07...circulation manager barbara krebaumi j23_v4.indd 1 11/6/14 10:16 am worldatwork ( - work.org)...

4Q | 2014

07 Assessing Reward Effectiveness: A Survey of Reward, HR and Line ExecutivesBy Dow Scott, Ph.D., Loyola University Chicago and

Thomas D. McMullen I Hay Group

20 The Business Case for Compensation TechnologyBy Alison French, CCP, GRP I IBM

31 Measuring Total Rewards: Conjoint Analysis vs. MaxDiff ScalingBy Federico Lopez I Thomas More Management

Consulting and Andres Bello I Catholic University

Institute of Advanced Management studies (IESA)

59 Organization Agility and Talent ManagementBy Edward E. Lawler III, Ph.D., and Christopher G.

Worley, Ph.D. I Center for Effective Organizations at the

USC Marshall School of Business

71 Employee Engagement: The Unusual Birth and Development of an HR ConceptBy Frank Giancola

82 The PPACA and Talent Management: From Early Movers to a Culture of HealthBy Steven Noeldner and Matthew Stevenson I Mercer

89 Pay for Performance: Hit or Miss? An In-Depth Look at the Relationship Between Pay and PerformanceBy Yonat Assayag, ClearBridge Compensation Group,

and Carl J. Stegman, Fidelity Stock Plan Services

102 What the Research Says About Pay SecrecyBy Nancy E. Day, Ph.D., University of Missouri –

Kansas City

111 Published Research in Total Rewards

$79.95

J23_V4.indd 1 11/6/14 10:19 AM

How Employee Experience Drives Organizational Results

March 17-18, 2015 | Nashville, TN

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Mission

WorldatWork Journal strives to:

z Advance the theory, knowledge and practice of total rewards management.

z Contribute to business-strategy development that leads to superior organizational performance.

z Provide an outlet for scholarly total rewards writing and research.

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Publisher I Anne C. Ruddy, CCP, CPCU

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WorldatWork (www.worldat-work.org) is a global human resources assoc ia t ion focused on compensa-tion, benefits, work-life and

integrated total rewards to attract, motivate and retain a talented workforce. Founded in 1955, WorldatWork provides a network of nearly 30,000 members in more than 100 countries with training, certification, research, conferences and community. It has offices in Scottsdale, Ariz., and Washington, D.C.

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Manuscripts: WorldatWork Journal welcomes manuscripts. See guidelines and review process at www.worldatwork.org, or contact any member of the editorial staff.

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2014 WorldatWork Association Board

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Lead Director I Nathalie Parent, CCP, CBP, GRP, CECP, CSCP

Secretary I Kevin Hallock, Ph.D.

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Director I Robin Colman

J23_V4.indd 2 11/6/14 10:16 AM

Reviewers

WorldatWork Journal thanks the following individuals for reviewing manuscripts during the editorial cycle for the fourth quarter 2014 issue. Subject-matter experts, including members of WorldatWork advisory boards, review all manuscripts.

Carol Anderson, CCP, SPHR | Anderson Performance Partners

Chad Atwell, CCP, GRP | Oracle

Yulia Austin, CCP | Cameron Processing & Compression

Joan Backman, CCP, CBP | Central Arizona Board of Realtors

Linda Ball, CCP, CBP, GRP | Nyhart Epler

Deborah Beany | ROI Consulting

William Blagmon | GlaxoSmithKline

Steve Bloomfield, CCP, SPHR | Syclo LLC

Alan Bolyard, CCP, GRP | Mine Safety Appliances Co.

Gayle Brocksmith | The Sports Authority

Rajiv Burman, CCP, CHRP, SPHR | Microsoft

Cristina Butu, CCP, GRP, CBO | Sony Corp of America

Dharma Chandran | Leighton Holdings Ltd.

David Cheatham, CCP | Coca-Cola Co.

Christine Costello

Wendy Criswell, CCP, CBP, PHR | Alexandria Renew Enterprises

Chuck Csizmar, CCP | CMC Compensation Group

Sean Delaney | Boradcom Corp.

Robin Denninger, CCP | RTD Consulting

Thomas Farmer, CCP, SPHR

Henry Federal, CCP | HLF Rewards Consulting LLC

Michelle Frink, CCP, GRP | MITRE Corp.

Kevin Garrett, CCP | Genuine Parts Co.

Deena Gilbert, CCP | U.S. Postal Service

Kim Huerta, CCP | Golden Living

Bob Johnson | Next Comp/Johnson HR Consulting Inc.

Evelyn Johnston, CCP | Blue Shield of California

Cynthia Jorgenson, CCP, CBP | Boeing

Jed Lindholm, Ph.D., SPHR, GRP | HR Performance Possibilities

Jennifer Loftus, CCP, CBP, GRP, SPHR-CA, GPHR | Astron Solutions

Carrie Mantel, CCP | FEI Co.

Nandini Ramaswamy, CCP, CBP, GRP | SalesForce.com

Jeff Robinson, CCP, CBP | Genesis HealthCare System

Dave Rocheleau, CCP, CHRP, SPHR | RBC

Agni Skafidas, GRP | Smith & Nephew

Debra Smith | C&S Wholesale Grocers Inc.

Jeffrey Tomschin, CCP, CBP, GRP | Phillips Services Industries Inc.

Robert Tursky, CCP, CEBS, SPHR | Volvo

Sonya Vollmer, CCP | Charter Manufacturing Inc.

Paul Wilson, CCP, GRP | Edison International

J23_V4.indd 3 11/6/14 10:16 AM

Executive SummariesFourth Quarter 2014 | Volume 23 | No. 4

Assessing Rewards Effectiveness: A Survey of Rewards, HR and Line ExecutivesBy Dow Scott, Ph.D., Loyola University Chicago and Thomas D. McMullen I Hay Group

This research examines senior management’s interest in evaluating rewards programs,

reveals how rewards-program effectiveness is evaluated, assesses the effectiveness

of these evaluation methods and examines the commitment of rewards professionals,

HR professionals and line executives to evaluate rewards programs in the future.

Respondents represented a variety of industries and a range of organizational size.

The findings indicate: (1) a strong interest in assessing rewards-program effectiveness

by senior leaders, rewards professionals and HR professionals; (2) substantial variation

in how effective assessment methods were perceived by senior management, rewards

professionals and HR professionals; and (3) variations among these groups on how

rewards programs would be assessed in the future. Based on these findings, the authors’

recommendations for improving assessment processes include development of multiple

criteria consisting of financial, operational and perception metrics for evaluating rewards

programs and inclusion of the evaluation methods in the initial program design.

The Business Case for Compensation TechnologyBy Alison French, CCP, GRP I IBM

Despite the foundational role compensation plays in any talent strategy, most organiza-

tions continue to manage compensation market analysis, strategy development and

program administration using spreadsheets.

This article discusses the business case and practical implications for the selection

and implementation of technology solutions to manage compensation. Specifically, it

addresses questions like:

• Which compensation process parts can be automated, and what types of tools

exist?

• Why are organizations choosing to move from spreadsheets to technology

solutions?

• How can technology solutions improve service delivery and quality?

• What is the business impact of using tools to build a more effective compensation

strategy?

4 WorldatWork Journal

07

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5 Fourth Quarter | 2014

Measuring Total Rewards: Conjoint Analysis vs. MaxDiff ScalingBy Federico Lopez I Thomas More Management Consulting and Andres Bello Catholic University

Institute of Advanced Management Studies (IESA)

Traditionally when measuring total rewards, conjoint analysis has been to determine

the relative importance of the categories or elements. However, with a large number of

items, conjoint analysis may take a long collection time and its results may be biased.

Maximum difference scaling is an alternative method that allows the determination

of relative preferences within a large number of items and in significantly less time,

helping identify which specific tools within the total rewards options are preferred by

the employees. Practical experience then suggests that conjoint analysis can be used to

detect the weights of total rewards’ general elements and maximum difference scaling

to determine which tools are specifically preferred by employees.

Organization Agility and Talent ManagementBy Edward E. Lawler III, Ph.D., and Christopher G. Worley, Ph.D. I Center for Effective

Organizations at the USC Marshall School of Business

To be sustainably effective, organizations need to change what they do and how they do

it at an ever-increasing rate. Creating an agile organization requires taking an approach

to organization design and management that allows organizations to sense what is

changing in the environment, develop and test possible changes, and quickly implement

changes. The payoff is worth it; research shows that organizations that are agile can

outperform others over decades. This article uses case studies on Netflix and oDesk

to show that organizations can create an agile workforce by adopting a set of talent

management practices that encourage employees to learn and develop, and by reducing

the transaction costs associated with changing the skill sets in their workforces.

Employee Engagement: The Unusual Birth and Development of an HR ConceptBy Frank Giancola

Employee engagement, a very popular concept in human resources, was developed

primarily through the efforts of HR consulting firms, largely without the significant

involvement of academic researchers. In the past, major new concepts in organi-

zational behavior typically entered the business world after many years of study by

academic researchers. HR professionals will benefit from knowing how this concept

was developed and who contributed to its growth and competed for a place on the HR

agenda. This information will serve them well as consumers of engagement products

and services.

Executive SummariesFourth Quarter 2014 | Volume 23 | No. 4

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59

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Executive SummariesFourth Quarter 2014 | Volume 23 | Number 4

89

102

The PPACA and Talent Management: From Early Movers to a Culture of HealthBy Steven Noeldner and Matthew Stevenson I Mercer

While many organizations have been anticipating health-care reform by adopting a

total health management approach, even the best health-management strategy will

not achieve optimal results without a focus on the basic requirements. This requires:

visible buy-in from senior management and business leaders; policies and practices

that support a culture of health; comprehensive, integrated and easy-to-use programs;

and meaningful and timely employee incentives. The new era of health-care reform has

been well-modeled by organizations that took health management seriously before the

Patient Protection and Affordable Care Act (PPACA) became law.

Pay for Performance: Hit or Miss? An In-Depth Look at the Relationship Between Pay and PerformanceBy Yonat Assayag, ClearBridge Compensation Group, and Carl J. Stegman,

Fidelity Stock Plan Services

A new reality for companies today is to demonstrate a strong pay-for-performance

relationship in their executive compensation programs. Companies have increasingly

turned to long-term performance awards as a means for enhancing the alignment of

executive pay and performance. The authors’ companies teamed up to analyze the pay-

for-performance relationship of performance awards. The study analyzed the overall

alignment between pay and performance, as well as identified which measures and

performance period lengths correlate with a stronger pay-for-performance relationship.

Furthermore, the authors analyzed this relationship in light of economic conditions and

among top, middle and bottom performers.

What the Research Says About Pay SecrecyBy Nancy E. Day, Ph.D., University of Missouri – Kansas City

Pay secrecy is the norm for many, if not most, American workers. However, the popular

press and some thought leaders are advocating total pay openness – making all

employees’ salaries public – as the route to truly innovative, collaborative manage-

ment. Rather than focusing on pay secrecy or openness, organizations should carefully

design and implement pay-communication programs. The article reviews research that

affirms a carefully designed and implemented pay-communication system can increase

perceptions of fairness and satisfaction with pay.

Published Research in Total Rewards111

82

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Thomas D. McMullenHay Group

Dow Scott, Ph.D.Loyola University Chicago

Assessing Rewards Effectiveness: A Survey of Rewards, HR and Line Executives

Human capital is typically the first or second

largest financial expenditure most organiza-

tions make, and senior executives have learned

that it must be managed strategically and efficiently.

This is, in large part, the driving reason why senior

management is asking rewards professionals to justify

recommendations for pay increases, incentive plans,

employee-benefits programs and investments in nonfi-

nancial rewards such as career development, recognition

and organization climate improvement.

However, as was learned from a related study with

WorldatWork in 2005, 9% of organizations reported that

they formally evaluated the return on investment (ROI)

of its compensation programs and 62% do not assess

their compensation program – either formally or infor-

mally (Scott, McMullen, and Sperling 2005). A second

study in 2013 found that attempts to use formal ROI

measures to evaluate rewards programs had increased

to 11% (Scott and McMullen 2013). Although this was a

modest 2% increase, a staggering 48% of respondents

said they planned to assess rewards programs more

rigorously and frequently during the next two to three

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years. Other research, primarily conducted in the United Kingdom, confirms

limited focus in rewards program evaluation (Corby, White, and Stanworth

2005; Armstrong, Brown, and Reilly 2011). A UK E-rewards survey (2009) of

rewards and HR professionals found that reluctance to evaluate pay programs

was primarily attributed to lack of resources and time (48%) but also included

the lack of information or data (19%), senior-management indifference (15%),

organizational changes (10%) and lack of analytical skills (8%).

In recent years, senior executives have placed more importance on human

capital in terms of optimizing productivity and cost effectiveness, engaging

employees, developing and retaining talent and aligning the rewarding of

human capital with business strategies (for example, the “CEO Challenge

2014” report). In this regard, rewards professionals are increasingly being

asked to provide evidence that rewards strategies, programs and policies do

indeed support these core human capital objectives. The primary method for

accomplishing this is to develop methods and supporting processes to assess

rewards-program effectiveness.

ROI analysis can provide important information in terms of the contribution

rewards programs make to the organization’s “bottom line” and providing senior

management with a means for comparing investment alternatives for scarce finan-

cial resources. However, as spelled out in the authors’ previous research (Scott,

McMullen, and Morajda 2006), assessing the effectiveness of rewards programs

more comprehensively offers substantial benefits including:

z Identifying problems early in a rewards program’s rollout so corrections can be

made before resources are wasted or other damage is done

z Providing necessary feedback for improving program effectiveness in a constantly

changing business environment

z Holding management responsible for implementing the rewards program

z Building employee and management commitment to the rewards program by

engaging them in the evaluation and using their input to correct problems

z Reinforcing pay values, policies and programs to employees and managers.

The focus of this research is to:

1 | Examine the extent to which senior management is committed to evaluating

the effectiveness of its rewards programs

2 | Identify how rewards programs are evaluated

3 | Assess the effectiveness of these evaluations methods

4 | Identify the level of commitment to evaluate rewards programs in the future

5 | Identify the challenges associated with assessing rewards programs.

There has been a change in the assessment of rewards programs as predicted by

rewards professionals (Scott and McMullen 2013; McMullen 2009). By examining

the interest in assessing rewards programs, the methods used and perceptions of

effectiveness of those methods, this study took a more comprehensive approach

than previous research on the topic. These findings are used to formulate

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recommendations as to how rewards programs can be most effectively evaluated

so as to optimize their value and impact on organizations.

DATA COLLECTION METHODS AND RESPONDENT CHARACTERISTICS

Members from U.S.-based compensation associations (e.g., Columbus Compensa-

tion Association - Ohio; Chicago Compensation Association - Illinois) and Hay

Group (an HR management-consulting firm) solicited rewards, HR and senior

executives to participate in the research initiative between March and April 2014.

The questionnaire required 10 to 15 minutes to complete.

Of the 386 respondents participating in the study, 60% were rewards professionals,

24% were HR professionals and 16% were C-suite executives. Most respondents

were from North America (69%) and Europe (29%) with a few from Asia (2%) and

Latin America (1%).

Participating organizations were fairly evenly distributed by size. Approximately

29% of respondents represented organizations with fewer than 1,000 employees;

26% had between 1,000 and 5,000 employees, 24% had 5,000 to 20,000 employees;

and 22% had more than 20,000 employees. When size is defined by revenue,

organizations are again divided into four categories: those with revenues less than

$250 million (23%), $250 million to $1 billion (24%), $1 billion to $5 billion (28%)

and more than $5 billion (26%).

Respondents were from a diverse range of industries; the largest representa-

tion came from manufacturing (22%); finance and insurance (14%); retail trade

(10%); professional, scientific and technical services (8%). The remaining 46% was

distributed throughout other industries. The organizations were also diverse in

terms of ownership. Respondents represented publicly traded/listed companies

(44%), privately owned companies (34%), government (9%), not-for-profit (8%)

and other (5%).

Respondents represented a good mix of companies from North America and Europe.

Findings from the questionnaire are presented as per the five areas of focus

identified in the previous section, followed by conclusions and recommendations

as to how management can assess rewards program effectiveness.

INTEREST IN REWARDS ASSESSMENT

An important driver of the level of assessment of rewards policies and programs

is the interest of senior management in determining their effectiveness. Table 1

shows the level of interest C-suite executives, rewards and HR professionals

say that senior leaders have for assessing effectiveness of rewards programs on

specific dimensions. These percentages represent the relative share of respondents

who indicated either interest or considerable interest in the specific approach for

assessing rewards-program effectiveness.

C-suite executives indicated they are most interested in how rewards programs

impact employee motivation and effort. They also expressed strong interest in

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assessing how rewards programs align with the business strategy and culture of

their organizations, how rewards programs link to individual performance, how

labor costs compare to competitors and how rewards programs support overall

employee engagement or commitment. Senior management’s stated interest in

employee motivation, engagement, alignment and link to performance indicates

a fundamental understanding that rewards program effectiveness is multidimen-

sional and solely not a cost reduction or ROI assessment issue.

Senior leaders indicated the least interest in how rewards programs supported

protected class/diversity initiatives; the ROI of the organization’s entire suite

Table 1 | Senior Management’s Interest in Assessing Rewards Effectiveness

ItemsC-suite

% Interest

HR % Interest

Comp.% Interest

Average %

Interest

The ROI of the organization’s entire suite of rewards programs

60% 54% 58% 58%

The ROI of individual rewards programs (i.e. base, short-term incentives, long-term incentives, benefits, etc.)

65% 57% 62% 61%

How externally competitive the rewards program is for benchmark jobs

71% 73% 78% 76%

How total labor costs compare with competitors 78% 75% 64% 67%

How rewards programs align with the business strategy and culture of your organization

75% 75% 78% 77%

How rewards programs link to enterprise or corporate performance

82% 77% 81% 79%

How rewards programs link to team, department or unit performance

63% 62% 59% 60%

How rewards programs link to individual performance 78% 74% 75% 75%

How well employees understand their rewards programs

74% 67% 62% 65%

How rewards programs support overall employee engagement or commitment

78% 78% 69% 72%

How rewards programs affect employee motivation and effort

83% 75% 62% 68%

How rewards programs affect employee retention or turnover

72% 72% 64% 68%

How rewards programs compare to “best practices” in other organizations

71% 65% 66% 66%

How rewards programs may discriminate based on protected class status (e.g., age, gender, race)

40% 39% 36% 38%

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of rewards programs; how rewards programs link to team, department or unit

performance; and the ROI of individual rewards programs (i.e., base, short-term

incentives, long-term incentives, benefits, etc.). Given the reported increased

emphasis in assessing ROI in recent years by CEOs and CFOs, it is interesting that

ROI assessment was a least-preferred rewards-assessment strategy. As is described

later, senior leaders are seemingly more interested in the leading indicators of

rewards effectiveness rather than the trailing indicators of effectiveness, such as

formal ROI measurement.

The disconnect between the interest of C-suite leaders relative to HR and rewards

professionals perceive the interests of senior management to be is apparent in

Table 1. How rewards programs affect employee motivation and effort was the

top priority of C-suite executives (83%), but rewards professionals indicated that

their perception of C-suite interest on this dimension was toward the bottom (62%).

C-suite executives also indicated that they were considerably more interested

in employees understanding their rewards programs, the relationships between

rewards and retention and how labor costs compared with competitors – more

so than rewards professionals. However, given the emphasis on ROI, note that

both C-suite executives and rewards professionals had low relative interest in

ROI-related assessment processes. Impact of rewards programs on discrimination

and protected classes and the link between rewards programs and team, depart-

ment and unit performance also had low relative interest from each group.

METHODS USED TO ASSESS REWARDS-PROGRAM EFFECTIVENESS

Table 2 shows the extent to which rewards assessment methods are reported to

be in use within their organizations. According to respondents, the methods most

often used to assess program effectiveness are:

z Exit interviews or surveys of departed employees (92%)

z Informal manager feedback regarding rewards-program effectiveness (91%)

z Purchased compensation surveys from compensation-survey providers to compare

compensation levels (89%)

z Informal employee feedback regarding rewards-program effectiveness (88%)

z Formal feedback from employee engagement surveys (85%).

The methods all survey participants reported as least used:

z ROI calculating rewards-program investment relative to results (58%)

z Rewards-focused formal manager feedback, such as surveys, focus groups or

interviews (59%)

z Rewards focused formal employee feedback, such as surveys, focus groups or

interviews (61%)

z Assessed value of human capital, such as replacement cost of talent (63%)

z Free compensation surveys from Internet sites or recruiting firms to compare

compensation levels (64%).

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Table 2 | Methods Used to Assess Rewards Programs Effectiveness

ItemsC-suite

% Used

HR % Used

Comp.

% Used

ALL % Used

Return on investment (ROI) calculating rewards program investment relative to results

53% 57% 59% 58%

Employee or work unit productivity 66% 67% 67% 67%

Assess the degree to which rewards programs are aligned with the business strategy

71% 77% 88% 82%

Key talent turnover rates among high potential employees, key jobs or high performance employees

72% 75% 85% 81%

Bench strength (staffing pipeline) for key positions 72% 80% 85% 82%

Informal employee feedback regarding rewards-program effectiveness

88% 87% 88% 88%

Informal manager feedback regarding rewards-program effec-tiveness

92% 88% 93% 91%

Formal feedback from employee-engagement surveys. 75% 77% 89% 85%

Reward-focused formal employee feedback (e.g. surveys, focus groups or interviews)

53% 61% 62% 61%

Reward-focused formal manager feedback (e.g. surveys, focus groups or interviews

54% 60% 59% 59%

Purchased cash compensation surveys from compensation survey providers to compare compensation levels

84% 87% 95% 89%

Free cash compensation surveys from Internet sites or recruiting firms to compare compensation levels

66% 65% 63% 64%

Purchased total remuneration surveys (i.e., cash compensa-tion plus benefits values)

77% 82% 86% 82%

Reward program design surveys from survey comparisons, consultant assessment, etc.

69% 67% 81% 75%

Total current labor cost benchmarking with competitors 63% 53% 68% 65%

Turnover rates across most occupations and jobs 78% 81% 86% 83%

Rejection or acceptance of job offers 62% 68% 73% 70%

Exit interviews or surveys of departed employees 91% 94% 92% 92%

Time required to fill job openings 71% 77% 78% 76%

Assessed value of human capital (e.g., replacement cost of talent)

65% 65% 61% 63%

Protected-class analysis (e.g., gender, race, age, etc.) 52% 56% 72% 66%

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Due to the resource requirements involved in assessing ROI for rewards programs

and the value of human capital, it is easy to understand why these programs

are not as frequently used for assessing rewards effectiveness as other methods.

However, it is more difficult to understand why organizations do not solicit formal

feedback from managers and employees about rewards programs, as opposed to

relying more on informal feedback. It is somewhat reassuring, however, to see that

purchased compensation surveys are most-often used to assess pay programs as

opposed to those offered for free (89% and 64%, respectively).

One might also wonder why differences in perception of program-assessment

methods use are occurring among C-suite executives, HR professionals and

rewards professionals. Eight out of 21 methods (more than one-third) have at least

a 10% difference in estimated rewards assessment methods used. For example,

senior managers report that “protected-class analysis” is used 52% of the time and

compensation professionals indicate 72% use.

EFFECTIVENESS OF METHODS

Table 3 shows how respondents rated the effectiveness of rewards-assessment

methods used by their organizations. The percentages indicate those who rated

the noted method as effective or very effective. Across all methods, there was

considerable variation in levels of rated effectiveness from a low of 19% to a high

of 78%.

All respondents combined (i.e., C-suite executives, HR professionals and rewards

professionals) rated the following programs as the most effective assessment

process:

z Purchased cash compensation surveys from independent compensation-survey

providers to compare compensation levels (78%)

z Purchased total remuneration surveys, which includes all cash compensation

elements and the value of benefits programs to compare programs, which

includes cash compensation plus benefits values (74%)

z Formal feedback from employee-engagement surveys (62%)

z Assessment of the degree to which rewards programs are aligned with the busi-

ness strategy (60%).

Note that purchased compensation and total remuneration surveys (78% and

74%, respectively) were considered the most-effective tools in assessing rewards-

program effectiveness. It is also noteworthy that formal feedback from engagement

surveys are so highly rated (62%) given how few questions are usually directly

asked about rewards in these surveys.

All respondents (i.e., C-suite executives, HR professionals and rewards profes-

sionals) rated the following programs as least effective:

z Free cash compensation surveys from Internet sites or recruiting firms to compare

compensation levels (19%)

z Formal ROI, calculating rewards-program investment relative to results (33%)

z Rejection or acceptance of job offers (35%).

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Table 3 | Rated Effectiveness of Rewards Method Assessment

ItemsC-suite

% Used

HR % Used

Comp.

% Used

All % Used

ROI calculating rewards program investment relative to results 53% 57% 59% 58%

Employee or work unit productivity 66% 67% 67% 67%


71% 77% 88% 82%

Key talent turnover rates among high-potential employees, key jobs or high-performance employees

72% 75% 85% 81%



88% 87% 88% 88%

Informal manager feedback regarding rewards-program effec-tiveness

92% 88% 93% 91%

Formal feedback from employee-engagement surveys. 75% 77% 89% 85%

Rewards-focused formal employee feedback (e.g. surveys, focus groups or interviews)

53% 61% 62% 61%

Rewards-focused formal manager feedback (e.g. surveys, focus groups or interviews

54% 60% 59% 59%

Purchased cash compensation surveys from compensation survey providers to compare compensation levels

84% 87% 95% 89%


66% 65% 63% 64%

Purchased total remuneration surveys (i.e., cash compensa-tion plus benefits values)

77% 82% 86% 82%

Rewards program design surveys from survey comparisons, consultant assessment, etc.

