Global Employer Rewards

Global Employer Rewards

oÉï~êÇë qê~åëÑçêã~íáçåW

Turning total rewards from a cost into an investment péÉÅíêìã Spanning the realm of business issues and solutions

Few business expenditures are more significant than total rewards. The cost of total rewards can often exceed 40% of a company's revenue. In addition to wages and salaries, indirect rewards such as health and retirement benefits, training and development programs, and paid leave can account for about 30% of the total cost.1 Relatively small changes in a company's total rewards budget can have a disproportionate impact on earnings. The impact can be seen through simple arithmetic, but we believe that small changes in total rewards can have a major impact upon employee motivation and productivity, which also can have a major effect on earnings. Despite the relationship between rewards, employee motivation, and corporate earnings, our experience shows that few companies believe they have the tools to determine the return on their investment in total rewards programs (see Exhibit 1).2 Without effective tools to understand how total rewards fuel "upside" business results, both direct and indirect rewards expenditures are typically perceived by management as essentially a cost of doing business, rather than as an engine of future earnings potential.

Total rewards ROI still an enigma Exhibit 1. How effective are your current tools and methodologies in helping you determine the return on investment for your total rewards programs? (N=123) 4%

25%

26%

45% Very effective – we are able to immediately gauge the impact of changes to our reward programs Somewhat effective – we can assess the impact, but there are noticeable gaps Minimally effective – there are significant gaps in our ability to measure our programs’ impact Ineffective – our programs are more reactive than proactive with regard to the needs of our company and employees

Source: "2006 Employee Rewards Survey: The Next Generation," Deloitte Development LLC 2006.

As used in this document, the term "Deloitte" includes Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP.

1

How can employers gain confidence that their total rewards programs are really contributing to business value? In very broad terms, we believe this can be accomplished by viewing one critical driver of rewards as an employer-employee "total rewards marketplace" − one in which employees "trade" their time and talent for the total rewards the employer offers, and in which the employer designs total rewards "products" that will elicit the desired results from their employee "consumers." By understanding the dynamics of its own total rewards marketplace, an employer can better assess the impact of total rewards on business value and focus its total rewards investment on those programs that have a higher likelihood of driving the desired return.

The total rewards marketplace Placing the emphasis on a company's own total rewards marketplace rather than on peer benchmarks and other external reference data can be a major change to many companies' current approaches to rewards design. In a recent survey by Deloitte's Global Employer Rewards practice, more than half of the HR professionals surveyed said that their primary approach for setting pay levels was to provide rewards at a certain percentile of defined industry benchmarks, and 89 percent considered benchmarking one of the three most important approaches used in setting pay levels.3 But no matter how valuable benchmarks can be for understanding the types of rewards

Traditional vs. transformed rewards Traditional Rewards • Benchmark-driven − focused on what others do

Transformed Rewards • Internally driven − focused on what you need

• Narrowly defined − compensation and benefits

• Broadly defined − “total rewards” include

• Employer paternalism

• Employer-employee partnership

• Viewed as a cost with uncertain ROI

• Treated as an investment with

everything about the work experience that affect an employee’s commitment and contribution to business value

measurable results other organizations are offering, they say nothing about how to align one's own total rewards programs with corporate strategy. A benchmarking study can identify industry pay ranges, but it can't tell an employer where in that range it should seek to fall to effectively support the company's business goals. Benchmarking studies may suggest that offering certain programs is a "leading practice," but they can't tell an employer how much value its own people place on such a plan. What can give an employer this vital information, we believe, is an integrated approach to understanding the company's strategic goals, the talent needed to achieve them, and the total rewards elements most likely to be effective in attracting, retaining, and engaging that talent. Based on that understanding, an employer can tailor its total

rewards programs to the specific needs of its unique corporate strategy and employee population, thereby making a tighter connection between its total rewards programs and the company's business goals. This approach, it should be pointed out, does not ignore the external marketplace. Rather, it reflects that marketplace through the perceptions of the employees themselves. These perceptions, more than the external marketplace in itself, are what influence employees' actions, and tapping into employees' perceptions can give employers the primary data needed to inform effective total rewards designs. As the only justification for benchmarking is to adjust total rewards relative to the level that employees believe they would earn elsewhere, benchmark data is actually a relatively inefficient proxy for the real thing.

