2016 Human Capital Insights & Strategies Report

2 | 2016 HUMAN CAPITAL INSIGHTS & STRATEGIES REPORT Arthur J. Gallagher & Co. | AJG.COM

Table of Contents

Engaging Every Opportunity to Compete as an Employer of Choice ....................................................................................3

Why Business Success Depends – More Than Ever – on Employee Engagement Success ......................................................4

Getting More Investment Mileage From Employee Value Propositions Through Research ...................................................6

The “EASY” Way to Communicate Effectively and Increase Employee Engagement..............................................................8

Compensation and Benefits – the Risk of Maintaining the Status Quo ...............................................................................10

Proactively Managing Healthcare Costs Through Innovative Plan Design ...........................................................................12

Engage Employees in Their Healthcare Choices and Save Money ........................................................................................14

Non-Traditional Voluntary Benefits Help Differentiate Employers in a Competitive Market ..............................................16

Total Wellbeing – Lowering Costs While Enhancing Culture, Employee Engagement and Productivity ..............................18

Driving Financial Wellbeing for Organizations and Their Employees ..................................................................................20

Meeting Defined Benefit Plan Investment and Fiduciary Challenges Head-on ....................................................................22

Overcoming Barriers to Absence Management ....................................................................................................................24

Structuring Executive Benefits to Support Corporate Objectives and Growth .....................................................................25

Why It Pays to Have an Effective Executive Compensation Strategy ...................................................................................26

Securing the Future with a Strategic Cost-of-Risk Approach ..............................................................................................28

Employee Engagement & Safety – High Cost or High Return? ..........................................................................................30

Protecting Personal Health Information in a Vulnerable Age ..............................................................................................32

HR Tech Trends That Deliver Bottom-Line Impact .............................................................................................................34

Top Three Global HR Trends to Watch in 2016 .................................................................................................................36

About Gallagher ..................................................................................................................................................................38

Contributors .......................................................................................................................................................................39

The intent of this document is to provide you with general information regarding the status of, and/or potential concerns related to, your current employee compensation and benefits environment. It does not necessarily fully address all of your specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your general counsel or an attorney who specializes in this practice area.

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Engaging Every Opportunity to Compete as an Employer of ChoiceJames W. Durkin, Jr., President, Gallagher Benefit Services, Inc.

According to Fortune magazine, by 2020 the global talent marketplace will confront a shortage of approximately 40 million highly skilled workers and a surplus of 95 million low-skilled workers.1 One out of three employees today is a millennial, and this ratio will increasingly favor younger demographics as baby boomers retire. With the competition for talent clearly heating up, what worked to attract talent in the past probably won’t work in the future. A father in his 50s who lives in the Midwest will value benefits, and an overall employee experience, that are different from a single woman in her mid-20s who lives in the Sunbelt. Employers everywhere, in all verticals, need to re-strategize how they will compete for diverse talent.

Many factors go into becoming a destination employer, which explains why there isn’t one simple, easy formula for attaining this advantage. Instead, employers of choice use many levers to attract and retain their human capital. Best-in-class employers do very well at balancing their needs to attract talent and manage rising costs. Although this feat is not easily accomplished, those who excel have taken the time to develop a written human capital strategy.2

Best-in-class employers also put the necessary energy into communicating the relevance of their employee value proposition to their workforce. It’s well known that employees tend to undervalue a benefit or a rewards program that they don’t understand or fully appreciate, and this disconnect often undermines any expected ROI.

Peak performance demands a highly engaged workforceHeightened competition for talent has bottom-line implications. It’s not enough for employers to “check the box” and proclaim they have the latest in rewards

programs when their market position is also at stake. To achieve turnover below the industry norm and become an organization that employees proudly recommend to friends, a holistic approach is in order. Employers need a reliable, sustainable strategy that integrates compensation, benefits, wellbeing, communication and culture.

It’s virtually impossible to be an employer of choice without a highly engaged workforce. Engaged employees are more productive, resilient and loyal. From a sense of fair treatment, to a career path with professional development, to valuing their total compensation package, they believe their employer supports their best interests.

The sense of loyalty that stems from engagement reduces the likelihood that employees will heed the call of recruiters. It also makes them better brand champions in support of their own employer’s recruitment objectives. As the demand for talent increases and the supply diminishes, these competitive advantages will only become more critical. The good news for employers, including both accomplished and aspiring top performers, is that engagement levels can be measured. Both lead and lag indicators inform and guide employers in modifying their total rewards or communications for optimal results.

At Gallagher, we’ve found that data uncovers deeper insights and drives better decisions when we work with employers to understand their needs, and establish best-in-class solutions. The 2016 Human Capital Insights & Strategies Report highlights the latest trends and solutions that help all organizations compete more strongly as an employer of choice.

1 Fortune Magazine, “How U.S. companies can fill the skills gap,” May 2015 2 Arthur J. Gallagher & Co., “2015 Best-in-Class Benchmarking Analysis,” March 2015

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Why Business Success Depends – More Than Ever – on Employee Engagement Success David D. Rowlee, PhD, Managing Director & Engagement Practice Leader

Chris Dustin, Managing Director & Senior Advisor

Employee engagement is one of the most monitored human capital metrics today – and for good reason. Research consistently demonstrates powerful links between high levels of employee engagement and the ability of employers to optimize business performance. The underlying theory is surprisingly simple. Engaged employees work smarter and more efficiently, giving an organization an advantage over its competitors.

While different employers define engagement in different ways, it is a robust multi-dimensional measure that taps employees’ emotional connectedness to their organization. The standard definition describes engagement as a pronounced state of enthusiasm characterized by effort, pride and passion that fosters a mutually committed relationship between employees and their employers, resulting in the enduring pursuit of organizational and personal goals. Defining engagement for the organization is the first step in developing a way to measure it and predicting its effect on business results.