69% 67% 81% 75%







65% 65% 61% 63%


J23_V4.indd 14 11/6/14 10:16 AM


Free compensation surveys had the lowest rated effectiveness at 19%, likely

largely due to their poor reputation for providing credible data. Formal ROI calcu-

lations and rejection or acceptance of job offers also received low ratings (33%

and 35%, respectively). Table 3 shows that almost one-half of methods (10) scored

below 50% effectiveness. This may indicate the challenges faced by rewards profes-

sionals to assess program effectiveness against these dimensions.

As shown in Table 3, approximately one-third of the ratings varied by at least 10

percentage points across the C-suite, HR professionals and rewards professionals

respondents. Rewards professionals perceived ROI calculating rewards-program

investment relative to results and time required to fill job openings as substan-

tially more of an effective methodology than C-suite executives; whereas C-suite

executives perceived exit interviews, purchased remuneration surveys, formal and

informal feedback from managers and engagement surveys substantially more

effective than rewards professionals. Perhaps viewed another way, rewards profes-

sionals take more comfort in formal data-based measures while senior executives

are more comfortable with directional indications of effectiveness based on

perception.

FUTURE FOCUS

Table 4 identifies where respondents intend to place future emphasis on the

assessment of rewards-program effectiveness. The percentages in the table indicate

more emphasis will be placed on those methods in the next two to three years.

The areas where respondents intend to place the most future focus on rewards

effectiveness assessment include:

z Degree to which rewards programs are aligned with the business strategy (50%)

z Bench strength (staffing pipeline) for key positions (45%)

z Key talent-turnover rates among high-potential employees, key jobs or high-

performance employees (41%)

z ROI calculating rewards-program investment relative to results (39%).

Alignment with the business strategy is seen as the most important future focus

area across rater groups and to C-suite executives in particular. It is interesting that

rewards professionals view ROI assessment in general as a much-more important

focus in the future than do C-suite executives. However, C-suite executives also

place more future focus in assessing leading indicators of rewards effectiveness

as opposed to trailing indicators of rewards effectiveness.

CHALLENGES OF ASSESSING REWARDS-PROGRAM EFFECTIVENESS

Table 5 indicates the most significant challenges identified in assessing the

effectiveness of rewards programs is the lack of budget, time and/or resources.

Although all agree this is the primary challenge, rewards professionals see it as a

much more significant challenge than either C-suite executives or HR professionals.

The lack of methodology or expertise was perceived as being the second most

J23_V4.indd 15 11/6/14 10:16 AM


Table 4 | Future Use of Rewards Assessment Methods

ItemsC-suite % More Future

HR % More

Future

Comp % More Future

All % More

Future

ROI calculating rewards program investment relative to results

24% 35% 41% 39%

Employee or work-unit productivity 23% 23% 19% 20%


59% 52% 50% 50%

Key talent-turnover rates among high-potential employees, key jobs or high-performance employees

31% 39% 43% 41%



30% 26% 26% 27%

Informal manager feedback regarding rewards-program effectiveness

28% 27% 26% 28%

Formal feedback from employee engagement surveys. 36% 40% 27% 31%

Rewards-focused formal employee feedback (e.g., surveys, focus groups or interviews)

33% 31% 28% 30%

Rewards-focused formal manager feedback (e.g., surveys, focus groups or interviews

29% 35% 31% 33%

Purchased cash compensation surveys from compensa-tion survey providers to compare compensation levels

19% 19% 21% 21%


9% 6% 5% 7%

Purchased total remuneration surveys (i.e., cash compensation plus benefits values)

28% 26% 29% 27%

Rewards-program design surveys from survey compari-sons, consultant assessment, etc.

19% 26% 19% 21%







31% 34% 29% 29%


J23_V4.indd 16 11/6/14 10:16 AM


significant challenge. Senior management sees this as more of a challenge than

do rewards or HR professionals.

Finally, it is quite telling that one-third of the respondents are unconvinced

that adequate value will be achieved to justify the investment in assessment of

rewards programs. However, senior management is less-skeptical than rewards

professionals (28% and 38%, respectively).

CONCLUSIONS AND RECOMMENDATIONS

The authors’ findings provide a substantially more-detailed examination of rewards-

program effectiveness assessment processes than previous studies. Overall, the

authors found the following:

z Senior management has strong interest in assessing the effectiveness of rewards

programs; in fact, rewards and HR professionals generally underestimate senior-

management’s interest

z Rewards programs are more frequently assessed than reported in previous studies

z Multiple methods are typically used to assess programs. These include employee

perceptions of rewards programs and how those programs impact performance

and retention

z Substantial variation exists in the degree to which assessment methods are

considered effective

z The variation in perceptions of interest and program effectiveness across senior

executives in the C-suite, rewards professionals and HR professionals indicate

“disconnect” in assessing rewards program effectiveness.

These findings indicate substantial opportunities for improving the assessment

of rewards programs. First, not only does senior management have considerable

interest in assessing rewards-program effectiveness, they also seem to understand

that assessment has multiple dimensions. Second, respondents identified a number

Table 5 | Challenges of Assessing Rewards Program Effectiveness

Item C-Suite % Agree

HR % Agree

Comp. % Agree

All % Agree

Lack of senior-management interest or commitment 34% 41% 45% 44%

Lack of budget, time or resources to invest in assessment of rewards programs

66% 65% 80% 75%

Lack of methodology or expertise (e.g., not sure how to get reliable and valid information)

63% 52% 50% 53%

Not convinced enough value will be achieved to justify the investment

28% 39% 38% 38%

J23_V4.indd 17 11/6/14 10:16 AM


of methods for assessing rewards programs they deem more effective than other

methods. Third, rewards professionals, HR professionals and senior managers have

substantially different perceptions as to the priorities associated with assessing

rewards programs and the effectiveness of these methods.

As discussed earlier, there is considerable value in assessing the effectiveness

of rewards programs. One important insight it reinforces is the divide in orga-

nizations between those who think of rewards as a cost to be managed versus

an investment to be optimized. This theme is referenced in an earlier future of

rewards practices study (Scott and McMullen 2013). On one side of the divide are

those who tend to view pay programs as a cost of doing business. Professionals

holding this belief tend to have an orientation on focusing their evaluation efforts

on cost control and benchmarking. On the other side are rewards and HR profes-

sionals who view rewards programs as an investment and are concerned about

optimizing the ROI. As a result, they are more likely to be proactive in deter-

mining how employees perceive their pay program, especially high performers

and high-potential employees. Furthermore, those that see rewards programs as an

investment want to ensure their employees understand the pay program’s purpose

and design. They are interested in how the pay program shapes desired employee

behavior. As such, they are more interested in obtaining a more comprehensive

assessment of their rewards programs.

Based on these findings and the authors’ extensive rewards experience, organi-

zations should use multiple methods for assessing rewards-program effectiveness.

A systematic and rigorous approach should be followed. To assess the program’s

effectiveness, one not only needs to know if the incentive programs are linked to

desired results (e.g., are commission levels related to both individual and aggregate

sales levels) but that employees perceive the program as competitive, relevant and

fair and that managers and employees understand the program goals and how to

effectively participate in the rewards program. In some cases, calculating ROI or

assessing the cost of replacing talent may be justified.

To ensure that rewards programs indeed drive employee behavior and results

in the desired areas for an organization, a rigorous assessment process should be

established. This process involves:

z Clearly stated goals for reward programs from which specific evaluation criteria

can be established

z Measurable criteria for assessing the effectiveness of the rewards program that

includes financial, operational and employee perception data

z Rigorous data-collection process that collects the right data from the right sources

and minimizes error

z Correctly applied statistical tests to determine if rewards programs have a signifi-

cant and positive effect on desired employee behavior and results. Longitudinal

evaluation analyses can be particularly relevant to organizations

J23_V4.indd 18 11/6/14 10:16 AM


z Rewards programs designed with embedded assessment process that are continu-

ously monitored and updated to maintain effectiveness.

Readers interested in a detailed description of a rewards-assessment framework

can learn more in Scott, Morajda, and McMullen (2006) published in WorldatWork

Journal. z

AUTHORS

Dow Scott, Ph.D ([email protected]), is a professor of human resources at Loyola University Chicago and president of Performance Development International Inc. Scott is nationally recognized as a thought leader in compensation and HR program evaluation. He has more than 100 publications. His teaching, research and consulting have focused on the creation of effective teams, employee opinion surveys, performance improve-ment strategies, pay and incentive systems and the development of high-performance organizations. Before following an academic and consulting career. He held a variety of HR positions at B.F. Goodrich Co. Scott obtained his master’s and Ph.D. from the School of Human Resources and Employment Relations at Michigan State University.

Thomas D. McMullen ([email protected]), is the North American reward practice leader for Hay Group based in Chicago. He has more than 30 years of combined HR practitioner and compensation consulting experience. His work focuses primarily on total rewards and performance program design, including rewards strategy development and incentive plan design. Before joining Hay Group, McMullen worked for Humana Inc. and Kentucky Fried Chicken Corp. in senior compensation analyst roles. He holds bachelor of science and master of business administration degrees from the University of Louisville.

REFERENCES

Armstrong, M., D. Brown, and P. Reilly. 2011. “Increasing the Effectiveness of Reward Management: An Evidence-Based Approach.” Employee Relations 33(2): 106-120.

Conference Board Report. 2014. “CEO Challenge 2014.”

Corby, S., G. White, and C. Stanworth, 2005. “No News is Good News? Evaluating New Pay Systems.” Human Resources Management Journal 15(1): 4-24.

E-reward. 2009. “Survey of Contingent Pay.”

McMullen, T. 2009. “Reward Next Practices Report.”

Scott, K.D. and T. McMullen, 2013. “Rewards Next Practices: 2013 and Beyond.” WorldatWork Journal 22(4): 43-54.

Scott, D., D.M. Morajda, and T. McMullen. 2006. “Evaluating Pay Program Effectiveness.” WorldatWork Journal. 15(3): 50-59.

Scott, K.D., T. D. McMullen, T.D., R.S. Sperling. 2005. “The Fiscal Management of Compensation Programs.” WorldatWork Journal 14 (3), 13-25.

J23_V4.indd 19 11/6/14 10:16 AM


Alison French, CCP, GRPIBM

The Business Case for Compensation Technology

C ompensation accounts for nearly 70% of oper-

ating expense for most organizations (Bersin

& Associates 2009) and is an important main

reason employees join and leave organizations. Yet,

despite the foundational role compensation plays in any

talent strategy, most organizations continue to manage

compensation market analysis, strategy development

and program administration using spreadsheets.

The perils and pitfalls of handling complex compensa-

tion tasks in spreadsheets are well-known, with more

than 70% of organizations reporting errors in their use of

spreadsheets to manage compensation (Ventana Research

2014). Working with spreadsheets can also be time-

consuming and difficult to scale across decentralized

groups. For these reasons, most discussions on the use

of spreadsheets in compensation and human resources

focus on productivity loss and risk of error. However,

beyond these important but tactical factors, the compen-

sation function and the organization at large have far

more to gain by reducing reliance on spreadsheets. This

article explores the areas in which organizations can

improve via the adoption of compensation technology.

J23_V4.indd 20 11/6/14 10:16 AM


COMPENSATION TECHNOLOGY DEFINED

Compensation technology solutions can generally be broken into two segments:

compensation analysis and design tools and compensation administration tools.

(See Figure 1.)

Compensation administration tools, often referred to as “compensation plan-

ning,” focus on the execution and communication of compensation programs

to employees. Included in this group would be tools enabling managers to

allocate merit budgets and incentives, generating employee compensation state-

ments, and enabling HR to administer and manage the annual salary-review

process. Adoption of manager self-service tools for administering compensa-

tion programs has increased in the past several years as organizations seek

to empower managers and streamline cumbersome processes that touch large

employee and manager populations. By some projections, compensation

management will outpace other segments of human capital management in

terms of market growth during the next four years (IDC 2014).

Before human resources and managers can administer compensation, however,

the organization must have a plan against which to execute. Compensation anal-

ysis and design tools facilitate compensation-survey management, market pricing,

salary structure development and merit-distribution scenarios, all of which are key

components of building an organization’s overall approach to compensation. While

many organizations leverage technology for compensation administration, adop-

tion of technology to manage the up-front process of analyzing the external market

and designing compensation programs is far from the norm (Aberdeen Group

2014). As these processes are more tightly contained within the compensation

Figure 1 | Compensation Analysis and Design Versus Compensation Administration

Compensation Lifecycle

J23_V4.indd 21 11/6/14 10:16 AM


and HR function, they are often overlooked as an area that could be positively

impacted by a technology investment.

COMMON OBJECTIONS TO THE ADOPTION OF COMPENSATION

TECHNOLOGY

A recent survey suggests that more than 50% of organizations rely on spreadsheets

as their primary tool for managing compensation (IBM Kenexa 2013). (This survey

received responses from 1,000 corporate compensation and HR practitioners from

organizations of multiple sizes across industries. Sample included, but was not

predominantly compromised of, IBM Kenexa customers. This survey examined

the tools, processes and data that are being used to inform decision making and

move HR professionals into the next generation of technology, with a focus on how

practitioners are managing their functional challenges using data and automation

and what the biggest challenges may be on the horizon.)

Other tools for compensation management, shown in (Figure 2), include HRIS

modules, broader talent-management tools and home-grown systems. Software

specifically designed for compensation management is used by 16% of organizations.

While spreadsheets are powerful, convenient and fast for single power users with

clean data, they are cumbersome, error-prone and fail to scale for most compensa-

tion processes, as anyone who has done the work of aggregating salary-increase

spreadsheets from managers can attest. This is not to say that compensation teams

cannot be successful with a spreadsheet-based process. They certainly can, but

Figure 2 | Primary Solution Used to Manager Compensation

Spreadsheets 50.7%

HRIS 21.3%

Compensation-specific software

16.3%

“Home-grown” system 8.7%

Talent management software suite

3.0%

J23_V4.indd 22 11/6/14 10:16 AM


chances are those who work primarily in spreadsheets have less bandwidth for

strategic activities and more single points of failure than those who manage at least

part of the process in a technology solution designed specifically for compensation.

The primary reason cited for continued use of spreadsheets or other solutions

not specifically designed for compensation is failure to convince senior leaders to

support the investment in a compensation technology solution. Another common

objection is lack of time to evaluate alternatives. (This is the self-fulfilling prophecy

of manual processes: they leave little time for meaningful investigation of other

options.) Finally, there are some cases in which an organization’s methodologies

are so particular that no packaged technology solution will suffice (IBM Kenexa

2013). These are few in number. In many cases they conclude that sacrificing some

level of customization in exchange for the efficiency gains delivered by technology

is a worthwhile tradeoff.

COMPENSATION TECHNOLOGY: DRIVING MORE VALUE

A common leadership-level objection to investment in technology solutions for the

compensation function is that spreadsheets are adequate or “good enough.” This

argument is symptomatic of many senior leaders’ perceptions of compensation in

general – that it is a purely tactical tool, and that there is little value in optimizing

the function or in better equipping those within it. Leaders who take this view

often perceive the primary benefit of compensation technology solutions as simply

making life easier for the compensation staff.

When the discussion of compensation technology focuses on saving time and

resources and managing risk (the most obvious and immediate results of tech-

nology adoption), leaders often miss the broader value that a better equipped

compensation function can provide in the context of the overall talent-manage-

ment program. While efficiency gains and operational risk reduction cannot be

discounted, they create the false impression that the benefit of a technology

investment for compensation is limited to the compensation function.

A 2012 WorldatWork survey of compensation practitioners indicates that by and

large, compensation teams are increasingly focusing on outcomes and initiatives

that move the business, with specific emphasis on:

z Controlling costs and increasing productivity

z Improving service/response to managers and employees

z Educating and enabling managers

z Delivering more value to the organization.

Leveraging technology solutions across the compensation process can provide

practitioners not only with more time to focus on these objectives but with better

tools to execute them. The author proposes that organizations consider compensa-

tion technology in a broader context, exploring not only the tactical gains created

by such tools, but also the strategic advantage enabled by a better-equipped

compensation team. (See Figure 3.)

J23_V4.indd 23 11/6/14 10:16 AM


Adoption of a technology solution to manage compensation may impact an

organization in five major areas:

z Efficiency

z Consistency

z Visibility

z Transparency

z Trust.

The first three items – efficiency, consistency and visibility — are immediate

gains that a technology solution delivers. These tactical “pillars” support the

broader, organizationwide outcomes that technology enables – transparency and

trust. These last two items concern what HR and compensation teams choose

to do with the time and resources freed by automation, and how they can drive

value within the organization.

EFFICIENCY

Efficiency is clearly a huge driver of technology adoption. When reviewing the

two places where technology can help compensation teams (analysis/design

and administration), the efficiency gains are clear. Particularly for processes like

manager salary planning, it is easy to identify the number of managers, the number

of employees and the number of spreadsheets that must be sent via email and

manually managed, and from there, the time savings and potential risk reduction

can be quantified.

In the case of compensation analysis and program design, which tend to be

managed within the compensation team alone, stakeholders often fail to grasp the

magnitude of efficiencies that can be gained. As discussed earlier, the assertion

that most of the tasks in question can be done in spreadsheets is one common

objection to the adoption of technology solutions. In particular, spreadsheets are

deemed most suitable for things like market pricing and salary structures, which

don’t directly “touch” managers and employees as much as something like salary

Figure 3 | Compensation Technology Value Framework

J23_V4.indd 24 11/6/14 10:16 AM


planning. But whether the work can be done in spreadsheets is less important

than whether it is best done in spreadsheets. Sticking with a spreadsheet-based

approach is often considered by leadership to be a “no-cost” option, but this view

fails to consider the opportunity cost of miring the compensation team in data

management tasks.

For example, consider Kenexa’s “2014 Compensation Outlook” survey was

administered in the first quarter of 2014. Responses were collected via an online

survey platform. There are 2,000 corporate compensation and HR practitioners

from organizations of multiple sizes across industries who responded. Sample

includes, but is not predominantly compromised of, IBM Kenexa customers. (This

is an annual survey that provides insight into trends and rewards practices for the

coming year.)

The survey shows that 32% of organizations feel that managers are capable of

having difficult conversations about compensation, and most organizations do little

to train managers in this area. Yet manager interaction is a key factor in whether

or not employees believe they are paid fairly, as indicated in Figure 4. (When

managers provide data, context and structure, and treat employees with respect,

they are more likely to believe their pay is fair (IBM 2013).)

Given the importance of managers in driving belief in pay fairness, where is

a compensation practitioner’s time best spent during the salary increase cycle?

Trying to reconcile spreadsheets sent back by 10 different managers? Or helping

to coach the vast majority of the managers who don’t know how to talk about

compensation? Compensation professionals themselves can answer this: 65% of

WorldatWork’s respondents in 2012 said that “educating and enabling managers

regarding compensation programs” was an area of current focus, and 50% said

Figure 4 | Relationship Between Belief in Pay Fairness and Manager Behavior

J23_V4.indd 25 11/6/14 10:16 AM


this topic would receive even greater focus in the future. Providing compensation

professionals with the tools and the bandwidth to focus on manager communica-

tion and education provides value far beyond mere efficiency and time savings.

CONSISTENCY

Enabling – and even enforcing – consistency is a major benefit of a technology solu-

tion. Consistency is critical in many areas – in how managers reward performance,

in how different locations align to the market and approach market pricing, and in

how programs globally are assessed and evaluated.

Pay for performance is an area where consistency matters. But while many orga-

nizations say they pay for performance, nearly one-half don’t provide any guidance

to managers about how to distribute limited pay budgets. Consider: In the “IBM

Kenexa Compensation Outlook Survey 2014,” 77% of organizations surveyed state

that they have a pay for performance philosophy, but only 48% of those surveyed

provide managers with a merit matrix to guide pay decisions and only one-half of

those require managers to adhere to guidelines.

At best, inconsistency exists in the way managers are rewarding high and low

performers. At worst, they are taking the path of least resistance and spreading

the dollars evenly (the “peanut butter” approach). Why does this matter? Because

belief that pay is related to performance impacts engagement, as shown in Figure 5.

Employees who believe their pay is related to performance are nearly twice as

engaged as those who do not (IBM 2013).

Does a compensation technology solution single-handedly fix problems with

managers’ inability to discuss compensation? No, but it can provide them with

guidelines (by way of a merit matrix embedded within salary planning tools) to

rely on when the conversation becomes difficult. In addition, technology solutions

free compensation professionals to prepare managers for pay conversations where

they have the opportunity to help employees see the connections between pay

and performance.

Figure 5 | Pay For Performance and Engagement

J23_V4.indd 26 11/6/14 10:16 AM


VISIBILITY

Today, HR teams play a critical role in partnering with finance to manage compensa-

tion spend, and to do this they need visibility into how compensation is allocated

across the organization. Department, business unit and organizationwide views are

key to connecting the compensation team’s work to business metrics like profitability.

Compensation technology solutions can provide top-level visibility into how

compensation dollars are being spent, and with that view in hand the compen-

sation function can start to add value as an investment adviser of sorts. Are we

overspending in places we don’t need to? Are we underspending on jobs that

are mission critical, creating turnover risk? How are we paying low versus high

performers? A global view is one example of the power of technology to drive

insight; the flip side is the micro, or employee-level, view, and the power to

move with ease between the two.

In general, compensation and HR practitioners who leverage technology

solutions (instead of spreadsheets) to manage compensation are more confi-

dent in their ability to meet key challenges, specifically those that involve

data and analytics (IBM Kenexa 2013). (See Figure 6.)

TRANSPARENCY

Beyond the tactical gains – efficiency, consistency and visibility – there are

further dividends that technology-enabled compensation processes pay to the

organization. The first of these is transparency.

Figure 6 | Impact of Technology Use on Practitioner Preparedness

“I feel prepared to address the following challenges”

J23_V4.indd 27 11/6/14 10:16 AM


Research indicates that employees who believe they are paid fairly are substan-

tially more engaged than those who don’t. Two main factors drive an employee’s

belief in the fairness of his/her pay (IBM 2013):

z Knowledge and understanding of pay (knowing how pay is determined and how

to maximize it)

z Belief that pay is tied to performance.

These two drivers influence an employee’s perception of pay fairness far more

than the pay level. (See Figure 7.) Regardless of how much time and money are

invested in building compensation programs, if employees don’t understand how

pay works, they are less likely to believe it is fair.

The implication of this is simple: compensation practitioners can design elegant

and fair programs, yet may fail to garner appropriate employee goodwill simply

because employees do not understand the programs and drivers. Similarly,

compensation increases alone may fail to retain and engage employees who do

not understand the overall pay programs. Providing this transparency is critical

to maximizing the effect of the compensation investment.

Technology enables transparency in a few ways. The most concrete is that it

makes it much easier to communicate the full rewards picture to every employee,

often via a total compensation statement that lays out the investment the organiza-

tion makes in an employee’s pay, benefits and incentives. Similarly, it enables HR

and compensation professionals to deploy and drive use of pay-for-performance

tools like the merit matrix.

Figure 7 | Drivers of Belief in Pay Fairness

Pay for Performance

42.5%

Actual Salary 9.5%

Knowledge & Understanding

48.0%

J23_V4.indd 28 11/6/14 10:16 AM


Transparency, however, must go beyond one-way communication to be effec-

tive – it must also be understood. This is where the additional bandwidth created

by reduced reliance on spreadsheets can truly be leveraged to protect engagement

and value. Compensation professionals have the time to ensure that data is not only

available but is also understood by managers and HR business partners, so that

employees have faith that they are being treated fairly.

Why does pay fairness matter? Because employees who believe they are paid

fairly are nearly twice as engaged as those who do not feel they are paid fairly

(IBM 2013) and a significant positive correlation exists between engagement levels

and organizational performance. Organizations with more engaged employees tend

to outperform their peers on metrics like customer satisfaction, total shareholder

return, diluted earnings per share and return on assets (Kenexa 2013). By protecting

engagement levels compensation teams could contribute to better financial outcomes

for the organization.

TRUST

The connections between compensation and trust may be somewhat aspirational,

but manifest in real ways for the compensation team. When requests for market

data take days to fulfill, or when errors in manual processes are discovered, the

organization’s trust in the compensation team is eroded. When managers have small

merit budgets and no context for how to distribute them, their trust in the merit

process diminishes. When managers cannot explain to employees how their pay

is determined, employees’ trust in the fairness of their pay fades. When a senior

leader cannot easily answer questions about the cost of compensation in a particular

region or business unit, management’s trust in human resources is reduced.

There are even more concrete ties between an employee’s perceptions about

pay and his/her level of trust in direct managers and senior leaders. As shown in

Figure 8, employees who believe they are paid fairly tend to have a higher degree

of trust in (IBM 2012).

Figure 8 | Pay Fairness and Trust

J23_V4.indd 29 11/6/14 10:17 AM


CONCLUSION

It is perfectly possible to manage compensation processes in spreadsheets, some-

times quite well, but it will always require a significant investment of time in

lower-value data management activities and will bear the risks typically associated

with spreadsheet-driven processes. Leveraging a technology for compensation

market analysis, program design and administration provides not only provides

tactical gains like time savings, risk reduction and increased productivity, but also

provides added visibility and, by enabling compensation teams to spend more

time on strategic activities, it could also impact larger organizational outcomes

such as employee engagement and financial performance. z

AUTHOR

Alison French, CCP, GRP ([email protected]) has spent 10 years driving product strategy for the IBM Kenexa compensation solution portfolio. In her current role, she works closely with customers and influencers in the market to understand the needs and aspirations of compensation professionals and is a frequent speaker on compensation technology. She holds a bachelor’s degree in political science from Yale University and an master’s in business administration from the Kellogg School of Management. She is a member of WorldatWork and has been a Certified Compensation Professional and a Global Remuneration Professional since 2005.

