Creating a Sustainable

Transcription

1 Creating a Sustainable Rewards and Talent Management Model Results of the 2010 Global Talent Management and Rewards Study

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3 2010 Global Talent Management and Rewards Survey Report Table of Contents Executive Summary 2 The Business Context 3 The Current Landscape of Rewards and Talent Management 10 Talent Management Strategy and Emphasis 14 Promoting Effective Talent Management Through Emphasis and Consistency 16 Global Consistency 17 Organization-Wide Job Evaluation and Job Leveling 18 Implications of the Current Landscape of Rewards and Talent Management 20 About the Survey 22 Key Terms 23 Featured Figures Figure 5. Employers recognize some of the adverse impacts of cost cutting 6 Figure 6. Employers fail to recognize the impact of changes to employee well-being on their ability to attract employees 6 Figure 12. European and Brazilian companies report greatest merit differentiation no differences in differentiation by firm performance 12 Figure 14. Very little differentiation of STI across regions, financial performance groups 14 Figure 16: Organizations that increase their emphasis on aspects of talent management are more likely to find them very effective 16 Figure 19: Global consistency helps companies become more effective in their other programs 19 Figure 20: Pay, bonuses and training budgets are the programs organizations are most likely to change if economic or business conditions change substantially in either direction 20

4 Executive Summary Reward and talent management programs at most organizations share common objectives: to attract, retain, motivate and develop employees, and to create alignment between employee actions and the behaviors required to support the employer s business strategy. In periods of relatively stable business growth, organizations typically rely on minor, adaptive changes to their reward and talent management programs in order to better meet these objectives. But the recent financial crisis and subsequent recession have forced organizations out of their business as usual mode, both from a strategic perspective and in the way they design and manage their reward and talent management programs. Companies were faced with a number of challenges during the economic crisis and needed to: Cut costs and manage any subsequent cost increases Reduce the rate of increase in the value of total rewards, often to levels where the real or absolute value of total rewards declined for many employees Reevaluate their business strategies Figure 1. Economic conditions vary dramatically around the globe* Representative list of countries in our survey Annual Economic Growth Country 2010P 2011F Unemployment rate China 9.9% 8.3% 9.6% India 7.9% 8.1% 10.7% Japan 3.1% 1.7% 5.2% Singapore 8.4% 4.5% 2.2% U.K. 1.2% 1.8% 7.9% Germany 1.9% 1.6% 7.7% Ireland 0.4% 1.2% 13.7% Spain 0.5% 0.4% 19.9% Brazil 6.3% 4.5% 7.5% Canada 3.5% 2.9% 8.1% U.S. 3.1% 2.9% 9.5% *Source: The Economist P = projected F = forecast Now, as we emerge from the recession, companies face additional challenges and need to: Develop new leadership competencies for their executives Respond to increasing demands by employees for security, stability and opportunity that are difficult to satisfy Confront the complexities caused by a lack of career advancement opportunities for top talent and employees with critical skills Going forward, in order to attract, retain and engage their employees, organizations need to think about developing a sustainable employee value proposition one that is flexible enough to be vital throughout the economic cycle. Employers can take many specific steps to improve their reward and talent management programs by: Differentiating rewards between top performers and average performers Developing a formal employee value proposition and communicating it to employees Introducing organization-wide consistency in reward and talent management programs Developing business-centered leadership competencies that support their strategy Increasing their emphasis on performance management, leadership, and employee learning and development 2 towerswatson.com

5 The Business Context Global and Regional Economic Conditions Following the global financial crisis of and the ensuing recession that occurred in many countries, we may be at a point of inflection. China, India and Brazil are experiencing strong economic growth, while Spain and Ireland continue to suffer through economic contractions with double-digit unemployment rates. Still, other countries and regions, such as the U.S., most of Europe, Canada and Japan, are somewhere in between growing in the first half of 2010, but facing uneven growth and a slow, uncertain economic recovery. Cost Cutting and Cost Management as a Reaction to the Global Recession Organizations immediate reaction to the financial crisis and subsequent recession was to freeze or reduce labor costs through hiring and salary freezes, layoffs, reduced bonuses and restrictions on overtime. However, there were regional differences in the nature and extent of these actions. In Europe and the U.S., where the recession was the deepest, companies were more aggressive, with over 60% of U.S. companies taking four or more cost-cutting actions. In China and India, which saw economic slowdowns but not outright recessions, organizations faced less cost pressure and consequently were much less likely to cut costs, freeze salaries or lay off employees. Companies forward-looking business and human resource strategies show a similar picture. Almost one-quarter of respondents globally report that workforce reductions will be an element of their strategy over the next three years reflecting their concern over future economic conditions. European organizations are most likely to make workforce reductions (35% of respondents), but in China and India, where attraction and retention pressures remain high, only 6% of respondents expect layoffs. This uneven economic recovery will require global organizations to establish targeted, flexible talent and reward strategies. The Impact on Global and Local Labor Markets and Employee Expectations The business climate affects the supply and demand of talent along with employers ability to attract and retain employees. Globally, only 25% of firms are having difficulty attracting employees generally, but four out of five respondents in Asia and Brazil and one of every two in the U.S., Spain and Ireland report difficulty attracting critical-skill employees. Even in relatively soft economies, top talent is in short supply. Organizations in most regions report having less difficulty retaining employees than they do attracting them. This may reflect employee reluctance to leave their current employer in uncertain business conditions. In Towers Watson s 2010 Global Workforce Study, Figure 2. Companies in different regions took different approaches to cost cutting and cost management during the recession Global China/ India Other Asia Pacific Ireland/ Spain Other Europe Brazil Canada U.S. Hiring freezes 64% 45% 60% 80% 72% 77% 61% 66% Salary freezes 55% 28% 53% 67% 60% 58% 54% 61% Layoffs, redundancies, reductions in force, etc. 51% 12% 32% 57% 56% 47% 57% 74% Reduced bonuses 36% 42% 46% 31% 36% 17% 23% 41% Restrictions on overtime 33% 14% 26% 27% 41% 52% 26% 44% Total number of actions taken (mean) % of respondents taking at least four actions % of respondents expecting to undertake workforce reductions over the next three years 44% 22% 34% 47% 52% 37% 40% 61% 23% 6% 21% 38% 33% 14% 21% 24% 2010 Global Talent Management and Rewards Survey Report 3