How drivers of engagement evolveThe key drivers of employee engagement change with economic conditions, generational shifts in the workforce, and events within an organization. And the most powerful drivers of employee engagement may change over time.

One employee database that spans multiple industries, geographies and employee types, and has been used to continuously track and monitor the opinions of the labor force since 1974, has produced a variety of research studies on employee engagement.1 A 2005 study, for instance, showed that engagement was most influenced by teamwork and respect within a workgroup, the ability to learn and grow, and employees’ belief that their supervisor was fair and transparent. In 2010, during the economic

recession with widespread job loss and elevated unemployment, the drivers of engagement shifted to senior leaders’ stewardship, the survivability and competitiveness of their organization, and job security. In 2015, these drivers reflected a hybrid of 2005 and 2010, including teamwork, career growth, and employees’ relationship with their supervisor. However, the most powerful drivers of employee engagement continued to be senior leadership performance and a relevant and strong organization.

The connection between culture and engagement So what do the best organizations look like culturally? Nearly all that are recognized as best in class have higher levels of employee engagement and strong business performance. Employers that win accolades for treatment of employees and business excellence, such as the annual Fortune 100 Best Companies to Work For list, share some common attributes. They exhibit heightened interconnectedness between leaders and employees – a tight-knit “community” working toward a common vision. Employees and leaders share the same attitudes in the highest performing organizations. Compare this to low-performing organizations where significantly different views between leaders and employees are often observed – with leaders’ views being more favorable.

The ROI of building engagementResearch demonstrates the power of building and sustaining a highly engaged workforce. A recent study drawn from data on multiple hospitals explored the impact of employee engagement on the experiences of inpatients.1 The results showed that for every unit increase in employee engagement, the proportion of patients rating the facility as the “best hospital possible” increased by 15%. Similarly, the proportion of patients who would definitely recommend the

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hospital’s services to others increased by 11%. Here, a more engaged workforce delivered higher customer satisfaction – a meaningful metric for any organization.

A 2010 study concluded that engagement was linked to turnover and replacement costs.1 For each unit increase in employee engagement, the level of voluntary turnover decreased by nearly two-thirds. And for every 1,000 employees who shifted from low to high engagement, over $3.13 million in savings was achieved. Two more meaningful results stemmed from improved employee engagement – a higher employee retention rate and lower costs associated with hiring replacement talent.

Clearly, improving employee engagement can have a significant effect on an organization’s bottom line. Employers interested in improving engagement should consider these key insights:

• First, it’s important to recognize that as engagement goes, so goes the business.

• Second, an organization’s key drivers of engagement change over time. Focusing on improving the same issues year after year may promote a focus on the wrong issues.

• Third, trying to optimize employee engagement but working on the wrong things puts business performance at risk.

• Finally, once an organization’s engagement score and drivers are identified, an action plan must be implemented and followed by leaders at all levels to improve the drivers.

Simply stated, employers must measure the factors that drive engagement on a regular basis to identify shifts, and then implement action plans to adjust. When this happens, the factors that drive engagement improve, elevating engagement levels and triggering better organizational outcomes. In short, these employers become high-performing, destination workplaces for employees.

BETTER EMPLOYEE ENGAGEMENT = MORE SATISFIED PATIENTS

BETTER EMPLOYEE ENGAGEMENT = LOWER TURNOVER & COST SAVINGS

1Gallagher’s U.S. National Employee Benchmarking Database

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Getting More Investment Mileage From Employee Value Propositions Through Research Chuck Reynolds, Area President, Benefits & HR Consulting

When filling their gas tank and watching the price tick upward in the pump’s total sale display, many drivers are unaware that their vehicle’s fuel efficiency may be as low as 14%. What happens to the rest of the gasoline energy that’s not converted to movement – to getting them where they need to go? Most of it is lost through heat in the engine, and the balance is consumed by wind resistance, rolling resistance and other culprits. Of course, because auto makers understand these problems, they are able to design and engineer solutions that increase efficiency to as high as 30% – more than double the bottom of the range.

It’s helpful for employers to think about this fuel efficiency example when evaluating their success in attracting, retaining and engaging employees to perform their best in alignment with organizational goals. What kind of mileage is the organization getting from investments made in its employee value proposition? Is the money spent on salaries and wages, variable pay, benefits, programs and intangibles like company culture yielding the needed results? Responses to a recent benchmarking survey on employee benefits strategy suggest that answering these questions may be vitally important to employers in the current benefits environment.1 In the survey, employers were asked to choose their organization’s top three business challenges. “Controlling benefit costs” was the top-ranked challenge, selected by 62%, and “Attracting and retaining a competitive workforce” was chosen by 55%.

Clearly, many employers struggle to balance the need to control costs with the need to attract, retain and engage talent. The implication of this challenge for these organizations is simple: They can’t spend more on their employee value proposition. Instead, they need to find ways to make the money they’re already spending go farther in driving the human capital outcomes they need to grow and prosper. This is where research comes in.

Research should provide the measurement that informs the optimal management of investments in an employee value proposition. This evaluation process should also offer employers insight into what their employees know, think and feel about their value proposition. To produce the most meaningful results, employers would do well to consider both qualitative (interviews, focus groups, solicited feedback, etc.) and quantitative (surveys and data analytics, etc.) research methods. Strategically chosen methods help employers understand employee perspectives on issues that can impact the efficiency of their employee value proposition.

Addressing four key issues provides a solid foundation for research:

1. Is the mix right? There are two possible concerns here. One is whether the employer offers employees the right blend of salaries and wages, variable pay, benefits and programs. The other is whether that offering has enough flexibility to enable employees to get more of what they value, and less of what they don’t.

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2. Do employees understand the value proposition and how to maximize it? On one hand, this is a tactical question about whether employees are aware of benefits and programs, and know how to access and experience their full value. For instance, do employees understand the tax-advantaged programs available through their employer (flexible spending account, health savings account, childcare expense reimbursement, etc.)? How can those programs contribute to the health of their personal financial bottom line? And, how do they take advantage of the programs that make sense for their lives?

