Looking Ahead to 2015 Trends in Workforce and Executive Rewards October 7, 2014 Jennifer Lavinbuk Stephen McGillivray
Agenda Part I About Mercer Economic Overview Part II Trends in Workforce Rewards Salary Increases Performance Management Freezes & Promotions Annual Incentives Total Rewards Career Frameworks Part III Trends in Executive Rewards Executive Pay Level/Mix Trends 1
ABOUT & ECONOMIC OVERVIEW 2
About Mercer 2013 Revenue: US$12.3bn Staff: approx. 52,000 Offices in more than 100 countries Listed on the New York Stock Exchange Marsh Inc. Risk and Insurance Guy Carpenter Re-Insurance Advisors Mercer Talent. Health. Retirement. Investments Oliver Wyman Group Consulting Capabilities Presence Talent Rewards Communications Information & Technology Solutions Health & Benefits Retirement, Risk & Finance Administration Investments M&A Consulting Services Investments $4.2 billion revenues in 2013 20,000 employees in more than 40 countries Americas Argentina Brazil Chile Canada Columbia Mexico Puerto Rico United States Venezuela Asia and Australa Australia China Hong Kong India Indonesia Japan Malaysia Europe Austria Belgium Czech Republic Denmark Germany Finland France Hungary Ireland Italy New Zealand Philippines Singapore South Korea Taiwan Thailand Netherlands Norway Poland Portugal Sweden Switzerland Spain Turkey UK Middle East Saudi Arabia UAE Dubai 3
About Mercer Benefit exchanges Benefit strategy and design Individual and voluntary benefits Benefit plan management and brokerage Specialty health and benefits Benefits administration International consulting Integrated defined benefit risk management High-performing defined contribution plans Comprehensive plan management and administration Innovative plan design Forecast talent needs Engage employees Mobilize workforce Reward performance Assess talent Develop skills CLIENTS Integrated defined benefit risk management Defined contribution plan investments Endowments and foundations Wealth management We understand the importance of bringing the best consulting team to each client relationship and ensuring continuity of services. We define client teams to ensure customized, personal attention, while also having access to Mercer s considerable resources as necessary. 4
Economic & Market Context US economy is positioned to experience strong growth in the second half of 2014 Economic recovery continues to be slow, but is expected to accelerate GDP contraction in Q1 2014, but projected to perform well for rest of the year More signs of economic improvement: Unemployment steadily declining, back to pre-recession level at 6.1% Consumer Confidence Index at its highest since January 2008 Households paying off their debt Salary freezes are down from 2013 and projected to decline further in 2014 Housing market 20%+ year over year growth in housing starts Salary freezes down to 1.7% in 2014. Expected to drop to 0.6% for 2015. The world economy is growing slowly due to weakening trends in emerging economies 5
Economic context US economy stumbled in the first quarter of 2014 but is re-gaining momentum 5% US Real GDP Growth Rate 4% 3% 2% 2H estimates ~2.5-3.5% 1% 0% -1% -2% -3% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2011 2012 2013 2014 Salary freezes dropping: 2013 = 6.5%; 2014 = 1.7%; 2015E 0.6% Source: US Commerce Department Bureau of Economic Analysis Real GDP (Percent Change From Preceding Period). Mercer US Compensation Planning Survey 6
TRENDS IN WORKFORCE REWARDS 7
Compensation Trends 2014/15 compensation planning Projected merit increase budget for 2015 up slightly to 3% with actual increases equaling the budgeted merit amount in 2014 3.5% 3.0% 2.5% Five-year trend for all employees 2.9% 2.9% 2.9% 3.0% 2.8% 2.7% 2.7% 2.8% Increased market pressure around talent retention and performance differentiation have driven organizations to more fully utilize merit budgets 2.0% 1.5% Projected Actual 1.0% 0.5% 0.0% 2011 2012 2013 2014 Projected 2015 Source: Mercer 2014/2015 US Compensation Planning Survey Report 8
