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Mercer Limited is authorised and regulated by the Financial Services AuthorityRegistered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London
EC3R 5BU
Future possibilities for public sector reward
9 September 2009
Christopher Johnson, London
2Mercer
The impact of the downturn on the public sector
UK credit rating under threat as debt hits £8.5bn22 May 2009, The Times
Budget 2009; Thousands of
public sector jobs at risk
22 April 2009, The Guardian
350,000 public sector jobs to go
16th June 2009, CIPD
Darling to cut public spending,
admitting difficult choices lie
ahead
9 June 2009, The Guardian
Average wage falls for the first time in at least 45 years, but not in public sector 27 April 2009, The Telegraph
Prime Minister steps in to curb civil service pay rises31 March 2009, Personnel Today
The impact of the downturn on the public sector
Public sector productivity falls 10 June 2009, The Financial Times
3Mercer
Now is the time to act…
Spending cut of 7% and efficiency savings of £9b announced in 2009 budget
Britain's national debt now stands at £703bn; The cost of maintaining this debt will increase as interest rates rise
Credit ratings agency Standard & Poor have explicitly stated that the UK’s future credit rating depends very much on the credibility of the “next government’s fiscal consolidation plans”
After the election the issue of cost-cutting will be more firmly on the agenda
It will take time to implement change and for the effects to be realised
The current crisis provides the need and opportunity chance for reform
As governments assume a broader, more significant role in response to the crisis, it becomes more important that they should be effective and efficient
There is a growing fiscal imperative
Taxpayers will pay more for public services and will expect and demand more in return
Out of crisis, opportunity
4Mercer
The public sector wage bill represents approximately 1/3 of public sector cost
Workforce reform is the only way to navigate through the pressures on public sector costs
Workforce reform
Cultural change is needed
A focus on improved efficiencies and cost savings should be ongoing as in any organisation
Differentiation and segmentation are key to delivering this cultural change by rewarding desired behaviours and improved performance
Key features should be…
A push for shared services
A more flexible, dynamic, differentiated approach to reward
An increased focus on competencies and performance
Key considerations are…
Affordability
Sustainability
The level of service must be maintained despite cost reductions
Employee engagement
A total rewards approach to incentivise employees
6Mercer
Base Pay
Guaranteed pay
Short term incentives
Long term incentives
Recognition awards
Total rewards approach to incentivise employeesThe approach to total reward in the public sector is very different to the private sector total rewards model
Benefits Careers
Workplace flexibility
Commuter programs
Workplace facilities & perquisites
Experiential rewards
Non-financial and status recognition
Time off
Wellness programs
Compensation Benefits Careers Work Lifestyle
A holistic approach to reward helps to enhance employee engagement as well as manage cost
Public sector practices
differs from private sector
Performance management
Career pathing
Training and development
Talent review/ succession planning
Depth Vs. breadth of experience
Health and group benefits
Retirement
Work/life programs
Voluntary benefits
7Mercer
Total rewards approach to incentivise employees Compensation
The current state;– Base pay constitutes the majority of the public sector’s compensation costs – Inflation linked pay increases– Pay progression linked primarily to service
This model allows for little flexibility and is not sustainable
10%
17%
7%
1%65% National Insurance
PensionBeneftisVariable payBase
Approximate break down of the public sector wage bill
Manufacturing Private sector services
Voluntary and not for profit
Public sector
15% 18% 70% 69%
Percentage of companies using Service as a criteria used to manage pay progression, by sector
Source; CIPD
8Mercer
Total rewards approach to incentivise employees Compensation
Bonuses in the public sector have historically been viewed negatively
– This needs addressing as variable pay is key to differentiating between high, middle and low performers and rewarding desirable behaviours
– Language is important to people’s perceptions
Variable pay can be used as a motivator of performance, a behaviour alignment tool or a tool for sharing success
Bonuses in the public sector are nothing less than rewards for failure The Daily Mail, 22 July 2008
0%
20%
40%
60%
80%
100%
120%
Executives/boardmembers
Senior managers Middle/first-linemanagement
Technical/professional
Clerical/ technical
All
Manufacturing andproduction
Private sectorservices
Voluntary sector
Public services
All 70%
Manufacturing and production
85%
Private sector services
89%
Voluntary sector 30%
Public services 33%
Use of cash based bonus or incentive plans, by sector;
Maximum bonus/incentive potential as a proportion of base salary, by sector
Source; CIPD
Source; CIPD
9Mercer
A shift in focus from base pay to variable pay would;
Enable money to be targeted where it can have the greatest impact
