Reward Next Practices Survey.proofed.3 - WorldatWork Next Practices.pdf · Reward Next Practices ... opportunity for human resources to step forward. ... rewards programs relative

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Paid Time Off and PTO Banks:

A Global Survey from WorldatWork and Hay Group

June 2009

Reward Next Practices

©2009 WorldatWork Any laws, regulations or other legal requirements noted in this publication are, to the best of the publisher’s knowledge, accurate and current as of this report’s publishing date. WorldatWork is providing this information with the understanding that WorldatWork is not engaged, directly or by implication, in rendering legal, accounting or other related professional services. You are urged to consult with an attorney, accountant or other qualified professional concerning your own specific situation and any questions that you may have related to that.

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Media Contact:

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Toll free: 877-951-9191

Fax: 480-483-8352

[email protected]

About Hay Group

Hay Group is a global consulting firm that works with leaders to transform strategy

into reality. We develop talent, organize people to be more effective, and motivate

them to perform at their best. With 88 offices in 47 countries, we work with over

7,000 clients across the world. Our clients are from the private, public, and not-

for-profit sectors, across every major industry and represent diverse business

challenges. Our focus is on making change happen and helping people and

organizations realize their potential

Contents

About the Survey 1

Participant Demographics 2

Key Findings 3

Rewards Strategy 5

Rewards Design 8

Rewards Program Implementation 10 10

Impact on the Rewards Professional 12

WorldatWork and Hay GroupRewards Next Practices Survey 2009

1

About the Survey In early 2009, WorldatWork and Hay Group jointly conducted a survey called Reward Next Practices. The intent of the survey was to determine how rewards program strategy, design and implementation would evolve over the next two to three years, particularly in light of rapidly changing business conditions. Survey respondents were asked to rate the current emphasis their organization places on different aspects of broad-based reward programs as well as whether they would increase, decrease or maintain their focus on these aspects of rewards in the future. Respondents were asked to rate each question relative to current focus on a 1 to 5 scale (“strongly disagree” to “strongly agree scale”) and rate each question relative to increased future focus on a 1 to 5 scale (“much less focus” to “much greater focus”). The percentages reported for current focus are the combined “strongly agree” and “agree” percentages. The percentages reported for future focus are the combined “future focus” and “much greater future focus” percentages. Note that a key finding of the survey is that very few respondents reported a decreasing focus on any of the questions. Most combined scores of “much less focus” and “less focus” were less than 6% in total for the vast majority of questions. This suggests that rewards practitioners will be at least maintaining if not increasing their current emphasis across the areas surveyed. A total of 763 organizations from 66 countries participated in the research study. Responding organizations were mid-to-high level rewards professionals who are WorldatWork members, haygroup.com registered users, or Hay Group clients. Typical organizations participating in the survey were multinational organizations of $1 billion or more in revenues across a wide range of industries. In addition to a Web-based survey, Hay Group and WorldatWork also conducted interviews with 30 large, multinational organizations to gain deeper insights regarding where their organizations plan to place their rewards program focus in the future. Data collected in the research survey includes organizational changes to base salary, short-term and long-term incentive programs as well as changes to other rewards-related programs (e.g. benefits plans, staffing and work rules programs, and training and development programs).


2

Participant Demographics Participants represent a broad cross section of industries, countries and company size. Participants by region:

Participants by industry:

Financial services 14%

High technology 9%

Services 8%

Health-care 7%

Fast-moving consumer goods 7%

Retail 7%

Industrial goods 6%

Chemicals 5%

Pharmaceuticals 5%

Transportation 5%

Communications, media and technology 5%

Oil and gas 5%

Public sector 4%

Consumer durables 4%

Restaurant, leisure and hospitality 3%

Utilities 2%

Construction 2%

Basic resources (i.e., mining) 2%

Education 2%

- 763 organizations, 66 countries, six continents

- 59% of respondents

have more than 5,000 employees

- 81% are publicly traded

or privately owned - 37% operate in more

than 20 countries

- 15% of respondents are Fortune Most Admired Companies


3

Key Findings – Rewards Next Practices While the focus of the research was on what rewards practices would look like in two to three years, many corporate rewards leaders were very preoccupied with the challenges of the current economic climate and how their organizations were responding. As the economic downturn continues to deepen around the world, rewards leaders recognize that rewards programs will likely experience an “evolution as opposed to a revolution” over the next two to three years. Rewards leaders expect to see their organizations first getting themselves healthier in terms of better aligning labor costs with new realities and then preparing for future growth when the economy improves. With many organizations undergoing restructuring, implementing layoffs and salary freezes right now, the focus for the short to mid-term will likely be:

