taking costs out of your business: quickly

Nigel BatemanHugh ShanksKatharine Turner

© 2009 Towers Perrin

Reproduction in whole or part of this material isstrictly prohibited. They should not be reliedon as a substitute for specific advice.Therefore, no responsibility for loss occasionedto any person as a result of acting or refrainingfrom acting on the contents of or informationcontained in these notes can be accepted byTowers Perrin.

Taking costs out of your business: quickly

27 February 2009

© 2009 Towers Perrin 1Proprietary and Confidential

Not for use or disclosure outside Towers Perrin and its clients

Value proposition

We have a checklist of over 100 cost saving interventions in the area of compensation, benefits and HR function spend

Working with our client base, we are adding to this list – and know how – daily

Not all measures are suitable to all companies

We will identify, quantify, and prioritise what works best for you

If applicable, we are open to partnering with you on a gain sharing basis



These are challenging times and…



0

2

4

6

8

10

12

14

16

< 20% 20 - 40% 40 - 60% 60 - 80% 80 - 100% 100 - 125% 125 - 150% > 150%

… the costs of total remuneration are significant

Overall HR Domain* As a % of Total Market Capitalisation for the Top 50 European Companies

(using year end 2007 information)

* Overall HR domain = future pay/benefit costs (capitalised over five years) + accrued past obligations (e.g., pension, postretirement medical)



The agenda for today

The need for speed

A framework for analysis and action

Cutting costs from :rewardsbenefits the HR function

Moving forward



The need for speed

Immediate cash

Savings in current

financial year

Savings in future years

Increased ROI

Small

Large

SIZE OF SAVINGS

SPEED OF SAVINGS



Our overall approach for taking actions

Context/ desired outcome:

Size of savingsSpeedRisk appetite

Approach:‘Top down’Broadinvolvement

Identify required internal data

Obtain internal data

Benchmark

Qualify potential savings

Examinesources of savings in detail

Prioritise

Develop action plan

Execute changes

Preparation Identification Validation Realisation



Country ACurrent Spend (£m/yr)

Estimated savings potential (£m/yr)

Source of savings (description)

Ease Risks Timescale

COMPENSATION

Base salaries

Annual bonus

Sales incentives

Additions eg overtime, shift, stand by etc

Long-term incentives

Other compensation

BENEFITS

Pension/retirement

Risk benefits

Other benefits

Country ACurrent Spend (£m/yr)


Source of savings (description)


COMPENSATION

Base salaries

450 50 cut base payperformance mgt.working time changes

IMMEDIATE

Annual bonus

Sales incentives

Additions eg overtime, shift, stand by etc

Long-term incentives

Other compensation

BENEFITS

Pension/retirement

Risk benefits

Other benefits

Identification: Assessing cost saving opportunities

+ cross border opportunities



Identification: Assessing cost saving opportunities (continued)

Country A Current Spend (£m/yr)


Source of savings

(description)


OTHER EMPLOYMENT COSTS

Social security/payroll taxes

Employee absence

Employee liability/litigation

Employee health & safety/wellbeing

Other

HR FUNCTION COSTS

Employment costs

Non-employment costs

+ cross border opportunities



Identification: Cutting costs from rewards rather than headcount

There are three main sources of savings

Cut current costsPayPerformanceWorking time

Reduce future costsTarget “spend”Re-designBespoke incentives

Improve return on investmentRe-calibrate performance standardsResearchRe-mixComms/processes



Identification: Rewards – sample items of checklist of 25

Possible Actions – selected examples Estimate Ease Risk Timing

Make 10% of the workforce redundant OR £100m CURRENT YEAR

Cut base pay by 20% £20m IMMEDIATE

Freeze base pay £15m CURRENT YEAR

Defer salary increase £5m CURRENT YEAR

Differentiate on increases £2m CURRENT YEAR

Manage out poor performers £10m CURRENT YEAR

“Shut down”/sabbaticals £43m IMMEDIATE

Part-time working £16m IMMEDIATE

Cancel overtime £22m IMMEDIATE

Reduce bonus £14m IMMEDIATE

Reduce LTI levels £10m CURRENT YEAR



Validation Targeting reward to ‘pivotal’ roles will be crucial

Build

Protect

Streamline/ Outsource

Redirect

Talent Segment and Value Potential Strategic ActionToday Tomorrow

StrategicCritical to driving long-term competitive

advantage, with specialized skills or knowledge

Core

SupportCannot do without, but whose value could

be delivered through alternative staffing strategies other than full-time headcount

Non-CoreTalent whose skill sets no longer align with the company’s strategic direction

Job families that affect the strategy

Job familiesaffected by the strategy

Source: The Conference Board, Strategic Workforce Planning, 2006.