On the other hand, this is a deeper question about employees’ understanding of an important relationship. Do they know how the pay they earn and the benefits they enjoy are linked to their performance and their organization’s success? A disconnect diminishes the power that can be generated by strong alignment of individual and company success, and makes the employee value proposition less efficient.

In fact, one industry report implies that most employers may be missing an opportunity to improve employees’ understanding of their value proposition.2 The study found that just two-thirds had a written compensation philosophy. Also, fewer than 30% of employers with a written or unwritten compensation philosophy believed that most or all of their employees understood that philosophy.

3. Is there say-do alignment? Employee value propositions can look great on paper, but in practice they suffer severe erosion where the proverbial rubber meets the road between employees and their managers. Even the best performance management programs, variable pay schemes and flexible working arrangements won’t achieve their potential as human capital management tools if managers don’t make good on what these policies promise. For an employee value proposition to succeed, employers must assess and address how employees are experiencing it. Employers should determine if implementation is aligned with strategy, and identify any gaps that can lead to disappointment and a breakdown of trust.

1 Arthur J. Gallagher & Co., “2015 Benefits Strategy & Benchmarking Survey – U.S. National Report,” August 2015

2 WorldatWork, “Compensation Programs and Practices 2012,” October 2012

4. Do employees credit their employer for the value they receive? When it comes to the actual value an employee gets from their employer’s value proposition, perception is reality. An employee might place a low value on a benefit or program because it’s not personally relevant. For example, a baby boomer is unlikely to highly value childcare benefits (despite feeling good about working for a company that offers them). Or, an employee might see little value in a benefit or program because information that provides meaningful context isn’t available.

Employee research often proves to be a reliable avenue for gaining practical insights into the overall efficiency of an employee value proposition, and how key issues impact this critical balance of employee rewards, benefits and performance. The value of research can be especially significant for employers that strain to control costs while they strive to attract, retain and engage a talented workforce. When spending more isn’t a viable option, research findings can help define a path forward to competing effectively for talent as an employer of choice.

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The “EASY” Way to Communicate Effectively and Increase Employee EngagementMatt Frost, Business Development Director of Communications

Employee engagement is intrinsically linked to organizational effectiveness, productivity and profitability, and organizations are looking for ways to improve it. Consider this data1:

• Organizations with engaged employees outperform those without them by up to 202%

• 71% of employees are not fully engaged

• $11 billion is lost annually due to employee turnover

A key component of engagement is rewards. Benefits are consistently ranked among the top contributors to employees’ overall job satisfaction and engagement with their employer.2 The challenge organizations face now is education; employees need help to understand their benefits so they can make better-informed decisions.

Communicating benefits valueOnce employees understand what their benefits mean, they need to maximize the value. On average, 25% of an employee’s total compensation package is made up of benefits. Yet most employees believe it to be less than 10%.3 And 56% of U.S. employees estimate they waste up to $750 annually because of mistakes made with benefit elections.4 This indicates a dramatic communication disconnect between employers and employees.

Employers that want to make their benefit communications more successful must put a clear strategy in place. Their approach should define what messages need to be communicated and how the information will be shared. It should also consider any obstacles to overcome, and identify the desired objectives and employee actions.

Using the “EASY” communication modelSuccessful communications have to make an impact. People are exposed to hundreds of marketing messages every day, and they make snap decisions on what to review, ignore or delete. The “EASY” communication model can help guide the content creation process to produce more meaningful and accessible messaging.

Emotional – Employees make decisions about benefits with their hearts as much as their heads, so messages should have appeal on both the emotional and intellectual levels. Communications can help employees understand the basics of their benefits, but only when it feels right will they start to actively engage in the process, take ownership of their decisions, and value what is being provided.

Appealing – If a communication doesn’t stand out and demand attention, and if it’s not obviously worth reading or easy to understand, it will be ignored. That lengthy benefits guide, bland email about open enrollment or detailed factsheet has to compete for an employee’s attention.

Simple – Benefits communication is often focused solely on being compliant, with less thought about the person at the other end. Avoid jargon. Keep sentences short. And always make clear what employees need to do with the communication. If it’s just for their information – say that. If it’s asking for a decision – say that too, but communicate clearly what they should do to fulfill the request.

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You-focused – Employees experience many events throughout their careers, for example, entering the workforce, getting married, having a child or getting ready for retirement. They require education and tools at each major life stage to ensure they’re prepared for what is ahead of them. Employers can learn from the techniques used by consumer-focused marketing and advertising experts to engage customers. Benefits communication must embrace a more sophisticated and personalized approach, and HR and benefit specialists must rethink how to communicate internally to reflect the preferences of the very different audiences that now occupy the workplace.

Effective communications will help employees understand their benefits and make sound, informed choices. With greater transparency about the total compensation package, employee appreciation and engagement rises, boosting organizational performance. In a significant way, employee communications can have a positive impact on the bottom line.

1 Dale Carnegie Training, “The Importance of Employee Engagement” infographic, 2012 2 Society for Human Resource Management, “Employee Job Satisfaction and Engagement,” 2015 3 The Hay Group Management Limited, “Total Rewards Statements: Maximising your investment in reward,” 20054 Society for Human Resource Management, “Employees Perplexed by Benefits Choices,” August 2012

Five Ways to Improve Benefits Communication1. Develop a strategy that defines what, why and how to

communicate

2. Define clear objectives that align with the company’s strategy and value

3. Regularly and proactively seek feedback from employees

4. Keep communication EASY

5. Measure the impact of communication, and be prepared to evolve

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Compensation and Benefits – the Risk of Maintaining the Status QuoKent Lonsdale, Area Senior Vice President, Operations & Client Services, Eastern Region

Joe Milano, Area Vice President, Mid Atlantic Region

Predictably, managing healthcare costs and recruiting and developing talent ranked as top organizational concerns in 2015, according to a recent benchmarking survey of U.S. employers.1 What’s surprising about this continuing trend is that only 10% of respondents have a written compensation and benefits strategy. For organizations that haven’t adopted this approach, it may be time to reconsider. A deeper dive into the data reveals that best-in-class employers are more likely to have a written total rewards plan.