• Aligning labor costs with economic realities • Aligning rewards with business strategy and performance

metrics • Engaging staff with limited financial rewards • Leveraging corporate scale, philosophies, processes and

technologies. Survey respondents indicate that a key focus for the next year will be to manage employee expectations and keep them motivated and engaged despite more constrained financial rewards and the fear of layoffs. Balance and integration is crucial Based on our research and discussions with organizations, many report moving from a focused, external benchmark orientation of their rewards program design to a more holistic view of rewards program management. Organizations also report seeking to increase the focus on linking their rewards programs to business strategy, talent management strategy and organizational performance.

“Our plan is to retain a very strong pay for performance philosophy. Should our business performance weaken, we would fully expect our bonuses to go down and potentially zero awards if the performance warrants this. In this way, we can retain some of the important aspects of our employment value proposition that differentiate McDonald's, such as a strong retirement savings and health-care plan, sabbatical, and training and development programs.”

– McDonald’s

“We are looking for our reward systems to transcend the cycles that the economy may have. We need and value a well-balanced approach.” – Deere & Co.

“Even in the current market, there is still a war for talent. This is also a huge opportunity for human resources to step forward. Volatility creates opportunity and now is the time for leaders in our field to define reality and provide hope” – Large industrial organization

“We are not going to cut pay to save jobs; we can save money in other ways. We are viewing this as an opportunity to make changes. Now that we have a burning platform, it could be a little easier” - Large consumer goods organization


4

Rather than a laser-like focus on what the market is doing, organizations report placing more rigor and rationale on strategic alignment of rewards programs and internally rationalizing them. While external benchmarking will still be important, organizations are seeking a better balance between external competitiveness and internal equity. As part of this balanced approach, organizations report increasing their focus on better aligning the needs of employees with the needs of the organization. Employee needs and wants are becoming more important as organizations seek to keep employees engaged and motivated in the current economic climate and looking forward. Implementation and communication will be a key factor in striking this balance, and organizations will be focusing more on how they communicate rewards to employees, including a new focus on the total value of the rewards package, rather than the individual elements. Performance obviously will be a critical component of the future focus of rewards programs as organizations seek to better align pay and performance. Organizations are not only looking at bonus target amounts, they are ensuring that the right performance metrics are in place, that there is appropriate balance between short-term and long-term focus (see Figure 1), and that there is a balance in the types of measures such as financial, customer, operational and human capital measures. (See Figure 2). Such action will ensure that employee behaviors are appropriately aligned with long-term strategic goals as well as the key throughput measures that drive financial performance.

Employee involvement in reward program design: “We do employee surveys every two years and make action plans based upon the survey results. One key finding is that we need to do a better job at communicating the total value of reward to our employees.” – Heineken “The real power is when you actually start talking with your employees. We design our reward programs, invest in new programs, and beef up current programs based upon the feedback we receive from our employees.” – McDonald’s

“We are striving to find the right balance between employee motivation, cost control and market competitiveness in our reward programs.” – Amway International


5

Rewards Strategy As part of this increased emphasis on a more balanced and integrated approach to total rewards program management, organizations report developing more consistency in rewards strategy and design across employee groups. More focus will be placed on the motivational value of rewards, managing total remuneration more holistically and viewing rewards as an investment as opposed to a cost. Increased emphasis on employee motivation When compensation budgets are tight, maintaining an engaged workforce is more challenging than ever. Financial rewards are limited and companies are required to seek new, creative ways to keep employees engaged and motivated. In light of this, it is no surprise that organizations will be increasing their future focus on the motivational value of rewards programs relative to other core program objectives, such as external competiveness and internal fairness. (See Figure 1). Figure 1: Core rewards strategy objectives

Financial performance is still king, but other measures are gaining steam Given the current economy, it is no surprise that organizations currently have a strong focus on financial performance and will continue to do so in the future. However, an increased number of organizations will be focusing on more balanced and integrated measures in the future, with a strong increase in focus on employee engagement. Forty percent of organizations indicate they currently focus on employee engagement measures, while 57% report they will be placing more focus on this in the future. Human-capital development and innovation will also have an increased focus in the future. (See Figure 2).

Increased focus on reward program alignment “While we are closer to the median on a large portion of our comp and benefits package, we know some are in the upper quartile, and we want that if it is a differentiator for us.”

