People drive business success HR Risk: managing risks that matter A meeting with IIA Orange County 13 September 2012
Discussion agenda People related risk in today s environment HR risk universe Hot topics How leading companies manage HR risk Questions Page 2
People related risk in today s environment HR Risk management creates a significant competitive advantage. Human Resource functions that understand risk implement effective processes and controls to manage the risks that matter, anticipate the impact of a rapidly changing business environment and drive business success. Megatrends in HR Risk affecting business success today Sub-optimal results due to misalignment of Talent and business needs Ever-increasing retirement fund deficits Increased oversight and governance of remuneration HR compliance challenges from accelerating regulatory change Inability to implement a genuinely global business model Under-investment in HR systems and resources Page 3
People related risk in today s environment Market reach HR challenges Right person, right place,right time Regulatory diversity Global rewards strategy Leveraging workforce data Standardization of global operating models collides with national and subnational regulation Amplified risk from cross-border mobility Trends in successful organizations Global organizations aligning talent management programs with strategic business objectives Expanded focus on international reporting through payroll, laborlaw, and immigration Talent management programs, IT systems and processes integrated globally, regionally or by business unit Increased suite of mobility policies reviewed regularly Inclusion of international assignments in their overall talent management framework and increased suite of mobility policies reviewed regularly Co-ordinated identification and management of a human resource risk across multiple internal business functions, and heightened wider corporate awareness Are the careers of internationally mobile employees managed on an enterprise-wide basis (as part of an overall strategic talent management program)?* 75% of 350 Global companies surveyed had changed or expanded their suite of mobility policies within the last 24 months, and over half were planning to do so in the next six months** 20% of expatriates have left their employer within two years of repatriation ** The inability to deploy and compete in a global market will impede growth * Source: EY - Managing today s global workforce ** Source: EY Global Mobility Effectiveness Survey 2011. North America only Page 4
People related risk in today s environment Operational agility HR challenges Pace of regulatory change Diminishedemployee engagement Data security and Integrity Leveraging HRIS technology Compliance with global tax and social security reporting Increased corporate audit focus on HR processes and global compensation programs Increased administrative and financial costs resulting from additional employee tax levies 23 378 355 Tax Information Exchange Agreements have expanded rapidly during the last three years from 23 to over 378 agreements now in place globally Trends in successful organizations Formal global pay policies and increased Board oversight resulting in greater flexibility to respond quickly to local regulatory changes A standardized approach to understand and meet the appropriate compliance requirements Integrated approach across corporate functions e.g., policy compliance, payroll, legal etc. Internal HR processes and implementation of appropriate controls to ensure compliance with internal audit procedures Linkage of the impact of legislative changes to HR strategy in order to validate that both cost competitiveness and value to the employee is maintained Massive increase in domestic legislative change around employee taxation Golden age of technical change OECD Article 15 changes EU Directive on Social Security New employment levies to supplement tax and social security 58% of HR leaders cited management HR compliance as one of their top three issues* 73% of companies cited inadequate HR compliance risk as a major area of concern** The pace of legislative change is increasing risk and uncertainty * Source EY Global Human Capital Conference Survey 2011 ** Source: EY Global Mobility Effectiveness Survey 2011 Page 5
People related risk in today s environment Cost competitiveness HR challenges Pension funding gap Disparate HR systems Ineffective service delivery model Increased regulatory complexity Gathering accurate employee data for strategic decision making across multiple systems Trends in successful organizations Use of shared services and centersof excellence driving consistency and reducing HR process costs globally A shift from defined benefits to defined contribution plans Performance of pension asset liability matching Improved labor and stakeholder relations Aggressively harmonized human resource and payroll systems HR services aligned with key business needs and objectives Pension underfunding can have a severe impact on business continuity Before center of excellence France Mexico Switz Czech Canada Canada After center of excellence Mexico France Switz Czech Long term bond yields have fluctuated by 2.5% since 2000 resulting in a 50% movement in liabilities USA UK Germany Italy USA UK Centerof Excellence Germany Italy Australia Australia Yield on global equities since 2000 has been 4.5% per annum against an expected return closer to 9%. Sweden Brazil Japan Sweden Brazil Japan Life expectancy in Western Europe has increased by 7 years since 1980 resulting in a 20% increase in liabilities* HR systems can be the last in line for corporate investment, compromising service delivery * Source: Hewitt 2009 study Page 6