REFERENCES

Aberdeen Group. 2014. “Compensation Strategy: Delivering Performance Through Pay.”

Bersin & Associates. 2009. “Enterprise Compensation Solutions: The Next Wave in Integrated Talent Management.”

IBM. 2013. “IBM Smarter Workforce Institute WorkTrends, 2013.”

IBM. 2012. “IBM Smarter Workforce Institute WorkTrends, 2012.”

IBM Kenexa. 2014. “IBM Kenexa Compensation Outlook Survey, 2014.”

IBM Kenexa. 2013. “IBM Kenexa Compensation Technology Survey, 2013.”

IDC. 2014. “Worldwide and U.S. Human Capital Management Applications 2014–2018 Forecast.”

Kenexa. 2013. “Beyond Engagement: The Definitive Guide to Employee Surveys and Organizational Performance.”

Ventana Research. 2014. “Compensation Requires Commitment: Managing Compensation in Spreadsheets is Risky Business.”

WorldatWork. 2012. “The Evolving Compensation Function.”

J23_V4.indd 30 11/6/14 10:17 AM


Measuring Total Rewards: Conjoint Analysis Versus MaxDiff Scaling

The purpose of this article is to compare two

techniques for measuring relative preferences —

conjoint analysis and maximum differential, or

maxdiff, scaling — applied to total rewards measure-

ment. Conjoint analysis will be explained first, then

maxdiff scaling and the two will be compared from a

theoretical point of view. Both techniques will then be

applied to a real-life case and their results compared.

TOTAL REWARDS AND CONJOINT ANALYSIS

The term total rewards describes all the elements, both

tangible and intangible, which attract, motivate and

retain employees. Classically, compensation and benefits

are referred to as tangible elements, while intangibles

are much more diverse, including such elements as

work-life effectiveness and career development.

Conjoint analysis has been used to measure total rewards

for more than a decade. It is based on the measurement

of relative preferences instead of absolute preferences;

that is to say on the trade-off of a total rewards element

in relation with another one, not on the importance of

Federico LopezThomas More Management

Consulting and Andres Bello Catholic University Institute of Advanced

Management studies (IESA)

J23_V4.indd 31 11/6/14 10:17 AM


each element individually. This makes the exercise similar to the decisions made

in real life.

Then for the measurement of relative preferences, conjoint analysis presents

several options or combinations of total rewards elements, which the employee

sorts or chooses according to the adopted conjoint analysis modality. This order

Recognition• Frequent

• Infrequent

Compensation• Market Average

• 10% above market

Work-Life Effectiveness• No flex time

• Flex time

Figure 1 | Conjoint Analysis Example

Figure 2 | Conjoint Analysis Example: Combinations

Recognition: Frequent

Compensation: Market average

Work-life effectiveness: Flex time

Recognition: Infrequent

Compensation: 10% above market







Work-life effectiveness: No flex time







Recognition Frequent






1

5

2

6

3

7

4

8

J23_V4.indd 32 11/6/14 10:17 AM


of selection(s) can be used to determine the configuration of the employee’s (or

employees’) preferences regarding tangible and intangible elements.

Figure 1 illustrates an example with only three attributes and two levels for

each attribute.

Figure 2 shows the combinations that can be obtained from the Figure 1 variables.

Figure 3 shows an employee sorting the eight “cards” according to his/her pref-

erences. That would produce the results shown in Figure 4, where compensation

is the dominant preference (59%), followed by work-life effectiveness (29%) and

recognition (12%). If another person orders the cards or combinations according

to what is established in Figure 5, preferences would be more aimed to work-life

effectiveness, followed by compensation and recognition. (See Figure 6.)

Of course, real-life cases are much more complex than the example, which is

used to illustrate how information is collected in conjoint analysis and exemplify

one of the kinds of information provided.

Note that conjoint analysis attributes are presented simultaneously; each card of

the eight previously presented contains a combination of attributes (i.e., compen-

sation) and levels (i.e., market average). When the number of attributes and levels

to be considered is higher, then it is necessary to depurate the most relevant

attributes, since the capacity to order combinations decreases as more attributes

are presented to the employees. This process is summarized in the following steps:

Figure 3 | Preferences Sorting Example



















Recognition Infrequent






1

3

8

5

2

4

6

7

J23_V4.indd 33 11/6/14 10:17 AM


1 | Definition of attributes, levels and initial models. In this stage, brain-

storming with employees is carried out to obtain all the variables or elements that

attract, retain and motivate employees in the organization. In general, practical

experience shows that a list of approximately 20-25 attributes is obtained. Another

option is to use a previously defined model.

2 | Pilot sample. Once the initial list of attributes and levels has been defined,

then a pilot sample is made to determine the relevant variables/attributes that

include most of the preferences, which will decrease collection time. Addition-

ally, the correct understanding and comprehension of attributes designed with

employees and the possible difficulties in ordering combinations are verified.

3 | Definition of final models. With the results of pilot sample, the final models

are prepared, which typically include a reduced number of attributes that concen-

trate 90% or more of the preferences.

4 | Field work, analysis and results processing. Results are processed in the

field and analyzed.

Conjoint analysis’s results are used for diverse purposes, such as: total rewards

optimization of an organization (contrast and adjust what the employees prefer

and what the organization offers); establishing preferences between two particular

attributes or variables (compensation vs. work-life effectiveness or safety at work);

and determining preferences previous to a negotiation.

Conjoint analysis has proven to be a versatile and flexible instrument in detecting

employees’ preferences of total rewards elements. Likewise, it is a low-cost method

and its results are less biased than those of direct collection instruments.

Despite those strengths, conjoint analysis presents certain limitations when iden-

tifying which specific tools, from a long list, should be given to employees. In other

words, it can quickly detect the main elements or categories and their weights

within relative preferences. For example, it can reveal that work-life effectiveness

Figure 4 | Conjoint Analysis Results (Data from Figure 3)

0%!

10%!

20%!

30%!

40%!

50%!

60%!

70%!

Compensation! Work Life Effectiveness!

Recognition!

J23_V4.indd 34 11/6/14 10:17 AM


represents 18% of preferences. But in order to specifically know which work-life

elements (such as flex time, telecommuting and sabbaticals) are preferred, a series

of successive subsequent conjoint analyses have to be performed. This implies a

longer collection time, since in conjoint analysis all attributes are simultaneously

presented and ordering options with a higher number of attributes is more difficult

for the respondent. Then, maxdiff scaling may be suitable.

Figure 5 | Preferences Sorting Example (Second Person)



















Recognition Infrequent






1

2

8

6

3

4

Figure 6 | Conjoint Analysis Results (Data from Figure 5)

0%!

10%!

20%!

30%!

40%!

50%!

60%!

70%!

Compensation! Work Life Effectiveness!

Recognition!-

J23_V4.indd 35 11/6/14 10:17 AM


MAXDIFF SCALING: ANOTHER TECHNIQUE FOR MEASURING TOTAL

REWARDS

There is another technique for measuring relative preferences, known as maximum

difference, or maxdiff, scaling. This technique, created by Jordan Louviere while

at the University of Alberta, seeks to measure preferences, but only by selecting

the most and least preferred options of a determined number of items, as shown

in Figures 7 and 8. Figure 7 shows total rewards elements, while Figure 8 seeks

to detect specific tools.

For example, in Figure 8, if a person answers that the most preferred option is

sabbaticals, (option A) and the least preferred one is alternative workplaces (option

D), it can be concluded that:

A is preferred to D

A is preferred to B

Figure 7 | How Information Is Collected in MaxDiff Scaling — Total Rewards Elements

Figure 8 | How Information Is Collected in MaxDiff Scaling — Work-Life Effectiveness Tools

J23_V4.indd 36 11/6/14 10:17 AM


A is preferred to C

B is preferred to D

C is preferred to D.

Five pieces of information regarding preferences are garnered from six possible

pairs. Of course, successive questions can detect employees’ preferences faster,

even in the case of a high number of items.

Unlike conjoint analysis, maxdiff scaling does not require preparation of a list

of attributes with levels within each attribute. It only needs a series of items to be

taken into account, directly measured on a common scale.

The maxdiff method has also been called the “best-worst” conjoint because

the way preferences are chosen. It helps to resolve a pair’s comparison method

(comparing two items at the same time), which will lead to a very long list of

pairs for the respondent with a significantly reduced number of questions. (This

is based on a list of 157 items, about the number of items in the WorldatWork

total rewards inventory. Such a list, organized in pairs, would imply asking 12,246

questions of preference.)

Then, if there is interest in observing the general categories or the elements

of total rewards, conjoint analysis could be more useful. But if the interest is to

select, within each category, the specific items employees prefer from a long list

of possible options, maxdiff scaling would be more suitable.

For better understanding of the implications of total rewards measurement,

imagine an HR professional working with WorldatWork’s total rewards inven-

tory. (See Figure 9). In maxdiff scaling terms, the list has about 157 items.

Likewise, imagine that HR professional is interested in knowing the preferences

of employees regarding that long list of items. Under conjoint analysis, that would

imply a model to determine the preferences of general categories (compensation,

benefits, work-life effectiveness, performance and recognition, development and

career opportunities). However, determining the specific tools within each of the

categories could take from 10 to 20 additional conjoints. Considering that each

model can take about 15 minutes of collection time per employee, that would total

about 150 to 360 minutes or 2.5 to 6 hours of collection time. The corresponding

respondents’ exhaustion levels would affect the collected data.

Under maxdiff scaling, determining employees’ preferences regarding the same 157

items can be made in one single sample collection of 97 maxdiff questions, within

about 30 minutes, if certain conditions are assumed. If previously, and under a pilot

sample and/or other method, about 100 items are excluded and a maxdiff scaling is

carried out, time is significantly reduced to an estimated 19 minutes.

Finally, maxdiff scaling’s results can be processed under three methods: counting,

logit and hierarchical Bayesian.

The counting method consists of estimating the proportion of times an item is

the most preferred (the times an item is more preferred among the number of its

J23_V4.indd 37 11/6/14 10:17 AM


appearances) and subtracting from the proportion of times the item is the least

preferred (times preferred among number of appearances).

The counting method is simple and easy to understand, but is only an initial

approach to the possible results. The other two methods are more statistically solid.

Figure 10 shows the comparison of some aspects of conjoint analysis versus

maxdiff scaling, oriented to total rewards measurement.

CONJOINT ANALYSIS VERSUS MAXDIFF SCALING: A REAL-LIFE CASE

A Latin American organization with about 2,000 employees can be used to illus-

trate the application of maxdiff scaling versus conjoint analysis. The organization

was interested in knowing the alternatives preferred by employees in designing

a total rewards strategy.

Due to confidentiality concerns, the results of the pilot sample as well as the

general results have been modified. However, to preserve the essence of those

results, the proportion among tangibles and intangibles are shown.

To carry out the process, the following steps were taken:

Brainstorming

Employees in different levels and functional areas within the organization

were invited for a brainstorming session in order to detect which total rewards

elements they thought were appropriate to attract, motivate and retain the orga-

nization’s employees.

Figure 9 | WorldatWork Total Rewards Inventory

J23_V4.indd 38 11/6/14 10:17 AM


Four groups of 15 employees were invited to a brainstorming session, which

produced a result of 193 items. Figure 11 represents the items as they were

expressed, once duplications were eliminated.

Pilot sample

In view of the list’s length, a pilot sample for 70 employees was designed in

order to eliminate items with a very low weight within the preferences, therefore

making the final collection much less extended. An online maxdiff scaling ques-

tionnaire with 97 questions was sent to the employees. It included an invitation

letter, which assured confidentiality. The respondents were given about 32 minutes

to answer the questionnaire.

Pilot sample results were analyzed under the three maxdiff scaling methods:

counting, logit and hierarchic Bayesian method.

It was decided to include preferred items under those three methods. Additionally,

if an item was preferred by a category, for example middle management, but not

in others, it was also included for the final instrument.

Results are shown in Figures 12 for the counting method and 13 for the counting,

logit and hierarchic Bayesian methods.

Examining Figure 12, column 3 indicates the number of times each item was

shown, corresponding to an almost orthogonal design (Times Shown-Best column).

On the other hand, the last column shows the difference of the proportion of times

it appeared as best (0.626) minus the proportion of times it appeared as worst

(0.005), which gives the value of 0.621. Items have been organized according to

this proportion so that the most preferred are at the beginning of the list and less

preferred at the end. Items whose differences of proportion are zero are included

in this list. Items with negative proportions, which are chosen the worst more

times than the best, are not included in this list.

Focusing on the 10 most preferred items, it can be seen that eight are tangible

elements, such as compensation and benefits, while the other two are intangibles.

Figure 10 | MaxDiff Scaling Vs. Conjoint Analysis: Relevant Aspects

J23_V4.indd 39 11/6/14 10:17 AM


COMPENSATION

Competitive compensation according to market

Compensation package stratification

Variable compensation/incentives Plan

Compensation with higher monthly liquidity (higher base salary)

Compensation according to country situation (inflation)

Option to distribute benefits throughout the year

Introduction of foreign currency portions in the compensation (Bonuses and others)

Compensation with individual incentives

Boss with a higher discretional role regarding compensation

Compensation with less fiscal impact

Internal Equity (internal appropriate differences among salaries)

Payment with stock (Stock Grants)

Competitive food ticket

Long-term variable plan (LTIP)

Plan of stock purchase at a prefixed price (stock options)

BENEFITS

Competitive benefits according to the market

Competitive preferential credits (home, vehicle, personal)

Parking place (free, paid)

Retirement plan

Employees’ gym

Credit for direct buy in stores through savings bank/fund

Competitive hospitalization, surgery and maternity insurance policy

Improvement in employees’ dining room’s infrastructure (more seats, ventilation)

Sabbatic year with payment in foreign currency

Unpaid year of studies with job security

Agreements with travel agents (discounts, preferential terms)

Permanent program of discounts in stores

Alliances with suppliers/clients for employees’ additional benefits

Competitive savings bank (loan conditions)

Figure 11 | Total Rewards Inventory (Client´s model)

J23_V4.indd 40 11/6/14 10:17 AM


Breastfeeding zones/areas

Benefits for school supplies and materials

Healthy food offer for employees

Day care

Reading room and library

Social & sports club

Competitive life and accident insurance policy

Employer contribution to hospitalization, surgery and maternity insurance policy excess

Vehicle insurance policy

Competitive vacation days enjoyment policy

Personal travel insurance

Telephone line/cell phone payment for employees

Telephone line and mobile phone assignation to the appropriate positions

Competitive internal medical service

Loans/facilities for purchasing insurance policies in U.S. dollars (international coverage)

Non-monetary incentives (travels, day off)

Competitive credit card loans for employees, at a preferential rate

Social assistance fund for special cases

Christmas present

Loans paid with service years for home purchasing down payment

Games room

Forgiveness of special loans due to performance assessment

Forgiveness with home, credit card and vehicles loan raffles

Nutritionist within medical assistance

Paying with food ticket card on 2nd floor

Extra contribution for day-care payment

Agreements with real state companies for home purchasing

Management of building projects for employees

Social clubs membership financing

Stock purchasing

Additional special bonus for working on holidays

Figure 11 | Total Rewards Inventory (Client´s model) (cont.)

J23_V4.indd 41 11/6/14 10:17 AM


BENEFITS (cont.)

Special bonus for vacations

Anti-stress massage center

Agreements with hairdressers and laundry shops

Savings fund for employees with more than 10 years in the organization

Flexible benefits package

Working time reduction on school holidays

Better food reheating system

Facilities for opening bank accounts abroad

Coffee on all floors

Well-supplied and clean restrooms

Transportation to work place

Inflation-adjusted travel allowances

Special attention window regarding office problems

Holiday plan for children and teenagers

Remembrance for the death of a relative

Abroad internships for employees’ children

Bonus for of studies completion

Assignation of company car (company car)

Foreign currency prepaid card

Club membership assigned by company

Retention plan payable with years of service

Possible offer of tickets for sport events abroad

Sabbatic year/period shorter than a year

Medical exams paid by the company

Savings plan in hard currency

Outplacement when necessary

Development of an alternative emigration plan in case of a major event

Large and appropriate areas to take a coffee/tea

IPad/tablet assigned by the company

Executive dining room


J23_V4.indd 42 11/6/14 10:17 AM


Delivery service to the office

Car-wash service at the parking facility

Dental insurance

Assistant for personal matters/formalities

Loan for second home

Rotative vacation resort with expenses covered by the company

Access to scarce essential goods (flour, dairy, etc)

Improved holiday payment

Post-holiday bonus increase

Infrastructure

Appropriate temperature of workplace

Large and appropriate physical space

Break room (during/between working time)

Suitable office infrastructure/back office (in general)

Workplace

Headquarter’s geographical location in the best municipality

Parking facility/headquarter transportation

Human resources to work with

Appropriate HR staff per area

Fast covering of vacant positions

Rotative staff for vacations/bed rests

Staff for work positions training

Physical security

State-of-the-art technology for employee’s security

Communications/emails with security tips/for relatives

City status analysis regarding physical security

Access to security services, as Internet home cameras, GPS devices, armored cars and vehicles

Labor stability

Labor stability

Clothing

Casual dress on Fridays (offices and back office) Semi-formal dress every day (only for back office)


J23_V4.indd 43 11/6/14 10:17 AM


Life-Work Balance

Work allows me to pay attention to my personal life

Flexible working time

Partial or total telework

Holidays exchange with Fridays or Mondays

Birthday off

Straight working time on Fridays

Additional time during postnatal period for mother and father

Day off due to profession

Monthly free Fridays

Extramural Activities

Personal development activities for employee and family

Recreational activities for employee and family

Volunteer activities

Bank’s general (not per department) party

Social and sport event

Bank covered walk/run for employees

Chorus

Interoffice games

Reading, games, cards groups

Theater club

Fitness and nutrition programs

National games

Social work at employee level

Coaching programs for the management of personal and working problems

National health fairs

Values

Values guided by supervising level

Improving image/perception as employer

Programs contributing to the sense of corporate identity and belonging


J23_V4.indd 44 11/6/14 10:17 AM


Climate

Good organizational climate /relations among peers

Team Work

Team work/work teams’ synergy

Respect

Respect for internal customer

Trust culture on bank’s actions

Performance Measuring

Clear communication regarding advancements’/promotions’ assessment modalities

Clarity regarding performance measuring methodology

Performance measuring equity between business and back-office areas

Communication and participation regarding goal distribution modalities

Empowerment and measurement of each position’s decisions

Regular feedback regarding performance

Gap closing methods of competencies in performance assessment

Acknowledgment

Acknowledgment to merit/work/specific achievement

Acknowledgment badges

Presence of Supervising Level

Inclusion of executive levels in programs to attract new human resources

Executive leadership with ambition

Timely responses to employees’ requirements/concerns by supervising levels

Supervisors’ attitude aimed to the solution of employees’ problems

Leaders that are models for the employees

Presence of executives and directors on employees’ day-to-day

Communication

Open communication (open-communication policy)

Timely communication regarding competitors’ best practices

Less formal communication among working teams

Communication about results


J23_V4.indd 45 11/6/14 10:17 AM


Figure 12 | MaxDiff Scaling: Pilot Sample Results Under Counting Method

Label

Competitive compensation according to market

Management of real estate projects for employees

Forgiveness of special loans due to performance assessment

Key talent turnover rates among high-potential employees, key jobs or high-performance employees

Career and development plan

Employer contribution to hospitalization, surgery and maternity insurance policy


Flexible benefits package

Savings plan in hard currency

Compensation without fiscal impact

Competitive life and accident insurance policy

Variable compensation/Incentives plan

Second home loans

Good organizational climate/relations among peers

Compensation with a higher monthly liquidity (higher base salary)

Competitive food ticket

Competitive benefits according to market

Agreements for English studies

Introduction of foreign currency portions in compensation (Bonuses, others)

Acknowledge to merit/work/an specific achievement

Retirement plan

Competitive preferential credits (personal, home, vehicle)

Competitive savings bank (loan conditions)

Compensation according to country situation (inflation)

Post-vacation bonus increase

Labor stability

Agreements with real estate companies for home purchasing


Post-vacation bonus increase

Labor stability

J23_V4.indd 46 11/6/14 10:17 AM


Item Number

Times Shown - Best

Times Selected

Best

Best Count Proportion

Times Shown - Worst

Times Selected

Worst

Worst Count Proportion

Difference

20 198.0 124.0 0.626 198.0 1.0 0.005 0.62

5 198.0 122.0 0.616 198.0 0.0 0.000 0.62

189 204.0 120.0 0.588 204.0 2.0 0.010 0.58

1 198.0 111.0 0.561 198.0 1.0 0.005 0.56

22 198.0 111.0 0.561 198.0 3.0 0.015 0.55

19 198.0 99.0 0.500 198.0 0.0 0.000 0.50

4 198.0 99.0 0.500 198.0 3.0 0.015 0.48

101 198.0 99.0 0.500 198.0 3.0 0.015 0.48

25 198.0 90.0 0.455 198.0 1.0 0.005 0.45

59 198.0 92.0 0.465 198.0 7.0 0.035 0.43

52 198.0 87.0 0.439 198.0 4.0 0.020 0.42

3 204.0 85.0 0.417 204.0 4.0 0.020 0.40

40 198.0 82.0 0.414 198.0 8.0 0.040 0.37

7 198.0 83.0 0.419 198.0 9.0 0.045 0.37

123 205.0 77.0 0.376 205.0 2.0 0.010 0.37

8 198.0 70.0 0.354 198.0 1.0 0.005 0.35

180 198.0 72.0 0.364 198.0 3.0 0.015 0.35

60 198.0 74.0 0.374 198.0 6.0 0.030 0.34

104 198.0 71.0 0.359 198.0 4.0 0.020 0.34

88 198.0 76.0 0.384 198.0 13.0 0.066 0.32

106 198.0 76.0 0.384 198.0 14.0 0.071 0.31

39 198.0 62.0 0.313 198.0 2.0 0.010 0.30

67 198.0 68.0 0.343 198.0 8.0 0.040 0.30

2 198.0 61.0 0.308 198.0 4.0 0.020 0.29

32 198.0 60.0 0.303 198.0 3.0 0.015 0.29

68 198.0 60.0 0.303 198.0 3.0 0.015 0.29

98 198.0 59.0 0.298 198.0 3.0 0.015 0.28

109 204.0 63.0 0.309 204.0 6.0 0.029 0.28

2 198.0 61.0 0.308 198.0 4.0 0.020 0.29

32 198.0 60.0 0.303 198.0 3.0 0.015 0.29

Figure 12 | MaxDiff Scaling: Pilot Sample Results Under Counting Method (cont.)