Why is a structured compensation and benefits strategy important? Most employers don’t spend enough time evaluating the risk of maintaining the status quo of current compensation and benefit programs. To ensure these programs are sustainable, they need to understand why they have them and how they support their organization’s business objectives. It should also be evident to employers that the current cost trajectory can be supported within their revenue and other expense forecasts. Data suggests that having a strategic plan that includes cost projections is an attribute of best-in-class employers.2 Business today is very dynamic, and maintaining existing programs may not be the best “chess move” to ensure industry relevance.

Getting it right: The impact on engagement, productivity and sustainabilityPlanning the right compensation and benefits for today’s multicultural, multi-generational workforce is tricky. Although organizations have their own unique culture, philosophy, goals and objectives, “people challenges” are a relatively consistent concern. How do employers provide a benefits plan that appeals to all generations? Offering employees more compensation options, with more flexibility, is key to a sustainable total rewards approach.

Compensation and benefit programs are foundational to recruiting, retaining and motivating employees. To resonate with employees, the approach that employers take to pay, like their benefits strategy, should support their organization’s culture, purpose and values. How they reward their people says a lot about the organization to their workforce, and reflects on their reputation in the talent marketplace.

Striking the right balanceThe compensation and benefits landscape is characterized by continual challenges and opportunities. To help employers respond effectively, a sustainability strategy should include planning for the proper amount of attrition. How is the employer helping people retire, and are they leaving at a manageable rate? Are employees who don’t fit the culture or are disengaged sticking around?

Research has found that the number of engaged U.S. employees reached a three-year high of 32.9% in February 2015, a 1.5% increase over the prior year.3 With heightened awareness of engagement as a meaningful metric, it’s important for employers to measure how well they’ve moved the needle. Evaluating whether employees are adequately motivated to maintain productivity can be helpful. Is there a point of diminishing marginal returns? Or do some employers just need their “toxic” employees to leave? Finding the right turnover rate is increasingly important to sustainable programs.

When no one wants to leave, it creates a bottleneck for upward mobility of talent, and puts pressure on organizations that are trying to strike the right balance of rewards. Once they “get it right,” how can they drive necessary turnover? How do they motivate the “wrong” people, those who don’t fit the culture or are not engaged, to exit the company?

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All employers are fighting a compensation and benefits sustainability battle that requires engaging their workforce. And, every employer needs to help their employees see (and feel) the value of being accountable for their own productivity, financial health and wellbeing. Building a strategic plan for communicating the organization’s commitment to employees and creating compensation and benefit programs that support their culture is part of that battle. Together, these pursuits are also a winning proposition. When employers implement a strategic plan and then monitor, measure and modify it, they’re in a strong position to build a sustainable total rewards program and compete for the best talent.

1 Arthur J. Gallagher & Co., “2015 Benefits Strategy & Benchmarking Survey – U.S. National Report,” August 20152 Arthur J. Gallagher & Co., “2015 Best-in-Class Benchmarking Analysis,” March 20153 Gallup, “U.S. Employee Engagement Reaches Three-Year High,” March 2015

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Proactively Managing Healthcare Costs Through Innovative Plan DesignMark Rosenberg, Area President, Healthcare Analytics Consulting

Kevin Cipoletti, Vice President Sales & Marketing, Western Region

Adam Wolff, Vice President, Sales & Marketing, North Central Region

Employee benefits are an increasingly important component of total rewards to employers nationwide, but the pressure of escalating healthcare costs is forcing them to cut benefits. One recent survey showed that employees who are very satisfied with their benefits are almost four times more likely to be satisfied with their jobs.1 Yet, nearly 70% of employers that participated in a 2015 benefits strategy and benchmarking survey said they had shifted more benefit costs to their employees.2

So, how should organizations approach cost shifting? An analysis of the employer survey results uncovered an interesting finding. Organizations identified as best in class at employee health and healthcare cost management were less likely to shift benefit costs to employees. Instead, they were more likely to use healthcare risk management tactics, and tended to be early adopters of emerging, but proven, tactics.

Proactive healthcare risk management is still far from the norm, especially for organizations with under 1,000 employees. However, an influx of investment and innovation in the healthcare payer sector in recent years means that employers can now choose from an ever-increasing number of affordable platforms and solutions. Three of the most effective healthcare risk management strategies trending in the marketplace today, which help balance the best interests of employers and employees, are summarized below.

Using healthcare access leversTraditional health insurance formulas are changing. Beyond plan design choices, there’s a great deal of innovation in the network and contracting space. Notable tactics include:

• Narrow networks – plans that offer a limited number of providers, typically chosen for quality of care and cost-effective outcomes. Narrow networks add an employer savings dimension that doesn’t require a higher employee contribution to premiums, or an increase in employee cost share through coinsurance and deductibles.

• Employer-focused accountable care organizations – direct contracting arrangements with local healthcare providers that smaller, not just jumbo employers can now access. A similar development is happening with onsite clinics.

• Telemedicine (online visits) – technology that cost-effectively connects patients and doctors by delivering healthcare services and information at a distance. Employer adoption of telemedicine grew from 3% in 2014 to 9% in 2015.2 As more solutions and technologies become available, this is a space to watch.

• Cost transparency – plan information delivered through cost-research tools that allows healthcare consumers to compare providers, and self-direct choices that are more effective for them and the plan. Employers that offer and promote these widely available tools see a positive impact on utilization and cost.