Validation Targeting pivotal roles

Below Threshold Threshold Target Maximum Above Maximum

Below Average MeritNo IncentiveEligible for EquityNormal Training

~1 – 1.5x Average MeritTarget Incentive~1 – 1.5x Target EquityHigh-performer TrainingConsideration for Development Assignments

~2x Average Merit~3x Target incentive~3x Target EquityHigh-performer TrainingTargeted for Developmental Assignments

No MeritNo IncentiveNo EquityNormal Training

Average MeritTarget IncentiveTarget EquityNormal Training

~1.5~2.5x Target Incentive~3x Target EquityNormal Training High Consideration for Development Assignments

No MeritNo IncentiveNo EquityNo TrainingImmediate Performance Plan

Below Average MeritTarget IncentiveBelow Target EquityNormal TrainingEligible for Development Assignments

~1 – 1.5x Average Merit~2x Target Incentive~2x Target EquityNormal TrainingEligible for Development Assignments

Individual Performance

How pivotal is the role

High

Low

Low High



Validation Cost savings can result in improvement

-40%

-30%

-20%

-10%

0%

10%

20%

30%

($80,000) ($60,000) ($40,000) ($20,000) $0 $20,000 $40,000

Change in Cost ($000's)

Chan

ge in

Sat

isfa

ctio

n

Current state64% satisfaction

• No change to Base Salary• 80% of current target STIP• No Stock Options• No Restricted Stock• No LTIP / PSP

• No change to Base Salary• 120% of current target STIP• No Stock Options• No Restricted Stock• No LTIP / PSP

Satisfaction based on 425 responsesCost extrapolated to full population of 598

• 5% increase in Base Salary

• 120% of current target STIP

• No Stock Options• No Restricted Stock• No LTIP / PSP

• 5% increase in Base Salary • 120% of current target STIP• Stock Options (WITHOUT perf. cond.) with the same

face value of the last grant• Restricted Stock with face value of 50% of last Stock

Options grant• No LTIP / PSP

• 5% increase in Base Salary• 120% of current target STIP• Stock Options (WITHOUT

perf. cond.) with the same face value of the last grant

• No Restricted Stock• No LTIP / PSP



Realisation: Rapid identification may not result in rapid decision making

Identify and Validate Strategy

Take any immediate actions

Q1 2009 Q2 2009 Q3 2009 Q4 2009

Cut current costs

A B

Reduce future costs

D

Decision m

ade on way forw

ard

Governance

C

Improve return on investment

I J

Q1 2010

K

E F

= action/intervention

G H



Identification: Cutting costs from benefits


Benefit designNew & existing employeesMarket trendsUsing member choice

SimplificationLower running costsPlatform for changeAgile decision-making

Accounting cost and cashDeficit and funding controlUnderlying cost vs timingDe-risking?



Identification: Benefits - sample items of checklist of 40


Make 10% of the workforce redundant OR £100m CURRENT YEAR

Close DB plan to new entrants £2m IMMEDIATE

Reduce DB accruals £30m CURRENT YEAR

Close DB accruals £50m CURRENT YEAR

Reduce DC contributions £6m CURRENT YEAR

Increase employee contributions £14m CURRENT YEAR

Convert employee contributions to salary sacrifice £2m CURRENT YEAR

Move pension accruals overseas £14m CURRENT YEAR

Consolidate pension plans £1m CURRENT YEAR

Reduce employee medical £1m IMMEDIATE

Multinational pooling £2m CURRENT YEAR



0 50 100 150 200 250 300 350

Germany

Americas

UK

Europe

Asia

State mandated Benefits Retirement Benefits Other Benefits* IME Benefits

Identification: Understanding costs can reveal opportunity

* Health & Well-being and other Benefits (non state mandated) and Long Service Awards

Germany Americas UK Europe AsiaState mandated Benefits 194 65 71 105 26 Retirement Benefits 108 60 105 28 12 Other Benefits* 9 57 33 21 27 IME Benefits 1 10 30 5 52 TOTAL 312 191 239 159 117

€ m

Benefits costs analysisIllustrative example



Validation: Assessing opportunitiesCountry Opportunity Estimated Cost Saving Estimated Cost

of Action ($’000)

Impact on Employee Value Proposition2007

($’000)Annual Long

Term ($’000)

Belgium Introduce bonus sacrifice for savings plan

⎯ 200 25 Neutral

France Harmonise health/risk benefits

⎯ 200 70 Small negative

Germany Move to cash balance

50 350 150 Mix of negative and positive

Netherlands Introduce employee contributions

⎯ 550 120 Negative

Switzerland Move to defined contribution

150 250 70 Negative

UK Salary sacrifice for employee contributions

600 1,500 150 Small positive

+ review multinational pooling/captives



Validation: how will the picture evolve?

