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Compensation trends of the future:Designing a sustainable global totalrewards strategy

Workforce and compensation research reveals some fundamental shifts

underway in the global labor markets that are already affecting companies

and have implications well beyond 2008 compensation planning. In this

article, we will describe these macro shifts and then discuss what you

can do to develop a longer-term total rewards strategy that will enable

you to attract, engage and retain the workforce you need at a sustainable

cost level. By anticipating these challenges, your company will be better

positioned to compete in the war for talent and win in the global business

environment over the next three to five years.

Global trends affecting the future of total rewards planning

Three major global trends are driving significant changes in standard

employment models and have profound implications for total rewards

planning. The first is the emerging shortage of skills, knowledge and

experience available to employers given large-scale, global shifts in the

demographics of the workforce. The second is the growing interest among

an increasingly diverse global workforce in alternatives to traditional

career paths and work arrangements. And third is the continuous rise

of employment costs as a percentage of revenues. These three trends

are largely responsible for the challenges HR leaders are facing and willcontinue to face in the coming years; they also point to some of the total

rewards solutions that best-practice employers have already begun imple-

menting today. Lets take a closer look at all three.

The workforce itself is changing.

Employers across the globe who participated in Mercers Global Total Rewards

SnapShot Survey in 2006 reported that their number one challenge is

recruiting and retaining key talent. There are several demographic reasons

why this is becoming an ever more serious problem for employers.

Human Capital Perspective

October 19, 2007

PerspectiveUpdate

For more informationabout compensation trendsof the future, visit ourCompensation Planning2008 Resource Centerat www.mercer.com/

compensation2008


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2 Mercer

First, workers around the world are getting older. The baby boom cohort

is aging, while birthrates around the world have declined (see Exhibit 1).

This means not only that there is a scarcity of young talent in the pipeline

but also that many seasoned workers those with valuable institutional

knowledge that cant easily be replaced by new hires will be moving out

of the workforce en masse in the coming years.

Exhibit 1. Aging of workforce contributes to shrinking labor pool

Second, it is becoming more difficult for employers to recruit employees with

the technical skills they need. For the last two decades of the 20th century,

for example, US Department of Labor statistics show a continuing decline in

the number of students enrolled in career and technical education.

Third, todays workforce tends to be more geographically mobile, makingretention of workers more difficult for most companies. For example,

manufacturing work from around the world is moving to lower-cost

centers in Eastern Europe and China, while qualified professionals and

skilled trade workers are moving to more mature economies to take

higher-paying jobs.

Employees are demanding alternatives to traditional work arrangements.

Todays global workforce is diverse, and not all employees value the same

things. This diversity is putting pressure on employers to move beyond

one-size-fits-all total rewards programs if they want to compete success-

fully for talent.

Todays global workforce

is diverse, and not all

employees value the same

things.

0

5

10

15

20

25

30

35

40

Population over age 60

P

ercentoftotalpopulation

Europe NorthAmerica

Australia Asia LatinAmerica

Source: United Nations Population Division

2000 2025 2050


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Human Capital Perspective Update

Mercers global Whats Working studies have found similarities, but also

significant differences, in what most influences employee commitment

and motivation. For example, while workers in Asia value base pay above

all other factors, those in North America value five other factors including

work-life balance, being treated with respect and benefits more highly

than base pay (see Exhibit 2).

Exhibit 2. Employees value different aspects of the employment relationship

Different generations also have different priorities. For example, while

employees over 60 years old (the Traditionalists) tend to value security

and company loyalty most highly, those between 18-29 (the Millennials)

tend to value their contributions and learning opportunities and thusare more willing to change jobs repeatedly, while those between 30-42

(Generation Xers) tend to value work-life balance most highly.

Cost escalations are threatening the sustainability of

traditional rewards programs.

According to another finding in Mercers Global Total Rewards SnapShot

Survey, HR leaders globally cite keeping total rewards costs affordable and

sustainable as one of their biggest challenges. When rewards are defined

primarily as pay and benefits, they are right to worry. To illustrate the

challenge of keeping total rewards costs sustainable, lets suppose an

organizations cost of pay and benefits equals 60 percent of revenues in

2007. If we assume an annual 2 percent growth in employee headcount,5 percent growth in revenues, 3.5 percent growth in pay and 12 percent

3

How important are the following factors in influecing your commitmentand motivation at work?