6 Figure 3. Attraction and retention difficulties vary significantly by region Global China/ India Other Asia Pacific Ireland/ Spain Other Europe Brazil Canada U.S. Critical-skill employees problems attracting 65% 84% 78% 49% 62% 81% 61% 52% problems retaining 49% 81% 69% 29% 44% 65% 35% 31% Top-performing employees problems attracting 61% 76% 71% 52% 67% 69% 57% 45% problems retaining 45% 77% 63% 22% 41% 67% 35% 25% High-potential employees problems attracting 56% 68% 70% 47% 58% 67% 54% 40% problems retaining 45% 75% 60% 29% 43% 64% 38% 25% All employees problems attracting 25% 36% 41% 22% 19% 30% 22% 15% problems retaining 21% 39% 39% 14% 12% 26% 12% 11% Figure 4. Fewer organizations report the real value of rewards has increased over the past five years than over the past 10 years Past 10 years Managers Hourly Employees Total Cash Total Rewards Total Cash Total Rewards Past five years Past 10 years Past five years Past 10 years Past five years Past 10 years All 63%* 55% 68% 58% 58% 48% 62% 53% China/India 71% 68 % 72% 67% 69% 64% 70% 64% Other Asia 69% 69% 72% 72% 66% 63% 66% 66% Ireland/Spain 73% 52% 76% 59% 71% 48% 74% 55% Other Europe 68% 52% 73% 55% 52% 38% 57% 44% Brazil 59% 62% 64% 70% 59% 61% 61% 64% Canada 65% 58% 72% 64% 59% 49% 66% 58% U.S. 51% 38% 56% 41% 43% 32% 49% 35% Past five years * The percentage of organizations where the real, inflation-adjusted value of total cash (salary plus bonus) or total rewards (total cash plus total value of employer-provided benefits) has increased from 2000 or 2005 to nearly half of employees indicated they either have no plans to leave their current employer or plan to stay with their employer until they retire. Economic conditions also drive changes in the value of total rewards. In Asia and Brazil, almost 70% of organizations report that the real value of cash compensation and total rewards has increased for managers and hourly employees alike over both the past five-year and 10-year periods. These organizations have increased the real value of their rewards in order to remain competitive in rapidly growing economies with tight labor markets. In Europe, roughly 70% of organizations report that the real value of cash and total rewards has increased for managers over the past 10 years, but fewer European organizations report real increases in rewards over the past five years reflecting the economic reversal in and current economic uncertainty. The experience in Canada indicates a much smaller change, perhaps as a result of Canada s relatively healthy financial services and natural resources industries. The numbers in the U.S. are stark by comparison: Only 40% of all U.S. organizations report an increase in the real value of rewards for managers over the past five years. The real value of wages and rewards at most U.S. firms has been flat or declined. Trends for hourly employees reflect the same underlying phenomena as those for professional/managerial employees, but hourly employees are even less likely to have experienced an increase in the real value of their total rewards. 4 towerswatson.com

