400%
> 400%
* Max Family Salary
Single/Family of 4
$15,856 / $32,499
$17,235 / $35,325
$22,980 / $47,100
$28,725 / $58,875
$34,470 / $70,650
$45,960 / $94,200
N/A
* Max Premium Cost
as % of Income
2%
3% - 4%
4% - 6.3%
6.3% - 8.05%
8.05% - 9.5%
9.50%
N/A
* Max Premium $ Amount
Single/Family of 4
$317 / $650
$689 / $1,413
$1,448 / $2,967
$2,312 / $4,739
$3,120 / $6,394
$4,159 / $8,525
N/A
* Max Out of Pocket
(Single/Family)
Actuarial Value
$1,983 / $3,967
94%
$1,983 / $3,967
94%
$1,983 / $3,967
85%
$2,975 / $5,950
73%
$2,975 / $5,950
70%
$3,987 / $7,973
70%
N/A
Employer Penalty
in 2015 +
None
$3,000 per employee
* All subsidies based on Silver (70%) Value Plan. All dollar amounts are annual figures.
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N/A
13
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To meet the demands of health care reform, benefit tradeoffs
must be explored to meet overall objectives


Based on Towers Watson’s 2013 Health Care Changes Ahead Survey, 46%
of respondents will evaluate health care in a Total Rewards context
Approaches may vary, however, initial considerations are consistent



What trade-offs are you willing to make in order to accomplish objectives?
What are the tradeoffs outside of the benefits plans that can be used to balance your
business/workforce objectives?
Who will drive the reward mix: Employer and/or employees?
Sample Initial Principles
Provide affordable and
comprehensive coverage
Sample Tradeoff Considerations


Continue market-based
approach to benefit
offerings

Align benefit offerings to
market risk profile





Choice may be limited in
order to provide
comprehensive coverage


Employer’s cost vs. employees’ cost ?

What’s the breaking point?
How will Employers prioritize members?

Employee vs. spouses vs. children?

Refine by job category?

Plan design vs. surcharge?
National consistency (one plan) vs. market-specific (optimize by market)
How are markets targeted for evaluation today?
Resources requirements due to administrative complexities vs. cost savings?
Strategy vs. labor sensitivities?
How fluid are these market risk profiles?
Frequency of reassessment?
Current benefits level vs. adding a lower cost option?
Employer sponsorship vs. public/private exchange?

What if it subjects the organization to the $3,000 penalty?

Will your strategy differ by market or segment?
14
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Total Rewards Optimization (TRO) is designed to help
organizations answer key questions
Total $ Investments in Selected Rewards
Recognition
ILLUSTRATIVE
What is the best level of
investment in employees?
Other
Benefits
$81 million
Medical
Base Pay
Dental
RetirementBase Pay and
Cash Incentives
$929.8 million
Bonus
What is the best allocation of
that investment to maximize
desired behavior
(e.g., retention, motivation)?
Do the answers vary by
organization
level, geography, business unit,
other demographic characteristics?
Rewards Optimization can be applied to compensation, benefits and non-financial rewards
(work/life balance, for instance) or to any combination of reward categories
15
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TRO is a means to address critical questions and offer
customized solutions for the workforce
1
Are you optimizing your Total Rewards investments to achieve the right cost, behavior and
performance outcomes?
2
Do your Total Rewards programs attract, retain and engage the talent you need across your
business, at all levels?
3
What are the key cost/value tradeoffs in balancing cost management and workforce
management objectives?
4
Are you optimizing your cost/value for key reward programs and the Total Rewards portfolio
overall?
5
Do your Total Rewards programs reinforce the desired “deal” with your employees
(i.e., aligning employee behaviors with key business needs and direction of the company)?
6
Do your employees understand and recognize the value of your Total Rewards portfolio?
16
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Compared to a traditional survey, TRO provides richer data
insights to better inform programmatic decisions
Directional information on understanding and
importance of programs
Information on employee awareness and
understanding of current programs
Quantitative information on the most
important rewards
Accurate information on various employee
segments
Data and analysis on how specific rewards
changes/trade-offs will affect employees
Data and analysis on what specific rewards
changes will cost
ROI for specific rewards changes or
reallocations
Ability to test cost-benefit of different rewards
and demographic scenarios with modeling
tool
Focus
Groups
Traditional
Survey
Conjoint
Survey
Total Rewards
Optimization



















