Reward Planning WorkshopPlanning the reward agenda for the year ahead

Aon Hewitt | March 2012

Introductions and workshop structure

Headline trends update• 2012 economic environment• 2012 HR environment• Effectiveness of and changes to reward programmes• Top 10 HR priorities for 2012-2014

Break-out sessions• Fresh thinking and new practices in pay / negotiation strategies• Line managers and their impact• Improving the relationship with the CEO and raising HR to board level importance

Plenary feedback

Any other Qs and wrap-up

We hope you enjoy the morning!

Agenda for today

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Aon Hewitt’s 2011/12 Salary Increase Survey reported actual median increases of 3.2% and 2012 projections of 3.2%.

Despite recent falls, inflation has been eating into these modest salary increases for some time:

– A major challenge for many organisations continues to be balancing the management of employees' pay expectations while preventing fixed costs from spiralling out of control.

Over the course of 2011 GDP increased by only 0.9%, much slower than the 2.1% growth seen in 2010 (ONS): – Economic output shrank by 0.2% in the Q4 of 2011, representing a significant decline from the

0.6% growth in the previous quarter. – Another quarter of negative growth would officially put the UK economy back into recession.

54% of respondents to Aon Hewitt’s 7th European HR Barometer expect a significant impact on business results from the economic slowdown (23% in 2011):

– 65% believe their organisation has responded to short term market conditions without impacting on long term business objectives.

– 43% believe more than half of the measures undertaken to cope up with the slowdown have been successful, 25% believe all have been successful.

The 2012 economic environment

Data sources: Aon Hewitt 7th European HR Barometer Trends and Perspectives 2012-2014Aon Hewitt 2011 / 2012 Salary Increase Survey 2

Ambitious ‘people plans’ remain in place despite economic uncertainty.

The pressure on cost reduction ranked as the factor most influencing HR policies and practices by 38% of respondents (1st or 2nd):• 87% view the tough economic environment as an opportunity, rather than a threat, to show the added

value and efficiency of HR to support the business• 81% of HR are happy in their current role and have no wish to change employer• 33% expect a significant impact on HR programmes (21% in 2011)

The top 3 performing HR activities (on or above target):• Employee data privacy policy implementation (81%)• Industrial relations (79%)• Overall HR strategy (77%)

The bottom 3 performing HR activities (below target):• Work-life balance programmes (71%)• Mapping and management of competencies (66%)• HR metrics (65%)

The 2012 HR environment

Data source: Aon Hewitt 7th European HR Barometer Trends and Perspectives 2012-2014 3

• Significant improvement in programmes being considered as ‘fully fit for purpose’ since 2007• Tactical implementation and effective delivery of plans are the areas of concern.

Effectiveness of reward programmes

Data source: Aon Hewitt Reward Fundamentals study 4

33%

24%

21%

24%

19%

15%

0%

15%

40%

29%27% 27%

24%

15% 15%

11%

24%

11%

18% 18% 18%

24%

0%

20%

42%

34%

45%

41%

53%54%

51%

47%

0%

10%

20%

30%

40%

50%

60%

Broad based long-termincentives (e.g all

employee share plans)

Succession planning Talent identificationmanagement process

Job Evaluation Broad employee bonusplans (e.g. profit

sharing)

PerformanceManagement process

Market Pay datamanagement

EmployeeRelation/UnionEnvironment

% o

f res

pond

ents

2007 All Respondents In Need of Revision2011 All Respondents In Need of Revision2007 All Respondents Fully Fit for Purpose2011 All Respondents Fully Fit for Purpose

Variable pay: Extension of and introduction of new bonus plans, changing plan measures and increasing bonus opportunities.

Pay and grading: Changes to the number of grades, the width of pay bands, and greater use of job family concepts in reward.

Pensions and benefits: Due to a combination of regulatory and demographic changes, increased focus on cost management and improving the motivational impact of benefits programmes.