7 Case Study Coming Back From Layoffs This organization engineered a series of layoffs in early Since then, financial results have improved; however, next year s projections are uncertain. If the economy slows, and demand for its services decreases, the company plans to undertake additional layoffs. Predictably, previous cost-cutting actions have increased the remaining employees workloads. Staffs are stretched thin; if business improves, the organization will need to hire more staff. Managers are especially concerned about retaining top-performing and high-potential employees because there have been fewer advancement opportunities since the layoffs. Meanwhile, other organizations have been actively recruiting these employees, and a few top performers have already left, citing the potential opportunities and increased security and stability elsewhere. Still, resources remain tight, so any actions the company takes will have to pay for themselves. To address these issues, Towers Watson recommended the following actions: Review this year s merit increases and bonus payouts, reducing payouts to those employees who only partially meet expectations in order to increase the available pool for top performers and highpotential employees. Provide financial recognition awards to employees who identify new ways to improve processes, cross-sell products to existing customers, save money, develop new products or otherwise contribute to the organization s bottom line. Leverage nonfinancial recognition broadly to drive employee engagement. Review opportunities to implement a retention bonus program with a multiyear time horizon for selected high-potential and top-performing employees. Payout would be contingent on business and employee performance, ensuring that the program effectively pays for itself. Re-recruit high-potential employees by communicating how they are viewed by senior leadership and holding career development discussions. Emphasize on-the-job experiences and identify at least two or three possible opportunities for developmental rotations or other stretch assignments that align with the employee s interests and career aspirations. Given the company s lean staffing model, assess whether the organization s best and brightest talent is aligned with its most strategic and pivotal roles. Consider rotating high-potential employees out of businesses with low growth to those expected to grow more this year or to those where turnaround efforts will provide significant growth opportunities. Create a process to ensure successful transition of employees who rotate into new roles Global Talent Management and Rewards Survey Report 5

8 Figure 5. Employers recognize some of the adverse impacts of cost cutting Increased workloads for employees Employees ability to manage their levels of work-related stress All Employers # of cost-cutting actions taken 1 2 actions 3 4 actions 61%* 45% 67% 79% 53% 36% 57% 72% Overall employee engagement 50% 35% 52% 70% Employees ability to have a healthy balance between work and their personal lives 50% 37% 54% 65% Productivity 28% 16% 29% 45% Willingness to take risks/try new things 25% 16% 28% 35% Quality/customer service 22% 12% 21% 37% Institutional knowledge (of core processes, prior business cycles, etc.) While employers acknowledged the impact of their actions on employee well-being, they have not made the connection between well-being-related items and an employee s decision to join a firm. 20% 9% 19% 34% 5 or more actions *The percentages of respondents who indicate that their cost-cutting actions have had an adverse impact in that area The more cost-cutting actions employers have taken, the more likely they are to recognize the impact of those cuts on employee engagement levels and other indicators of employee well-being. Nevertheless, while declines in employee engagement often have an adverse business impact, respondents in our survey do not believe their cost-cutting actions have adversely affected quality, customer service, employee productivity or willingness to take risks, regardless of how many cost-cutting actions they have taken. Cost-cutting actions may have affected the drivers of employee attraction and retention. Organizations recognize the importance of base pay, challenging work, career advancement opportunities and their reputation in attracting employees. The cost-cutting and cost management actions employers have taken have had significant negative impacts in each of these areas. While employers acknowledged the impact of their actions on employee well-being, they have not made the connection between well-beingrelated items such as a convenient work location, flexible scheduling and time off and an employee s decision to join a firm. Employers and employees agree that compensation and advancement opportunities are important factors in both attracting and retaining employees. However, employers underestimate the importance of employee security both now and in retirement and well-being when employees evaluate whether or not to leave their current organization. With many employees feeling more responsible for managing their careers and retirement, they are increasingly Figure 6. Employers fail to recognize the impact of changes to employee well-being on their ability to attract employees Ranking* Employer View Employee View 1 Competitive base pay Competitive base pay 2 Reputation of the organization as a great place to work Challenging work 3 Challenging work Convenient work location 4 The business/industry of the organization Opportunities for career advancement 5 Opportunities to learn new skills Vacation/holiday/paid time off 6 Opportunities for career advancement Reputation of the organization as a great place to work 7 Organization's financial health Flexible schedule * Ranking represents the frequency the item was selected as one of the top five reasons an employee would join their firm, from a list of 26 items. Employee data come from the 2010 Towers Watson Global Workforce Study. 6 towerswatson.com

9 likely to be influenced by job offers that include a (better) pension, greater job security, better work/life balance or more flexible work arrangements. Cost cutting and other changes have created a gap between the employee value proposition (EVP) companies offer and the EVP employees are seeking. Employees are looking for job security and stability, opportunities to earn substantially higher levels of compensation, and opportunities for development and advancement, which they feel are unavailable in their current organization. Many employers confirm that these intrinsic and extrinsic rewards are unavailable. Wide gaps between what employees want and what they believe is attainable can lead to disenchantment with their current employer, an unwillingness to give discretionary effort on the job and retention risk. Figure 7. Employers underestimate the impact of pensions, job security and more flexible work arrangements on employees decisions whether or not to leave their organization All Asia Brazil Canada Europe U.S. Increased compensation Availability of/ better pension Greater job security Improved work/life balance Greater career advancement opportunity Employee 91% 86% 86% 85% 84% 82% Employer 88% 30% 43% 66% 87% 48% Gap 2% 56% 42% 20% 3% 34% Employee 91% 89% 90% 88% 88% 86% Employer 94% 28% 47% 61% 90% 43% Gap 3% 61% 43% 27% 2% 43% Employee 90% 86% 84% 87% 89% 83% Employer 93% 31% 44% 66% 89% 36% Gap 3% 55% 40% 21% 0% 47% Employee 91% 88% 82% 84% 82% 81% Employer 85% 23% 35% 59% 83% 50% Gap 6% 65% 47% 25% 1% 31% Employee 89% 83% 82% 82% 81% 78% Employer 87% 26% 38% 69% 88% 49% Gap 2% 57% 44% 13% 7% 29% Employee 94% 86% 87% 86% 81% 80% Employer 83% 37% 48% 70% 83% 56% Gap 10% 49% 39% 15% 2% 24% More flexible work hours The percentage of employees or employers responding to a moderate or great extent: How would receiving each of the following from a new employer influence your/your employees decision to leave your current organization? Gaps are the difference between employee and employer percentages, and may not add up due to rounding Global Talent Management and Rewards Survey Report 7

