Mission WorldatWork Journal strives to: z Advance the theory, knowledge and practice of total rewards management. z Contribute to business-strategy development that leads to superior organizational performance. z Provide an outlet for scholarly total rewards writing and research. Executive Committee of the Board of Directors Chair I Sara R. McAuley, CCP Vice Chair I David Smith, CCP Vice President, Human Resources, AGL Resources Secretary/Treasurer I Jeff Chambers, WLCP Past Chair I Tracy J.O. Kofski, CCP Vice President, Compensation & Benefits, General Mills Member I Anne C. Ruddy, CCP, CPCU President, WorldatWork Editorial Publisher I Anne C. Ruddy, CCP, CPCU Executive Editor I Ryan M. Johnson, CCP Managing Editor I Jean Christofferson Contributing Editor I Michelle Kowalski Review Coordinator/Permissions Editor I Marie Finke Design Senior Manager, Marketing, Communications and Creative Services I Barry Oleksak Art Director I Jamie Hernandez Creative Services Manager I Rebecca Williams Senior Graphic Designer I Kris Sotelo Graphic Designer I Hanna Norris Circulation Circulation Manager I Barbara Krebaum
Transcript
Mission
WorldatWork Journal strives to:
z Advance the theory, knowledge and practice of total rewards management.
z Contribute to business-strategy development that leads to superior organizational performance.
z Provide an outlet for scholarly total rewards writing and research.
Executive Committee of the Board of Directors
Chair I Sara R. McAuley, CCP
Vice Chair I David Smith, CCP Vice President, Human Resources, AGL Resources
Secretary/Treasurer I Jeff Chambers, WLCP
Past Chair I Tracy J.O. Kofski, CCP Vice President, Compensation & Benefits, General Mills
Member I Anne C. Ruddy, CCP, CPCU President, WorldatWork
Editorial
Publisher I Anne C. Ruddy, CCP, CPCU
Executive Editor I Ryan M. Johnson, CCP
Managing Editor I Jean Christofferson
Contributing Editor I Michelle Kowalski
Review Coordinator/Permissions Editor I Marie Finke
Design
Senior Manager, Marketing, Communications and Creative Services I Barry Oleksak
Art Director I Jamie Hernandez
Creative Services Manager I Rebecca Williams
Senior Graphic Designer I Kris Sotelo
Graphic Designer I Hanna Norris
Circulation
Circulation Manager I Barbara Krebaum
This publication is a special benefit of membership in: Global Headquarters: In Canada: WorldatWork P.O. Box 4520 14040 N. Northsight Blvd. Postal Station A Scottsdale, AZ 85260 USA Toronto, ON M5W 4M4
WorldatWork Journal (ISSN 1529-9457) is published quarterly by WorldatWork, 14040 N. Northsight Blvd., Scottsdale, AZ 85260, as a benefit to members, who receive an annual subscription with their member-ship. Subscriptions in the United States and United States possessions are $130 per year; in other coun-tries sub scriptions are $165 per year. POSTMASTER: Send address changes to WorldatWork Journal, 14040 N. Northsight Blvd., Scottsdale, AZ 85260; 480/951-9191. Canada Post (CPC) publication #40823004.
WorldatWork neither endorses any of the products, services or companies ref er enced in this publication nor does it attest to their quality. The views ex pressed in this pub li ca tion are those of the authors and should not be as cribed to the officers, mem bers or other spon sors of WorldatWork or its staff. Noth ing herein is to be construed as an at tempt to aid or hinder the adoption of any pending legislation, regulation or in ter pre tive rule, or as legal, ac count ing, actuarial or oth er such pro fes sion al ad vice.
Rejection Rate: In the second half of 2010, the rejection rate for papers submitted to WorldatWork Journal was 57.6 percent.
Reprints: For bulk reprints contact: Gail Hallman at 800-352-2210, Ext. 8175, or [email protected].
Manuscripts: WorldatWork Journal welcomes manuscripts. See guidelines and review process at www.worldatwork.org, or contact any member of the editorial staff.
Letters: Readers are invited to submit letters for publi-cation. Letters are pub lished as space permits and are subject to editing.
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WorldatWork (www.worldatwork.org) is a global human resources association focused on compen-sation, benefits, work-life and
integrated total rewards to attract, motivate and retain a talented workforce. Founded in 1955, WorldatWork provides a network of nearly 30,000 members in more than 100 countries with training, certification, research, conferences and community. It has offices in Scottsdale, Arizona and Washington, D.C.
The WorldatWork group of registered marks includes: WorldatWork®, WorldatWork Society of Certified Professionals®, Alliance for Work-Life Progress® or AWLP®, Certified Compensation Professional® or CCP®, Certified Benefits Professional® or CBP, Global Remuneration Professional or GRP®, Work-Life Certified Professional™ or WLCP®, Certified Sales Compensation Professional™ or CSCP™, Certified Executive Compensation Professional or CECP™, workspan®, WorldatWork® Journal and Compensation Conundrum®.
WorldatWork Management Team
President I Anne C. Ruddy, CCP, CPCU
Vice President, Publishing and Community Ryan M. Johnson, CCP
Vice President, Professional Development Bonnie Kabin, CCP
Director, Human Resources I Kip Kipley, CBP, SPHR
Executive Director, AWLP I Kathie Lingle, WLCP
Vice President and CFO I Greg Nelson, CCP, CPA
Managing Director, Washington, D.C. Office and Conference Center I Paul Rowson, CCP, CBP, WLCP
Vice President, Marketing and Channel Management Betty Scharfman
WorldatWork Advisory Board Chairs
WorldatWork advisory boards identify current and future strategic issues and topics in compensation, benefits and the work experience. Their suggestions, as well as input from other sources, help determine the technical content of WorldatWork products and programs such as conferences, forums, seminars and publications.
Benefits Advisory Board I Debra A. Weafer, CCP, CBP Vice President, Compensation & Benefits, BlueCross BlueShield of Massachusetts
Compensation Advisory Board I Constance L. Haney, CCP, CBP, GRP, Director, Compensation and Benefits, Mentor Graphics Corp.
Executive Rewards Advisory Board I Randolph W. Keuch Vice President, Total Rewards, H.J. Heinz
Global Advisory Board I Steven P. Seltz, CCP Vice President, Compensation and Benefits, US/Americas, Siemens Corp.
Reviewers
WorldatWork Journal thanks the following individuals for reviewing manuscripts during the editorial cycle for the Fourth Quarter 2010 issue. Subject-matter experts, including members of WorldatWork’s advisory boards, review all manuscripts.
Angel Alamo, CCP I Wal-Mart Stores Inc.
John Bremen I Towers Watson
Judy Butterworth, CCP I TransCanada Pipelines Ltd.
Karen Crandall, CCP I Expedia
Chris Crawford, CCP I Longnecker & Associates
Leigh Culpepper, CCP, CBP, GRP I Culpepper and Associates Inc.
Kim Denning, CCP I Microsoft
Challie Dunn, CCP, GRP I The RiskMetrics Group
Claudia Elmore I Elmore Consulting Group Inc.
David Engelman, CCP I Accenture LLP
Mark Englizian, CCP, GRP I Amazon.com
Thomas Farmer, CCP, SPHR I InterContinental Singapore
Mark Fogel, SPHR I Leviton Manufacturing
Steve Gross I Mercer
Regina Hack, CCP I True Value Co.
Robert Hartley, CCP I Sanminia-SCI
Myrna Hellerman, CCP I Sibson Consulting
Jolene Huey, PHR I Talent Stream Consulting
Vivian Jennings, CCP, CBP, GRP I Bell Aliant
Jeffrey Johnson, CCP I Workforce Planning & Rewards Consultancy
David Johnston I Sales Resource Group
Bob Jones, CSCP I ICBC
Ann Kraus, CCP I The Guardian Insurance Co.
Barbara Magito, CCP I Pinnacle HR Solutions LLC
Luke Malloy, CCP I UnitedHealth Group
Deborah Marsh, CCP, CBP, CEBS I Nautilus Inc.
Doug Sayed, CCP, SPHR I Applied HR Strategies Inc.
Executive SummariesFourth Quarter 2010 | Volume 19 | Number 4
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Beyond Compensation: How Employees Prioritize Total Rewards at Various Life StagesBy Margaret Leaf and Rebecca Ryan, Next Generation Consulting
In 2008-2009, Next Generation Consulting (NGC) teamed with WorldatWork to study
how employees at different life stages prioritize their rewards. The authors hypothesized
that the relative importance of the five total rewards elements is based on life stage
and includes age, work experience, parental status and other demographic variables.
The implication is that compensation professionals, total rewards practitioners and
managers who understand their employees’ life stages and rewards priorities can begin
to fashion a more relevant and meaningful total rewards package, thereby increasing
their odds of retaining employees and reducing turnover and replacement costs.
Compensation Framework to Optimize Employee Retention and Engagement During AcquisitionsBy Anupam Khanuja, CCP, and Jim Harvey, CCP, Cisco Systems
The success or failure of an acquisition is not typically known until well after the
ink is dry on the agreements. In most cases, without key employees of the acquired
company fully engaged for their new employer, the purpose of the acquisition will not
be realized. This paper outlines the elements and approaches of compensation to
secure key acquired talent. The authors also explain why such compensation strategy
must be aligned with the purpose of acquisition and the overall business strategy to
be successful.
The Role of Rewards in Building Employee Engagement: A Survey of Rewards ProfessionalsBy Dow Scott, Ph.D., Loyola University Chicago; and Tom McMullen
and Mark Royal, Ph.D., Hay Group
Employee engagement has become a major focus for organizations concerned about
retaining talented employees after they have suffered through one of the worst reces-
sions in decades that has involved wage freezes, lost bonuses, increased work demands
and downsizing. The authors surveyed more than 700 rewards professionals to deter-
mine how rewards programs impact employee engagement. This study confirms that
total rewards approaches, both financial and non-financial rewards programs, influence
employee engagement. However, it is also evident that many rewards professionals do
not adequately take into account the insights and perspectives of employees and line
managers in designing and implementing rewards structures, policies and programs to
foster high levels of engagement. This paper discusses the role rewards professionals
Rethinking Retention Strategies: Work-life Versus Deferred Compensation in a Total Rewards StrategyBy Alec Levenson, Ph.D., Center for Effective Organizations, Marshall School of Business,
University of Southern California; Michael J. Fenlon, Ph.D., PricewaterhouseCoopers LLP; and
George Benson, Ph.D., University of Texas – Arlington
In 2004, PricewaterhouseCoopers LLP faced a retention challenge with a key talent
pool: accounting professionals. The firm thought that compensation was a primary
lever that could be used to reduce turnover, and commissioned a deep analysis of
careers and the drivers of turnover. The approach included gauging the value of human
capital developed on the job by tracking employees who left to measure their subse-
quent career outcomes. The findings confirmed a number of the leaders’ beliefs about
how compensation should be structured over an employee’s career. But the find-
ings also challenged the focus on compensation solutions, and suggested that the
firm also needed to reevaluate its approach to work design and the role of work-life
balance. This paper explains a rethinking of the meaning of total rewards that led to
changes that produced lasting reductions in turnover and direct bottom-line benefits.
It describes how the lessons learned at PricewaterhouseCoopers can be applied to
other businesses.
Directors More Sensitive to Shareholder Advisers in Executive Compensation Votes By Marshall T. Scott, Towers Watson, and Laura G. Thatcher, Alston & Bird LLP
Shareholder advisers, who have counseled on executive compensation programs for
many years, have gained influence with the wide-spread adoption of a majority voting
standard in uncontested director elections. In this paper, the authors discuss the impact
of majority voting and the potential influence on executive compensation policies at
public companies that have adopted that standard. The authors list some of the voting
policies of Institutional Shareholder Services, one of the leading shareholder advisers,
and offer observations as to how directors need to respond to shareholder advisers
to continue to serve on the board.
The Myths and Realities of U.S. Executive Incentive Goals By Aubrey Bout and Ira Kay, Ph.D., Pay Governance
This paper details the authors’ research, which debunks three myths concerning execu-
tives’ goals in U.S. public companies: 1) That executives set easy goals so they can
receive high bonuses; 2) that companies do not disclose goals, which allows them to
pay higher bonuses; and 3) that company internal goals are often set below analyst
expectations. In fact, the research in this paper will confirm that the opposite is true –
companies, executives and shareholders thrive and achieve greater shareholder returns
when pay is tied to difficult goals.
Published Research in Total Rewards
F or years, consumers have customized their food
and beverage orders. There’s even a market for
designer pets; buyers can cross breed to suit their
allergies and aesthetic preferences.
But when it comes to work, employees have limited
options with limited flexibility among and between
options. Often, if an employee wants a different “deal”
at work, he/she typically tries to negotiate a special
arrangement or look for a different employer.
The lack of broad flexibility in negotiating a total
rewards package has several implications:
Managers who are willing to customize an employee’s z
rewards arrangement must invest additional time and
energy to understand, design, negotiate and monitor
these arrangements. This usually is in addition to a
manager’s “day job.” What’s more, the accommodating
manager often must serve as liaison between the
requesting employee and the HR department or CFO,
who often has final approval. For these reasons, nego-
tiating custom rewards arrangements for employees is
unpopular with some managers.
Executives and certain “high potential” employees z
commonly receive customized rewards arrangements.
If known or suspected by a broader base of employees,
these arrangements may cause rancor, resentment or
loss of productivity among employees who aren’t
deemed “eligible” for a customized package.
