Optimizing Total Rewards: Controlling Costs and Maximizing Business ValueOptimizing Total Rewards: Controlling Costs and Maximizing Business Value

Mark Englizian – MicrosoftAllen Slade – MicrosoftTom Davenport – Towers Perrin

BU ILDIN G RELATIO N SHIPS PRO D U C IN G RE S U L T S TM

May 14, 2002

2

Workshop objectives

Explain Total Rewards Optimization What it is How it works

Discuss how Microsoft used the approach successfully

Answer your questions about optimizing your investment in employee engagement and retention

3

Workshop agenda

Why should you be concerned about optimizing rewards?

Microsoft’s people issues

TRO overview and approach

Microsoft case study

TRO modeling

Q&A

Why should you be concerned about optimizing rewards?

5

Q: Who agreed most strongly with this statement: “People are our most important investment”? Q: Who agreed most strongly with this statement: “People are our most important investment”?

Human resource executives

Line management executives

Strategic planning executives

Financial executives

Ex-spouses of CEOs

Who agreed Who agreed leastleast strongly? strongly?

Source: Towers Perrin People Strategy Benchmark Awareness and Attitude Study

6

It’s time for a new metaphor

Highest Cost

“What does the employee cost the organization?”

Greatest Asset

“What is the employee worth to the organization?”

Most Important Investor

“What is the organization worth to the employee?”

Our employees are our...

Prehistoric 1991 1996

7

What the organization delivers

Base salary

Variable pay

Recognition

Stock

Pay

Health care

Retirement

Savings

Time off

Benefits

Total Rewards

Career development

Performance management

Learning managementLearning & Development Work Environment

Leadership

Work/life balance

Trust and respect

Organizational climate

Line of sight/Involvement

8

Percent Saying“A Lot of Personal Satisfaction”

Q: What gives people the most personal satisfaction?

Getting promotedfaster than expected 40% 50% 60% 70%40%

Source: Roper Starch

Getting a bigger-than-average raise 40% 50% 60% 70%

Receiving a compliment/memo from your boss 40% 50% 60% 70%

Knowing that you hada really productive day 40% 50% 60% 70%63%

53%

48%

9

29%

31%

37%

29%

29%

62%

54%

31%

35%

41%

44%

42%

41%

79%

71%

The “High TSR” Talent Management Differentiators

0 or negative TSR

10%+ TSR

27%

Reputation in the job market

Competitive retirement benefits

Incentive pay tied to performance

Rewarding top performers

Selecting skilled employees

Providing recognition for talented employees

Developing leaders

Allowing employees to have “their job their way”

NOTE: Company groupings based on five-year Total Shareholder Return (TSR).

% of Employees Rating Their Company as “Good” or “Excellent.”

Source: Towers Perrin Talent Management Study

10

Questions for participants

What major reward issues are you facing?

Are you more concerned about reward effectiveness (that is, employee behavior) or reward cost?

11

Concepts relevant to the rest of our discussion

The “deal”

Reciprocity

Retention and engagement

Total rewards

Optimization

Microsoft’s People Issues

13

What were we thinking in Fall 2000?

Historically, Microsoft had a winning rewards formula Stock that produced wealth under the right

market conditions Conservative base salaries Small variable pay opportunity Generous benefits Engaging but challenging work environment

The effectiveness of this rewards formula decreased as share price declined and competitors became more aggressive with cash compensation

14

What were we thinking in Fall 2000? (cont’d)

Responses to attraction and retention challenges had limited success MS Poll suggested dissatisfaction with cash

compensation Despite much data on employee attitudes,

surveys not designed to identify the rewards that encourage people to join or stay

The organization wanted to avoid the “silver bullet” approach to dealing with unwanted turnover

15

What were we thinking in Fall 2000? (cont’d)

Therefore, total rewards response had to be Comprehensive, covering all reward quadrants Effective against competitors Reflective of the organization’s status as an

attractive — albeit maturing — company Clear link of rewards with contribution Flexible in accommodating individual needs

but also administratively practical Effective in ensuring that the organization

invests its reward dollars where they produce the greatest benefit (employee commitment and engagement)

16

2002 HR mission: Create an environment where the industry’s most talented people can do their best work

Employee engagement Career development Mentoring Part-time/leave policy changes Rewards optimization

Management matters Cultural attributes Management development road map Manager portal

17

Questions for participants

Do any of these challenges sound familiar?

What forms do they take in your organizations?

Total Rewards Optimization (TRO) Overview and Approach

19

Suppose you knew all this...

20

...and could determine this

21

What is the optimum

allocation of that investment to maximize retention?

What is the optimum level of

investment in employees?