J23_V4.indd 47 11/6/14 10:17 AM



Label

Agreements with real estate companies for home purchasing


Supervisors’ attitude aimed to solve employees’ problems

Training plan

Loans paid with years of service for home purchasing down payment


Study agreements with universities

Competitive credit card loans for employees, at preferential rates

Leaders that are models for employees

Stratifying compensation a benefits package

Team work/Team work synergy

Remaining bonus

Responsible leadership education

Work station with updated hardware and software

Training adapted to individual (not general and massive) requirements

Timely responses to employees’ requirements/concerns by the supervising level

Social assistance fund for special cases

Internship programs with international partners

Respect for the internal customer

Temporary job opportunities with international partners

Work allows employee to pay attention to his/her personal life

Internal equity (appropriate salary differences at internal level)

Improved vacation payment

Insurance policy for vehicles

Participation in decision making

Company values guided by supervising level

Challenging job

Long-term variable plan (LTIP)

Programs contributing to corporate sense of identity and belonging

Empowerment and measuring of each position’s decisions

J23_V4.indd 48 11/6/14 10:17 AM


Item Number

Times Shown - Best

Times Selected

Best


Times Shown - Worst

Times Selected

Worst


Difference

68 198.0 60.0 0.303 198.0 3.0 0.015 0.29

98 198.0 59.0 0.298 198.0 3.0 0.015 0.28

109 204.0 63.0 0.309 204.0 6.0 0.029 0.28

15 198.0 62.0 0.313 198.0 9.0 0.045 0.27

171 204.0 63.0 0.309 204.0 10.0 0.049 0.26

102 198.0 55.0 0.278 198.0 4.0 0.020 0.26

16 206.0 60.0 0.291 206.0 14.0 0.068 0.22

10 207.0 61.0 0.295 207.0 15.0 0.072 0.22

14 198.0 51.0 0.258 198.0 8.0 0.040 0.22

49 198.0 49.0 0.247 198.0 7.0 0.035 0.21

113 198.0 51.0 0.258 198.0 9.0 0.045 0.21

54 198.0 55.0 0.278 198.0 14.0 0.071 0.21

50 198.0 43.0 0.217 198.0 2.0 0.010 0.21

188 198.0 47.0 0.237 198.0 6.0 0.030 0.21

169 207.0 51.0 0.246 207.0 10.0 0.048 0.20

108 198.0 48.0 0.242 198.0 9.0 0.045 0.20

170 204.0 50.0 0.245 204.0 10.0 0.049 0.20

120 198.0 51.0 0.258 198.0 13.0 0.066 0.19

182 198.0 40.0 0.202 198.0 2.0 0.010 0.19

12 198.0 45.0 0.227 198.0 7.0 0.035 0.19

141 198.0 44.0 0.222 198.0 7.0 0.035 0.19

121 198.0 53.0 0.268 198.0 17.0 0.086 0.18

177 198.0 39.0 0.197 198.0 3.0 0.015 0.18

11 198.0 40.0 0.202 198.0 6.0 0.030 0.17

125 198.0 39.0 0.197 198.0 5.0 0.025 0.17

128 205.0 39.0 0.190 205.0 4.0 0.020 0.17

174 202.0 39.0 0.193 202.0 5.0 0.025 0.17

17 198.0 50.0 0.253 198.0 17.0 0.086 0.17

126 198.0 43.0 0.217 198.0 10.0 0.051 0.17

41 202.0 46.0 0.228 202.0 13.0 0.064 0.16


J23_V4.indd 49 11/6/14 10:17 AM



Label

Communication and participation in goal distribution modalities

Clarity in the performance measuring methodology

Closing gaps program for employees’ competencies

Permanent job opportunities with international partners

Retention plan payable with years of service

Clear communication regarding assessing modality for advancements and promotions

Coaching programs for the management of personal and working problems

Regular performance feedback

Payment with organization’s stock

Competitive policy regarding vacation enjoyment days


Executive leadership with ambition

Abroad apprenticeships for employees’ children

Personal development activities for employee and family

Appropriate human resources workforce per area

Inclusion of executive levels in programs for attracting new human resources

Timely communication of competitors’ better practices

Open communication (open-door policy)

Loans/facilities for the acquisition of insurance policies in US$ (international coverage)

Purchasing of company stock

Medical exams paid by the company

Agreements with travel agents (discounts, preferential conditions)

Non-monetary incentives (travels, day off)

Closing gaps methods for competencies in performance assessment

State-of-the-art program for employee security

Rotative vacation resort with expenses covered by the company

Unpaid year of studies securing job position

Autonomous working

Communication regarding vacant positions to apply for (“Job posting”)

Alliances with suppliers/clients for employees’ additional benefits

J23_V4.indd 50 11/6/14 10:17 AM


Item Number

Times Shown - Best

Times Selected

Best


Times Shown - Worst

Times Selected

Worst


Difference

176 205.0 40.0 0.195 205.0 7.0 0.034 0.16

130 198.0 43.0 0.217 198.0 12.0 0.061 0.16

84 198.0 42.0 0.212 198.0 12.0 0.061 0.15

110 198.0 35.0 0.177 198.0 6.0 0.030 0.15

122 198.0 45.0 0.227 198.0 16.0 0.081 0.15

163 198.0 38.0 0.192 198.0 10.0 0.051 0.14

178 198.0 37.0 0.187 198.0 11.0 0.056 0.13

173 198.0 41.0 0.207 198.0 15.0 0.076 0.13

90 198.0 48.0 0.242 198.0 22.0 0.111 0.13

42 198.0 30.0 0.152 198.0 7.0 0.035 0.12

13 198.0 42.0 0.212 198.0 19.0 0.096 0.12

168 205.0 33.0 0.161 205.0 13.0 0.063 0.10

62 198.0 45.0 0.227 198.0 27.0 0.136 0.09

134 198.0 24.0 0.121 198.0 6.0 0.030 0.09

175 204.0 32.0 0.157 204.0 14.0 0.069 0.09

47 198.0 35.0 0.177 198.0 18.0 0.091 0.09

29 198.0 40.0 0.202 198.0 23.0 0.116 0.09

48 198.0 43.0 0.217 198.0 26.0 0.131 0.09

46 198.0 29.0 0.146 198.0 12.0 0.061 0.09

79 198.0 35.0 0.177 198.0 19.0 0.096 0.08

87 198.0 37.0 0.187 198.0 21.0 0.106 0.08

179 198.0 28.0 0.141 198.0 12.0 0.061 0.08

167 204.0 25.0 0.123 204.0 9.0 0.044 0.08

99 198.0 43.0 0.217 198.0 28.0 0.141 0.08

129 198.0 25.0 0.126 198.0 10.0 0.051 0.08

184 198.0 29.0 0.146 198.0 14.0 0.071 0.08

28 198.0 34.0 0.172 198.0 20.0 0.101 0.07

124 207.0 26.0 0.126 207.0 12.0 0.058 0.07

31 198.0 31.0 0.157 198.0 18.0 0.091 0.07

150 198.0 34.0 0.172 198.0 21.0 0.106 0.07


J23_V4.indd 51 11/6/14 10:17 AM


As it can be observed, the counting method has the advantage of its simplicity.

However, it does not indicate the relative weight of the eight tangible elements

versus the two intangible elements. It only indicates which one is more preferred

over the other, but not the relative weight or percentage of the eight tangible (or

the two intangible) in the total rewards spectrum. It also does not directly indicate

the relative weight of categories or elements, such as compensation, work-life

effectiveness or development and career opportunities.

The logit and Bayesian methods provide additional information in that sense.

Figure 13 shows the items selected under the three methods, sorted using the

counting method.

FINAL SAMPLE

With the final previously selected 90 items, a new Web instrument was prepared,

with 68 maxdiff questions and an estimated collection time of 22 minutes per

employee. The final sample selected 240 employees, proportionally distributed in

the organization’s different levels. Choices within each level were done randomly.

Additionally, a conjoint analysis with five attributes or classic elements (compensa-

tion, benefits, work-life effectiveness, performance and recognition, development

and career opportunities) was given to the same respondents.

The final results of maxdiff scaling for the total sample are shown in Figure 14.

As it can be observed, of the first 30 items preferred by the employees, six (20%)

are intangibles while the rest are tangibles. However, the fact that 24 items corre-

spond to the compensation and benefits category does not imply that tangibles

represent 80% of preferences regarding general elements or components, but 80%

of preferred items.

After seeing maxdiff scaling results, the conjoint analysis results need to be

examined in order to combine them later.

CONJOINT ANALYSIS FINAL RESULTS

As explained previously, in order to determine employees’ preferences regarding

the elements of total rewards and combine them with the results of the preceding

aspect’s maxdiff scaling, a conjoint analysis model was prepared on the general

categories or elements of total rewards. A set of cards was prepared with combina-

tions of attributes administered online to the sample of employees who answered

the maxdiff scaling survey. (See Figure 15.)

The weight of the tangible elements is 57% compared to 43% for intangibles.

However, conjoint analysis does not indicate which specific tools could be used

to activate each of the five categories showed in Figure 15.

J23_V4.indd 52 11/6/14 10:17 AM


Items Logit HB Counts

Competitive compensation according to market 1.76 1.43 0.62

Management of real estate projects for employees 1.73 1.41 0.62

Forgiveness of special loans due to performance assessment 1.65 1.29 0.58

Career plan and development 1.63 1.15 0.56

Employer contribution to hospitalization, surgery and maternity insurance policy excess

1.58 1.21 0.55


1.47 1.18 0.50

Flexible benefits package 1.46 1.21 0.48

Savings plan in hard currency 1.40 1.16 0.48

Compensation without fiscal impact 1.39 1.17 0.45

Competitive life and accident insurance policy 1.34 1.21 0.43

Variable compensation/Incentives plan 1.31 1.10 0.42

Second home loans 1.26 1.06 0.40

Good organizational climate/relations among peers 1.22 1.05 0.37

Compensation with a higher monthly liquidity (higher base salary) 1.20 1.07 0.37

Competitive food ticket 1.18 1.15 0.37

Competitive benefits according to market 1.18 0.91 0.35

Agreements for studies of English 1.17 1.04 0.35

Introduction of foreign currency portions in compensation (Bonuses and others)

1.16 0.86 0.34

Acknowledgment to merit/work/specific achievement 1.09 0.92 0.34

Retirement plan 1.09 1.00 0.32

Competitive preferential credits (home, vehicle, personal) 1.05 0.91 0.31

Competitive savings bank (loan terms) 1.03 0.87 0.30

Compensation according to country situation (inflation) 1.03 0.84 0.30

Post-vacational bonus increase 1.02 0.80 0.29

Labor stability 1.00 0.82 0.29

Agreements with real estate companies for home purchasing 0.98 0.84 0.29

Compensation with individual incentives 0.98 0.98 0.28

Supervisors’ attitude aimed to the solution of employees’ problems 0.96 0.84 0.28

Training plan 0.94 0.77 0.27

Loans paid with years of service for home purchasing down payment

0.92 0.73 0.26

Figure 13 | MaxDiff Scaling: Pilot Sample Results Under Counting, Logit and Hierarchic

Bayesian Methods

J23_V4.indd 53 11/6/14 10:17 AM




0.91 0.84 0.26

Study agreements with universities 0.89 0.81 0.22

Competitive credit card loans for employees, at a preferential rate 0.88 0.76 0.22

Leaders that are a model for employees 0.88 0.88 0.22

Stratify compensation and benefits package 0.85 0.78 0.21

Team work/team work synergy 0.82 0.71 0.21

Permanence bonus 0.82 0.80 0.21

Responsible leadership education 0.81 0.83 0.21

Work stations with updated hardware and software 0.80 0.81 0.21

Formation adapted to individual (not general and massive) requirements

0.80 0.75 0.20

Timely responses to employees’ requirements/concerns by the supervising levels

0.80 0.71 0.20

Social assistance fund for special cases 0.78 0.69 0.20

Internship programs with international partners 0.77 0.70 0.19

Respect for internal customer 0.77 0.72 0.19

Temporary job opportunities with international partners 0.77 0.68 0.19

Job allows me to pay attention to my personal life 0.77 0.75 0.19

Internal equity (appropriated salary differences at an internal level)

0.77 0.76 0.18

Improved payment for vacations 0.76 0.87 0.18

Insurance policy for vehicles 0.74 0.75 0.17

Participation in decision making 0.74 0.70 0.17

Company values guided by the supervising level 0.73 0.73 0.17

Challenging job 0.73 0.72 0.17

Long-term variable plan (LTIP) 0.72 0.69 0.17

Programs contributing to corporate sense of identity and belonging

0.72 0.84 0.17

Empowerment and measuring of decisions of each position 0.71 0.62 0.16

Communication and participation of goal distribution modalities 0.70 0.66 0.16

Clarity in the methodology for performance measurement 0.68 0.72 0.16

Gap-closing program regarding competencies for employees 0.67 0.65 0.15

Opportunities of a permanent job with international partners 0.67 0.61 0.15

Retaining plan payable with years of service 0.66 0.64 0.15

Clear communication regarding the assessment modality for advancements and promotions

0.65 0.77 0.14

Coaching program for the management of personal and working problems

0.63 0.58 0.13


Bayesian Methods (cont.)

J23_V4.indd 54 11/6/14 10:17 AM


COMBINING CONJOINT ANALYSIS AND MAXDIFF SCALING RESULTS

Figure 16 combines the results of both methods. On one hand, conjoint analysis

determines the relative weight of each element or category. For example, work-life

effectiveness represents 18% of preferences while compensation represents 45%.

Meanwhile, maxdiff scaling results point out the top three preferred tools by the

employees within each category. For example, in the benefits category, which has

a weight of 12%, the elements preferred by employees are special loan reductions

for performance, a savings fund for employees with more than 10 years seniority

and real-estate project management.


Regular performance feedback 0.63 0.64 0.13

Payment with company stock 0.62 0.69 0.13

Competitive policy regarding vacation enjoyment days 0.61 0.58 0.12


0.61 0.69 0.12

Executive leadership with ambition 0.58 0.69 0.10

Apprenticeships abroad for employees’ children 0.58 0.62 0.09

Personal development activities for employees and family 0.57 0.57 0.09

Appropriate human resources staff per area 0.57 0.54 0.09

Inclusion of executive levels in programs for attracting new human resources

0.56 0.62 0.09

Timely communication regarding competitors’ best practices 0.55 0.50 0.09

Open communication (open-door policy) 0.54 0.56 0.09

Loans/facilities to acquire insurance policies in U.S. dollars (inter-national coverage)

0.54 0.66 0.09

Buying company stock 0.54 0.51 0.08

Medical exams paid by the company 0.53 0.64 0.08

Agreements with travel agents (discounts, preferential terms) 0.53 0.52 0.08

Non-monetary incentives (travels, day off) 0.52 0.51 0.08

Closing gap methods of competencies in performance assess-ments

0.51 0.59 0.08

State-of-the-art program for employee’s security 0.51 0.53 0.08

Rotative vacation resort with expenses covered by the company 0.51 0.58 0.08

Unpaid study year securing job position 0.51 0.58 0.07

Autonomous working 0.51 0.50 0.07

Communication regarding vacant positions in order to apply for (“Job posting”)

0.51 0.58 0.07

Alliances with suppliers/customers for additional employees’ benefits

0.50 0.51 0.07


Bayesian Methods (cont.)

J23_V4.indd 55 11/6/14 10:17 AM



Special loans forgiveness for performance assessment 1.76 1.43 0.62

Competitive compensation according to market 1.73 1.41 0.62

Savings fund for employees with more than 10 years in the orga-nization

1.65 1.29 0.58

Building project management for workforce 1.63 1.15 0.56

Compensation without fiscal impact 1.58 1.21 0.55

Flexible benefits package 1.47 1.18 0.50

Career and development plan 1.46 1.21 0.48

Appropriate organizational climate/peer relations 1.40 1.16 0.48

Employer contribution for hospitalization, surgery and maternity insurance excess

1.39 1.17 0.43

Saving plan in hard currency 1.34 1.21 0.45

Competitive food ticket 1.31 1.10 0.42

Variable compensation/Incentives Plan 1.26 1.06 0.40

English learning agreements 1.22 1.05 0.37

Labor stability 1.20 1.07 0.37

Second home loans 1.18 1.15 0.35

Compensation with more monthly liquidity (higher basic salary) 1.18 0.91 0.34

Appreciation of merit/work/specific achievement 1.17 1.04 0.35

Competitive benefits according to market 1.16 0.86 0.37

Competitive savings bank (loan conditions) 1.09 0.92 0.32

Retirement plan 1.09 1.00 0.34

Introduction of foreign currency portions in the compensation (Bonuses and others)

1.05 0.91 0.30

Compensation according to country situation (inflation) 1.03 0.87 0.28

Competitive Preferential credit (home, vehicle, personal) 1.03 0.84 0.31

Competitive life and accident insurance policy 1.02 0.80 0.30

Post vacation bonus increase 1.00 0.82 0.29

Loans paid with service years for home purchase down payment 0.98 0.84 0.29

Compensation with individual incentives 0.98 0.98 0.28

Supervisor’s attitude aimed to the solution of employees problems

0.96 0.84 0.29

Agreements with real estate companies for home purchasing 0.94 0.77 0.27

Training plan 0.92 0.73 0.26

Figure 14 | MaxDiff Scaling Final Results: Common Items Under Counting, Logit and Hierarchic

Bayesian Methods

J23_V4.indd 56 11/6/14 10:17 AM


Figure 15 | Conjoint Analysis Results

Figure 16 | Combining Conjoint Analysis & MaxDiff Scaling Results: Employees’ Relative

Preferences and Top 3 Preferred Items by Category

Compensation (45%)

Cash compensation according to market

Fiscal effectiveness

Variable compensation

Benefits (12%)

Loan reduction based on performance

Saving funds

Real-estate projects for employees

Work-Life Balance (18%)

Good organizational climate

Telecommuting

Sabbaticals

Performance & Recognition (12%)

Recognition on specific achievements

Supervisor oriented to employee´s problem solving

Performance feedback

Development & Career Opportunities (13%)

Career plan

Tuition discounts for a foreign language

Training plan

Compensation Benefits Work-Life Performance & Recognition

Development & Career

Opportunities

J23_V4.indd 57 11/6/14 10:17 AM


FINAL COMMENTS

Traditionally, when measuring total rewards, conjoint analysis has been used as a

versatile tool to determine the relative importance of the categories or elements.

However, with a large number of attributes or items, conjoint analysis may take a

long collection time and its results may be biased since the simultaneous presence

of attributes is necessary.

Maximum difference, or maxdiff, scaling is an alternative to determine prefer-

ences when the number of attributes or items is high. It allows the determination

of relative preferences within a large number of items and in significantly less

time, helping determine which specific tools within the total rewards options are

preferred by the employees.

When analyzing maxdiff scaling with conjoint analysis, items in each element

of the total rewards model can be added and compared with conjoint analysis

results. That does not mean the results are equivalent. In maxdiff scaling, the sum

of percentages represents an analysis of specific items versus the remaining items

while in conjoint analysis, the comparison is of elements or categories as a whole,

simultaneously presented.

Practical experience then suggests that conjoint analysis can be used to detect

the weights of total rewards’ general elements or categories and maxdiff scaling

to determine which tools are specifically preferred by employees. z

ABOUT THE AUTHOR

Federico Lopez ([email protected]) is a Managing Partner at Thomas More Management Consulting. Lopez is also a professor and teaches compensation, sales compensation and executive compen-sation and statistics at Andres Bello Catholic University in Caracas, Venezuela and at the Institute of Advanced Management studies (IESA)

J23_V4.indd 58 11/6/14 10:17 AM


Organization Agility and Talent Management

T o generate profits and societal benefits that are

better than average over a long period of time,

organizations need to change what they do and

how they do it now more than ever. The environments

they face are increasingly uncertain, disruptive and

complex. They are more globally interconnected, more

technologically complex and more politically challenged.

To respond to this environment, organizations need to

be able to quickly adjust their capabilities and manage-

ment processes so that they are effective over time.

Creating an agile organization that can respond to

today’s environment requires taking an approach to

organization design and management that allows orga-

nizations to sense what is changing in the environment,

then develop and test possible changes and quickly

implement the right changes (Worley, Williams, and

Lawler 2014). Research shows that agile organizations

can outperform others over decades. Even though they

may not be the best performers in any given year, they

tend to be consistently above average in performance,

while the best performers in a year are usually thrashers

whose performance varies greatly over time (Worley,

Williams, and Lawler 2014).

Edward E. Lawler III, Ph.D.Center for Effective Organizations at the


Christopher G. Worley, Ph.D. Center for Effective Organizations at the


J23_V4.indd 59 11/6/14 10:17 AM


Talent management is a critical management process in an agile organization. It

is a primary determinant of an organization’s ability to change its behaviors and

capabilities in response to environmental change. This is a direct effect of the

rapidly changing, more complex global environment. The combination of new

technologies and more complex environments has made having the right talent

a competitive necessity. It has also created a major challenge for organizations

when it comes to change.

A central issue for almost any change is whether the individual members of an

organization have the skills necessary to support the change and the new business

activities it calls for. Given the rate of change that is occurring in the environment,

yesterday’s right talent often is not today’s or tomorrow’s right talent. Organizations

need to develop talent management strategies that allow them to change their

employees’ skills and knowledge at the same time and rate as they change their

business strategies.

An agile approach to talent management is different from the execution-focused

approach used by most organizations. In the execution approach, the focus is on

high levels of talent stability in order to avoid turnover costs and to assure that

the existing workforce can execute an organization’s current strategy. Employees

are recruited to fill existing jobs, rewarded for seniority, trained to perform today’s

jobs and rewarded for current performance. With this approach, replacing existing

employees with new hires in order to change what an organization can do has

high transaction costs associated with it while training them to perform new jobs

takes time and makes rapid change difficult.

The talent management practices and policies used to make organizations

agile must enable strategy-driven organizational change. They need to motivate

individuals to change what they do and ensure that the workforce has the skills

and competencies that are needed to make the organization successful given

its new activities.

The talent management strategy of an organization needs to reflect both the

kind of agility and the speed of change that it needs. Organizations in different

businesses, industries and countries need to change at different rates. Therefore,

they need to consider which agility talent management strategies and practices fit

their rate of change and type of change. Those that are changing more slowly, for

example, can use more of a career approach to talent management, while those

facing extremely rapid change need more transactional relationships with indi-

viduals and short-term talent management approaches so they can easily change

their workforces.

Organization agility requires a talent management approach that minimizes

resistance to change on the part of organization members and eliminates the high

talent-change transaction costs that can stem from changing the skill mix. This

requires practices and systems that are significantly different from those that are

commonly used in the developed world and are considered best practice. Most of

J23_V4.indd 60 11/6/14 10:17 AM


them were designed with execution and stability, not agility and change, in mind.

As a result, they create individuals and organizations that resist change, or at best

are slow to implement it. Talent management for agility needs to be based on the

right employment deal, but it also needs to include the right attraction, selection,

performance management, pay and talent development systems.

EMPLOYMENT DEALS

There are two approaches that organizations can and do take to talent manage-

ment in order to deal with change. One is the “career approach,” which calls

for staffing an organization with individuals who like change, are willing and

able to learn new skills, and enjoy creating organizational policies and practices

that encourage and support individuals changing. The other is the “travel light

approach,” which creates an employment deal and talent management system

that supports an organization constantly changing the members of its workforce

in order to change the types of skills it has (Hoffman, Casnocha, and Yeh 2014;

Lawler and Worley 2011).

The literature on talent management has often argued that the best way to assure

an organization has the right talent is to internally develop its talent, invest in

it and have relatively long-term employment relationships with individuals. One

advantage of this is that it helps build loyalty and the willingness of individuals

to sacrifice for the good of the organization. Another is that it helps to attract and

retain talented individuals.

The problem with the career approach is that change often requires new skill

sets and new approaches to dealing with business issues that aren’t quickly learned

and developed. This is where the “travel light” approach is superior. It argues

strongly for “temporary” relationships between individuals and organizations.

Responsibility for an individual’s career and the skills they have shifts from the

organization to the individual. Employment is “guaranteed” for only as long as an

individual has the skills the organization needs and performs well.

There are a number of approaches to employing individuals that produce minimal

transactional costs when the skills an organization’s employees have need to be

CASE STUDY: NETFLIX

Netflix Corp.’s approach to talent management exemplifies the travel light approach. At Netflix,

the reward for doing a good job today is having a job tomorrow. It does not guarantee work.

It is up to individuals to have the skills that the organization needs. If they have them, they

have a job. If they don’t have them, they find themselves out of a job (Lawler and Worley 2011).

Closely related to this point is the following statement on its website. “We try to hire well, but

unlike many companies, adequate performance gets a generous severance package.”

Netflix has no problem paying a premium for talent developed by other companies. It views this

as the only way it can change fast enough. Developing talent is simply not a realistic option

in the fast-changing world. Not only does that help Netflix change rapidly, it avoids the costs

of talent development.

J23_V4.indd 61 11/6/14 10:17 AM


changed. A recent article by Cappelli and Keller (2013) provides detailed examples

of the many different ways organizations are contracting with people to get work

done by those who are not regular employees. It makes the distinction between

employment and contract work and under each of these, identifies almost 20

different types of employment arrangements. Many of them involve contract-based

temporary relationships that meet the need for short-term skills. Not all of them

can be used on a global basis because some violate national labor laws; but in

most countries many of them can be and are being used.

One last point, even when an organization faces a rapidly changing envi-

ronment, there are situations where it makes sense to do some internal talent

development, the most obvious being where there simply is none of the needed

talent available in the market. This

can be for a large number of reasons

ranging from high demand to the

fact that the cutting-edge or unique

skills needed simply do not exist

elsewhere. Overall, what differenti-

ates agile firms is that they have the

talent they need in order to imple-

ment change, and as a result, do

it more quickly and effectively than

their competitors.

RECRUITING AND SELECTION

Recruiting and selecting the right

employees is the first step in

building an agile organization’s

workforce. There is no selection or

recruiting process that will have a

perfect “hit rate” when it comes to hiring the right employees. But, there are a

number of key practices that when built into the process, can greatly increase

the success rate when an organization wants to be agile. Netflix provides a

good example of several of the best selection practices which lead to hiring an

effective, agile workforce.

Years of research on employee selection has shown that giving individuals a

realistic preview of what it is like to work in the organization they are consid-

ering is one of the most important things that organizations can do. In short,

organizations need to have a clear employer brand. There are two major reasons

to establish a clear and accurate employer brand. First, it helps individuals make

an intelligent decision about whether they are, in fact, a good fit for the organiza-

tion. Yes, it is true that individuals don’t always know themselves well enough to

know whether they will survive and thrive in a particular work environment, but

CASE STUDY: ODESK

oDesk represents a particularly interesting

example of an organization that provides

contract labor. It operates in the world of

information technology and has a large

inventory of individuals who are available to

do contract labor. Using a cloud-sourcing

system, oDesk matches individuals with the

projects that need to be done. It posts the

projects on its website, individuals bid on

them, and organizations contract with the

individuals to do a specific project. The

result, from an organization’s point of view, is

that it has tremendous flexibility with respect

to who it employs and how long individuals

work for them. oDesk enjoys minimal transac-

tion costs when severing relationships with its

“employees.”

J23_V4.indd 62 11/6/14 10:17 AM


many individuals do and can make better decisions if they know what it will be

like to work for an organization. Second, realistic job previews are a big help in

reducing early turnover among new employees. When individuals have a realistic

sense of what it is going to be like to work for an organization, there isn’t the

problem of newcomers becoming disillusioned and dissatisfied because they were

sold a “false deal.”

When an organization wants to be agile, it is critical that its realistic job preview

provides a great deal of information about what agility means in the organiza-

tion and what individuals can expect in terms of work assignments, skill change

demands, job security and in general, what it means to work in an agile organiza-

tion. Netflix has an interesting approach to providing individuals with a realistic

preview. Its website has more than 100 PowerPoint pages that define and specify

what it’s like to work for Netflix and what Netflix expects from its employees.

It encourages employees to look at the PowerPoint presentation and to become

familiar with Netflix. After reading through them, most job applicants can’t help

but have a sense that this is a different organization, and that if they go to work

there, they will be expected to perform extremely well and change what they are

doing on a regular basis.

The second issue to focus on when selecting employees for agile organizations

is their willingness to take on new things, learn new things, develop new skills

and work in new environments. Agile organizations often are faced with the deci-

sion of whether to train and develop their existing employees or replace them

with others who have the needed skills. Even in a travel-light organization, some

employees are likely to be asked to do new and different things. In some travel-

light organizations, it may be preferable to invest in existing employees rather

than hiring new ones. As mentioned earlier, the most obvious case is where there

simply are no people available who have the needed skills. When this is true, it

is best to develop existing employees.