10 Figure 8. Employees perceive a significant gap between what is important to them in their job and what is available in their current organization Region All Asia Brazil Canada Europe U.S. A secure and stable position Substantially higher levels of compensation Opportunity to rapidly develop my skills and abilities A wide range of jobs and work experiences Important* 76% 72% 68% 60% 51% Achievable** 51% 31% 39% 39% 29% Gap 26% 41% 29% 21% 21% Employer View*** 54% 26% 44% 45% 42% Important 69% 73% 74% 71% 60% Achievable 48% 37% 44% 45% 36% Gap 21% 37% 31% 25% 24% Employer View 60% 37% 49% 50% 41% Important 74% 74% 75% 47% 65% Achievable 59% 50% 57% 41% 48% Gap 15% 25% 19% 6% 17% Employer View 23% 20% 38% 24% 48% Important 87% 76% 66% 63% 43% Achievable 59% 27% 37% 41% 22% Gap 28% 49% 29% 22% 21% Employer View 57% 20% 43% 49% 34% Important 76% 68% 65% 54% 47% Achievable 49% 27% 37% 32% 26% Gap 27% 41% 29% 21% 20% Employer View 56% 22% 54% 46% 51% Important 87% 74% 62% 55% 39% Achievable 53% 22% 33% 37% 18% Gap 34% 51% 29% 19% 21% Employer View 54% 23% 33% 42% 39% Opportunity to develop innovative products/services * The percentage of employees responding favorably to item: To what extent is each of the following important to you in your most-preferred work situation? ** The percentage of employees responding favorably to item: To what extent is each of the following achievable within your current organization? *** The percentage of employers responding favorably to item: To what extent is each of the following available to professional/managerial employees at your organization? In growing economies with tight labor markets (e.g., Brazil and much of Asia), the attraction/retention impact of these EVP gaps threatens companies ability to realize both immediate and long-term growth opportunities. Organizations in the U.S., Europe and Canada face similar EVP gaps, but continuing economic uncertainty in these markets means that these EVP gaps pose greater short-term business risks through their negative impact on employee engagement levels, performance and willingness to exert discretionary effort, rather than through their impact on attraction and retention. In the long term, however, these EVP gaps will have a similar impact on these companies ability to attract, retain and develop key talent, and deliver sustained business performance. Although companies everywhere face similar EVP gaps, organizations in faster-growing economies such as Brazil, China and India are more likely to devote additional resources to close these gaps because of their greater urgency than organizations in Europe, Canada and the U.S. The economic crisis dramatically changed the business environment, causing organizations to focus on short-term cost-cutting actions that resulted in EVP gaps. As economic and business conditions improve, employers are restoring some of the losses in reward programs and addressing their EVP. They are also rethinking their long-term business, talent and reward strategies, developing greater integration and consistency within and between programs, and prioritizing their investments. These changes are reflected in the current landscape of talent and reward programs. 8 towerswatson.com

11 Case Study Outgrowing a Decentralized Approach to HR Management This company has grown rapidly over the past 10 years, developing new products and expanding geographically. Regional leaders have operated with autonomy as long as they delivered strong revenue growth. But recent results in Asia have been below expectations. And high-performing managers, who were promoted quickly, have struggled to adjust to their new responsibilities even as the company has been challenged to backfill their positions. Managing talent globally is being hindered by a variety of factors. Transferring people from one region to another has been difficult; managers are reluctant to release key employees, and the workers themselves do not see any connection between the proposed rotations and advancement (in their view, advancement means moving up the hierarchy for greater pay). There is a clear lack of global talent management infrastructure and technology. In addition, leadership expectations, cultural norms and performance expectations are not consistent across countries or business units. Furthermore, the high starting salaries and large salary increases necessary to attract and retain talent in fast-growing markets have created internal equity and governance issues. Moving from a decentralized to a centralized approach, which represents a major undertaking, is critical for this organization s future success. Towers Watson suggested that the SVP of HR plan a series of change initiatives, starting with the organization s employee value proposition (EVP) and proceeding through design, implementation and ongoing measurement. Over time, most of the following recommendations could or should be implemented: Obtain the support and involvement of the CEO and executive team as sponsors for what will represent a significant change in the way the organization manages its human capital. Create a global team to develop a formal, organization-wide EVP and total rewards and talent management strategy that align reward and talent programs with the company s business drivers and human capital strategy. Inventory all reward and talent programs (by region, business unit, etc.), evaluate their effectiveness, and identify any required improvements or new programs. Map the change initiatives across a multiyear plan to ensure focus and prioritization of resources. Identify talent groups most critical to the organization s continued success. Assess the drivers of engagement for these key talent segments, and ensure the human capital strategy and EVP are credible, distinctive and compelling in the markets where this organization competes for talent. Review the job-leveling models used across the firm and establish a single, globally consistent leveling protocol. This protocol should be used to level all jobs, with the resulting framework serving as a foundation for all reward and talent management designs. Conduct competitive market analyses and develop locally competitive salary ranges for each level to help ensure pay is equitable and sufficient, but not overly competitive with the external market. Establish a calendar for a recurring review of competitive market practices and pay levels. Build an organization-wide core competency model that translates the company s mission and values into behavioral expectations for all employees. Embed the competencies and behaviors throughout the organization s talent programs and practices. Adopt a global performance management process and compensation administration guidelines, establishing policies for delivering pay on the basis of performance, market competitiveness, internal equity and development of required competencies Global Talent Management and Rewards Survey Report 9

