hr matters march 2014

HR MATTERSIssue 03 | March 2014 | towerswatson.com

Pensions revolution Performance management Employee engagement HR technology

2 towerswatson.co.uk

04 06Pensions revolution

Employee surveying

Will Aitken examines the impact of the tax provision for DC pensions.

12HR transformationTim Richard gives some guidance on how companies can define their HR technology strategies and implement a successful transition.

14High performanceYves Duhaldeborde investigates the trends in high-performance companies and talks about effective leadership.

18Benefits health checkEdd Collins looks at creating fit for purpose benefit programmes.

21Performance management Chris Charman examines the importance of performance management and how UK organisations differ in their approach to the subject.

Steve Young reviews how business leaders should gather employee opinions.

09Pension savingsThere is an increasing need for individuals to supplement their State pension. John Cockerton analyses what the future holds for pension savings.

Con

tent

sHR MATTERS


UK Budget tears up the pensions

tax rules Major overhaul of tax provision for DC pensions

Will Aitken Senior Consultant, Benefits

And overnight, DC pensions have become a more attractive benefit, albeit with some possible strings attached around changing investment and providing guidance at retirement. Getting maximum value from them will mean communicating effectively.

Alongside these changes to DC pension income delivery are ‘consequential’ changes to the defined benefit (DB) pensions regime, a proposed increase in the normal minimum pension age and numerous other ‘tinkerings’.

The annual and lifetime allowances remain in place, and from 6 April 2014, these will be £40,000 and £1,250,000 respectively.

Changes to DC income delivery

Annuities have rarely been out of the news of late, often portrayed as the latest financial services ‘rip off’ and a potential barrier to building public trust in pensions. At the end of last year the Financial Services Consumer Panel reported on annuities, following which the Government had said that it is ‘currently considering the broad range of research and evidence on decumulation and how the market is working’.

Clearly, it has given the matter a lot of thought

Changes are being introduced in two stages, the first from 27 March 2014, the second from April 2015. The reason for the two-tier approach is that the more sweeping changes – taking effect from the later date – require changes to primary legislation.

As is currently the case, 25% of the DC fund value within the lifetime allowance (LTA) will be available as a tax free lump sum. Any other amounts drawn will be taxable at the member’s marginal rate (an LTA charge on any amount in excess of the member’s available LTA would also apply).

In the Budget delivered on 19 March 2014, the Chancellor announced sweeping changes to the rules for income delivery on defined contribution (DC) pension pots.

£2,000

£10,000to

The small pot commutation threshold

will increase from

HR Matters 5

UK Budget tears up the pensions

tax rules Major overhaul of tax provision for DC pensions

From 27 March 2014:The minimum income requirement to be able to use flexible drawdown (under which there is no restriction on the amount of a DC pot that a member can withdraw) will reduce from £20,000 to £12,000.

The capped annual withdrawal limit will increase from 120% of the equivalent annuity that could have been purchased to 150%.

The trivial commutation limit (currently £18,000) will increase to £30,000.

The small pot commutation threshold will increase from £2,000 to £10,000. Within the personal pension regime, small pot commutation may take place three times (rather than twice at present) – again to £30,000 in total.

From April 2015:There will be no withdrawal limits. From minimum pension age, an individual will be able to draw as much or as little (subject to marginal rate tax) as he or she wishes. In other words flexible drawdown will be extended to all DC pots. Annuities and other income delivery ‘products’ such as drawdown will continue to be available.

The Government is to consult on extending this flexibility, but its starting point is that it may remove the right of all members of DB schemes to transfer to a DC scheme. It also proposes to increase the minimum pension age to 57, from 2028, and to then maintain it 10 years below State pension age.

This consultation runs to 11 June 2014.

So what are the immediate implications?

People who had planned to retire in the short term may now decide to stay on. They will need to be informed of what the changes might mean for them and how they might best take advantage of them. But it could mean that people who have already announced an intention to retire may change their minds.

“The annual and

lifetime allowances

remain in place,

and from 6 April

2014, these will

be £40,000 and

£1,250,000

respectively.”

Post-2015, we expect employees to focus greater attention on fund values rather than the amount of income that can be produced from the fund. That might mean some people will look at their fund value and conclude that they can afford to retire, whereas if they looked at the income their fund could generate, they might have reached a very different conclusion.

For all employers with DC arrangements, there is a need to communicate with potentially affected employees to help them understand what the impact might be for them.

Pensions revolution


Capturing meaningful employee

opinion data When to census, when to pulse, and when to listen

Steve Young EMEA Practice Leader, Employee Surveys

Today’s business leaders are inundated with a vast ongoing flow of information. Technological advances allow us to track financial results, customer behaviour and operational performance on an up-to-the-minute basis.

It is therefore only natural for leaders to expect that all business-relevant information – including employee opinion – should be gathered and reported on an equally frequent basis. But does that really make sense?

The pitfalls of over-surveying

The first issue to consider is how frequently the different types of employee opinions we are measuring are likely to change. Consider two questions commonly used to measure employee engagement: ‘Do you believe strongly in the goals and objectives of this company?’ and ‘Are you proud to be associated with this company?’ Responses to these questions are not likely to change on an hourly, daily, weekly or even monthly basis. The same is true for questions that measure aspects of organisational culture. Although responses to these questions may change and, we hope, improve over time, such change is noteworthy only if linked to a genuine change in the work environment. For example, opinions that change in response to a company initiative or difference in behaviour are more noteworthy than those attributed to the ups and downs of everyday life in a big company. Indeed, Towers Watson’s experience suggests that a quarterly check of employee opinion is frequent enough, and even that is often too frequent.