People related risk in today s environment Stakeholder confidence HR challenges Data privacy Executive regulatory compliance Stakeholder scrutiny of executive remuneration Managing low 'yes' votes during shareholder meetings and control possible reputational damage Pay plans are not performance oriented leading to dissatisfied shareholders and media scrutiny Adhering to differences in global executive remuneration regulation with associated compliance risk Pervasive and sophisticated attacks and penetration of HR-related systems Trends in successful organizations HR data integrity and security elevated to a strategic level Engagement with shareholders and proxy advisors in preparing remuneration disclosures and for annual meetings Reworked remuneration plans linking pay to business strategy, company performance and shareholder value Established formal global pay policies and increased Board oversight and flexibility to respond quickly to local regulatory changes HR Risk Management embedded in performance metrics and goals Say on pay legislation: US: Dodd-Frank Act (2009) Germany: VorstAG (2009) Australia: 2 Strikes Law (2011) UK: Executive pay reform (2012) Pay for performance measures: Influenced by shareholder interest groups e.g., ISS in UK, Australia, US 47% 47% of companies cited their greatest challenge in managing compliance and risk was inefficient HR processes or lack of resources* 73% Only 73% of IT professionals surveyed have a clear understanding of privacy laws impacting their organization** Executive remuneration and data security are in the media spotlight * Source: EY Global Human Capital Conference Survey 2011 ** Source: EY Global Information Security Survey 2011 Page 7
The HR risk universe Strategic Compliance Executive Compensation Risk Review 409A, 280G, 162(m) Incentive Compensation plan Executive Benefits and Perquisites Equity compensation and incentives Severance programs Employee Benefits and Retirement 401(k) plan operations Pension/OPEB plan operations Pension plan terminations Health Care reform readiness assessment Fiduciary requirements/plan asset payments Regulatory Employee Privacy and Data Protection Labor law / Collective Bargaining Pension / Retirement Benefits HIPAA and PPACA policies and procedures Wage and Hour Determination of hours worked and OT requirements Employee classification (Exemptions, Independent Contractors, etc). Time and Recordkeeping requirements State law considerations Payroll Global and domestic mobility compliance Payroll process Payroll tax and reporting Planning and Resource Allocation Training / Talent Development Organizational Structure and Design Deployment and Utilization Global Workforce Management Employer Relations Health, Safety and Security Union Relations Policies and Procedures Employee Satisfaction Whistleblower Governance Corporate Culture and Social Responsibility Code of Conduct / Ethics Transparency of Pay Programs Talent Management HR Performance and Policies HR service delivery & risk Sourcing Strategy Vendor Contracts and Service Level Agreements Vendor performance/fees Human resource data Talent Management Role and competency design Recruitment, sourcing and on/off boarding Performance management Career mapping, succession planning and leadership development Learning and training Workforce analytics and planning Operations Financial Page 8
Wage and hour and employment law compliance Misclassifying workers under the Fair Labor Standards Act exempt vs. non-exempt independent contractor vs. employee Not paying workers for all work performed Improperly calculating overtime Not training employees and supervisors on wage and hour practices Not responding to changes in federal and state wage and hour laws Change in HR, Pay or Time system results in incorrect calculations of overtime hours and rate Exposure to litigation and government audits, potentially resulting in the following-- civil and criminal penalties back wages liquidated damages (e.g., double damages ) attorney s fees additional taxes Is the company periodically reviewing its workers classifications and documenting these classification decisions? How does the company ensure that workers are paid for all hours worked (e.g., for pre-and post-shift activities, work performed during meal breaks)? Are workers trained on wage and hour practices and required to report policy violations? Are wage and hour issues part of HR s routine self audits? Have the HR, pay and time systems been tested for compliance? Page 9