It is often said, and it is true, that the best predictor of future behavior is past

behavior. This means that the selection process should focus on what individuals

have done when they have had the opportunity to change, and whether they have,

in fact, done it successfully. Thus, the selection process should target individuals

who in the past have shown the willingness and ability to learn and develop. Key

examples here would be people who have changed functions, volunteered for

new assignments, have a history of job changes, and those who have continued

their education. A careful look at an individual’s résumé is a good way to get

information about how he/she has responded to change in the past. Individuals

who have a long steady history of holding the same job in the same company and

geographic location are probably are not the best candidates for an organization

that wants a workforce that welcomes and seeks change.

Carefully structured job interviews are a second way to gather information about

how individuals have dealt with change in their past work situations. Interviewers

J23_V4.indd 63 11/6/14 10:17 AM


need to ask questions about what changes the individuals have experienced, how

they responded to them and whether they have ever led a change effort. In short,

a whole series of questions need to be asked about what the job applicants have

done in the past when it comes to change and their roles in it.

PERFORMANCE MANAGEMENT

Even though they differ significantly, almost every organization has a performance

management system. They can be one of the many parts of an organization’s HR

system that makes it difficult for organizations to change in significant and impor-

tant ways. In the minds of many critics of performance management systems, this

is one more reason why organizations should abandon performance appraisals.

The argument is straightforward. Most performance management systems demand

commitments to specific performance goals and skill growth over a period of time,

often a year. As a result, if they motivate behavior at all, they cause individuals

to focus on achieving goals and acquiring skills that may be out of date if rapid

change is occurring. All too often, the argument goes, even though the skills and

goals quickly become outdated, employees resist changing them. They continue

to pursue their preset goals because they have made a “commitment” to them

and their bonuses and salary increases depend on achieving them.

There are those that say no performance appraisal can effectively motivate any

kind of performance or skill acquisition. As a result, they are simply a waste

of time rather than a cause of resistance to change or a cause of failed change

efforts. However, the research evidence does not support this view. Performance

management systems that set clear achievable goals and establish a clear connec-

tion between performance and rewards do significantly influence behavior (Lawler

2000; Lawler, Benson, and McDermott 2012). But, there is the danger that they

motivate yesterday’s right behaviors rather than today’s and tomorrow’s right

behaviors.

Designed correctly, there is reason to believe that performance appraisal systems

can be a major force in making organizations more agile. Indeed, in today’s rapidly

changing business environment, it is more important than ever that organizations

have effective performance management systems. When organizations operated

in relatively stable local environments, much of what needed to be done to make

them successful was well known and clear and thus, even without an effective

performance management system, individuals often knew what to do, how to do

it, and in some cases, were motivated to do it. In today’s world this is simply no

longer true. Rapid successful change requires frequent alteration of what people

do, and often of the skills that they have. One way to help ensure that this change

occurs is to have a performance management system that is designed to support

organizational change.

To be change friendly, there are three key features an effective and flexible

performance management system must have. First, it is critical that it focus on the

J23_V4.indd 64 11/6/14 10:17 AM


skills that individuals need in order to be successful in the future. The system

should not focus on traditional job descriptions and just the skills that are needed

for someone to execute their current job. Of course, the skill acquisition part of the

system needs to be sure that the job holders have the skills they need to perform

their current job. But, it also needs to be constantly pushing the frontier with

respect to skills that are critical to the future. It is also critical that the skill acquisi-

tion process be tied to the reward system of the organization. Bonuses, promotions

and/or pay increases should be contingent upon the successful acquisition of new

skills. This means paying the person for what he/she can do.

There is no magic timing for how often the skill portfolio of an individual needs

to be assessed, but it is certainly important for the performance management

system to review it more often than the traditional rate of once a year. For most

agile organizations, at least every three months there should be a review of the

skills that individuals should be learning and an assessment of how their learning

has gone over the last three months.

Second, clear performance goals are a powerful motivator and should be the

major focus of the performance management system. They are a motivator even

when they are not tied to financial rewards, but they are even more powerful

when they lead to bonuses, salary increases, stock, promotions, etc. For goals to be

meaningful and motivate the right behavior, they often need to be both short-term

and long-term. Short-term goals can be 30-day goals, for example, while long-term

may be two or more years. Short-term goals are particularly important in a rapidly

changing environment because what individuals need to do in order to make a

business succeed may in fact change every month or so. Long-term goals are

also important because they can ensure that an individual doesn’t become overly

focused on short-term results and fail to behave in ways that will build a longer-

term successful business, such as building good relationships with customers or

making investments that will pay off in the future. It is also important that goals

include how results are achieved, not just whether they are achieved. The “how”

goals should include building organizational agility, developing new skills and

demonstrating the company’s values.

Third, in some instances, the performance management system needs to reward

failure, or at least to not punish it. All too often individuals fail to take risks and

fail to change because they are concerned about punishments. This is particu-

larly likely if they are on a financial incentive performance management system.

The best way to get individuals to take risks and change is to reward them for it,

and in some cases to reward them even if they are not successful (Lawler 2000;

McGrath 2011). Organizations need to build into their performance management

and rewards systems the concept of “good failures.”

Until recently, the type of performance management system that supports change

was often impossible to implement in most organizations. It requires a consider-

able amount of flexibility with respect to when and how the appraisal is done, and

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a considerable amount of information being shared up and down the hierarchy.

Only if this is done can the right goals be set and changed, the right skills incented,

and good performance and good failures identified.

But, the world has changed with modern information technology and social

networking tools. It is quite possible to develop performance management systems

that support change and organization agility. It is also possible to give people real

time feedback on their performance and to have it come from multiple sources

(e.g., customers, bosses and their peers and subordinates). Goals can be changed

and adapted as the business environment changes, and needed skills can be identi-

fied and incented on short notice. Finally, and perhaps most importantly, rewards

can be more easily and quickly distributed on a flexible schedule.

In addition to having the right structure and technology, a change-friendly

performance management system requires managers who are skilled in managing

business and employee performance. This is a must-exist condition that is often

lacking in organizations. Organizations seem willing to spend money on infor-

mation technology support for performance management systems and even for

performance-based rewards, but they hesitate to invest in the training and develop-

ment of managers who can operate systems in a way that makes them motivating

and supportive of change (Lawler, Benson, and McDermott 2012). This is simply

unacceptable in a world in which organization agility is a key differentiator with

respect to organizational performance. More than ever, organizations need perfor-

mance management systems and managers that effectively support change.

REWARD SYSTEM

The compensation system of an organization must fit and support the approach

that it takes to overall talent management as well as its business strategy. This is

true for any organization, but it is particularly true for an organization that wants

to be agile. It must fit well with the attraction and selection practices of the system,

the performance management system and the organization’s approach to careers

and talent development.

There is a set of compensation practices that fit well with developing organiza-

tion agility. In some compensation areas, there is clearly a one best pay practice,

but in others there are several approaches which can produce the right results.

With that in mind, this article looks at what effect a compensation system can

and should have on an organization’s performance, then looks at the type of pay

system practices that will produce the desired outcomes.

Attraction and Retention

There is no question that the amount of compensation that an individual receives

is a clear driver of attraction and retention (Lawler 2000). In many respects, it is

about an organization’s brand as employer. Higher paying organizations attract

more applicants than lower paying organizations, and this attraction follows with

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respect to retention. All things being equal, turnover is higher in lower paying

organizations than in higher paying organizations.

Thus, the best approach for an organization that wants to attract and retain

individuals with the right skills is to be sure they are paid above the market. This

is the approach that Netflix takes. It pays all its employees above market and

expects every individual to perform above market. If individuals do not perform

above market, Netflix is quick to dismiss them. It feels that paying above market

for everyone is something that sends a strong message to everyone about the

advantages and disadvantages of working at Netflix. It also fits with its corporate

culture and aspiration to be a company that is known for seeking excellence, a

culture which values high performance, and pay that is at the top of the market.

Because higher paying organizations are more desirable to work for, they have

better job applicant pools and are able to select and retain the best talent. This

policy helps organizations when they need to change the mix of talent that they

have in order to have the right skills and knowledge. If they have a reputation and

corporate image as a high payer, they attract more applicants, can add individuals

with new skills and attract potential high performers much more effectively than

an organization with below or at market pay rates.

Performance Motivation

The compensation practices of an organization can be an important determinant of

performance. Simply stated, decades of research show that well designed pay for

performance systems motivate performance (Lawler 2000). In the case of creating an

agile organization, the compensation system must motivate both performance and

skill development. To do this, the amount of compensation someone receives needs

to depend on how well the individual performs and the skills he/she has. Of course

compensation isn’t the only thing that drives performance, and it shouldn’t be the

only talent management organizational design feature on which an agile organization

focuses. Nevertheless, the evidence is clear that when compensation depends on a

particular type of performance, individuals are motivated to perform well in that area.

Rewards System Design for Agility

The most effective type of compensation may differ greatly from one agile orga-

nization to another. Bonuses, salaries, stock and benefits all can be important in

attracting the right talent. There is no right combination of these that is a particu-

larly good fit for agile organizations. In many situations, bonuses are the best

choice because they are the most flexible form of cash compensation. But what

is a good fit varies considerably by the type of people the organization wants to

attract and retain and the kind of agility that it needs. What is clear is the need to

have an at- or above-market combination of multiple forms of compensation. This

is a must-have in order to attract and retain individuals who are high performers

and have high-level skills and knowledge.

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What is the right kind of pay for performance system for an agile organization?

For most agile organizations, the best approach is one that looks at both short-term

and long-term performance and delivers pay accordingly. Focusing too much on

the short term can result in some obvious and highly negative consequences. For

example, it can create a mentality of constantly trying to optimize performance in

the short term. But it fails to create the kind of investments and behaviors that will

lead to long-term success. Overly focusing on long-term performance has its own

negative consequences. Individuals may not be particularly motivated to produce

good current performance because there is little incentive to do it. The right

balance between long-term and short-term incentives is very much determined by

the type of business environment the organization is in and its strategies.

In most cases, some participation in a stock program is a positive for agility. It

keeps individuals focused on the external world and what is happening there. It

also provides an effective retention device if individuals have to stay a certain

period of time to collect their stock or financial reward. Short-term bonuses

and rewards are a good way to encourage skill acquisition and performance. For

them to be successful in an agile organization, they must be tied to short-term

goals. When they are effectively tied to short-term performance goals, they can

be powerful motivators of skill acquisition and performance.

One final issue with respect to pay for performance is the degree to which

it is based on group performance versus individual performance. There is no

right answer to what it should be based on. Individual bonuses and organization

performance based variable pay plans can be quite effective in agile organizations,

as can group plans. The right choice between them depends on the measures of

performance that are available and the degree to which performance of the orga-

nization is essentially an individual-driven outcome versus a collective outcome.

Some organizations that need to be agile fall into the group performance sector

while others fall into the individual performance sector. The key, therefore, is

matching the incentive plan to the type of performance interdependencies and

outcomes that the organization needs in order to be successful. This, above all else,

should drive whether the compensation system rewards individual performance,

group performance or both.

The base pay systems of most organizations are based on jobs. Jobs are priced

to market and individuals are paid according to the value of the job they hold.

This is an approach that fits the career model of talent management. It does not

support an agile organization. Jobs do not have a market value; they are not hired

and fired. Employees have a market value based on their performance and their

skills and competencies.

One of the things the job-based approach does is encourage individuals to

develop their job-related skills. It also makes job-restructuring and, in many cases,

movement to a new job something that individuals may resist or be at the very

least be concerned about because they may lose job value and as a result pay.

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Finally, it typically offers no direct incentive for them to improve their skills and

learn new skills.

An alternative to a job-based pay system is a person-based pay for skills system

(Ledford and Heneman 2002). This alternative has been growing in popularity over

the last several decades and has done well with respect to creating agile talent

management systems and with the reality that more and more work is becoming

knowledge-based and individualized. Also, it makes it easier to get individuals

to change what they can do because there is a reward for learning new work

related skills. Under a skill-based pay system, change can lead to more rewards

for the individual in addition to opportunities to learn and develop. Overall, the

right compensation system can be an important component of an agile organiza-

tion. It can motivate the right performance, the right kind of skill acquisition, and

contribute to the attraction and retention of the right individuals.

TALENT, AGILITY AND TYPE OF CHANGE

Every organization’s need for new skills and knowledge varies considerably

by function and area within it. This is particularly true of global organizations

because parts of them often operate in very different environments. Organizations

facing continuous rapid change need to take an organizationwide agile talent

management approach. In others, the need for agility may be limited to certain

functions or areas. For example, in the more technical areas of knowledge work

firms, talent is often a particularly important asset to have and one where the

skills and knowledge needed changes rapidly.

One way to think about where flexibility in the talent management system

is particularly likely to be needed in an organization is to combine an analysis

of where product, technological and/or environmental change is likely to be

rapid, with an analysis on the degree to which the work being done is pivotal or

critical to the successful execution of an organization’s strategy (Boudreau and

Ramstad 2007). Job areas where change is expected to be rapid and where talent

is a pivotal determinant of the organization’s effectiveness are the areas where

agile talent management practices should be utilized. It is less important to use

such management approaches as skill-based pay and paying everyone well above

market in areas that are not pivotal to the organization’s success and are unlikely

to require new skills.

In agile organizations, it may make sense to treat a limited number of members

more like traditional organizations treat their employees by giving them longer-

term employment contracts and investing in their development. Examples of this

are individuals who are strong candidates to be senior managers and who are

needed to develop and maintain an agile corporate-wide approach to running

the organization. The obvious issue here is concern over whether an organization

can maintain an agility culture if it is constantly changing its employees in the

most critical leadership roles. The danger is that without a core of employees who

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maintain the culture, an organization will become more of a temporary organiza-

tion than an agile one. Another example involves national differences. In some

countries, because of local talent and legal conditions, it may make sense for an

organization to treat employees in a traditional manner, while in other countries

an agile approach is the best fit.

CONCLUSION

Organizations can and need to create workforces that can adapt. They can do it by

adopting a set of talent management practices that encourage employees to learn

and develop, and by reducing the transaction costs associated with changing the

skill sets in their workforces. Their challenge is getting the right mix of internal

development and change in who is in the workforce. This should be driven by the

nature of the organization’s strategy, the kinds of change it expects to implement

and the rate of change that it sees coming in the future. What is very clear is that

more and more organizations need to adopt agile talent management practices so

that they can change as fast as their environment is changing. z

ABOUT THE AUTHORS

Edward E. Lawler III, Ph.D., ([email protected]) is distinguished professor of business, professor of management and organization, and director of the Center for Effective Organizations at USC’s Marshall School of Business. Lawler has been honored as a top contributor to the fields of organizational development, HR management, organizational behavior and compensation. He is the author of more than 350 articles and 48 books.

Christopher G. Worley, Ph.D., ([email protected]) is a senior research scientist in the Center for Effective Organizations at USC’s Marshall School of Business and as a professor of management at Pepperdine University. Worley is author of five books and numerous articles and chapters on organization agility, strategy formulation and implementation, organization design and the evaluation of strategic change.

REFERENCES

Boudreau, J., and Ramstad, P. 2007. Beyond HR: The New Science of Human Capital. Boston: Harvard Business School.

Cappelli, P., and Keller, J. R. 2013. “Classifying Work in the New Economy.” The Academy of Management Review 38(4): 575-596.

Hoffman, R., Casnocha, B., and Yeh, C. 2014. The Alliance: Managing Talent in the Networked Age. Boston: Harvard Business School.

Lawler, E. E., Benson, G., and McDermott, M. 2012. What Makes Performance Appraisals Effective?. Compensation & Benefits Review 44(4): 191-200.

Lawler, E. E. 2000. Rewarding Excellence: Pay Strategies for the New Economy. San Francisco: Jossey-Bass.

Lawler, E. E., and Worley, C. G. 2011. Management Reset: Organizing for Sustainable Effectiveness. San Francisco: Jossey-Bass.

Ledford, G., and Heneman, R. 2002. Pay for Skills, Knowledge and Competencies. In R. Heneman (Ed.), Strategic Reward Management (pp. 409-423). Los Angeles: SAGE Publications.

McGrath, R. 2011. “Failing by Design.” Harvard Business Review 89(4): 76-83.

Worley, C. G., Williams, T., and Lawler, E. E. 2014. The Agility Factor. San Francisco: Jossey-Bass.

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Employee Engagement — The Unusual Birth and Development of an HR Concept

M any HR professionals are under the impression

that major new concepts in organizational

behavior enter the business world after

many years of study by academic researchers. They

believe that scholars conceive a new idea for under-

standing employee behavior and test their hypothesis

in controlled studies. They want to see if it can be

measured with validity, reliability, and applied to a wide

range of employees. Then, if the idea generates suffi-

cient interest in the organizational world, academics

and HR consultants translate behavioral science into

practical tools for practitioners.

This has been the path followed by the familiar

employee attitudes of job satisfaction and organiza-

tional commitment. One very popular current concept

in human resources — employee engagement — has

taken a different path. It is primarily the creation of

HR consulting firms that developed and introduced the

idea into the organizational world, largely without the

involvement of academic researchers.

Employee engagement also has other interesting evolu-

tionary features. Competing HR consulting firms that

Frank Giancola

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market engagement services have openly criticized their competitors for simply

re-labeling existing employee attitude surveys as employee engagement surveys

(Macey and Schneider 2008a; Schneider et al. 2010). Well-known HR thought

leaders appear to have been caught off guard at its popularity and have contrib-

uted little to its development (Lawler 2012). In some cases, thought leaders have

claimed that solid research support is lacking for its advertised positive effects

on organizational performance (Ledford 2012). Comments from gurus indicating

that engagement represents a breakthrough in understanding employee behavior

are hard to find.

HR professionals will benefit from knowing how this concept has started and

developed and who the major contributors were. They should know its roots,

various forms, controversies and current status. This information will serve them

well as consumers of engagement products and services.

THE BASICS

There is no generally accepted definition of employee engagement and stan-

dard survey instrument for determining an employee’s engagement level. Towers

Watson (2007), an HR consultancy with expertise in this area, has defined it as “an

employee’s willingness and ability to contribute to company success.” The Gallup

Organization has defined it as “the individual’s involvement and satisfaction with

as well as enthusiasm for work” (Harter et al. 2002). Other knowledgeable sources,

such as organizational behavior professor and author Fred Luthans (2011), use a

simple definition — whether employees are “emotionally invested in their jobs.” Its

signature characteristic is that it combines several measures of employee behavior,

such as organizational commitment, job satisfaction and job involvement, into

one survey instrument to measure the more intensive and higher order concept

of engagement.

Employee engagement has been studied at various levels, including individual,

business unit, department and organization. It also has been studied from various

aspects, including employee behaviors, psychological states, traits, attitudes, drivers

and organizational conditions. Most commonly, it is considered an attitude, like

organizational commitment, or a psychological state, like motivation.

1990 — KAHN’S GROUNDBREAKING RESEARCH

In 1990, William Kahn, a professor of organizational behavior at Boston University,

published “Psychological Conditions of Personal Engagement and Disengagement

at Work,” in which he identified a concept that would capture the minds of HR

professionals and the business world 10 years later. His work was largely ignored

by other academics for almost 20 years as HR consulting firms were primarily

responsible for developing versions of the concept that made it well known.

Kahn was interested in developing a theoretical framework for understanding the

conditions that led to employees being fully psychologically present at work and

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giving their best efforts. He believed that people use varying degrees of themselves

in performing their jobs. He defined engaged employees as those who employ

and express themselves physically, cognitively and emotionally when performing

their work roles.

To determine how employees became engaged, he asked 16 counselors at an

adolescent summer camp and 16 employees at an architectural firm to describe

four different situations in which they were attentive, absorbed, involved and

uninvolved, detached, and distracted at work, and how they responded in each

situation. He was able to collect 86 personal engagement samples and 100 personal

disengagement samples.

In analyzing the samples, he found that three conditions were associated with

engagement:

z A sense of meaningfulness in which employees felt valued in interactions with

the work itself and co-workers.

z A sense of safety to employ themselves without fear of negative consequences

to self-image, status or career.

z A sense of availability by possessing the physical, emotional and psychological

resources necessary for investing their inner selves in their work (Kahn 1990).

After conducting this research, Kahn did not publish noteworthy additional

research on employee engagement. Only in rare instances, and after many years

had passed, did other researchers use his original framework to develop a theory

that defined the dimensions in which people were engaged at work. Independent

activity by academic researchers studying worker burnout eventually led to the

formation of a similar concept of employee engagement late in the 1990s.

LATE 1990s: THE BURNOUT VERSION OF ENGAGEMENT

Around 1997, academic researchers began to rephrase the concept of burnout as

an erosion of a positive state that they labeled as engagement, which was char-

acterized by energy, involvement and efficacy. Prior to the late 1990s, the word

engagement was absent from job burnout literature. They described the erosion

as follows: “What starts out as important, meaningful, and challenging work

becomes unpleasant, unfulfilling and meaningless. Energy turns into exhaustion,

involvement turns into cynicism, and efficacy turns into ineffectiveness (Maslach,

Schaufeli, and Leiter 2001).

Based on this thinking, a self-report questionnaire — the Utrecht Work

Engagement Scale (UWES) — was developed covering three aspects of work

engagement: vigor, dedication and absorption (Maslach, Schaufeli, and Leiter 2001).

Engagement is defined as a positive, fulfilling, work-related state of mind char-

acterized by a persistent and pervasive state of feeling and thinking that is not

focused on any particular object, event, individual or behavior (Schaufeli and

Bakker 2004). The UWES and engagement definition were developed by Dutch

academics who were leading researchers in worker burnout. Their questionnaire

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for measuring engagement is focused on how engaged employees feel and behave,

rather than on attitudes and conditions for engagement like the ones used by

several HR consulting firms. Sample questionnaire items:

z At my job, I am very resilient mentally.

z I am enthusiastic about my job.

z Time flies when I’m working.

Engagement seems like a curious choice of words to describe a condition that

opposes burnout, since it does not convey the extent and seriousness of the

burnout condition. Well-being would seem to be a better choice of words. In fact,

the UWES employee questionnaire used in engagement surveys is titled, “The

Work and Well-Being Survey.” In addition, in some countries burnout is used as a

medical diagnosis and in others as a psychiatric one (Schaufeli et al. 2009).

In their early writings on engagement, burnout researchers did not mention or

credit Kahn for his pioneering work, although both versions of engagement are

striking similar. Two of three major components in his definition of engagement

— meaningfulness and availability — closely resemble two of the three major

components of the burnout-related version — dedication and vigor. If someone

were to claim that burnout researchers selected the word engagement and derived

its meaning from Kahn’s work, it would be difficult to disagree.

At the same time that burnout researchers introduced their version of engage-

ment, researchers at the HR consulting firm, The Gallup Organization, gave birth

to a version of employee engagement that would later capture headlines in the

HR and business media in the next decade.

1999: FIRST BREAK ALL THE RULES

In their 1999 best-selling business book on managerial practices, First Break All

the Rules, Gallup practice leaders made what appears to be the first significant

reference to employee engagement outside of academia. Although brief, Gallup

made the connection between employee responses on its famous 12-question

employee survey tool for assessing business unit effectiveness and engagement.

The questions relate to resources necessary to do the job, respect for employee

opinions, performance feedback, opportunities for personal growth and other

organizational programs and conditions, such as having a best friend at work.

The authors stated that “A ‘fully’ engaged employee, by our definition, is one who

can answer with a strong affirmative to all 12 of those questions” (Buckingham

and Coffman 1999). They also cited direct links between the number of engaged

employees and low turnover, improved unit productivity and higher profits.

The official Gallup corporate history provides an interesting commentary:

In the late 1990s, as the business environment was becoming increas-

ingly global and more competitive, Gallup produced its next major

breakthrough. For the first time, corporate leaders began to express an

interest not only in what their customers were thinking but also in the

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opinions of their employees. Although employee surveys had been around

for years, they tended to focus on issues that were narrow in scope, such

as employee parking or benefits. Gallup’s breakthrough occurred when

corporate leaders actually committed themselves and their organizations

to studying basic employee attitudes that affect workplace morale, and

ultimately, overall productivity.

Gallup was at the right place at the right time with its in-depth research

(developed over 25 years of study and analysis). This research clearly

indicated that among thousands of questions, 12 key items revealed the

primary needs of people in the workplace. Gallup quickly developed part-

nerships with 200 organizations around the world. In these partnerships,

Gallup conducted ongoing employee “engagement tracking” based on the

newly discovered 12 measurements, as well as development programs to

improve employee engagement throughout these organizations. Gallup

had produced a major management consulting breakthrough” (The Gallup

Organization u.d.).

The Gallup survey questions relate more to conditions of work, how employees

are treated and co-worker relationships, than to how they feel and behave at work,

as in Kahn’s and the burnout researchers’ versions of engagement.

2002: GALLUP’S IMPORTANT ENGAGEMENT RESEARCH

In 2002, Gallup published the first extensive meta-analytical study of employee

engagement, using data from its extensive employee survey data base (Harter et

al. 2002). This research was significant as it provided key information about its

engagement product that was only briefly mentioned in First Break All the Rules.

The research included:

z A definition of engagement was provided: “the individual’s involvement and

satisfaction with as well as enthusiasm for work.”

z A connection was made between Gallup’s conception of engagement and Kahn’s,

but the intensity of behavior described in Kahn’s research appears far greater

than what is suggested by Gallup’s 12-question model. (Questions are shown in

Harter et al. 2006).

z The research was based on a great deal of evidence — 42 Gallup studies in 36

different companies.

z There was a very high correlation (.91) between engagement and a measure

of overall job satisfaction at the business unit level, which is measured by a

13th question in Gallup’s survey. Later Gallup research showed a correlation

“approaching 1.0” between engagement and organizational commitment (Harter

and Schmidt 2008).

z The level of analysis was the business unit, not individual employees as in Kahn’s

work. The engagement score for a business unit, which averages 25 employees,

is the aggregate engagement scores of its employees (Harter et al. 2003).