Provide a more sustainable approach to reward
Attract high performers
Help management of fixed costs
Incentivise desired behaviours
Key features should be;
Goals focused on outcomes
An integrated way of allocating the right quantity and quality of resources for each objective
Clear accountability across organisations
Accurate and consistent measurements of progress
Benchmarking against best practice
Compensation
10Mercer
Total rewards approach to incentivise employees Benefits and pensions
Traditional differentiator for public sector organisations
The public sector’s reward offering has not moved with the times
– The majority of private sector organisations now offer employees a flexible benefits package
– It is rare to find final salary pension arrangements that are open to all outside of the public sector
– DC scheme membership now exceeds that of DB schemes
Both of these shifts can lead to substantial cost savings
A reduction in pensions has been a key element of Swedish public sector reform
Considerations;– Political sensitivities regarding some benefits– The impact of pension reform on the career
proposition
Public sector pensions must be tackled for the sake of the economyThe Telegraph, 29 April 2009
Final salary pension arrangements, by sector
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
Open to all Closed to newemployees but not
future accruals
Closed to newemployees andfuture accruals
Wind up
All Manufacturing and production
Private sector services Voluntary sector
Public services
Source; CIPD
11Mercer
Total rewards approach to incentivise employees Careers
Careers element is an important driver of employee engagement, and therefore incentivisation, but is neglected by many employers
Investing in employee’s careers can also be a cost effective way of increasing employee engagement
There is a trade off in any organisation with the depth versus the breadth of experience that can be offered
– The public sector has a strong career proposition built on the development of broad professional skill sets which conflicts with the need for technical expertise
To increase value for taxpayers, organisations need to be clear about what core competencies are required to deliver service excellence
Talent strategies are vital
Skills – Leitch, apprenticeships
Development and deployment
Sourcing – internal, external, duration
12Mercer
Workforce trends drive people management programmesFrom homogeneity to heterogeneity
Segmentation – type of work
Talent requirements
Skills strategy
Performance management
Level and mix of rewards
Linkage between pay and performance
Segmentation – type of work
Talent requirements
Skills strategy
Performance management
Level and mix of rewards
Linkage between pay and performance
Differentiation –performance Higher proportion of
variable pay linked to performance
Focus on individual and team, short and long term
Greater use of spot rates/short progression linked to role and competence
Discretionary benefits
Differentiation –performance Higher proportion of
variable pay linked to performance
Focus on individual and team, short and long term
Greater use of spot rates/short progression linked to role and competence
Discretionary benefits
Tailored – employees’ voice
Employee engagement driven and/or choice
Opt for marketable expertise
Flexible work environment
Avoid perverse incentives
Tailored – employees’ voice
Employee engagement driven and/or choice
Opt for marketable expertise
Flexible work environment
Avoid perverse incentives
Underpinned through common values and some coherenceUnderpinned through common values and some coherence
13Mercer
Reward principles
Meet business need and be affordable
Business, operational and workforce needs are the drivers for a reward strategy
Business cases outline benefits, risks and costs to justify investment
Reflect nature of work
Manage total reward
Recognise performance
Recognise and reflect workforce groups identified by function and skills utilised
Organisations employing similar workforce groups encouraged to consider similar reward arrangements
Reward reflects continuing value and contribution of an employee in given period
Value and performance rewarded reflect contribution to organisation and impact delivery
Total reward is tailored to attract, engage and retain the right talent as well as providing personal choice and flexibility
Employers/employees need to develop a full understanding and appreciation of the value of the total reward package
14Mercer
Reward principles
Manage all cash Base pay reflects job challenge and individuals’ competence in the job
Variable pay reflects performance delivered against agreed objectives
Face the market
Support equal pay
Reward levels aligned with agreed market positioning to attract, motivate and retain the right talent
Reward competitiveness covers each element of total reward and the overall deal
Eliminate direct and indirect reward discrimination and reduce any unjustified gender pay gaps
Operate reward systems that are perceived by staff to be reasonable and transparent
Mercer Limited is authorised and regulated by the Financial Services AuthorityRegistered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London
EC3R 5BU
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