Beyond Compensation: How Employees Prioritize Total Rewards at Various Life Stages
Employees may perceive their organizations as inflexible or unwilling to work z
with employees on customized rewards arrangements simply because they’re
uncommon or not well known. Turnover may become an issue.
Yet, offering more fluid, customized rewards arrangements seems inevitable.
Today’s workforce is more global, celebrates greater diversity and employs more
knowledge workers than ever before. As WorldatWork concluded:
With an increasingly diverse workforce, no single reward element will be
a value driver. Job enrichment, flexibility and career development will be
valued above job security and stability. There will be increased importance
of the value proposition for individual workers. … The traditional career
path will be a thing of the past — there will be many opportunities
for workers beyond affiliating themselves with one organization (Kelley,
Moore and Holloway 2007).
Outside of work, things also have changed: Only 17 percent of households have
a husband in the workforce and a wife who is not, down from 63 percent when
the first Baby Boomers were not even in kindergarten (Benko and Weisberg 2007).
In the words of Benko and Weisberg, “The workforce has changed, while the
workplace has not.”
In 2008-2009, Next Generation Consulting (NGC) teamed with WorldatWork to
study how employees at different life stages prioritize their rewards. (Note that
“rewards” refers to all five WorldatWork Total Rewards Model elements as shown
in Figure 1). The authors hypothesized that the relative importance of the five total
FIGURE 1 The WorldatWork Total Rewards Model (WorldatWork 2006).
8 WorldatWork Journal
rewards elements (compensation, benefits, work-life, performance and recognition,
and development and career opportunities) is based on life stage, including age,
work experience, parental status and other demographic variables. Note: To assist
the reader, many of the terms used in this paper are defined in Figure 2.
The implication is that compensation professionals, HR practitioners and managers
who understand their employees’ life stages and rewards priorities can begin to
fashion a more relevant and meaningful total rewards package, thereby increasing
their odds of retaining employees and reducing turnover and replacement costs.
METHODOLOGY
In December 2008, the authors completed a telephone and Web survey of profes-
sionals culminating in 678 responses. Survey questions centered on the total
rewards model, including prioritization of the total rewards elements, work experi-
ence, professional goals and demographic questions.
FIGURE 2 A Glossary of Terms
Benefits
One element of the WorldatWork Total Rewards Model that encompasses all programs an employer uses to supplement employees’ monetary compensation, including social insur-ance (e.g., unemployment, worker’s compensation, disability), group insurance (e.g., medical, dental, retirement) and paid time off (e.g., breaks, vaca-tion, personal days).
Breadwinner
For the purposes of this report, a full-time employee with a partner or spouse who works less than 30 hours per week.
Compensation
One element of the WorldatWork Total Rewards Model that simply refers to an employee’s pay, including fixed pay, variable pay, short-term incen-tive pay and long-term incentive pay.
Development and Career Opportunities
One element of the WorldatWork Total Rewards Model. “Development” refers to learning experi-ences designed to enhance employees’ skills (e.g., corporate universities, tuition assistance for advanced degrees). “Career opportunities” are organizationally supported plans for employees to advance their career goals (e.g., internships, apprenticeships, succession planning).
Life Stage
The primary independent variable in this study, “life stage” encompasses age, family and house-hold status, and experience (e.g., work experience, personal experience). Life stage interacts with other variables, such as gender and income, to influence employees’ priorities at work.
Performance and Recognition
One element of the WorldatWork Total Rewards Model. “Performance” involves the alignment of organizational, team and individual effort toward the success of the organization, and includes performance planning, the performance itself and performance feedback. “Recognition” is the acknowledgement and appreciation of employees’ efforts and performance (e.g., verbal recognition, trophies, certificates).
Prioritization of Rewards
The primary dependent variable in this study. “Prioritization of rewards” is measured by number of points allocated to each of the five elements of total rewards.
Total Rewards
A WorldatWork model that includes all of the tools employers may use to attract, motivate and retain employees. The five elements of “total rewards” include: compensation, benefits, work-life, perfor-mance and recognition, and development and career opportunities.
Work-life
One element of the WorldatWork Total Rewards Model. Work-life refers to a set of organizational practices, policies and philosophies that support employees in achieving success at work and home. There are seven categories of organizational support for work-life. They are: workplace flexibility, time off, health and well-being, dependent care, financial support, community involvement and management involvement/culture change interventions.
9 Fourth Quarter | 2010
NGC took a multimethod approach to best capture the links between total
rewards and life stage. Data sources included:
Web survey of NGC’s panelists (a group of mostly 20- to 40-year-old professionals z
who periodically take NGC surveys) conducted in November and December 2008,
culminating in 378 responses
Random-digit-dialed phone survey conducted by Dieringer Research Group in z
November and December 2008, which culminated in 300 responses.
The survey included approximately 22 questions related to total rewards and
employment, and approximately 18 demographic questions, ranging from number
and age of children to partner’s work status.
The primary independent variable in this study was life stage. Life stage is
defined as a crosswalk between age, family/household status and experience as
well as other demographic variables.
The dependent variable in this study was prioritization of rewards or, more
specifically, prioritization of the five total rewards elements. Prioritization of
rewards was measured through a “point allocation” question in which respondents
were asked to allocate 100 total points to the five total rewards elements based
on their relative importance.
Survey Demographics
Figure 3 describes the 678 respondents’ demographic characteristics. The survey
also included several questions related to employment. Figure 4 summarizes
respondents’ employment characteristics.
FIGURE 3 Survey Demographics
Gender
Female 64%
Male 36%
Age
Under 30 25%
Ages 30-39 36%
Ages 40-49 16%
Ages 50 & over 23%
Race/Ethnicity
White 87%
Black/African-American 7%
Hispanic/Latino 3%
Asian 2%
Other 3%
Education
College Graduate 50%
Post-Graduate 24%
Some College 14%
High School 8%
Other 4%
Marital Status
Married or Living Together 70%
Single 20%
Separated/Divorced 9%
Widowed or Widower 1%
Children
None 63%
1 child 16%
2 children 13%
3 or more children 8%
10 WorldatWork Journal
PROJECT RATIONALE: WHY THIS PROJECT? WHY NOW?
In 1998, the dot-com heyday, NGC began studying 20- to 40-year-old
employees and the workplaces that attract and keep them. In 2001, after the
dot-com collapse and the ensuing pink-slips, the authors wondered, “What
makes a truly great place to work? One that can attract and keep talent for
the long haul?”
The authors started conducting primary research about what makes employees
happy and productive at work. The original research examined employees
through a single lens: age. Specifically, two cohorts were studied: those under
age 40 and those age 40 and over. These groups include four generations of
workers in contemporary society: Generation Xers and Millenials (under 40)
and Traditionalists and Baby Boomers (40 and over).
FIGURE 4 Employment Characteristics
Employment Sector
For-profit 55%
Nonprofit 27%
Government 18%
Hours Worked per Week
Less than 40 7%
40-49 36%
50-59 32%
60 or more 25%
Size of Organization
Less than 10 employees 10%
10 to 49 employees 20%
50 to 99 employees 9%
100 to 499 employees 17%
500 or more 44%
Industry
Business & Professional Services 15%
Education 15%
Health care 12%
Government 10%
Manufacturing 8%
Financial Services 6%
Technology & Information 6%
Consumer Products and Services 6%
Transportation & Tourism 4%
Construction 3%
Retail 3%
Other 12%
Years with Organization
2 years or less 32%
3-5 years 27%
6-9 years 15%
10-14 years 11%
15 years or more 15%
Years of Experience in Current Field
2 years or less 9%
3-5 years 23%
6-9 years 19%
10-14 years 17%
15 years or more 32%
Individual Income
Less than $30K 13%
$30K to less than $50K 37%
$50K to less than $75K 29%
$75K to less than $100K 12%
$100K or more 9%
Union Membership
Union members 10%
Nonmembers 90%
Supervisor Status
Supervisors 43%
Not supervisors 57%
11 Fourth Quarter | 2010
Today hundreds of articles, books and resources outline how the four genera-
tions prioritize various components of the Total Rewards Model. Yet generational
variables often fall short when trying to harness the dynamic makeup of the
emerging workforce.
Understanding employees’ generational context is insufficient to create dynamic
and engaging work arrangements that turn on talent and bring out the best in each
employee. A more nuanced approach is needed, one that considers the complex
mosaic of employees’ needs and their life stages — which encompasses not only
generation, but also age, family status and experience —at home and at work.
The notion of individually tailored value propositions may cause the heads of
total rewards professionals to spin. And it should. The commitment and admin-
istrative horsepower required to offer each employee his/her own customized
career proposition is mind-boggling. Yet, it appears the time is coming.
Deloitte broke ground on this issue with the 2007 release of Mass Career
Customization (MCC) (Benko and Weisberg). A thorough reading of their
thesis — that work must change to respond to changes in the workforce — is
spot on. However, Benko and Weisberg take an employer-centered — and almost
transactional — approach to the solution. The MCC framework suggests career
customization can be based on four factors:
Pacez
Workloadz
Location/schedulez
Role.z
This four-part framework does an adequate job of solving one part of the equa-
tion: how an employee can contribute to the organization. But it leaves room for
an additional factor: how the employee would prefer to be rewarded for his/her
contribution. This is the central question of this research.
Employee engagement is centered on an interactive discussion between employer
and employee, where a fair exchange of work for rewards is made. Many busi-
nesses are faced with a win-win opportunity to get more “bang for their rewards
bucks” by enabling employees a say in the mix of rewards that is best for them,
based on their personal and professional life stages.
KEY FINDINGS
With a survey sample of 678 responses, the authors compared total rewards
prioritization across several categories related to life stage and other social
statuses. These variables were combined in several ways to assess their effect
on rewards prioritization via regression analysis and means comparisons. Three
“life-stage profiles” emerged as most significant in terms of their effect on
rewards prioritization. Additionally, several individual components of life stage
were significantly linked to rewards prioritization. These bivariate findings are
discussed later in this section.
12 WorldatWork Journal
Life-Stage Profiles
Profile 1: Women with Children Under the Age of 6. Looking at the entire
sample of 678 full-time employees, the majority prioritized “compensation” as
most important. Respondents were asked to allocate 100 points to the five total
rewards elements based on their relative importance. On average, respondents
gave 26.7 points to compensation, followed by work-life at 20.5 points and
benefits at 20.3 points. (See Figure 5). However, not all groups put “compensa-
tion” first.
Women with children who are all under the age of six placed work-life first as
their total rewards prioritization. These women gave an average of 26.3 points to
work-life, compared to 20.5 points for everything else (significant at p = 0.002).
A Closer Look at This Profile. There were 38 women in the sample with children
who were all under the age of six. All of these women reported working full-time.
In addition, these women reported:
Working an average of 48 hours per week (but would prefer to work an average z
of 40 hours per week)
Having an average of nine years of experience in their field, and six years at z
their organizations
Having an average age of 33z
Having two children (median)z
Being well educated; 53 percent being college graduates and 32 percent having z
a post-graduate degree
Being married or living with a partner (90 percent), most of whom also work z
full-time (94 percent)
Earning a median individual income of $62,500 (before taxes).z
Are They Finding the Work-Life Balance They’re Looking For? Looking at their
profile, these mothers with young children are very valuable to employers. They bring
FIGURE 5 Total Rewards Prioritization: Women with Children Under the Age of 6.
28
Mean number of points allocated
Work Life
Compensation
Benefits
Development
Recognition
Women with Children <6
Everyone Else
10 12 14 16 18 20 22 24 26
20.5
24.726.7
18.520.3
15.716.5
14.916
26.3
13 Fourth Quarter | 2010
experience, education and hard work to their jobs. They also are conducting a
balancing act, trying to manage work and family, especially given that their children
are not yet in school full-time (many 5-year-olds will be in half-day kindergarten).
So, while these women are working an average of 48 hours per week, they must
find child-care arrangements for their children. Flexibility is a must.
Are They Finding the Flexibility They Need at Their Organizations? All respon-
dents were asked to rate their level of agreement with three statements about
work-life at their current organizations:
My manager or supervisor actively promotes a healthy work-life balance at my z
organization.
Flexible work arrangements (e.g., telework, reduced workload, compressed work z
weeks) are available at my organization.
My job gives me flexibility to meet the needs of both my professional and z
personal life.
Figure 6 shows how the 38 women with children under the age of six
responded compared to their counterparts (men with children younger than
six). As exhibited, neither men nor women with young children showed high
levels of agreement with regard to work-life at their organizations (a “high-level
of agreement” is categorized as 80 percent agreement or above). Compared to
men, women with young children perceived that their managers were better
at promoting work-life balance. However, in terms of offering flexible work
arrangements, less than one-half of women in this profile (47 percent) reported
feeling that they had access to arrangements like telework or compressed work
weeks, compared to 56 percent of men. Additionally, 50 percent of women
with young children reported feeling that their job gave them the flexibility
they need to balance their professional and personal lives, compared to 66
percent of men.
FIGURE 6 Level of Agreement with Work-Life Statements: Women and Men with Children Under the Age of 6
Work-Life StatementsWomen with Young
Children (N=38)Men with Young Children (N=32)
My manager or supervisor actively promotes a healthy work-life balance at my organization.
66% Agree 56% Agree
Flexible work arrangements (e.g., telework, reduced workload, compressed work weeks) are available at my organization.
