Using Pay to Better Sustain Employee Engagement
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- Aubrey Fields
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1 Using Pay to Better Sustain Employee Engagement Attract, Retain and Motivate Key Employees By John Gayley, Steve Hinden and Marc Roloson In the near future, insurance companies will need to use their compensation tools better so they can attract, retain and motivate talent in a fast-changing market that offers many employment options. The divergence between employees commitment levels and their perceptions of rewards is huge, and is not sustainable in the current environment. Figure 1. A critical gap exists 90% 85% 80% 75% 70% 65% 60% 55% 50% 45% 40% 2008 Pride Engergized to go the extra mile Perception of relative rewards $334 $ Today s insurance environment is challenging for both senior management and employees. Top industry executives continually focus on employee engagement, as external challenges add pressure on workloads, and economics constrain the delivery of consistent and appealing total rewards. Management needs to find a critical solution that maintains, if not improves, employee commitment and drives business results, while optimizing rewards and recognition budgets. In some ways, the industry has been lucky: According to Towers Watson research, over the past several years, employee commitment in the industry has actually risen, with many employees feeling energized to go the extra mile despite feeling increasingly dissatisfied with their relative total rewards. Employees always care about pay, but the sluggish rebound in the economy may have temporarily reprieved the insurance industry: Those with jobs felt fortunate to have them, despite lingering $ DJUSLI $ $ Sources: Towers Watson Insurance Norms ; Dow Jones U.S. Life Insurance Index (DJUSLI) $684 Critical issue 2013 concerns over pay levels. This may explain the improvement in engagement scores. But this reprieve may soon end: Figure 1 illustrates the recent divergence between employees commitment levels (i.e., energized to go the extra mile) and their perceptions of rewards. The gap between the two is huge and getting wider; this position isn t sustainable as the economy and global labor markets continue to improve. Employees clearly feel squeezed in the current environment since the pay trends have been almost static: Our industry research and data suggest that operating budgets (including pay) often are frozen or even shrinking, and total direct pay opportunities have plateaued over the past few years. Aggregate base salary increases continue to be modest, and few insurers are increasing bonus or long-term incentive (LTI) targets across the board. Also, the per capita realized (earned) value of pay has generally been stagnant. However, the industry and the demand for talent are anything but static. Insurance technology and online services continually need fresh sources of skilled workers to succeed, pushing many insurers to rethink their talent strategies. Increased regulatory scrutiny also puts a premium on other capabilities and expertise (e.g., risk, compliance and governance). As a result, some long-tenured employees feel threatened, while those with high-demand skills are increasingly aware of their relative value. Solving for this dynamic requires a multifaceted yet targeted approach. The insurance industry can get ahead of this looming issue with a focused action plan that increases the perceived value of its reward programs 16 towerswatson.com
2 before the cycle completely turns. There are many aspects of rewards that employees value. In particular, though, we believe insurance companies that use compensation tools more effectively will help support their value propositions and sustain employee engagement. Sustainable Employee Engagement Matters The return on investment for sustainable engagement is significant. Companies with high sustainable employee engagement outperformed low-engagement companies, grew earnings before interest and taxes (EBIT) at a significantly faster rate than their sector and had higher growth rates for capital expenditures (Figure 2). Towers Watson conducts regular research into employee engagement and perception in a variety of industries, including insurance, and maintains one of the world s largest databases of norms overall and by industry. Figure 3 illustrates where the insurance industry falls relative to a global, cross-industry composite of companies on employees perception of key factors that drive engagement. It also shows the degree of movement in these perceptions over the past five years. The good news is that insurance companies outperform other sectors on many key engagement factors. The bad news is that they don t outperform on all factors, and the areas in which insurers lag are getting more crucial. Compared to cross-industry norms, insurance companies fall short on pay and rewards; career development; and stress, balance and workload. All three of these fall in the danger zone, where employee perceptions are comparatively low and are either stagnant or even deteriorating. How can resource-constrained insurers address the reward issues more effectively? In short, by using targeted, focused and efficient approaches that optimize scarce resources. These approaches will also help improve perception and complement other important aspects of engagement in order to drive business results. Figure 4 focuses on three key themes related to pay and rewards: program segmentation, differentiation and manager delivery. Figure 2. Performance of high- and low-engagement companies 20% 15% % 5% n Low sustainable engagement 4.5 0% companies 5% n High sustainable