Towers Watson Total Rewards

Total Reward Strategies for the 21st Century
A Quantitative Approach to Total Rewards

Lubca Paclikova
Richard Gendron
October 15, 2013
towerswatson.com
2013 Towers Watson. All rights reserved. Proprietary and Confidential. For Towers Watson and Towers Watson client use only.
Todays speakers
Lubomira (Lubca) Paclikova is a Senior Executive Compensation Consultant in Towers
Watson's Washington, D.C. region. Lubca has 15 years of consulting experience,
working with senior management and Board members to link human resources programs
with the organizations business strategies. She focuses primarily on executive
compensation analysis and design as well as global broad-based compensation. Lubca
has worked with clients from different industries throughout Asia, Europe and the U.S.,
and spent a portion of her career working in Towers Watsons European offices.
Richard Gendron is Senior Consultant in Towers Watsons Washington, D.C. region, and
has advised both domestic and foreign-owned public corporations, privately-held
corporations and nonprofit healthcare and higher education organizations. Richs recent
focus has been on Total Rewards and Employee Value Proposition supported by a strong
background in the management, design, valuation, compliance and administration of
retirement and welfare benefit plans. Rich has also consulted on strategic workforce
effectiveness issues such as rewards optimization, workforce planning, financial
effectiveness of programs, management of workforce risk and employee communication
issues.
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Todays discussion
Why Total RewardsNow?

Insights from our research
Getting started
Total Rewards Optimization
Case studies
Questions
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The classic employer-employee deal is becoming extinct

Its unaffordable. Rising costs, especially for health care, concerns
about existing or new legacy obligations, slow growth and continuing
economic uncertainty require employers to rethink both the size and
structure of their reward investments
Its outmoded. Long-established workplace practices are increasingly

inadequate to meet the needs and support the performance of a
technologically mobile and digitally savvy workforce
Its ineffective and inefficient. A rewards strategy thats not

aligned with the way a company creates value for its customers or
optimized to channel investment where it will have the most impact
will struggle to deliver desired performance or meet key financial and
talent objectives
4
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Companies face serious challenges when it comes to

attraction, retention and engagement of talent. Our research
reveals what it takes to get it right
5X
more likely to report their
employees are highly
engaged
Companies that have adopted an

increasingly integrated approach to
Total Rewards strategy, design and
delivery decisions supported by
an overarching Employee Value
Proposition are:
2X
more likely to report achieving
financial performance
significantly above their peers
*Source: Towers Watson 2012 Talent Management and Rewards Study Global.
towerswatson.com
What is an effective Employee Value Proposition?

Benchmarks of an effective EVP include
Developing a formal EVP

Effectively communicating the EVP to
employees
Aligning the EVP with what the
organization stands for in the
marketplace
Delivering on EVP promises
Differentiating the company from
competitors in the labor market
Designing customized EVPs for critical
employee segments
Total Rewards elements include
Articulating a Total Rewards strategy

aligned with the business and HR
strategy
Using business strategy and objectives to
inform talent management and reward
programs
Creating specific objectives for each
talent management and reward program
to align them with the EVP
Employing organizational analytics (i.e.,
business performance and analytics,
workforce demographics, workforce
performance data) to test the
effectiveness of Total Rewards programs
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The evolution of an effective EVP and Total Rewards strategy
Communicating and
Delivering
Segmenting and
Differentiating
Integrated and Strategic

Tactical
Have not progressed in

formally articulating an
EVP or in developing a
total rewards strategy
Have formally
articulated an EVP and
adopted a Total
Rewards approach
Greater focus on an
integrated strategy for
managing rewards and
talent management
Have stated objectives
for each reward and
talent management
program
Have effectively
communicated their
EVP to employees and
delivered on their EVP
promises
Have differentiated
their EVP from other
organizations with
whom they compete for
talent
Have customized EVPs
for critical workforce
segments
More likely to employ
organizational analytics
to test the effectiveness
of total rewards
programs
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A Total Rewards framework provides the roadmap to update