47% Agree 56% Agree
My job gives me flexibility to meet the needs of both my professional and personal life.
50% Agree 66% Agree
(Percents shown include respondents who chose “completely agree” or “agree” for each statement.)
14 WorldatWork Journal
These results are telling: Women with young children — who value work-life
more than any other life stage group — were dissatisfied with the level of flex-
ibility at their workplaces and are therefore “at risk” for leaving.
Profile 2: Experienced Women (Age 30+) Who Are the Breadwinners in Their
Households. Full-time female employees whose partners do not work full-time
(30 hours or more) have a unique set of needs when it comes to their workplace.
In terms of total rewards, they placed “benefits” ahead of other rewards, followed
by “work-life” and “compensation.” This trend is particularly significant for female
breadwinners who are 30 or older (See Figure 7).
Women in their 30s and 40s who are the primary breadwinners gave an average of
27.8 points to “benefits,” compared to only 19.7 points for everyone else (significant
at p = 0.0001). Not only is the difference significant, but also large — a discrepancy
of more than eight points.
A Closer Look at This Profile. There were 31 women in the sample who were 30
or older and whose partners did not work full-time. All of these women reported
being employed full time. In addition, they reported:
Working an average of 47 hours per week (but would prefer to work an average z
of 37 hours per week)
Having an average of 17 years of experience in their field, and 12 years of experi-z
ence at their organizations
Having an average age of 47z
Having no children or dependentsz
Having a college degree or higher; 39 percent being college graduates and z
23 percent having a post-graduate degree
Earning a median individual income of $45,000 (before taxes).z
Are They Happy with the Benefits They’re Receiving? This set of employees brings
experience and commitment to their employers, averaging 17 years of experience
FIGURE 7 Total Rewards Prioritization: Women Breadwinners Age 30+
Mean number of points allocated
Benefits
Work Life
Compensation
Development
Recognition
10 12 14 16 18 20 22 24 26 28 30
19.7
21.721.0
20.526.8
15.016.0
15.016.7
27.8
Women Breadwinners 30+
Everyone Else
15 Fourth Quarter | 2010
in their field and 12 years at their organization. They are older and most do not
have the responsibility of caring for children or dependents (58 percent have
no children, 74 percent do not have dependents). Yet, they do have the respon-
sibility of “bringing home the bacon,” as their partners do not work full-time.
As their partners were unlikely to be eligible for benefits at their jobs — either
because they do not work at all or only work part time — these women saw
benefits as critical to their total rewards package.
How Satisfied Are They with the Benefits They Receive at Their Organizations?
Respondents rated their level of agreement with three statements regarding
benefits:
I have access to high-quality health insurance from my employer.z
I receive a satisfactory amount of paid time off (e.g., vacation, personal days, z
sick days).
I have access to good retirement benefits through my company.z
Figure 8 shows the level of agreement with these statements for female bread-
winners who are 30-plus compared to women 30-plus who are not the sole
breadwinners in their households. Figure 8 shows, generally, women were
not entirely satisfied with the benefits they receive, yet breadwinner women
were particularly dissatisfied. Women responsible for providing benefits for
themselves and their partners were looking for more from their companies.
They reported being most dissatisfied with retirement and health-insurance
benefits, with agreement levels well below 40 percent. (As a side note, men
who were the sole breadwinners also carried this weight, and indicated low
levels of agreement with the benefits statement — less than 40 percent for all
three statements.)
The message is clear: To retain these experienced women, employers should
consider renegotiating their benefits packages, perhaps in exchange for a slightly
lower salary (remember: Women breadwinners ranked compensation third,
behind benefits and work-life).
FIGURE 8 Level of Agreement with Benefits Statements.
Benefits StatementsBreadwinner Women
Ages 30+ (N=31)Nonbreadwinner Women
Ages 30+ (N=169)
I have access to high-quality health insurance from my employer.
36% Agree 49% Agree
I receive a satisfactory amount of paid time off (e.g., vacation, personal days, sick days).
42% Agree 48% Agree
I have access to good retirement benefits through my company.
50% Agree 66% Agree
16 WorldatWork Journal
Profile 3: Employees Under 40 Who Are Not Supervisors. As age and experience
increase, the importance placed on development decreases (significant at p = 0.008).
When supervisor status is added to the picture, this trend is magnified: Younger
employees — especially those who are not supervisors — place significantly
more importance on development than older employees. (See Figure 9).
To be more specific, employees under 40 who are not supervisors gave an
average of 17.4 points to “development” compared to 15.9 points for everyone
else (p = 0.074). Although this may not seem like a large difference, it is signifi-
cant and telling. Development is ranked last for almost all employees except for
these younger employees, who rank it fourth.
A Closer Look at This Profile. There are 250 employees in the sample who are
under the age of 40 and are not supervisors. In addition, they:
Work an average of 47 hours per week (but would prefer to work an average z
of 40 hours per week)
Have an average of six years’ experience in their field, and four years’ experi-z
ence at their organizations
Have an average age of 30z
Are married or living with a partner (65 percent)z
Have no children (65 percent) or dependents (94 percent)z
Are well educated; 63 percent are college graduates and 23 percent have a z
post-graduate degree
Earn a median individual income of $45,000 (before taxes).z
Are These Employees Getting the Development Opportunities They’re Looking For?
Secondary research confirms the data presented here: Development is a must for
young employees who desire opportunities to learn and grow. In 2007 and 2008,
a PricewaterhouseCoopers survey of more than 4,000 recent university graduates
found training and development is the most highly valued employee benefit for
FIGURE 9 Total Rewards Prioritization: Employees Under 40 Who Are Not Supervisors
Mean number of points allocated
Compensation
Work Life
Benefits
Development
Recognition
10 12 14 16 18 20 22 24 26 28 30
25.9
21.820.2
19.120.9
17.415.9
15.816.1
27.0
Under 40 Nonsupervisors
Everyone Else
17 Fourth Quarter | 2010
this group, with three times the number of respondents voting it No. 1 compared
to cash or compensation. (PricewaterhouseCoopers 2008)
Although development was ranked fourth by employees under the age of 40
in this survey, it is nevertheless more important for younger employees — espe-
cially those who do not yet have supervisory or management responsibilities.
These employees may be looking for opportunities to learn and grow precisely
as they hope to become supervisors and managers later in their careers.
Are They Finding These Opportunities at Their Organizations? Respondents
were asked to rate their level of agreement with four statements surrounding
development:
In the last six months, I have talked to a supervisor or mentor about my z
career development.
I am provided with the training and support I need to excel in my career.z
I have the opportunity to assume leadership roles on projects and/or in my z
work group.
In my organization, I am encouraged to learn and develop new skills.z
This group reports higher levels of agreement with the development state-
ments than other groups. Figure 10 compares their agreement levels with their
“opposites:” employees 40 and older who are supervisors. As the figure shows, it
is older supervisors who have a negative perception of development opportuni-
ties. Younger employees (under age 40) who are not supervisors are relatively
happy with the development opportunities they receive, with fairly high levels
of agreement (60 percent or more).
So younger employees value development opportunities more than older
employees, which perhaps makes them more likely to seek out opportuni-
ties to learn and grow. This could contribute to their relative satisfaction with
development opportunities.
FIGURE 10 Level of Agreement with Development Statements: Under 40 Nonsupervisors and 40-Plus Supervisors
Development StatementsBreadwinner Women
Ages 30+ (N=31)Non-Breadwinner Women
Ages 30+ (N=169)
In the last six months, I have talked to a super-visor or mentor about my career development.
68% Agree 29% Agree
I am provided with the training and support I need to excel in my career.
60% Agree 21% Agree
I have the opportunity to assume leadership roles on projects and/or in my work group.
70% Agree 18% Agree
In my organization, I am encouraged to learn and develop new skills.
68% Agree 17% Agree
18 WorldatWork Journal
Conversely, some employers might assume that their older employees — espe-
cially those in supervisory positions — are “done” with their learning and
growth, and may be less likely to encourage development opportunities. In turn,
these employees are not exposed to the same development opportunities as
younger employees.
BIVARIATE RESULTS
In addition to the life stages previously listed, several individual life-stage vari-
ables were significantly related to total rewards prioritization. These bivariate
relationships were analyzed using linear regression. Only significant relation-
ships are listed (i.e., p-value of less than .05).
Older Employees Value Benefits More; Younger Employees Value Work-Life,
Development More
Younger employees value development and work-life more than older employees,
and older employees value benefits more than younger employees. The results
found that, as age increases, the importance of benefits increases (p = 0.0001)
and the importance of development (p = 0.008) and work-life (p = 0.022)
decrease. (See Figure 11).
More Experienced Workers Value Benefits More; Less Experienced Workers
Value Work-Life and Development More
Age and years of experience are highly correlated (i.e., older workers tend to
have more experience), so the results around years of experience are similar
to age: As years of experience increased, the importance of benefits increased
(p = 0.041) while the importance of work-life (p=0.014) and development
(p = 0.049) decreased.
Men Favor Money;
Women Favor Balance
Men gave significantly
more points to compen-
sat ion than women
(p=0.062). Specifically,
men gave an average
of 2.2 more points to
compen sa t ion t h an
women. Conver se ly,
women gave significantly
more points to work-life
than men (p = 0.001).
FIGURE 11 Total Rewards and Age
Benefits Development Work-Life
Mea
n n
um
ber
of
po
ints
allo
cate
d
Age
10
12
14
16
18
20
22
24
18-29 30-39 40-49 50-59 60+10
12
14
16
18
20
22
24
19 Fourth Quarter | 2010
Specifically, women gave an average of 3.2 more points to work-life than men.
(See Figure 12).
Work-life Is Significantly More Important for Parents with Young Children
Parents of children under the age of six (N=70) gave significantly more points to
work-life than everyone else (p=0.036). Specifically, parents of young children
gave an average of three more points to work-life than everyone else.
Benefits Are Significantly More Important for Breadwinners
Employees whose partners do not work outside the home full time (N=109) gave
significantly more points to benefits than everyone else (p=0.015). Specifically,
employees who reported being the primary breadwinners gave 3.3 points more
to benefits than everyone else.
Total Rewards Perception
In addition to asking respondents to prioritize the total rewards elements that
matter most to them, respondents also were asked to evaluate the total rewards
elements as they function (or fail to function) in their current organization.
Respondents rated three to five statements on a Likert Scale (“completely agree”
to “completely disagree”) for each total rewards element. Following is their
overall agreement or perception of total rewards at their current workplace:
Development and career opportunities: 49.7 percentz
Benefits: 48.2 percentz
Performance and recognition: 46.9 percentz
Work-life: 45.9 percentz
Compensation: 44.3 percent.z
In other words, nearly one-half of respondents (49.7 percent) agreed that their
workplace offers plenty of development and career opportunities, including
training and support, leadership roles on projects, mentorship and encouragement
FIGURE 12 Total Rewards Points by Gender
Compensation Work Life Benefits Development Recognition
26
30
25
20
15
10
22
1920
21
1716 16 16
28
Female
Male
20 WorldatWork Journal
to develop new skills. Specifically, the statement with the highest level of agree-
ment (54.6 percent) was, “In the last six months, I have talked to a supervisor or
mentor about my career development.”
At the spectrum’s other end, “compensation” received the lowest levels of
agreement. Specifically, the statement with the lowest level of agreement overall
(42.1 percent) was, “People at my organization are paid fairly compared to
industry standards for similar work.”
Employees across the board consistently prioritize compensation above all
other rewards elements, yet they have the lowest perception of compensation
at their workplace. This clearly shows a mismatch between what employees
value most and what they perceive.
CONCLUSION
Many readers will greet the idea of customized rewards packages with a
groan. It is, after all, easier to treat all employees the same. Making “special
deals” requires time, positive intention, creative thinking and discussions with
which many managers and compensation practitioners have little experience
or comfort.
Customizing total rewards packages for employees’ unique life stages is one
important way to demonstrate that engagement is a shared commitment between
employer and employee.
For step-by-step case study examples related to this research, see the complete
For case study examples related to the research in this paper, see the complete report available on the WorldatWork Journal Web site.
AUTHORS
Rebecca Ryan ([email protected]) is founder of Next Generation Consulting and author of Live First, Work Second: Getting Inside the Head of the Next Generation, which Richard Florida called “one of the most reliable sources for leaders who want to attract and retain the next generation.” Ryan was named Entrepreneur of the Year by the U.S. Association for Small Business and Entrepreneurship, and Communicator of the Year by Women in Communication. She received her bachelor’s degree in economics and international relations from Drake University.
Margaret Leaf ([email protected]) served as the lead analyst and head writer for this WorldatWork research project. She is a research analyst at Next Generation Consulting (NGC), touching all of NGC’s research to help cities and companies engage, retain and attract employees throughout their life stages. Prior to NGC, Leaf received her master’s degree in Sociology from Florida State University
REFERENCES
Benko, C. and A. Weisberg. 2007. Mass Career Customization: Aligning the Workplace with Today’s Nontraditional Workforce. Boston: Harvard Business School Press.
Kelley, K., B. Moore and S. Holloway. 2007. “The Future of Attraction, Motivation and Retention: A Literature Review.” Scottsdale, Ariz.: WorldatWork.
PricewaterhouseCoopers. 2008. Millennials at Work: Perspectives from a New Generation. Managing Tomorrow’s People.
WorldatWork. 2006. “What is total rewards?” http://www.worldatwork.org/waw/aboutus/html/aboutus-whatis.html#model) Viewed: June 23, 2010.
and the extent to which it will be integrated into the host company. Given these
factors, a few possible starting scenarios are described in Figure 2.