Changes to reward programmes

Data source: Aon Hewitt Reward Fundamentals study 5

The Top 10 HR priorities for 2012-2014

Data source: Aon Hewitt 7th European HR Barometer Trends and Perspectives 2012–2014 6

46%

38%37%

27%

23%

19%

13%12%

10% 10%

54%

50%

44%

12%

17%

12% 12%

0% 0% 0%0%

10%

20%

30%

40%

50%

60%

Build a pipelineof leaders for

the future

Improveemployee

engagementand satisfaction

Improve talentretention at

every level ofthe organisation

Bettermeasuring and

rewardingemployee

performance

Implement anintegrated HR

IT systemthroughout theorganisation

Workforceplanning to

better anticipatebusiness needs

Improveassessment ofwhat HR does

and how it addsvalue to the

business

Prepare theorganisation toface possible

recession

Transform HRto overcome its

fragmentedorganisation by

activity

Develop onecoherent HR

policyframework for

the entireorganisation

% o

f res

pond

ents

2012 2011

Group Subject

A Fresh thinking and new practices in pay / negotiation strategies

B Line Managers and their impact

C Raising HR to board level importance

Break-out sessions

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Break-out Group AFresh thinking and new practices in pay / negotiation strategies in the current ER and engagement climate

Business context and emerging reward themesBu

sine

ss d

rive

rs Organisational change – declining markets; strategic shifts; innovation and re-skilling; re-targeted growth (with a firm lid on Opex)

Quality and customer care –understanding the value drivers

Efficiencies – smarter, more flexible working in the face of continuing price competition

Changed engagement landscape –multi-generational; declining DB pension populations; out-dated and strained ER / IR frameworks; is the goodwill starting to fragment?

Legislative / regulatory changes –big HR implications

Rew

ard

them

es

Pay for contribution & market –renewed focus

Prioritising – key talent

Success-sharing – all employees

Global standards and consistency

Focus on Total Package

Seizing opportunities – changing employee landscape; economy ‘flat on its back’: reshape the employment deal?

Segmentation – specific talent pools / sector skills

Increasing choice – even if a little

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Keeping a lid on base pay escalation:

• Broadening the focus away from salary and inflation• Improving the ROI (‘give and take’)• Closer market alignment (reigning back over market pay, use of job families etc)

Properly differentiated (and more use of) variable pay:

• More for the best, possibly less for on-target performance, higher thresholds• Measures more closely aligned to ‘where I work’

Optimising benefits programmes for employers as well as employees:

• More flexibility / choice• Greater harmonisation / addressing protections• Co-ordinated campaigns to fill the communications and engagement vacuum on pay

Fresh thinking and new practices? Our experience

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Break-out Group BLine managers and their impact – how do we ensure we are getting the best out of line manager involvement in reward and performance

Market uncertainty

Customer confidence

Mergers & acquisitions

Regulatory changes

Influencing consequences

Line Manager

Making sense of corporate messages

Market uncertainty

Customer confidence

Mergers & acquisitions

Regulatory changes

Influencing consequences

Line Manager

Making sense of corporate messages

Influencing consequences

Line Manager

Making sense of corporate messages

Line managers and their impact

Line managers are under pressure

• Expected to interpret key messages to their teams about strategic direction, vision, values and hard targets AND transmit these to employees so they are clear about what they need to do, motivated and inspired.

• They need to do this in a constantly changing and challenging environment.• Low or zero pay increases make the pay/performance conversation even harder.

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Research* drawn from 4,500 managers, including 300 CEOs and 550 HR managers found:

• Over four in ten managers (43%) consider their line managers to be ineffective.

• 39% of managers in low performing business thought their line managers were effective– 80% in high performing organisations.

• The average expenditure on management training per manager was £1,275 pa for low performing organisations

– £1,738 pa for high performing organisations.

• Accredited learning and qualifications such as MBA’s were rated as having the best impact on management performance

– However the majority of organisations relied on short courses and on-the-job experience as their main training method.

In the UK only 1 in 5 managers has had any form of formal management training.