– McDonald’s “We balance internal and external considerations. We don’t do what others in the market are doing if it doesn’t make sense for us. We try to maintain consistency over time and don’t chase fads. We strive for consistency as well as effectiveness.”

– Dow Chemical “Internal equity is more of a driver of our reward design than external comparison. The current recession emphasizes this, as we have limited interest in benchmarking our actions against the market because business needs are driving our actions. In the future, we would like to focus more on intangible rewards.”

– GKN “We need to take a total rewards approach and move from designing rewards on a siloed basis within human resources and focus on pulling the programs together for employees.”

– Key Corp.


6

Figure 2: Performance Measure Types There is also an extreme focus right now on short-term objectives — again given the economy this is not surprising. However, in the future, there will be a substantial shift in focus toward long-term objectives. The financial industry has received a lot of media coverage lately related to its perceived ultra-focus on short-term objectives at the detriment of long-term viability. (See Figure 3). Organizations across all industries have taken note and are viewing longer-term growth and gain as a better business strategy. Figure 3: Performance Timeframes Consistency becoming more important As more organizations review and redefine their rewards strategy, consistency is becoming more important. Organizations that have a broad range of business units or a wide geographic footprint are implementing strategies and programs that can be consistently applied across all areas of the company. However, this does not mean they are utilizing a “one-size-fits-all” approach. Local nuances and differing employee demographics are not being ignored; where needed the strategy is flexed and adapted to meet the needs of the business and its employees. Is pay a cost or an investment? This research, as well as our previous research, shows that the majority of organizations do not evaluate the return on investment (ROI) of their rewards programs. Of the 20% of organizations currently focusing on ROI, many do not have rigorous processes in place and/or don’t regularly measure ROI. (See Figure 4).

The importance of consistency “We have great consistency in reward programs at the executive level. We'll be placing more emphasis on consistency of approach below the executive level so as to better enable achievement of corporate programs and the development of talent to the executive level. This will also better support the achievement of more of a performance culture” – AkzoNobel “Some of our reward programs are different around the world. We will try to harmonize where it makes sense, while respecting local/business differences in strategy and implementation.” – Sara Lee “There will be a greater focus on achieving global consistency on our reward programs and greater focus on governance.” – Scotiabank

57%

44%

48%

44%

50%

-40%

-25%

-29%

-41%

-71%

80% 60% 40% 20% 0% 20% 40% 60% 80%% Greater Focus in Future% Current Focus

Financial performance

Customer satisfaction

Human-capital development

A culture of innovation

Employee engagement

71%

41%

29%

25%

57%

44%

48%

44%

50%

-40%

-25%

-29%

-41%

-71%






Employee engagement

% Greater Focus in Future% Current Focus % Greater Focus in Future% Current Focus





Employee engagement

71%

41%

29%

25%

50%

39%

-31%

-78%


Achieving short-term objectives

Achieving long-term objectives

78%

31%

% Greater Focus in Future% Current Focus



% Greater Focus in Future% Current Focus



78%

31%


7

Figure 4: Return on Rewards Investment

A big difference between the organizations that measure the ROI of rewards and those who don’t is likely a function of how rewards programs are viewed — whether rewards are viewed as a cost or as an investment. If organizations view pay as a cost, the goal is to keep it down. If pay is viewed as an investment, the goal is to leverage its value. The organization, its managers, and its HR function are likely to behave quite differently depending on their viewpoint. When pay is viewed as a cost, there is an ultra focus on managing pay levels and pay designs against external benchmarks which creates a “follow the herd mentality.” External benchmarking is the one of the primary determinants of the nature of the rewards program as Figure 6 below illustrates. Reward is more of a reaction to outside influences, rather than an internally derived, strategic way to improve organizational performance. Figure 5: External Benchmarking Drives Compensation Budgeting

Determinants of base salary budget Prevalence Importance

What other firms do High High

Organization ability to pay Medium Medium

Desired competitive labor market position Medium Medium

Organization performance Medium Medium Employee turnover Low Low

Employee morale/satisfaction Low Low

However, when pay is viewed as an investment, the view of rewards is much broader and longer term. Organizations with this viewpoint are also more likely to effectively leverage the power of the managers in communicating and implementing rewards programs as well as to measure the ROI of their reward programs. Organizations with an ROI focus tend to spend much more attention in aligning:

• Rewards strategy and business strategy • Employees’ interests with the organization’s interests • Rewards programs with other human-capital-management processes • Pay and performance.

