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HR innovation
Winter 2011
02
Is retirement an
endangered species?
08
Balancing the
pay-for-performance
equation
12
Determining the
value of employer-
sponsored Health
Improvement
Programs
20
Multiemployer
pension plans
in corporate
transactions:
How to obtain
a purchase price
adjustment for
plan decits
24
Is talent in the right
position for what’s
ahead?
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Contents
Foreword
Scott Olsen, US Leader, Human Resource Services
Is retirement an endangered species?
Jim McHale
Balancing the pay-for-performance equation
Brandon Yerre
Determining the value of employer-sponsored
Health Improvement ProgramsRon Barlow and Don Weber
Multiemployer pension plans in corporate transactions: 2 How to obtain a purchase price adjustment for plan decits
Michael Sculnick
Is talent in the right position for what’s ahead?
Skills assessments help companies build the foundation
for better business benets
Sayed Sadjady and Jessica Dunham
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The C-suite’s waiting. Your current
(and future) workforce is waiting.
Are you ready?
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Foreword
The upshot: It’s a great, albeit chal-
lenging, time to be a part of HR, where
the people engine gets its juice and
the entity’s goals get their legs. The
workforce today is more complex than
ever. Gone are the days of one-earner
households, one-nation economies,
and one-company careers. HR is a
major player in a global economy that’s
changing with every tick of Big Ben,
every headline in Times Square, every
tweet, on every street, from Boston to
Beijing and beyond.
These changes affect not only opera-
tions, but people and the way they do
their work, leave their mark, and live
their lives. Our fates are intertwined—
whether that’s universally recognized
or not. It’s HR that helps drive the
critical connections between the orga-
nization, its objectives, and the people
who can make them happen.
What faulty assumptions, stale atti-tudes, or unasked questions might stand
in their way and yours? HR Innovations
will look at current trends and their
implications for meeting organizational
goals while cultivating and sustaining
an efcient, high-performing workforce
in a dynamic organizational culture.
Our authors will address HR matters
that run the gamut of today’s workplace
issues and ask some probing questions
to get at the answers you need
to move forward and pull ahead:
• Is retirement an endangered species?
• What makes performance click?
• Is your wellness program in
good health?
• How can you adjust for pension
plan decits?
• It’s 2012. Do you know where yourtalent is?
I hope you’ll take some time to read our
most current thinking on HR effective-
ness and excellence. Is your HR function
up to today’s tasks? As always, your
feedback and involvement is not just
welcome, but encouraged as we work
together to meet the challenges of your
enterprise and its talent.
The C-suite’s waiting. Your current(and future) workforce is waiting. Are
you ready?
1HR Innovation
HR Innovation offers advanced thinking about the challenges that should
be uppermost on the minds and agendas of organizations and their
Human Resources (HR) leaders. Today’s economic and operating envi-
ronment is fraught with risks and unknowns. It’s no place for the meek.
The good news: more than 80% of CEOs we recently surveyed1 recognize
the gravity of the situation and its implications for their people strategies.
1 PwC’s 14th Annual Global CEO Survey, 2011
Scott Olsen
US Leader, Human Resource Services
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Is retirement an endangered species?
2
By Jim McHale
Will your employees outlive their 401(k)s? We all know the main
headline in the retirement arena of the last 20 years or so: the decline
of dened benet (DB) plans and the rise of dened contribution (DC)
plans as the main tool for nancing retirement. But this isn’t another
article lamenting that change or arguing that DB plans are more
efcient or more effective at delivering retirement security. Regardless
of whether that’s true, the fact remains that most employers in many
industries, having decided for a variety of reasons that DB plans and
the heartburn associated with maintaining them, aren’t sustainable,
have shifted to DC plans.
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3HR Innovation
The result? Virtually all of the nancial
risks of retirement have been trans-
ferred to employees. And they’re signi-
cant: investment risk, longevity risk,
and ination risk of managing retire-
ment assets. And, although the risks of
nancing retirement have been trans-
ferred primarily to employees in many
industries, if they don’t or can’t manage
that risk effectively, workers will nd
they can’t retire when they want to.
While those putting in enduring careers with the same employer can deliver
many advantages to the organiza-
tions they serve, they also can disrupt
effective workforce succession—if they
continue to work only because they
can’t afford not to.
Where have all the savings gone?
What does this mean for employees as
they plan for retirement? Do employers
understand the size and shape of therisks they’ve transferred to employees
and the impact this might have on
their business? Do employees under-
stand how to plan for retirement in
this context? Do the many models and
tools available adequately measure
the risks involved? While it’s generally
believed that employees tend to invest
reactively and fail to save adequately,
what happens to those who follow the
guidance and do everything the “right”
way? To what extent will they control
the risk?
Let’s say a male employee targets 40%
income replacement from his 401(k)
plan, expecting that Social Security
benets and other savings will provide
the balance of spending needs in retire-
ment. To meet this objective, he needs
to decide on an investment strategy and
savings plan that takes into account the
length of his working career and life
expectancy. If we settle on a realisti-
cally ambitious savings period begin-
ning at age 30, retirement at age 60,
and a life expectancy for a 60-year-old
retiree to age 83, we have an accumula-
tion phase of 30 years and a draw-down
period of 23 years.
If we follow a typical retirement glide
path investing approach, which calls for
investing heavily in stocks at younger
ages and gradually moving to bonds and
ination-hedging assets to and through
retirement age, this retiree could expect
to earn 7%–7.5% annually before retire-
ment and 5.5%–6% after retirement.2
Based on these inputs, the employee
would have to save just over 10% of
earnings annually during his working years to nance 40% replacement
through his life expectancy. This amount
would include the employer’s matching
contribution to a 401(k) plan and could
be contributed and accumulated for
most workers on a pre-tax basis.
Sounds like a great plan, right? It may
be a good starting point, but the plan
assumes that everything will occur just
as expected. If the last decade of ups
and downs has taught us anything, it’s
that things too often fail to turn out
as expected. Even if markets return to
their norms over a long span of years
(and not all experts agree they will), we
still have a lot of volatility to deal with
along the way.
2 The expected returns used in the Monte Carlo simulation are based on the 2011 capitalmarket assumptions published by Callan Associates.
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4
What risks does the employee in our
example bear and how can we measure
how these risks could affect his 30-year
plan? Before we get started, it’s impor-
tant to note that we deal here speci-cally with the nancial and longevity
risks, but workers deal with many other
risks as they near and enter retirement.
These include the cost and life issues
connected with healthcare, long-term
care, family situation (divorce and
death of spouse), living independently,
real estate, and securing and main-
taining employment. The mathematical
models we will use can tell us a lot
about the impact of the potential vari-
ability of life span and market uctua-
tions, but they don’t handle these less
tangible risks.
Sizing up retirement risks
To arrive at some answers, we used a
Monte Carlo methodology to generate
the results over 10,000 alternate
lifetimes; this is basically a type of
computerized coin-ip that looks at the
market results each year from age 30 todeath and the chance that a retiree will
live or die in each year of retirement.
After running these random trials, we
tabulated the results, looking at each
simulated lifetime and determining if
the employee was successful in funding
his retirement target.
Note that we recognize that the debate
over what constitutes an appropriate
target is not universally agreed upon
and is a personal matter that’s based on
an employee’s family situation, health,
prospects for working in retirement,
and many other factors. The focus
here is on looking at the chances that a
selected goal will be met and the vari-
ability of results; we should see similar
variability of results if we decided that,
say, a 50% goal was a better objective.