Why transform rewards? Many employers' reward structures were established in an economy very different from today's. Deloitte has found that old approaches to rewards are leaving new challenges unaddressed and potential new opportunities on the table. For instance: • In 2008, the first members of the Baby Boom generation will turn 62 (the average retirement age in North America, Europe, and Asia), marking the start of a potentially severe, demographically driven drain of essential skills from the workforce. • The global economy applies new competitive stresses on employers. Especially in the U.S., employers take on social responsibilities that are handled in other countries by governments or family structures − or, in the case of some global competitors, simply not handled at all. In this global context, how can employers make total rewards something other than a competitive burden? • As the growing cost of benefits changes the proportion of total compensation allocated to benefits, employees' interests in how their rewards are structured − that is, how much of their compensation they receive in the form of cash versus health, retirement, and other benefits − start to diverge along economic, social, and demographic lines. The increasing divergence in employee interests makes it more difficult for employers to address the needs of its total workforce with one-size-fits-all rewards designs. • Security for employees now comes not from a sustained employer-employee relationship, but in the form of portable value: transferable skills, retirement accounts, health spending accounts, and so on. How can employers make this work for them? • Modern HR administrative models and systems are increasingly able to handle complex benefits arrangements (e.g., retirement choice programs), opening new possibilities for managing complex total rewards programs in a cost-effective manner. How can employers take advantage of these technologies to improve, not just HR efficiency, but the effectiveness of their total rewards programs?

As used in this document, the term "Deloitte" includes Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP.

2

Of course, it's important to make sure that total rewards decisions are based on actual perceptions rather than "wish lists." The effectiveness of the approach will depend upon sound analysis facilitated by some of today's leading interactive technology. Such results can be validated by benchmark data, but not restricted by it, especially if the employer has reason to believe that deviating from so-called leading practices would yield a better ROI.

Think business, not benchmarks Changes in the business environment can make last year's benchmarks irrelevant to this year's rewards concerns. At one company that had just completed its first year of compliance activities under the Sarbanes-Oxley Act, the executive team wanted to establish behavior-based incentives for the internal audit staff to encourage them to support the company's Sarbanes-Oxley compliance efforts in future years. The head of HR, however, was reluctant to implement these incentives because a benchmarking study had shown that very few companies used behavior-based incentives for their internal audit employees. It was only after the head of HR realized that the benchmark results reflected pre-Sarbanes-Oxley reward practices that the internal audit incentive structure was adopted.

Understanding the total rewards consumer To understand its employees’ views on total rewards, employers can use the same techniques that a retail business may use to understand its targeted customers’ buying habits. Before introducing a new product,

a retailer is likely to conduct extensive market research to study its prospective customers' preferences. Through repeated surveys and focus groups, the company can learn how popular the product might

Exhibit 8. Which procedures do you use to gather information from your employees Exhibit 2. Which procedures do you use to gather information from your employees on on their views and preferences about their rewards? Check all that apply. (N=117) their views and preferences about their rewards? Check all that apply. (N=117)

56% 2% 1% 49% 13% 21% 10% 22% 0%

10%

20%

30%

40%

50%

Survey, once a year or less often

On-boarding interviews

Survey, every six months (approximately)

Focus groups

Survey, monthly Exit interviews

60%

Other Not applicable – we do not gather information from our employees on their views and preferences about their rewards

Source: "2006 Employee Rewards Survey: The Next Generation," Deloitte Development LLC 2006.

Exhibit 3. Top Five Job-Satisfaction Factors Rank

1 2 3 4 5

According to Employees

According to HR Professionals

Benefits Compensation Work/life balance Job security Feeling safe in the work environment

Relationship with supervisor Recognition of performance Communication Compensation Benefits

be among both existing and potential new customers, what changes might make it more appealing, and how to price it appropriately. Now consider the potential advantages an employer could gain by making a comparable effort to understand its employees' "buying habits" with respect to total rewards. Our experience suggests that different total rewards elements − base pay, bonuses, health and welfare benefits, and "intangibles" such as training programs and career opportunities − all influence employees' choices of where to work and how much discretionary effort to expend. The more fully an employer can understand how its employees are likely to react to various aspects of total rewards, the more effectively it can design programs that help motivate the right performance. And the same tools that companies use to measure their external consumers − surveys, focus groups, etc. − can help an employer make better total rewards decisions. Many companies do, of course, collect some of this information from their employees, as illustrated in Exhibit 2.3 Yet recent evidence suggests that many employers do not necessarily come to the same conclusions as their employees. For example, according to the 2005 Job Satisfaction Survey by the Society for Human Resource Management (SHRM), HR professionals and employees disagreed about the relative importance of all of the top five factors important to job satisfaction (Exhibit 3).4

Source: "2005 Job Satisfaction Survey," Society for Human Resource Management (SHRM), cited in Margaret M. Clark, "Employees, HR Differ on Satisfaction Factors," HR Magazine, August 2005.

As used in this document, the term "Deloitte" includes Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP.

3

Ask the right questions A Rewards Dialogue survey, like a market research tool, would ask focused questions about employees' total rewards preferences. The answers could then be used to guide particular aspects of a company's total rewards policy and programs. Deloitte’s Rewards Dialogue approach explores subjects such as: • How do you see your future career with us? • Which items do you value as "rewards" from employment? • Among those items, which is most important to your decision to stay here? • What are your preferences among various benefits and cash? • Is your satisfaction with rewards greater or less than last time we asked? By how much? • How do you expect your rewards to progress through your career?