Compensation Trends 2014/15 compensation planning by level For 2015, little differentiation in budgets will be seen by employee level Organizations with salary budgets that are projected to be higher for 2015 indicated that the primary reason for the increase is due to greater competition for their workforce or anticipated labor shortages Organizations that have lowered their 2015 budgets (compared to 2014) indicated they are doing so in response to further economic uncertainty or as a general cost reduction initiative 3.15% 3.10% 3.05% 3.00% 2.95% 2.90% 2.85% 2.80% 2.75% Actual 2013 (excl 0s) Actual 2013 (incl 0s) Actual 2014 (excl 0s) Actual 2014 (incl 0s) Projected 2015 (excl 0s) Projected 2015 (incl 0s) All Employees Executive Management Professional (Sales & Non-Sales) Office/Clerical/Technician Trades/Production/Service Source: Mercer 2014/2015 US Compensation Planning Survey Report 9
Compensation Trends 2014/15 compensation planning by ownership type Privately held organizations and joint ventures project merit budgets slightly higher than publicly traded organizations for 2015, while average merit budgets at Not-for-Profits are the lowest among ownership types 3.30% 3.20% 3.10% 3.00% 2.90% 2.80% 2.70% All Employees Executive Management Professional Office Clerical Technician Trades Production Service Publicly Traded Privately Held Public Sector Joint Venture Not for Profit Source: Mercer 2014/2015 US Compensation Planning Survey Report 10
Compensation Trends 2014/15 compensation planning - by industry 2015 merit budget projections show positive movement across most industries The Energy sector continues to project considerably higher merit budgets while the Services (Non-Financial) industry projects lower than average increases 4.00% 3.50% 3.00% 2.50% Actual 2014 Project 2015 Averages include freezes (0s) 2.00% 1.50% 1.00% 0.50% Source: Mercer 2014/2015 US Compensation Planning Survey Report Source: Mercer 2014/2015 US Compensation Planning Survey Report 11
Compensation Trends Compensation changes by function Top Management 2.9% 3.5% Corporate Affairs Legal HR Sales Marketing 2.5% 3.0% 3.0% 2.9% 3.0% 2.9% 3.0% 3.2% 3.2% Median total cash for Top Management rose from 2.8% in 2013 to 3.5% in 2014, mainly driven by Energy and Transportation Equipment industries. Communications 3.0% 2.9% Information Technology 2.7% 3.0% Administration Supply & Logistics Finance 2.6% 2.5% 2.7% 2.6% 2.9% 2.8% Total Cash Base Salary 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% N=673,252 Incs 12
Compensation Trends Compensation changes by region Base salary increases are consistent across regions, while total cash increased slightly West Coast Base Salary: 2.5% Total Cash: 2.6% Increases: Base TCC North Central Base Salary: 2.6% Total Cash: 2.9% Increases: Base TCC vs. 2013 Increases: Base TCC vs. 2013 Northeast Base Salary: 2.6% Total Cash: 2.8% AK vs. 2013 Increases: Base TCC vs. 2013 Increases: Base TCC vs. 2013 Southeast Base Salary: 2.7% Total Cash: 2.8% South Central Base Salary: 2.7% Total Cash: 2.9% 13
Compensation Trends Salary freezes over the past three years Salary freezes are on the decline 1.7% of organizations froze salaries across all employee groups in 2014 Less than 1.0% of organizations indicate that they plan to freeze salaries next year 9.0% 8.0% 8.3% 2013 2014 Projected 2015 7.0% 6.0% 6.4% 5.9% 6.1% 5.4% 5.0% 4.0% 4.0% 3.0% 2.0% 1.0% 1.1% 2.3% 2.1% 2.0% 2.0% 0.6% 0.6% 0.6% 0.7% 0.0% Executive Management Professional (Sales & Non-Sales) Office/Clerical/ Technician Trades/ Production/ Service Source: Mercer 2014/2015 US Compensation Planning Survey Report 14
Promotional Increases Approximately 35% of organizations budget promotional increases separately from merit increases. The table below provides responses from organizations with separate budgets of promotional increases. This includes which employee groups have separate promotional budgets, the percentage of each employee group promoted and the budget amount as a percentage of payroll. Source: Mercer 2014/2015 US Compensation Planning Survey Report 15