So, how did things turn out for our
sample employee and his 9,999 alter
egos? For starters, remember that a
male employee who retires at age 60 is
expected to live to age 83 on average, but
that happens only about 4% of the time.
There is an almost 20% chance that he
could live past age 90 and a more than
5% chance he could make it to 95. While
this is a nice problem to have, longer life
would create the need for signicantly
more retirement savings.
Moreover, average returns over the
working years also varied signicantly.
Although the average 30-year return in
the build-up period was 7.1%, there is a
20% chance the employee would earn
less than 4.6% and a 1% chance that theaverage 30-year return would actually
be negative. Of course, there’s an upside
to taking risk: 20% of the time, the
employee earned 9.5% or more, and in
the jackpot top 1% scenario, the port-
folio returns 14% or more per year.
All this adds up to a wildly varying
result in retirement: In some cases, the
employee ends up with hundreds of
thousands of dollars to leave to his heirs
(if he is “lucky” enough to have stronginvestment results while working but
then die young); in others, the retire-
ment income objective is not even
close to being achieved. The bottom
line: 55% of the time, employees end
up outliving their savings, despite
The bottom line: 55% of the time, employees
end up outliving their savings, despite following a
disciplined retirement savings regimen over their
lifetime and following industry rules of thumb
about sound retirement investing.
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5HR Innovation
following a disciplined retirement
savings regimen over their lifetime and
following industry rules of thumb about
sound retirement investing.
Managing retirement risks
As bleak as this outlook sounds,
employees can avail themselves of
many options to manage this risk. We
looked at some of these and noted what
our sample employee would have todo to improve his chances of making
the retirement savings last. Note that
these options have to be initiated
ahead of time; if a retirement nest
egg is depleted at age 85, at that point
the retiree will have few avenues for
rethinking strategy. Here are some
things employees can do to hedge their
retirement risks:
• Save more. Increasing the 30-year
savings rate to 15% could reduce the
chances of outliving savings to 30%—
still a risky proposition. Risk manage-
ment processes often look at targeting
the 5% worst case, so we follow a
strategy that will allow us to weather
95% of outcomes and so be exposed
to only the worst 5%. To budget for all
but 5% of outcomes, a retiree would
have to save close to 30% of income
for a 30-year period, which would not
be feasible for most workers.
• Work longer. If an employee is beset
with sudden market drops near
retirement, he or she is often forced
to work longer than expected. This
can help in a small percentage of
cases, but what if the market drop
comes after retirement? An employee
may hedge the risk by planning to
work longer ahead of time in order to
accumulate a “reserve” for potential
longevity and poor market perfor-
mance. Our analysis shows that
working ve more years past age 60
could reduce the chances of outliving
savings from 55% down to 25%. Our
retiree would have to work to age 70
to meet the 5% standard.
• Reduce consumption in retire-
ment. If the market is not kind to an
employee, he or she can also realign
expectations to draw down savings
more slowly in retirement, based
on the size of the 30-year nest egg.
Financial advisors often suggest
an annual rate of withdrawal from
savings that is set conservatively
to allow a cushion for longevity
or down markets. For instance,
reducing the annual withdrawal in
retirement by 20% would reduce the
chances of outliving savings to 35%
in exchange for the belt-tightening.
To get to a 95% condence level that
he would not outlive his nest egg, the
retiree would have to live without
60% of the expected income.
• Work in retirement. Instead of
living with 20% less income, a
retiree could consider supplementing
income with a part-time job to make
up the difference. Note that this
is more realistic in the early years
of retirement (and under bettereconomic circumstances).
• Invest in less volatile assets. In
just about any current 401(k) plan,
employees can choose to allocate
their retirement savings to assets
that are expected to be less risky.
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6
Conventional wisdom says that less
risk comes in exchange for a lower
expected long-term return. If they go
this route, employees need to do so
in conjunction with one of the other
hedges described earlier (save more,
work longer, or consume less to make
up the difference).
These approaches can be effective in
reducing the risk employees take for
their retirement, but they all involvea signicant adjustment to lifestyle
or workforce participation. Because
we started with what can be called a
reasonably ambitious expectation for
what a worker can save over a working
life, it would be difcult for many
workers to make these kinds of adjust-
ments. They might, therefore, remain
exposed to these risks as they enter or
consider entering the retirement years.
How employers can help
Many employees retiring today have
some form of dened benet annuity
guarantee, even if it comes from a
frozen plan, but as more and more
employees move into their pre-retire-
ment years with a DC-only portfolio,
the difculty that employees have in
managing retirement risk will have
a growing impact on employers.
Employers may nd they need to offer
their people more tools to manage this
risk. This can be done through:
Plan design
Innovations in plan design, such as
automatic enrollment, have helped
incentivize more employees to save
sooner. If employers can gain a betterunderstanding of the choices employees
are making, additional innovations may
also help. For instance, would providing
a smaller employee match percentage
on a larger dollar base incentivize more
employees to save at higher rates? How
high should the automatic enrollment
rate be?
Are 401(k) plans the most effec-
tive and overall efcient vehicles for
delivering retirement benets? Whilethey certainly will be the choice of
many employers going forward, some
employers may want to consider
hybrid design approaches that balance
risks in a different manner between
employees and employers. For instance,
Pension Preservation Plus (PPP), a PwC
Instead of living with 20% less income, a retiree could
consider supplementing income with a part-time job to
make up the difference.
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7HR Innovation
innovation, provides elements of DB
and DC plans within the employer’s
retirement program. Market-rate cash
balance plans can operate in a nearly
identical manner to a DC plan in the
build-up phase, but operate as a DB plan
in the draw-down phase. Would such
designs strike a more realistic balance
for some employers?
Investment innovation
The conventional wisdom on retire-ment investing is constantly evolving
as practitioners understand the risks
better and experience the limitations
and pitfalls of discarded past para-
digms. Many employees want (or need)
less of the freedom offered by self-
direction and more ways to purchase
(for a reasonable cost) lifetime income
opportunities. Employees and retirees
have historically avoided traditional
annuities because of perceived high
cost and reluctance to commit a largepart of their savings irrevocably. To
address some of these concerns, many
providers are developing retirement
income or annuity purchasing options
that employers can introduce into
their DC programs. These include bulk
purchasing of annuities through a DC
investment choice option and managed
account alternatives that target and
maintain a stated income level from
the account. To get comfortable with
wide participation in these investment
vehicles, employees will need to under-
stand the tradeoffs and risks discussed
in this article.
Education
Building nancial literacy and invest-
ment education are important objec-
tives, but employees will need to
somehow understand the risk manage-
ment challenges of retirement. How
do their investment and life choices
interact with their long-term nan-
cial health? What’s a reasonable
cost or investment return trade-off
for reducing investment risk and
longevity risk in retirement? Right now,employees may have a pretty good idea
of the upside and downside of market
risk based on their experiences of the
past several years. But it will become
increasingly difcult to make informed
decisions as the range of choices
continues to expand. Moreover, just
because employees are educated about
how investment works, even if it helps
comply with regulations and avoid
lawsuits, it doesn’t mean the employees
will apply the knowledge consistently or that they are equipped with feasible
options to control their risks.