North Asia WesternAmerica Europe

Being treated with respect 1 2 2

The type of work that you do 2 3 1

Work-life balance 3 5 3

Benefits 4 7 9

Working in an environment where you can providegood service to others 5 10 5

Base pay 61

4The quality of the people you work with 7 11 6

Long-term career potential 8 4 8

Having flexible working arrangements 9 12 7

Learning or training opportunities 10 9 11

Promotion opportunities 11 6 10

Variable bonus/incentive bonus 12 8 12

Source:Mercers Whats Working Global Employee Survey


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growth in benefit costs fairly realistic estimates for companies operat-

ing in mature economies then the total cost of pay and benefits to this

organization five years out will equal 67 percent of revenue! (See Exhibit 3,

an example for illustration purposes.)

Exhibit 3. Assessing the sustainability of current costs

How should global companies respond?

The companies that succeed in the future will be the ones that are able

to attract, engage and retain the people they need in a way that is sus-

tainable from a cost perspective. In our view, doing this requires moving

beyond traditional compensation planning toward the development of

a total rewards strategy that acknowledges a broader interpretation ofrewards with differing appeal to employees:

Compensation, which includes base pay, short-term and long-term

incentives, and recognition awards

Benefits, which includes health and other group benefits, retirement

plans, work-life programs, and perquisites

Careers, which includes performance management, career pathing,

training and development, talent review and succession planning

Two-thirds of companies surveyed by Mercer as part of our SnapShot

survey are now taking this holistic view, including not only compensation

and benefits in their total rewards mix, but also career opportunities and

alternative work arrangements.

The companies that

succeed in the future

will be the ones that are

able to attract, engage

and retain the people

they need in a way that

is sustainable from a

cost perspective.

0%

10%

20%

30%

40%

50%

60%

70%

Escalating total rewards cost as a percent of revenue

Percentofrevenue

2007 2008 2009 2010 2011 2012

Totalbenefits

Totalpay

11%

50%

12%

50%

13%

51%

14%

51%

15%

52%

61%

10%

50%

60%62%

64% 65%67%

Example for illustration purposes


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5 Human Capital Perspective Update

Our research and work with global companies indicate that developing a

total rewards strategy for competitive advantage will require HR leaders

to take the following five steps:

1. Segment and reward employee groups according to relative

value creation.

2. Understand and plan for employee total rewards preferences.

3. Offer attractive non-cash compensation to appropriate

employee segments.

4. Maximize the return on limited total rewards investments

by differentiating pay based on performance.

5. Review and refresh your total rewards strategy.

1. Segment and reward employee groups according to relative value creation.

When companies align their total rewards strategy with their business

strategy, they help to ensure that expenditures are yielding the maximum

returns in terms of productivity. Achieving alignment requires under-

standing how your business creates value, mapping distinct employee

groups to the value creation process and then allocating total rewards

accordingly.

Understand how your company creates value.

This is predicated, of course, on understanding your business model

and revenue generating strategy, which involves answering questions

about the business lifecycle, business design, brand impact and geo-

graphic requirements of your company, such as:

How do we make money today and will that changethree years from now?

What skills and behaviors are required at different stages of

growth and decline?

What business design supports our ability to make money?

What are the skills and competencies required in those areas?

Whats the value of our brand in attracting and retaining employees?

Where do we want to be geographically? Do we need global

consistency or local focus in order to succeed?

When companies align

their total rewards

strategy with their

business strategy, they

help to ensure that

expenditures are yielding

the maximum returns in

terms of productivity.


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[S]egmentation in your

company will depend

entirely on the role of

different employee

groups in creating value

and adding to your

bottom line.

Segment your workforce.

After you have clearly identified your business needs and the work-

force characteristics that propel your business forward, the next step

is to identify the corresponding workforce groups of employees that

create value for your organization. These segments may include:

Performance drivers, who directly create value for the organization,such as marketing in consumer products companies or research sci-

entists in pharmaceutical organizations

Performance enablers, who support value creation by facilitating

the efficiency of performance drivers, including human resources or

finance staff at many organizations

Legacy drivers, who created value for the organization historically,

but no longer drive competitive advantage; for example, production

and circulation functions in a media organization may become lega-

cy drivers as content is increasingly delivered online

Keep in mind that how employee groups are segmented will be unique

to each company. Specific job families, geographies or skill sets do not

consistently map to specific workforce segments across companies.