Organizations seem to realize that the value of adopting a stronger ROI focus as the future focus for measuring reward ROI is significantly greater than current practice. (See Figure 4). As such, organizations will be well served to take a more holistic and in measuring ROI — measuring the perceptions and behaviors of their employees in addition to the operational and financial results achieved.


8

Rewards Design As organizations revamp their rewards strategy and pay-for-performance processes, there will be a greater future focus on short-term and long-term variable pay programs, paying for contributions and intangible rewards. Figure 6 illustrates the shifting future focus to short-term and long-term variable pay programs, with increased emphasis in better aligning these programs with the business strategy as well as performance metrics. In addition, many organizations report increased focus on more effectively communicating these programs and ensuring that pay-for-performance design mechanics are solid. Figure 6: Stronger emphasis on variable pay

Fixing the foundation There are several core foundational processes that support rewards programs. These include market pricing, job leveling, managing performance and supporting line managers to manage the overall pay-for-performance relationships for employees. There is substantial current focus on market pricing and job leveling processes, though, admittedly, there is not great focus where it is perhaps needed the most — helping line managers effectively manage the pay-for-performance relationship. Future focus will increasingly be on helping line managers effectively implement rewards and performance management programs. (See Figure 7). Figure 7: Substantial Increase in Managing Pay for Performance Programs

“We ensure that the objectives in our short-term incentive program are broad, simple, quantifiable and measurable and that they accurately reflect the key fundamentals of our business.” – Heineken


9

Intangible rewards The payback in investing time with line managers should be substantial as managers often have the most influence over the array of rewards the organization provides, particularly the non-financial (or intangible) rewards. Often, it’s these intangible rewards that drive the company’s “employer of choice” platform, and they are the primary vehicles in attracting and retaining talent. In this context, managers play a significant role in creating the work climate of an organization and in creating development and career growth opportunities for employees. Moreover, the immediate supervisor is often the lead influencer in the employee’s satisfaction with the organization. Hay Group’s retention studies over the years have found that when it comes to voluntary employee turnover, people tend to leave bad bosses rather than bad organizations. Figure 8: Intangible Rewards Intangible rewards are key motivators and drivers of employee engagement. Intangible rewards are often missed by organizations as they don’t consider the impact of work climate, career opportunities, non-financial recognition, the quality of the work itself and other intangibles as key retention vehicles. Often, the HR function may not “own” these intangible rewards programs, and in many organizations no one owns them. Research has shown that the majority of employees do not cite pay as the primary reason for leaving a job. Organizations are recognizing this, especially in light of limited financial resources, and are increasing their focus on intangible rewards to improve employee retention and engagement. Career/development opportunities (60% future focus) and non-financial recognition (52% future focus) are the two areas where organizations report placing the most incremental future focus. (See Figure 8).

44%

53%

52%

40%

60%

50%

-48%

-57%

-40%

-48%

-48%

-54%


Education and training programs

Career/development opportunities

Flexible work arrangements

Nonfinancial recognition

Work climate/culture

Work-life balance

54%

48%

48%

40%

57%

48% 44%

53%

52%

40%

60%

50%

-48%

-57%

-40%

-48%

-48%

-54%


Education and training programs

Career/development opportunities

Flexible work arrangements

Nonfinancial recognition

Work climate/culture

Work-life balance

54%

48%

48%

40%

57%

48%

Intangibles: a key component of the reward package “We'll provide much more focus on non-monetary forms of rewards and recognition. In tougher economic times, there will be a focus to provide recognition through non-monetary vehicles.” – Collective Brands “We'll have much more focus on a variety of non-financial rewards.” – Ericsson Network Services, B.V. “Recognition is one of those things that is free but worth a fortune.” – Large industrial organization “We continue to stress the importance of intangible rewards as well as tangible ones, and we will strive to have quality training and development processes to promote individual growth and team results.” – Rock Bottom Restaurants “We are going to continue to look for non-cash rewards that are meaningful to our employees and will drive the behaviors we are looking for.” – Dave & Buster’s


10

Rewards Program Implementation While relatively incremental future shifts are being taken in rewards program strategy and design, there are significant changes in how organizations will be approaching rewards program implementation in the future. The increased focus on employee engagement and likely constrained financial resources make rewards implementation and communication more important than ever. Organizations are recognizing the need to ensure that employees more fully understand and value their entire rewards program, and are motivated to achieve the performance the organization requires. Figure 9: Shifts in Rewards Implementation Focus

