2006/2007 Effectively Managing Global Compensation and Benefits: September 2006

Survey Brief 06: A Survey of WorlatWork Members by WorldatWork and Watson Wyatt 2006/2007 Effectively Managing Global Compensation and Benefits: September 2006

About WorldatWork WorldatWork is the world's leading not-for-profit professional association dedicated to knowledge leadership in total rewards, compensation, benefits, and work-life. Founded in 1955, WorldatWork focuses on human resources disciplines associated with attracting, motivating and retaining employees. Besides serving as the membership association of the professions, the WorldatWork family of organizations provides education, certification (Certified Compensation Professional CCP, Certified Benefits Professional CBP, Global Remuneration Professional GRP and Work-Life Certified Professional WLCP ), publications, knowledge resources, surveys, conferences, research and networking. WorldatWork Society of Certified Professionals ; Alliance for Work-Life Progress (AWLP) and ITAC, The Telework Advisory Group are part of the WorldatWork family. WorldatWork 14040 N. Northsight Blvd., Scottsdale, Arizona 85260-3601 480/348-7239 Toll free: 877/951-9191 Fax: 480/483-8352 www.worldatwork.org About Watson Wyatt Worldwide Watson Wyatt is a global consulting firm focused on human capital and financial management. We specialize in three areas: employee benefits, human capital strategies and related technology solutions. We combine human capital and financial expertise to deliver business solutions that drive shareholder value. Our consulting is grounded in the most extensive research in the business. This translates into unique perspectives and forward-thinking solutions. Watson Wyatt has more than 6,000 associates in 30 countries. Corporate offices are in Reigate, England, and Washington, D.C., USA. Visit www.watsonwyatt.com to learn more. 2006 WorldatWork. This content is licensed for use by purchasers solely for their own use and not for resale or redistribution. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission of WorldatWork and appropriate attribution.

2006/2007 Effectively Managing Global Compensation and Benefits Survey Brief WorldatWork and Watson Wyatt Worldwide September 2006 Executive Summary As extend their reach worldwide, they must strike a balance between global and local management of their compensation and benefit programs. Finding the optimal HR management structure will ultimately lead to improved financial performance in an increasingly competitive global environment. The 2006/2007 Effectively Managing Global Compensation and Benefits report, produced jointly by WorldatWork and Watson Wyatt Worldwide, finds that multinational tend to manage tactical programs at the local level but are centralizing processes and programs that affect the organization s strategy. For example, global consistency is more prevalent at the executive level, where there is more impact on company performance, and less prevalent in reward practices for nonexecutives and in areas such as health and welfare and retirement, which are driven by local statutory and/or market practices. Key Findings The most common structure for managing HR programs is partial centralization. More than half of all multinationals (56 percent), however, plan to shift to a more centralized structure over the next two years, up from 42 percent in 2004. Two-thirds of multinationals (66 percent) report they have adopted a globally consistent HR strategy. The strategies of financially high-performing tend to focus on outcomes such as attracting and retaining key talent, linking rewards and results, and developing a common corporate culture while the strategies of low performers focus on implementation. Half of multinational organizations (51 percent) have a formal or informal global total rewards strategy, and another 20 percent plan to develop a strategy within the next 12 to 24 months. Twenty-nine percent have no plans to do so. Of those that have a strategy, half (51 percent) also have a strategy for communicating it. High-performing provide more opportunity for above-market compensation. For example, 25 percent of high-performing firms target total cash compensation at the 75th percentile or higher (versus no low-performing firms). 1