Rather, segmentation in your company will depend entirely on the

role of different employee groups in creating value and adding to your

bottom line. Take IT professionals, for example. For a retail chain that

partners with an outside vendor for IT services, they may serve as per-

formance enablers, while for an IT consulting firm, they may serve as

performance drivers.

Offer different total rewards to different employee segments.

Lastly, having identified distinct employee segments in terms of the

value they create for your business, you can then determine how to

allocate your finite total rewards dollars accordingly, offering premium,

standard or discounted rewards to various segments as appropriate.For performance drivers your value-creators you must succeed

in attracting, engaging and retaining them through an optimal total

rewards mix depending on what is important to them. A more stan-

dard total rewards package may be appropriate for your performance

enablers, while the appropriate total rewards for legacy drivers will

depend on the value of retaining their institutional knowledge.

2. Understand and plan for employee total rewards preferences.

While the increasing diversity and evolving wants and needs of the global

workforce make total rewards planning today a more complex task, it also

opens up valuable opportunities for overcoming recruitment, retention and

cost challenges. But to take advantage of those opportunities, employersmust learn more about what actually motivates their employees.


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Beyond analyzing

survey data, you can

also take advantage

of new statistical

modeling techniques

that allow companies

to analyze other

existing employee data

to better understand

employee behavior.

Survey your employees.

A first step toward planning for employee preferences is to survey

them about the work arrangements and total rewards elements that

are most important to them. You may be surprised to learn of the

relatively inexpensive or even cost-neutral things you can do to

improve attraction, engagement and retention.

Analyze other employee data.

Beyond analyzing survey data, you can also take advantage of new

statistical modeling techniques that allow companies to analyze

other existing employee data to better understand employee behavior.

Remember that what employees really care about as measured by

things like making a decision to leave the company is sometimes

different than what they say they care about. Broadened inputs provide

HR leaders with more robust information on which to build an effective

total rewards program.

Compare internal and external data.

Finally, you can compare internal survey data with reliable normative

data, such as Mercers Whats Working data on country- and region-

specific employee perceptions and attitudes about work, to help guide

decisions about how best to structure total rewards in a given market.

3. Offer attractive non-cash compensation to appropriate employee segments.

More and more companies are seeking to limit fixed costs by holding base

pay increases to modest levels while investing in other non-cash and vari-

able pay options. With a solid understanding of both your own business

needs and employee preferences, you may be able to identify high-value,

non-cash compensation alternatives, such as flexible schedules, alternative

work arrangements, and career development and training opportunities,

that will allow you to better attract, engage and retain employees while

meeting your business objectives and managing costs.

Offer flexible work options to key employees.

It is becoming common for employers to offer key employees flexible

work options such as telecommuting, job-sharing, flex-time, compressed

work weeks, sabbaticals, and greater autonomy in scheduling and

delivering work. This trend speaks to what employees want and need

and how employers are accommodating them. While a 1999 Mercer

study, US Policies and Practices Survey, found that 32 percent of

companies surveyed had telecommuting arrangements, twice as

many had made them available to professional staff by 2006. And

while over half of companies surveyed in 1999 offered flex-time

arrangements, 95 percent offered them to professional staff by 2006(see Exhibit 4).


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Global HR leaders who

participated in the

SnapShot survey say

that they are planning

to increase their invest-

ments in these areas

[career development

and training] over the

next 12 months.

Exhibit 4. Increasing flexible work arrangements

Consider alternative work arrangements.

Beyond flexible schedules, the use of temporary/contingent and

contract labor is helping companies balance their own business needs

with employee demands while getting the greatest returns for their

total rewards expenditures. From the employers point of view, the

traditional model of permanent, full-time employees is not flexible or

cost-efficient in addressing periods of under-capacity or over-capacity.

And for employees, building a career through a variety of non-linear

work experiences that are a mixture of temporary, full- and short-term

employment, and contractor assignments can provide even greater

learning opportunities and better value than more standard career

paths. Given these advantages for both the employee and employer,

growth in the temporary/contingent labor market is expected tosignificantly outpace total employment growth over the next decade.

Invest in career development and training.

Another non-cash compensation option that can help you meet

business objectives, employee demands and cost constraints is to

offer employees more in the way of career development and training

opportunities. Global HR leaders who participated in the SnapShot

survey say that they are planning to increase their investments in

these areas over the next 12 months.