Evolving workforce paradigms
Currently, the average retirement age
in the United States is around 62, which
has been decreasing for decades. As
longevity increases, this means that
most workers will be spending over 20
years in retirement. Couple that with
declining birth rates and we will be
expecting an ever-shrinking workforce
to support growth and productivity. Is
this sustainable? Alternate approaches
to managing the transition to retire-
ment, such as phased retirement, have
been widely discussed but rarely imple-
mented. Can employers better tap the
skills of retirees or pre-retirees?
Imagining a better way forward
What happens to the workforce and
long-term sustainability and viability
if employees can’t retire? If workers
are thrown to the whims of forces far
beyond their control, how is succession
planning not also thrown into turmoil?
In today’s environment, it’s hard to
imagine how most employees will have
the resources necessary to reliably
manage the risks of nancing retire-ment. How will this impact broader
society, the economy, and the nancial
markets? In moving forward to a better
state for employers and employees
alike, greater availability of appropriate
tools (some of which have yet to be
developed) must help bridge this gap.
Employers may well nd a competitive
advantage to equipping their people
with such tools and the knowledge and
insight that will enable them to makegood use of them—and their retirement
years. But rst, organizational leader-
ship will have to come to grips with the
very real consequences of failing to take
action today.
Article contributor, David Cantor, PwC
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8
By Brandon Yerre
Despite its familiarity in the workplace, the phrase “pay for
performance” likely means different things to different people. This
lack of clarity and understanding can keep employers from meeting
short- and long-term goals and employees from deriving satisfaction
in their roles and careers.
Balancing the pay-for-performance equation
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9HR Innovation
For top management, performance has
most often been dened by metrics
commonly reported to public company
shareholders or otherwise easily calcu-
lated, such as earnings per share (EPS)
or total shareholder return (TSR). This
has afforded top management and
shareholders a clear view of the linkage
between pay and the nal measure of
performance. But unfortunately, the
means to achieving that end measure
of performance were not typically included as performance measures.
As for other employees, the metrics
used for linking pay to performance
were not always considered from a busi-
ness performance perspective. In some
companies, middle management and
lower-level employees might have been
incentivized based on overall company
goals, without knowledge of how their
role impacted the company as a whole.
In other cases, they were incentiv-ized based on individual performance
measures that had no direct linkage
to company performance, and during
years of poor company performance,
incentive pay was reduced or elimi-
nated—even for high performers.
Balancing your organization’s use of
pay and other rewards with meaningful
measures of individual performance
helps create a talented, engaged work-
force and an organization capable of
creating long-term value. This applies
to the entire organization, including top
management. A properly managed pay-
for-performance program should reect:
• What fuels individual performance
• What links individual performance
and organizational performance
• How to effectively use performance
goals to achieve short-term successes
and long-term objectives while
managing risk
Fueling individual performance
With talent management identied as
the number one focus of CEOs around
the globe,3 it’s critical that employers
weighing workforce strategies under-
stand and apply the behaviors that
enable them to attract, reward, and
retain pivotal talent.
The retirement savings hit inicted
by the economic downturn, combined
with longer life expectancies, have
kept many baby boomers in the work-
force beyond traditional norms. These
more deeply experienced workers now
contribute side-by-side with recent
college graduates and Generation
X, which is establishing itself as the
predominant workforce population.
Amid this diversity, no single approach
is likely to enable your organization to
achieve its talent management objec-tives. Baby boomers may be more highly
motivated by nancial rewards, while
Millennials (also known as Generation
3 PwC 14th Annual Global CEO Survey, 2011
4 Managing tomorrow’s people: Millennials at Work. PwC Survey 2009
Y), who entered the workforce during
the 21st century, are more likely to
respond to career advancement incen-
tives; in our interviews, this group
chose training and development as their
rst choice among benets three-to-one
over those who opted for cash bonuses.4
When considering the most effective
reward package for sparking individual
performance, your organization should
take into account the typical compo-nents of most reward programs: salary,
short-term incentives, long-term incen-
tives, benets (including health insur-
ance, retirement savings, and vacation
pay); training and development, and
recognition. Many organizations have
also been focusing on work-life balance
and offering new benets, such as ex-
ible work schedules, telecommuting
opportunities, and sabbaticals.
Although the “pay” in “pay for perfor-mance” can refer to any of the more
traditional components of reward
programs, your organization should
look beyond its current forms of remu-
neration and consider whether addi-
tional approaches might work best in
the long term. Regardless of the diverse
composition of your workforce today—
in experience levels, gender, location,
work style, or any number of vari-
ables—a solid understanding of what
launches top-ight individual contribu-
tions will be essential to developing an
effective pay-for-performance strategy.
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10
Rewards that resonate
Compensating an employee with the
same amount of monetary value as
that created by the employee for the
organization is viewed by some as the
“holy grail” of compensation strate-
gies. But it’s rare that such value can
be measured. And value can be tough
to grasp, particularly when its creation
is not a direct, easily quantied objec-
tive, as is the case, for example, with
employees whose roles are to preserve
the organization’s value through public
relations or customer service.
For top management, responsible as it
is for the overall success of the orga-
nization, individual success can and
should be measured by organizational
success. Even so, determining the value
created by top management is no easy
task. Because TSR and other measures
based on share price don’t fully take
into account the effect of the market in
those measures, high-level managers
can wind up under- or overcompen-
sated. And, while measures of perfor-
mance that can be controlled, such asreducing operating expenses, provide
far superior linkage between individual
and organizational success, they’re still
not perfect.
With the lines between individual
performance measures and organiza-
tional performance often dotted, the
term “pay for performance,” while hardly
alien, isn’t always thoroughly understood
or effectively applied. To strike the right
balance, leaders need to understand
the behaviors of each employee groupresponsible for creating or preserving
organizational value and use that knowl-
edge to develop reward programs that
encourage those behaviors.
Consider, for example, a payroll
manager who’s responsible for timely
and accurate payroll submissions to
ensure that employees are paid as
expected. This manager’s contribu-
tion prevents loss of productivity if
employees discontinue work to deter-
mine why they weren’t paid on time.
High performers in this role might,
as a rule, effectively manage their
time, use proper planning, and ef-
ciently apply technologies. As such,
the payroll manager can be rewarded
based on having achieved measur-
able objectives in these categories. If
the payroll manager is a Millennial, a
company-sponsored trip to an annual
payroll conference, which sweetensthe package with Millennial-minded
training and recognition, can be a
crucial ingredient in rendering a reward
that resonates.
Your organization can fully assess its
linkage between individual and orga-
nizational performance by conducting
competency assessments and interviews
with critical stakeholders, with the
approval and support from appropriate
organizational leaders.
Performance goals boost short-
term successes and long-term
objectives, and manage risk
Once you have an organizational under-
standing of individual performance
boosters and the linkage between indi-
vidual and organizational performance,
individual goals should be established
with consideration as to how they’ll
support organizational goals. Choosing
the right short-term and long-term
goals without creating excessive risk
for the organization presents the nalchallenge in the mission to balance the
pay-for-performance equation.
Most organizations set short- and long-
term goals as part of their business
plan, providing the basis for individual
goals and incentive pay programs.
Organizational goals, which often
Regardless of the diverse composition of your workforce
today…a solid understanding of what launches top-ight
individual contributions will be essential to developing
an effective pay-for-performance strategy.