We believe that closing the gap between employers' perceptions of employees' views and the actual state of the internal total rewards marketplace requires a much more rigorous, scientific, and intensive approach than the traditional annual survey. Many times, employee surveys tend to contain biases, make unconscious assumptions, and miss the integrated picture. Also, a relatively infrequent survey does not permit management enough ongoing contact to improve the survey's questioning in the light of responses previously received.

We advocate a more extensive "Rewards Dialogue" between employers and employees, a kind of continuous feedback loop in which an employer would regularly reach out to its employees for their views about total rewards while responding to them to demonstrate that it is listening in a meaningful way. This outreach would take place often enough for the employer to spot trends in employees' responses over time. Instead of conducting surveys once a year or less often, as many employers now do, Rewards Dialogue might take advantage

of the many existing touch points between employer and employee − open enrollment, performance reviews, benefits inquiries, even brief pauses at work − as well as more formal survey efforts to maintain an ongoing flow of information. Employers would close the loop regularly with communications to manage employees' expectations and keep them informed of changes to their rewards, along with the reasons for those changes insofar as they can be disclosed. By keeping employers in continuous touch with employees' views on total rewards, Rewards Dialogue can help an employer understand its workforce's changing preferences and develop programs that are both tailored to employees' current needs and flexible enough to respond to employee feedback without major redesigns. Building in such flexibility is key to striking a workable balance between responsiveness and stability. It may not be practical for an employer to make the changes to its total rewards programs to keep current with the latest employee feedback. But with Rewards Dialogue, an employer can keep an eye on emerging trends and plan ahead to meet anticipated needs, as well as create a total rewards structure with the inherent flexibility to respond to a fluid environment.

How dialogue can drive more effective total rewards investments One employer, a mid-sized U.S. hospital, saw the need to align its total rewards programs to support a challenging new business strategy in an effort to help improve the hospital's competitiveness and support its plans for future growth. HR and executive leaders understood the value of securing employee feedback and opinions, and they used a combination of interviews, focus groups, and surveys to explore their employees' attitudes toward their total rewards and the organization. Among their findings and subsequent actions: • The hospital's spending on certain health and welfare benefits measurably exceeded the subjective value to employees without generating a corresponding return to the hospital in employee commitment. Management scaled back these benefits and reinvested the money saved to enhance their training and career development programs, which more directly supported the hospital's strategic plan. Ultimately, they believe these investments will benefit both the employees and the hospital. • The hospital's spending and approach to disability coverage was also mismatched to employee and employer needs. Through a combination of illness banks and voluntary disability insurance, long-tenured employees had more protection than they could use, creating a perception of "phantom value." Newer employees, on the other hand, either faced burdensome costs or lacked protection in the event of disability. By restructuring the program, the hospital was able to provide universal disability protection, which improved their attractiveness to experienced new hires while saving money for both the hospital and employees. • Management and nurses agreed that it was important for top-performing nurses to provide direct patient care. However, the lack of a career path for bedside nurses worked against this objective. In response, the hospital deployed a task force, including several nurses, to design a career ladder program to provide an opportunity for nurses to earn recognition and advance their careers without having to leave patient care and move into management positions.

As used in this document, the term "Deloitte" includes Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP.

4

Focusing the total rewards investment A key challenge in designing total rewards programs is managing the trade-off between satisfying employees' rewards preferences on the one hand, and working with limited resources on the other. Few employers are likely to have the resources to create programs that suit the preferences of all of its employees. Given these resource constraints, we suggest that employers can further boost the total returns by focusing on incorporating total rewards elements that increase commitment among "critical workforce segments" − employee groups whose retention and motivation are highly important to a company's efforts to achieve its financial objectives. These are the people a company can least afford to lose, whether outright to a competitor or indirectly through a lack of commitment, effort, and productivity. Because of their relatively greater leverage, it is their views that will most influence an employer focused on greater ROI. There are obvious sensitivities around designating certain employee groups as more "critical" than others. However, the term "critical workforce segment" should be understood in its specific context of impact on corporate earnings, not as a broad value judgment. A workforce segment is critical to the extent that its work directly affects business value creation, its people are difficult and/or expensive to replace, and its skills are in high internal or external demand. Different workforce segments, therefore, may become more or less critical as the business strategy and the external environment change over time. Which areas are in need of immediate or long-term growth? Where would turnover or attrition be most harmful to the business plan? Where do talent, experience, and/or training have the greatest impact on business results? These and other strategic considerations will influence which workforce segments are considered critical at any given time. Many employers already segment their workforce to some degree, managing whatever sensitivities may arise in order to take advantage of this talent management tool. In our recent survey of HR executives, see Exhibit 4, 61 percent said that their organizations defined their critical workforce segments either explicitly or implicitly. Moreover, 22 percent of these said that they proactively design rewards programs to meet critical workforce segments' needs, and a further 35 percent said that critical workforce segments receive significant consideration in program design.5