Organizations identified as best in class at employee health and healthcare cost management were less likely to shift benefit costs to employees.

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Pharmacy spend: Managing the unknown Prescription drug costs are growing at a higher rate than other medical expenses,3 driven primarily by specialty drugs that are expected to account for roughly half of all U.S. pharmacy expenditure by 2018.4 While no magic bullet exists for this accelerating trend, scrutiny and negotiation of pharmacy benefit manager (PBM) contracts will help employers avoid costly surprises. “Hidden” provisions in highly complex and nuanced PBM contracts can dramatically impact the net cost of the agreement.

Similar to other segments of the healthcare payer market, the spirit of innovation has touched PBMs. Some vendors have developed both a deep understanding of the rapidly evolving drug market and better than average methodologies. They’re able to quickly adapt formularies and policies to the coming changes. Tactics used by these vendors include strict pre-authorization guidelines and aggressive step therapy to avoid overuse and misuse of high-cost drugs. Care in selecting the right PBM, negotiating a strong contract, and designing an appropriate benefit pays off.

Taking control of risk The trend toward medical plan self-funding has grown among U.S. employers over the years, and increasingly smaller organizations are taking advantage of this approach. In the employer survey mentioned earlier, 28% of participants were self-insured, and companies identified as better at controlling employee healthcare costs were even more likely to self-insure.2 However, considering the potential for increased financial exposure, this strategy calls for rigorous due diligence when implementing a self-funded plan.

Midsize employers may also want to consider these innovative emerging trends:

• Medical stop-loss captives – collective purchasing arrangements for like-minded employers

• Reference-based pricing – a strategy for setting market-based caps on the maximum amount a health plan will cover for certain medical services that tend to have wide price ranges, such as knee and hip replacement surgery

Given the extreme complexity of today’s healthcare market and regulatory environment, there is no off-the-shelf solution to risk and cost management that can guarantee savings. However, when implemented with expert guidance as part of a holistic benefits strategy, some of the most effective approaches include healthcare access levers, pharmacy spend management, and strategic self-insurance measures that help control risk.

Research shows that if budget limitations pressed U.S. employers to either reduce benefits or direct compensation, 71% would sacrifice benefits.2 Yet, escalating healthcare expenses cut into their cash compensation and employee development dollars, which may also diminish the ability to strategically manage rewards spend and compete as a preferred employer. Employers that emphasize a proactive healthcare cost management approach will create opportunities to secure a stronger future, by reducing healthcare costs without sacrificing the value of health benefits to employees and their families.

Self-Funded Plan Implementation: Due Diligence Steps

1 MetLife, Inc., “Benefits Impact – Delivering Dynamic Benefits for a Loyal Workforce,” 2015 2 Arthur J. Gallagher & Co., “2015 Benefits Strategy & Benchmarking Survey – U.S. National Report,” August 20153 Milliman, Inc., “2015 Milliman Medical Index: Will the typical American family of four be driving a ‘Cadillac plan’ by 2018?,” May 2015 4 Project HOPE: The People-to-People Health Foundation, Inc., Health Affairs, “Specialty Medications: Traditional And Novel Tools Can Address Rising Spending On These Costly Drugs,” October 2014

• Gauge the organization’s risk tolerance

• Assess the feasibility of self-funding

• Evaluate stop-loss contracts

• Design plans based on valid contract discount data

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Engage Employees in Their Healthcare Choices and Save MoneyRick Strater, Division Vice President & National Exchange Practice Leader

In 2015, the average total cost of medical premiums for family coverage reached $17,545, a 4% rise over 2014 that exceeded a 1.9% rise in workers’ wages.1 Employees are often required to contribute 25% or more to this cost, and with the median annual household income at less than $55,000,2 they’re struggling to keep up with annual premium increases. Medical coverage will continue to claim a greater share of employees’ take-home pay, making this scenario unsustainable in the long run.

The increasing pressure of benefit costs is adding to employers’ challenges as they compete for top talent to help grow their businesses. With a highly diverse workforce and healthcare costs that continue to climb, providing a sustainable employee benefits program that attracts and retains talent is becoming more and more difficult.

Complicating the issue, employers are faced with multiple generations of employees working side by side. Baby boomers, Generation X’ers and millennials all have different interests and needs, which makes a one-size-fits-all approach to providing benefits unattractive to present and future employees.

Private exchange + employee choice = increased engagementWhat options will help keep costs under control for both employers and employees? Continuous small plan tweaks or one-year solutions aren’t going to produce satisfactory long-term results. Instead, a focus on sustainable, long-term benefit strategies to meet engagement and cost goals will produce more favorable results that employees will understand and appreciate. When paired with a well-designed defined contribution strategy, private exchanges can help employers control their growth in benefits spend without simply shifting costs to employees.

Private exchanges appeal to a multi-generational workforce by allowing employees to customize their benefits package to fit their unique situations. Employees have greater choice with a wide variety of

medical, ancillary and voluntary products, backed by full cost transparency and decision-support tools to help them become better healthcare consumers. As an added benefit, HR departments experience a reduced administrative burden.

In 2015, 70% of employers offered only one or two traditional healthcare plans,3 while a recent study found that employers with a private exchange offered an average of seven plans.4 Employees who have a broader range of choices are able to match a medical plan more closely to their needs, and can avoid spending money on an option that doesn’t make sense. When employees choose plans with higher deductibles and out-of-pocket maximums through a private exchange, they drive down actuarial values and total plan costs. In fact, the private exchange study showed that first-year plan migration resulted in plan savings of approximately $1,100 per employee, or about 9.4% of the premium. The average employee cost share for these groups remained at 31%, which confirms that these savings were not a result of cost shifting.