About The Survey The second edition of this survey produced by WorldatWork and Watson Wyatt examined multinationals overall HR strategies and management and then probed deeper into their global total rewards, communication, technology and governance practices. This survey, which was conducted in February 2006, involved 275 multinational organizations that collectively employ nearly 10 million workers. Multinationals are defined as with operations in two or more large regions (e.g., Europe, Latin America). Global Breadth of Operations 50+ countries, 18% 1-2 countries, 2% 3-10 countries, 29% Headquarters Location North America 82% Europe 13% Japan 2% Other (e.g., Middle East, Australia, 2% Africa, Asia) Numbers do no total 100% because of rounding 25-49 countries, 25% 11-24 countries, 26% High-Performing Companies Versus Low-Performing Companies This report sometimes refers to high- and low-performing organizations, which is based on selfreported but validated responses to the question How well did your company perform financially compared with other firms in your industry over the past year? Respondents were given five choices, ranging from substantially below peer group to substantially above peer group. In our analyses, we characterized that identified themselves as substantially above peer group as high-performing organizations (24 percent) and those that said their performance was below that of their industry peers as low performing (11 percent). Independent analyses that linked these responses to shareholder returns in publicly held showed the measures to be valid. Specifically, firms identified as high performing realized an average three-year total returns to shareholders of 30 percent, compared with 4 percent for those firms identified as low performing. Since the majority of survey respondents are neither high- nor low-performing, the middleperforming group has a significantly greater influence on the overall numbers than either the high or low performers. For this reason, the response percentages for the entire sample (which include the middle group) can sometimes fall either above or below the percentages reported by both high and low performers. 2

Global HR Strategy When examining HR strategies at the highest level, the survey found that two-thirds of multinational (66 percent) have a globally consistent HR strategy a single overarching framework across different countries, subsidiaries and operating units that is not necessarily uniform or identical. The three most important objectives of global HR strategies are to improve attraction and retention of key talent (48 percent), implement a consistent global HR philosophy (44 percent) and ensure a consistent link between rewards and results (39 percent). But individual objectives differ for high- and low-performing (Figure 1). High-performing tend to focus on outcomes such as attracting and retaining key talent, linking rewards and results, and developing a common corporate culture while low performers focus on implementation. Lowperforming organizations are also much more likely to have a strategy that concentrates on reducing overall HR costs. Figure 1: High-Performing Companies Focus Their Global HR Strategies on Attracting and Retaining Key Talent and Linking Rewards and Results* Highperforming Lowperforming All Improving attraction and retention of key talent 50% 42% 48% Implementing a consistent global HR philosophy 31% 58% 44% Ensuring a consistent link between rewards and results 50% 46% 39% Adapting a global HR strategy to local culture 36% 27% 30% Developing a common corporate culture 39% 12% 29% Implementing streamlined and efficient processes 25% 42% 29% Improving governance of compensation policies, 33% 23% 21% implementation and administration Enabling talent mobility 17% 8% 17% Ensuring a consistent link between rewards and behavior 19% 0% 15% Maintaining internal equity 19% 4% 13% Improving governance of benefits policies implementation 19% 0% 11% and administration Reducing overall HR costs 3% 27% 7% Complying with Sarbanes-Oxley 3% 8% 4% * Percentage reporting objective as one of the three most important. 3

Global HR Management and Design As a company moves along the global continuum and shifts from being a domestic to a global company, its HR management structures and design change accordingly (Figure 2). In terms of managing their overall HR programs, most are partially centralized (43 percent) versus globally centralized (31 percent) or decentralized (25 percent). Centralized management encourages more global consistency, and as a result, more transparency, internal equity, easier employee mobility and improved communication and design. Decentralized, local management may allow for more efficient use of company funds and effective program implementation. The ideal HR design is a mix of global, regional and local management across different reward components. Figure 2: Global Enterprise Continuum Globalization Exporting Initial Expansion Multinational Multidomestic Global Expatriate deployment Local hire support (e.g., labor contracts, payroll setup) Compliance Local policies and programs (includes implementation) HRT applications and infrastructure (i.e., basic administration and communication with HQ) Market-driven programs (e.g., compensation and benefits) Cost management Performance management Executive programs for key talent M&A services Staffing and retention Rationalization/ harmonization Corporate governance Shared services Global HR infrastructure and programs Reorganization/ change management Global synergies Team building Global leadership One firm communications Centralization Local management Regional management Global management More than half of respondents (56 percent) plan to shift to a more centralized structure over the next two years, up from 42 percent in 2004. That trend may be driven by the need to facilitate global expansion and mobility, manage costs, ensure effective global governance and improve corporate oversight. Few (11 percent) will shift to a more decentralized structure, and a third (33 percent) expect no change in structure. 4