12 The Current Landscape of Rewards and Talent Management Formalizing and Communicating the Employee Value Proposition Regardless of how it is developed or defined, and whether it is articulated explicitly or remains implicit, every organization has an EVP, and some develop several EVPs that are inconsistent with each other. Only 34% of organizations report having an EVP that they have articulated, documented and communicated. The other two-thirds say theirs is implicit and has evolved over time. Organizations in Asia and Brazil, where attraction and retention challenges are greatest, and top-performing companies in general are the most likely to have a formal EVP. Figure 9. High-performing organizations are more likely to have a formal EVP Have a Formal EVP All 34% Asia 39% Brazil 53% Canada 25% Europe 35% U.S. 25% High-performing organizations 42% Average-performing organizations 32% Organizations performing below their peers 28% The EVP can be a powerful tool for attracting, retaining and engaging employees. Organizations are also using the EVP to improve the alignment within HR programs and between HR programs and the organization s business and its brand. Better alignment between the EVP and the brand can lead to improved employee line of sight, encouraging employees to adopt those behaviors that will deliver on the brand promise, including superior customer service. The EVP is a powerful management tool when it is used and communicated effectively. Among organizations that offer competitive rewards, improving communication of those rewards can have a greater impact on employee satisfaction and at far lower cost than additional investments in making the rewards richer. Companies that have a formal EVP are nearly four times as likely to communicate their existing EVP effectively and are twice as likely to align their EVP with what they stand for in the marketplace. When an organization formalizes its EVP, that EVP is more likely to become a stable, unifying experience within the company. While it is often necessary to modify the EVP for use in different locations or for different employee segments, it is better to do so within a stable, common framework that is aligned with the organization s strategy and has been effectively communicated. Organizations with a formal EVP are less likely to have changed their EVP recently or to expect to change it over the next three years. Figure 10. Organizations formalize their EVP in order to promote effective alignment All Asia Brazil Canada Europe U.S. To improve alignment of HR processes, programs and administration with business objectives, brand and each other 81% 78% 90% 84% 82% 79% To establish employer brand for talent/attraction 73% 73% 60% 81% 75% 76% To set and manage employee expectations 65% 63% 48% 65% 72% 73% To support/drive change management 59% 59% 58% 38% 67% 63% To facilitate communication with prospective employees 50% 48% 44% 59% 47% 55% 10 towerswatson.com

13 Figure 11. Organizations with a formal EVP communicate it more effectively, and achieve better stability and alignment EVP Informal Formal Organization does a good job communicating its existing EVP* 19% 74% Organization s EVP is clearly aligned with what we stand for in the marketplace 37% 81% Organization has significantly changed its EVP in light of the recent economic changes 20% 28% Organization is going to change its EVP significantly over the next three years 38% 23% Organization varies EVP by:** Location 34% 14% Business Unit 35% 19% Job Level 46% 29% Top Performers 46% 28% High Potentials 43% 27% *The percentage of respondents who have an informal/formal EVP who agree with the statement **The percentage of respondents who have an informal/formal EVP who vary that EVP by location, business unit, etc. Financially high-performing companies are the most likely to have a formal EVP. Rewards Base pay is the foundation for attracting and retaining employees. However, in many organizations, the real value of base pay has been flat for the past five years. Many organizations have also reduced bonuses and instituted salary freezes in the past two years to cut or manage costs. Moving forward, it will be critical for organizations to align employer and employee interests in order to attract and retain employees with required skills in a cost-effective way. Merit There are significant differences in both the size of merit increase budgets as well as individual salary increases by region. Employees who met performance expectations received an average base pay increase of 8.8% in China and India, but only 1.6% in Ireland and Spain. Similarly, there are differences in the merit increases companies provide to employees who far exceed expectations top performers versus average performers. The greatest percentage differentiation is found in Europe and Brazil. In Europe, organizations with lower to average merit increase budgets are making it a priority to give significantly larger increases to top performers, reflecting their difficulties attracting or retaining top performers. In Brazil, where labor markets are tighter and salary increase budgets are larger, organizations are limiting merit increases for average performers in order to give top performers increases that are more than three times as large. Differentiation is lower in Asia and North America, where organizations give top performers merit increases that are twice as large as the increases for average performers. Low-performing companies are not differentiating merit increases to a significantly greater extent than top-performing companies, awarding comparable merit increases to employees who only partially meet expectations Global Talent Management and Rewards Survey Report 11