Scenario A is a Tech and Talent acquisition. The acquired company could be a
small privately held start-up company of 5 to 25 employees. The pre-acquisition
compensation packages may be equity rich with broad-based participation. Given
the type of deal, it is very likely that the acquisition will be fully integrated and
a post-acquisition consideration may be a need for rewards symmetry between
acquired employees and host-company employees.
On the other hand, Scenario C is a Platform acquisition. The acquired company
could be a well-established mid-sized company with 50 to 250 employees. The
FIGURE 1 Acquisition Business Scenarios
Factors Categories
Type of deal
Tech and talent•
Product•
Platform•
IntegrationCompletely integrated•
Bolt-on•
Type of companyStart-up•
Established •
FIGURE 2 Example Acquisition Business Scenarios
Scenario Type of DealDescription
of DealType of
CompanyIntegration
Pre-acquisition Compensation
ATech and
Talent
Integration
into current
product
Start-up,
private
company
Full integration or
absorption
Likely to be stock-rich
and broad-based
equity participation
B Product
Gap filler
in existing
portfolio or
extend current
market
Start-up or
Established
private
or public
company
First Bolt-on to
execute current
line and maintain
revenue stream,
then integrate
More likely to be
stock-stick with
broad-based equity
participation with
skew toward leader-
ship team.
C Platform
No current
presence in
market/tech
Established
public,
mid-sized
company
Bolt-on (Operate as
stand-alone divi-
sion, may integrate
over time)
Could be balanced
mix of cash and stock.
May have broad equity
participation.
24 WorldatWork Journal
pre-acquisition compensation packages most likely will be a balanced mix of
benefits, cash and stock with or without broad-based equity participation. Given
the type of deal, it is very likely that the acquisition will either operate as a stand-
alone division or may integrate over time. Hence, a consideration post-acquisition
may be to maintain the acquired company’s compensation philosophy and pay
mix until it is completed integrated.
IDENTIFYING KEY TALENT
Not all acquired employees are considered key talent. The criticality of the talent
depends on its future business impact on the success of the acquiring company.
The acquiring company will want to retain the key talent for varying lengths of
time depending on the significance and time horizon of the business impact.
An additional dimension about key talent is flight risk; key talent can be greatly
sought after by competitors, or they may be more interested in moving to the
next big adventure. Sometimes, the idea of settling into a narrow, well-defined
role in a large corporation may be not very appealing to the free-spirited entre-
preneur, also leading to flight risk.
Figure 3 shows how acquired talent then can be grouped into three tiers based
on business impact, time horizon and flight risk:
Tier 1: These are usually individuals who possess capabilities and experience
that significantly impact the success of the acquiring company and are critical
to its continued success. They have extensive and deep understanding of such
factors as the industry, markets, customers, technology and products. In addition,
FIGURE 3 Employee Tiers
Employee GroupsDescription
of Business ImpactFlight Risk
Time Horizon
Approximate Employee Population
Distribution
Tier 1Key Employees
Critical function/skills, top contrib-utor, high potential
High flight risk
2-3 years
1%-5%
Tier 2Core Employees
Important func-tion/skills, solid contributor, high potential
Medium; 1-2 years
20%
More likely to be stock, stick with broad-based equity participation with skew toward lead-ership team.
Tier 3Rank and File
Less critical func-tion/skill set, strong performer; low potential
6 months-1 year
75%- 80%
Could be balanced mix of cash and stock. May have broad equity participation.
25 Fourth Quarter | 2010
their leadership may have significant influence on the morale and optimism of the
acquired employee population. In the case of a start-up, these would usually be
the founders of the company; in a more established company, they could be the
senior leadership in line functions. Only 1 percent to 5 percent of the acquired
employee population typically falls in this elite tier of Key Employees and has
high flight risk. Any exits among this talent pool can have a domino effect on the
remainder of the acquired employees. Acquiring companies usually want to retain
this talent for at least two to three years as it can take that long for integration
and knowledge transfer.
Tier 2: These are primarily solid performers in mid levels of the acquired
company who play lead roles in line functions such as engineering, product
management and sales. They have significant product, customer and technical
knowledge. This tier may also selectively include strong performers from support
functions who have high potential. The acquiring company needs to retain this
talent pool until there is complete knowledge transfer and/or a specific business
goal such as a successful launch of the next generation product. About one-fifth
of the acquired employee population may fall into this tier of Core Employees,
which has a medium flight risk. Acquiring companies usually want to retain this
talent for at least one to two years for successful achievement of specific short-term
goals and knowledge transfer.
Tier 3: The rest of the acquired employee population falls in the third tier
of Rank and File. These are usually employees who are in support functions,
of mixed performance levels, and may be easier to replace. It is possible that
these employees’ roles may be eliminated or consolidated with those of acquiring
company post-acquisition. The majority of the acquired employees fall in this tier.
Because of the generic nature of the knowledge these employees bring to the table,
the acquiring company perceives them as low flight risk. Acquiring companies
usually want to retain this talent but they are clearly less critical to success. Tech
and Talent deals are sometimes an exception, because Tier 3 employees in smaller
companies can have significantly more responsibility that justifies a longer reten-
tion time horizon and different compensation treatment.
DETERMINING RETENTION BUDGETS FOR KEY TALENT DURING
AN ACQUISITION DEAL
Deciding a retention rewards budget to appropriately fund compensation strategies
for employee tiers in various acquisition scenarios can be challenging. There are
two approaches to derive the budget, the top-down and bottom-up, with the right
answer likely somewhere in between. In addition, the acquiring company’s internal
retention programs can serve as a reliable benchmark/reference point. This is based
on the premise that motivators that work for internal employees will work equally
well for acquired employees, they just need to be a little sweeter for a key acquired
employee. In many cases, the decision that a key employee of an acquired company
26 WorldatWork Journal
has to make to join the new company is not just an economic one, but also involves
perception of the new company as a place to work, what level of job the employee
will have and if that person believes the work will continue to be engaging. And
if that employee is critical to the success of the deal, the acquiring company may
stretch internal guidelines on compensation to finalize the deal.
Top-down approach: Determine the budget based on the expected value from
acquisition and then decide on how to distribute it among the employee tiers.
Bottom-up approach: Decide the retention spend needed for key employees based
on individual scenarios and take the rolled-up view to determine the budget.
Figures 4 and 5 elaborate on the two approaches and possible guidelines.
The top-down approach builds on the valuation methodology used by Business
Development teams. It assumes the post- acquisition value of the acquiring company
will be more than the sum of the value of the two companies. This can be possible
only if the key acquired talent is retained. What percent of the value creation is
a fair amount for retention rewards of this talent pool? A possible starting point
can be the widely accepted standard for payroll as a percent of revenue, which
is about 30 percent. In very simplistic terms, the value of the acquiring company
post-acquisition is the revenue the shareholders can expect if the company was
sold. However, this percentage can vary from industry to industry and must be
based on the business model of the company.
In the bottoms-up approach, the retention amount is determined for each
employee group and then rolled up to determine the required retention budget.
This approach is ideal for Tier 1 employees. Figure 5 offers an example of three
tiers of the employee population based on their business impact and flight risk.
The two approaches together help determine the optimum retention strategy.
Individual retention packages in both approaches may be delivered as a mix of
cash and equity.
FIGURE 4 Top-Down Approach
Retention
Spend on Tier 1 employees
Retention
Spend on Tier3 employees
Total retention budget is 25%-35% of value creation
from acquisition
Retention
Spend on Tier 2 employees
Note: Value creation from acquisition is defined as post acquisition value of host company minus price paid for acquisition.
27 Fourth Quarter | 2010
DEVELOPING RETENTION STRATEGIES FOR VARIOUS ACQUISITION
SCENARIOS
Each acquisition can have one or more of the following retention goals:
Critical product knowledge/customer transfer:z Focus is on buying time with
Tier 1 and select group of Tier 2 employees to ensure critical product and/or
customer transfer.
Critical to milestone achievement:z Focus is on achieving a specific business
objective such as ‘”first customer ship.” Typically, Tier 2 employees are relevant
for this retention goal.
General retention: z Focus is on retention of rank-and-file employees who can
help keep the lights on. Tier 3 employees fall in this retention goal category.
Depending on the retention goal, each acquisition requires a customized retention
strategy. From a total rewards perspective, it is important to consider all elements
of compensation in various prevalent forms and also the current market trends
toward them. Figure 6 describes a few possible retention strategies, depending on
the retention goal, for the previously described acquisition business scenarios.
If the retention goal is critical product knowledge transfer in a Tech and Talent
type of deal, a possible retention strategy could be a greater mix of full value
equity as compared to cash. Use of equity reduces the asymmetry in cash compen-
sation, which may be important during full integration.
FIGURE 5 Bottom-Up Approach
Employee Groups
Time Frame for Retention
Retention Spend as Multiple
of BasePay Mix Example
Tier 1 2 - 3 Years 3X - 5X 50% Cash and 50% Equity
Average Salary = $200K
Retention Dollars = $800K over 5 years
•$400Kincash
•$400Kinequity (preferably restricted stock tied to performance)
Tier 2 1 - 2 Years 2X - 3X 50% Cash and 50% Equity
Average Salary = $150K
Retention Dollars = $370K over 3 years
•$185Kincash
•$185Kinequity(preferablyrestrictedstock tied to performance)
Tier 3 6 months - 1 Year
Follow internal guidelines for new hires
NA Depends on employee’s grade level
Total Retention Budget = Sum of Tier 1, 2, and 3 Spend
28 WorldatWork Journal
However, for the same retention goal in a platform type of deal, the strategy
could allow for differences from the acquiring company in benefits, job title, cash
and re-vesting of equity as acquired employees could be heavily vested. Given
that the acquired company will most likely stay as a stand-alone entity, it allows
for customization/exceptions in total rewards.
SUMMARY
A robust compensation framework can allow for a customized approach toward
each acquisition. That will help achieve targeted retention of key employees, which
is critical to any acquisition. In addition, focusing HR, acquisition, compensation
and business development teams on the same goals will facilitate a cohesive,
consistent and affordable retention strategy. z
AUTHORS
Anupam Khanuja, CCP ([email protected]) is HR manager at Cisco Systems and is based in San Jose, Calif. She has more than 10 years experience in compensation and in HR business partner roles. She holds a master’s degree in business administration from the University of Michigan.
Jim Harvey, CCP ( [email protected]) is director of compensation at Cisco Systems and is based in Portland, Ore. He has extensive experience in compensation with high-tech, utility, aerospace and health-care industries. He has been an instructor for WorldatWork for nearly 20 years.
FIGURE 6 Rewards Framework
Retention goal Critical Product Knowledge/
Customer TransferCritical to Milestone
AchievementGeneral Retention
Type of deal Focus Is on buying time Employee Tier 1 and 2
Focus is on achieving business objective Employee Tier 2
Focus is on keeping lights on Employee Tier 3
Tech and Talent Deal
and
Product Deal
A greater mix of full value equity as compared to cash since the population profile is used to compen-sation being heavily stock-based.
Use of equity allows for less asymmetry in cash, which may be important during full integration.
A balanced mixed of full value equity and cash tied to perfor-mance with high leverage.
Set a nominal floor so that employees get something even when not able to achieve milestones because of changes in busi-ness drivers.
Follow new hire/or internal retention guidelines.
Platform Deal Allow for differences in comparison in benefits, job title, cash, re-vesting the equity as employees could be heavily vested.
Being a stand-alone entity allows for customization/exceptions
Mix of equity and cash, career opportunities.
Being a stand-alone entity allows for customization/ exceptions.
Follow new hire and/or internal retention guidelines.
Amid the worst global recession in decades,
employees have suffered through wage freezes,
lost bonuses, increased work demands and
downsizing. The need to motivate employees under
these circumstances and the recognition that once the
economy improves top talent may leave for other oppor-
tunities have created a renewed emphasis and white-hot
spotlight on “employee engagement.”
Although a variety of definitions can be found, employee
engagement is typically described as encompassing
high levels of employee involvement, commitment to
the organization and discretionary effort. Engaged
employees value, enjoy and have pride in their work.
Studies have shown they are more willing to help each
other and the organization succeed, to take additional
responsibility, to invest more effort in their jobs, to
share information and collaborate with other employees
and to remain with the organization than employees
who are less engaged (Lazear 1989; LePine, Erez and
Johnson 2002; Riketta 2008, 2002; Royal and Yoon 2009).
Additionally, employee engagement and related variables,
such as commitment and cooperation, have been found
to be associated with organization performance (Harter,
Schmidt, and Killham 2003; Macey and Schneider 2008;
Schneider, Macey, Barbera, and Young 2009).
Employee engagement has never been more impor-
tant. In a competitive economy where organizations are
Mark Royal, Ph.D.Hay Group
Tom McMullen Hay Group
Dow Scott, Ph.D. Loyola University Chicago
The Role of Rewards in Building Employee Engagement: A Survey of Rewards Professionals
As shown in Figure 5, benefits, short-term incentives and bonuses are the
financial rewards that have the highest impact on employee engagement. The
impact of benefits may seem counter-intuitive to some, but one could effec-
tively posit that benefits are the one reward that is received most equally by
all employees. Short-term incentives may score high because of their typical
direct relationship to performance. Long-term incentives and financial recogni-
tion have the lowest impact on engagement. The authors were surprised that
recognition was perceived to have so little impact, but the reason may be that
few organizations typically issue recognition awards via formal programs.