Of those that are decentralized, roughly a third cite their corporate culture (32 percent) and business structure (31 percent) as the greatest barriers to centralizing HR management (Figure 3). These may need to demonstrate a clear business case and persuade key stakeholders to agree to centralize. Change management and communication will be critical to this process. Figure 3: Business Structure and Corporate Culture Are the Greatest Barriers to Centralizing HR Management Centralized Partially Decentralized All centralized Business structure 16% 26% 31% 24% Corporate culture 18% 23% 32% 24% Availability of clear and documented 21% 13% 9% 14% processes, policies and procedures Lack of internal resources 16% 12% 13% 14% Lack of appropriate staff skills to 9% 9% 2% 7% implement Cost 5% 5% 3% 5% Global Total Rewards Once employers have established the overall HR strategy and structure, they should incorporate a global strategy that recognizes and integrates the various elements of rewards. From an organizational standpoint, a global total rewards strategy provides the framework for the employment deal pay, benefits, learning and development, work environment and culture that takes local culture and regulations into consideration. Nearly a third of multinationals (31 percent) have a formal global total rewards strategy (an articulated, documented strategy and principles to guide reward plan design and administration worldwide). Another 20 percent have an informal strategy (Figure 4). Not surprisingly, centralized are more than twice as likely as decentralized to have a formal global total rewards strategy (44 percent versus 18 percent). The absence of a formal strategy is a common characteristic of decentralized organizations, which tend to leave plan design decisions to business units or regions. While some decentralized (25 percent) plan to develop a global total rewards strategy within the next 12 to 24 months, 46 percent have no plans to do so. In general, that have adopted formal strategies are better able to maintain oversight of their reward plans, encourage talent mobility and have confidence in both the internal alignment and the external competitiveness of their total rewards. Figure 4: Most Multinationals Have a Global Total Rewards Strategy Centralized Partially centralized Decentralized All Have a formal strategy 44% 29% 18% 31% Have an informal strategy 27% 20% 10% 20% Have plans to develop a 12% 23% 25% 20% strategy in 12 24 months Have no plans to develop a strategy 17% 28% 46% 29% 5

Multinationals most frequently manage all compensation elements of executive compensation, long- and short-term incentives for nonexecutives, and performance management on a global basis rather than on a regional or local basis (Figure 5). Because these HR programs drive strategic performance, there is more need for them to be consistent around the world. As a result, most organizations have globally consistent short- and long-term eligibility and target opportunities and awards for their executives (Figure 6). To help reinforce this, most organizations have globally consistent leveling approaches, job titles and codes and compensation structure for executives. In contrast, while incentive programs for nonexecutives may be managed globally, the targets and awards are usually based on local market practice. Additionally, the majority of participants manage base pay, perquisites, health and welfare and retirement benefits locally possibly because they have low correlation to company performance and need to reflect local statutory and market practices. Companies seem to be trying to balance global consistency with local market design. Overall, most find that managing some programs globally and others locally is at least moderately effective. Figure 5: Companies Are Finding a Balance Between Managing HR Programs Globally or Locally Managed Globally Managed Regionally Managed Locally Executive compensation 92% 5% 3% Long-term incentives (nonexecutive) 79% 9% 12% Performance management 48% 22% 30% Short-term incentives (nonexecutive) 42% 32% 26% Perquisites 10% 30% 59% Health and welfare 13% 29% 58% Retirement 18% 27% 56% Base pay (nonexecutive) 23% 34% 44% Sales compensation 24% 38% 37% 6