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Example: trade-off questions
In the conjoint section of the survey, employees are presented a series of
combinations of reward elements
These questions, presented as pairs (or trios) of elements which elicit
trade-offs, determine the respondents’ preferences
The respondent will be asked to rate his or her preference for two different
combinations of rewards, holding all other things equal
Survey questions vary for each respondent based on their responses to prior
survey questions
EXAMPLE
If these two combinations were identical in all other ways, which would you prefer?
Your annual merit pay increase opportunity is increased
to x%
Your annual merit pay increase opportunity remains
unchanged at x%
The company contribution to your retirement plan is
reduced by x% of your eligible pay
The company contribution to your retirement plan is
increased by x% of your eligible pay
18
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Example: portfolio questions
EXAMPLE
How motivated are you to perform consistently at your highest level to help ABC
Company fulfill its mission if your rewards package included the following?
ABC Company increases its investment in flexible work options by 20% to improve
programs. Programs/policies will be applied more consistently, with management support
Your annual merit pay increase opportunity is increased to x%
The company contribution to your retirement plan is reduced by x% of your eligible pay
You receive 5% more than current annual base pay (with ongoing annual increase
opportunity)
No change in your supervisor’s effectiveness
Please indicate how motivated you are to perform consistently at your highest level to help ABC Company
succeed on a scale of 0 to 100 where:
0 represents "Not At All Motivated"
100 represents "Very Highly Motivated"
19
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TRO combines conjoint analysis with financial optimization
Conjoint
Analysis
Portfolio
Optimization
+
Optimum Level
of Investment
=
Optimum Allocation
of Investment
Segment-Specific Strategy



Is a surveying method
used for many years in
marketing to capture
subjective preferences
Asks employees to make
trade-offs among program
features as opposed to
assessing the features
individually
Is a more reliable forecast
of behavior than
traditional survey methods



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 retention/motivation
by changing allocation while
maintaining the current level
of investment

Maintain current level of
retention/motivation at lower
level of investment by
changing allocation

Increase investment and
retention/motivation to
economically efficient level
20
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Total Rewards can be optimized by evaluating the financial
and employee impact of specific program design changes
Improvements in Perceived Value
Change in Pay and
Benefits Cost ($000)
Merit Increases — Above avg performers +50%
4.5
Base Pay — +3%
3.7
Time Off — +2 days
2.9
Wellness Incentives — Premiums -10% upon achievement of
health milestones
2.8
$3,153
$23,358
$5,989
$647
STD — 60% base pay & weekly max of $1,500
2.5
$1,277
Retirement Contribution — 5% of base pay
2.5
$4,935
Medical Deductible — -25%
2.5
$635
Bonus — 3% target/change in target weighting (execs &
directors)
2.2
Life Insurance — 2X base pay & $200k max
Retirement Match — $0.50 up to 8% & 4-year vesting
1.6
0.4
$14,943
$300
$31
Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the “portfolio effect.” Modeled impact assumes all other
programs stay the same. Improvements in perceived value are increments to current perceived value of 82.3 (among valid conjoint respondents).
21
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Understanding what employees value — opportunities for
improving employee perceived value and associated costs
Improvements in Perceived Value
Change in Pay and
Benefits Cost ($000)
Merit Increases — Above avg performers
+50%
4.4
4.9
3.6
Base Pay — +3%
4.0
2.9
3.2
Time Off — +2 days
Wellness Incentives — Premiums -10% upon
achievement of health milestones
$1,277
3.4
2.3
3.9
2.1
Medical Deductible — -25%
2.0
$14,943
3.1
1.5
Life Insurance — 2X base pay & $200k max
$4,935
$635
2.7
CARE/Bonus — 3% target/change in target
weighting (execs & directors)
Retirement Match — $0.50 up to 8% & 4-year
vesting
$647
2.4
Retirement Contribution — 5% of Base Pay
$23,358
$5,989
2.7
3.0
STD — 60% base pay & weekly max of $1,500
$3,153
$300
2.0
-0.2
2.6
Division A
Division B
$31
Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the “portfolio effect.” Modeled impact assumes all other programs stay the same.
Improvements in perceived value are increments to current perceived value of 83.2 for A respondents and 79.1 for B respondents (among valid conjoint respondents).
22
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Understanding what employees value — identifying cost
savings and the associated decrease in employee perceived
value
Declines in Perceived Value
Change in Pay
and Benefits
Cost ($000)
($4,635)
($570)
($360)
($5,989)
-8.6
-8.1
Medical Premiums — +20%
-7.8
-7.6
-7.5
-7.4
Prescription Copays — +25%
-6.9
-7.1
Time Off — -2 days
-6.8
-6.6
($1,452)
Medical Deductible — +25%
-5.0
-4.7
($473)
Medical Copays — Coinsurance of 20%
Prescription Copays — Coinsurance of
20%
-4.6
-4.5
($294)
Wellness Incentives — Premiums +10%
upon failure to meet health milestones
-4.2
-4.2
($1,670)
($3,750)
Medical Copays — +25%
Division A
Division B
-2.2
-1.1
CARE/Bonus — Eliminated
Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the “portfolio effect.” Modeled impact assumes all other programs stay the same.
Declines in perceived value are decrements to current perceived value of 83.2 for A respondents and 79.1 for B respondents (among valid conjoint respondents).
23
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Creating a Total Rewards portfolio that reduces cost In light of
budgetary constraints and health care reform while
Program improvement
maintaining/increasing program perceived value
Program reduction
Reward
Scenario #1
Scenario #2
Above average performers +50%
Current
Eliminated
Eliminated
Current
Current
Medical Deductible
+25%
Current
Medical Premiums
Current
+20%
+30%
Current
Current
Current
Premiums -10% Upon achievement of
health milestones
Current
2X base pay & $200k maximum
2X base pay & $200k maximum
60% base pay & weekly maximum of $1,500
60% base pay & weekly maximum of $1,500
$0.50 up to 8% & 4-year vesting
$0.50 up to 8% & 4-year vesting
Retirement Plan
Current
Current
Time Off
-2 days
-2 days
Portfolio Perceived Value
84.3
82.1
Change in Perceived Value
+2.0
-0.2
($5,889,000)
($8,316,775)
Merit-Based Pay Increases
Bonus
Base Pay
Medical Copays
Prescription Drug Copays
Wellness Outcome Incentives
Life Insurance
Short-Term Disability
Company Match to Retirement Plan
Change in Pay and Benefits Costs
24
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Portfolio optimization analysis
Increase in Indicated Perceived
Value from Current Level
(Percentage)
3) Increase investment
and increase perceived
value
40%
2) Maintain current
level of investment
while increasing
perceived value
30%
1) Maintain current
level of perceived
value at lower
investment
20%
Current levels of
perceived value and
reward investment
10%
–$20mm –$10mm
Decrease in investment from
current level
0
$10mm $20mm $30mm
Increase in investment
from current level
Three Points on the Curve
Each 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 level of perceived
value
2) To maintain current
investment levels, the curve
identifies how to reallocate
investment across programs
to increase perceived value
without raising cost
3) To increase perceived value
dramatically and make the
most of each reward dollar,
the curve indicates the best
ways to invest additional
rewards funds
25
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Case study #1: health care organization
Situation