Measuring engagement and culture too frequently can lead one to over-interpret minor fluctuations, which may be nothing more than measurement

error or a reflection of confusion among employees at being asked the same questions repeatedly without experiencing any true change.

Some opinions require regular monitoring

Are we to conclude that there is no value in measuring employee views on a more regular, ongoing basis? Not at all, but we need to focus on exactly what we are measuring and how often the views being measured truly change. For example, more organisations are now interested in measuring employee mood or overall sentiment as well as the kind of water cooler conversations that occur every day. Advances in technology and the prevalence of mobile devices make measuring these kinds of employee opinions easier and less intrusive than ever before. Although no clear link currently exists between employee mood or sentiment and organisational performance, it is plausible that over time, these sentiments may influence the more stable employee opinions that do reliably link to performance. Therefore, there may be value in having a continuous ongoing scan of this information as a possible leading indicator. This information can also provide valuable context to help inform more stable opinions such as employee engagement and organisational culture.

HR Matters 7

Capturing meaningful employee

opinion data When to census, when to pulse, and when to listen

Another example of employee opinion that might be valuable to assess on a more frequent basis is employee reaction to a particular event or business issue (for example, a new product launch, recent acquisition or reorganisation), which by definition is time-limited. This type of assessment can send a strong signal that employee input is valued. Indeed, better decisions may ultimately be reached through this broader input. There is a broad range of tools that enable organisations to capture these kinds of opinions. Some of the most popular include:

• Social media analysis – A regular culling of comments made on internal and external social media sites about the company and employees’ work experience

• Continuous polling – An ongoing, always open, single-question poll rating one’s current sentiment toward the company

• Qualitative pulsing – An open-ended opportunity to respond to a single question on a pressing topic

• Online chats/jams – A facilitated online dialogue on a particular issue or business problem

• Exit/entry surveys – A brief survey automatically deployed to all onboarding and exiting employees

While none of these techniques may be suitable for robustly measuring employee engagement or organisational culture in a way that will reliably predict business performance, they can be used to collect other types of employee opinion on a more real-time basis and therefore usefully

supplement the more stable opinions. In fact, we have recently worked with several clients to explore an overall listening strategy that combines ongoing measurement of these kinds of opinions with the more focused, intentional measures of engagement and culture.

Developing a listening strategy

The listening strategy approach utilises a full census survey taken on a 12-, 18- or even 24-month basis and shorter, focused pulse surveys in between. The full census provides a comprehensive picture of employee engagement and organisational culture. The pulse survey, typically including 20 or fewer questions and involving a small representative sample of employees, measures progress on the priorities identified through the census. While circumstances vary regarding when the pulse survey is deployed relative to the census, it often occurs at the midway mark between census surveys. Such an interval may feel like an eternity given today’s technology, but this is not fundamentally a matter of technology; it is a matter of the pace of organisational change. One must consider the time needed to implement solutions to drive engagement and performance, and for employees to experience the impact of those solutions. Simply put, it provides no value to repeatedly ask employees about a particular issue that has not been addressed, even if you have created a terrific app to measure their views seamlessly every hour.

Pulse PulseCensus Census Census

Social media

analysis

Social media

analysis

Social media

analysis

Social media

analysis

Start +9 months +18 months +27 months +36 months

Continuous single question sentiment poll, aggregated/reported weekly

Exit/entry survey to all entering/departing employees, aggregated/reported monthly

Listening strategy

“Advances in

technology and

the prevalence of

mobile devices allow

measuring these

kinds of employee

opinions easier and

less intrusive than

ever before.”

Employee surveying


Note that this approach also uses a range of techniques on a more regular basis to measure employee sentiment as well as opinions on particular business topics. For example, a single-question poll measuring overall sentiment is available continuously, and aggregated and reported every week. Social media scanning is also done continuously and reported on a quarterly basis. All new and departing employees receive a short survey upon their onboarding or exit, and focused online chats and qualitative pulse surveys are used to gauge reactions to unique events.

Of course, when embarking on this type of comprehensive listening strategy, there are several important factors to consider:

• Communication. It is important to communicate with employees and leaders regarding what you are measuring with each listening tool and why, and what follow-up actions may or may not occur. Clearly the expectations will be different for a census versus a pulse survey, and even more so for any kind of social media analysis, continuous polling or online chats.

• Survey fatigue. A second issue is the need to avoid survey fatigue, or the point at which repeated surveying of employees becomes overly burdensome or intrusive. Segmenting the population so as to distribute participation can be one solution here, although it may not practically allow you to gather the insights needed from the populations of interest. Stressing the voluntary nature of participation is another approach, which will likely differ based on the particular tool.

• Confidentiality and other policy considerations. A final set of issues relates to confidentiality, specifically to employee expectations and employer policies regarding the mere collection and analysis of data as well as how it will be handled. Clearly, these issues vary greatly depending on the particular listening tool deployed and can have a range of impacts on the information collected, known and unknown. As in most cases, open communication and transparency are generally the wisest courses of action here. In other words, if you are regularly monitoring your internal social network to inform your people programmes, you should let employees know this is the case.

However these and other issues are ultimately addressed, it seems clear that the future of employee opinion gathering will involve a combination of thoughtfully timed measurements of engagement and culture along with ongoing assessments of employee sentiment and reactions to events as they occur.

Employee surveying

HR Matters 9

Pension savings What does the future hold?

The Government’s Autumn Statement set out that, in principle, people should spend on average no more than one-third of their adult lives in retirement, and gave rise to headlines such as ‘Work until you are 70’.