Figure 6: Reward Programs for Executives Are Globally Consistent, But Locally Regulated Programs Are Not Globally consistent for executives Globally consistent for nonexecutives Job/Role Framework Leveling approach 78% 51% Titles and codes 60% 41% Structure/frame (grades/bands) 66% 45% Short-Term Incentives Eligibility 80% 52% Target 66% 36% Awards 65% 37% Long-Term Incentives Eligibility 84% 57% Target 72% 47% Awards 74% 46% Retirement Eligibility 42% 32% Plan design 36% 25% Benefit level 34% 24% Employee contribution 33% 23% Perquisites Eligibility 34% 20% Benefit level 27% 16% Plan design and financing 27% 17% Most (61 percent) have a common targeted position versus the market globally. While high- and low-performing alike are most likely to target the 50th percentile for base salary and benefits, high-performing provide more opportunity to pay above market (Figure 7). For example, 25 percent of high-performing firms target total cash compensation at the 75th percentile or higher (versus no low-performing firms). These higher targets provide more upside potential and opportunity to differentiate and reward employee performance. This finding is supported by Watson Wyatt s Human Capital Index research, which found that targeting pay and benefit levels above the market is associated with superior shareholder returns. Figure 7: High-Performing Companies Are More Likely to Position Rewards Above Market 50th percentile 51st to 75th percentile >75th percentile Base Salary High-performing 68% 19% 8% Low-performing 79% 11% 0% Total Cash High-performing 36% 25% 25% Low-performing 63% 21% 0% Benefits High-performing 54% 11% 11% Low-performing 74% 5% 0% 7

Multinational Pooling With the trend toward centralizing HR management structures, multinational have unique opportunities to establish benefit plans on a worldwide basis and to leverage their global purchasing power. A multinational insurance pooling arrangement can help reduce expenses by grouping benefits insurance in various countries into one pool. This benefit program is relatively straightforward to globalize, improves corporate oversight and financial reporting, facilitates global mobility and improves underwriting terms and customer service. The larger the workforce, the better the insurance terms a company can receive, but small and growing can also benefit from the improved administration and reporting services. Only one-quarter (24 percent) of multinationals insure all benefit programs and use a multinational pooling network (Figure 8); however, high-performing use these networks more than their low-performing counterparts (24 percent versus 15 percent). Of those that use multinational pooling, 67 percent use one or two pooling networks. Companies with more than 20,000 employees (44 percent) are more likely to use three or more networks than with fewer employees (13 percent). This is expected, since larger may need to diversify their pooling networks given the size of their workforce, and smaller have fewer poolable lives. Figure 8: Most Companies Self-Insure Benefits Locally Where Practical and Possible Self-insure benefits locally wherever practical and possible 48% Insure all risk benefit programs and use a multinational pooling network where possible 24% Insure all risk benefit programs 11% Use the company s captive insurance facility wherever 5% possible Other 12% Global Communication Communication is critical to implementing a global total rewards strategy. Of those that have a global total rewards strategy, half (52 percent) have a strategy for communicating it. According to Watson Wyatt s 2005/2006 Communication ROI study, an effective communication strategy not only ensures that employees understand the value of their total rewards package, but links rewards to business goals as a way of engaging employees in improving business performance. 8