The inclusion of cost-transparency tools helps drive consumerism in a private exchange environment. More employees are choosing health plans with high deductibles that must be satisfied before their coverage kicks in. When they see the actual cost of the treatment, sticker shock often follows. Employees are also surprised at the price variance from one provider to the next, and may not realize that a higher price does not necessarily indicate a higher quality of care. Supplying a source for employees to shop for high-quality services from lower-cost providers, and providing tools for making the right healthcare decisions, gives them a sense of empowerment. And, when employees are making better choices, they’re also helping to reduce medical trend for their employer.

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By having more choice, along with advocacy and cost and transparency tools, employees become more engaged in the purchase process and are happier with their overall benefits package. This leads to employee satisfaction, evident from these research results:5

• 96% of employees say they’d rather choose their own benefits than have their employer choose

• 95% are satisfied with their private exchange purchase one year later

• 90% say they had the right number of choices, or wanted even more

Change will have a positive impactBetween rising healthcare costs and lower than anticipated engagement, it’s no wonder that employers are struggling with the sustainability of their employee benefit programs.

Over eight million Americans enrolled in a medical plan via a private exchange for the 2016 benefit plan year,6 and the growth will continue. An increasing number of companies are considering a move to a private exchange and defined contribution environment. Although only a small portion of respondents to a 2015 benefits survey have implemented a defined contribution strategy for medical coverage, this segment is poised for growth with 23% considering a move in one to three years.3

Making changes to the way organizations have traditionally provided benefits is a bold move. However, if competing as a preferred employer is a priority, a defined contribution and private exchange strategy is a change that’s worth a closer look. By exploring the possibilities, employers can fully assess its potential to manage costs and offer employees an opportunity to control their own future – through greater choice.

1 The Henry J. Kaiser Family Foundation, “2015 Employer Health Benefits Survey > Summary of Findings,” September 2015 2 United States Census Bureau, “Income and Poverty in the United States: 2014,” September 2015 3 Arthur J. Gallagher & Co., “2015 Benefits Strategy & Benchmarking Survey – U.S. National Report,” August 2015 4 Arthur J. Gallagher & Co., “Comparison of Plans and Coverage Choices Before and After Implementing a Private Exchange Strategy,” December 2014 5 Liazon Corporation, “Liazon’s 2015 Employer & Employee Survey Results” 6 Accenture, “Private health insurance exchange enrollment increases 35 percent to 8 million in 2016”

16 | 2016 HUMAN CAPITAL INSIGHTS & STRATEGIES REPORT Arthur J. Gallagher & Co. | AJG.COM

Non-Traditional Voluntary Benefits Help Differentiate Employers in a Competitive Market Tim Easterwood, National Co-Practice Leader, Voluntary Benefits Consulting

veteran getting ready to retire from the workforce. Considering non-traditional benefits can help resolve this dilemma.

Non-traditional benefits provide choice to employees while they create a new level of excitement and engagement. Access to a range of products and services can help fill the gaps where employees feel they need additional coverage or assistance. Non-traditional benefits run the gamut, but the most popular benefit program elements include discount buying programs, a group legal plan and identity theft protection. A diversified set of benefit options can provide peace of mind to a workforce demanding more.

Private exchanges drive voluntary benefit purchasesEmployer-sponsored private exchanges present the perfect opportunity to offer a wide variety of voluntary benefits to employees. As more employers move toward online enrollment platforms with defined contribution plans, adding voluntary benefits helps satisfy the need for choice among employees. Private exchanges are starting to thrive, and voluntary products are one of the cornerstones of increased employee engagement and adoption of these new technology platforms.

Employees are more fully engaged in the purchase process on private exchanges and empowered to make selections tailored to their specific needs. The result is increased employee satisfaction.

Healthcare costs will continue to grow, so providing a tier of voluntary benefits that have little to no cost to the employer are a welcome way to maintain competitiveness in an employee-centric job market.

Today’s workforce is diverse. Several generations of employees are working side by side, each with a different expectation about benefits from their employer. As the workforce continues to diversify, it’s challenging to build benefit packages that appeal to employees at every stage in life. This is where voluntary benefits can become a true differentiator for employers.

As voluntary benefits have become more mainstream over the last several years, they’ve played an important role in satisfying employees’ needs for “something extra” from their employers. But now, employees want even more.

Non-traditional benefits make a differenceNon-traditional voluntary benefits are gaining momentum as a differentiator for employers, and as a necessity for employees who want to supplement their financial safety net and enhance their personal lives.

Designing a voluntary benefits offering is complex, and the need for employers to consider the makeup of their workforce can complicate this task. The 20-something employee working his or her first job has different needs from a 60-something

Best-in-class employers are offering financial education and financial wellbeing programs to help employees change behaviors and increase their financial literacy.

96% of employees prefer to choose their own benefits rather than have their employers choose for them.1

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1 Liazon Corporation, “Liazon’s 2015 Employer & Employee Survey Results”

Voluntary benefits will continue to play an important role in competitive benefit package designs due to tighter budgets and rising healthcare costs. They help differentiate employers in a competitive job market and strengthen their employee value proposition as an employer of choice, yet won’t break the bank when it comes to the benefits budget. And when employees customize benefit buying decisions to their unique situations, they’re happier, more connected to their employer and contribute their best work.

Financial wellbeing: More than buzzwordsFinancial wellbeing benefits are moving to the forefront of the voluntary benefits space, and for very important reasons – increased engagement and overall financial readiness. Like it or not, an employee’s financial stress eventually becomes their employer’s problem as well. It’s difficult for employees to leave their financial issues at home. When they bring their stress and the need to deal with their finances to work, it ultimately affects their overall productivity and the organization’s bottom line.

A growing number of organizations have discovered they can build loyalty, increase productivity and boost job satisfaction by providing programs that help employees improve their financial wellbeing. Best-in-class employers are offering financial education and financial wellbeing programs to help employees change behaviors and increase their financial literacy. With money management education, financial planning seminars and discount purchase programs, employees have readily available tools to help them ease their financial concerns.