Exhibit 4. Has your company defined its critical workforce segments (e.g., segments that have the greatest impact on the value chain, possess the skills that are most difficult to replace, and/or are currently in the shortest supply)? (N=123)

18%

20%

22%

41%

Yes, we have explicitly defined them Yes, but the definitions are somewhat implicit and not widely understood No, but we’re considering doing so No

Note: percentages do not total 100% due to rounding.

If you answered "yes" to the above, have you identified specific needs/desires of these critical workforce segments in terms of rewards programs? (n=74)

5% 22%

38%

35%

No Not really, we are more likely to view our workforce as a whole or segmented differently (e.g., by level, region, etc.) Yes, they receive significant consideration in program design Yes, we proactively design rewards programs to meet their needs

Source: "2006 Employee Rewards Survey: The Next Generation," Deloitte Development LLC 2006.

As used in this document, the term "Deloitte" includes Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP.

5

Importantly, designing total rewards with an eye to critical workforce segments' needs does not mean that this comes at the expense of a company's other, "core" employees. The Rewards Transformation approach to differentiation applies only to rewards design, not to rewards magnitude. Critical workforce segments may not necessarily receive more total rewards than others, but they should have relatively more influence over the nature and design of the company's incentive programs, the configuration of its benefits programs, and other aspects of the company's total rewards designs. We're also not suggesting that employers should unquestioningly offer a "rising tide" of rewards that lifts all employees to the level of the segments with the most leverage. Rather, an employer's "baseline" total rewards programs should treat critical and core workforce preferences as one of many important factors, including the company's cost and risk constraints, to consider in program design. It's also possible that many of the total rewards factors valued by critical workforce segments will include "intangibles" such as mentoring, career planning, and flexibility, which can be offered to the wider employee population without necessarily incurring prohibitive costs.

The case for Rewards Transformation

Contacts

With critical workforce segments defined and Rewards Dialogue in place, an employer can better monitor the value generated by its investment in total rewards programs and the specific impact of those programs on its employees. The workings of the internal total rewards marketplace can become more clear, and the employer can better fine-tune its investment in that marketplace to support its business goals as they may evolve. Instead of a cost to be controlled, total rewards can become an investment to be managed for greater business value − a true "transformation" that recognizes the consumer-driven nature of total rewards.

Tim Phoenix Principal, Deloitte Consulting LLP 512-226-4272 [email protected] Joseph Rosalie Principal, Deloitte Consulting LLP 212-618-4734 [email protected]

References 1 "Employer costs for employee compensation − September 2005," U.S. Department of Labor, December 2005. 2 "2006 Employee Rewards Survey: The Next Generation," Deloitte Development LLC 2006. 3 Supra, fn. 2. 4 "2005 Job Satisfaction Survey," Society for Human Resource Management (SHRM), cited in Margaret M. Clark, "Employees, HR Differ on Satisfaction Factors," HR Magazine, August 2005. 5 Supra, fn. 2.

About This Publication This publication contains general information only and Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, Deloitte Financial Advisory Services LLP, their affiliates and related entities shall not be responsible for any loss sustained by any person who relies on this publication. About Deloitte Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms and their respective subsidiaries and affiliates. Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and advice, focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital of 120,000 people worldwide, Deloitte delivers services in four professional areas, audit, tax, consulting and financial advisory services, and serves more than one-half of the world's largest companies, as well as large national enterprises, public institutions, locally important clients, and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein and, for regulatory and other reasons, certain member firms do not provide services in all four professional areas. As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions. Each of the member firms is a separate and independent legal entity operating under the names "Deloitte", "Deloitte & Touche", "Deloitte Touche Tohmatsu" or other related names. In the US, Deloitte & Touche USA LLP is the US member firm of Deloitte Touche Tohmatsu and services are provided by the subsidiaries of Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP and their subsidiaries), and not by Deloitte & Touche USA LLP. The subsidiaries of the US member firm are among the nation's leading professional services firms, providing audit, tax, consulting and financial advisory services through nearly 30,000 people in more than 80 cities. Known as employers of choice for innovative human resources programs, they are dedicated to helping their clients and their people excel. For more information, please visit the US member firm's web site at www.deloitte.com/us. As used in this document, the term "Deloitte" includes Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial Advisory Services LLP.

Copyright © 2006 Deloitte Development LLC. All rights reserved.

Member of Deloitte Touche Tohmatsu