While these investments can help employers more quickly develop

employees technical and leadership skills, they are also highly valued bymany employees and so can aid with attraction and retention. Mercers

Whats Working surveys of European employees, for example, show that

two-thirds of workers are satisfied with their jobs when there is a good

opportunity for continuous learning; however, where such opportunities

are lacking, only 17 percent of employees say they are satisfied.

Flexible schedule becoming common

Percentofemployers

32%

64%

28%

Telecommuting Job-share Flex-time

Source:Mercers Policies and Practices Survey, 1999 and 2006

1999 2006

0

20

40

60

80

100

31%

58%

95%


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Based on the pace of

change in the global

business environment

as well as the fluidity of

most business strategies,

we recommend that you

review and refresh your

total rewards strategy

at least once every

three years.

4. Maximize the return on limited total rewards investments by differentiating

pay based on performance.

Recent research indicates that companies are increasingly differentiating

pay based on performance in order to wring the greatest return from

limited total rewards dollars. Mercers SnapShot survey study found that

in North America, for example, the highest performers earned one-and-

a-half times or more what is provided to mid-level performers (on apercent-of-salary basis for both base salary increases and actual bonus

payouts). Low performers, on the other hand, earn half of what is pro-

vided to the mid-level. (See Exhibits 5 and 6.) Moreover, North American

employers strive for even more differentiation through their plan designs,

in which the maximum award opportunity for annual incentive plans is

often two times target or more.

Exhibit 5: Base pay increases as a function of performance

Exhibit 6: Bonus payouts by performance

5. Review and refresh your total rewards strategy.

Keeping your total rewards strategy in sync with an ever evolving business

strategy can be demanding. It requires frequent review and revision if it

is to continue to deliver business results. Mercers SnapShot survey found

that, of the firms that said that their total rewards strategy is fully aligned

with their business strategy, over three-quarters had made changes to

their total rewards strategy in the last three years. In contrast, three-fifths

of firms reporting a weaker alignment had not revised their strategy in

the past three years. Following are suggested best practices:

Review strategy at least every three years.

Based on the pace of change in the global business environment as

well as the fluidity of most business strategies, we recommend that

you review and refresh your total rewards strategy at least once every

three years. This review should go far beyond one-year-out compensa-

tion planning and include all of the steps discussed in this article.

Percent of workforce Average pay increase

Highest-rated 12% 5.7%

Next highest-rated 28% 4.5%Middle-rated 52% 3.5%

Low-rated 6% 2.0%

Lowest-rated 3% 1.7%

Source:Mercers 2007/2008 US Compensation Planning Survey

Executive Management Professional Office/ Trades/

(Sales and Clerical/ Production/

Non-sales) Technician Service

Highest-rated 64% 27% 20% 15% 13%Middle-rated 44% 20% 14% 11% 11%

Lowest-rated 30% 10% 7% 6% 4%

Source:Mercers 2007/2008 US Compensation Planning Survey


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Communicate to employees using a variety of communication channels.

Organizations cannot reap the full benefits of a well-designed total

rewards strategy if employees are not aware of all of the elements

offered. You must effectively communicate to employees the value of

the total rewards package in order to maximize its value in attraction,engagement and retention. According to Mercers SnapShot survey, HR

leaders in North and South America report that they are using at least

three vehicles to communicate with employees, particularly if they have

changed their total rewards strategies within the past three years. The

most popular methods include individual meetings, hard-copy person-

alized statements, and presentations to employees made by leadership.

The challenge for HR

Developing a sophisticated total rewards strategy that is tailored to vari-

ous workforce segments is a challenge. For organizations accustomed to a

traditional one-size-fits-all approach, change could be slow and strained.But for organizations that take the steps necessary to better understand

their workforce both the needs and preferences of the people they

employ and the contributions to value creation that various segments

make the pay-off is a total rewards program that not only drives perfor-

mance but also helps to maintain sustainable employment costs.

Perspective Update author:

Steven Gross

Global leader, Broad-based Performance and Rewards Consulting

+1 215 982 4257

[email protected]

00907-HC

The Update is published by:

Mercer

1166 Avenue of the Americas

New York, New York 10036

You are welcome to reprint short

quotations or extracts from this

material with credit given to Mercer.

Visit us at mercer.com.

For more informationabout compensation trendsof the future, visit ourCompensation Planning2008 Resource Center atwww.mercer.com/compensation2008

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