14 Figure 12. European and Brazilian companies report greatest merit differentiation no differences in differentiation by firm performance Did not meet expectations Partially met expectations Met expectations Employee Rating Exceeded expectations Far exceeded expectations China/India 0.7% 3.5% 8.8% 12.6% 17.7% 202% Other Asian countries 0.4% 1.6% 4.0% 5.8% 8.0% 202% Ireland/Spain 0.2% 0.7% 1.6% 3.0% 5.1% 317% Other European countries 0.1% 0.8% 2.7% 4.5% 7.0% 261% Brazil 0.7% 1.3% 4.1% 7.6% 10.9% 264% Canada 0.2% 1.1% 2.8% 4.0% 5.6% 197% U.S. 0.1% 0.9% 2.5% 3.6% 5.0% 199% Top-Performing Companies 0.4% 1.5% 3.7% 5.6% 8.1% 217% Average-Performing Companies 0.3% 1.3% 3.7% 5.6% 8.0% 216% Low-Performing Companies 0.3% 1.7% 3.7% 5.6% 8.2% 219% *Differentiation ratio is the ratio of the increase in merit pay for employees who far exceeded expectations divided by the increase for employees who met expectations. Differentiation ratio* Figure 13. STI funding is holding steady in most regions Most recently completed year* Current Year China/India 89% 85% Other Asian countries 82% 82% Ireland/Spain 72% 73% Other European countries 76% 80% Brazil 77% 88% Canada 102% 90% U.S. 83% 92% Top-performing companies 98% 91% Average-performing companies 83% 86% Low-performing companies 59% 72% *Percentages are the actual payouts of STI relative to targeted levels at beginning of the year. Companies that have outperformed their peers are increasing their STI performance targets for this year, while poor performers are decreasing theirs. Short-Term Incentives Amid increasing profits and shareholder returns, the average projected short-term incentive (STI) funding level in most regions for the current year is approximately the same percentage as for the most recently completed year, as many organizations have increased performance targets. The two exceptions are Canada, where payouts are expected to decrease by 12 percentage points, and the U.S., where payouts are expected to increase by nine percentage points. Companies that have outperformed their peers are increasing their performance targets for this year, while poor performers are decreasing theirs. As a result, high-performing companies have lower expected payouts this year than last, while low performers expect their payouts to increase. Companies have maintained significant levels of differentiation between top-performing employees and average employees. The average difference is approximately 1.5 times greater. There is no significant difference between high-performing companies and low-performing companies in the ratio of STI payouts to top performers relative to average performers. Poorly performing companies are providing the same relative differentiation as high-performing companies rather than allocating a larger share of their relatively scarce resources to top performers and less to others. 12 towerswatson.com

15 Case Study Integration Following a Merger These two organizations merged shortly before the 2008 financial crisis. Each targeted customers in different market segments and different stages in the value chain, and each had been highly profitable. To maintain focus with minimal disruption in a rapidly changing marketplace, the merged organization s CEO decided to allow each legacy entity to continue operating as a relatively independent business unit rather than pursue an aggressive integration plan. However, the global recession brought two years of poor performance for both organizations, and in early 2010, the incumbent CEO retired. The incoming CEO s mandate was to deliver the synergies that had been promised at the time of the merger, including cross-selling the company s entire portfolio of products and leveraging economies of scale across the combined entity. Given the new organizational mandate, the two SVPs of HR started to outline the needs and potential challenges of integrating the legacy businesses. The two companies cultures were very different; one was hierarchical and structured, the other informal and flat. And their reward and talent management philosophies were also very different. Not surprisingly, there was a great deal of anxiety among employees about the upcoming changes, as employees had become accustomed to business as usual during the years immediately following the merger. The SVPs were particularly concerned about retention risks among those high-potential employees needed to help the company return to growth. To overcome these challenges, Towers Watson suggested the organization establish task forces with the following accountabilities: Assess the two cultures to understand differences in expectations and day-to-day operating assumptions between the two. Using these insights, plan and execute a top team alignment session to define new values and guiding principles for the combined entity. Conduct a series of pulse surveys to identify, monitor and manage employee engagement issues throughout the integration process. Segment and analyze the data for key employee populations, and leverage the data to start building the employee value proposition. Review the career framework, job leveling, compensation and benefits, and corporate titling programs of both business units, and recommend new designs for the integrated organization. Ensure these recommendations align with the employee engagement findings, articulate a vision of the desired-state employee experience and establish a road map for achieving it. Formalize a high-potential employee program that meets the needs of the integrated organization. Communicate to managers expectations for engaging and retaining highpotential employees. Review the company s incentive and recognition programs, and ensure that the metrics and rewarded behaviors support the organization s business and cultural objectives (e.g., working across the two legacy businesses and cross-selling). Create organizational and functional competency profiles for the combined organization. Embed these profiles in all talent processes to ensure that they are fully operational. Select and monitor business and employee engagement metrics to track progress toward the desired-state culture, business results and employee experience Global Talent Management and Rewards Survey Report 13