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The final point that the level of analysis is the business unit, not the employee,

is somewhat controversial. It appears that when certain organizational conditions

exist, employees are more productive (“engaged”), but this has not been verified

by reports of work behavior of employees or by observing subjects in controlled

studies. This inferential leap from conditions to actual employee behaviors has

troubled some organizational psychologists (Macey and Schneider 2008). Gallup

has countered this criticism by showing that a high correlation exists between its

measure of engagement and a “direct” measure of engagement, the UWES (Harter

and Schmidt 2008).

Equally important, in this context, a satisfied or committed employee is not

much different than an engaged one. It suggests that the engagement trend was

started based on job satisfaction or commitment as much as on a new concept

of engagement.

OTHER HR CONSULTANTS

While Gallup took the lead in advancing engagement in the business world in

the late 1990s, several major HR consulting firms, most notably Towers Watson,

began offering engagement survey tools and related consulting services in the

early 2000s. They used different definitions of the concept of engagement and

surveys. At that time, the state-of-the-art employee attitude survey in the business

world measured employees’ organizational commitment (OC), which is defined as

an individual’s psychological attachment to an organization. Attitude surveys have

followed an evolutionary path from the 1950s, from loyalty, to job satisfaction, to

job involvement, to organizational commitment, to engagement (Ledford 2012).

Because engagement surveys reached the market when OC surveys were in

use, some consultants developed products based on that concept in whole or in

part (Macey and Schneider 2008; Macey and Schneider 2008a). The more creative

firms, such as Towers Watson, combined OC measures with others, including job

satisfaction, job involvement, intrinsic rewards and availability of job resources.

Consultants tend to focus more on the antecedents or conditions that improve

engagement levels than on specific employee behaviors (Giancola 2007; Giancola

2011). Therefore, their survey results suggest clear actions an organization can

take to improve engagement levels. In addition, multidimensional engagement

surveys can, for example, simultaneously measure employees’ willingness to

stay in their jobs as well as indicate their overall engagement level. Academics

traditionally have not combined attitude surveys in this way. The UEWS draws

from a number of different sources to measure engagement levels, but focuses

on behaviors and feelings.

During the 2000s, HR consulting firms popularized the engagement concept

through their press releases on engagement levels in the nation’s workforce and

reports detailing the benefits of having an engaged workforce. Although the UWES,

the primary tool for measuring employee engagement in academic research, was

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developed in the late 1990s, there was not much academic research on engage-

ment for about eight years.

THE ACADEMICS COME LATE TO THE PARTY

Late in the past decade, the concept of engagement had grown to the point

where academic researchers could no longer ignore its existence and influence

in the organizational world. Up until then, they had shown much less interest in

the concept than HR consultants, and there was a dearth of pertinent academic

research (Macey and Schneider 2008a; Saks 2006). In addition, university-based

HR scholars who try to bridge the gap between academic research and HR prac-

tice had contributed little to the concept’s development and use. Lawler (2007)

noted that academic HR research is being supplanted by the work of consultants’

research departments.

In 2008, editors of an academic journal, Industrial and Organizational Psychology,

published by a professional association of organizational psychologists, decided

to devote an entire issue to employee engagement. Its purpose was to provide a

conceptual framework for researchers and practitioners to help them recognize the

various meanings of the term and related research traditions. It included 13 articles

about engagement written primarily by psychologists and some HR consultants.

The issue was interesting in several respects:

z While its purpose was to increase our understanding of the concept, much more

could have been done to help readers understand engagement as practiced by HR

consulting firms. They have by far the most experience measuring engagement

levels and applying the concept. The special issue provided few new insights on

the efforts of two major consultants, Towers Watson and the Corporate Executive

Board (CEB), which did not contribute to the special issue. In its biennial surveys

of thousands of employees, Towers Watson has published a great deal of explana-

tory information and analysis to identify the primary engagement drivers. Over

the years, Gallup is the only major HR consulting firm that has provided a list of

their engagement survey questions and detailed data on results. Questionnaire

questions can be analyzed and traced back to questions used in other surveys on

other concepts, such as job satisfaction, to get a better idea of what an engage-

ment survey measures. Gallup’s questionnaire items were not analyzed in the

special issue.

z Two academic researchers showed that 16 of the 17 questions in the UWES

were very similar to those used in existing surveys, such as those measuring job

satisfaction, job involvement, organizational commitment and positive-negative

psychological states (Newman and Harrison 2008). They stated that “the re-labeling

of reshuffled items does not necessarily add conceptual clarity.” They maintained

that engagement is conceptually redundant with an established, higher order job

attitude construct that underlies the behaviors measured in these surveys.

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z In the issue’s summary article, the authors expressed surprise at the exclusive

research-focused nature of the articles, which showed little empathy for what

practitioners struggle with when trying to understand a new complex concept.

The issue supplied evidence of a research-practice gap in human resources.

ACADEMIA TAKES MORE INTEREST

In 2010, Simon Albrecht, a psychology professor at Monash University in Australia,

published the Handbook of Employee Engagement (2010) to provide a single resource

to help practitioners and researchers understand the current status of the concept by

covering research, practices, perspectives and issues. The 34 articles in the book were

written by 49 academic researchers, 17 HR consultants and two government officials.

Based on the number of articles, academic interest in the concept had grown

considerably since 2008, when the 13 articles were published in the journal,

Industrial and Organizational Psychology. In addition, in 2008 few of the articles

were in favor of viewing engagement as something new, rather than a realignment

of old constructs (Schohat and Vigoda-Gadot 2010). This was not the case in the

Handbook. Despite being a combination of existing concepts, some psychologists

now believe that engagement is a new concept that will improve the understanding

of employee behavior. Because of the current high level of academic interest,

Albrecht thinks there is little support for the idea that engagement is a mere fad

that will soon fade from view.

Although 17 HR consultants contributed to the book, the ones that established

the concept in the organizational world, and arguably have the most empirical

experience, did not participate. They are the U.S.-based Gallup, Towers Watson

and CEB. And no systematic attempt was made by contributors to analyze consul-

tants’ work over the past 12 or so years, even though it arguably surpasses what

academic researchers have contributed in terms of knowledge created and number

of employees surveyed.

Of the 68 contributors, 40% were based in North America and 60% in other

countries. This division reflects the two separate directions for studying engage-

ment — one led by U.S. consultants, based on their models of engagement and

worldwide findings, and another led by European academic researchers, using the

UWES as applied to European workers (Mauno et al. 2010). Since the subjects of

the academic studies tend to be European workers, one wonders how well the

results apply to other workers in other parts of the world, such as the United States.

By contrast, Towers Watson’s “2007-2008 Global Workforce Study” involved 90,000

employees of medium and large organizations in 18 countries worldwide, including

the United States, China, United Kingdom and India. The group represented every

age category, key job type and experience level (Towers Watson 2007).

Unless changes are made, academic researchers’ contributions will be signifi-

cantly limited because their studies primarily involve European workers and do

not fully consider the substantial contributions of U.S. consulting firms.

J23_V4.indd 78 11/6/14 10:17 AM


OUTSIDE INFLUENCES

Beginning in 2000, engagement was been positively affected by several changes

in the field of psychology and the workplace. Influential psychologists have tried

to shift the focus of psychology from disease, damage, disorder and disability

to “positive psychology,” which studies human strengths and optimal functioning

(Seligman and Csikszentmihalyi 2000). As a result, some organizational psycholo-

gists view engagement as a form of optimal functioning that can be measured,

developed and effectively managed to improve employee performance. Burnout

and Gallup researchers have placed engagement in this context (Bakker and

Schaufeli 2008; Harter, Schmidt, and Keyes 2003).

Perhaps the most notable recent development pertaining to the concept’s evolu-

tion has been the connection made by HR consultants between their version

of engagement and the one used by burnout researchers, which emphasizes

physical and mental resources available to employees. The change appears to

be driven by the effects of the recession on employers. Stress levels rise when

employers operate with lean staffs and anxiety increases when the economy

is uncertain.

In 2012, Towers Watson refined its definition of engagement (an employee’s

willingness and ability to contribute to company success) and now uses the term

“sustainable engagement” (intensity of employees’ connection to their organiza-

tion), which incorporates the thinking of burnout researchers through two

important additions — enablement and energy. Towers Watson identified three

elements in sustainable engagement.

z Traditional engagement: Belief in company goals and objectives, emotional

connection to employer, and willingness to give extra effort to support success.

z Enablement: Freedom from obstacles to succeed at work, availability of resources

to perform well, ability to meet work challenges effectively.

z Energy: Ability to maintain energy at work, supportive social environment, feel-

ings of enthusiasm and accomplishment at work (Towers Watson 2012a).

CONCLUSION

Employee engagement has captured the imagination of the organizational world

by combining existing concepts in a new and meaningful way that is adaptable

to the needs of the times, largely through the research and promotion of U.S.-

based HR consulting firms. However, some gaps need to be filled. The connection

between the conditions for engagement and employee behaviors needs to be

strengthened. Researchers should confirm that the organizational benefits of high

engagement levels exceed those of high levels of job satisfaction and organiza-

tional commitment. HR professionals also must realize that engagement is not the

same as motivation and does not address the role of financial rewards in driving

employee behavior.

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Despite these shortcomings, engagement’s track record shows that practitioners

are receptive to new measures for enabling more intense employee behaviors.

The record also shows that HR management can move forward meaningfully

without the involvement of academic researchers. The hope is that researchers

and consultants will work more closely together, so that HR practitioners have the

best available evidence to justify using engagement tools in their organization. z

AUTHOR

Frank Giancola ([email protected]) has written more than 90 articles analyzing HR trends and practices. He has over 40 years of HR experience, 25 with Ford Motor Co., primarily in various compensation and benefits positions. He has taught HR and compensation courses at several colleges. He graduated from the University of Michigan with a bachelor’s degree in psychology-sociology and received a master’s degree in business administration and industrial relations from Wayne State University in Detroit. He is a regular contributor to WorldatWork publications and Online Community.

REFERENCES

Albrecht, S.L. 2010. Handbook of Employee Engagement. Northhampton, MA: Edward Elgar.

Bakker, A.B., and W.B. Schaufeli. 2008. “Positive Organizational Behavior: Engaged Employees in Flourishing Organizations.” Journal of Organizational Behavior 29:147–154.

Buckingham, M. and C. Coffman. 1999. First, Break All the Rules. New York: Simon & Schuster.

The Gallup Organization. Corporate History. n.d. Viewed: Jan. 2, 2013. http://www.gallup.com/corporate/1357/corporate-history.aspx.

Giancola, F. L. 2011. “Should ‘Attract, Engage and Retain’ Replace ‘Attract, Motivate and Retain?” WorldatWork Journal 20(2): 6-15.

Giancola, F. L. 2007. Employee Engagement: What You Need to Know. workspan 50(10): 57-59.

EVALUATING ENGAGEMENT REPORTS AND SERVICES

Knowledge of the history of a concept not only deepens our understanding, but also has

practical value. It reveals its roots, various forms, controversies and how it will likely evolve

in the future. That information should help practitioners be more intelligent consumers of

employee engagement products and services. Important questions to ask when reviewing

reports of engagement levels in the workforce and when evaluating consulting firms’ engage-

ment surveys are:

• How is engagement being defined?

• How does the engagement survey differ from organizational commitment and job satis-

faction surveys?

• Does the survey measure the effects of financial rewards on engagement?

• What are engagement scores based on? Employee behaviors? Feelings? Traits?

Psychological states? Organizational conditions or other factors?

• Does the consumer have access to the survey questions?

• Have survey findings been validated by observing employees at work to ensure that what

the survey says is being measured equates with how employees behave on the job?

• At what level do the survey results apply? Individual employee, department or company?

• To what extent do survey results translate to actions for organizations to improve engage-

ment levels?

• Regarding engagement survey findings, what occupations, industries, organizational

levels and countries are represented? How many employees were surveyed and how

were they selected?

J23_V4.indd 80 11/6/14 10:17 AM


Harter, J.K., and F.L. Schmidt. 2008. “Conceptual Versus Empirical Distinctions Among Constructs: Implications for Discriminant Validity.” Industrial and Organizational Psychology 1: 36–39.

Harter, J. K., F.L. Schmidt, and T.L. Hayes. 2002. “Business-Unit-Level Relationship between Employee Satisfaction, Employee Engagement and Business Outcomes: A Meta-Analysis.” Journal of Applied Psychology 87(2): 268-279.

Harter, J.K., F.L. Schmidt, and C.L.M. Keyes. 2003. “Well-Being in the Workplace and its Relationship to Business Outcomes: A Review of the Gallup Studies.” In Flourishing: Positive Psychology and the Life Well-Lived, ed. C.L.M. Keyes and J. Haidt, 205-224. Washington, DC: American Psychological Association.

Harter, J.K., F.L. Schmidt, E.A. Killham, and J.W. Asplund. 2006. Q12 Meta-Analysis. Viewed: Nov. 5, 2013.http://strengths.gallup.com/private/Resources/Q12Meta-Analysis_Flyer_GEN_08%2008_BP.pdf.

Kahn, W. A. 1990. “Psychological Conditions of Personal Engagement and Disengagement at Work.” Academy of Management Journal 33(4): 692-724.

Lawler, E.E. 2012. “An Idiot’s Guide to Employee Engagement.” Viewed: Feb. 1, 2013. http://www.forbes.com/sites/edwardlawler/2012/11/08/an-idiots-guide-to-employee-engagement/.

Lawler, E. E. 2007. “Why HR Practices Are Not Evidence-Based.” Academy of Management Journal 50: 1033-1036.

Ledford, G.E. 2012. Rethinking Employee Engage¬ment: Finding ROI and Avoiding Pitfalls. 2012 WorldatWork Total Rewards Conference. May 21, Orlando, FL. Viewed: Nov. 7, 2012. http://www.ledfordconsultingnetwork.com/content/articles-and-presentations.

Luthans, F. 2011. Organizational Behavior. New York: McGraw-Hill.

Macey, W. H. and B. Schneider. 2008. “Engaged in Engagement: We Are Delighted We Did It.” Industrial and Organizational Psychology 1:76-83.

Macey, W H. and B. Schneider. 2008a. “The Meaning of Employee Engagement.” Industrial and Organizational Psychology 1: 3-30.

Maslach, C., W. Schaufeli, and M. Leiter. 2001. “Job Burnout.” Annual Review of Psychology 52: 397-422.

Mauno, S., U. Kinnunen, A. Makikangus, and T. Feldt. 2010. “Job Demands and Resources as Antecedents of Work Engagement: A Qualitative Review and Directions for Future Research.” Handbook of Employee Engagement, ed. S.I. Albrecht, 111-128. Northhampton, MA: Edward Elgar.

Newman, D. A. and D.A. Harrison. 2008. “Been There, Bottled That: Are State and Behavioral Work Engagement New and Useful Construct Wines?” Industrial and Organizational Psychology 1: 31-35.

Saks, A.M. 2006. “Antecedents and Consequences of Employee Engagement.” Journal of Managerial Psychology 21(7): 600-619.

Schaufeli, W. and A. Bakker. 2004. Utrecht Work Engagement Scale Preliminary Manual Version 1.1. December. Viewed: Jan. 7, 2013. http://www.wilmarschaufeli.nl/publications/Schaufeli/Test%20Manuals/Test_manual_UWES_English.pdf.

Schaufeli, W.B., M.P. Leiter, and C. Maslach. 2009. “Burnout: 35 Years of Research and Practice.” Career Development International 14(3): 204 - 220.

Schneider, B., W.H. Macey, K.M. Barbera, S.A. Young, and W. Lee. 2010. “Employee Engagement Everything You Wanted to Know About Engagement but Were Afraid to Ask.” Viewed: Jan 31, 2013. http://info.valtera.com/the-meaning-of-employee-engagement/.

Schohat, L.M. and E. Vigoda-Gadot. 2010. “Engage Me Once Again: Is Employee Engagement for Real or Is It ‘Same Lady Different Dress’?” Handbook of Employee Engagement, ed. S.I. Albrecht, 98-107. Northhampton, MA: Edward Elgar.

Seligman, M.E.P. and M. Csikszentmihalyi. 2000. “Positive Psychology: An Introduction.” American Psychologist 55(1): 5-14.

Towers Watson. 2012. “U.S. Report.” 2012–2013 Talent Management and Rewards Survey. Viewed: Jan. 2, 2013. http://www.towerswatson.com/assets/pdf/8415/TowersWatson-US-Report-TMR-Survey-NA-2012.pdf

Towers Watson. 2012a. Global Workforce Study. Viewed: Jan. 2, 2013. http://towerswatson.com/assets/pdf/2012-Towers-Watson-Global-Workforce-Study.pdf.

Towers Watson. 2007. “Closing the Engagement Gap: A Roadmap for Driving Superior Business Performance.” 2007-2008 Towers Watson Global Workforce Study. Viewed: Jan. 5, 2013. http://www.towersperrin.com/tp/getwebcachedoc?webc=HRS/USA/2008/200803/GWS_Global_Report20072008_31208.pdf.

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The ongoing impact of the Patient Protection and

Affordable Care Act (PPACA) is not only shaking

up U.S. politics and the health-care profession, it is

also affecting how organizations manage their HR strate-

gies. Beyond coping with the requirements of health-care

reform, many organizations are also influencing healthier

employee behavior and, as a result, are better managing

their talent.

For some time before the PPACA became law, a number

of organizations anticipated reform most effectively by

adopting a Total Health Management (THM) approach.

These early movers have embraced policies and prac-

tices that support a culture of health, including providing

incentives for employees to take health-assessment surveys,

reporting key biometric numbers (blood pressure, body-

mass index, cholesterol and blood sugar levels, with targets

for their improvement), as well as offering the familiar

range of health-management/wellness programs that can

assist with everything from fitness to weight, behavioral

issues and smoking cessation.

Companies have facilitated this move to incorporate THM

programs as part of their workforce management strategies

The PPACA and Talent Management: From Early Movers to a Culture of Health

Steven NoeldnerMercer

Matthew StevensonMercer

J23_V4.indd 82 11/6/14 10:17 AM


with comprehensive, integrated, user-friendly third-party programs that involve online

resources, ongoing communication and meaningful rewards (such as gift cards and

preferred rates on employer-provided health-care insurance for non-tobacco users).

The results are measurable and can influence the evolution of THM programs. For

example, if some offerings prove to be marginally popular (such as smoking cessation

in a largely non-smoking employee population), they can be de-emphasized in favor

of more relevant offerings. Most importantly, vendors, stakeholders and employees

are held accountable for program success so that all parties have a vested interest.

A THM approach has evolved hand in hand with the shift from defined benefit

(DB) to direct contribution (DC), typically in 401(k) retirement plans. This provides a

model where the DC approach to benefits funding can be deployed. This shift limits

the open-ended costs of traditional arrangements and gives employers more control

over future premium cost increases.

The influence of the DC approach is evident in a key tenet of the PPACA: the

individual mandate and the establishment of public exchanges to allow Americans

to directly purchase health insurance. Most who obtain coverage through the

public exchange are low-income individuals and families who qualify for a govern-

ment subsidy.

Fortunately for employers, the emergence of private exchanges is an aid in the

quest for better cost management and the evolution of the DC approach. Indeed,

private exchanges allow employers to offer PPACA-compliant health insurance with

a new efficiency, providing access to a range of health plans along with a full suite

of traditional (e.g., medical, vision, dental) and supplemental benefits. Meanwhile,

the private-exchange mechanism can greatly facilitate the transition to a DC model

for benefits — a key value proposition for employers — while allowing employees

to build their individual benefit-risk portfolios. This has the potential to be a strong

talent management mechanism, affording an efficient benefits model in addition to

THM incentives.

ROBUST DATA/ANALYTICS

An important issue for employers is to make sure their data/analytics are robust

in order to identify PPACA-eligible employees and produce the necessary compli-

ance reports. For many companies, the question of providing health benefits versus

managing hourly workers to less than the 30 hours-per-week eligibility threshold is a

key factor. Beginning in 2015 (the original deadline of Jan. 1, 2014, was extended to

allow employers more time to comply), companies with 50 or more full-time equiva-

lent employees will face shared responsibility penalties if they do not offer a medical

plan that meets minimum plan requirements with affordable contributions for all who

work 30-plus hours per week.

Regardless of their strategy, employers will have to rigorously track their employees’

hours, relying on solid databases for documentation. The data will be critical to prove

what they owe in shared responsibility penalties based on IRS data calculations

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after the close of 2015. System issues may complicate tracking employee hours, thus

employers will want to ensure that they have reliable software solutions or have

engaged third-party providers who offer those solutions.

Meanwhile, benefit plan design remains a strategic question for many employers.

Each year since the law was signed into effect, employers have faced compliance

requirements that have added cost to the health benefits. Two examples are the

elimination of benefit maximums and 100% coverage for preventive care.

This will continue into 2015, when employers must provide benefits to everyone

working 30 or more hours per week as well as satisfy minimum plan design require-

ments and affordable contributions, or be subject to shared responsibility penalties. As

employers quantify the impact of the law on their overall health-benefit costs, many

have become motivated to embrace bold plan design strategies.

Thus, there’s a trend toward more companies making consumer-directed health

plans (CDHPs) their default or core plans, and better communicating the advantages

of the CDHP option, from which employees can purchase higher benefit levels. In

fact, 18% of covered workers in organizations with more than 500 employees that offer

CDHPs are enrolled in them, up from 13% in 2012 and 10% in 2010 (Mercer 2013).

STRATEGIES TO MANAGE PPACA IMPACT

As PPACA implementation continues, employers have some key strategic decisions

to make in order to cut costs and minimize the adverse impact of the legislation’s

requirements. For example, companies may choose to convert full-time employees to

part time. In certain industries, such as retail and hospitality, the case can be made

that such a strategy, if carefully executed, makes sense. Utilizing statistical analysis,

organizations can link employees’ full-time or part-time status to business results (a

cost/benefit analysis that takes into account the expense of providing benefits pack-

ages and full-time salary against the advantages of full-time work, such as a greater

degree of employee reliability, job knowledge and customer-relations skills). This

amounts to a qualitative assessment of cost, and is often worthwhile.

More fundamentally, there’s the issue of continuing to offer employer-sponsored

health care — or not. While large employers remain committed to offering health

coverage, a growing number of small employers say they will likely drop their plans,

a significant rise from 23% of small employers in 2012 to 34% in 2013 (Mercer 2013).

(See Figure 1.)

Even more complicated than the decision whether to continue offering health

coverage is the strategic decision regarding whether employers should continue

to offer high-cost health plans in the face of a significant excise tax that will

take effect in 2018. Mercer (2014) surveyed 767 U.S. employers about health-care

reform, and the excise tax issue showed some interesting results. For example,

33% of those surveyed were taking action to steer more employees into CDHPs,

while 41% of them had taken action to implement a CDHP for the first time. In

addition, 44% of those surveyed have chosen to unbundle dental and medical

coverage. (See Figure 2.)

J23_V4.indd 84 11/6/14 10:17 AM


Figure 2 | Actions Against Excise Tax

Actions to avoid or minimize the impact of the excise tax on high-cost plans

35% 32% 41% 33%

17%

44%

17% 8% 2%

47% 48% 27% 22%

35%

7%

33% 34%

33%

Considering

Have taken action

Implement a CDHP

Steer more employees into CDHP

Drop high-cost plan(s)

Offer a private health

exchange

Raise deductibles

or other cost-sharing

provisions

Add or improve wellness programs

Unbundle dental and

medical coverage

Go out to bid with plan(s)

Use high-performance

network

Figure 1 | Staying the Course?

23% 20%

12%

7%

34%

23%

12%

6%

2012 2013

Employers with 200-499 employees

While a third of the smallest employer health plan sponsors are considering an exit strategy now that public exchanges are operational, the largest remain committed to offering coverage Percent of employers that say they are “very likely” or “likely” to terminate plans within the next five years

Employers with fewer than 50 employees


Employers with 500 or more employees

Percent of employers that say they are “very likely” or “likely”

to terminate plans within the next five years

While a third of the smallest employer health plan sponsors are considering an exit

strategy now that public exchanges are operational, the largest remain committed

to offering coverage

Employers with fewer than 50 employees



Employers with 500 or more employees

J23_V4.indd 85 11/6/14 10:17 AM


THE BUSINESS CASE AFTER PPACA

It is easy to make the case that a healthier workforce is directly related to better

business outcomes. Healthier workers secure in their health-care coverage are

inevitably associated with less absenteeism, higher levels of productivity and job

capability, and overall employee engagement, as has been cited by the Centers for

Disease Control and Prevention (CDC) in its online Workplace Health Promotion

toolkit. So despite the burdens and complexities of PPACA, it remains worthwhile

from a talent-management perspective for companies to continue making health

coverage a centerpiece of the employment value proposition.

While it takes considerable effort to calculate the savings from improved health,

the largest employers are the most likely to have formally measured the return on

investment (ROI) of their health-management programs — 46% of employers with

20,000 or more employees (Mercer 2013). Nearly nine out of 10 of these employers

say that their programs have had a positive impact on the medical plan trend.

The validation study for the HERO Employee Health Management Best Practices

Scorecard in Collaboration with Mercer, showed that employers with high scores

had measureable reductions in health-care claims trends that averaged -1.6% over

three years (Goetzel 2014).

Given such statistics, employers have good reason to view these health-

management programs positively, despite the increased administrative work

required to implement them. This increased effort includes planning for new

federal reporting requirements of the PPACA, as well as revising Health Insurance

Portability and Accountability Act-related privacy and security policies and proce-

dures to comply with final omnibus regulations. In addition, it is important to

prepare and distribute required employee communication, such as summaries

of benefits and coverage, exchange notices, summary plan descriptions and

summaries of material modification.