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11HR Innovation
pertain strictly to nancial perfor-
mance, are used to set similar nancial
goals for the workforce. But armed with
the knowledge of how employee behav-
iors fuel organizational performance,
you can determine individual goals that
will encourage positive behaviors that
will propel the enterprise toward its
strategic objectives.
When setting short-term goals for
employees, the focus should be trained
on what’s tangible and achievable. A
goal of increasing EPS by a specic
percentage for the year will be more
effective and better support a high-
performing culture when rewards
reect achievements that fall within
their span of control.
Long-term employee goals should
parallel and contribute to the organiza-
tion’s vision for sustainable nancial
success. For example, since CEOs
place talent management at the top of
the corporate agenda, the successful
implementation of a strategy to attract,
reward, and retain pivotal talent should
be viewed as a long-term goal of top
management. Although this strategy
might not provide staggering return in
the short-term, it can position the right
workforce and the enterprise to deliver
on long-term goals. The success of this
goal can be measured statistically using
workforce metrics such as the turnover
rate of priority talent and employee
engagement survey feedback.
The goal-setting process should also
take into account the importance
of risks and rewards. On the one
hand, risk management can help
keep the process consistent with the
company’s risk prole and contain
and reduce behaviors that might bedeemed excessively risky. On the
other hand, performance goals that
languish without achievement-based
rewards can quickly lose impact and
relevance. A performance-funded plan
is an effective way to make sure that
monies will be available to recognize
employee achievement. This kind of
funding mechanism can serve as an
operational self-fullling prophecy by
setting performance goals and payout
levels based on formulas that depend on
corporate success.
Keeping it simple
Many factors contribute to establishing
and maintaining a meaningful and
effective pay-for-performance program.
But program management needn’t
be overly complicated. A successfully
designed plan should be meaningful
and simple.
It won’t always be feasible or cost effective
to set specic goals for every employee,
or even every employee group. But if yourorganization understands and commu-
nicates the linkage between individual
performance and organizational perfor-
mance, you can create a sense of concrete
continuity for employees, management,
and investors alike.
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By Ron Barlow and Don Weber
Over the last decade, employers, led by those with more than 5,000
employees, have been instituting a variety of health management
programs designed to improve employees’ (and their dependents’)
health and productivity. These Health Improvement Programs,
ranging from worksite wellness, on-site clinics, health coaching and
advocacy, disease management, and clinical management, have
vastly expanded during the last three to ve years, even though their
value is still often not fully understood.
Determining the value of employer-
sponsored Health Improvement Programs
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13HR Innovation
Among large employers, 88%
responding to the 2011 PwC Health
and Well-being Touchstone Survey 5
said they offer some type of “well-
ness” program, and 86% offer disease
management programs to healthcare
benet program participants. While
respondents tended to doubt program
effectiveness, most planned to double
down on their investment: 55%
believed their wellness programs were
minimally or not effective, but 66% were planning to increase their invest-
ments in this area.
This raises a crucial question: How,
exactly, is program effectiveness being
measured? According to a 2010 joint
National Business Group on Health
and Fidelity Investments survey,6 only
one-third of employers have measur-
able goals/targets for their Health
Improvement Programs, and 59% of
employers don’t know their returnon investment (ROI). Determining
a “CFO-credible” methodology of
measuring the cost savings, health
improvement, or an overall ROI in these
programs has been complex, confusing,
and at times, simply non-existent. Many
CFOs and other business leaders ques-
tion the value of these investments and
are asking for proof of a positive ROI and
clear, understandable, and defensible
analyses that demonstrate such proof.
The problem is that most HR depart-
ments either have simply not measured
their savings or ROI, or they’re
depending on the healthcare vendors
to do so—vendors who have a vested
interest in the programs. Often, these
vendor-provided ROI demonstrations
use either overly simplied method-
ologies or extremely complex meth-
odologies, both of which produce
questionable results. In addition, most
of these demonstrations rely on a singlemeasurement or a very limited set of
measurements, which increases the risk
of producing inconclusive results.
The good news? Recent advances in
data/information availability, together
with advanced data analytic methods,
can result in a solid set of ROI measure-
ments, provided companies are willing
to invest not only in the wellness
programs, but in measurement efforts
that effectively gauge their merit.These approaches can be as simple
as measuring the reduction in nega-
tive medical events, such as hospital
admissions or emergency room visits for
those enrolled in a condition-specic
disease management program. Or, they
can be more complex, population-wide
comparisons. Choosing the right meth-
odology for your company will depend
on the Health Improvement Programs
being evaluated, data and resources
available, and the degree of precision
desired by management.
5 PwC Health and Well-being Touchstone Survey, 2011
6 Joint National Business Group on Health/Fidelity Investments Survey, 2010
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Measurement methodologies
At their core, ROI measurements hinge
on the determination of savings. For
Health Improvement Programs, savings
can be based on medical claims cost
only or more holistically estimated to
include items such as productivity or
other business results. Simply put, if it
can be demonstrated that the effects
of a particular healthcare program
reduced the company’s costs over what
they would have been without theprogram, we have measureable savings
and the basis for a valid ROI measure-
ment. However, the real challenges lie
in knowing what the costs would have
been without the program and knowing
whether observed changes represent a
true “cause and effect” impact.
There are many methodologies in use
today to measure the effectiveness
of Health Improvement Programs,
with varying degrees of applicability.Generally, we can group them into the
following four categories:
1. Test/control group methods
(participant vs. non-participant)
One general category of measure-
ments is based on the comparison of the
change in costs (i.e., trend rate) or other
statistics between a Test Group and a
Control Group. The Test Group repre-
sents those members who participated
in the particular Health Improvement
Program under review and the Control
Group usually comes from those who
did not. As described in the followingchart, the Control Group can be adjusted
in various ways to arrive at a better
comparison. Correct determination of
the Control Group is one key to arriving
at a successful measurement under the
Test/Control Group analysis method.
Techniques for determining the Control
Group have evolved in recent years
as additional data elements and more
advanced analytic methods are deployed.
Unadjusted Aggregate
Method (simpler/less
accurate)
Compares the emergingtrend rate of those using theprogram vs. those who don’t
use the program, with thesavings being the differencein trend rates
Control Sub-Group
Method (complex/more
accurate)
Creates a sub-group fromthe control group that bestmatches the characteristics
of the test group, normalizingthe two populations, and thencompares the emerging trendrates of each group
Demographically
Adjusted Aggregate
Same as prior approach,except the groups areadjusted based on age/sex and other demographicfactors
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15HR Innovation
The most basic and common method is
what we call the Unadjusted Aggregate
Method. This method uses the observed
trend in the Control Group to adjust
the Test Group results, which are then
compared to the Test Group actual results
to determine savings. Exhibit 1 demon-
strates how this conceptually works.
Essentially, this method assumes that
the change for the Control Group (those
who did not participate) is an accuratepredictor of what would have happened
to the Test Group (those who did partic-
ipate) without the program in place.
This approach requires the least
amount of information, but ignores
what could be signicant differences
between the two groups in terms of age,
gender, and other demographic factors.
Exhibit 1: Example of Unadjusted Aggregate Method
(Assume a 1/1/2010 eective date or the employee-only Health Improvement Program anda one-year beore & ater look.)