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Total Wellbeing – Lowering Costs While Enhancing Culture, Employee Engagement and ProductivityAli Payne, MS, Regional Vice President, North and South Central Region Wellbeing & Engagement Practice Leader

Kathleen Schulz, MS, CHES, Area Vice President, Eastern Region Wellbeing & Engagement Practice Leader

Rebecca Kruske, EdM, Western Region Wellbeing & Engagement Practice Leader

The merits of wellness programs have gradually earned them a place in employee total rewards strategies. In 2015, 42% of employers offered a wellness program of some kind.1 However, there is still a wide gap between organizations that are implementing traditional wellness programs and those that have discovered the value of a total wellbeing approach.

Wellness programs focus primarily on physical health. Wellbeing is a more holistic concept that includes physical, emotional, financial, career and community health dimensions. A total wellbeing program addresses healthcare costs along with employee engagement, productivity, and talent attraction and retention – more strongly supporting efforts to become or remain an employer of choice.

It can be difficult to develop and implement a total wellbeing strategy. Right from the outset, this pursuit requires commitment from leadership, in-depth research and the right data. And, having a true sense of an organization’s starting point is important before developing tailored recommendations.

Once a course of action is determined, a comprehensive communication plan will support employee understanding and participation. Most important of all, a wellbeing strategy requires a culture committed to fostering this type of initiative.

It’s all about cultureCharacter and personality define an organization’s culture. These traits make employers unique and are the sum of their values, traditions, beliefs, interactions, behaviors and attitudes. Culture, usually determined by senior leaders, will positively or negatively influence the behaviors of their employees – with far-reaching consequences. Employees’ experience of their culture impacts everything including individual wellbeing, work performance, injury rates, employee engagement, productivity, and talent attraction and retention.

With issues around talent and engagement driving three of the top five human resource challenges in 2015,1 the advantages of a positive organizational culture should not be overlooked. A focus on wellbeing and engagement is a clear differentiator in this competitive and pro-employee talent market. Thriving, engaged employees generally cost less in annual healthcare benefits spend, take less time off due to illness and injury, are more likely to be high performers, and are less likely to leave the organization.

The key to becoming an employer of choice often starts with understanding the organization’s unique culture, and then identifying opportunities to help build or strengthen the behaviors that lead to healthy outcomes for employees and the business. By leveraging employee engagement surveys, executive interviews and focus groups, employers can develop targeted action plans to enhance their culture and map the right total wellbeing strategy.

TOTAL WELLBEING DIMENSIONS

Physical Health

Financial Health

Career HealthCommunity

Health

Social/Emotional Health

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Financial wellbeing is a top concernFinancial wellbeing, one of the five total wellbeing dimensions, continues to grow as a key concern for employers and employees. Financially stressed employees are less productive and engaged compared to those with a healthy financial outlook. And this situation relates directly to an organization’s bottom line.2

For example, financial stress can impact an individual’s physical and mental health by contributing to sleep difficulties, anxiety, depression, headaches and high blood pressure. Higher healthcare costs, increased absenteeism and lower productivity often stem from these conditions. Also, financial stress may indirectly relate to an increase in workers’ compensation claims and costs associated with delayed retirement.

Personal finance is about more than just numbers; it’s about acquiring and applying knowledge through behavior. When employees are equipped with the appropriate tools and resources to budget and plan their savings and investments, financial stress is reduced and financial wellbeing increases. This often leads to a more productive workforce and a healthier organization. When evaluating a total wellbeing approach, it’s important to analyze and identify a scope of financially focused benefits and programs that are best suited to easing employees’ financial concerns.

Onsite clinics: A growing resource for total wellbeingMore employers are looking for effective ways to manage healthcare costs, and onsite clinics are a driving factor in reducing expenses related to productivity and health management. These clinics are growing in popularity because they help create a physically and emotionally supportive culture for employees, which in turn helps to drive an effective total wellbeing strategy.

Where appropriate, onsite healthcare can also decrease lost work time, keeping employees present, engaged and productive. With the right strategy, both small and large employers can offer these opportunities.

Onsite healthcare can be an asset for both employees and their employers in many ways, including:

• Employee access to coaching or behavioral health specialists

• Onsite services such as dental care or physical therapy

• Enhanced opportunity to change workplace culture and drive engagement, by empowering employees to easily and conveniently support their physical and emotional wellbeing

So, how do employers evaluate whether an onsite clinic will work for their organization? Often the process starts by understanding their culture and workforce needs, evaluating logistics such as available space and vendor support, and conducting data analysis and compliance research on the potential challenges.

Overall, total wellbeing continues to grow as an important strategy for enhancing organizational culture to support increased employee engagement and productivity, while driving down cost. Financial wellbeing programs can contribute to lower costs by relieving employee distress over financial concerns, which is often a factor in physical health problems. In addition, onsite healthcare solutions provide a cutting-edge benefit that helps keep employees healthy and productive, empowering the organization to compete as an employer of choice.

1 Arthur J. Gallagher & Co., “2015 Benefits Strategy & Benchmarking Survey – U.S. National Report,” August 20152 Journal of Occupational and Environmental Medicine, “The Stock Performance of C. Everett Koop Award Winners Compared With the Standard & Poor’s 500 Index,” January 2016, Volume 58, Issue 1

1 Controlling healthcare expenses

2 Recruiting qualified employees

3 Keeping up to date on healthcare reform

4 Retaining employees

5 Increasing employee job satisfaction

TOP HUMAN RESOURCE CHALLENGES1

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Driving Financial Wellbeing for Organizations and Their EmployeesBill Kline, National Practice Leader, Retirement Plan Consulting

Today’s employers realize financial issues are a top stress factor for their employees. From the entry-level employee who needs to pay off college debt while saving for a first home to the pre-retiree struggling to cover a spouse’s long-term care costs, employees’ reasons for financial stress can change throughout every career and life stage.