IMPLICATIONS FOR THE HEALTH-CARE INDUSTRY

If anything, the impact of PPACA on the health-care industry itself is likely to

be profound, as health-care organizations’ revenue will be affected even more

by their performance. In the PPACA era, the health-care providers with the best

outcomes at the lowest price points will most likely be the long-term survivors.

PPACA is driving this shift toward a quality-based health-care system from

the current volume-based system by linking hospital reimbursements to patient

outcomes. Beginning in 2013, the PPACA’s value-based purchasing (VBP) program

for inpatient hospitals reduced all Medicare payments by 1%. (This amount will

be increased each year until the cap of 2% is reached in 2017.) These funds will

be redistributed to hospitals based upon their value-based purchasing (VBP) score,

which is made up of both clinical outcomes and patient satisfaction survey scores.

Hospitals with better relative scores will be reimbursed more of these additional

funds. Patient satisfaction, measured by the Hospital Consumer Assessment of

J23_V4.indd 86 11/6/14 10:17 AM


Healthcare Providers and Systems (HCAHPS) survey, accounts for 30% of a hospi-

tal’s VBP score.

Hospitals that recognize that their workforces can improve both clinical outcomes

and patient experiences are more likely to track human-capital metrics found to

be related to positive survey scores. Mercer (2014) found that selected HCAHPS

measures are related to a hospital’s staffing mix. The ratio of nurses to patient-care

assistants or other support staff is often associated with select higher HCAHPS

measures, as is average workforce tenure and ratio of full-time to part-time staff.

Although innovative hospitals are formalizing their efforts to better manage

their workforces in order to impact HCAHPS scores and ultimately their revenue,

research has found that patient satisfaction scores are partially driven by external

factors, such as patient acuity or care type (Fenton 2012). These factors that

cannot be controlled by hospitals may contribute to changes in the VBP formula.

Nonetheless, the implementation of PPACA has created a financial incentive for

hospitals to actively manage and track their human capital and acknowledge that

their workforces can affect their bottom line.

But performance and price are only the iceberg’s tip. Health-care reform is

driving integrated health-care delivery systems to rationalize their leadership and

organizational structures. The number of executives required to lead health-care

organizations will likely drop, while the emphasis on wellness, prevention and

ambulatory care will decrease the demand for hospital beds as primary care, home

health care and hospice services continue to evolve to support the emphasis on

the most appropriate setting to achieve the best, most cost-effective outcomes.

One result will be a greater demand on health-care organizations to communi-

cate their executive compensation programs. If anything, health-care organizations

must look toward the simplification of executive pay programs and elimina-

tion of problematic practices such as: tax gross-ups; large “other compensation”

amounts that go unexplained (deferred compensation, for example); and excessive

perquisites and “special reward” practices. Double trigger standards (time and

performance) in retention and deferred compensation agreements are now called

for, in addition to appropriate severance and change-in-control periods.

CONCLUSION

The realities of health-care reform may be difficult, leading to an extended period

of adjustment for employers and employees. But the key to success for organiza-

tions and their workforces is to successfully manage their strategies, coping with

the requirements of health-care reform as well as influencing healthier employee

behavior to better manage talent.

While a number of organizations have been anticipating reform by buying into

a THM approach, even the best health-management strategy will not achieve

optimal results without a focus on the basic requirements. This requires: visible

buy-in from senior management and business leaders; policies and practices that

J23_V4.indd 87 11/6/14 10:17 AM


support a culture of health; comprehensive, integrated and easy-to-use programs;

and meaningful and timely employee incentives.

These include targeted activities that are relevant and high quality, from hands-

on health fairs that provide information about the changes brought by the PPACA

and how organizations are promoting a culture of wellness, to ongoing commu-

nication in multiple media (print, online, mobile and social). Results must be

measured and influence program evolution, while vendors, stakeholders and

employees are not only held accountable but are also keenly aware of the new

emphasis on accountability.

Nor should any of these strategies be vague. It should be clearly communicated,

for example, that employees must meet targets for biometric improvement — for

example, registering a 10% improvement in three of four biometrics and being

engaged in risk or condition coaching — to realize incentives. This engagement

can be defined by participation in coaching programs, the establishment of specific

goals and the demonstration of progress on goals.

Ultimately, the strategies of wellness should go hand in hand with the preventive-

care inclusions of the PPACA, such as no-cost annual medical exams. By now,

such conclusions should be obvious to businesses that want to make the most of

the changing landscape for managing talent. And it is fair to say that the new era

of health-care reform has been well-modeled by organizations that took health

management seriously before the PPACA became law. z

AUTHORS

Stephen Noeldner ([email protected]) is a partner and senior consultant in the Total Health Management (THM) specialty practice of Mercer. He serves on the THM practice’s leadership team and is a national expert in strategic planning, program design, behavior change and evaluation.

Matthew Stevenson ([email protected]) is a principal in Mercer’s Workforce Sciences group in Washington, D.C. His work involves helping Mercer clients define their human-capital strategy and fine tune the implementation of that strategy in order to support business objectives. Stevenson’s areas of expertise include human-capital metrics and dashboard design and strategic workforce planning.

REFERENCES

Fenton, Joshua J. et al. 2012. “The Cost of Satisfaction: A National Study of Patient Satisfaction, Health-Care Utilization, Expenditures, and Mortality.” JAMA Internal Medicine 172(5): 405-411.

Goetzel, R.Z. et al. 2014. “The Predictive Validity of the HERO Scorecard in Determining Future Health-Care Cost and Risk Trends.” Journal of Occupational and Environmental Medicine 56(2): 136-144.

Mercer. 2014. “Survey on Health-Care Reform in 2014: Are We There Yet?” Viewed: Aug. 20, 2014. http://www.aei.org/files/2014/04/25/-20140425watts_155814967393.pdf.

Mercer. 2013. “National Survey of Employer-Sponsored Health Plans.” Viewed: Aug. 20, 2014. http://benefit-communications.com/upload/downloads/Mercer_Survey_2013.pdf

J23_V4.indd 88 11/6/14 10:17 AM


Pay for Performance: Hit or Miss? An In-Depth Look at the Relationship Between Pay and Performance

A new reality for companies today is to demonstrate

a strong pay-for-performance relationship in their

compensation programs. Shareholders expect

better alignment between executive pay and performance

and have an avenue to express their views through say on

pay. (Say on pay was introduced to U.S. publicly traded

companies in 2011 as a result of the Dodd-Frank Wall

Street Reform and Consumer Protection Act of 2010.) As

a result, companies have increasingly turned to long-term

performance awards as a means for enhancing the align-

ment of pay and performance.

While the use of performance awards has become

more common, their effectiveness in aligning pay with

actual company performance has remained in question.

The authors’ companies teamed up to analyze the pay-

for-performance relationship of performance awards. In

the analysis, the authors examined not just the align-

ment of pay and performance, but also took a deep

dive into the relationship to assess the impact of the

economic environment on performance awards.

The study found that on the whole, performance

awards generally align pay with performance. However,

Yonat AssayagClearBridge Compensation Group

Carl J. StegmanFidelity Stock Plan Services

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this relationship may be challenged depending on economic conditions and/or

whether the company is a top, middle or bottom performer. Some of the key

findings are:

z The majority of payouts under performance awards are in alignment with a

company’s relative performance, indicating that these awards may be an effective

tool for aligning pay with performance.

z The alignment exists regardless of which performance measure is used, although

the alignment is strongest when performance is measured based on total share-

holder return (TSR) or earnings per share (EPS). (Total shareholder return is

defined as stock price appreciation, including reinvestment of dividends.)

z Three-year performance awards have a statistically stronger correlation between

pay and performance than performance awards with shorter performance

measurement periods.

z The pay-and-performance relationship can be influenced by economic condi-

tions; the relationship seems to be weaker when goals are set during times of

economic uncertainty.

z The pay-and-performance relationship is strongest among top and bottom

performers.

METHOLOGY

One author’s company (ClearBridge Compensation Group) analyzed performance

award data collected from the other author’s company (Fidelity Stock Plan Services)

for 131 clients with share-based performance awards with performance periods

of one year or more. The total number of participants in these plans ranged from

one to 2,270 employees, with an average of 185 employees. For purposes of this

research, a performance award is a stock award or unit where the payout of the

underlying shares is contingent on the achievement of specified performance

metrics and where a company’s plan allowed a maximum payout to be above the

plan’s target payout.

The study analyzed 159 performance award payouts spanning six years (2008

through 2013). These payouts were compared to a company’s performance

measured relative to performance of the S&P 500 index. Specific performance

measures analyzed included:

z Revenue growth

z Net income growth

z Earnings before interest, taxes, depreciation and amortization (EBITDA) growth

z Earnings per share (EPS) growth

z Return on capital (ROC)

z Return on equity (ROE)

z Total shareholder return (TSR).

The pay-and-performance relationship was analyzed over the same period as

that of the performance award measurement period. For example, the payout for

J23_V4.indd 90 11/6/14 10:17 AM


a performance award with a three-year performance measurement period ending

on Dec. 1, 2012, was compared with a company’s performance relative to the S&P

500 for the same three-year period.

Each performance award payout (ranging from a zero payout to a maximum

payout under the plan) and a company’s corresponding performance ranking

relative to the S&P 500 were plotted on a pay/performance scale. The pay/perfor-

mance scale was divided into four quadrants reflective of the pay-and-performance

alignment. (See Figure 1.)

Payouts falling in the upper right quadrant (High Performance/High Pay) or

lower left quadrant (Low Performance/Low Pay) are considered to be aligned with

a company’s relative performance. Payouts falling in the other quadrants represent

a potential disconnect between pay and relative performance. In addition, regres-

sion analyses were performed to assess the statistical correlation between payouts

and relative performance.

EVALUATING THE PAY-FOR-PERFORMANCE RELATIONSHIP

When performance award payouts were compared against a company’s TSR perfor-

mance versus the S&P 500, 103 of 155 observations (66%) fell within the upper

right and lower left quadrants, indicating that there was general alignment between

payouts and relative TSR performance. (See Figure 2.)

While the results of this analysis indicate that pay and performance are aligned

overall, about one-third of the payouts indicate a potential disconnect between

pay and performance. Furthermore, it is worth noting that among high-performing

Figure 1 | Pay/Performance Alignment

J23_V4.indd 91 11/6/14 10:17 AM


companies (companies with TSR performance above the 50th percentile of S&P 500

companies), 76% of payouts were aligned with performance. In contrast, payouts

among low-performing companies (companies that performed below the 50th

Figure 3 | EPS Growth Performance Versus S&P 500 (n = 127)

When performance award

payouts are compared to

relative EPS performance

rather than relative TSR,

extreme high performance/

low pay outliers are

removed, indicating better

alignment when perfor-

mance is strong. However,

in the reverse situation

when performance is

low, there continue to

be high payouts that are

misaligned.

R² = 0.26704

0% 25% 50% 75% 100%

Perf

orm

ance

Sha

re P

ayou

t

EPS Growth Percentile Rank Relative to the S&P 500

EPS Growth Performance Versus S&P 500 (n=127) Max

Target

Low Performance - High Pay (n= 30)

High Performance - Low Pay (n= 11)

High Performance - High Pay (n= 52)

Low Performance - Low Pay (n= 34)

R = 0.1248

0% 25% 50% 75% 100%

Perf

orm

ance

Sha

re P

ayou

t

TSR Percentile Rank Relative to the S&P 500

TSR Performance Versus S&P 500 (n=155) Max





Target

Figure 2 | TSR Performance Versus S&P 500 (n = 155)

J23_V4.indd 92 11/6/14 10:17 AM


percentile) were aligned only 54% of the time. This differential will be explored

further in a later section.

Replicating the TSR pay/performance analysis for EPS growth performance versus

the S&P 500, the authors found similar results. In 86 of 127 observations (68%),

payouts align with performance, i.e., payouts tend to be at or above target when

relative EPS growth is at or above the median EPS growth for S&P 500 companies

and payouts tend to be below target when relative EPS growth is below target.

Payouts are generally below target when relative EPS growth is below the median

S&P 500 EPS growth. (See Figure 3.)

The statistical correlation between performance award payouts and relative EPS

growth is greater than the correlation between payouts and relative TSR, with fewer

significant outliers. In fact, when performance award payouts are compared to

relative EPS performance, extreme high performance/low pay outliers are removed.

This is likely because most awards (68%) are based on financial metrics, which

are more directly linked with EPS than with TSR.

The authors also found the same relationship that they discovered with TSR,

where high-performing companies demonstrate a higher percentage of pay/perfor-

mance alignment (83%) compared to low-performing companies (53%).

PERFORMANCE MEASUREMENT AND PAY/PERFORMANCE ALIGNMENT

Impact of Performance Measures Used

TSR and EPS are the most common measures used by companies. TSR has risen

in prevalence as a performance measure and is widely used, although earnings

measures continue to also be highly prevalent.

Figure 4 | Performance Measures

0% 10% 20% 30% 40% 50% 60%

TS

R/Stk

Price

EPS

/Net

Inc/EB

IT

Returns

Rev

=Cash

flow

Other

Fina

ncial

Non

-‐Fina

ncial

Fidelity

CB100

Equilar

Note: ClearBridge 100 (“CB100”) is a proprietary database of executive compensation practices among 100 S&P 500 companies representing a cross-section of industries.

J23_V4.indd 93 11/6/14 10:17 AM


Performance award payouts tend to be best aligned with TSR or earnings perfor-

mance. However, metrics such as revenue growth and returns (e.g., ROC and ROE),

when also measured on a relative basis, did not result in as strong a correlation

between performance and payouts. Figure 5 summarizes payout alignment relative

to the S&P 500 for various performance measures. Pay-and-performance alignment

reflects the percentage of observations falling within the top right quadrant or the

bottom left quadrant of the pay/performance chart, while pay-and-performance

disconnect reflects the percentage of observations falling within the top left or

bottom right quadrants of the pay/performance chart.

There is little difference overall in how performance awards pay out when

comparing plans based on an absolute or a relative measure. Plans that are based

on a combination of absolute and relative measures, however, paid between target

and maximum 83% of the time, which may indicate that absolute and relative

performance provide a check or hedge against each other. (See Figure 6.)

Impact of Performance Measurement Periods

Three-year measurement periods continue to be the most common time horizon

to assess performance under performance-based incentive awards. (See Figure 7.)

In recent years, some companies have adopted a shorter performance period,

such as one or two years, to help mitigate some of the challenges with long-

term goal setting in an uncertain economic environment, although it remains a

minority practice.

While one would expect a stronger pay-and-performance alignment for perfor-

mance awards with a one-year measurement period compared with performance

awards with a three-year measurement, given it is easier for companies to predict

one year of future performance as opposed to three years, the converse is true.

As Figure 8 indicates, the pay-and-performance relationship, where performance is

defined as EPS growth relative to S&P 500 companies, does not correlate as well

Figure 5 | Relationship Between Pay and Relative Performance

32%

34%

41%

44%

44%

47%

47%

68%

66%

59%

56%

56%

53%

53%

EPS Growth

TSR

Net Income Growth

Revenue Growth

ROC

EBITDA Growth

ROE

Pay-‐for-‐Performance Disconnect Pay-‐for-‐Performance Alignment

J23_V4.indd 94 11/6/14 10:17 AM


as one might expect for one-year performance awards. In fact, high pay resulted

from low performance 50% of the time (12 of 24 occurrences of low performance

paid at or above target), which is counter to achieving alignment between pay

and performance. This may be attributed to the fact that it often takes time to

Figure 6 | Absolute vs. Relative Plans

23%

14%

17%

15%

26% 2%

83%

62%

39% 19%

0% 25% 50% 75% 100%

Both

Relative

Absolute

Performance Plan Payouts Absolute vs. Relative Plans

Zero Below Target Target Between Target and Max Max

n=42

n=13

n=6

Figure 7 | Prevalence of Performance Periods in Performance Awards

19%

5%

79%

9%

19%

6%

80%

10%

1 Year 2 Years 3 Years 4+ Years

2011

2012

J23_V4.indd 95 11/6/14 10:17 AM


Figure 8 | EPS Growth Performance Versus S&P 500 — One-Year Plans (n = 47)

R² = 0.28719

0% 25% 50% 75% 100%

Perf

orm

ance

Sha

re P

ayou

t


EPS Growth Performance Versus S&P 500 - 1 Year Plans (n=47) Max

Target





Figure 9 | EPS Growth Performance Versus S&P 500 – Three-Year Plans (n = 76)

R² = 0.27

0% 25% 50% 75% 100%

Perf

orm

ance

Sha

re P

ayou

t


EPS Growth Performance Versus S&P 500 - 3 Year Plans (n=76) Max

Target





J23_V4.indd 96 11/6/14 10:17 AM


gather momentum toward achieving a goal, and a one-year goal may not afford

sufficient time.

Influence of Economic Uncertainty on Pay/Performance Alignment

While the majority of performance awards are directionally aligned with perfor-

mance, as discussed previously, there continues to be a meaningful number of

awards classified as misaligned. In order to further analyze this disconnect, the

authors examined the pay-and-performance alignment in the context of the

economic environment.

A deeper dive analysis of the pay-and-performance alignment found a difference

in the payout levels based on the year of the payout. (See Figure 10.) The vast

majority of performance award payouts for performance periods ended in 2011

and 2012 paid out at target or above, while payouts for performance periods ended

in 2010 were more evenly distributed above and below target.

The way that companies set their long-term performance goals can be heavily

impacted by the economic outlook and environment at the time the goals are

being set. Because award cycles are most commonly three years and longer-term

cycles can have more goal-setting challenges, the study further examined this

relationship among three-year awards only. (See Figure 11.)

There was significant economic uncertainty at the time companies were setting

goals for performance awards with three-year performance periods ended in 2011

and 2012 (i.e., goals were set in 2009 or 2010). Given the economic uncertainty,

companies likely set their goals to reflect the bleak economic outlook at the time

and their inability to predict when the market might rebound. When the general

market then recovered over the course of the performance cycles, these awards

may have paid out above target even though the company’s performance did not

look as strong on a relative basis. (See Figure 12.)

Examining Pay/Performance Alignment Among Top, Middle

and Bottom Performers

In order to dissect the differences between these groups, performance award

payouts were segmented into three performance categories:

Performance Rank vs. S&P 500 Performance Category

Greater than or equal to 75th percentile Top Performers Market

Between 25th and 75th percentiles Middle Performers

At or below 25th percentile Bottom Performers

J23_V4.indd 97 11/6/14 10:17 AM


Figure 10 | Performance Award Payouts by Year

13%

4%

22%

18%

22%

30%

7%

4%

46%

54%

29%

16%

16%

19%

0% 25% 50% 75% 100%

2012

2011

2010

Perf

orm

ance

Per

iod

Ende

d (Y

ear)


n=55

n=45

n=37

Figure 11 | Performance Plan Payouts by Year for Three-Year Awards

13%

3%

31%

15%

23%

17%

8%

3%

3%

49%

55%

28%

15%

16%

21%

0% 25% 50% 75% 100%

2012

2011

2010

Perf

orm

ance

Per

iod

Ende

d (Y

ear)


n=39

n=31

n=29

J23_V4.indd 98 11/6/14 10:17 AM


When performance award payouts are compared to relative EPS performance,

the Top Performers and Bottom Performers were directionally aligned with perfor-

mance. However, an interesting phenomenon occurs in the Middle Performers

group, where the payouts skew toward above target (74%). (See Figure 13.)

This relationship indicates that when companies perform very well or very

poorly, they are equally effective in aligning pay with performance. However, the

data suggest that when performance is in the middle, companies may be rewarding

their employees to accomplish other objectives, such as attraction and retention.

Replicating the same analysis with relative TSR performance finds directionally

similar results, except that with TSR, the Bottom Performers are more evenly split

between below target and above target payouts than might be expected. (See

Figure 14.)

CONCLUSION

The results of this study indicate that performance awards are directionally aligned

with company performance, which supports their continued use by companies

seeking to align pay with performance. Performance award payouts have aligned

with performance, especially when assessing performance against key metrics like

TSR and EPS over a longer performance measurement period, such as three years.

However, the pay-for-performance relationship is certainly tested during times of

uncertain economic conditions.

Figure 12 | Goal Setting and Performance History

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

Jan-‐07 Jan-‐08 Jan-‐09 Jan-‐10 Jan-‐11 Jan-‐12

S&P

500

Inde

x St

ock

Pric

e

Timing of Goal Se9ng and Payouts vs. S&P 500 Index Historical Stock Price:

3-‐Year Performance Awards

2008-2010 Performance Cycle



J23_V4.indd 99 11/6/14 10:17 AM


An integral component of getting the pay-for-performance relationship right in

any performance award is goal setting. While there is no crystal ball to ensure a

perfect relationship, some things to keep in mind when setting goals are:

z Select performance measures that are critical drivers of the business strategy.

While TSR is undoubtedly a strong gauge of success, other financial or strategic

measures may be equally, if not more, important in executing the business

strategy successfully, which will ultimately translate to shareholder value creation.

Figure 13 | Performance Awards Segmented by EPS Performance Level

15%

35%

58%

85%

65%

42%

-‐80% -‐60% -‐40% -‐20% 0% 20% 40% 60% 80% 100%

Top Performer

Middle Performer

Bo9om Performer

Distribu(on of Above/Below Target Payouts by TSR Performance Level

Below Target Payouts Above Target Payouts

Figure 14 | Performance Awards Segmented by TSR Performance Level

12%

26%

70%

88%

74%

30%

-‐100% -‐80% -‐60% -‐40% -‐20% 0% 20% 40% 60% 80% 100%

Top Performer

Middle Performer

Bo9om Performer

Distribu(on of Above/Below Target Payouts by EPS Performance Level

EPS Below Target Payouts EPS Above Target Payouts

15%

35%

58%

85%

65%

42%

-‐80% -‐60% -‐40% -‐20% 0% 20% 40% 60% 80% 100%

Top Performer

Middle Performer

Bo9om Performer

Distribu(on of Above/Below Target Payouts by TSR Performance Level

Below Target Payouts Above Target Payouts

J23_V4.indd 100 11/6/14 10:17 AM


z Test the probability of achieving goals at all levels of performance and avoid

softball goals or super-stretch goals that may encourage undesired behaviors or

result in a pay-and-performance disconnect.

z Consider macroeconomic conditions. If a company’s business is highly influ-

enced by external factors, measuring performance on a relative basis may be

appropriate.

z Consider street expectations. Inherently built into a company’s stock price are

shareholders’ expectations of how the company will perform in the future.

Guidance provided to the street and analyst projections are important inputs to

the goal-setting process.

While all factors contributing to a company’s performance and, in turn, how

performance awards will pay out, are not foreseeable at the beginning of each

performance period, companies should strive to ensure performance awards are

designed to best support the company’s long-term business strategy and enhance

alignment with shareholder and compensation objectives. z

AUTHORS

Yonat Assayag ([email protected]) is a partner at ClearBridge Compensation Group, an independent executive compensation consulting firm. Assayag has more than 15 years of experience advising boards and senior management on performance measurement and compensation strategy and design, with the ultimate goal of aligning reward programs with the creation of shareholder value. She has worked with both publicly traded and privately held companies in a variety of industries. Before joining ClearBridge, Assayag was a principal at Mercer, specializing in executive compensation, and prior to that she held various corporate HR roles. She has spoken frequently at conferences and written numerous articles on executive compensa-tion issues. Assayag holds a master’s of business administration from New York University’s Stern School of Business and a bachelor degree of science in business administration from Syracuse University.

Carl J. Stegman ([email protected]) is senior vice president of product management for Fidelity Stock Plan Services. With 15 years of experience in financial services and managing system applications, Stegman helps drive the success of Fidelity’s Stock Plan Services product offering, serving U.S. multinational public companies. For the past seven years, he has been dedicated to the stock plan services business focused on delivering enhanced functionality to clients and their participants. Stegman earned a bachelor’s degree from Northeastern University and a master’s of business administration in management information systems (MIS) from Bentley College. He is Series 7, 63 and 24 registered.

REFERENCE

Chin, Christopher, Felicia Wong, and Ankur Prabhakar. 2013. “Measuring Short-Term and Long-Term Performance in 2012: An Analysis of S&P 1500 Incentive Plan Metrics.” Equilar.

J23_V4.indd 101 11/6/14 10:17 AM


P ay secrecy is the norm for many, if not most,

American workers (Nosenzo 2013), even though

the legality of policies prohibiting employees’

pay discussions in the United States is questionable (Stan-

berry and Aven 2014). However, the popular press and

some thought leaders are advocating total pay openness

– making all employees’ salaries public – as the route to

truly innovative, collaborative management. Some promi-

nent business thinkers argue that freely sharing others’

pay levels is the cutting edge of innovation (Case 2001),

and will increase productivity (Indiviglio 2014). One busi-

ness blogger suggests pay secrecy simply creates employee

frustration and encourages distrust (Kjerulf 2006); another

claims companies are “jumping on the open-salary band-

wagon” (Pozin 2014).

Why don’t more organizations enthusiastically embrace

pay openness? After all, secrecy may suggest the orga-

nization is deceiving employees about pay, reinforcing

a perception of unfairness. Without the ability to judge

how pay stacks up to others, employees may rely on

inappropriate comparisons and feel unjustly treated even

What the Research Says About Pay Secrecy

Nancy E. Day, Ph.D. University of Missouri – Kansas City


J23_V4.indd 102 11/6/14 10:17 AM


when injustice doesn’t exist. Secrecy provides no evidence with which to appeal

pay decisions that seem unfair.