16 Figure 14. Very little differentiation of STI across regions, financial performance groups Did not meet expectations Partially met expectations Organizations have focused on risk management and cost reductions over the past two years. But as economic and business conditions improve, employers have begun to restore some of the previous cuts in rewards and to address gaps in their EVP. They are also addressing the long-term impact of the changing conditions by modifying their business and talent management strategies, and adjusting their talent programs accordingly. Like the economic and business conditions that made these changes necessary, these adjustments vary significantly by region. Asia Growth and Innovation Met expectations Organizations in Asia plan to grow by expanding into new markets and introducing new products and services. These organizations report that creativity and innovation is a key competency for executives to be successful. Expansion into new markets requires additional talent at all levels. Since labor markets are tight, organizations place a premium on developing people requiring executives to promote employee development, investing in the internal talent pipeline and talent acquisition, and emphasizing developing new leaders with new competencies. Brazil New Markets and New Skills Organizations in Brazil plan to grow by expanding into new markets, requiring new leaders with Exceeded expectations Far exceeded expectations China/India 16% 52% 97% 123% 151% 155% Other Asian countries 18% 52% 97% 126% 155% 161% Ireland/Spain 10% 47% 82% 101% 125% 154% Other Europe countries 13% 54% 96% 120% 146% 153% Brazil 19% 56% 99% 120% 141% 143% Canada 13% 58% 99% 118% 141% 143% U.S. 15% 54% 97% 115% 134% 139% Top-performing companies 20% 57% 102% 122% 142% 140% Average-performing companies 15% 55% 95% 118% 144% 151% Low-performing companies 8% 43% 84% 112% 137% 163% Differentiation ratio* * Differentiation Ratio is the ratio of the STI payout as a percentage of target for employees who far exceeded expectations divided by the STI payout as a percentage of target for employees who met expectations Talent Management Strategy and Emphasis different competencies. Brazilian organizations expect executives to help develop talent with these new skills, but due to the urgency, emphasize buying talent over investing in building their internal pipeline. Nevertheless, organizations in Brazil indicate that going forward they are more likely to increase their emphasis on leadership development, employee learning and succession management in order to sustain this push. Canada Emphasizing Efficiency Organizations in Canada are more likely to stress improving efficiency of operations. Executives are required to be results-oriented first and visionaries second. Since efficient operations often require a highly experienced workforce with deep expertise in the organization s methods, Canadian organizations emphasize long-term career development and advancement through clearly defined career paths to support this strategy. Europe Continued Emphasis on Cost Reductions and Value European organizations emphasize strategic cost reductions, but they are also shifting their competitive strategy to emphasize innovation and customer service. Given the importance of cost reduction among European organizations, managing the talent supply chain is critical to their success. 14 towerswatson.com

17 Figure 15. Economic and business conditions cause organizations in different regions to emphasize different business and talent management strategies and executive competencies Global Findings Business Strategy* Executive Competencies** Strategic Talent Management Priorities*** Focused primarily on growth Results orientation Ensuring readiness of talent for critical roles Shifting away from competing based on image or reputation Shifting toward competing by developing innovative products and services Regional Variation From Global Findings Strategic vision Change leadership Increasing the investment in building the internal pipeline of talent Creating more movement, rotation and development opportunities for talent Business Strategy Executive Competencies Strategic Talent Management Priorities Asia Grow through product and market expansion Compete by developing innovative products and services More focus on expense reduction to supplement growth Creativity and innovation Knowing the business Developing people Increase investment in talent pipeline and acquiring new talent Europe Compete by developing innovative products and services and improving customer service Revenue growth through market expansion Knowing the business Inspiring and motivating others Creating movement/rotation for development without increasing the investment in the internal pipeline Brazil Developing people Developing next generation of leaders with new competencies Acquisition of new talent Less emphasis on investing in internal pipeline/ ensuring readiness of existing talent Canada Less growth-focused than other regions, increasing emphasis on efficiency of operations Same as global Less emphasis on acquisition of new talent U.S. Supplementing growth with M&A activity Knowing the business Emphasis on ensuring readiness of critical talent Compete by developing innovative products and services *Business strategy represents the organization s business strategy and the differentiating factors the organization has traditionally competed on or expects to compete on. **Executive competencies are the most frequently selected competencies that are necessary for executives to be effective. ***Strategic talent management priorities are based on the percentage of firms that indicated this area was one of the top three talent implications of their organization s strategic priorities. Although they are less likely to increase their investment in the internal pipeline, they still need to create movement and rotation in order to develop leaders who know the business. European organizations also expect executives to inspire and motivate employees perhaps as a way to spur innovation and customer service. U.S. Growth Through Innovation and M&As Organizations in the U.S. plan to grow, but they are more likely than organizations in other regions to accomplish this through merger and acquisition (M&A) activity. Successful mergers require executives to have a deep expertise and knowledge of their business. In the U.S., ensuring the readiness of critical talent is the number one talent management priority. Organizations are emphasizing leadership development, career paths and succession management, but not by creating movement or talent rotations. This may reflect the relative importance of developing deep technical expertise rather than broader experience in organizations in the U.S. In addition to implementing the right talent management strategies and setting the right priorities, it is critical for companies to deliver programs effectively. Effectiveness is often a function of effort emphasis and investment and consistency or alignment Global Talent Management and Rewards Survey Report 15