When communicating their strategy, most consider local customs and cultures to a moderate or great extent (77 percent). However, the Communication ROI study identified the need to provide local leaders with the information, tools and training to effectively deliver these strategic messages in a coordinated and consistent manner. Most also use an intranet and create a global brand for their internal global communications (Figure 9). Figure 9: Most Companies Use an Intranet and Create a Global Brand as Part of Their Global Communication Strategies Company intranet 77% Global brand for internal communication 67% Global HR forums 50% Global newsletters 50% Employee sensing (e.g., focus groups, surveys) 45% Global leadership forums 45% Global communication training for managers 42% To improve communications, employers should formally measure the effectiveness of their strategy. Companies most frequently use employee or broad-based organizational surveys and focus groups (Figure 10). The Communication ROI study supports the use of these methods, as it found that highly effective were more likely to use employee opinion surveys and focus groups, particularly in conjunction with a change effort, than less effective. Unfortunately, a large percentage of (42 percent) with a strategy for communicating global total rewards do not formally measure communication effectiveness. Figure 10: Employee Surveys and Focus Groups Are Top Methods for Measuring Communication Effectiveness Employee surveys and/or focus groups 43% Broad-based organizational surveys and/or focus 29% groups Readership surveys 9% Objective measures of changed behavior 9% Communication audit 6% Other 2% Global Technology Relatively few multinational use global technology to administer and maintain HR programs. Global technology can ensure some level of consistency but, more important, it can define a standard method of data collection, analysis, evaluation and decision making. Centralized, however, are more likely to have such systems in place than decentralized ones (Figure 11). 9

Figure 11: Centralized Companies Are More Likely to Have Technology in Place to Administer and Maintain HR Programs Globally Centralized Partially centralized Decentralized All Human resource information systems 81% 48% 34% 55% (HRIS) technology Compensation management technology 62% 42% 19% 43% Performance management technology 68% 41% 17% 43% Recruitment technology 52% 31% 12% 33% Payroll technology 46% 27% 22% 31% DB plan administration technology 37% 17% 25% 25% Health and welfare administration 41% 16% 20% 25% Sales compensation technology 45% 19% 14% 26% HR call center technology 30% 15% 3% 16% Case Study: NCR Global Compensation Redesign In assessing its existing global compensation programs, NCR Corporation, an Ohio-based global technology company with $6 billion in revenue and over 26,000 employees worldwide, saw an opportunity for improvement. As the company continues to grow, NCR wanted to create a compensation management system that would better support its evolving business strategy and empower managers with credible, fact-based decision-making tools. The company decided to develop a web-based global compensation management solution and job leveling tool that would allow NCR to effectively link pay, performance and external market positions across business lines and borders. Analysis revealed that NCR had outgrown its current compensation system of broad salary bands; it now required a more globally consistent methodology with better alignment to its key business functions, and an improved external linkage to the competitive market. A key underlying requirement was improved technology, practice and process. NCR leaders identified desired characteristics of the new solution and customized a web-based compensation management system and job leveling tool (Watson Wyatt s REWARD ) to support NCR s global compensation process and infrastructure. Key features of the new solution include: An internal job-level framework that is consistent across businesses and geographies Transparency and ease of use Career growth tools Clear and consistent links between compensation programs and external markets Defined competitors for talent and target market position Alignment between internal levels and growth in market pay Better decision-making support for managers linking individual pay, performance and external market positions NCR now has a compensation management solution that provides a globally consistent, marketbased methodology for job analysis. It also has access to large libraries of market data to generate timely, accurate and credible analyses. And key staff around the world have the tools they need to model, price and manage NCR s base salary structures. 10

Global Governance and Compliance Before the implementation of Sarbanes-Oxley, the responsibility for global governance resided primarily at the executive levels or in advisory committees. However, global governance is more than oversight by a small group of executives. It involves managing legal and financial risks associated with compensation and benefits programs around the world. It is a formal system of decision-making structures, processes, practices and values that enable an organization to make good and actionable decisions. The governance system identifies who is responsible and accountable, and what should be done to operate and oversee the business. As a result, are looking to develop a more formal approach to global governance than in the past. Overall, 45 percent of have a formal approach, and the programs most frequently included are executive compensation (92 percent) and long-term incentive compensation (73 percent). This is not surprising, as the boards of directors of many organizations have long been charged with overseeing these areas, particularly stock-based compensation. With the increasing centralization of HR management, have tremendous opportunities to extend governance of benefit and investment programs to mitigate the financial and legal risks associated with poor compliance with statutory and mandatory federal, state and local regulations. Most multinationals require global or regional management approval to implement benefit changes, even if they are made in a local country. All benefit plans tied to equity, bonuses, base pay, expatriate plans, investment plans, perquisites and changes in investment policy or manager require approval by global management, but more minor or country-specific plan changes require only regional approval (Figure 12). For effective global governance, must define the necessary approval process types of programs, costs, legal requirements, organizational structure and the decision making and accountability in changing or implementing compensation and benefits plans. Figure 12: Most Multinationals Require Global or Regional Management Approval to Implement Benefit Plan Changes Approved by Global Management New or altered share or equity plans 96% Expatriate/TCN policy changes 83% New or altered bonus plan 75% Significant changes in existing benefit plan design 68% New or altered salary structures 58% New perquisite plan 56% Change of investment policy manager 56% Approved by Regional Management Change of benefit provider (insurer) 45% Benefit plan renewal (new plan rates for coming period) 45% Change of benefit administrator 42% 11