Mobility of global workforce as expatriates or business travelers Entity restructuring, merger, acquisition, divestiture Joint venture or contract employment Expansion into new markets Permanent establishment in foreign country Reduction-in-force, and/or employment surge Global and domestic mobility Noncompliance with foreign and domestic tax laws and regulations at a corporate, individual, and/or social tax level Double taxation (by host country and home country) Failure to properly budget and allocate costs Immigration risk, risk of prosecution, and payroll risk Failure to drive global growth and efficiency Are you monitoring and fully aware of all employees international business travel and their potential tax risk? Are you effectively managing the tax costs of your mobile workforce? Do you have policies in place covering all types of mobile employees? Do you monitor immigration status of your employees in light of your tax and/or compensation reporting practices? Not using workforce planning tools to identify and fill talent shortages Failure to develop a dynamic global workforce Reputational risk Poor organizational agility Are you monitoring the changes in laws and regulations of countries your employees are located in? Page 10
Payroll operations, tax, and reporting Payroll policies, procedures, processes, and controls are inadequate Accurate workforce data not readily availableto help make strategic planning decisions Standardized and integrated payroll processes across business units/organizations does not exist Lack of monitoring service level agreements with payrollvendors HR data has errors resulting in pay errors Over/underpayments to employees Incorrect income tax withholding Delayed remittances to third-parties (including taxing authorities) Erroneous reporting Qualified plan (e.g., 401k) disqualification Penalties and late fees Not receiving full value of vendor services currently being paid for What calculation routines are included as a part of your gross-to-net calculations? How often are your state level garnishment policies reviewed? How is third-party remittance to taxing authorities monitored? Does your organization use a Shared Service Center to manage payroll? Does your organization selectively outsource any payroll processes? What roles do the Time and HR system play in calculating pay and has the end to end scenario/data flow been examined? Page 11
Talent management Pay programs and practices are not periodically reviewed and benchmarked with appropriate industry peer groups Ineffective performance evaluation, promotion practices, and leadership evaluation Failure to link pay programs and practices to individual and corporate performance metrics Disparate training, deployment, and utilization processes across different business areas, geographies Company does not have infrastructure to develop skill sets needed in the next 3-5 years Lack of transparency of pay programs Failureto develop talent globally Increased costs of operations and deployment Missed opportunities to put the right person in right job and loss of top performers The company does not have the resources and/or capacity to capitalize on business transaction opportunities Loss of Return on Equity (ROE) Poor reputation both internally and externally, including employee discontentment at perceived unfair pay practices Poor demographic diversity What are the company s key performance indicators (KPIs) for talent management purposes? Does the company have succession strategies for areas affected by retirement or skill shortages? How close are middle managers to retirement? Is there a process in place to identify and communicate with key talent? Is employee data currently accurate and updated globally? Is short-term incentive eligibility limited to those with a direct line of sight to how their performance/decisions affect outcomes? How large of a role does peer comparison play into your company s compensation strategy? Are recognition awards based on an explicit program design or on recommendations? Page 12
HR information systems Need to changeplatforms as part of a company-wide ERP strategy Outsourcing the support of the HRIS platform Acquisitions, divestitures or large reorganizations are difficult to execute Systems bandaged together through interfaces that are failing HRIS system of record is an older model and does not provide integrated functionality with newer programs such as recruitment, talent management, performance or comp planning Ability to respond to changes to federal and state law, OFCCP compliance, etc. Different data definitions in disparate HR systems resulting in incorrect pay or program/plan coverage Plan qualification if compliance is affected due to incorrect underlying HR data Pay errors from incorrect data or interfaces from time keeping systems Financial misstatement because of pay errors or payroll posting errors because of data issues Compliance with federal and state record keeping requirements around new hires, terminations, changes Inability to pursue larger HR strategies or performance objectives because of outdated technology such as performance planning Page 13 What is our long term HRIS strategy? How does HR fit into my company s ERP strategy/choice? If I have outsourced record keeping, is my vendor performing to the service level agreement? How can I know that? Do I have ready access to detailed reports to audit my HR data? Whatkey areas of functionality am I missing from my current system? When is my system due for its next major upgrade? What additional functionality comes as a part of that upgrade?