Intangible rewards generally have a much higher impact on employee
FIGURE 3 Impact of Rewards on Business Outcomes
Percent Agree
Percent Neither
Percent Disagree11%
0% 20% 40% 60% 80% 100%
Created a competitive advantage
Resulted in better relation-ships with customers
Increased organizations’s financial performance
Increased organization innovation
36% 39% 23%
40% 49%
40% 44% 16%
35% 46% 18%
Efforts to engage employees through reward programs have:
FIGURE 4 Impact of Rewards on Climate, Culture and Internal Efficiencies
Percent Agree
Percent Neither
Percent Disagree
0% 20% 40% 60% 80% 100%
Reduced complaints on pay fairness
Reduced turnover
Reduced absenteeism
Reduced employee performance problems
Created a more positive work culture
Resulted in better collaboration and relationships
36%
39%
40%
39%
24%
22%
23% 54%
26% 49% 25%
46%
53%
41%
32%
14%
15%
Efforts to engage employees through reward programs have:
23%
33 Fourth Quarter | 2010
engagement than tangible rewards. (See Figure 6). All of the intangible rewards,
with the exception of non-financial recognition rewards, scored higher on
impacting employee engagement than the most impactful financial rewards.
As shown in Figure 7, the quality of leadership also has a pronounced impact
on employee engagement in organizations. Most of the leadership attributes
noted in Figure 7 also score higher than the impact of most financial rewards
on engagement. This speaks to the importance of the right people steering the
organization, as well as the criticality of the first-level supervisor, in determining
an employee’s engagement level.
Conventional thinking and numerous research studies suggest that partici-
pation in rewards program design and implementation builds ownership and
commitment (Fernie and Metcalf 1995; Wagner 1994). Indeed, this study found
FIGURE 5 Impact of Financial Rewards on Engagement
Percent Agree
Percent Neither
Percent Disagree
14%
0% 20% 40% 60% 80% 100%
Base salary level
Base salary increase
Benefits and perquisites programs
Short-term incentives or bonus programs
Long-term incentives or bonus programs
Financial recognition programs
41%
42%
44%
39%
15%
20%
48% 37%
54% 30% 16%
32%
32%
50%
44%
18%
24%
FIGURE 6 Impact of Nonfinancial Rewards on Engagement
Percent Agree
Percent Neither
Percent Disagree
11%
0% 20% 40% 60% 80% 100%
The nature of he job or quality of the work
Work environment or organizational climate
Career development opportunities
Work-life balance
Nonfinancial recognition programs
69%
61%
26%
28% 10%
59% 29%
55% 31% 14%
37% 47% 16%
5%
34 WorldatWork Journal
rewards program involvement is linked to more positive views of effectiveness
of rewards strategies in engaging employees (r ≥ .35). However, the researchers
found very low levels of employee and manager involvement in rewards program
design, implementation and evaluation. Figure 8 shows that the vast majority of
organizations do not consistently get their employees’ input in rewards program
design, implementation, or evaluation.
While involvement is slightly better for managers, it appears that a majority of
rewards programs are still designed in the ivy tower by corporate HR, finance
and operations staff.
In summary, the core headlines from Figures 3 through 8 on the role of rewards
in supporting engagement are:
Intangible rewards and leadership have more impact on engagement than base z
pay, benefits and incentives.
Short-term incentives are the tangible rewards that have the most impact z
on engagement.
FIGURE 7 Impact of Leadership on Engagement
Percent Agree
Percent Neither
Percent Disagree
13%
0% 20% 40% 60% 80% 100%
Manager’s assessment of employee performance
Coaching from managers or supervisors
Organizational objectives
Quality of senior leadership
65%
55%
25%
36%
9%
9%
53% 34%
49% 37% 14%
FIGURE 8 Compensation Program Design, Implementation and Evaluation
Percent Agree
Percent Neither
Percent Disagree
Percent Disagree37%
0% 20% 40% 60% 80% 100%
Design
Implementation
Evaluation
16% 40%
42%17%
39%18% 40%
4%
4%
3%
40%
35 Fourth Quarter | 2010
Quality of work, work environment, career development and senior leader-z
ship are the intangible rewards that have the most impact on impacting
employee engagement.
Managers and employees are seldom involved in the design of pay programs. z
RECOMMENDATIONS
The study’s findings indicate that rewards programs can have a positive influ-
ence on employee engagement. Figure 9 shows the authors’ Top 10 list of actions
that organizations would be well served to take to improve engagement in their
workplaces. This list is based on the authors’ research and substantial experience.
The list has been divided into two groups: general organizational priorities and
rewards-oriented priorities.
Organizational Priorities for Engagement
1 | Make a business case for engaging employees. Employee engagement should
not be confused with employee satisfaction. The focus of engagement initia-
tives is not on making employees happier but rather on creating the conditions
that encourage high levels of organizational commitment and a willingness to
invest maximum effort in achieving key goals and objectives. The increased
emphasis among organizational leaders on employee engagement reflects
a growing recognition of the critical link between people and strategy and
the extent to which human capital provides the most sustainable source
of competitive differentiation for organizations. Organizations that manage
employee engagement most successfully clearly articulate how high levels of
employee motivation support core priorities such as enhancing productivity
and innovation, fostering and sustaining strong customer relationships and
retaining top talent (Royal and Yoon).
Measure and monitor engagement.2 | It is important to recognize that employee
surveys are always two-way communication tools. They allow organizations
to solicit feedback from employees on key topics related to organizational
FIGURE 9 Top Ten List for Improving Engagement
Organizational Priorities
1. Make a business case for engaging employees
2. Measure and monitor engagement
3. Take action on survey results
4. Make everyone responsible for engagement.
5. Connect people with the future
Rewards Priorities
6. Go beyond compensation and benefits to a total rewards mindset
7. Include employees and managers in rewards design and launch
8. Tailor total rewards to workforce segmentation
9. Use engagement metrics in performance criteria
10. Communicate the value of what you have
36 WorldatWork Journal
effectiveness. But what an organization chooses to measure with a survey
also sends important signals to employees about its values and priorities. In
this way, an employee survey can be an effective intervention even before
questionnaires are completed and data are analyzed. The authors have found
that the content of an engagement survey should connect with the key “value
propositions” an organization is offering to its employees. Alignment with
objectives not only promotes appropriate employee expectations but also more
actionable results. By soliciting employee feedback in areas of focus for the
organization, survey results can be more readily incorporated into ongoing
improvement efforts.
Take action on survey results.3 | This study indicates that an employee engage-
ment survey is a means to an end. It is not enough that the data are reliable
and valid, confidentially gathered, or even provocative. An engagement survey
initiative is only successful if the results are used. In this regard, it is critical
to remember that the goal is not to improve survey scores for their own sake.
The survey is being conducted to understand factors in the work environ-
ment that impact important organizational goals and objectives. In addition
to working through the survey data and taking note of issues that emerge,
it is equally important to focus on the strategic objectives associated with
the survey and work back to the survey results to understand what the data
indicate in regard to those objectives.
4 | Make everyone responsible for engagement. The authors’ experience indicates
that employee engagement cannot be a focus only in and around employee
surveys and other measurement efforts. It needs to be incorporated into
the way an organization operates. Engaging line managers is critical to the
success of initiatives designed to promote higher levels of engagement among
employees. If the connection between engagement programs and the concerns
of line managers is not clear, managers may see themselves as too busy
with their day-to-day responsibilities to play an active role. That’s a deadly
response in any organization because it suggests that managers are viewing
engagement initiatives not as tools provided for them to help accomplish core
business objectives, but instead as add-on activities that are being assigned to
them. Typically in the early stages of an engagement initiative, line managers
play a secondary role to internal project coordinators or external consultants.
But once information is collected and the attention of the organization turns
to communicating the results and using the results to drive organizational
improvements, external consultants and internal project coordinators need
to step back and rely on line managers to carry the results forward into the
organization.
5 | Connect people with the future. Engagement success is about more than
encouraging positive views of the present realities of the organization. Fostering
buy-in and commitment over the longer term also requires that employees
37 Fourth Quarter | 2010
have a positive view of the future of the organization and their futures in it.
Three considerations are key:
- Clear and promising direction. Ensuring that the practical implications
of organizational directions are clear to employees is essential to effective
execution. But connecting employees with the big picture is equally impor-
tant from a motivational perspective. In their work, most employees are
looking for an opportunity to contribute to something larger than themselves,
a chance to make a difference. Appealing to this sense of purpose is critical
to promoting high levels of employee engagement.
- Confidence in leaders. If faith in the direction of the organization is critical
for fostering high levels of employee engagement, so too is ensuring that
employees have confidence that senior management is capable of executing
on strategic objectives. Today’s employees recognize that their prospects for
continued employment, career development and advancement are dependent
on their companies’ health and stability. They cannot be expected to bind
their futures to those of their employers unless they are confident that their
companies are well managed and well positioned for success.
- Development opportunities. Employees are increasingly aware that they are
responsible for managing their own careers and that their futures depend
on continuous elevation of their skills. If employees are not expanding their
capabilities, they risk compromising their employability within their current
organizations or elsewhere. Accordingly, opportunities for growth and devel-
opment are among the most consistent predictors of employee engagement
(Royal and Yoon).
Rewards Priorities for Engagement
6 | Go beyond compensation and benefits to a total rewards mindset. This
study indicates that leaders and managers understand that rewards go far
beyond compensation and benefits and build the core organization messages,
such as an employment value proposition, around what is meant by total
rewards. Develop tools for managers so they can effectively reward employees
beyond the confines of compensation and benefits and develop and reinforce
communications around total rewards.
7 | Include employees and managers in rewards design and launch. To balance
the needs and wants of the organization and employees, managers should
know what employees value in rewards. But this study clearly showed that
many organizations do not have a good handle on what their employees’
value in rewards. Most organizations have a mindset around listening to their
customers to learn what they value in products and services. This mindset
should then apply to their most important internal customers, the employees.
As per the study’s findings, engagement is enhanced when employees and
managers are involved in the design and launch of their pay programs.
38 WorldatWork Journal
8 | Tailor total rewards to workforce segmentation. Identify the most mean-
ingful and valued rewards in the organization. Do rewards values vary across
the organization and work units? Recognize that different employee groups
value different rewards and build the manager’s rewards tool kit based on
this understanding. How can managers use career development, organization
and job design, non-financial recognition programs and organizational work
climate to reward their employees?
9 | Use engagement metrics in performance criteria. According to several research
studies, the best organizations have more balance in their performance score-
cards (Stark 2002). This includes balance in timeframes, measurement level
and measurement types. These organizations tend to have human capital
measures in their scorecards at twice the prevalence of other organizations.
This includes measuring and managing engagement. If not doing so already,
an organization should consider establishing baseline measures in the first
year of the scorecard process and monitor and rewards trends in achieving
engagement levels in subsequent years.
10 | Communicate the value of what you have. The authors’ previous WorldatWork
research indicates that organizations must clarify and focus on a few direct
channels and tools to communicate these messages (Scott, Sperling, McMullen,
and Bowbin 2008). It is a more powerful strategy to reduce down to core
rewards messages rather than using the “everything and the kitchen sink”
strategy. Total rewards statements to individual employees are powerful tools
for communicating the value of rewards offered by the organization. The HR
function should be actively involved in helping line managers understand and
use their tool kits to communicate rewards value.
What is the role of rewards programs in an engagement strategy? With today’s
organizations operating increasingly lean, employees are being asked to do more
with less. In higher workload environments, employees are generally more keenly
aware of rewards programs and policies. Acutely aware of all that they are contrib-
uting, employees are inclined to increase the pressure on their organizations to
balance rewards with their contributions. In this context, it is more important than
ever to ensure that rewards policies and programs are perceived to adequately
recognize employee efforts and contributions.
Employee engagement involves striking a new employment bargain with
employees. Organizations must invest in creating the conditions that make work
more meaningful and rewarding for employees. Employees, in return, are expected
to invest more effort into their work and deliver superior performance. z
39 Fourth Quarter | 2010
AUTHORS
Dow Scott, Ph.D. ([email protected]) is a professor of human resources at Loyola University Chicago and president of Performance Development International LLC. He is a nationally recognized compensation and HR program evaluation expert, with more than 100 publications. Scott’s teaching, research and consulting have focused on the creation of effective teams, employee opinion surveys, performance improvement strategies, pay and incentive systems, and the development of high-performance organizations.
Tom McMullen ([email protected]) is the U.S. rewards practice leader for Hay Group, and is based in Chicago. He has more than 20 years of combined HR practitioner and compensating consulting experience. His work focuses primarily on total rewards and performance-program design, including rewards-strategy development and incentive-plan design. Prior to joining Hay Group, McMullen worked for Humana Inc. and Kentucky Fried Chicken Corp. in senior compensation analyst roles. He holds bachelor’s degree and master’s degree in business administration from the University of Louisville.
Mark Royal, Ph.D. ([email protected]) is a senior consultant within Hay Group Insight, Hay Group’s employee research division, and is based in Chicago. His client consulting work focuses on helping orga-nizations leverage employee input to increase employee engagement and retention, manage change more effectively, and enhance customer satisfaction and business performance. Royal also plays a leading role in directing Hay Group’s annual partnership with Fortune magazine to identify the World’s Most Admired Companies and uncover the business practices that make these companies both highly regarded and highly successful. Royal holds a master’s degree and doctorate in sociology from Stanford University and a bachelor’s in sociology from Yale University.