To improve governance procedures for total rewards design and administration around the world, organizations are developing clear global policies and implementing consistent tools, processes and technology, and gathering, storing and monitoring global data (Figure 13). Figure 13: Companies Are Developing Clear Global Polices to Improve Governance Procedures for Total Rewards Design and Administration Develop clear global policies 80% Implement consistent global tools, processes, technology 64% Gather, store and monitor global data 52% Define specific roles 48% Review procedures, policies and resources regularly 35% Case Study: Baker Hughes Global Benefits Governance Baker Hughes, a Texas-based oilfield services company with $7.2 billion in revenue and approximately 29,000 employees in more than 70 countries, audited its benefit plans, practices and programs in Germany, Italy, the Netherlands, Norway and the United Kingdom. The results exposed several concerns, including underfunded pension plans and limited global coordination or oversight of new programs. Concerned about the inefficiencies and potential legal liability associated with these issues, Baker Hughes decided to develop a new global benefits governance model that streamlined and coordinated global benefits while ensuring compliance with statutory and corporate requirements. Baker s leadership team began the project by evaluating the people, processes and technologies used to make decisions at Baker. The team convened a meeting attended by global stakeholders and cross-functional corporate HR leaders. Through a facilitated workshop, hands-on exercises and the use of instant polling technology, a global benefits governance model was developed over a two-day period. The model defines lines of responsibility; operational tasks and oversight; methods and processes; and schedules and time lines for approval of changes. Once the model was approved, Baker Hughes began global implementation of the model and execution of its global benefits strategy. This work includes development of regional benefit plans for mobile employees, local benefit plans in key growth countries, regional benefits functions and global distribution of a Total Rewards Statement that shows employees the value of their individual benefits packages. Baker Hughes now has a global benefits governance strategy that reduces financial and legal risk and ensures that total rewards designs around the world are fully aligned with business needs and strategy. 12

Conclusion In the last decade, many multinational have sought to determine the most appropriate system for managing and administering reward programs for business units that are divided by time zones, cultures, currencies and, in many cases, business objectives. As have expanded globally, the need for consistency in strategy, company culture, reward program design and messages to employees has grown. Thus, multinationals find themselves constantly searching for the optimal balance between global strategies and cross-border consistency on the one hand and programs that are responsive to local market regulations, culture and competition on the other. To help reach this goal, most have partially centralized their HR management at the regional level. They are fully centralizing programs that drive strategic performance, such as executive and long-term incentive compensation, while locally managing programs that are more affected by local statutory and market practices, such as base pay, retirement, and health and welfare benefits. Additionally, while developing a global strategy for communicating total rewards, are considering local customs and cultures and adapting messages as needed. However, there is no silver-bullet solution. What works or does not work for one organization or industry may not produce the same result for another. Many factors affect the outcome, including the countries involved, the resources available and the compensation policies and structure of the existing programs. To achieve effective delivery of global rewards, a company must consider its business needs, program design, local markets and cultures and integrate these elements with its broader business objectives. 13