While such headlines were designed to shock, they did highlight the increasing need for individuals to supplement their State pension through private or workplace pension plans.

Automatic enrolment is seeing millions of workers saving for their retirement in a defined contribution (DC) arrangement. Alongside this, defined benefit (DB) contracting out is being abolished, which for some DB schemes could prove to be the final straw, resulting in them closing to future accrual. Although the momentum is towards DC schemes, the Government has been working on proposals for a new type of pension – ‘Defined Ambition’. Defined Ambition is part of a strategy to reinvigorate workplace pension provision, bridging the gap between DB and DC pensions by sharing the risk between employers and employees.

In an uncertain and ever-changing world, where the Government keeps moving the goal posts, what does the future hold for pension savings?

DB schemes – now and in the future

In a recent survey, we asked senior finance, HR and pension specialists how they expect their pension plan design to change in the future. The results showed that the number of DB pension schemes closed to future accrual is expected to increase from 37% today to 73% in five years’ time, with just 2% of companies expecting to still provide DB pensions to new entrants. The trend for DB schemes that are closing to future accrual

continues to be to offer members contributions into a DC scheme instead. However, when closing their DB scheme to future accrual, companies appear to be acknowledging the difference in value of DB benefits compared to DC. Two-thirds of companies in our survey are offering DB members enhancements in excess of the current DC contribution level, if only, in some cases, for a limited period.

Of the schemes that are currently open to future accrual (either to all employees or only existing members), 43% expect to still be providing DB pensions to some employees in five years’ time. This highlights that closure to future accrual is not the only option for companies.

The introduction of a flat State pension benefit will bring with it the ceasing of contracting out. This will lead to higher National Insurance contributions for employers and employees in contracted-out schemes (typically DB schemes). Our survey indicated that, of those companies that have considered the impact this might have on their scheme, over half will take one of three actions: close to future accrual, adjust the benefits, or increase member contributions to reflect this extra cost.

John Cockerton Senior Consultant, Benefits


Pension savings

Scheme changes

DB pension schemes have a reputation for being high risk, with a high level of funding volatility and high associated costs. These are some of the key reasons why the number of employers providing future accrual is dwindling. DC schemes, on the other hand, transfer the risk from the scheme, or company, to the member. Removing this risk means that costs are more predictable for employers.

It is usually the case that a DB scheme will first close to new members, and then at a later stage, close to future accrual. At this second stage it is natural to ask whether the existing DC scheme is fit for purpose for former DB scheme members. Recognising that by moving their former DB scheme members to the DC scheme there is likely to be a shortfall in expected pension, 66% of respondents provide benefits in excess of those offered by the existing DC scheme to members who were being moved from a DB scheme. There are a number of

0% 5% 10% 15% 20% 25%

Not applicable

Other

Revised DC plan for both – DB members get enhancement

Revised DC plan for both DB and existing DC members

Existing DC plan plus increase in non-pension bene�ts

Existing DC plan plus short-term enhancement

Existing DC plan – higher employer contributions

Existing DC plan – no uplifts or enhancements10

5321

3

7

14

10

14

21

Figure 01. If you have closed your DB plan and moved members to DC within the past three years, what did you offer to former DB members for future service?

“Of the schemes

that are currently

open to future

accrual (either to all

employees or only

existing members),

43% expect to still

be providing DB

pensions to some

employees in five

years’ time.”

ways in which these enhancements are provided, with the most popular option being enhanced pension benefits. However, 3% of respondents offer DB members additional benefits outside of the pension schemes.

One motivating factor behind closing to future accrual is often the desire to have equality amongst employees. This may explain why 7% of our respondents revised their DC plan for both existing members and DB members. Furthermore, some companies (21%) smooth the transition from DB provisions to DC by offering short-term enhancements, so that in the long run all employees will have access to the same level of pension benefits. See Figure 01.

An alternative to DC schemes is a cash balance plan. This is a means of sharing the risk of providing retirement benefits with the employees, which is broadly in line with the Government’s idea of a reinvigorating workplace pension saving.

HR Matters 11

Contracting out

The biggest change in State pension design in 35 years, a shift away from the basic State pension (BSP) and State second pension (S2P) to a new single-tier State pension of around £140 per week, has been well publicised. And as part of the switch to a single-tier State pension, the ability for occupational pension schemes to contract out on a DB basis will also cease (in April 2016).

Currently, DB members, whether contracted out or contracted in, accrue a BSP; but contracted-out members give up S2P and the scheme has to provide at least a certain level of benefit in its place. In return, the company and members pay a reduced level of National Insurance contributions. When contracting out ceases, if no action is taken, the level of benefits payable from the occupational pension scheme will not change, however the company will pay a higher level of National Insurance contributions, and therefore costs will rise. Furthermore, an employee who has always been contracted out will earn a higher State benefit in future, but will also pay higher National Insurance contributions.

Our research indicated that of those respondents who have considered the impact to their DB scheme of contracting out ceasing, over half would consider either closing to future accrual, reducing the level of pension or increasing member contributions to reflect the increased costs. See Figure 02. Although 18% would be willing to accept the higher costs, when we take a closer look at the data, three-quarters of these schemes anticipate being closed to future accrual within the next three years. This might indicate that these schemes only contain a small proportion of active members, therefore such an increase in costs is likely to only represent a small proportion of overall scheme liabilities. Also the number of active DB members may be small compared to the company’s total employee population and therefore the cost of DB future accrual will be small relative to the overall pension cost, including DC contributions.