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How did compensation compare to other job attributes in turnover 1 |
decisions?
What were the typical career paths for PwC employees who leave at various 2 |
career stages?
How did current and former employees with similar experience compare in 3 |
satisfaction, compensation and career attainment?
The CEO worked closely with the HR staff in three offices chosen to represent
different regions and client mix. Offices were chosen that had a robust “alumni”
(former employee) network since surveying a large number of former employees
was key to answering many of the questions at the heart of the study.
To accurately compare careers of current and former employees, groups were
matched on the basis of career stage: former employees were compared to the
cohort of current employees with whom they started, assuming that their job
level at the firm would have been the same as their fellow cohort members
had they remained at PwC. This type of matching was possible because of
the nature of the recruiting and promotion system in accounting firms. First,
the majority of new employees are hired together out of universities and start
training together which creates distinct cohorts in the firm. Second, specific
performance and promotion criteria influence how many years it typically takes
to progress between levels for associates through senior managers. It takes, on
average, three years to progress from associate to senior associate, three more
years to get to manager, and three years beyond that to get to senior manager.
The transition from senior manager to partner, in contrast, takes a more variable
length of time.
To illustrate the matching of current and former employees, as shown in Table 2,
consider a group of former employees who were senior associates when they left
PwC and who had been gone for five years. They were matched with current
employees at the manager level, which is where they would have been if they had
stayed at PwC and met the performance and promotion criteria. The table shows
other examples of employees who left at various career stages and the current
employees with whom they were matched.
TABLE 2 Matching Current and Former Employees Based on the Former Employees’ Year Left and Position When Left PwC
Position and year when left the firm
Left in 2001 as Associate
Left in 2001 as Senior
Associate
Left in 1998 as Associate
Left in 1995 as Associate
Left in 2001 as Manager
Position the former employees would have had in 2004 had they stayed
Senior Associate
Manager ManagerSenior
ManagerSenior
Manager
Group of current employees the former employees were matched to for the analysis
Current Senior
Associates in 2004
Current Managers
in 2004
Current Managers
in 2004
Current Senior
Managers in 2004
Current Senior
Managers in 2004
45 Fourth Quarter | 2010
A second set of comparison analyses was conducted using former employees
only. (See Table 3). These analyses looked at people who started at PwC at the
same time, but who left at different career stages. For example, the cohort of
people who started at PwC in 1990 and left before their first likely promotion in
1993 were classified as “1990 Cohort Associates.” Those who left before 1996 were
classified as “1990 Cohort Senior Associates,” etc. Comparing career outcomes
within a cohort of people who started at PwC at the same time but who left at
different career stages ensured that when they were surveyed in 2004 they all had
comparable opportunities to develop their careers and advance to high-level jobs.
Table 3 provides two examples of how these cohorts were constructed.
A number of survey measures were used to assess retention and career outcomes
at PwC:
Intention to turnover was modeled for current employees to identify the factors z
most likely to cause someone to leave the firm.
Job and career satisfaction was compared for current and former employees who z
left PwC at various career stages.
Current compensation and job level. Cohorts of former employees who left z
at different career stages were compared to see if those who stayed at PwC
longer fared better in the long run in compensation and attaining high-level
jobs (e.g. ,vice president or higher in a firm with at least $500 million in sales
or assets under management).
RESULTS
The first major finding from the study was that the firm’s hypothesis about the
trajectory that people’s careers take after leaving was correct. (See Table 4). PwC
employees who advanced to the managerial ranks before leaving reported higher
pay and job attainment than those with the same total years of work experience
TABLE 3 Matching Former Employees Who Left at Different Career Stages Based on entry Cohort When Started Working at PwC
Example No. 1: Grouping together everyone who joined PwC in 1990 as one entry cohort
Year and position when left the firmLeft in 1992 as
Associate
Left in 1995 as Senior Associate
Left in 1998 as Manager
Left in 2001 as Senior Manager
Entry cohort classification for the analysis (year when started at PwC)
1990 entry cohort
1990 entry cohort
1990 entry cohort
1990 entry cohort
Example No. 2: Grouping together everyone who joined PwC in 1987 as one entry cohort
Year and position when left the firmLeft in 1989 as
Associate
Left in 1992 as Senior Associate
Left in 1995 as Manager
Left in 1998 as Senior Manager
Entry cohort classification for the analysis (year when started at PwC)
1987 entry cohort
1987 entry cohort
1987 entry cohort
1987 entry cohort
46 WorldatWork Journal
who left PwC earlier. Those who left as managers, compared to those who
left as senior associates, on average had 28 percent greater current compensa-
tion, and were 14 percent more likely to be in a top-level job. Those who left
as senior managers fared even better compared to those who left as senior
associates: 49 percent reported greater current compensation, and 37 percent
were more likely to be in a top-level job. This showed that achieving greater
compensation and career advancement are key benefits of staying with the firm
longer before leaving. PwC now had strong objective data that staying with
the firm longer paid large dividends for those with a career goal of attaining
a high-level corporate job.
Additional analysis was needed to show there were other key factors in
reducing turnover than just communicating the career and compensation bene-
fits realized by staying longer before leaving PwC. A critical issue for PwC
was the way employees at risk of departure viewed the importance of those
potential future benefits. Retention models were estimated that measured the
importance of compensation relative to other factors and controlling for various
career goals. The results are summarized in Table 5 and reported in terms of
impact on employees’ stated intention to leave versus stay with the firm. Each
row represents one factor included in the model designed to measure the
importance of job and motivational factors. This type of regression modeling
enables the direct comparison of the importance of potential retention factors
relative to each other.
The Role of Compensation in Driving Retention
The top portion of Table 5 reports the importance of various measures of
compensation in driving retention at the firm. Not surprisingly, pay satisfaction
was a key driver of retention, as was perceived pay equity, which had a virtu-
ally identical impact on retention. Given the strong relationship between pay
satisfaction/equity and retention, it would have been quite reasonable to expect
that current compensation was a key driver of retention. Yet the top portion of
Table 5 shows that current compensation had essentially no impact on retention
TABLE 4 Advantages of Leaving the Firm at Later Career Stages, Compared to Leaving at the Senior Associate Level
Compensation
Advantage of staying beyond Senior Associate and leaving as:
Manager
28% greater current compensation
Senior Manager
49% greater current compensation
Career advancement
Advantage of staying beyond Senior Associate and leaving as:
Manager
14% greater likelihood of having a top level job
Senior Manager
37% greater likelihood of having a top level job
47 Fourth Quarter | 2010
compared to other compensation-related factors, Instead, what mattered more for
the employees’ intention to stay with the firm was how quickly they anticipated
their compensation would grow at PwC relative to other potential jobs, and how
quickly it had grown in the past.
The second major finding from the study was that if the firm had chosen to
implement the planned deferred compensation policy, there was a good chance it
might have done little to improve retention. Because the employees put so much
weight on compensation growth, a moderate increase in deferred compensation
would have had relatively little impact on retention. For example, if the firm had
done a one-time grant of deferred compensation payable in five years and equal
to 10 percent of each employee’s current compensation, it would have a much
smaller impact than the cumulative effect of smaller pay raises each year. With an
average raise of 5 percent per year, the cumulative raise over five years (accounting
for compounding) is 27.6 percent, or almost three times larger than the 10-percent
deferred compensation. If annual raises average 7 percent, the cumulative raise over
five years after compounding is 40.2 percent, or four times larger than 10-percent
deferred compensation. Thus, normal salary progression alone would have a much
greater impact on future compensation than an additional 10-percent deferred
TABLE 5 Employees’ Intention to Stay at PwC: The Role of Compensation Versus Other Factors
Compensation Factors Retention Impact
Pay equity/pay satisfaction +3
Current compensation 0
Historical compensation growth +1
Anticipated compensation growth in 5 years if stay at PwC +2
Anticipated compensation growth in 5 years if leave PwC –1
General marketability
Perceived job alternatives –3
General job factors
Job satisfaction +3
Work-life balance +3
Professional skills and development-related factors
Fit with professional services +3
Skill utilization +3
Development support +3
Legend: +3 big positive impact +2 positive impact +1 small positive impact 0 no impact
–1 small negative impact –2 negative impact –3 big negative impact
48 WorldatWork Journal
compensation and, based on the figures in Table 4, would dwarf the impact on
current retention. Although high for some industries, historical raises of 5 percent
or 7 percent are consistent with typical salary progression from associate to senior
associate and then to manager at PwC.
The Role of Other Factors in Driving Retention
Most importantly, the survey findings demonstrated that compensation was
only part of the story of retention at PwC, as shown in the middle portion of
Table 5. PwC had long suspected that its best employees were being poached
away by clients or other firms with offers of additional money. It turns out
this was only partially true: employees reported that they were constantly
recruited by other employers and executive search firms and a large number
stated they had standing job offers from other firms, but these were not the
triggers for turnover decisions. Perceived job alternatives were strongly related
to retention, but other aspects of the employee’s job and career were more
important drivers of retention, beyond whatever influence compensation and
job alternatives were having.
The third major finding from the study indicated that turnover decisions were
also strongly related to job satisfaction, opportunities to develop and use new
skills on the job, and fit with professional services. This suggested that if the
firm did a better job of providing junior employees with meaningful experi-
ences that improved professional development and skill utilization, this critical
talent pool would be less likely to jump to alternative jobs outside the firm. It
also meant that retention was driven in large part by aspects of the job that
are independent of compensation. Rather than making decisions to leave PwC
based on differences in current compensation, employees were more influenced
by whether their work at PwC fit their interests, used their skills, and developed
them professionally.
The fourth major finding from the study showed the importance of work-life
balance on retention. This was not necessarily a surprise to the firm’s leader-
ship. During the busy season, everyone in the industry works long, hard hours.
It had been assumed that top performers found effective ways to manage the
work-life balance issues without jeopardizing their chances of staying with the
firm. The study results revealed that that was not the case. Even top performers
indicated that work-life balance issues had the potential to drive them to the
brink of leaving.
These work-life balance issues were brought into sharp relief by two sets
of analyses. The first analysis looked at the importance of flexibility of hours
versus the total work load. The firm had a well-designed program that enabled
employees to flex when they worked as a way of dealing with work-life
balance challenges. While the program provided an important safety valve for
some employees, the study found that flexibility alone was not a big driver of
49 Fourth Quarter | 2010
retention. The second analysis compared work-life balance of current versus
former employees at similar career stages. The results indicated that former
employees reported much better work-life balance across the board. This meant
that work-life balance differences were enhancing the attractiveness of jobs
outside of PwC, increasing the turnover danger for current employees at all
job levels.
Given the nature of public accounting and relative difficulty of reaching the
partnership, most PwC employees expect to leave at some point. Because most
have good opportunities elsewhere, many that offer at least comparable pay for
less travel and more regular hours, the decision often does not come down to
money. Instead, PwC employees are driven to stay by opportunities for profes-
sional development and interesting work that is not too taxing. This provided
the insight needed to develop an effective retention initiative.
ACTIONS TAKEN
The leadership of the firm decided to focus on the root causes of turnover that
had been revealed by the USC Center for Effective Organizations (CEO) study
instead of implementing a new deferred compensation plan. In the spring of
2004, firm leadership shared a full report of the study findings across the U.S.
offices along with a message from the chairman expressing his commitment
to address the concerns of the staff that had been identified in the study. A
“cascading” process was put in place in which local office leaders held forums
to discuss the study and the findings, engage in open dialogue about actions
to address the causes of turnover, and help staff understand the value of the
PwC professional experience.
Firm leadership then organized an action-planning process that identified
national initiatives to address the findings, while also holding team and local
office leaders accountable for action planning for their respective units of
responsibility. A scorecard and performance measures were then designed to
drive accountability and facilitate organizational learning through the identi-
fication of practices used by higher performing teams while also identifying
underperforming teams that needed rapid, corrective actions. Based on the
study, overall plans were developed to address:
Connectivity.z Leaders strengthened relationships between partners and staff
through a “connectivity” initiative in which partners were matched with
individual staff members to discuss their experience at the firm, their goals
and career aspirations, and to offer coaching and developmental support.
These meetings were recurring over time, and were in addition to existing
supervisory and performance coaching relationships.
Coaching and development.z Leaders established a significant focus on
strengthening the quality and timeliness of developmental feedback provided
to staff. In addition to performance management process and systems
50 WorldatWork Journal
enhancements, major behavior change campaigns were launched via commu-
nications, training and alignment of measures and rewards to support candid,
timely feedback. Partners and staff attended skill-building workshops to
improve their competencies in delivering written and verbal performance
feedback. A video series was developed by human resources, using actual
partners and staff who acted out common issues and obstacles in providing
direct, candid feedback. These videos were accompanied by team discussion
guides to motivate change and support skill building by providing humorous
and compelling examples of coaching that could be quickly applied within
engagement teams. Partners and staff members also received increased feed-
back and appraisal on their own coaching skills through upward feedback.
Coaching was also related to delegation and increasing the skills utilization
of staff on engagements.