Compensation Trends Short-Term Incentives eligibility and receiving STI receivership increased six percentage points to 73% for Para-Professionals; eligibility and receivership remain constant for all other career streams 2013 2014 STI Eligibility STI Receiving STI Eligibility STI Receiving 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 90% 88% 85% 83% 78% 51% 43% 67% 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 90% 87% 86% 78% 54% 82% 42% 73% N=1,273,061 Incs N=1,247,076 Incs Note: STI Receiving bar represents the percentage of eligible employees receiving a payout 16
Compensation Trends Short-Term Incentives targets vs. payouts Targets and payouts remained consistent between 2013 and 2014 2013 2014 STI Target STI Actual STI Target STI Actual 40% 35% 35% 40% 35% 35% 30% 30% 25% 25% 20% 15% 10% 5% 14% 12% 10% 7% 4% 4% 20% 15% 10% 5% 15% 12% 8% 7% 4% 4% 0% 0% N=508,271 Incs N=516,643 Incs Note: Bars represent the average of all data points by career stream. Executive data includes jobs at the VP level and above 17
Compensation Trends Long-Term Incentives eligibility and receiving LTI eligibility is similar to 2013, but a greater percentage of those eligible received awards in 2014 2013 2014 LTI Eligibility LTI Receiving LTI Eligibility LTI Receiving 100% 90% 80% 70% 68% 85% 64% 100% 90% 80% 70% 67% 88% 67% 60% 60% 50% 40% 38% 50% 40% 42% 30% 20% 10% 0% 20% 6% 1% 8% 30% 20% 10% 0% 20% 6% 12% 1% N=1,161,156 Incs N=1,209,463 Incs Note: LTI Receiving bar represents the percentage of eligible employees receiving an award 18
Performance Management Incentive payouts for top performers are expected to be higher across employee levels High performers may receive up to 150% of their target opportunity % of Target as a Function of Performance 160% 140% 120% 100% 80% 60% 40% 54% 52% 52% 53% 99% 93% 97% 96% 121% 122% 115% 119% 147% 152% 146% 139% 20% 12% 10% 9% 11% 0% Lowest Low Middle Next Highest Highest Executive Management Professional (Non-Sales) Professional (Sales) Source: Mercer 2014/2015 US Compensation Planning Survey Report 19
Annual Incentive Plan Design Elements and Market Trends: Metrics Used by Companies Internal cash flow measures are captured in the internal financial metrics The charts below, illustrate the average weighting of metrics that are used in annual incentive plans. Only those with at least 10% weighting are considered useful measures. Annual Sales Operating Income Internal Financial Earnings per Share Customer Satisfaction Return on Assets Net Profit After Tax Service/Quality Return on Equity Metric Prevalence Measure Average Weighting 38% All others 0% 36% Earnings per Share 37% 26% Annual Sales 38% 21% Operating Income 48% 13% Internal Financial 11% 84% 11% 9% 9% Productivity Total Shareholder Return 0% 9% Source: US Short-term Incentive Plan Design Survey For-profit organizations over $5B in Revenue 0% 10% 20% 30% 40% 20
Annual Incentive Plan Market Practices: Performance Metrics and Industry Life Cycle 2014 Number of Performance Metrics Used 1 Performance Metric Used 20% 2 Performance Metric Used 30% 3 Performance Metric Used 19% >3 Performance Metric Used 31% 0% 5% 10% 15% 20% 25% 30% 35% Half of companies utilize three or more performance metrics However, year-over-year data shows companies are streamlining their annual incentive plans around two or three performance metrics Only 4% of responding companies use three or more financial performance metrics Use of Performance Measures Along Industry Life Cycle 0.900 0.800 0.700 0.600 0.500 0.400 0.300 0.200 0.100 0.000 Growth Mature Declining Earnings Sale Cash flows or EBITDA Accounting Returns Cash flow metrics tend to be found more frequently in more mature industries 21
Total Rewards Trends 22
Total Reward Trends: Medical Plans Health benefit cost grew 2.1% in 2013 a 16-year low Employers warn of a rebound in 2014 Most employers say health reform will increase their spending in 2014 Many take action to counter ACA cost challenges CDHP enrollment continues to grow, matching enrollment in HMOs Employers use CDHPs to meet cost, choice and compliance goals Widespread interest in private exchanges as a way to add choice While controlling cost and simplifying administration Health management programs stress innovation and engagement Most employers that measure ROI see lower trends Employers remain committed to sponsoring health benefits Sustainable health programs will require workforce planning, proven strategies 23