engagement companies 10% 15% 20% % Earnings (EBIT) Capital expenditures Source: Towers Watson Insurance Norms Figure 3. How insurers rate on employee engagement Movement in industry scores over five-year period At or below global composite Potential Engagement Communication Training Competitiveness Job satisfaction Danger Pay and rewards Career development Stress, balance and workload Industry scores relative to global composite Source: Towers Watson Insurance Norms Figure 4. Pay and reward ideas to consider Above global composite Promise Customer focus Goals and objectives Supervision Image Work tools and conditions Inactive Benefits Quality Diversity Leadership Empowerment Performance evaluation Operating efficiency Working relationships Segment Differentiate Deliver One size does not fit all. Consider segmentation strategies for reward programs covering key skills. Ensure pay for performance is a reality in your programs. Use all available pay tools to send performance messages. Improving Stagnant Maximize on the pivotal role of managers in the reward process. Build upon sound designs through effective manager delivery. The insurance industry can get ahead of this looming talent issue with a focused action plan that increases the perceived value of its reward programs in key areas. Emphasis 2014/3 17
3 John Gayley Chicago Steve Hinden New York Marc Roloson New York Segmenting Reward Programs Continuing global competition drives the urgency to attract, engage and retain the best talent. Companies say they design their reward programs to reflect what top talent values the most. However, it s rare that one size fits all. Using pay effectively doesn t mean just throwing dollars at talent vulnerability without a clear-eyed assessment of what s most likely to work. Insurance companies will succeed by placing their reward bets where they will count the most. Tailoring pay elements to key skills can significantly improve attraction, retention and engagement where it matters. These resources can be targeted to the talent segments with the highest impact on business outcomes: top-performing, high-potential and critical-skill employees. Just to illustrate: In the insurance industry today, there is intense talent competition within a number of job families. Among those most frequently cited are underwriting specialties, actuarial, risk management and compliance. These and other functions are receiving greater emphasis because of increasing business and regulatory pressures. Insurers have segmented rewards to address these pressures by: Selectively targeting higher market pay levels. Some insurance companies target higher levels of external market compensation for certain functions or job families. In aggregate, the company may continue to target median (50th percentile) market pay. But for select segments, their business needs dictate higher pay levels closer to the 75th percentile in some cases to ensure they can attract the right talent. Paying for talent from other industries. Insurers increasingly take a broader view of their talent market and effectively take pages from the playbooks of other industries. For example, with the growing focus on evolving technology and big data analytics, it s more important than ever to understand how technology, or other similar companies, pay people with these skill sets. It also becomes critical to assess how to incorporate these practices into insurance pay programs most effectively. Varying pay mix. Changing up the total pay mix for hot skills or functions to reflect differences in market practices or internal priorities is often effective. In some cases, employee groups, such as underwriters, are given higher targeted bonus opportunities than those assigned to other employees at similar organizational levels. This can provide a market edge while also reinforcing higher performance expectations that go along with higher pay opportunities. Rethinking pay program eligibility. Others also extend eligibility for LTIs equity grants and multiyear cash plans, among others deeper into key job families to underline their critical importance to the organization. In addition, some companies also make larger LTI grants to those within these functions who already are eligible. Differentiation Is Key Drive More Pay Dollars to the Highest- Performing Employees A critical priority in any business is to identify those who perform at consistently high levels and use compensation dollars to reward them effectively. Although pay for performance is a universal mantra, few companies say they ve achieved levels of success consistent with their desire to drive employee engagement. Each organization has a unique reward culture that supports its business mission. However, those insurers with a keen desire to differentiate rewards continually strive to use their limited pay budgets even more effectively, including: Better use of merit pools. Salary increase guidelines can be structured to reward true performers with higher increases, instead of giving smaller, more uniform raises to everyone. These guidelines allow companies to fund larger increases for their best performers by changing the shape of the merit distribution curve toward higher performance ratings. This effectively signals that it takes more than just decent performance to automatically receive those annual increases. Then the real merit dollars can be used for the highest performers. 18 towerswatson.com