About a third of respondents have not yet considered the impact of the change. There could be many reasons for this. For example, the employer could have very few employees in contracted-out employment, putting this issue low on the agenda. It could be viewed that 2016 is still a long way off, despite the need to consult with employees to manage change. It is also possible that some employers are awaiting the results of the DWP’s Defined Ambition consultation to see whether there will be further flexibility that they may find attractive.

0% 5% 10% 15% 20% 25% 30% 35% 40%

Other

Not yet considered the impact of the change

Close the DB plan to future accrual

Reduce level of DB bene�t to allow for higher NI costs

Pass NI costs to members by increasing contributions

No change and absorb the higher NI costs12

6

34

17

16

15

Figure 02. What changes are you planning to make to your DB plan in response to the ending of contracting out in 2016?

In summary

Published in early 2014, our Pension Strategy Survey reinforces the trend observed in recent years: DB schemes continue to change and close, and DC is the replacement scheme of choice. The cessation of contracting out in April 2016 will drive further change and that change will be varied: closure and other benefit modification will be adopted in order to mitigate the costs of contracting back in.

The DWP has consulted on a third way, ‘Defined Ambition’, and is conscious of the cessation on contracting out as a driver for change in DB schemes. Whilst some of the changes in the consultation document appear relatively straightforward to implement, others appear to require significant legislative change. We currently await the outcome of this consultation and it remains to be seen what can realistically be achieved before contracting out finally ceases.

But one thing is clear: organisations should be thinking now about the impact of these changes on their pensions arrangements, considering which options will support their benefits strategy, and starting to plan the steps needed to formalise the changes, consult with stakeholders and implement change.

Pension savings


HR transformation Technology’s role in the future of HR

Tim Richard EMEA Practice Leader, HR Service Delivery

New technologies are at the forefront of these changes with more companies implementing Software as a Service (SaaS) and Cloud-based solutions to help gain greater efficiencies in HR and drive employee self-service.

Benefits of HR technology

Technology is not a panacea and needs to be thought about holistically. The people delivering HR, the HR processes and the technology must all be in sync in order to provide the most efficient and effective HR services to the organisation.

Technology is the key enabler of a leading practice HR operating model, but most often changes have to be made to processes, procedures, and integrations with other systems during implementation. In addition, roles for individuals on the HR team typically change thus requiring training and updating of skills.

It is always best to review the entire HR operating model (including some policies) before implementing or upgrading technology and assess the impacts it may have on other areas within the model (such as structure, HR talent, processes, governance and vendors). Also, never forget the power of a good change management programme when introducing a big change like new technology to your organisation. Approaching a technology programme holistically ensures that the benefits for your HR operating model can be realised when the system goes live.

Workday

Workday has made a big splash in the world of SaaS-based HR technology over the last four years, mainly for companies based in North America. Today, Workday has very robust HR functionality and is expanding rapidly with two update releases per year in the areas of talent, compensation, recruiting and HR analytics. The software provider has been expanding across EMEA and Asia over the past year and is gaining momentum in those regions. Towers Watson has been one of Workday’s key integration partners for the past nine years and continues to provide implementation services for Workday in all regions, with major expansion plans in EMEA.

SaaS solutions

All of the current research points to the fact that Cloud and SaaS technology is gaining momentum and is firmly here to stay. Our Towers Watson HR Service Delivery Survey clearly shows that SaaS solutions now make up the majority of new implementations for replacement HR applications.

According to Forrester research, every software generation improves on the fundamental flaws of the past generations and SaaS has improved significantly on the enterprise resource planning (ERP) solutions of the past. However, the largest gains have been made in technical implementation time reduction, ability to quickly upgrade functionality, user experience acceptance and cost control.

HR has been working hard to respond to changing demands over the past year. HR departments, especially in global and multinational businesses, have been centralising, harmonising and standardising wherever they can in order to achieve a structure that enables them to adapt and deliver the services in a way that suits the business as it evolves.

HR Matters 13

SaaS in the HR space operates most effectively when implemented with manager and employee self-service. If your organisation does not currently

have self-service, it is recommended to slowly roll out functionality over a period of time. This can be easily planned for and should be considered as SaaS solutions are more intuitive and user-friendly than traditional ERP systems.

Mobile technology. SaaS technology allows for a much more robust and simple approach to rolling out mobile technology than software generations

before. Apps can be installed on various types of mobile devices like the iPad, iPhone and Android-based tablets/phones. It is possible to roll out mobile applications utilising the same processes that are used through the Cloud browser applications, thus eliminating the need for separate code that was required in the past. This not only improves performance, but also removes the need for special software to run mobile applications. It is just a matter of turning on mobile technology in the Cloud.

Security and data privacy. Although you will be sharing a server with multi-clients (multi-tenant) applications, the protocols put into place by the vendors ensure

that your data is protected. They are aware of the nature of the EU Data Privacy regulations and will work within collaboration to ensure that they are in compliance and will explain how they are meeting the requirements.

It is important to remember that many companies are going through these changes at the moment, so you are not alone. Transitioning from traditional ERP systems to the Cloud successfully can enhance the service delivery of the HR function and provide significant benefits to the business.

Our HR Service Delivery practice has been helping clients define their HR technology strategies and implement HR technology solutions since HR systems came into existence and we have seen a definite shift towards the Cloud. Based on our experience, organisations that are considering moving their HR systems to the Cloud should consider the following:

What systems will they need to integrate with? Often replacing the HR systems that contain the majority of employee data can impact the entire organisation.

Including finance and business operations from the start can help tremendously once implementation begins as they understand the ambitions and goals for HR, managers and employees and can form a partnership with which to achieve success.