$ Investment in Employees

Base pay

Bonus

Healthcare

Retirement plan

Learning anddevelopment

Retiree

medical

Workflexibility

Thrift planPaid time off

Towers Perrin’s Total Rewards Optimization (TRO) enables organizations to invest in rewards that maximize ROI

22

Reflects cost constraints on investment

Develops an efficient frontier of optimum allocation of investments in retention

Determines an optimum investment level on the basis of program costs and turnover cost savings

Optimum solution may be to Increase retention by

changing allocation while maintaining the current level of investment

Maintain current level of retention at lower level of investment by changing allocation

Increase investment and retention to economically efficient level (marginal investment equals marginal turnover savings)

+ConjointAnalysis

PortfolioOptimizati

on

Optimum Level of

Investment

Optimum Allocation of Investment

= Is a surveying

method used for many years in marketing to capture subjective preferences

Asks employees to make trade-offs among program features as opposed to assessing the features individually

Is a more reliable forecast of behavior than traditional survey methods

Our approach to TRO consists of two primary activities

23

Determining utilities

Marginal Utilities of Reward Levels

1

2

3

4

5

6

7

8

9

10

11

12

Current +5% +15%

Levels of Reward Elements

Work Flexibility

Manager Performance

Nature of Job

Bonus

Training

Stock Options

Base Pay

Sabbatical

Tuition Reimbursement

Career Path

401(k)

Health Care

24

Determining utilities (cont’d)

Marginal Utilities of Reward Levels

1

2

3

4

5

6

7

8

9

10

11

12

1 2 3

Levels of Reward Elements

Work Flexibility

Manager Performance

Nature of Job

Bonus

Training

Stock Options

Base Pay

Sabbatical

Tuition Reimbursement

Career Path

401(k)

Health Care

25

Comparing utilities

Relative Importance of Reward Elements

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

Work Flexibility

Manager Performance

Nature of Job

Bonus

Training

Stock Options

Base Pay

Sabbatical

Tuition Reimb.

Career Path

401(k)

Health Care

for Base & Comparison Groups

26

0 $100,000$100,000200,000200,000300,000300,000400,000400,000500,000500,000$600,000$600,000

Identifying optimal reward portfolios

Change in Cost ($000)

2-Y

ear

Rete

nti

on

(%

)

67%67%

70%70%

73%73%

76%76%

79%79%

82%82%

85%85%

64%64%

88%88%

91%91%

94%94%

Current Current level of level of investment investment and and retentionretention

Current Current level of level of investment investment and and retentionretention

(100,000)(100,000)

27

Determining financial outcomes

Work Flexibility Work at home up to 20% of

time with supervisor approval

Manager Performance Manager provides more

autonomy, informal learning opportunities and business unit strategy information

Nature of Job More opportunities for

strategic projects and more engaging assignments

Bonus No change to current

performance bonus opportunity

Training At least 40 hours of training

annually per employee

Work Flexibility Work at home up to 20% of

time with supervisor approval

Manager Performance Manager provides more

autonomy, informal learning opportunities and business unit strategy information

Nature of Job More opportunities for

strategic projects and more engaging assignments

Bonus No change to current

performance bonus opportunity

Training At least 40 hours of training

annually per employee

Stock Options No change

Base Pay No change

Sabbatical Eight weeks paid after four

years

Tuition Reimbursement No change

Career Path Formal career map; extensive

internal job markets

401(k) No change

Health Care No change

Stock Options No change

Base Pay No change

Sabbatical Eight weeks paid after four

years

Tuition Reimbursement No change

Career Path Formal career map; extensive

internal job markets

401(k) No change

Health Care No change

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Determining financial outcomes (cont’d)

$0 $22,850

68.8%68.8% 87.5%87.5%

15.6%15.6% 6.2%6.2%

-9.4%-9.4%

-$76,963-$76,963

($54,113)($54,113)

237%237%

Annual turnover rate

Change in turnover rate

Change in turnover cost

Net change in cost

Net as % of Change in Reward Cost

Current Rewards

Proposed Rewards

Change in Reward Cost

2-yr retention %

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Consider your target variable

Retention

Engagement

30

How much of a total cash compensation (base salary plus annual incentive)

increase would you expect if you left your job?

3%

3%

3%

7%

12%

16%

30%

24%3%

0% 10% 20% 30% 40% 50%

Source: Towers Perrin Talent Management Study

Q: How much of a pay increase do people expect from changing jobs?

Less than 5%

5 - 7%

8 - 10%

11 - 15%

16 - 20%

21 - 25%

26 - 30%

31 - 50%

51% or more

Microsoft Case Study

32

Project summary

Objective: Create a data-driven framework for evaluating changes (improvements or take-aways) to compensation, benefits and other employee programs by analyzing the impact on retention and cost

Scope: Focus on cost and the impact of rewards on retention, rather than other objectives behind reward elements (employee motivation, community relations, etc.)

33

Focus Groups andSurvey Design

January 2001February

2001 March 2001 April 2001

Analysis, Interpretation

and Recommendati

ons

Implementation Planning and

Results Monitoring

Cost Calculation

Survey Administration

Step 1

Step 2

Step 4 Step 5

The project unfolded over about four months

Step 3

34

Initial insights

The results were similar across job family, level and tenure However, the highest stock-rated population

has a higher preference for stock, bonus and sabbatical...