Misalignment of pay and company performance Incomplete or inaccurate proxy disclosures resulting in shareholder/institutional shareholder scrutiny Not anticipating the effect a change in control has on parachute payments ( 280G) Not planningfor deduction limits when granting non-performance based compensation ( 162(m)) Not evaluating a plan s compensation deferral and distribution election rules with respect to 409A Lack of corporate and employee tax planning around global equity Executive compensation Poor employee or shareholder relations and reputational consequences (e.g., failed say on pay or withholdvotes for directors) Inability to take deduction for excess parachute payments Non-deductible 20% excise tax on recipient of excess parachute payment Inabilityto take deduction for certain non-performance based compensation to top executives Excise tax on amounts Over/understatement of financial reporting due to erroneous compensation accrual calculations Noncompliance, resulting in fines and penalties How does executive pay align with company performance? What has the company done to address disclosures under the newly enacted Dodd-Frank Act? What type of equity vehicles does the company use currently and why? How do the equity awards vest (time based or performance based vesting)? Where are the executives based receiving awards? How are compensation records maintained? What is the process to review and revise agreements affecting executive compensation? Page 14
Employee benefit plan compliance Failure to provideparticipant notices in a timely manner Corrections are not performed timely Plan violatesirs nondiscrimination requirements Incomplete or inaccurate data feeds to third-party benefit providers Failure to effectively and timely govern global pensionplans Inadequate benefit plan design Plan disqualification Penalties, interest, and late fees Having to correct plan errors Exposure to government audits Civil and criminal penalties for breaching ERISA duties Additional taxation when certain errors not timely corrected Time-consuming reconciliations between payroll and the third-party vendor(s) (e.g., trust, administrator, etc.) How often are your company s retirement plans reviewed? Is indicative employee data (e.g., level, hire date, financial data) gathered and submitted to your providers in the same manner across all business units? How are disbursement errors/exception reporting monitored? Page 15
Incentive compensation Misalignment of compensation practices with the company s strategic objectives Lack of integration of the risk management function into the decision making process around compensation policies and incentive design Lack of a correlation between the incentive period and the time horizon of underlying risks Ineffectiveuse of risk mitigating or incentivizing features Employees take risks beyond the company s risk profile (or vice versa) Poor employee or shareholder relations and reputational consequences (e.g., failed say on pay or withholdvotes for directors) Company performance and employee engagement suffers Proxy disclosure noncompliance What is the company s definition of an acceptable risk threshold? Has the company reviewed and identified the links between the key organizational risks and the incentive compensation programs and policies? Do the current performance metrics encourage excessive or inappropriate risk-taking by employees that could have a material adverse effect on the company? What risk mitigating features are built into the current incentive compensation programs and policies? What controls does the company have in place to mitigate the risks? Page 16
HR service delivery Split accountabilities and responsibilities between localhr and corporate HR Current HR service delivery is focused on transactions and administrative functions (back-office efforts) rather than serving as a strategic business driver Disconnect between HR service owners and understandings of business needs in their service areas Specialty support unavailable or not centralized through corporate HR Inadequate communication of benefit and retirement choices Lack of clarity around accountability and delivery of HR services Inconsistent application and understanding of central HR services Limited ability to expand and globalize by providing appropriate HR support to new geographies HR service delivery model that is not market competitive and does not provide business with a transparent method of cost management Excessive financial exposure, operational inefficiencies and a lack of coordination with overall business objectives due to an ineffective HR service delivery model and/or sourcing strategy. Do formal reporting and functional lines exist between local HR and corporate HR? Could your current HR delivery model support international expansion or geographical scalability? Do various business units have diverging demands and resources for HR services? Does corporate HR focus solely on services that provide its business units with a competitive advantage? Has the company performed a shared service analysis to determine whether it is cost effective or fits within the organization s strategic initiatives? Page 17