Test Group (2010 Program
Participants)
Control Group (2010 Program
Non-Participants)
Number of employees 1,000 9,000
2009 costs per employee per year $12,000 $8,000
2010 costs per employee per year $12,600 $8,680
Actual trend rate 5.0% 8.5%
Estimate of what the 2010 costswould have been, absent the program =$12,000 x 1.085
$13,020
Estimated savings: $13,020 – $12,600 =$420 per employee per year
$420
Estimated total savings: $420 x 1,000 =$420,000
$420,000
For example, if only young, single
employees choose the program, and we
see a large cost trend difference when
compared to older employees who have
families and who did not participate,
then the measured savings may not
be an accurate reection of program
effectiveness alone.
Accounting for differences in demo-
graphics between the Test and Control
Groups adds a degree of precision inthe Aggregate Method. This is accom-
plished by adjusting the change in costs
being measured based on the average
demographic indicators. Demographic
differences are usually accounted for by
using standard actuarial values to reect
differences in age, gender, family status,
and sometimes geography. Exhibit 2
shows how this conceptually works.
Even when the Control Group is
adjusted for differences in demo-
graphics, differences can be present due
to other factors, most notably health
status and selection. Two people with
exactly the same demographic prole
can have markedly different health
statuses and therefore signicantly
different cost and trend levels. Also,
voluntary participation introduces an
element of selection. Often, someone
who chooses to participate in a well-ness program might be predisposed to
making lifestyle changes based on a
desire to improve health status; this can
make it seem as if the program is more
effective than it really is.
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16
Group with the Test Group for an
accurate assessment of the impact of
the Health Improvement Program.
The Control Sub-Group Method can be
expected to yield a better measurement
of the true effects of the healthcare
program than the Unadjusted Aggregate
Method or Demographically Adjusted Aggregate Method. However, the Control
Sub-Group Method is more data- and
labor-intensive. In some cases, where the
necessary data is not available or the size
of the population is not large enough, the
Control Sub-Group Method may simply
not be feasible.
Exhibit 2: Example of Demographically Adjusted Aggregate Method
(Assume a 1/1/2010 eective date or the employee-only Health Improvement Program anda one-year beore & ater look.)
Test Group (2010 Program
Participants)
Control Group (2010 Program
Non-Participants)
Number of employees 1,000 9,000
2009 costs per employee per year $12,000 $8,000
2010 costs per employee per year $12,600 $8,680
Actual trend rate 5.0% 8.5%
Demographic factors:
2009 demographic actor2010 demographic actorDemographic impact on trend
1.2141.2624.0%
0.9761.0113.6%
Adjusted trend to apply to test group =(1.085 x 1.040 ÷ 1.036) – 1
8.9%
Estimate of what the 2010 costs wouldhave been, absent the program =$12,000 x 1.089
$13,066
Estimated savings: $13,066 – $12,600 =$466 per employee per year
$466
Estimated total savings: $466 x 1,000 =$466,000 $466,230
Accounting for such factors can be
complicated. Some of the latest tech-
niques involve using multivariate
regression analysis to determine which
factors are most closely correlated with
the cost levels or other items being
measured. Then using the results, a
new Control Group is created from the
non-participating population that best
replicates how the Test Group would
have performed if the program had
not been in place. Factors that can beconsidered in the multivariate regres-
sion analysis are:
• Age
• Gender
• Family status
• Level/salary
• Risk score
• Total healthcare costs—
medical
• Total healthcare costs—
prescription drugs
• Health risk assessment (HRA)
completion and results
• Biometric measurements
• Chronic condition category
• Co-morbidities
• Preventive services used
This new Control Group is a subset of
the initial Control Group population
that best replicates the underlying
tendencies of the Test Group, apart
from the inuences of the healthcare
program being evaluated. Some degree
of “experimentation” may be necessary
to nd the best set of factors and the
match thresholds (i.e., ve-year age
buckets instead of exact year match for
age) that will be used to create the sub-
group. See Exhibit 3 as an example.
Short of a pure randomized clinicalsampling, which is not a viable solu-
tion for most employers, no test/control
group method is scientically perfect.
But if the data is available, this multi-
variate regression method appears to
do the best job of aligning the Control
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17HR Innovation
2. Population-wide analyses (also
called historical control analyses)
Population-wide analyses usually look
at trends in undesirable health utiliza-
tion statistics across the entire popula-
tion. Also referred to as a Measurement
of Negative Medical Events, this
methodology uses the population-wide
analysis of events, such as hospital
admissions or emergency room visits,
to measure the value of specic Health
Improvement Programs. It can alsoinclude measurement of changes in the
number of health risks or occurrences
of certain disease states. Care should
be taken to adjust for differences in
population levels, demographics, plan
changes, and other factors from year to
year that can impact observed trends.
Comparison to previous years’ events
for the identied groups, or normative
data, if available, can also be helpful
in determining whether the observed
trends represent a measurable reduc-
tion in cost.
The types of healthcare statistics that
can be included in the population-wide
analyses and tracked over time include:
• Medical claims
• Average risk scores
• Number of sick days
• Number of hospital admissions• Number of hospital readmissions
• Number of ER visits
• % of members having a
physical exam
• % of members getting
immunizations
• Number of new diabetic cases
• Number of new renal failure/
dialysis cases
• Number of new cardiovascular
disease cases
• Number of heart attacks
• Number of strokes
• Number of back surgeries
• Number of knee replacements
• Number of diabetes-related
complications, such as amputations
• Number of screening tests
completed, such as HbA1c, foot
exams, lipid panels, or cancer
screenings
• Wellness program participation rates
• HRA completion rates
• Number of health risks identied
through the HRA
• Biometric results, such as weight,
BMI, waist size, blood pressure,
cholesterol levels, etc.
Exhibit 3: Example of Control Sub-group Method
(Assume a 1/1/2010 eective date or the employee-only Health Improvement Program and a one-year beore & ater look.)
Test Group (2010 Program
Participants)
Initial Control Group (2010 Program
Non-Participants)
Adjusted Control Group(Sub-group o 2010 Program
Non-Participants)
Number of employees 1,000 9,000 1,000
2009 costs per employee per year $12,000 $8,000 $11,800
2010 costs per employee per year $12,600 $8,680 $13,100
Actual trend rate 5.0% 8.5% 11.0%
Estimate of what the 2010 costswould have been, absent the program =$12,000 x 1.110
$13,322
Estimated savings: $13,322 – $12,600 =$722 per employee per year
$722
Estimated total savings: $722 x 1,000 =$722,000
$722,034
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3. Longitudinal studies of
participants (also called
pre-post cohort analyses)
In this methodology, members working
to manage a given condition, such as
diabetes, can be analyzed by use of
certain identied statistics or medical
events (see list above) during a base
period; the impact of the program is
then determined by analyzing the same
group after program implementation
to determine if there was a reductionin the identied medical events. The
average cost of the medical events can
be calculated using the employer’s own
data or normative data.
The methodology does require the
employer and the vendor to work
together to identify the group to be
measured, the diagnostic codes to be
used, and the events to be measured.
For this measurement, care needs
to also be taken to ensure that theresults observed are not signicantly
inuenced by regression to the mean
(dened below).
4. Qualitative assessments
In addition to the quantitative analyses
described above, it may often make
sense to also include a qualitative
analysis that assesses such factors as
program features, activities, accomplish-
ments, employee feedback surveys, andself-reported results. The qualitative
analysis is important to complement
and explain the numbers and to suggest
alternative directions for the quantita-
tive analyses as well as provide insight to
possible program renements.