12,000 employees, ten hospitals, five clinics

Acute, long-term and home health care

Actual Results

Turnover dropped from 33% to 21% (a 36%
improvement over three years)
33% annual turnover among nurses, technicians, and
support services

Turnover dropped even as area turnover
was increasing

Many millions spent on contract labor due to high turnover
and volatile staffing requirements


Labor shortage and agency market preventing competition
for labor based solely on pay
Recommended changes to rewards
generated an ROI of $4M in year one,
contributed to system’s stronger financial
performance

Gallup scores increased from 3.46 to 3.8

Avoided large-scale pay increase with a
negative return on investment

Desire to avoid “silver bullet” approaches to reducing
unwanted turnover
Actions
Projected –vs– Actual Results

Conducted focus groups in each facility to develop the
survey; invited all employees to participate in online survey

Analyzed results by position and service offering to
determine optimum rewards portfolios

After corporate review, presented/discussed results with
facility leadership to build the case for change and discuss
next steps

Implemented changes to training, leadership development,
dental plan, tuition reimbursement, PTO, and medical
insurance

The optimization model projected a 10%
drop in turnover, while actual results
produced at 12% reduction

Please note, this kind of comparison is
directional rather than exact. As is common,
how organizations implement a number of
rewards changes to address employee
turnover issues varies, which could include
some changes that were not modeled in the
TRO analyses
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Case study #2: customer service organization
Situation
Actual Results

72 contact centers, operating in 19 countries, interacting in
25 languages

1.5 million contacts per day

Roles ranging from Customer Service Representative to
Technical Support/Help Desk

Zero to 300% turnover, depending on site and role

Retention increased more than 30
percentage points in 13 out of 17 business
units worldwide within six months

Within nine months, all but one business unit
had achieved monthly retention rate of 92%
or greater

Savings exceed $10 million annually
Actions

Enhanced performance management and career
development systems, addressing job security issues as
well as broader career development needs

Implemented team manager training and development
program

Tracked changes and results with a rigorous goal-setting
and measurement system
Projected –vs– Actual Results

The optimization model projected a 19%
drop in turnover, while actual results
produced at 30% reduction
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For More Information
To learn more about Towers Watson’s Total Rewards Optimization and
related research, please follow
(http://www.towerswatson.com/en/Services/Services/total-rewardsoptimization)
Please also contact:
Lubomira (Lubca) Paclikova
Senior Consultant
901 North Glebe Road | Arlington, VA 22203
Phone: 703.258.8270
[email protected]
Richard Gendron
Senior Consultant
901 North Glebe Road | Arlington, VA 22203
Phone: 571.445.0661
[email protected]
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