rewards strategy and align it with business needs
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The specific elements will vary based on a companys

business, economics, culture and demographics
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Mismatches remain between what matters to employees and

what employers think matters
All Employees
Employer Responses
Employee Responses
High-Potential Employees
Employer Responses
Employee Responses
1 Challenging work
1 Base salary
1 Challenging work
1 Career advancement
opportunities
2 Base salary
2 Job security
2 Ability to impact
performance
2 Base salary
opportunities
opportunities
opportunities
3 Job security
4 Health/wellness benefits
4 Organization reputation
4 Base salary
4 Challenging work
5 Organization values
5 Convenient work
location
5 Organization values
6 Learning opportunities
6 Organization
performance
6 Learning opportunities
7 Organization
performance
7 Health/wellness benefits
7 Job autonomy
7 Convenient work
location
Source: Towers Watson 2012 Global Workforce Study, 2012 Talent Management and Rewards Study United States.
towerswatson.com
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Health care reform complicates the Situation, affecting both

reward costs and workforce dynamics
Workforce Implications
HCR Provisions
New Groups
Require Coverage
Job and work hour redesign
Alternative staffing models
Outsourcing/job relocation
Impact on Total Rewards and Employee

Value Proposition (EVP)
Reduced importance of
employer-sponsored health care for
lower paid employees (e.g., employees
no longer view coverage as valuable for
employment and accompanying
communication challenges)
Availability of
Public Options
Excise Tax
Impact on Total Rewards and EVP
Plan redesign could reduce benefits
Excise tax cost could be shared with

employees
Impact on Total Rewards and EVP
Financial Implications
Increased costs beginning in 2014

related to part-time, seasonal, contract
employees
Examine alternative play or pay

strategies
Lower paid employees may prefer public

options; loss of employer
control/penalties
Examine alternative play or pay

strategies
Increased costs beginning as early as

2018
Further pressure to reduce health care

trend rate
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Companies that do not improve efficiency will likely reduce the value
of benefits to contain cost and avoid excise tax
$1,100
$1,000
Defer excise tax by

lowering the value of
the plan
$900
LD*
ESHO
R
H
AX T
SE T
EXCI
$800
Single Coverage
Monthly Rate
ED
Avoid excise tax by

lowering long-term
cost trends using
thoughtfully-designed
incentives, optimal
care management,
consumerism,
engagement and
other health activities
EL
S N
Y
C
A
IEN P PL
C
I
U
F
EF GRO
N
A
I
ED
M
OUP
G GR
IN
M
GE
FOR
-PER E EXCHAN
HIGH
T
A
RIV
OR P
$700
$600
$500
2014
UR
NS
I
F
2015
2016
2017
2018
2019
2020
* Excise tax threshold indexed at 4% for 2019 and 3% per year thereafter.
NOTE: Results depicted are for illustrative purposes only based on single coverage monthly rate for median efficiency plan and assumed savings/trend reduction.
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Mitigating health care reform cost impact plan design only
Significant plan value reduction is required to mitigate the health care

reform cost impact
Sample Plan Value Comparison
0.9
0.85
0.8
0.86
Illustrative
0.78
0.75
If Design is reduced by
Est. Savings
-5%
$22M
-10%
$45M
-12%
$55M
0.75
0.7
0.7
0.65
HMO
PPO
0.6
0.55
0.5
Current Program
Illustrative Program
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Health insurance exchange

Plan Offerings
Platinum
(90 Value)
%
Gold
Silver
(80 Value)
(70 Value)
Bronze
(60% Value)
Other requirements: guarantee issue; no medical underwriting; no pre-existing condition limits; essential health
benefits; preventive care at 100%; no lifetime or annual limits; maximum out-of-pocket limits $6,350/$12,700
Family Income
as % of FPL
< 138%
138% - 150%
150% - 200%
200% - 250%
250% - 300%
300% - 400%
> 400%
* Max Family Salary