A balanced scorecard approach
Unfortunately, there is no “silver
bullet.” There are pros and cons for
each of the analytic methods described
above. As such, it may make sense to
include some or all of the methods
into a set of measurements that collec-
tively can provide a balanced assess-
ment of the effectiveness of the Health
Improvement Programs.
Using multiple analyses reduces the risk of having inconclusive or misleading
results. And aggregating results from
various analyses into one report or
scorecard can be helpful in under-
standing the big picture, especially
when monitoring progress over time. In
this effort, it’s important to clearly lay
out and understand the strengths and
limitations of each method used, which
may vary based on the data and the
programs in place. Corporate leader-
ship, including the Finance Departmentin particular, should be involved when
deciding the overall structure of the
measurement and ROI reporting.
Measurement considerations
These areas should be considered when
conducting an analysis of the effective-
ness of Health Improvement Programs:
1. Data sources—Depending on
the type/scope of the HealthImprovement Program and the
extent of the measurement analysis,
data sources can include medical and
prescription drug claims extracts,
health risk appraisal information,
biometric screening data, risk
scores (calculated from the other
data), eligibility data, absence and
disability claims extracts, and other
business results data.
2. Data credibility —Credibility should
be a primary consideration in any
analysis of healthcare claims data.
The more data that’s available and the
“cleaner” it is, the more credible will
be the results of the analysis and the
more precise your savings estimate.
3. Years to be included in the study —It’s
preferable to have two years of data
prior to the Health Improvement
Program implementation date as a
sound basis for measurement. This
is especially true if the number of
participants is not enough to be
considered fully credible with one
year alone. At least one year of
post-implementation data is usually
needed to draw any signicant
conclusions on the effectiveness of
the Health Improvement Program,
and multiple years are preferred for
observing lasting effects.
4. Populations to be included in the study —Generally speaking, all
employees and dependents who have
access to the Health Improvement
Program and are therefore consid-
ered eligible should be included in
the study.
5. Outliers—When analyzing claims
data, outliers (high-cost claims) may
sometimes skew results. Establishing
a claims amount threshold, say
$50,000 per year, and then exam-ining the results with and without the
claims capped at this threshold can be
benecial in determining the extent
to which outliers are affecting results.
6. Savings criteria—Reductions in
medical claims paid is commonly
used to measure savings. However,
other measures can include change
in certain health utilization stats
(e.g., hospital admissions), change
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19HR Innovation
in certain health indicators (e.g.,
risk scores or BMI), reductions in
the number of persons with chronicconditions (e.g., diabetics), or changes
in productivity or other business
measures. Generally speaking,
the use of changes in utilization
is preferred over changes in costs
because Health Improvement
Programs are primarily designed to
affect healthcare utilization. Focusing
on utilization also minimizes the
effects of outliers (high-cost claims),
changes in provider reimburse-
ments, and healthcare ination. If
we think of costs as being expressed
by the simple equation Total Cost =
Utilization x Unit Cost, then focusing
our measurement analyses on the
changes in healthcare utilization can
still be translated into cost savings at
the end of the day.
7. Criteria for Health Improvement
Program participation —Health
Improvement Programs often reect
multiple levels of involvement. Forsome eligible members, participation
may go no further than receiving an
initial contact; others might have
responded with some interest, be
fully engaged, or have “graduated”
from the program. Performing
several iterations at various levels
of the participation criteria may
be warranted.
8. Diagnoses to be excluded, such as
maternity and delivery —As with
outliers, the inclusion of members who have certain diagnoses or
conditions can sometimes skew
results. These conditions, such as
maternity and delivery or accidents,
are usually unrelated to the Health
Improvement Program. Again, it may
be benecial to examine results with
and without the members who have
these identied diagnoses.
9. Regression to the mean—In statistics,
regression to the mean is the phenom-enon that if a variable is extreme on
its rst measurement, it will tend to
be closer to the average on a second
measurement. For analysis of health
outcomes, this comes into play, for
example, when looking at a closed
group of members in a particular
disease category. In the rst year,
high claims could have triggered
program participation. But a look at
these same individuals in the second
year will show that some naturally tend to have more average claims.
Without an inux of new high-cost
members in the second year, it will
appear as if improvement in costs
occurred. Care must be taken in any
analysis of Health Improvement
Programs to ensure that this phenom-
enon is not skewing results.
Analytics provide the path
to tracking value
The measurement of HealthImprovement Program value can be
a daunting task for any plan sponsor;
often, a purely scientic approach is
simply not possible because what is
being evaluated is often something that
did not occur. In a post-reform era of
employer health plans, designing cost-
effective programs will remain a top
priority, and by applying the analytic
approaches described here, employers
can begin to produce at least a reason-
able estimate of the value of various
programs. In most cases, the use of
several methods and multiple iterations
under varying sets of assumptions is
useful in understanding the range of
possible results. The use of an inde-
pendent advisor to provide a qualied
“second opinion” can often be helpful
in determining the correct method-
ology and deriving assistance with
calculations.
But these analytic techniques can
deliver more than a calculation of
savings and ROI. Thoughtful analytics
can also provide you with a framework
for the continual tracking and improve-
ment of the value of your programs and
for determining which programs should
be enhanced, altered, or discontinued.
The use of an independent advisor to provide
a qualied “second opinion” can often be
helpful in determining the correct methodology
and deriving assistance with calculations.
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By Michael Sculnick
Deal professionals should proceed with caution when evaluating
businesses that participate in multiemployer dened benet pension
plans. Many plans face huge unfunded liabilities and have mandated
higher contributions for the next 10 to 15 years in an attempt to
improve their nancial status. In addition, multiemployer plans (MEPs)
carry greater risk than single-employer plans because the stronger
participating employers in a plan may have to pay the costs for weaker
employers who become unable to pay their required contributions.
Multiemployer pension plans in corporatetransactions: How to obtain a purchase price
adjustment for plan decits
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21HR Innovation 21
About multiemployer
pension plans
MEPs are typically established by a
union with which employers in the same
industry have collective bargaining
agreements. These plans have the
advantage of enabling employees
to earn benets and become vested
while working for various companies.
The arrangements are prevalent in
the building and construction trades,
trucking, certain manufacturing sectors,grocery stores, and other service-related
industries. About 10.4 million partici-
pants are currently covered under some
1,460 plans throughout the United
States, according to the 2010 Annual
Report of the Pension Benet Guaranty
Corporation (PBGC).7
MEPs have suffered from the same
problems as single-employer plans, but
their “all for one, one for all” structure
presents its own distinctive challenges.Lower than expected rates of return
of assets in MEPs, smaller numbers of
active employees supporting the plans,
benet improvements from earlier
years, and other actuarial losses all
conspire to adversely impact their
funding ratios. About one-third of all
MEPs are now less than 65% funded.
Unfunded liabilities in MEPs are the
measure of an employer’s withdrawal
liability: the amount of the “exit”
payment that’s required when an
employer ceases to participate in the
plan due to plant closings or substantial
reductions in employment levels. If a
participating employer fails to pays its
withdrawal liability due to bankruptcy,
the other remaining employers become
responsible for paying the benets
promised to all participants, including
those of the bankrupt employer. Thus,
employers that participate in MEPs are
not in full control of their own nancial
destiny. The PBGC, a federal agency,
acts as an insurer of last resort to provide
liquidity to plans that are insolvent or
that undergo a mass termination.
