Mercer Limited is authorised and regulated by the Financial Services AuthorityRegistered in England No. 984275 Registered Office: 1 Tower Place West, Tower Place, London

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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

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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