Single/Family of 4
$15,856 / $32,499
$17,235 / $35,325
$22,980 / $47,100
$28,725 / $58,875
$34,470 / $70,650
$45,960 / $94,200
N/A
* Max Premium Cost

as % of Income
2%
3% - 4%
4% - 6.3%
6.3% - 8.05%
8.05% - 9.5%
9.50%
N/A
* Max Premium $ Amount

Single/Family of 4
$317 / $650
$689 / $1,413
$1,448 / $2,967
$2,312 / $4,739
$3,120 / $6,394
$4,159 / $8,525
N/A
* Max Out of Pocket

(Single/Family)
Actuarial Value
$1,983 / $3,967
94%
$1,983 / $3,967
94%
$1,983 / $3,967
85%
$2,975 / $5,950
73%
$2,975 / $5,950
70%
$3,987 / $7,973
70%
N/A
Employer Penalty
in 2015 +
None
$3,000 per employee
* All subsidies based on Silver (70%) Value Plan. All dollar amounts are annual figures.
towerswatson.com
N/A
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To meet the demands of health care reform, benefit tradeoffs

must be explored to meet overall objectives
Based on Towers Watsons 2013 Health Care Changes Ahead Survey, 46%
of respondents will evaluate health care in a Total Rewards context
Approaches may vary, however, initial considerations are consistent
What trade-offs are you willing to make in order to accomplish objectives?

What are the tradeoffs outside of the benefits plans that can be used to balance your
business/workforce objectives?
Who will drive the reward mix: Employer and/or employees?
Sample Initial Principles
Provide affordable and
comprehensive coverage
Sample Tradeoff Considerations
Continue market-based
approach to benefit
offerings
Align benefit offerings to

market risk profile
Choice may be limited in

order to provide
comprehensive coverage
Employers cost vs. employees cost ?
Whats the breaking point?

How will Employers prioritize members?
Employee vs. spouses vs. children?
Refine by job category?
Plan design vs. surcharge?

National consistency (one plan) vs. market-specific (optimize by market)
How are markets targeted for evaluation today?
Resources requirements due to administrative complexities vs. cost savings?
Strategy vs. labor sensitivities?
How fluid are these market risk profiles?
Frequency of reassessment?
Current benefits level vs. adding a lower cost option?
Employer sponsorship vs. public/private exchange?
What if it subjects the organization to the $3,000 penalty?
Will your strategy differ by market or segment?

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Total Rewards Optimization (TRO) is designed to help

organizations answer key questions
Total $ Investments in Selected Rewards
ILLUSTRATIVE
What is the best level of

investment in employees?
Benefits
$81 million
What is the best allocation of
that investment to maximize
desired behavior
(e.g., retention, motivation)?
Base Pay and
Cash Incentives
$929.8 million
Do the answers vary by

organization
level, geography, business unit,
other demographic characteristics?
Rewards Optimization can be applied to compensation, benefits and non-financial rewards

(work/life balance, for instance) or to any combination of reward categories
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TRO is a means to address critical questions and offer

customized solutions for the workforce
Are you optimizing your Total Rewards investments to achieve the right cost, behavior and
performance outcomes?
Do your Total Rewards programs attract, retain and engage the talent you need across your
business, at all levels?
What are the key cost/value tradeoffs in balancing cost management and workforce
management objectives?
Are you optimizing your cost/value for key reward programs and the Total Rewards portfolio
overall?
Do your Total Rewards programs reinforce the desired deal with your employees
(i.e., aligning employee behaviors with key business needs and direction of the
company)?
Do your employees understand and recognize the value of your Total Rewards portfolio?
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Compared to a traditional survey, TRO provides richer data

insights to better inform programmatic decisions
Focus
Groups
Traditional
Survey
Conjoint
Survey
Total Rewards
Optimization
ROI for specific rewards changes or

reallocations
Ability to test cost-benefit of different rewards

and demographic scenarios with modeling
tool
Directional information on understanding and

importance of programs
Information on employee awareness and
understanding of current programs
Quantitative information on the most
important rewards
Accurate information on various employee
segments
Data and analysis on how specific rewards
changes/trade-offs will affect employees
Data and analysis on what specific rewards
changes will cost
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Example: trade-off questions