4 Putting the variable back in variable pay. In most financial services companies, pay for performance usually means annual incentives, bonuses or stock grants, with both upside potential and downside risk. However, many companies operate these more like profit-sharing plans, giving the vast majority the same (or similar) awards; this just spreads the money evenly, like peanut butter. Ways to avoid this trap and enhance differentiation include: More flexible tools. Building internal processes and sufficient flexibility in bonus funding and allocation to ensure the highest performers receive appropriate awards. The past decade has seen many insurers moving away from very mechanical bonus pools and incorporating more fluidity, allowing them to shift funds where needed, in order to recognize talent priorities and performance. Varying grant sizes. Breathing life into formulaic LTI grant structures to send targeted individual performance messages. Large insurers increasingly vary the size of LTI grants between individuals to recognize potential, differentiate and strengthen longer-term commitment to the organization. One-off mechanisms. Adding programs (outside the normal, annual structure) to effectively reward high performers. For example, selective recognition or retention awards with extended vesting (e.g., a three-year cliff) often have a disproportionately high impact relative to the costs involved, particularly if individual awards are big enough to catch the attention of recipients. Making sure the reward dollars get used. The ad hoc programs mentioned above are increasingly part of the pay landscape but, surprisingly, often go unnoticed and underutilized. Smart companies not only have specific spot pools set aside, but work with managers to ensure the pools are fully deployed. Employees relationships with their supervisors or managers is one of the top five drivers of sustainable engagement. Source: Towers Watson s 2012 Global Workforce Study Prioritize High Potentials in Career Management and Pay Many insurers devise separate pay arrangements for employees with high potential (next-generation leaders) regardless of their functions. Succession management is a key business and engagement priority, and typically follows a carefully considered strategy. High-potentials are often given different or accelerated career development opportunities and more defined road maps. But pay programs have a role in this strategy, too, and can powerfully underline messages that are delivered through the career development process and other corporate channels. Companies with formalized (or even informal) high-potential programs frequently use additional pay-related retention hooks to accompany designation as high potentials. In some cases, this translates into accelerated pay increases, different performance or bonus plans, and even a separate reward structure entirely. Others have a specific equity grant schedule for their designated high potentials, aimed at retaining them and gradually moving them into the ongoing equity grant structure as they assume roles of greater impact. Does the company have effective processes as well as sufficient flexibility in bonus funding and allocation to ensure the highest performers receive appropriate awards? Or are bonus funds spread evenly, like peanut butter? Emphasis 2014/3 19
5 Managers Matter Managers are a key part of the employee experience and play a critical role in performance management, career advancement, pay delivery and ultimately employee engagement. They help determine pay and career directions, and also embody much of the company culture the employee perceives. Managers therefore play a critical role in nurturing commitment and convincing employees they have been treated fairly. The good news is that insurance outpaces many other industries in employee perceptions of managers, and this perception advantage can be leveraged to better deliver on reward programs. The majority of employees in the insurance industry believe managers are effective in setting appropriate individual performance goals, distinguishing between high and low performers, and fairly reflecting performance through pay. In essence, this underlines the importance of superior execution as well as sound plan designs: Even average pay programs can be high-impact devices when effectively delivered by managers. Key management roles deserve focus and attention to ensure they are getting this right: Goal setting. Working with employees to set appropriate goals that effectively balance stretch with attainability Connecting the dots. Describing the linkages between organization strategies and priorities, and both unit and individual goals Frequent check-ins. Conducting midyear updates to discuss progress toward goals, recalibrate/ refocus goals where necessary and generally illustrate the link to ultimate awards Mapping pay plan mechanics. Ensuring employees understand the process by which awards are determined Conveying balance. Explaining the rationale for the relative weight given to local line-of-sight goals versus organization-wide imperatives, and how to help achieve both Reinforcing career management. Ensuring employees particularly high performers and high potentials are getting greater attention and access to developmental and organizational opportunities Reward Well and Be Rewarded Astute employers identify the key/pivotal employee segments that will drive the business and adapt their total rewards programs accordingly. They formally and informally tailor programs to criticalskill groups and segments that produce the highest returns. Lastly, they equip managers with the tools and training to differentiate and manage effectively. For comments or questions, call or John Gayley at , john.gayley@towerswatson.com; Steve Hinden at , steve.hinden@towerswatson.com; or Marc Roloson at , marc.roloson@towerswatson.com. 20 towerswatson.com
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