Total Rewards Benefit trends - retirement plans Today, less than 25% of companies provide a DB plan, with less than one-third being final average pay plans The prevalence of companies offering plans to new hires has remained unchanged over the past seven years. 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% Defined Benefit Contribution Final Average (DC) Only Pay Formula Defined Benefit (DB) - Other Defined Contribution Benefit - Final (DC) Average Only Pay Formula The types of plans continue to shift: Traditional final average pay formula DB plans are being replaced by DC plans 0% 2006 2008 2010 2012 Today Source: Fortune 500 companies from Mercer s Executive and Broad-based Employee Retirement Tool (EBeRT) 24
Total Rewards Focus on critical jobs Jobs requiring specific skill sets, such as software engineers, programmers and product managers, are in demand 8% 11% Customer Service Emerging Markets Mature Markets Jobs may not fit in a typical pay structure Legal/Compliance 15% 17% Sales Executives Research & Development Engineering 42% 36% 41% 41% 38% 42% 44% 53% Companies wrestle with talent buy vs. build and how to attract and retain this talent Information Technology 44% 62% 0% 10% 20% 30% 40% 50% 60% 70% Source: Mercer 2014 North American Total Rewards Survey of 355 Organizations 25
Total Rewards Future rewards investments Investments in career development and training top the list of planned investment areas WK environment 8% 12% Emerging Markets Mature Markets Non-cash recognition 8% 16% S/T incentives 9% 11% Training opportunities 23% 28% Career development/management programs 26% 35% Base salary increases 28% 27% 0% 5% 10% 15% 20% 25% 30% 35% 40% Source: Mercer 2014 North American Total Rewards Survey of 355 Organizations 26
Mercer s Career Framework What is it? An approach that defines and organizes jobs so that: HR and business leaders understand, allocate, and communicate rewards and career opportunities. HR technology and analytics leaders share critical workforce data across multiple technology platforms, enhancing workforce analysis and accelerating new HRIS installations, Employees can effectively manage their career choices within the organization by having available information and tools. An organization can specify the desired composition, capabilities, and requirements of the workforce enabling increased business performance. A well developed, clearly articulated career framework serves as an anchor to many other HR programs and processes. 27
Career Framework: Employees want to explore opportunities to move vertically & horizontally within their organization Future Opportunities Sales R&D OPS Marketing HR IT Finance 28
TRENDS IN EXECUTIVE REWARDS 29
Executive Remuneration Trends Pay-for-performance paradigm shift? 2012/2013 Pay-for-performance vs. 2014 How much is too much? SCT values /equity holdings being thoroughly evaluated Pay elements garnering attention Larger bonuses in 2013; mixed expectations for 2014 Equity values and wealth accumulation back in the spotlight Risk mitigation concerns being raised Evolving business strategies impacting pay programs Different financial metrics/weightings in incentive plans External market conditions driving design and payout (data security; product issues) Mergers/acquisitions/IPO environment may influence design New executives /team members Four generations of executives each have own personal motivation factors 30
Executive Remuneration Trends CEO Total Direct Compensation continues to increase S&P 100 Other 400 S&P 500 25th %ile Median 75th %ile 25th %ile Median 75th %ile 25th %ile Median 75th %ile $6,000 $6,589 $7,051 $8,861 $9,023 $9,656 $13,501 $12,775 $13,131 $5,514 $6,195 $6,168 $8,152 $7,981 $8,547 $11,678 $10,931 $11,915 $11,358 $11,472 $11,556 $14,230 $14,499 $14,408 $18,087 $17,688 $18,580 2011 2012 2013 Stock market boom in 2014 likely to lead to much higher TDC levels Understanding of actual to realized/realizable pay pushed to forefront $0 $2,000 $4,000 $6,000 $8,000 $10,000 $12,000 $14,000 $16,000 $18,000 $20,000 Amount (000s) 31