Proper implementation procedures are still required but can be more streamlined. Process design sessions, data conversion, building of integrations,

testing and training are all still needed, but often to a lesser extent than in the past. Our guidance states that a typical SaaS implementation will take about 20% to 30% less time and effort than a similar ERP implementation would take.

Organisations still need to consider the changes necessary on the people and process side even more than they did with ERP solutions. Given SaaS models

eliminate or reduce the ability to customise the technology, it is more important to ensure the end-to-end HR process fits the technology and HR professionals are prepared to execute in their assigned roles. It is no longer possible to ‘fit’ the technology totally to current HR practice. SaaS is highly configurable and many things can be completed in much the same way as before, but those that cannot need to be changed. A strong change management programme is highly recommended to address this.

After implementation and training, it is possible for people within the HR organisation to make the necessary changes as SaaS is based on configuration and not customisation. This frees HR directors from having to rely on expensive IT or consultants to make required changes. Not that IT support is not important. Reliance on IT will remain for integrations, overall security and accessibility.

“Process design

sessions, data

conversion, building

of integrations,

testing and training

are all still needed,

but often to a

lesser extent than

in the past.”

The growing base of installed solutions from Workday has proven that this generation of software is the trend for most companies regardless of size. Based on the above, the overall total cost of ownership is lower and allows the HRIS/HR Operations function to take ownership of the system.

Cloud technology

2

1

4

5

63

HR transformation

HR transformation Technology’s role in the future of HR


Tracking people priorities and trends

in high-performance companies HR needs to focus on key HR programmes and elements

of effective leadership

Yves Duhaldeborde Director, Employee Surveys

For example, results from the most recent Towers Watson Talent Management and Rewards Study, a global survey of over 1,600 organisations’ talent practices, indicate that more employers see employee advancement opportunities improving today than they did 24 months ago. These efforts are driven in part by the fact that labour markets are slowly heating up. More employers report difficulty retaining critical-skill employees, as well as those in high-potential and high-performing employee groups.

If, in fact, companies are increasing their emphasis on and investment in people programmes, we should expect to see employees developing favourable attitudes toward critical aspects of their work environment as we emerge from the depths of the Great Recession. The companies best equipped to lead this trend are likely to be those with strong financial performance.

Towers Watson maintains a benchmark that tracks opinions of employees in high-performance organisations and companies with performance levels above sector averages for a range of financials, including top-line and bottom-line results, as well as return to shareholders (see page 6). Trends showing more favourable employee opinions in these companies suggest that the best organisations are investing more in their people. Furthermore, the topic areas improving the most over time reflect the people priorities receiving the greatest attention from this elite group during the post-recession recovery.

Five-year employee opinion trends in high-performance organisations

Our research examined trends in high-performance organisations during the five-year period from 2009, when global gross domestic product trends began to improve, through 2013. The results show that four major topic areas gained substantially over this period. These topic areas reflect broad, company-wide issues, as well as issues pertaining to local work conditions:

• Career development. People practices related to career planning, recruiting, training and the creation of long-term career opportunities

• Empowerment. The enabling of employees’ voices in the workplace and ability to innovate

• Rewards and recognition. Competitive pay and benefits, as well as nonmaterial rewards

• Leadership. Senior leaders’ effectiveness at decision making, communication and change management

Trend results for each of these four areas are summarised opposite. The survey questions with the strongest trends are used to illustrate each topic.

As the global economy continues its slow recovery, there are signs of a renewed focus on organisational investments in people.

HR Matters 15

Career development. Employees in high-performance companies are increasingly satisfied with the emphasis placed on valuing and fostering talent, and the availability of long-term career opportunities and training. Figure 01 shows trends over the last five years, with improvements ranging from seven to 12 points on the percent-favourable metric, a measure of the percentage of employees selecting the top two boxes of a five-point scale, averaged over all organisations. Improvements are apparent in promoting, recruiting and retaining the best people, and in providing training and long-term opportunities.

Empowerment. High-performance companies are also improving over time with regard to managing open, supportive cultures that encourage new ideas and empower staff to delight customers. Figure 02 highlights trends in this area over the last five years, with improvements of seven points in each case.

“Our research

examined trends in

high-performance

organisations during

the five-year period

from 2009, when

global gross domestic

product trends

began to improve,

through 2013.”

High performance

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100%

696968686767 6969

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1212111188 66

2009 2010 2011 2012 2013

7474

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Most of the time it is safe to speak up in this company

I have enough �exibility in my job to do what is necessary to provide good service to my customers

This company has established a climate where innovative ideas can fail without penalty

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This company does a good job promoting the most competent people

My company does a good job recruiting the right people for future needs

I think this company offers long-term opportunities

My company does a good jobretaining its most talented people

Training needed to increase eligibility for a better job

74747979

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Figure 01. Career developmentHigh-performance companies are promoting, recruiting and retaining the best people, and offering long-term opportunities and training

Figure 02. EmpowermentHigh-performance companies have environments in which it is safe to speak up and suggest ideas without penalty, and employees have flexibility to ‘do right’ by customers

Tracking people priorities and trends

in high-performance companies HR needs to focus on key HR programmes and elements

of effective leadership


Reward and recognition. Employees in high-performance companies are increasingly satisfied with the competitiveness of compensation and benefits, as well as nonmonetary forms of recognition. They also report feeling that their employers have a greater appreciation for their contributions. Figure 03 shows trends over the last five years, with improvements ranging from seven to eight points.

Leadership. Employees in high-performance companies are increasingly satisfied with senior leaders’ general ability to manage the company and also, in more specific areas, to communicate down the line to all employees, set the right

pace for change and make decisions in line with company values. Figure 04 illustrates trends over the last five years, with improvements of six to 12 points.