From To Rewards program design Rewards program implementation

Consistent treatment in pay Performance-based differentiation

HR-led implementation Line manager-led implementation Ad-hoc rewards communications Sustained senior leader messaging

Differentiation Differentiation in the rewards for top performers will become more important in the future as organizations seek a stronger linkage between pay and performance. This is important as the ROI in rewards can be improved via greater differentiation in pay. However, for this to effectively happen, performance linkages must be clear and managers need to be better trained and prepared to make tough calls on how rewards are to be distributed as well as to increasingly see merit and incentive funds as investments rather than entitlements. Figure 10: Greater focus on pay differentiation


11

Communicate, communicate, communicate The area of rewards communications sees the biggest shift in current versus future focus. Sustained communications from management and senior leadership will help establish and reinforce the organization’s rewards strategy and help employees more effectively understand the value and intent of their rewards packages. They also enable organizations to more effectively “put its mouth where its money is.” Figure 11: Rewards Communications

Currently, the onus of communicating rewards is largely placed on the HR function. Our research shows that many organizations are expecting line managers and senior leadership to take greater ownership in communication and implementation of rewards. This is the single largest gap between current and future focus in our study, and it represents a fundamental shift for many organizations. Human resources must be prepared to take the lead in assisting managers and leadership in learning to effectively communicate rewards. Additional training, tools and one-on-one assistance in this process will help managers learn to better communicate rewards and effectively manage performance.

Line manager role in communication “One of our key priorities is to provide increased manager training on understanding and communicating reward programs and reward program results.” – Sun Life Financial "Our total reward communication will be improved by senior and line management focusing on shaping and delivering consistent messages." – Xerox Magyarország, Hungary “We will be focusing on achieving higher levels of employee and management communication in a more transparent manner.” – Saudi Aramco “We need better support for managers to be able to better explain the reward programs and how they link to individual and company performance.” – Microsoft

Increased focus on communication: “Implementation effectiveness begins with senior leadership compensation followed by changes in field compensation. Executives need to model the behavior change before it is accepted by others.” – Medco Health Solutions “We work hard to communicate total rewards. This is a big emphasis for us. We tie total rewards into all communications.” – Dow Chemical “We will be placing much greater focus on communicating the value of total rewards.” – Scotiabank “We will be generating more analytics in assessing the value of our programs, then coaching business leadership on more effective program design and value communication to employees.” – Westinghouse Electric Co. “There will be greater attention to aligning plans with enterprise strategies. More emphasis on customer service balanced with business profit/financials.” – Nationwide Insurance Co.


12

Impact on the Rewards Professional This research suggests that there will be clear implications and changes to the role of rewards professionals in the next two to three years. The following are among these changes:

• Doing more with less: As budgets get smaller, rewards professionals need to utilize limited resources to accomplish even more.

• Communications: Sustained communication of the entire rewards package with reinforcement of key performance messages will be critical.

• Educating and coaching line managers: Line managers play a critical role in communicating rewards and performance. Human resources must coach and educate line managers on how to best communicate this to their employees.

• Differentiating rewards: In coaching line managers, rewards professionals need to make sure top performers are being rewarded appropriately and poor performers are getting the “tough love” they need.

• Intangible rewards: Intangible rewards will play a bigger role in attracting and retaining talent. Rewards professionals must be creative in the intangible space and how this is communicated.

Shifts in required competencies As the role and accountabilities of the rewards professional changes, so to does the set of behaviors and competencies required to do the job. In recent Hay Group research with 40 U.S. rewards professionals, the following five competencies were identified as being integral to the future evolution of the function:

• Conceptual thinking: Ability to identify patterns or connections between situations that are not obviously related, and to identify underlying issues in complex situations. It includes using creative or inductive reasoning.

• Impact and influence: Intention to persuade, convince or influence in order to have a specific impact. It includes the ability to anticipate and respond to the needs and concerns of others.

• Change management: Helping the organization understand what the change means to it and providing the ongoing guidance and support that will maintain enthusiasm and commitment to the change process.

• Listening and understanding: Ability to accurately listen and understand and then respond appropriately when interacting with individuals and groups.

• Integrity: Acting in a way that is consistent with what one says is important — one’s behaviors are consistent with one’s values (i.e., values from business, society or personal moral codes.)

Documents

Reward Next Practices Survey.proofed.3 - WorldatWork Next Practices.pdf · Reward Next Practices ... opportunity for human resources to step forward. ... rewards programs relative