1%

2%

3%

4%

5%

2010 2012 2014 2016 2018 2020 2022

Ann

ual C

ost a

s a

% o

f Pay

roll

Current Pension Plan Recommended Pension Plan

0

100

200

300

400

2009 2011 2013 2015 2017 2019 2021 2023

$ in

Milli

ons

Current Pension Plan Recommended Pension Plan

Cost Risk Exposure



Realisation: A plan typically has four inter-linked strands

if new planestablished

if consultation

Identify and Validate Strategy

Take any immediate actions

Simplification

B H

Accounting Cost & Cash

C

Decision m

ade on way forw

ard

Governance

D F

K

Benefit Design

E I L

G J

= intervention

Q1 2009 Q2 2009 Q3 2009 Q4 2009 Q1 2010

A



HR function cost reduction


Reduce volume of workPrioritise vs criteria (e.g. strategic value, cost, time) and identify work to stopReduce demandStreamline processesMove work to managers/ employees

Reduce cost of providing servicesReduce use of suppliersRenegotiate supplier termsIncrease use of outsourcingIncrease use of offshoringIncrease use of service centres

Reduce HR FTEApply ratios, spans of controlRedesign structure – refineRedesign structure - radical



Identification

Metrics That Provide Insights

Ratio of total head count to HR FTEsHR function costs per headHR function costs as percent of net operating costsDegree of self-serviceCost per processRatio of total head count to HR generalistsHR outsource ratioVendor costs

Sources

Towers Perrin HRSD & HRO SurveysTowers Perrin Human Capital MetricsSaratogaEverest Research

Types of Comparison

By company sizeBy industry typeBy geographyBy sub-function

Moving from median to LQ in total HR cost per total FTE would save:

£% of HR

Costs

In 5,000 person co.

0.70 20

In 10,000 person co.

2.39 27


10.7 39


14.8 34

Required Internal Data Benchmarks Comparisons Example Savings



HR Function - sample items of checklist of 35


Reduce volume: Simplify data management £2m CURRENT YEAR

Reduce volume: Extend self service £3m CURRENT YEAR

Reduce HR FTE: Reduce distributed specialists £2m IMMEDIATE

Reduce HR FTE: Increase span of control and decrease layers £2m CURRENT YEAR

Reduce HR FTE: Increase HRBP manager ratio £4m IMMEDIATE

Reduce cost of providing services: Recruitment supplier consolidation £2m IMMEDIATE

Recruitment marketing consolidation £1m IMMEDIATE

Reduce cost of providing services: Move from classroom to e-learning £4m FUTURE YEARS

Centralize training £2m CURRENT YEAR

Reduce travel costs £2m IMMEDIATE



Realisation

SOURCE SHORT-TERM ACTIONSMEDIUM – LONGER TERM ACTIONS

Reduce volume of work

Engage with key managersAgree what to stopCommunicate and stop

Identify priority processes (cost, value etc)RedesignDesign and implement ESS and MSS

Reduce HR FTE

Develop staffing principlesApply top down targetsManage redundancy process

Redesign structureDefine new rolesDevelop staffing principlesConduct selection processManage redundancy process

Reduce cost of providing services

Renegotiate with suppliersConfirm potential for greater use of existing shared services, offshoringIdentify potential for selective / broader outsourcing

Produce business case for changesMove work to existing SS, offshoreConduct RFP for outsourcing



Insights

Increasing managing and employee self-service can actually be welcomed!

Top down reductions, intelligently applied, can be required to break inertia

Size thresholds for HR shared service centres are coming down

Shared services are rarely fully exploited

Multi-country HR shared services are feasible

Outsourcing often does not save money (although may help with capital)



Moving forward How does your company progress from today?

Where are opportunities?

IDENTIFY:potential opportunities

fast

Are the opportunities ‘real’?

VALIDATE:opportunities and

considerations

Decided where to cut?REALISE:

achieve change effectively

You How Towers Perrin Can Help

How much do you need to save?

PREPARE:how to approach

Nigel BatemanHugh ShanksKatharine Turner

© 2009 Towers Perrin

Reproduction in whole or part of this material isstrictly prohibited. They should not be reliedon as a substitute for specific advice.Therefore, no responsibility for loss occasionedto any person as a result of acting or refrainingfrom acting on the contents of or informationcontained in these notes can be accepted byTowers Perrin.

Taking costs out of your business: quickly

27 February 2009

taking costs out of your business: quickly

Business