Work-life and workload balance.z Firm-wide communications were created to
acknowledge the challenges of work-life balance and share how teams could
support individual staff members’ achievement of better balance through
improved planning and coordination. At the same time, team leaders were
encouraged to improve workload balance among the individuals on their
teams. Tools were developed so leaders could monitor and manage workload
balance. HR leaders introduced innovative approaches to support work-life
and flexibility while also responding to the “peaks and valleys” of the busi-
ness cycle that created variations in staff capacity. For example, in addition to
a wide variety of flexible work arrangements, such as compressed workweeks,
reduced work schedules and telecommuting, sabbaticals are now offered to
client service staff that enable them to pursue educational goals, work with
nonprofits and community organizations, or address other personal interests
for a period ranging from four to 16 weeks.
Enhanced communication on compensation and the value of the PwC z
professional experience. HR leaders launched an initiative, “PwC Careers,” to
increase the understanding of career paths and options at the firm as well as
technical and professional development opportunities, and to clearly define
“high performance” expectations, and the rewards achieved by remaining
with the firm, including increased external career options and personal
“market value” based on the findings of the CEO study. In addition to firm
communications, these findings were also incorporated into the annual total
rewards discussions each staff member has with a partner of the firm.
The commitment to conducting rigorous, independent research, and then
translating the findings into measureable actions, has produced significant
benefits for PwC. For example:
The April 2009 employee survey achieved the highest overall score since the z
inception of the survey in 2002, and demonstrated continued improvement
in key categories related to retention.
51 Fourth Quarter | 2010
By 2009, voluntary turnover had fallen from 26 percent to less than 10 z
percent annually, including significant declines before the recession.
IMPLICATIONS FOR OTHER ORGANIZATIONS
Before the project began, the firm was seriously considering a large investment
in a deferred compensation policy based on a number of critical assump-
tions about its workforce. With a survey and analysis of personnel records,
PwC was able to test these assumptions and make better-informed decisions
based on hard data. Like many firms, PwC has a culture that values data-
based analysis. Auditors are also dedicated to rigorous methodology. Working
with independent researchers and a rigorous process gave PwC partners and
employees confidence in the results.
While there are several aspects of careers at public accounting firms and
professional services firms in general that make them unique, these survey
and analytic techniques are broadly applicable. First, PwC benefited from
having a strong network of former employees to survey, but organizations
can learn plenty from their present employees alone. Second, there is a
tendency for firms to use money as a means to address turnover without an
analysis of the root causes. Third, the research was coupled with a strategic
organizational change effort that included a number of efforts to report the
findings and inform changes to employee development and time-off poli-
cies. In PwC’s case, investing in a broad range of firm initiatives to educate
staff on the value of the PwC professional experience as well as efforts
to strengthen the experience itself through enhanced coaching and work-
life balance was more effective than investments in deferred compensation.
This represented a much richer view of total rewards than the traditional
compensation and benefits package, which historically dominated the firms’
discussions of careers and retention.
For organizations considering replicating this approach in different work
settings and with different employee populations, it is critical that the analyses
be tailored to the environment and group(s) being studied. The problem
with generic employee surveys, whether designed internally or purchased
from a vendor, is that they tend to include most of the “usual suspects,” such
attitudinal measures as job satisfaction, career and pay satisfaction, relation-
ship with supervisor and opportunities for development, without a direct link
to the work design that enables deep understanding of the factors that drive
motivation and productivity. What made the analysis in the PwC case so
powerful was a work-design analysis that identified the potential factors to be
included in the survey. The analysis eliminated actors that, in theory, might
have been an issue but which could safely be assumed to be more marginal
contributors based on deep knowledge of the work, culture and history of
the organization.
52 WorldatWork Journal
CONCLUSION
This deep examination of the careers and aspirations of the current and former
employees of PricewaterhouseCooopers is an example of the power of inde-
pendent, rigorous research to drive change in a large organization. The findings
demonstrated the need for a much more integrated approach to retaining mid-level
professionals. Whereas before many managers and partners had simplified the
turnover problem to a compensation issue, the data allowed firm and HR leaders
to make the case for making broader changes to address job assignments, careers
and work-life balance in the firm. Partners saw the need to address work-life
balance and career growth and committed themselves to serious changes in the
culture and staffing practices at PwC.
The case also demonstrates the importance of taking a broad view of total
rewards that includes aspects of the job beyond compensation and benefits. The
nature of the work itself, and what that means for professional development, work-
life balance and career success can exert equally strong, if not stronger, influences
on motivation and retention of employees, including those with the highest produc-
tivity and potential. Carefully constructed and rigorously implemented analyses
that measure the importance of competing factors — both compensation-related
and non-compensation-related — can reveal where the real ROI lies that supports
lasting and effective change. ❚
AUTHORS
Alec Levenson, Ph.D. ([email protected]) is a research scientist at the Center for Effective Organizations, Marshall School of Business, University of Southern California. His research and consulting work with companies optimizes job and organization performance and HR systems through the application of organization and job design, and human capital analytics. Levenson’s research has been published in numerous academic and business publications and he is on the editorial boards of Human Resource Management and Small Business Economics. He received his doctorate from Princeton University, specializing in labor economics and development economics.
Michael J. Fenlon, Ph.D. ([email protected]) joined PricewaterhouseCoopers LLP in 2005 as a managing director with responsibility for the development and implementation of people strategy. He is currently U.S. Human Capital Leader for the Tax Line of Service. A psychologist with expertise in executive leadership development, strategic changes, executive teams and coaching, he has consulted a variety of private and public sector organizations, including programs on leadership and change for the New York City police and fire departments and the Department of Homeland Security. Fenlon was a faculty member of the Columbia Business School executive education team. He has a doctorate from Columbia.
George Benson, Ph.D. ([email protected]) is an associate professor of management at the University of Texas-Arlington, where he joined the faculty in 2002. He was a research analyst for the American Society for Training and Development and the Center for Effective Organizations at the University of Southern California. Benson has a doctorate in business administration from the University of Southern California.
Institutional shareholder advisers, such as Institu-
tional Shareholder Services (ISS), and Glass-Lewis,
are becoming increasingly relevant regarding share-
holder actions affecting executive compensation. The
statistics from the proxy votes may not suggest a signifi-
cant impact, but many public companies have adopted
majority voting standards for their boards of directors.
That has given shareholder advisers, which recommend
to clients that are generally institutional shareholders
how to vote on proxy matters, leverage in their efforts
to effect change.
When a company has a majority voting standard, an
adviser’s recommendation to its institutional share-
holder clients to withhold or vote against compensation
committee members can influence changes in executive
compensation. In a company with a majority voting stan-
dard, a “withhold” or “against” vote recommendation will
cause directors to consider whether to risk the loss of
the director’s board seat in support of a compensation
arrangement to which a shareholder adviser may object.
In this paper, the authors discuss how majority
voting policies and a shareholder adviser’s policies for
Laura G. ThatcherAlston & Byrd LLP
Marshall T. ScottTowers Watson
Directors More Sensitive to Shareholder Advisers in Executive Compensation Votes
Payments upon an executive’s termination in connection with a perfor- -
mance failure
“Liberal” change-in-control definition on individual contracts or equity -
plans, which could result in payments to executives without an actual
change in control.
Overly generous perquisites, which may include but are not limited to:z
Personal use of corporate aircraft -
Personal security system maintenance and/or installation -
Car allowances -
Executive life insurance. -
Internal pay disparity, such as excessive differential between CEO total pay and z
that of the next highest-paid named executive officer
Voluntary surrender of underwater options by executive officers, which may be z
viewed as an indirect option repricing/exchange program, especially if those
canceled options are restored to the equity plans and can be regranted to
58 WorldatWork Journal
executive officers at a lower exercise price and/or the executives subsequently
receive unscheduled grants in the future.
Other pay practices deemed problematic but not covered in any of the z
above categories.
ISS has also added for 2010 a new focus on practices that may encourage inap-
propriate risk taking. In this regard, ISS will assess compensation policies and
practices in the following areas, taking into consideration the presence of practices
that mitigate risk, such as rigorous claw-back provisions and robust stock owner-
ship/holding guidelines:
Guaranteed bonusesz
A single performance metric used for short- and long-term plansz
Lucrative severance packagesz
High pay opportunities relative to industry peersz
Disproportionate supplemental pensionsz
Mega annual equity grants that provide unlimited upside with no downside risk.z
HOW THE COMPENSATION COMMITTEE CAN PROTECT ITSELF
The stakes have been raised, and members of the board of directors need to 1 |
take action to avoid losing a board seat due to compensation practices that would
trigger a withhold vote recommendation. Directors need to take control of the
situation and effectively manage compensation issues and processes. To that end,
the authors recommend:
Know the company’s institutional investors and whose recommendations they z
follow. For example, know how they vote on executive compensation issues.
Many institutional investors have published their voting positions (Fidelity 2010;
CalPERs 2008). Some institutional shareholders also have expressed whether they
follow the recommendations of certain advisers, such as ISS or Glass Lewis. Some
companies, such as Schering-Plough and Amgen, have conducted polls of the
company’s shareholders to learn their viewpoints. Some of the consulting firms
also poll institutional shareholders on topics of concern.
Consider the application of any “safe harbor” the shareholder adviser may z
offer. To potentially mitigate the withhold vote recommendation in respect of the
CEO pay-for-performance policy violation, ISS will consider whether a company
evidenced a commitment to pay-for-performance principles by disclosing
performance measures and goals for all performance-based compensation, and
committing to grant at least 50 percent of equity wards (by number of shares, not
value) where the grant or vesting is tied to pre-established performance condi-
tions. To provide complete transparency to shareholders, these commitments
must be publicly disclosed.
Take advantage of the proxy statement’s CD&A to clearly describe and z
explain the company’s or committee’s point of view or commitment to pay
for performance. In the context of shareholder say-on-pay proposals, which will
59 Fourth Quarter | 2010
be required for all public companies starting in 2011, the company’s CD&A will
be a primary marketing tool to “sell” investors on the compensation program and
ultimately determine the outcome of the vote.
Conform compensation practices to investor standards.z One of the more diffi-
cult standards is the ISS “pay-for-performance” policy, where (1) the company’s
one-year and three-year total shareholder returns (the combination of stock price
appreciation and dividends) place the company below the median of its industry
group and (2) the CEO’s total compensation (consisting of base salary, bonus,
nonequity incentives, grant-date fair value of stock awards and options, target
value of performance shares, change in pension value and nonqualified deferred
compensation earnings, and all other compensation) increases year-over-year – or
even remains static or decreases moderately.
The challenge associated with this test is that the compensation committee often
makes equity award decisions in the first quarter of the fiscal year, but ISS’s testing
of the pay-for-performance standard is not done until after the close of the fiscal
year, depending on when the company’s fiscal year ends.
Consider an illustration in which a calendar year-end company makes its regular
annual equity award to the CEO in January. After the year closes the following
December, ISS determines, based on the calendar year/fiscal year, that the compa-
ny’s one-year and three-year relative total shareholder return compared to its peers
is in the bottom half, all of which occurs approximately 11 months after the date
of the award. When the award was made, it may have been difficult to predict
the company’s expected relative TSR position.
In order to deal with this situation, the compensation committee will have to
make some decisions. First, the committee can rely on the safe harbor previously
mentioned, demonstrating a commitment to pay-for-performance principles. The
key is to make certain the equity design provides that at least half of the equity
award (in terms of numbers of shares) is performance-based. Again, time-vesting
stock options and restricted stock awards do not count as performance-based for
this purpose.
As an alternative, if the company’s stock value has been trending downward,
and it seems possible that the company’s TSR may be in the bottom half of the
industry group, the compensation committee could keep the CEO’s compensa-
tion value constant year over year or even implement a decrease to reflect the
expected downward trend. (ISS will calculate the year-over-year change, as it may
be different than the most straight-forward approach would suggest. Also note
that ISS will now look at a five-year trend in CEO compensation and not just the
most recent year-over-year change.)
As another alternative, the marginal portion of any compensation increase, such
as the equity grant, could be conditioned upon the company’s relative TSR not
being in the bottom half of the industry group. For example, consider an equity
award whose total current value is $3 million and has increased by $500,000 since
60 WorldatWork Journal
the grant at the beginning of the year. The incremental $500,000 could be condi-
tional upon meeting the one-year and three-year relative TSR test of ISS. Even this
“leveling” feature may not be sufficient to avoid a negative ISS recommendation if
the TSR test is not met and the CEO’s compensation over the past five years has
been trending upward even without this incremental equity value. In short, ISS’s
2010 policy updates make it clear the group is adopting a more holistic approach
to examining pay for performance as it relates to CEO pay.
Say on Pay
At least every three years, beginning with annual shareholder meetings held after
January 20, 2011, all U.S. public companies will be required to give shareholders
a nonbinding vote on executive compensation, or “say on pay.” ISS will use the
say-on-pay vote to communicate compensation issues with companies before
recommending a withhold vote on directors. This is good news because it provides
an opportunity to receive a warning and resolve compensation issues before they
escalate into a negative vote recommendation with respect to individual directors
or the whole board.
Balancing the Response to ISS
A compensation committee should be guided by the needs and circumstances of
the company when designing a program that supports the company’s business
and talent strategies. ISS voting guidelines, which are updated annually and can
vary from year-to-year, are developed for its ease of administration and servicing
a large group of clients. There will be times when a compensation committee
may not be able to satisfy ISS and meet its fiduciary duties, and the committee
may have to communicate the rationale for its decisions more aggressively through
proxy disclosure and even shareholder solicitation.
CONCLUSION
For companies that have adopted a majority voting standard, it is more important
than ever to have a keen awareness of who their institutional shareholders are,
which shareholder advisers may be influential, and what compensation policies
or practices may attract a “withhold” or “against” recommendation on directors.