On the other hand, organizations often have sound reasons to keep employees

from discussing pay. Pay decisions are complicated and individualized; typically

they are impossible to explain and justify in any manageable way. Secrecy keeps

the messiness behind pay determination and allocation behind the scenes. Because

there is less need to justify pay decisions, secrecy allows employers more freedom

in administering pay.

Employees may prefer secrecy as well. As privacy concerns become more promi-

nent in the expanding digital world, pay-secrecy policies allow employees to keep

a vital piece of personal information to themselves. Pay communicates more than

income. It can convey status, expertise, worth of the individual to the organization

and value of the person in society. Employees may want to keep their pay level

to themselves if they believe it would present them in a negative light.

So what is a compensation manager to do? The purpose of this article is to shed

light on the topic by summarizing the academic research about pay secrecy. The

article describes recent laboratory and organizational research, then concludes

with considerations for practice. The goal is to help compensation managers inte-

grate knowledge of their own organizational cultures with empirical evidence in

the creation of strategically effective pay-communication strategies.

Since legal pressures prohibit pay-secrecy policies that discipline employees

for discussing their individual pay, it’s safe to assume few employers now have

such written policies. However, many organizations make the decision not to

publish individual salaries, and often such organizations have norms discouraging

employees from pay discussions. This article refers to this practice as pay secrecy.

Given the current push against pay secrecy, it is notable how little research is

devoted to the topic. A few laboratory and organizational studies exist, which will

be briefly summarized here. Although laboratory research typically lacks external

validity (the ability to generalize to real organizations), it is valuable because it

isolates specific key dynamics by eliminating the complexity of external environ-

ments. On the other hand, although research occurring in organizations reflects

the real world, many factors are beyond the researchers’ control and isolating the

true source of any change is typically impossible. So, both types of research are

relevant and important.

The studies described here investigate how pay secrecy relates to: (1) perceptions

of a performance-rewards link; (2) allocation of pay increases; (3) fairness percep-

tions, including pay equity, procedural justice (the perception that procedures are

fair), and distributive justice (the perception that individual rewards are allocated

fairly); 4) worker attitudes, including job satisfaction, pay satisfaction, organiza-

tional commitment and intention to turnover.

J23_V4.indd 103 11/6/14 10:17 AM


RESEARCH IN THE LABORATORY

An early laboratory study asked bank managers to complete an in-basket similar

to those used in assessment centers to assess management skills (Bartol and

Martin 1989). The focus was to study pay secrecy in conditions when: (1)

employees’ skills were critical to achieving to key organizational goals (low or

high “dependence”) and (2) whether the employee was considering leaving (low

or high “dependency threat”). The in-baskets were experimentally manipulated

to include open or secret pay conditions and low and high levels of dependency

and dependency threat, and participants were to allocate pay increases to the

imaginary employees. Although the researchers predicted managers would allo-

cate higher pay in dependency threat conditions when pay was secret, this was

not found. When the manager was highly dependent on the employee’s knowl-

edge, skills and abilities (KSAs) and the employee was likely to leave, managers

awarded higher pay when pay was open than when it was secret. Perhaps they

assumed that in open-pay conditions, highly essential employees would see their

performance had not been distinguished sufficiently from others’, thus increasing

the chance they would leave.

Bamberger and Belogolovsky (2010) have been active in a series of laboratory

studies investigating links between pay secrecy and performance. In one study,

college students were randomly assigned to groups where pay was either open or

secret and were paid to perform a simple task. Students in the pay-secrecy condi-

tion who had high “tolerance for inequity” performed better over the course of the

experiment, although the performance of those low in tolerance for inequity did

not change. In other words, pay secrecy seemed to reduce performance-rewards

perceptions (instrumentality) in subjects who were more bothered by inequity.

Secrecy did not adversely affect pay-rewards perceptions of those who could

better tolerate inequity.

Another study utilized a gift-exchange game. Subjects who knew other players’

pay and were underpaid relative to others exerted less effort over time (Nosenzo

2013). Those who knew others’ pay and were overpaid also tended to expend less

effort. However, the effort of subjects in the pay-secrecy condition did not change

over time. Nosenzo speculates that pay secrecy seemed to protect subjects from

knowledge of inequity and thus their performance was unimpaired.

These laboratory studies have important implications for pay-communication

policies. First, pay secrecy may have differential effects on how supervisors allo-

cate pay. Pay secrecy may discourage managers from paying for performance.

Second, pay secrecy may adversely affect performance-reward perceptions. Third,

if performance is measured subjectively (perhaps the norm in most organizations),

pay-performance linkages may be obscured, particularly if pay is secret. Fourth,

if pay is inequitable, secrecy may maintain productivity by sheltering individuals

from knowledge of the inequities.

J23_V4.indd 104 11/6/14 10:17 AM


Although these results show pay secrecy is not uniformly positive or negative, the

takeaway idea is understanding how individual pay levels are communicated seems

to be important in establishing and supporting performance-rewards perceptions.

RESEARCH IN ORGANIZATIONS

Another study took advantage of a website containing university employee sala-

ries (Card et al. 2012). (By law, state-funded university salaries are public record.)

The researchers sent two notices to randomly chosen university employees: one

group was notified of the website; the other was directed to a website listing

only salaries of top university administrators (a placebo treatment, according to

the researchers). Of the workers made aware of the all-university salary website,

those with salaries below the median showed lower job satisfaction and higher

intention to turnover compared to the placebo group. Those over the median did

not differ from those in the placebo condition.

A study conducted by the author distinguished between formal, written pay-

secrecy policies (explicit secrecy policies) and informal, unwritten expected

behavior norms dictating pay secrecy (tacit secrecy policies) (Day 2012). Given

most employers realize the legal precariousness of requiring pay secrecy, it is

likely that most organizations are moving to adopt a tacit, rather than explicit,

pay-secrecy policies. The study asked a sample of non-union employees at a

Midwestern utility their perceptions of their organization’s pay-secrecy policies.

To the extent employees felt pressure not to discuss their pay (they perceived tacit

pay secrecy), they tended to be less satisfied with how pay was administered, and

this depended on how equitable they found their pay.

A further finding from this study sheds light on the raison d’etre of pay-secrecy

policies: to discourage employees from discussing their pay. Whether or not

employees perceived pay secrecy policies, explicit or tacit, did not predict how

likely they were to report discussing their pay with coworkers. Implications of this

study are, first, employees’ perceptions of pay secrecy affect their perceptions of

pay equity, which impacts pay satisfaction; second, pay-secrecy policies may not

stop employees from actually discussing their pay.

These organizational studies suggest two somewhat conflicting findings. First,

in favor of pay secrecy, it may “protect” employees, particularly those lower-paid,

from perceiving inequity, and thus may prevent some negative attitudes. Second,

in favor of pay openness, even unwritten secrecy policies may lower pay satisfac-

tion and equity perceptions, and may do little to stop employees discussing pay.

PRACTICE CONCLUSIONS FROM PAY-SECRECY RESEARCH

The pay-secrecy research cited suggests several themes:

z Pay secrecy may affect the establishment of performance-rewards linkages.

z Managers may be more likely to pay for performance in open systems, especially

when top performers need to be retained.

J23_V4.indd 105 11/6/14 10:17 AM


z Pay secrecy may lower fairness perceptions.

z Pay secrecy may increase or decrease important worker attitudes, including job

satisfaction, pay satisfaction, organizational commitment and intention to turnover.

Thus, the jury is still out on whether pay secrecy is a bad idea. While its legality

is questionable and restricting employee communication inadvisable, compensa-

tion managers should not rush to publish individual salaries. The question of

how much pay openness is needed should be addressed in the development of a

broader pay-communication strategy.

Pay communication is sometimes viewed as a continuum ranging from total

secrecy (no information about the pay system or individual pay levels) to complete

openness of the system and individual pay (Colella et al. 2003). Perhaps it is simpler

to address these policies as patterns, as suggested by Burroughs (1982). “Type red”

organizations provide no pay information to employees besides their own individual

pay levels. “Type green” organizations openly communicate all pay data, including

everyone’s individual pay. Most organizations are “type yellow”: somewhere in

between. Some make known the pay structure but not other system factors; others

allow employees to know their ranges as well as the next higher range. Many other

variations exist (Gomez-Mejia and Balkin 1992).

WHAT WORKS: COMMUNICATION ABOUT THE PAY SYSTEM.

Academic research findings are fairly unequivocal: Communication about how

the pay system works results in positive outcomes for organizations. Fairness

perceptions, pay satisfaction and intention to leave have all been associated with

better pay communication. In fact, in studies of two organizations, one a utility

and the other a university, results suggest enhanced pay communication affects

both satisfaction with pay, commitment to the organization and perceptions of

pay equity and justice (Day 2011). Workers who believed they received more pay

communication tended to have more positive attitudes, partly because they saw

their pay as more equitable. Other research shows increased pay communication

leads to better decision making, higher work engagement, enhanced empower-

ment perceptions, a sense of worker importance, better understanding of how to

maximize performance, more trusting environments, positive work climates, more

credible pay systems and more effective organizations (Lawler 1981; Williams and

Levy 1992). Several studies have found employee understanding (or perceived

understanding) of pay improves pay satisfaction and reduces turnover intentions.

The decision of whether to make individual pay levels available or kept secret

should flow out of the development and implementation of a broad pay-commu-

nication strategy. This strategy should be carefully aligned with, and support the

goals of, the organization and its rewards strategy. Recommendations for devel-

oping such a broad strategy are beyond the scope of this article. However, this

strategy must be in place before decisions are made about whether employees’

individual pay should be kept secret.

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Based on the cited research, the author suggests the following practice consid-

erations regarding whether pay secrecy or openness is appropriate. It should be

kept in mind that the amount of research is very limited and these are points to

consider rather than clear recommendations.

z Practice Conclusion 1: Consider pay secrecy’s effects on instrumentality percep-

tions (the performance-rewards link). Research reported here suggests keeping

pay secret can adversely affect establishing instrumentality perceptions – the

pay-for-performance link. In an organization emphasizing pay-for-performance,

the effect of restricting access to pay information should be carefully considered

as part of the development of the broader pay communication strategy. Careful

deliberation should be undertaken to determine if – and how much – pay open-

ness will best create performance-rewards perceptions.

z Practice Conclusion 2: Consider pay secrecy’s effect on the allocation of pay

increases. Pay secrecy may make a difference in how managers allocate rewards.

If managers pay for performance more readily in open systems, pay secrecy may

be detrimental in organizations aiming to pay for performance. However, it is

likely that managers might, in some contexts, allocate pay more appropriately in

secrecy conditions – particularly when performance is assessed subjectively. It

may be easier for managers to make the hard choices when their decisions are

not widely known.

Focusing on what the organization needs to communicate rather than what

it needs to keep secret may be the best approach. An effective, well-designed

pay-communication strategy should balance maintaining employees’ pay privacy

with giving managers the clarity and tools needed to allocate pay based on the

organization’s rewards strategy.

z Practice Conclusion 3: Consider pay secrecy’s effect on fairness, pay equity

and justice perceptions. Pay equity and procedural and distributive justice are

important to ensure workers are satisfied with their pay and benefits. When

the procedures by which rewards are distributed are seen as consistent, bias-

free and equitable, workers are more assured pay and benefit systems have

been properly designed. When individual rewards are fairly distributed, based

on performance and merit, individuals will be happier with their outcomes. A

workplace perceived as just will experience higher organizational commitment

and better employee engagement. Pay secrecy is detrimental to the degree it

constricts justice perceptions.

It is likely that how pay secrecy affects justice depends on the organizational

context. In a competitive, individually based rewards system, pay secrecy may

be less desirable since it obscures important performance-rewards linkages. In

collaborative, team-based settings, pay secrecy may enhance perceptions of coop-

eration and teamwork, particularly if a strong pay-communication strategy assures

employees the overall pay system is fair.

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z Practice Conclusion 4: Consider pay secrecy’s effects on important worker

attitudes. Research cited here does not fully explore how pay secrecy affects

key worker attitudes such as commitment, job satisfaction, pay satisfaction and

turnover intentions. It is likely these attitudes are impacted by perceptions of fair-

ness and equity, which in turn are affected by how pay is communicated or kept

secret. While pay openness seems to be associated in some studies with positive

attitudes, in another, knowledge of coworkers’ pay led to lowered commitment

and satisfaction (Card et al. 2012). Further, the desire for privacy may make pay

openness distasteful to many. A sound pay-communication policy may be the best

strategy to encourage positive worker attitudes as opposed to just considering

whether pay levels should be made public.

z Practice Conclusion 5: Consider making the pay system transparent. As this

article has shown, research isn’t clear as to whether making individual pay levels

public is a good idea. But research is clear that making the pay system transparent

is a good idea. When employees understand how and why pay is differentiated,

that it has been done fairly and intentionally, they are much more likely to be

engaged, committed to the organization and its strategies, and less likely to

leave. Allocating sufficient resources of time, money and expertise to a robust

pay-communication strategy is an investment in successfully engaging employees.

Such a communication approach requires strong organization-wide media and

methods. An additional and critical component is to ensure managers and supervi-

sors are well grounded in the organization’s rewards strategies and practices so

they serve as credible ambassadors for the pay system. Rather than focusing on

whether individual salaries should be open, a best practice is to ensure employees

understand the pay system and that the system’s implementation supports key

organizational goals and upholds values of fairness and equity.

CONCLUSION

In summary, rather than focusing on pay secrecy or openness, organizations should

carefully design and implement pay-communication programs. Unfortunately, pay

communication is often neglected. It can be perceived as cost ineffective and

unimportant compared to other demands in tight budgets. However, strategic

communication is essential. Pay systems are often complicated and sometimes

misunderstood by management. In the absence of the strong support of clear

communication strategies, many managers do not have the skills or experience

to effectively communicate about pay. Research affirms a carefully designed and

implemented pay-communication system can increase both perceptions of fairness

and satisfaction with pay.

The principles of interactional justice should drive communication: Employees

need to receive critical, relevant and understandable information in a timely

manner, delivered with courtesy and awareness of the dignity and respect due

to employees (Colquitt 2001). It is critical to determine if pay secrecy advances

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or detracts from interactional justice before communication decisions are made

(Till and Karren 2011). Management’s fundamental task is to create and maintain

a fair pay system aligned with the organization’s values and goals of its rewards

strategy. Keeping individual employees’ pay secret is not a bad thing when it is

supported by the broader culture and the organization’s rewards strategy. In a less

than equitable system, it may be preferable.

The organizational context is critical to whether a fully open pay system will

work. An open system may be appropriate only in organizations with participative

management styles and high levels of trust. If the organization’s environment (its

external context, nationality, etc.), its individual members (their propensity toward

risk-taking, job types, etc.), and its culture and climate are not ready for openness,

then it may be best to keep individual pay secret until evidence warrants otherwise.

Finally, communication is a one-time phenomenon: Once something is commu-

nicated, it cannot be taken back. Managers are wise to communicate conservatively,

erring on the side of divulging less rather than more. More research is needed

before the impact of pay secrecy – or openness – is determined, let alone what

type is the best, and for whom. Management should communicate clearly about

the pay system, and ensure employees understand what they have been told. But

management they should carefully consider whether a decision to make individual

pay information available to all is appropriate. z

ABOUT THE AUTHOR

Nancy E. Day, Ph.D. (dayn@umkc,edu) is associate professor in human resources and organizational behavior at the H.W. Bloch School of Management at the University of Missouri – Kansas City (UMKC) where she is also the faculty ombudsperson. She has a Ph.D. in social psychology with an emphasis in organizational psychology from the University of Kansas and a master’s degree in counseling from UMKC. Day has served on the board of directors, research advisory panel and advisory council at WorldatWork. Her research focuses primarily on compensation, rejection sensitivity and diversity. Day has been published in Personal Psychology, Human Resource Management and Employee Relations among others. She regularly attends and makes presentations at the Academy of Management and other academic conferences.

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Published Research in Total RewardsA review of total rewards, compensation, benefits and HR-management research reports.

(Compiled by the editors from the WorldatWork Newsline column at www.worldatwork.org.)

U.S. Employers Expect Health-Care Costs to Rise 4% in 2015U.S. employers expect a 4% increase in 2015 health-care costs for active employees after plan design changes. If no adjustments are made, employers project a 5.2% growth rate, which would put absolute cost per person for health-care benefits at an all-time high. Despite this cost trend, most (83%) employers consider health benefits an important element of their employee value proposition and plan to continue subsidizing and managing them for both full-time and part-time active employees. They are, however, continuing to rethink company subsidies for spouses and dependents.

According to the “2014 Towers Watson Health Care Changes Ahead Survey,” of particular concern on the cost front is the Patient Protection and Affordable Care Act of 2010’s excise tax, which goes into effect in 2018. Nearly three-quarters (73%) of employers said they are somewhat or very concerned they will trigger the tax based on their current plans and cost trajectory. More than four in 10 (43%) said avoiding the tax is the top priority for their health-care strategies in 2015.

In response to short- and long-term cost concerns, 81% of employers plan moderate to significant changes to their health-care plans over the next three years, up from 72% a year ago.

U.S., UK, Canada Dominate Competition for Global TalentNine percent of job seekers worldwide are searching for jobs in another country, with 50% of all job seekers searching for jobs within the United States, according to the Indeed Hiring Lab, a global research institute.

As global economic leaders and major migration centers, the United States, United Kingdom and Canada receive the greatest mix of job seekers from other countries. Of the four emerging BRIC countries (Brazil, Russia, India, China), only India is effectively attracting talent from around the world, having integrated into the global economy better than those other countries.

Companies Worldwide Spending More on HR TechnologyCompanies around the world are planning to increase and redirect their investments in HR technology as they embrace talent management solutions, HR portals, software-as-a-service (SaaS) systems and mobile applications, according to a survey by Towers Watson. The “2014 HR Service Delivery and Technology Survey” found that 1 in 3 respondents (33%) plan to spend more on HR technology in the coming year compared with the previous year. This includes 23% that plan to increase spending by as much as 20% and 10% that plan to increase HR technology investment by more than 20%. Only 15% plan to spend less on HR technology in the coming year.

40% Would Quit if They Could Buy Comparable Health InsuranceForty percent of U.S. workers with health insurance as an employee benefit are reluctant to change jobs for fear of losing health insurance, according to a Securian Financial Group survey of 767 Americans employed full time (94%) or part time (6%). That 40%, according to Securian, are job locked, or would leave their jobs if they could buy health insurance on the open market that is comparable to the out-of-pocket cost and coverage they currently have through their employers.

High-Performing Companies Pay Executives Differently High-performing companies design their executive compensation programs differently from many other organizations, according to a study by Towers Watson. High-performing organizations, unlike other companies in the overall S&P 1500, place a greater emphasis on stock options, target compensation levels at market median rates and do not take a one-size-fits-all approach to their executive pay program design.

While there is strong movement in the market to adopt long-term performance plans, high-performing companies place a greater emphasis on stock options, both in terms of prevalence and long-term incentive mix. Among these companies, stock options represent about 50% more of the LTI mix than in the broader market. In addition, the high performers place less emphasis

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on long-term performance plans (e.g., LTI plans that have explicit performance measures such as relative total shareholder return).

Investment Risk Appetite, Retirement Confidence Remain Low GloballyRetirement confidence remains low among defined contribution (DC) plan participants in the United States, United Kingdom and Ireland. A survey from State Street Global Advisors (SSgA) shows that just 31% of participants from the U.S, 26% from the United Kingdom and 17% from Ireland feel confident that they will have enough saved through their employer-sponsored DC plan to afford the lifestyle they want in retirement.

The results also highlighted that investment knowledge remains low, with only 22% of respondents, on average, rating themselves as “very or extremely” knowledgeable about financial matters such as savings and investments.

Increased Hiring, Job Mobility Creating Attraction and Retention Challenges With hiring and turnover levels on the rise, employers are now experiencing challenges with both attracting and retaining employees, especially top performers and high-potential employees. Adding to the challenge is that many employers don’t understand the important reasons that employees join and stay with a company, according to Towers Watson.

The “Towers Watson Global Talent Management and Rewards Survey” shows there has been an uptick in labor market activity. Globally, nearly half of employers (48%) said hiring activity has increased compared with last year. For 15%, hiring has jumped significantly. Additionally, more than one-third (35%) indicated that turnover was rising. Nearly two in three respondents are experiencing problems attracting top performers (65%) and high-potential employees (64%), an increase from two years ago. Further, more than half reported difficulty retaining high-potential employees (56%) and top performers (54%).

“With talent mobility on the rise, employers need to understand what employees value if they are to succeed in attracting and retaining employees. Unfortunately, our surveys reveal a significant disconnect between employers and employees,” said Laura Sejen, managing director at Towers Watson. “While employers recognize the importance of pay and career advancement as key reasons employees choose to join and stay with a company, they don’t place the same importance on another top attraction and retention driver: job security, or a key retention driver: trust and confidence in senior leadership.”

Canadian Employers Innovating to Overcome Tight Labor Markets Employers across Canada are initiating innovative methods to combat labor shortages, according to a study released by the Fraser Institute. The “Do Labor Shortages Exist in Canada?” study finds more employers are encouraging employees to delay retirement and work longer hours with more overtime. Nearly one-third of Albertans, for example, work more than 50 hours a week. In fact, the number of Alberta employees paid to work overtime rose by 57% over the past decade, and 60% in Saskatchewan, compared to a 3.3% rise in the rest of Canada.

But this strategy, notes the study, is unsustainable due to Canada’s rapidly aging population. The number of Canadians 65 years and older (the retirement years) rose to 5.1 million in 2013 from 3.8 million in 2003.

San Francisco Tops U.S. List for Projected 2015 Salary IncreasesEmployers in the San Francisco metropolitan area continue to outpace employers in other U.S. cities in the percentage increases they are budgeting for 2015 salaries, according to the “Worldat-Work 2014-2015 Salary Budget Survey.” U.S. employers in mining and four other industries also are budgeting bigger increases than the national average for 2015, the survey shows. The variations in salary budgets by city and industry show up in WorldatWork’s 41st annual survey, which is the largest survey of its kind. This year’s data were compiled from nearly 5,252 responses from members working in the HR, compensation and benefits departments of employers in 17 countries.

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This year’s survey found that, overall, employers expect to increase their 2015 salary budgets by a mean of 3.1% — a slight improvement over the 3% they reported for 2014 and the 2.9% for the previous year.

Companies Worldwide Increasing Wellness InvestmentA company culture of wellness is strongly tied to the effectiveness of individual wellness programs and, according to a Buck Consultants at Xerox survey, 78% of the world’s employers are strongly committed to creating a workplace culture of health.

According to “Working Well: A Global Survey of Health Promotion and Workplace Wellness Strategies,” 43% say they created a brand identity for their employee wellness programs, 52% offer health insurance premium reductions, and 65% believe wellness programs are extremely or very important to attract and retain employees.

36% of Americans Haven’t Saved Anything for RetirementMore than one-third of Americans (36%) have not saved any money for retirement, according to a Bankrate.com report; 69% of 18-29 year-olds haven’t saved anything, along with 33% of 30-49 year-olds, 26% of 50-64 year-olds and 14% of people 65 and older.

The good news is that Americans who are saving are starting earlier. Twice as many 30-49 year-olds started saving in their 20s as opposed to their 30s. But 50-64 year-olds were only slightly more likely to have started saving in their 20s than their 30s, and Americans 65 and older were almost evenly split between starting in their 20s, 30s and 40s.

One-Fifth of American Workers Say Compensation is the Biggest Factor in Work HappinessCompensation, working in a field of interest and job security all rank high on factors that determine employee happiness on the job. A survey from Spherion also showed that workers will make monetary and other career-related sacrifices to achieve job happiness. According to the second

“WorkSphere” survey, in addition to compensation being a factor in determining job happiness (22%), about one-fifth of workers reported that it’s important they work in a field that they are interested in and passionate about (19%). Job security (15%), the company’s culture/work envi-ronment (13%) and the ability to work with people they like (10%) were ranked almost equally as high among workers. Yet, factors such as workplace flexibility (7%), the ability to work with people they work well with (6%) and opportunities for career advancement (5%) were reported as less significant when it comes to job happiness.

When looking for a new job, workers would be at least somewhat willing to work in a less private office space (76%), reduce their workplace flexibility (60%) and even accept a lower position or title (60%) to be happier in their job. Almost half of all workers will give up benefits such as their vacation time, 401(k) contributions and other job perks (41%). In contrast, workers are much less willing to take a cut (36%) or relinquish their health benefits (31%).

2014 Variable Pay Spending Spikes to Record-High LevelVariable pay spending among U.S. employers reached a record-high level of 12.7% of payroll in 2014, the highest in more than 35 years. Meanwhile, according to a survey from Aon Hewitt, salary increases for U.S. workers were 2.9%, reflecting companies’ continued focus on holding the line on fixed costs. These findings are in line with findings from the “WorldatWork 2014-2015 Salary Budget Survey.”

Aon Hewitt’s “2014 U.S. Salary Increase Survey” found that 91% of organizations currently offer a variable pay program and expect to spend 12.7% of payroll on variable pay for salaried exempt employees in 2015. By comparison, in 2005, just 78% of companies offered a variable pay program, which accounted for 11.4% of payroll.

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Work-Life Imbalance Plaguing Working WomenThe stresses of managing both a successful career and a healthy home life are taking a serious toll on today’s working women. A survey from Fierce Inc. found that 70% of respondents cited work-life imbalance as a major cause of stress. Respondents noted that these stress levels have negatively impacted their health, including depression (34.5%), weight gain (45%) and/or loss of sleep (45%).

The survey showed women feel there is a pressing expectation to maintain high-functioning, fulfilling lives at both work and at home, and it’s causing increasing stress levels. The growing importance of work-life effectiveness — coupled with the negative impacts of higher stress levels

— is resulting in one in five women leaving higher-paying jobs for lower-paying opportunities that offer better balance.

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