The impact of pension reform
The Pension Protection Act of 2006
mandated a host of new MEP require-
ments. The funds must now monitor
their current and projected funding
status and determine whether they’re
in endangered or critical status,
commonly referred to as red or yellow
zone; a plan is considered green zone if
it’s neither endangered nor critical. If an MEP is in the yellow or red zone, it
must adopt a funding improvement or
rehabilitation plan that calls for a mix of
increased employer contributions and
reduced benet accruals.
Additional disclosure requirements
also make it easier for participating
employers (and prospective buyers) to
assess the current and future nancial
status of the plans. Recent action by the
Financial Accounting Standards Board
(FASB) will impose additional foot-
note disclosures in generally accepted
accounting principles (GAAP) nancials
that enable users to nd the information
7 Pension Beneft Guaranty Corporation 2010 Annual Report
they need to assess more accurately the
impact of MEPs on the business. Roughly
equal numbers of plans were considered
to be red, yellow, or green zone plans in
2011, although many green zone plans
achieved that status by taking advantage
of funding relief enacted by Congress the
previous year.
Implications for deal
professionalsBuyers have traditionally attempted to
secure a purchase price reduction equal
to the potential withdrawal liability,
arguing that the withdrawal liability
represents a fair measure of the under-
funded status of the plan up to the date
of sale. Sellers argue that withdrawal
liability is purely contingent on a future
event within the control of the buyer,
and thus an inappropriate basis on
which to adjust purchase price. PwC’s
experience has been that an argumentbased solely on withdrawal liability has
limited success in obtaining a purchase
price reduction from sellers, especially
if the buyer intends to continue oper-
ating under the collective bargaining
agreement and make contributions into
the plan, or the plan is relatively well
funded (green zone).
Buyers can employ two better
approaches to arguing for a purchase
price adjustment for an underfunded
MEP: one based on a debt-like (enter-
prise value) analysis and the other based
on a quality-of-earnings adjustment.
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22
Enterprise value: The rst approach is
to estimate the employer’s “net” funding
liability by calculating the company’s
share of the plan’s long-term funding
decit, reduced by the deal value of theportion of the employer’s contribution
that’s used to pay off the decit.
This approach treats the company’s
participation in an MEP in the same
way that buyers typically approach
single-employer plans.
Assume, for example, that the company’s
share of the funding decit is $10 million
[(A) in the chart], measured using
long-term funding assumptions and the
market value of assets. Annual employercontributions of $1 million per year
are used 40% for new benets (service
cost) and 60% to pay off the decit [(B)
current decit funding of $0.6 million].
At a deal multiple of 7, the enterprise
value of the current decit funding is
$4.2 million, and buyers should argue
for a purchase price adjustment of
$5.8 million, rather than the full $10
million decit [(D) “net” funding
liability] on the theory that $0.6 million
is already included in the P&L above the
line and should be treated as interest on
the decit. Note that this amount is on a
pre-tax basis, so any adjustment may be
tax-effected. A similar approach is to add
back (B) from the P&L if a discounted
cash ow model is being used.
The price-adjustment approach basedon quality of earnings asserts that
current earnings are overstated to
the extent that future contributions
will signicantly increase under the
terms of a funding improvement plan.
Although there’s no consensus on how
to measure the extent to which earn-
ings are overstated, we’ve used the
practice of estimating the steady-state
level of contribution increase needed
immediately to achieve the same level
of funding improvement as called for inthe more gradual funding improvement
plan (where contributions increase each
year on a compounded basis over the
term of the funding improvement plan).
For example, assuming that a one-
time increase of 100% is needed—
not uncommon for poorly funded
plans—ongoing contributions would
be $2 million per year instead of
$1 million (as in the earlier example)
on a pro forma basis. At a sample deal
multiple of 7, a buyer will argue for
a $7 million reduction to purchase
price. Note that this gure would not
be adjusted for taxes. If the buyer were
using a discounted cash ow analysis,
future earnings should be reduced to
the extent that future employer contri-
butions are required to increase.
The quality-of-earnings approach will
usually not meet with any success when
a plan is in the green zone, absent any
authoritative measure of required
future contribution increases. Also, if
projected contribution increases are notmaterially higher than the level of ina-
tion projected for the cost of goods sold
in the valuation model, no purchase
price adjustment will be warranted.
Getting the right purchase
price adjustment for
underfunded MEPs
With a convergence of actuarial losses
adversely affecting MEP funding ratios,
buyers need to carefully assess theirapproach to seeking MEP purchase
price adjustments. They should closely
examine the funded status of MEPs and
the prospect for increased contributions
required under a funding improvement
plan. No single approach is generally
accepted for achieving a purchase price
reduction. But by looking through the
lens of a variety of approaches, the
parties can more easily reach an agree-
ment reecting the reality that poorly
funded MEPs should not be ignored in
transactions.
$ in millions A B C D
XYZ multi-employer plan
Fundingliability
Current decitfunding
Deal multiple*(B)
“Net” fundingliability (A–C)
10.0 0.6 4.2 5.8
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23HR Innovation 23
How carefully are you dealing
with the MEP in your deal?
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24
By Sayed Sadjady and Jessica Dunham
Companies need the right talent in the right places.
This has always been true, but it has never been more critical.
Companies must reinvent themselves to survive, compete, and
grow. Without key talent in the right positions, companies may
fumble or miss opportunities to innovate, create value, and
differentiate themselves from competitors.
Is talent in the right position for what’s ahead?Skills assessments help companies
build the foundation for better business benets
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25HR Innovation
The talent landscape is
changing—quickly
Many companies are already grappling
with the global talent crisis, discov-
ering that the skills that were critical
for success just a few years ago are
not the skil ls needed today. For many
companies, there’s a mismatch between
where demand is and where critical
talent resides. Company leaders need to
make sure they’re placing talent where
they can be most effective and createthe most value. First, they need to know
what skills and competencies existing
workers have. The stakes are high, as
the market slowly recovers and the pace
of mergers and IPOs gains momentum.
A proper skills assessment can help an
organization understand its employees’
competencies and identify current and
possible future skill gaps. This can help
companies align their talent and work-
force development plans to businessobjectives and promote greater ef-
ciency, productivity, and retention.
After a period of cost cutting, hiring
freezes, and budget constraints, compa-
nies are seeing new opportunities to
grow, innovate, and compete. However,
many leaders—in the executive suite,
in the human resources function, and
at the head of business units—fear
their organizations won’t have the right
people with the right skills to execute
day-to-day operations and plan for the
future. Talent is a major concern among
CEOs, according to PwC’s 14th Annual
Global CEO Survey: 83% of CEOs say
their companies will make “some” or
“major” changes to their strategies for
managing people.8
While we applaud leaders for putting
the talent crisis at the top of their
agendas, we still believe that many
companies do not understand how to
create a sustainable talent management
strategy that will serve their companies
over the long term.
Many talent discussions center on
rewards and incentives for keeping
current talent engaged, reducing the
risk that employees will leave as the job market improves and new opportu-
nities emerge. But how do companies
address these concerns when they
don’t have an accurate understanding
of who their talent is? We believe that
companies should begin by asking two
very basic questions:
1. What skills does the company need
to advance its business objectives?