Vendor management Performance issues resulting in incorrect records or paychecks Unexpected or excessive fees billed Sale of vendor to new organization who has different technology, pricing, and processes Vendor upgrades or changes technology platform Merger, sale, or integration with a new company who processes inhouse or with a different vendor Vendor is not performing to the level of service agreed upon in the contract Vendor is not complying with state and federal reporting and deposit requirements resulting in penalties and potential suspension of business activities Cost of outsourcing is higher than expected due to hidden or unexpected fees Plan qualification is at risk due to vendor operational errors with the data or non-compliance in their administration Has the company experienced service issues or fee concerns with its current HR outsourcing vendors (e.g., 401(k) administration, benefit calculations, HRIS, payroll etc.)? Have periodic assessments of vendor performance been performed? Do you have the means to audit vendor performance? Has an audit of vendor fees been performed? When is the vendor contract set to expire? Is this a good time to go back to market for the outsourced services? Page 18
Failure to develop and implement policies and procedures that are consistent with company values and that support the company s commitment to compliance Failure to establish and maintain an internal control environment which aligns stakeholders and regulatory expectations Disparate policies within the organization post merger or other corporate acquisition HR policies and controls Internal controls and policies drive behaviors and results inconsistent with company values Difficult to administer and communicate multiple policies within the organization Changes to underlying tax or labor law to which policies are associated Is there a process to audit HR practices, transactions and processes for compliant with applicable laws and regulations (e.g., federal and state wage and hour laws, ERISA requirements, EEOC requirements, exempt vs. nonexempt employee classification, state and local garnishment rules, etc.)? Page 19
Communication and change management Mergers, acquisitions, and/or divestitures Leadership changes Reduction in force Technology implementation Changes to how employees access HR benefits, payroll and all other HR programs Changes to the HR function Multiple organizational changes happening at once Disengaged employees Higher than average attrition Failure to develop a process that monitors and tracks feedback from employees Failure to develop an understanding of what communication channels are most effective in reaching employees Organizational change initiatives do not deliver their ROI Employees are unproductive or do not perform at their highest level Rumors and misperceptions dominate the communications environment Communication channels are unutilized, insufficient or inappropriate for circumstances Formal and informal communications are inconsistent Important key messages are not understood by the audience Difficulty to implement process and product/service improvements quickly Failure to effectively manage integration issues associated with organizational HR changes to programs, policies, and systems Strained employee relations Is there a formal communications strategy and plan, updated on an annual basis? Is feedback from communications being gathered to enhance messaging? Are your communication channels effective for intended audiences? Are there opportunities to standardize messages across locations and across functions to improve effectiveness and efficiency of communications? Are leaders and managers prepared for the challenging employee question related to organizational change? Is communications effectiveness tracked on a consistent basis? Page 20
How leading companies manage HR risk Applying a broad risk lens to the business Global HR Mega Trends Sub-optimal results due to misalignment of talent & business needs Ever-increasing retirement fund deficits Increased oversight and governance of remuneration HR compliance challenges under acceleratingregulatory change Inability to implement a genuinely global business model Under-investment in HR systems and resources Risk multipliers Executive visibility International Mobility Industry Geographic profile Emerging Markets Enhance risk strategy Embed risk management Optimize risk management functions Improve controls and processes Traditional risk management functions The RISK Agenda Strengthen risk governance and oversight Define risk strategy and oversight with accountability for risk management at the Board and Executive levels Integrate risk and performance management Embed an enterprise approach to risk assessment and monitoring into business planning and performance management Coordinate multiple risk functions Improve leverage across multiple risk functions to expand coverage, reduce cost and enhance value to the business Enhance business level performance Enable the organization to differentially manage key risks with optimized processes and controls at the business level Enable risk management, communicate risk coverage Internal Audit, Compliance, IT Risk Management, Information Security, Legal, Tax, Transactions, SOX Compliance Page 21
Questions Cathy Goonetilleke Senior Manager Ernst & Young LLP Los Angeles Office phone number: (213) 977-7758 Email address: cathy.goonetilleke@ey.com Page 22