Failure to take these steps will, at a minimum, make each proxy season more
adventurous. As more companies move to a majority voting standard, the changes
in executive compensation design, structure and amount at large capitalization
companies, where the majority voting standard is already prevalent, will be an
important market-reference point. z
61 Fourth Quarter | 2010
AUTHORS
Marshall T. Scott ([email protected]) is a senior executive compensation consultant with Towers Watson in Chicago where he consults on major aspects of executive compensation. Scott’s experi-ence includes assignments in general business, manufacturing, technology, retail, health care, and U.S. and international arrangements. He has been speaker at American Bar Association (ABA), Society of Corporate Secretaries and Governance Professionals, the National Investor Relations Institute and National Association of Stock Plan Professional (NASPP) seminars and programs.
Laura G. Thatcher ([email protected]) is a partner at Alston & Bird LLP. Where she heads the execu-tive compensation practice. She also serves as chair of the advisory board of the Certified Equity Professional Institute (CEPI) at Santa Clara University. In addition, Thatcher is on the editorial board of the Journal of Deferred Compensation and is the co-author of the book, Compensation Committee Handbook, 3rd Ed. She was recently named “Atlanta Employee Benefits Lawyer of the Year” in the 2010 edition of Best Lawyers in America.
REFERENCES
California Public Employees’ Retirement System. 2008. “Statement of Investment Policy for Proxy Voting.” April 21. Viewed: Aug. 28, 2010.
Fidelity Investments. 2010. “Corporate Governance and Proxy Guidelines.” March 2010. Viewed: Aug. 28, 2010.
was signed into law in July (Dennis 2010). This legislation calls for “say-on-
pay” votes from shareholders, enhanced proxy disclosure and transparency, and
specifically seeks to clearly disclose the relationship of executive pay and the
company’s performance.
Often, in the absence of answers, speculation and mythology fill the void and
become fact. The authors believe that the majority of the public and mass media
think that most CEOs control their boards, thus allowing them to reap excessive
pay packages that are not aligned with actual company performance. Myth No. 1
says that as a result of the imbalance of power, the commonly held belief is that
companies deliberately set low performance goals to make it easy for executives
to receive higher bonuses.
However, there is a problem with this assumption; it isn’t true. A study of S&P
200 companies’ (172 companies, who had filed proxies by the time of the study,
were included) goals and financial results over a two-year period was conducted
(Bout and Kay 2009). The study revealed that shareholder friendly pay-for-perfor-
mance compensation packages are alive and well. The study also confirmed that
companies that set more difficult goals achieved a higher level of total shareholder
return (TSR) and had higher price-to-earnings ratios.
These findings are especially meaningful in light of the fact that the economy
took a turn for the worse in 2008. Companies setting hard goals not only deliv-
ered relatively higher returns than those that set less challenging goals; they
delivered them in spite of a stressed financial and macroeconomic environment.
Though the fallout from the recession and subsequent weak recovery has yet to
completely play out, it seems that setting challenging goals may also help compa-
nies weather and recover from severe economic downturns. Companies and their
shareholders benefit when executives are successful in motivating and energizing
their employees to meet challenging goals in difficult economic times. Of course,
goals that are too difficult can be demotivating. The challenge for boards and top
management is to get the balance right.
DISCLOSING AND ACHIEVING GOALS LEADS
TO A WIN-WIN FOR SHAREHOLDERS AND EXECUTIVES
Based on historical research, 74 percent of S&P companies (in 2007) met or
exceeded their annual incentive plan goals, resulting in a 152 percent of annual
incentive target CEO payout (Bout and Kay 2009). By contrast, CEO payouts
in companies that failed to meet their goals were just 73 percent of target. For
example, assume a typical CEO has a $1 million salary with a target bonus of 100
percent of salary. In the case where goals were met, the median CEO would have
received a $1.52 million bonus while the median underperforming CEO would
have received a $730,000 bonus; many would say that a delta of $790,000 in bonus
payouts validates the occurrence of performance differentiation. These findings
may prove that the majority of S&P companies are serious about pegging senior
64 WorldatWork Journal
executive bonuses to annual goals. More importantly to shareholders, the compa-
nies that achieved their annual goals had a one-year TSR (2007) of approximately
26 percentage points higher than those who failed to meet their goals.
Not all S&P companies, however, publish their goals within their proxies. The
authors’ research of 2008 proxy statements showed that 59 percent of S&P 200
companies (102 of 172) actually disclosed their annual incentive goals (with
increased pressure from the SEC, the disclosure percentage has since increased
in 2008 and 2009 proxies). This has led to yet another erroneous assumption.
Myth No. 2 is that many companies don’t disclose performance goals so that they
can avoid the regulating effects of public scrutiny and get away with overpaying
executives. The same study may have disproved this, as well. In fact, the authors’
research showed that the median bonus payout for companies that did disclose
goals was 135 percent of the total bonus target, while the median payout for those
that didn’t was 127 percent. In other words, the companies that did not disclose
goals paid out less in bonuses — not more — than those who did. (See Table 1).
An executive compensation critic may have no answer as to why nondisclosers
would pay lower bonuses – the whole purpose of not disclosing goals is so that
the public would not have a clear measuring stick allowing companies to pay high
bonuses regardless of company performance.
DEFINING CHALLENGING GOALS
Americans take pride in our ability to overcome enormous odds and prevail by
sheer determination. So it should come as no surprise that the authors’ research
also revealed that the majority of S&P companies not only set goals but set difficult
ones with a 53 percent probability of attainment. This may be further evidence
that high bonuses and low performance don’t go hand in hand. If companies
were setting easy goals, then they would have set goals closer to 75 percent prob-
ability of achievement (which corresponds to moderately challenging or effectively
easier goals).
But what, exactly, defines a challenging goal? In this study, difficulty assess-
ment is determined by the probability of attainment of a particular goal relative
to peer median 10-year performance and the company’s own 10-year performance
against the same goal. The authors used the executive compensation peers that were
disclosed in proxy statements for each of the companies analyzed. The lower the
percentage of attainment probability, the higher the difficulty factor. (See Table 2).
TABLE 1 Goal Disclosure and Bonus Payouts
Goal Disclosed Goal Not Disclosed
Median Payout as a Percent of Target 13% 127%
65 Fourth Quarter | 2010
Companies with higher difficulty
goals saw CEO short-term incen-
tive payouts at 135 percent of the
total bonus target while compa-
nies with low difficulty goals paid
out 124 percent. Again, the more
difficult the goal, the more CEOs
and their leadership teams rose to
the challenge of achieving it. This
finding may debunk myth No. 1
(when executives set easy goals to gain high bonuses), and the opposite is true.
By setting harder goals, executives work harder and are more likely to achieve
these goals, and they will likely earn higher bonus payouts.
CHALLENGING GOALS DELIVER GREATER TSR
An analysis of a random subset
of the S&P companies shows
that at least 90 percent of
companies set internal compen-
sation plan targets at or above
Wall Street analyst annual earn-
ings guidance. Myth No. 3 that
a majority of companies set
internal goals below analyst
guidance is absolutely false. It rarely happens, as CEOs and CFOs would lose cred-
ibility and boards would not tolerate such a practice. (See Table 3). In most cases, it
would be very difficult for a company to pay bonuses above target when the analyst
guidance was not achieved. Investors would genuinely be upset as management
paid above target bonuses when they did not meet expectations, and in most cases
the stock price would be adversely impacted.
The authors’ research shows that there exists a strong relationship between goal
difficulty and TSR. Overall, S&P companies with high difficulty goals had a one-
year TSR (2007) of approximately 10 percentage points higher than those with low
difficulty goals and a two-year TSR (2007 to 2008) of 5.6 percent higher, regardless
of goal attainment failure or success. (See Table 4). This demonstrates that everyone
has a chance to win when companies set challenging goals – shareholders benefit
with higher TSR performance while executives benefit with greater bonuses and,
more importantly, increased value from their equity holdings.
Moreover, board members and shareholders who want C-suite executives to
be held to higher goals may now have the evidence they need to push for chal-
lenging growth goals, as, based on the author’s research, it results in higher
shareholder returns.
TABLE 2 Difficulty Assessment
Probability of Attainment Assessment
0% to 19%
20% to 39%
40% to 59%
60% to 79%
80% to 100%
Extremely challenging
Very challenging
Challenging
Moderately challenging
Not challenging
TABLE 3 Analyst Guidance vs. Internal Performance Goals
Internal goal is higher than guidance 27%
Internal goal is same as guidance 64%
Internal gaol is lower than guidance 9%
66 WorldatWork Journal
ANOTHER STRONG ARGUMENT FOR DIFFICULT GOALS:
HIGHER PRICE-TO-EARNINGS RATIOS
Consistent with higher TSR,
another potential metric in
favor of setting difficult goals is
higher price-to-earnings ratios.
Companies with high difficulty
goals experienced an average
price to earnings ratio of 19.1 in
2007 compared to 16.5 for those
with low difficulty goals. (See
Table 5). This differential was
sustained the following year (even in the face of the great recession), suggesting that
investors may reward companies that set hard goals with more favorable valuation
multiples in both up and down markets. The level of a company’s price-to-earnings
ratio can be attributed to many factors. One possible reason could be that companies
with harder goals would have higher price-to-earnings ratios because harder goals
would often imply faster growth rates (relative to industry peers); Wall Street typi-
cally repays companies that have higher growth rates with higher price-to-earnings
ratios. Investors ultimately reward companies that consistently meet or beat their
hard-growth goals with higher TSR and a more favorable valuation multiple. In most
cases, if a company sets hard goals and falls short consistently, the market will likely
punish them with a declining price-to-earnings ratio and low or negative TSR.
APPLYING THE FINDINGS
Boards need to be cautious that they do not push management to set unrealistic
goals that could pressure senior executives, and in turn, line managers, to take
excessive risks or compromise ethical standards. It is important that compa-
nies enhance their annual budgeting cycle with a robust strategic planning and
goal-setting process, as this will lead to a win-win situation for all stakeholders.
Compensation committees should rely on the following:
TABLE 4 Goal Difficulty, TSR and Bonus Payout
ScenarioHigh Goal Difficulty
Low Goal Difficulty
Difference (Percentage Points)
Median one-year TSR 15.71% 5.86% 9.85
Median two-year TSR -2.71% -8.28% 5.57
Median payout as a percent of target 135% 124% 11.00
TABLE 5 Price-to-Earnings Ratio
YearHigh Goal Difficulty
Low Goal Difficulty
2007 19.1 16.5
2008 12.9 12.2
67 Fourth Quarter | 2010
1 | A goal-difficulty assessment. Conduct a comprehensive analysis that reviews
historical and future growth rates against company and peer performance.
2 | A metric-correlation analysis. To ensure that incentive plans are employing
optimal financial metrics, companies should conduct correlation analysis of
various financial metrics versus TSR, as this will help ensure that these finan-
cial measures are truly driving long-term shareholder value creation.
3 | A robust risk assessment. Conduct a thorough assessment as this will help
strike the right balance of setting challenging goals while ensuring that exces-
sive risks are not undertaken.
Debunking the myth that companies deliberately set lower goals in order for
executives to receive higher bonuses not only affirms a strong American work ethic
at the top, it also paves the way for new executive compensation strategies that are
good for leaders and shareholders alike. Indeed, the public scrutiny resulting from
some highly publicized leadership debacles demands these approaches. Finally,
boards of directors, the ultimate stewards of the future, can confidently insist that
their CEOs earn every dime of their keep by delivering on the kind of challenging
goals that drive growth, profitability and long-term share appreciation. z
EDITOR’S NOTE
This article is adapted from an August 2009 white paper, “It Pays to Set Difficult Goals,” an original Watson Wyatt Internal Research paper by Ira Kay, Aubrey Bout and Sean Heron. The authors and editors would like to thank Towers Watson for allowing them to use their proprietary research.
ABOUT THE AUTHORS
Aubrey E. Bout ([email protected]) is a partner with Pay Governance LLC based in Boston. His consulting experience includes all aspects of executive compensation. He has a strong track record of helping boards and management teams develop pay programs that are aligned with company performance. He has worked with global companies across various industries over his career helping them address complex issues.
Ira T. Kay, Ph.D, ([email protected]) is a managing partner at Pay Governance LLC based in New York. He is one of the nation’s foremost experts on executive compensation. He works closely with the boards and management to help them develop executive compensation programs that increase shareholder value. His clients include premier American and global corporations ranging across various industries, including telecommunications, financial services, retail, defense, technology, consulting, insurance, business services, consumer products, media, food, transportation, among others.
REFERENCES
Ackman, D. 2002. “Pay Madness at Enron.” Forbes, March.
Bout, A. and I. Kay. 2009. “It Pays to Set Difficult Goals.” Towers Watson, August.
Dennis, B. 2010. “Congress Passes Financial Reform Bill.” The Washington Post, July 16.
Glater, J.D. 2009. “Companies Reset Goals for Bonuses.” New York Times, April 17.
Proskauer. 2010. “The Impact of Financial Reform on Executive Compensation.” Proskauer Alert, July 19.
Steverman, B. 2007. “Big Bonuses for CEOs? Not so Fast.” Bloomberg Businessweek, December 5.
Van Putten, S. and A. Bout. 2008. “Beyond the Boardroom: Considering CEO Pay in a Broader Context.” People & Strategy, June.