There is a payoff for organisations showing continued improvement in all of these aspects of employee opinion. Specifically, the trend analysis reveals that employees in high-performance organisations report their company is more highly regarded by customers, and is perceived as more competitive with regard to the quality of products and the delivery of customer service. Figure 05 shows trends over the last five years, with improvements ranging from eight to 10 points.

“There is a payoff

for organisations

showing continued

improvement in all

of these aspects of

employee opinion.”

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2009 2010 2011 2012 2013

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In my judgment, the company as a whole is well managed

Management decisions areconsistent with values

Top management is doing well communicating down the line

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The pace of change is about right

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Pay is as good as or better than that of other organisations

Bene�ts are as good as or better thanthose of other organisations

This company makes adequate use of recognition and rewards other than money to encourage good performance

79798080 8181 8585 8686

My supervisor values my contribution

Figure 03. Reward and recognitionHigh-performance companies offer competitive pay and benefits, and provide nonmonetary rewards; in addition, employees feel valued by supervisors

Figure 04. LeadershipHigh-performance companies are well managed, make decisions consistent with values, have leaders who communicate down the line and make changes at a reasonable pace

High performance

HR Matters 17

The takeaway

With the effects of the global recession still lingering and global growth still tepid, organisational investments in people may likewise grow at a slow rate. Given the need to prioritise limited resources, it can be useful to identify the areas where the best financial performers are directing their investments. Generalising from the results just examined, it appears that these companies are focusing their efforts on key HR programmes and elements of effective leadership. From an HR programme perspective, the high performers are focusing on talent management initiatives, competitive compensation and benefit programmes, and effective nonmaterial recognition. From a leadership perspective, these organisations are striving to excel in three areas: managing change at the right pace, staying true to company values and ensuring employees have a voice in the workplace.

The trends reveal a clear payoff for organisations that invest in these areas. Employees in high-performance companies perceive themselves as being held in higher regard by customers and view their organisations as more competitive in product quality and customer service delivery.

The 2013 global high-performer group identified by our research is comprised of 26 organisations from a range of industry sectors, including financial services, manufacturing, pharmaceuticals and health care, professional services, retail and telecommunications. These organisations outperform their peers in two key areas:

• Financial performance. High performance is first and foremost about financial success. To evaluate companies’ fiscal performance, Towers Watson collects indicators of bottom-line performance and profitability, such as gross profit margin, earnings, and revenue growth. In addition, several measures that reflect the value of an organisation to its shareholders are examined, including return on capital and return on equity. In all cases, performance relative to sector-specific averages is calculated for each financial indicator. Therefore, to be designated a high performer, an organisation must first display financial performance across this full range of financial indicators that is consistently above industry averages for current-year results, and at least on par with sector performance over the last three years.

• Employee opinion scores. High performance is about more than just great financials. As an organisation may be financially successful and yet a difficult place to work from an employee perspective, an additional screen is applied before selecting the final list of organisations to be included in the high-performer group. Specifically, the employee opinion scores of organisations recognised for excellent financial performance are compared with each other. If an organisation’s scores fall significantly below those of the others across most or all available survey topics, the organisation is removed from the group. In this way, the final set of companies represents environments that are both financially successful and judged by employees as effective at managing people and culture.

What distinguishes the high performers?

Focusing on the aspects of the employer-employee relationship reviewed here provides any company with the opportunity to measure and benchmark its performance across a set of topics of particular importance to some of the world’s best-performing companies.

High performance

0%

20%

40%

60%

80%

100%

8686868684848787

747470706969 6666

88 66

2009 2010 2011 2012 2013

9292

77776969 7171 7171 7474

7979

Organisation is highly regarded by customers

Customer service is as good as or better than that of our competitors

Quality of products is as good as or better than that of our competitors

Figure 05. The payoffEmployees in high-performance companies report improved competitive position and regard from customers


Benefits health check Creating fit for purpose benefits programmes

Edd Collins Consultant, Benefits

Over the last few years organisations have experienced enormous changes to their benefits programmes, driven by legislative changes, difficult market conditions and the growing financial burden of legacy DB pension arrangements.

As a result, the vast majority of organisations offer benefits that are now very different from the programmes that were originally designed, costing more than originally anticipated, carrying greater risk than desired, and no longer meeting the employer’s objectives or the employees’ needs. Employers may therefore want to reassess the benefits programmes they offer to ensure they remain fit for purpose and support the wider business goals.

We recently explored this issue with an audience of mid-tier employers (those with less than 2,000 employees and/or with defined benefit (DB) assets less than £1bn), more than 60 of which completed a Benefits HealthCheck Survey assessing the ongoing appropriateness of their benefit provision.

The high costs of benefits provision

According to the survey, more than one-third of respondents said their overall employee benefits package now costs more than 20% of salary costs. Perhaps unsurprisingly, those offering DB pension plans experienced higher benefit costs than those with only defined contribution (DC) arrangements.

This raises the question as to whether employers that continue to offer DB benefits are fully aware of the implications of this decision. In particular, some employers will need to consider whether the associated higher costs will affect their ability to remain competitive with peers who may have a significantly lower cost base.

On the other hand, it may be that for some employers with open DB plans this level of benefit provision remains appropriate. However, they will need to ensure that the additional costs are offset by increased employee appreciation and engagement.