Line managers and their impact

* Chartered Management Institute / Henley Business School 13

Line managers and their impact: our experience of what makes a difference

Organisations who are ‘good’ at this:1. Invest significant effort in manager specific training

– And make managers invested in the outcome

2. Have a strong company message and clear ‘branding’ of reward– Not just a one off “initiative” – reward and performance conversations need to be

part of the fabric of the organisation

3. Have strong and highly cooperative HR/Manager relationships– Access to ongoing support and guidance is critical

4. Provide sufficient resources and tools – But do not overload with ‘process’

5. Communicate to manager community regularly– Make managers feel ‘special’

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Break-out Group CHow reward can support HR to improve the relationship with the CEO and raise HR to board level importance

24% ranked the level of cooperation between the CEO and HR Director ‘very high’ (1st or 2nd), the highest proportion.

The top 4 reported HR needs for 2012 all relate to the relationship between HR and senior leadership:

• Greater and timely HR involvement in strategic business decisions (46%)• Increased business related experience (35%)• Improved execution of activities (35%)• Attracting new talent within HR (31%)

‘Improving the assessment of what HR does and how it adds value to the business’ is:

• Considered the second most important issue in terms of the HR ‘delivery gap’ (37%)• A top priority for less than a fifth (13%)

58% disagreed that HR has a limited margin of manoeuvre to influence the business agenda• 37% agreed

Raising HR to board level importance

Data source: Aon Hewitt 7th European HR Barometer Trends and Perspectives 2012–2014 16

Does the HR function truly understand business plan changes and how they are perceived across the organisation?

Strategic AlignmentCommercial Focus

The CEO ‘Radar’Service Excellence

To what extent is the Reward agenda aligned to your business strategy?

Is the HR function sufficiently skilled to understand and provide the right balance between process-driven and proactive activities?

How successfully does the HR function act as an early warning system, proactively managing regulatory risk?

Raising HR to board level importance: strategic thinking

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What is the perception of HR within your organisation? Are you considered “process police”?

Capability to implementTrust

Workforce trendsHR Support

How successfully does your business manage reward and performance?

To what extent do your current HR policies, processes and practices support your Reward agenda?

How successfully does your Reward agenda reflect changes in business, demographics and workforce trends?

Raising HR to board level importance: influencing corporate culture

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Strategic thinking

• The Reward agenda should be aligned to the organisation’s business strategy.• HR should be on top of any changes to business plans and how they are being accepted

across the organisation. • HR needs to move away from purely ‘process driven’ HR (eg) MI reporting must be proactive,

robust and relevant. Skilled specialist (C&B) teams are essential.• HR departments that stay abreast of an ever-changing regulatory environment (employment

practices), can be the CEO’s early warning system. Proactively managing regulatory risk means the potential for harm to the company, and therefore the CEO, can be minimised.

Influencing corporate culture

• HR’s ability to instill trust at all levels is key. The influence begins to decline when HR become “process police”.

• The effective management of reward and performance should be sound.• HR policies, processes and practices should be set up to support the reward agenda.• Succession planning is key to ensure an effective system to pinpoint high-potential talent and

probable successors.

Raising HR to board level importance

‘Why HR and the CEO Should Be Joined at the Hip’ – John Bell 06/09/2012 (http://www.weknownext.com/blog/why-hr-and-the-ceo-should-be-joined-at-the- hip?utm_source=twitterfeed&utm_medium=twitter&utm_campaign=Feed%3A+weknownext+%28Next%29)

HR Advocate 16/09/2011 (http://hradvocate.biz/2011/09/16/no-surprises/)19

More information

Mike CurtisPrincipal Consultant | Performance, Reward & Talent +44 (0)207 086 9037

Jackie WallerPrincipal Consultant | Performance, Reward & Talent+44 (0)172 788 8394

Steve MundaySenior Consultant | Performance, Reward & Talent+ 44 (0) 207 086 9213

Related research:

Sales Incentive Survey

Total Compensation Measurement™

Salary Increase Survey

Reward Fundamentals

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