And an equal preference for base pay, as compared to the lowest stock-rated population

Traditional reward levers (in isolation) have poor payoffs

Nontraditional rewards have high payoffs (in isolation)

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Actions

Policy changes we are already driving… Invest in manager effectiveness Eliminate “no poaching” rule Expand LOA

… are projected to have the following impact $20m investment 21% decrease in attrition (from 10% to 7.9%) $30m reduction in cost of attrition Net savings of $10m

36

Innovations

Interactive decision tool “Data dialogue” driving decisions

Conjoint Put employees into the domain of constrained

choices

Collaboration Between cost data and attitude data Between Compensation, Research and

Finance

37

Deal scenarios

Trade Bonus Trade Bonus for Basefor Base

Maximize Maximize PayoffPayoff

Maximize Maximize RetentionRetention

Cut CostCut Cost

Fixate on Fixate on Cash SalaryCash Salary

Improve Improve Retirement Retirement BenefitsBenefits

SCENARIO ELIMINATE ADDCHANGE IN REWARD COST

CHANGE IN ATTRITION

CHANGE IN TURNO VER COST (SAVINGS)

NET COST (SAVINGS)

No Bonus

No Bonus

NA

No bonus

NA

NA

+10% base pay

Improve manager effectiveness

Remove “no poaching”

40 hours of training Improve nature of

job Paid sabbatical Telecommuting

Improve manager effectiveness

Remove “no poaching”

40 hours of training Improve nature of

job Paid sabbatical Telecommuting

+10% base pay

Double 401(k) match

38

Q: Where is manager performance best (and worst)?

Customer focus

Multitasking

Working with diverse workforce

Transforming ideas into words and actions

Recognizing and solving problems

Coaching and mentoring

39

69%

56%

44%

51%

31%

69%

0% 100%

Help people discover how they

contribute

Build teams with diverse

backgrrounds, skills, perspectives

Help people interpret information

from multiple sourcesHelp people interpret information from multiple sources

Build teams with diverse backgrounds, skills, perspectives

Help people discover how they contribute

Managers see their roles evolving

NOW

3 TO 5 YEARS FROM NOW

CONNECTING PEOPLE WITH GOALSCONNECTING PEOPLE WITH GOALS

TEAMWORKTEAMWORK

COMMUNICATIONCOMMUNICATION

40

NOW

3 TO 5 YEARS FROM NOW

51%

62%

37%

58%

40%

53%

0% 100%

Managers see their roles evolving (cont’d)

Give people opportunity to earn what they value most

Introduce many learning options, help people choose

Help people take change initiative

CHANGECHANGE

COACHINGCOACHING

REWARDSREWARDS

Interactive Mini-CaseInteractive Mini-Case

42Where do we start???

Mini-case study: B&C Inc.

Business: Clothing retailer with 20 stores in the Northeast

Revenues: $1b

Employees: 10,000 front-line employees (cashiers, stockers, sales clerks)

Presenting issue: Unwanted turnover of 100% per year at a cost of more than $30m per year; customer satisfaction scores at an all-time low

Situation: Highly autonomous store management with many “silver bullet” horror stories; Wall Street expects 5% profit margin improvement

43

Exercise 1: Frame the problem

You have three minutes in the elevator to convince the CEO to take action to analyze and act on a turnover problem. What will you tell her about...

Where the problem is most acute

Which implications are the most dramatic Cost of turnover Revenue lost from customer

dissatisfaction Institutional knowledge lost

How employees and managers will be engaged in solving the problem

44

Exercise 2: Hypothesize the reward elements

You’re conducting a focus group to pin down the reward elements to be analyzed. What kinds of questions will you ask to...

Get a sense of what’s important to people?

Ensure that you have information on the full range of total rewards?

Ensure that you are specific about elements within reward categories?

Use terms that have meaning for employees?

45

Exercise 3: Interpret results

Your survey produces these results. How would you explain these to the CEO?

88

63

0

25

50

75

100

Low Medium High

98

80

0

25

50

75

100

Low Medium High

100

50

0

25

50

75

100

Low Medium High

6055

0

25

50

75

100

Low Medium High

Pay

Learning & Development

Supervision

Benefits

Perc

eiv

ed

Valu

eP

erc

eiv

ed

Valu

e

Perc

eiv

ed

Valu

eP

erc

eiv

ed

Valu

e

46

Exercise 4: Interpret the curve

How much should you spend to reduce turnover?

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

($30)($20)($10) $10 $20 $30 $40 $50 $60 $70 $80 $90 $100$110$120$130$140$0

Added Total Rewards Cost ($mm)

Pre

dic

ted

Rete

nti

on

In

cre

ase

RetentionIncrease

TurnoverSavings Cost

10%

20

30

40

45

$12.3 mil

24.6

36.9

49.2

55.4

Q&A