Aligning benefits strategy and business needs

The HealthCheck revealed that around 60% of respondents believed they had a consistent philosophy and strategy across their employee benefits, and that this strategy was aligned with their business needs. This is good to see and is particularly important in the current environment to ensure that business resources are allocated efficiently and used to deliver tangible benefits back to the business. However, more than half of all employers admitted that they did not have any metrics in place to assess how successful their benefits plans were in supporting their business needs in practice. Further, of the companies that did have metrics in place to assess the effectiveness of their benefits plans, few were confident that they were using the right metrics or monitoring these metrics on a regular basis.

With over half of employers saying they had reviewed one or all of their pension or benefit plans in the last year, it is clear that there is a desire to align benefits with business needs. However, this should not be limited to one-off, infrequent reviews, but should instead

HR Matters 19

Benefits health check Creating fit for purpose benefits programmes

“The HealthCheck

revealed that around

60% of respondents

believed they had a

consistent philosophy

and strategy across

their employee

benefits and that

this strategy was

aligned with their

business needs.”

be incorporated into an ongoing monitoring framework. The ability to both measure and monitor how well pension and benefit provision is working will be essential in ensuring that these plans remain fit for the future.

DC pensions

The HealthCheck also showed that for those organisations with DC arrangements, unsurprisingly, auto-enrolment has been top priority recently, with work to review plan investments and improve governance also featuring.

Going forward, improving DC member engagement was top of the agenda. There is still a significant gap in interest and engagement between some new joiners of DC schemes – often the result of auto-enrolment – and those really paying attention and taking the necessary actions to maximise the value of future pensions and to safeguard their financial futures.

It is clear this gap has to narrow quickly if employers are to get the full benefit of the investment in their benefits packages, and to ensure better outcomes and levels of understanding for the members of their scheme. Alternatively, some employers may want to consider a two-tier approach to DC, where their spend is only targeted at those employees who appreciate its value, either through the use of nursery schemes or by reshaping the contribution structure to put more of an emphasis on matching contributions. See Figure 01.

DB pensions

For those organisations with DB plans, de-risking has been, and will continue to be, high on the agenda, according to the survey. The most common actions taken by companies so far are typically ‘first-phase’ de-risking activities, for example closures to new entrants and future accrual, while work to diversify pension schemes’ investments has also been common.

The survey shows that the most popular company actions for the coming years are likely to focus on ‘second-phase’ de-risking, either via buy-in/buy-out solutions, interest-rate hedging or other liability management exercises. Liability management processes are increasing in popularity now that the Code of Good Practice on Incentive Exercises has been tried and tested and IFA’s advice models have become more established and settled. 2013 was also a record breaking year for bulk annuity and longevity hedging transactions, with over £16 billion of liabilities hedged, and we expect this trend to continue, with further records broken in 2014. See Figure 02.

21

3

Interest rate hedging

Buy in/buy out

Liability management2

1

3

Increase governance

focus

Improve member

engagement

Introduce annuity broking

Yr 1

Yr 3

Yr 2

Figure 02. DB plans – top three employer planned actions

Figure 01. DC plans – top three employer planned actions

Benefits health check


Other benefits options

The HealthCheck identified that employers had to-date largely focused on using cost-effective solutions to meet their employees’ needs. Introducing salary sacrifice, for example, had evidently been a quick win for employers in the past few years, and health benefit reviews and death-in-service redesigns had also been popular.

The survey suggests this trend was expected to continue, with a number of employers planning to introduce flexible benefits programmes for their employees if they hadn’t already, as a way of introducing further benefits without increasing cost. However, the survey also revealed an interesting shift in focus towards prevention rather than cure for future actions, with employers most focused on developing wellbeing programmes for their employees.

Absence management is becoming an increasingly costly issue for employers to deal with and an ageing workforce is likely to mean that healthcare benefits increase in importance to employees. Employers that take a proactive and preventative approach to the wellbeing of their employees are likely to reap the rewards of this more than ever in the future. See Figure 03.

The Benefits HealthCheck – what did we learn?

The key messages coming from our delegates, at both the event and through the HealthCheck Survey, were fourfold.

First, a key challenge facing plan sponsors is how to develop a successful long-term strategy for managing DB pension risk, particularly in an ever-shifting legislative landscape. With the cessation of contracting out in 2016, change remains on the agenda, but it is equally important to consider further actions to manage this risk to ensure that it does not start driving business decisions.

Second, the role of pensions and benefits practitioners is evolving as governance and regulatory commitments grow, the workforce changes and pension and benefits are increasingly seen as a vital part of wider-reward strategy. Benefits programmes, therefore, need to be managed within the wider business context and cannot be viewed in isolation from everything else.

Third, as DC arrangements increase in size and number, member engagement and education is a big priority. Having a clear framework would help employers reduce governance costs and help companies decide how to approach this rapidly evolving area, ensuring that attention is focused in the right areas.

And finally, although cost continues to be a driver for change, there is still room for paternalism to be reflected in the level of pension and benefit provision. While employers should continue to look for cost-effective solutions, this need not translate into a race to the bottom. Retaining and recruiting talent remains a key concern and benefits programmes can continue to play a big part in this.

21

3

Introduce flexible benefits

Develop wellbeing

programme

Review healthcare benefits

“The HealthCheck

identified that

employers had

to-date largely

focused on using

cost-effective

solutions to meet

their employees’

needs.”

Figure 03. Other benefits – top three employer planned actions

Benefits health check

HR Matters 21

Ticking all the boxes? A study of performance management practices in the UK

Chris Charman Director, Reward

In fact, not even a third of this group reported that their approach has caused a marked improvement in employee performance, despite this being a key driver for almost 80% of respondents.

Our December 2013 survey gathered data on a wide range of topics relating to performance management from over 100 UK-based organisations, representing a wide range of industries.