2. Does the key talent reside within
the organization—and, if so, is it
in the right positions?
Answering these critical questions
will help companies create a sustain-
able talent management framework
that improves retention, engagement,
and productivity. But the reality is that
many companies do not understand
who their key talent is, and have no
systematic methodology for analyzingskills and aligning them to business
objectives.
8 PwC 14th Annual Global CEO Survey, 2011
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26
What’s at stake?
As we emerge from the recent reces-
sion, companies likely do not know
where their talent is. What’s more, key
talent may feel it is time to leave for
new opportunities. After years of salary
freezes and layoffs, many workers now
feel stretched and demoralized. We are
beginning to see signs that workers are
reaching their limits—non-farm busi-
ness sector labor productivity decreased
at a 0.7% annual rate during the secondquarter of 2011.9 And even though
unemployment remains high, voluntary
turnover is rising in the high-performer
category, increasing from 3.7% in 2009
to 4.3% in 2010.10
At the same time, these early days
of economic recovery will be critical
for companies eager to rebound from
the recession.
The market for mergers, acquisitions,
and new public offerings seems to be
recovering from the lull of previous years.
Investors expect nearly $15 billion in
initial public offerings in 2011, compared
with slightly over $5 billion in 2010.11
Merger and acquisition activity rose14.2%, from $773 billion to $833 billion,
from 2009 to 2010, following two years
of declines.12
When new opportunities arise, will
companies have the right talent in the
right place to seize them? Will they
discover too late that they haven’t
taken steps to retain workers with key
skills or to ll skills gaps through hiring
and training?
9 Bureau o Labor Statistics, Productivity and Costs, Second Quarter 2011(Non-Farm Business), September 1, 2011
10 PwC Saratoga 2011/2012 US Annual Human Capital Eectiveness Report, 2011
11 PwC Private Equity Sector Trends Analyst Briefng, March 2011
12 Ibid
Major change > 31%
No change > 17%
Some change > 52%
CEOs who anticipate changing strategies for managing talent over the next 12 months,
according to PwC 14th Annual Global CEO Survey
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27HR Innovation
Real clients, real value: Setting the path for future growth
Issue: An international power company needed to assess its talent skills in
advance of a major corporate and finance function realignment.
Action: PwC helped develop competency models and performed one-on-one
assessments. We reported back to more than 750 individuals, 30 leaders,
the CFO, and the audit committee. We made clear recommendations about
functional processes in leadership and finance.
Impact: With PwC’s help, the company was able to identify the gaps in itscollective skill set and fill them through strategic hires and employee develop-
ment. The company also began taking steps toward succession planning and
identified key talent in pivotal roles for strategic rewards. PwC worked closely
with the company to develop a new training curriculum for senior manage-
ment that aligned to organizational goals and the new competency models.
Real clients, real value: Saving $50 million a year
Issue: A top health insurance company needed to redesign the talent
management model in its procurement function for greater efficiency,
compliance, and savings.
Action: PwC helped assess the client’s organizational state, design a new
model, create a roadmap for improvement, and craft a clear governance policy
with control procedures. We also helped define job descriptions. The skills
initiative played a large role in this effort, as it helped identify talent and
evaluate existing workers’ suitability for newly designed jobs. We assessed
what skills the client had and what talent it needed to add through strategic
hiring or internal development.
Impact: The organizational restructuring saved the company $50 million a
year and created new job opportunities, both for people within the organiza-
tion and outside talent. The organization now has clear metrics for measuring
its performance.
The case for skills assessments
To be resilient in the face of change,
every organization needs an accurate
inventory of the capabilities of their
talent and how those capabilities align
with their business and functional
strategies.
A skills assessment is a comprehensive
program of interviews, tests, bench-
marking analyses, and other services
designed to help a company assess theskills and capabilities—the talent—
possessed by its people.
Leading companies use skills assess-
ments to:
• Make sure the talent in pivotal roles
aligns with the organization’s leader-
ship competencies
• Identify opportunities for training
and development
• Identify talent gaps that may be
lled through hiring or internal
development
• Benchmark the organization against
its peers
• Prepare for business combinations or
organizational structures
• Validate development strategy
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28
How do I know which skills
and talents are important to
my company?
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29HR Innovation
How skills assessments ft into
overall talent strategy
Skills assessment is the analysis that
allows an organization to build a
stronger, smarter, more sustainable talent
strategy. When an organization knows
where its talent is, it can begin asking
(and answering) questions such as:
• What are the pivotal roles in our
organization?
• Do we have talent in those pivotalroles? If not, how do we get talent
there?
• How can we tap and develop talent
pools from key demographics,
Millennials, for our long-term
growth?
• How do we measure return on
investment from talent?
• Where are we losing key talent?
• How do we keep talent engaged?
• How do we reward talent?
• What non-nancial rewards are we
using to retain talent?
How do I know what skills and talents
are important to my company? Just as
no two companies are the same, no two
companies will require the same skills
from its talent and leadership.
Important leadership
competencies
While specic companies will need
their unique set of leadership compe-
tencies, below you will nd some
high-level competencies to consider
when performing a skills assessment of
leadership:
• Ability to set direction
• Innovative
• Strong communication skills
• Motivational and inspiring to people
• Decisive
• Trusting and good with relationships
These exercises are not easy, calling as
they do for intense organizational intro-
spection, short- and long-term strategic
outlooks, and challenging questions. An
objective perspective can be a critical
ally in making the right calls amidcomplicated changes, turbulent times,
and committed competition. Where does
your organization stand? Now is a good
time to get some answers. A solid skills
assessment is a good place to start.
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30
As a leading provider of HR consulting services, PwC’s Human Resource Services’ global network of 6,000 HR practitioners
in over 150 countries brings together a broad range of professionals working in the human resource arena—retirement,
health & welfare, total compensation, HR strategy and operations, regulatory compliance, workforce planning, talent
management, and global mobility—affording our clients a tremendous breadth and depth of expertise, both locally and
globally, to effectively address the issues they face.
PwC is differentiated from its competitors by its ability to combine top-tier HR consulting expertise with the tax,
accounting, and nancial analytics expertise that have become critical aspects of HR programs.
PwC’s Human Resource Services practice can assist you in improving your performance across all aspects of the HR and
human capital spectrum through technical excellence, thought leadership, and innovation around ve core critical HR
issues: reward effectiveness and efciency; risk management, regulatory, and compliance; HR and workforce effectiveness;
transaction effectiveness; and global mobility.
To discuss how we can help you address your critical HR issues, please contact us.
Scott Olsen
Principal
US Leader, Human Resource Services
(646) [email protected]
Ed Boswell
Principal
US Leader, People and Change
(617) [email protected]
Billy Owens
Partner
Global Leader, International Assignment Services
(704) 347-1608 [email protected]
About PwC’s Human Resource Services (HRS)
HR Innovation Contributors
Jim McHale
(646) 471-1520
Brandon Yerre
(214) 999-1406
Ron Barlow
(312) 298-3056
Don Weber
(678) 419-1417
Michael Sculnick
(312) 298-4060
Sayed Sadjady
(646) 471-0774
Jessica Dunham
(617) 530-5760
Please visit our website at www.pwc.com/us/hrs
or scan this QR code:
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www.pwc.com/us/hrs