18 Promoting Effective Talent Management Through Emphasis and Consistency Although most organizations have increased their emphasis on talent management over the past three years, they recognize that they still need to improve their talent management programs. Even those talent management programs that are considered most effective specifically, employee learning and development, and performance management are rated as very effective by less than 30% of organizations. Employers are significantly more likely to report being more effective on a particular aspect of talent management when they have increased their emphasis in that area. On a global basis, organizations are most likely to increase their emphasis in three areas over the next three years: leadership, succession planning and career pathing. Given today s economic conditions, the skills and competencies that leaders require have changed, reflecting the new behaviors that are needed for organizations to compete successfully. Organizations are addressing this need by investing in leadership development programs, emphasizing new executive competencies around creating a strategic vision, change leadership skills to implement these new strategies and a results orientation to deliver on them. Organizations are also working to develop new leadership assessment tools around these executive competencies. These tools will be used to assess the new leadership competencies and to identify the development needs of leaders who, in some cases, are required to make significant jumps in role complexity to meet the changing needs of the business. Employers and employees alike recognize the importance of career pathing and succession management, but employers are less effective in these areas. Effective succession management is a tool for reducing human capital risks and loss of institutional knowledge associated with employee turnover, and is vital to preparing leaders for significant jumps in complexity as they move up the hierarchy. Developing career paths and plans helps organizations direct employee development to those areas that will prepare them for advancement opportunities and build deeper skill sets. Together, career paths and plans and succession management all help ensure the organization continues to develop the top talent and critical-skill employees needed for success. Figure 16. Organizations that increase their emphasis on aspects of talent management are more likely to find them very effective % increasing emphasis over past three % very effective** Company emphasis over past three years years* All Increased Decreased Ratio Performance management 54% 28% 31% 17% 1.8 Leadership development 54% 24% 35% 2% 17.5 Employee learning and development 48% 29% 38% 9% 4.2 Leadership assessment 47% 23% 33% 6% 5.5 Succession management 46% 17% 24% 3% 8.0 Coaching and mentoring 45% 15% 22% 3% 7.3 Competency models and architecture 43% 16% 24% 4% 6.0 Career pathing and planning 42% 10% 15% 0% n.a. Manager performance 41% 16% 25% 0% n.a. Critical role identification 39% 21% 32% 4% 8.0 Onboarding/induction into new roles 38% 17% 28% 7% 4.0 Talent movement/rotations 34% 12% 23% 3% 7.7 Workforce planning 33% 14% 25% 8% 3.1 Team effectiveness and development 29% 14% 26% 5% 5.2 *Percentage of companies that indicated they increased their emphasis on this area of talent management over the past three years. ** Percentage of respondents that indicated that their organizations increased or decreased their emphasis in this area of talent management over the past three years who rated their organizations as very effective in this area. Gap equals the differences in effectiveness between the organizations that increased or decreased their emphasis in that area. 16 towerswatson.com

19 Global Consistency Today s increasingly global organizations are balancing the need for local variation in reward and talent management practices with the benefits of global consistency. The key business drivers behind the decision to establish global consistency in reward and talent management programs are: Alignment. Competing globally requires a cascade from organizational business imperatives, to the EVP and total rewards strategy, and ultimately to rewards and talent management program design. Governance. Regulation and increasing complexity require organizations to improve their risk management, decision-making and knowledgesharing abilities. Cost Management. Globalization, competition and economic conditions are placing pressure on margins, increasing the need to manage human capital costs. Efficiency. Globally consistent programs are easier to administer, facilitate quick and accurate reporting and analysis, and allow companies to leverage investments in technology. Quality. Global scale allows for the development of compensation and talent management centers of excellence. Talent Mobility. Leveraging a global workforce helps to get the right people to the right places at the right time. Complexity. Managing the employees of a global organization requires a more sophisticated infrastructure (e.g., technology). Becoming Globally Consistent Where to Start Multinational organizations are more likely to develop consistent programs for top management, particularly in the areas of performance management, succession planning, leadership development and incentive programs. These companies also have globally consistent performance management and STI programs for other employees, but not succession management programs. Instead, they develop globally consistent competency models, job leveling or job evaluation (hereafter, job leveling), and base pay programs. These programs are foundational, enabling organizations to develop global consistency in other talent management and reward areas. Figure 17. The pattern of global consistency varies by job level Global Firms* Top management Other employees Long-term incentives 84% 50% Performance management 76% 70% Succession management 75% 38% Short-term incentives 72% 61% Leadership development 69% 42% Competency models/architecture 66% 59% Job leveling or job evaluation 66% 58% Base pay 61% 56% Workforce planning 58% 47% Career pathing and planning 57% 42% * Percentage of firms where this program exists in two or more countries that indicate the program design is globally consistent 2010 Global Talent Management and Rewards Survey Report 17