So what lies behind this headline?

Our report reveals more about how performance management is actually used in organisations today. We see a striking degree of similarity in the features of performance management processes across organisations, despite a reported wide range of drivers for having it in the first place. Furthermore, we see very little tailoring of the process to meet the diverse needs of different employee populations. Although performance management is widely used to identify high potentials, for example, it is not used to manage their performance any differently than the rest of the employee population. Has ‘best practice’ meant a uniformity of practice which, despite the bullish rhetoric, made performance management just another box to be ticked?

Is there an opportunity to revisit the process and tailor it for different segments to better meet their individual needs? When it comes to setting goals, only 11% of our respondents conduct any kind of calibration either before or after the goal setting process. It strikes us that this is a missed

opportunity to ensure consistency from the very outset. Moreover, investing a little time at the start of the cycle could potentially reap huge benefits later on in the year when those challenging discussions around parity of objectives come up.

When it comes to assessing performance, the vast majority take a balanced view in evaluating performance against specific objectives and competencies (the ‘what’ and the ‘how’), however, there is much less consistency when it comes to calibrating these evaluations – even less communicating them. In fact only 34% of respondents stated that they were open about the calibration process. Our employee research tells us that the clarity and perceived fairness of performance management has a significant impact on employees’ levels of engagement. This strikes us as a further opportunity for organisations to make a relatively small change that will have a big impact.

Despite the perceived importance of performance management to an organisation, very few are investing significantly in ensuring their managers are well-equipped to deliver it. In fact, only 17% of our respondents said that their organisations provide comprehensive in-person training, with the majority opting for a self-directed approach.

For something this important, that impacts each and every employee and drives organisational performance – the key driver for doing it in the first place according to our respondents – is it not worth investing a little more?

An overwhelming majority of our respondents (96%) believe that performance management is important for their organisation, yet only 64% reported having either an effective or very effective approach.


“Our employee

research tells us

that the clarity and

perceived fairness

of performance

management has a

significant impact

on employees’ levels

of engagement.”

So what is the prize? Why should you be concerned?

Let us think about the financials: over 90% of the organisations we surveyed said that performance management has a direct influence on determining base pay and incentives or was the primary influencer. 93% of organisations differentiate on base pay and bonus at the individual level and spend, on average, 9% of their base-pay bill on this each year – 9% being the typical value of the base-pay review pot (3%) and bonus pot (6%) combined. Therefore, the typical UK organisation will have 9% of their annual base-pay bill directly influenced by this one process. In our experience, the typical people cost of a business constitutes some 50% to 70% of the total cost base of an organisation. This seems like a lot of money hanging on one process – one process that seeks to focus people’s attention on doing the right thing for business success.

Let us think about engagement and retention: Towers Watson research for many years has pointed to career development and skills growth as key drivers of engagement and retention – for key talent groups and professional knowledge workers in particular. performance management is the vehicle for improving this aspect of the employee experience, which is closely correlated to sustained engagement, which then aligns to improved business performance.

Our point of view

Our research and experience of working with leading organisations around the world leads us to believe that more value can be gained from performance management and we would recommend organisations think about the following:

1. Targeting and tailoring performance management to meet the unique needs of different segments of the population – do high potentials need to be treated differently to high performers, for example. Do all parts of your organisation need to be set objectives?

2. Think flexibly about competencies and how they can be more tailored to different employee groups. Use a core set of competencies and a menu that can be chosen from for different job families to increase the specificity of competencies. By being more relevant, performance discussions can be more meaningful and aid fair differentiation.

3. Be more open and communicate more about the approach to managers and employees. Do not be afraid to talk about the curve if you use one and certainly do not make processes hidden.

4. Invest in manager training to enable more effective and empathetic performance and development discussions.

5. Increase the emphasis on calibration at the goal-setting stage to the level invested at the performance-rating stage in order to focus on direction of travel not just on arrival.

6. Meeting employees once or twice a year to work through the basic steps in the process is not enough to ensure continuous development. performance management should be part of business as usual – if it really is the business process companies say it is.

7. For employees to feel engaged by the process, they need to have an active and regular role in it – joint setting of goals and joint evaluation of performance.

17%of respondents

Only

said that their organisation provides

comprehensive in-persontraining

Performance management

A new perspective 2014 Talent Management and Rewards Study

– launching soon

Benefits

Risk and Financial Services

Talent and Rewards

To learn more about how organisations are managing their talent management and reward programmes, we invite you to participate in our 2014 Global Talent Management and Rewards Study.

We will explore changes to reward and talent management strategy, design and implementation, as we focus on a fresh perspective for the future of talent management and rewards.

All participants will receive a complimentary copy of the survey report, which will include revealing insights to help answer some of your most challenging talent management and rewards questions:

• How are reward programmes governed and designed? • How do organisations design a sustainable and successful employee value proposition? • How does cost management affect reward and performance management? • How do organisations effectively manage their talent pipeline?

For further information, or if you would like to participate, please contact your usual Towers Watson consultant, or Kylie Russell on +44 20 7170 3491 or [email protected]

Towers Watson is represented in the UK by Towers Watson Limited.

towerswatson.com

towerswatson.co.uk

About Towers WatsonTowers Watson is a leading global professional services company that helps organisations improve performance through effective people, risk and financial management. With more than 14,000 associates around the world, we offer consulting, technology and solutions in the areas of benefits, talent management, rewards, and risk and capital management.

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Towers Watson is represented in the UK by Towers Watson Limited.

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Copyright © 2014 Towers Watson. All rights reserved.TW-EU-2014-37001. March 2014.

hr matters march 2014

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