In the conjoint section of the survey, employees are presented a series of
combinations of reward elements
These questions, presented as pairs (or trios) of elements which elicit
trade-offs, determine the respondents preferences
The respondent will be asked to rate his or her preference for two different
combinations of rewards, holding all other things equal
Survey questions vary for each respondent based on their responses to prior
survey questions
EXAMPLE
If these two combinations were identical in all other ways, which would you prefer?
Your annual merit pay increase opportunity is increased to
x%
Your annual merit pay increase opportunity remains

unchanged at x%
The company contribution to your retirement plan is

reduced by x% of your eligible pay
The company contribution to your retirement plan is

increased by x% of your eligible pay
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Example: portfolio questions

EXAMPLE
How motivated are you to perform consistently at your highest level to help ABC
Company fulfill its mission if your rewards package included the following?
ABC Company increases its investment in flexible work options by 20% to improve
programs. Programs/policies will be applied more consistently, with management
support
Your annual merit pay increase opportunity is increased to x%
The company contribution to your retirement plan is reduced by x% of your eligible pay
You receive 5% more than current annual base pay (with ongoing annual increase
opportunity)
No change in your supervisors effectiveness
Please indicate how motivated you are to perform consistently at your highest level to help ABC Company
succeed on a scale of 0 to 100 where:
0 represents "Not At All Motivated"
100 represents "Very Highly Motivated"
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TRO combines conjoint analysis with financial optimization
Conjoint
Analysis
Portfolio
Optimization
Optimum Level
of Investment
Optimum Allocation
of Investment
Segment-Specific Strategy
Is a surveying method
used for many years in
marketing to capture
subjective preferences
Asks employees to make
trade-offs among program
features as opposed to
assessing the features
individually
Is a more reliable forecast
of behavior than
traditional survey methods
Reflects cost
constraints
on investment
Develops an efficient
frontier of optimum
allocation of
investments
Determines optimum
investment level on the
basis of program costs
and turnover cost
savings
Optimum solution may be to

Improve retention/motivation
by changing allocation while
maintaining the current level
of investment
Maintain current level of
retention/motivation at lower
level of investment by
changing allocation
Increase investment and
retention/motivation to
economically efficient level
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Total Rewards can be optimized by evaluating the financial

and employee impact of specific program design changes
Improvements in Perceived Value
Change in Pay and

Benefits Cost ($000)
Merit Increases Above avg performers +50%
$3,153
Base Pay +3%
$23,358
Time Off +2 days
$5,989
Wellness Incentives Premiums -10% upon achievement of

health milestones
$647
STD 60% base pay & weekly max of $1,500
$1,277
Retirement Contribution 5% of base pay
$4,935
Medical Deductible -25%

Bonus 3% target/change in target weighting (execs &
directors)
$635
$14,943
Life Insurance 2X base pay & $200k max
$300
Retirement Match $0.50 up to 8% & 4-year vesting
$31
Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the portfolio effect. Modeled impact assumes all other
programs stay the same. Improvements in perceived value are increments to current perceived value of 82.3 (among valid conjoint respondents).
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Understanding what employees value opportunities for

improving employee perceived value and associated costs
Improvements in Perceived Value
Change in Pay and

Benefits Cost ($000)
Merit Increases Above avg performers

+50%
$3,153
Base Pay +3%
$23,358
Time Off +2 days
$5,989
Wellness Incentives Premiums -10% upon

achievement of health milestones
$647
STD 60% base pay & weekly max of $1,500
$1,277
Retirement Contribution 5% of Base Pay
$4,935
Medical Deductible -25%
$635
CARE/Bonus 3% target/change in target

weighting (execs & directors)
$14,943
Life Insurance 2X base pay & $200k max
$300
Retirement Match $0.50 up to 8% & 4-year

vesting
Division A
Division B
$31
Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the portfolio effect. Modeled impact assumes all other programs stay the same.
Improvements in perceived value are increments to current perceived value of 83.2 for A respondents and 79.1 for B respondents (among valid conjoint respondents).
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Understanding what employees value identifying cost savings

and the associated decrease in employee perceived value
Declines in Perceived Value
Change in Pay
and Benefits
Cost ($000)
($4,635)
Medical Premiums +20%
($570)
Medical Copays +25%
($360)
Prescription Copays +25%
($5,989)
Time Off -2 days
($1,452)
Medical Deductible +25%
($473)
Medical Copays Coinsurance of 20%
($294)
Prescription Copays Coinsurance of