Executive Remuneration Trends CEO Pay: Long-Term Incentives comprise greatest component 2011 14% 21% 67% Base Salary STI S&P 100 Other 400 S&P 500 2012 2013 2011 2012 2013 2011 2012 14% 13% 16% 15% 14% 10% 10% 20% 21% 21% 20% 22% 22% 21% 67% 67% 67% 67% 65% 69% 70% LTI 2013 10% 19% 71% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 32
Executive Remuneration Trends CEO Target STI (as a percentage of salary) has increased S&P 100 Other 400 S&P 500 25th %ile Median 75th %ile 25th %ile Median 75th %ile 25th %ile Median 75th %ile 110% 116% 120% 130% 140% 142% 154% 161% 160% 100% 110% 115% 125% 135% 135% 150% 150% 150% 135% 140% 149% 150% 160% 160% 200% 200% 200% 2011 2012 2013 0% 50% 100% 150% 200% 250% % of Salary 33
Executive Remuneration Trends While actual STI paid to CEO has varied significantly S&P 100 Other 400 S&P 500 25th %ile Median 75th %ile 25th %ile Median 75th %ile 25th %ile Median 75th %ile 90% 100% 88% 125% 100% 113% 159% 107% 146% 87% 100% 87% 121% 100% 112% 156% 104% 144% 100% 100% 92% 135% 100% 118% 162% 120% 150% 2011 2012 2013 2013 Compensation reflects stronger financial performance 2014 expectations continue to fluctuate with performance 0% 20% 40% 60% 80% 100% 120% 140% 160% 180% 34
Executive Remuneration Trends Performance awards comprise majority of executive LTI pay PSUs 41% 47% 51% 2011 2012 S&P 100 Other 400 S&P 500 RSUs, Cash Options PSUs RSUs, Cash Options PSUs RSUs, Cash 21% 23% 22% 28% 25% 22% 24% 22% 28% 25% 17% 20% 20% 35% 34% 39% 46% 46% 50% 52% 56% 2013 Options 22% 29% 36% 0% 10% 20% 30% 40% 50% 60% 35
Executive Remuneration Trends Health benefits and other perquisites among general industry companies Approximately 70% of organizations continue to provide at least one executive level perquisite Executive Physical 23% 40% 46% Car Benefits Financial Counseling 16% 19% 37% 28% 35% 31% Executive Life Executive Long-term Disability Executive Short-term Disability Executive Medical 28% 24% 14% 18% 13% 8% 11% 8% 6% 10% 8% 5% Tax Preparation Personal Use of Company Aircraft Country Club First Class Air Travel Perquisite Allowance Dinner Club Spouse Travel 20% 19% 13% 19% 10% 0% 17% 12% 7% 15% 13% 6% 13% 13% 5% 8% 7% 4% 8% 7% 2% Executive Long-term Care 5% 3% 2% Legal Counseling Health Club 6% 5% 6% 5% 4% 2% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% CEO Tier 1 Tier 2 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% CEO Tier 1 Tier 2 Tier 1 = Direct Reports to CEO, Tier 2 = Direct Reports to Tier 1 Source: 104 companies from Mercer s 2014 For-Profit Executive Benefits and Perquisites Survey. 36
Executive Remuneration Trends Retirement plan prevalence varies by industry Nonqualified Employer-Paid Plans Open to New Hires 90% 80% 70% 60% 82% 24% 72% 63% 62% 59% 58% Nonqualified DB Only Nonqualified DB and Nonqualified DC Nonqualified DC Only 50% 45% 40% 38% 40% 51% 47% 39% 30% 20% 10% 0% 20% Utilities N=85 17% 13% 10% 10% Manufacturing N=363 Insurance N=90 10% 5% 5% 6% 7% 9% Healthcare N=258 Retail N=91 Finance N=81 Source: Mercer s Executive and Broad-based Employee Retirement Tool 37
Executive Remuneration Trends and by revenue Nonqualified Employer-Paid Plans Open to New Hires 90% 80% 70% 60% 82% 72% 69% 66% 63% 62% 59% 82% 41% 58% Nonqualified DB Only Nonqualified DB and Nonqualified DC Nonqualified DC Only 50% 40% 43% 45% 39% 30% 20% 10% 0% 33% 12% 18% 27% 3% 7% 9% 12% 14% Less than $1B N=178 $1B - $5B N=367 $5B - $10B N=154 $10B+ N=225 Source: Mercer s Executive and Broad-based Employee Retirement Tool 38
Executive Remuneration Trends 80% of the Fortune 500 Allow Executives to Defer Beyond the Qualified Plan 90% Prevalence of Voluntary Deferred Compensation Plans (Among For-Profit Companies) 80% 70% 60% 50% 40% 30% 66% 66% 78% 82% 20% 34% 10% 0% All Companies N=1002 <$1B N=197 $1B - $5B N=354 $5B - $15B N=277 $15B+ N=2174 Source: Mercer s Executive and Broad-based Employee Retirement Tool 39