20%
($1,670)
Wellness Incentives Premiums +10%

upon failure to meet health milestones
($3,750)
Division A
Division B
CARE/Bonus Eliminated
Note: Modeled impacts of various pay and benefits changes on perceived value are not additive due to the portfolio effect. Modeled impact assumes all other programs stay the same.
Declines in perceived value are decrements to current perceived value of 83.2 for A respondents and 79.1 for B respondents (among valid conjoint respondents).
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Creating a Total Rewards portfolio that reduces cost In light of budgetary constraints
and health care reform while maintaining/increasing program perceived value
Program improvement
Program reduction
Reward
Scenario #1
Scenario #2
Above average performers +50%
Current
Eliminated
Eliminated
Current
Current
Medical Deductible
+25%
Current
Medical Premiums
Current
+20%
+30%
Current
Current
Current
Merit-Based Pay Increases

Bonus
Base Pay
Medical Copays
Prescription Drug Copays
Wellness Outcome Incentives
Life Insurance
Premiums -10% Upon achievement of

milestones
health
Current
2X base pay & $200k maximum
2X base pay & $200k maximum
60% base pay & weekly maximum of $1,500
60% base pay & weekly maximum of $1,500
$0.50 up to 8% & 4-year vesting
$0.50 up to 8% & 4-year vesting
Retirement Plan
Current
Current
Time Off
-2 days
-2 days
Portfolio Perceived Value
84.3
82.1
Change in Perceived Value
+2.0
-0.2
($5,889,000)
($8,316,775)
Short-Term Disability
Company Match to Retirement Plan
Change in Pay and Benefits Costs
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Portfolio optimization analysis

Increase in Indicated Perceived
Value from Current Level
(Percentage)
3) Increase investment
and increase perceived
value
40%
2) Maintain current
level of investment
while increasing
perceived value
30%
1) Maintain current
level of perceived
value at lower
investment
20%
Current levels of
perceived value and
reward investment
10%
$20mm $10mm
Decrease in investment from
current level
$10mm $20mm $30mm

Increase in investment
from current level
Three Points on the Curve

Each point along the curve
represents the best allocation of
the corresponding total investment
1) To reduce total cost, the
curve identifies which
programs should be reduced
to reallocate investments in
other areas and maintain
current level of perceived
value
2) To maintain current
investment levels, the curve
identifies how to reallocate
investment across programs
to increase perceived value
without raising cost
3) To increase perceived value
dramatically and make the
most of each reward dollar,
the curve indicates the best
ways to invest additional
rewards funds
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Case study #1: health care organization

Situation
Actual Results
12,000 employees, ten hospitals, five clinics

Acute, long-term and home health care
33% annual turnover among nurses, technicians, and
support services
Many millions spent on contract labor due to high turnover
and volatile staffing requirements
Labor shortage and agency market preventing competition
for labor based solely on pay
Desire to avoid silver bullet approaches to reducing
unwanted turnover
Actions
Turnover dropped from 33% to 21% (a 36%

improvement over three years)
Turnover dropped even as area turnover
was increasing
Recommended changes to rewards
generated an ROI of $4M in year one,
contributed to systems stronger financial
performance
Gallup scores increased from 3.46 to 3.8
Avoided large-scale pay increase with a
negative return on investment
Projected vs Actual Results
Conducted focus groups in each facility to develop the

survey; invited all employees to participate in online survey
Analyzed results by position and service offering to
determine optimum rewards portfolios
After corporate review, presented/discussed results with
facility leadership to build the case for change and discuss
next steps
Implemented changes to training, leadership development,
dental plan, tuition reimbursement, PTO, and medical
insurance
The optimization model projected a 10%

drop in turnover, while actual results
produced at 12% reduction
Please note, this kind of comparison is
directional rather than exact. As is common,
how organizations implement a number of
rewards changes to address employee
turnover issues varies, which could include
some changes that were not modeled in the
TRO analyses
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Case study #2: customer service organization

Situation
Actual Results
72 contact centers, operating in 19 countries, interacting in

25 languages
1.5 million contacts per day
Roles ranging from Customer Service Representative to

Technical Support/Help Desk
Zero to 300% turnover, depending on site and role
Retention increased more than 30

percentage points in 13 out of 17 business
units worldwide within six months
Within nine months, all but one business unit

had achieved monthly retention rate of 92%
or greater
Savings exceed $10 million annually
Actions
Enhanced performance management and career

development systems, addressing job security issues as
well as broader career development needs
Implemented team manager training and development

program
Tracked changes and results with a rigorous goal-setting

and measurement system
Projected vs Actual Results
The optimization model projected a 19%

drop in turnover, while actual results
produced at 30% reduction
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For More Information

To learn more about Towers Watsons Total Rewards Optimization and
related research, please follow
(http://www.towerswatson.com/en/Services/Services/total-rewardsoptimization)
Please also contact:
Lubomira (Lubca) Paclikova
Senior Consultant
901 North Glebe Road | Arlington, VA 22203
Phone: 703.258.8270
lubomira.paclikova@towerswatson.com
Richard Gendron
Senior Consultant
901 North Glebe Road | Arlington, VA 22203
Phone: 571.445.0661
rich.gendron@towerswatson.com
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Total Reward Strategies for the 21st Century

A Quantitative Approach to Total Rewards

Why Total RewardsNow?

The classic employer-employee deal is becoming extinct

Its outmoded. Long-established workplace practices are increasingly

Its ineffective and inefficient. A rewards strategy thats not

Companies face serious challenges when it comes to

Companies that have adopted an

What is an effective Employee Value Proposition?

Developing a formal EVP

Total Rewards elements include

Articulating a Total Rewards strategy

The evolution of an effective EVP and Total Rewards strategy

Integrated and Strategic

Have not progressed in

A Total Rewards framework provides the roadmap to update

The specific elements will vary based on a companys

Mismatches remain between what matters to employees and

Health care reform complicates the Situation, affecting both

Job and work hour redesign

Alternative staffing models

Impact on Total Rewards and Employee

Impact on Total Rewards and EVP

Plan redesign could reduce benefits

Excise tax cost could be shared with

Impact on Total Rewards and EVP

Increased costs beginning in 2014

Examine alternative play or pay

Lower paid employees may prefer public

Examine alternative play or pay

Increased costs beginning as early as

Further pressure to reduce health care

Defer excise tax by

Avoid excise tax by

Mitigating health care reform cost impact plan design only

Significant plan value reduction is required to mitigate the health care

Health insurance exchange

* Max Family Salary

* Max Premium Cost

* Max Premium $ Amount

* Max Out of Pocket

$3,000 per employee

To meet the demands of health care reform, benefit tradeoffs

What trade-offs are you willing to make in order to accomplish objectives?

Sample Tradeoff Considerations

Align benefit offerings to

Choice may be limited in

Employers cost vs. employees cost ?

Whats the breaking point?

Employee vs. spouses vs. children?

Refine by job category?

Plan design vs. surcharge?

What if it subjects the organization to the $3,000 penalty?

Will your strategy differ by market or segment?

Total Rewards Optimization (TRO) is designed to help

What is the best level of

Do the answers vary by

Rewards Optimization can be applied to compensation, benefits and non-financial rewards

TRO is a means to address critical questions and offer

Compared to a traditional survey, TRO provides richer data

ROI for specific rewards changes or

Ability to test cost-benefit of different rewards

Directional information on understanding and

Example: trade-off questions