Financial stress takes a heavy toll on employees, affecting their physical and emotional wellbeing, and also impacting their ability to engage in and deliver on their job responsibilities. In fact, its direct and measurable impact on employee health and productivity can also exact a toll on the organization’s profitability.

Financial stress impacts an organization’s bottom line in a variety of ways:

• Higher compensation costs due to delayed retirement

• Higher healthcare costs from stressed employees whose chronic conditions do not improve, and an aging workforce

• Higher workers’ compensation and disability claims as employees reach retirement age

• Increased absenteeism due to serious illnesses and chronic conditions, leading to lower productivity

Research has shown it’s not solely retirement planning that causes employee financial stress. It comes from several sources, including:

• Lack of retirement plan participation and adequate contribution. Employers might not offer automatic enrollment or matching contributions, both of which increase plan participation. And research shows that 22% of employers offer no retirement plan at all.2 Even those employees who are contributing to a retirement plan aren’t saving enough. A 2013 survey reports 76% of respondents haven’t saved $100,000 or more for retirement.3

• Inadequate understanding of finances and lack of financial preparedness. Aside from retirement, life introduces many other issues that add to financial stress, such as saving for college, long-term care, personal budgeting and financial management, flexible savings accounts, mortgages and other concerns.

Employers realize they must do more than offer a 401(k) plan and auto-enrollment to be seen as an employer of choice. A comprehensive approach could include:

• Plan design improvement to drive participation rates, increase contribution rates and help diversify investment choices

• Financial counseling for employees to develop a lifetime financial plan

• Learning opportunities across a wide spectrum of financial topics including college tuition, long-term care, budgeting, debt management, and healthcare plans such as a health savings account and a flexible spending account

FINANCIAL WORRIES AFFECT AMERICANS’ MENTAL HEALTH1

Feel stressed about money at least some of the time 72%

32%

22%

Struggle or fail to live a healthy lifestyle due to finances

Experience extreme stress about money

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• Use of all forms of media (print, phone, online, workshops, one-on-one, social media) to reach various employee demographics

• Custom messages for unique employee classes by sex, age, functional role, location and other distinctions to increase response

Retirement planning protects not only the individual employee’s future, but encourages a healthy succession pattern in the workforce, providing employees with the means and confidence to retire on time. But a retirement planning program is more than just the “drive to age 65,” it’s about proactively communicating and educating employees, and arming them with resources and knowledge to help them achieve financial independence.

Employers of choice are self-assessing, taking inventory of their demographics and getting to know their unique workforce. Rather than offering a one-size-fits-all approach to financial wellness, they’re asking their employees what issues are most important to them and using a wide array of media to reach and engage them.

Getting people financially fit – moving them away from financial stress, caring for their financial wellbeing and moving them toward financial independence – is good for their health. And their good health (both physical and financial) results in higher productivity, engagement and retention.

In this competitive work environment, retirement planning is a key part of achieving employer-of-choice status. Employees who have thorough financial awareness and a plan with future savings goals are less stressed about life’s many financial issues, and are more easily able to engage in their work. This increased engagement drives productivity and helps leading organizations maintain a healthy workforce and a healthy bottom line, now and into the future. Tomorrow’s employer of choice is taking action on financial wellbeing today.

1 American Psychological Association, “Paying With Our Health,” February 2014 2 Arthur J. Gallagher & Co., “2015 Benefits Strategy & Benchmarking Survey – U.S. National Report,” August 2015 3 Employee Benefit Research Institute and Mathew Greenwald & Associates, “The 2013 Retirement Confidence Survey: Perceived Savings Needs Outpace Reality for Many,” March 2013

Higher Healthcare Costs

Higher WC and/or Disability Claims

Increased Absenteeism

Lower Productivity

!Increased Turnover

Higher Compensation Costs

$Delayed

Retirement

BOTTOM-LINE IMPACT

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Meeting Defined Benefit Plan Investment and Fiduciary Challenges Head-onNick Davies, Area President, Institutional Investment & Fiduciary Services

Defined benefit plans were historically set up as pooled funding mechanisms to offer retirement benefits to employees. However, as costs have escalated, they have evolved into a legacy financial issue for many plan sponsors and raise key investment and fiduciary concerns.

Funding levels for defined benefit plans improved modestly during 2015, but plan sponsors could face many challenges with their investment and fiduciary obligations. Regulations and legislation can be complex and investments can be volatile, while resources and time may be constrained.

Today’s most successful plan sponsors seek partners with broad knowledge of investment oversight, and experience in supporting numerous and diverse investment committees. They also look for effective governance as an important element of sound risk management. The following are three key areas for organizations to consider.

Factoring liabilities and overall objectives when evaluating an investment management approachPlan sponsors who want to optimize their financial performance should periodically analyze the fiduciary framework that an institutional investor has in place. Understanding the overall performance of investments is important, but the whole investment management approach needs to be considered in the context of liabilities and overall objectives.

One significant development to keep in mind is that returns are now harder to generate. The average annual return on equities was 10.1% over the period 1926–2014, but declined to 8.6% over 1990–2012 and 7.1% over 2003–2012. With more retirement plans moving toward defined contribution, it’s also notable that from 1990–2012 defined benefit plans generated 0.7% more per year than defined contribution plans.1

Organizations should consider their specific circumstances and optimize the portfolio investment approach based on their own objectives, assets and liabilities. Some of the responsibilities of a fiduciary or investment committee typically include:

• Ensuring the proper infrastructure is in place

• Establishing policies and objectives

• Approving the investment strategy

• Approving the portfolio construction

• Monitoring the portfolio

The committee performs an essential oversight function – it can delegate various analytical and administrative functions while retaining its fiduciary obligations. This is true whether a traditional investment consultant or a delegated (Outsourced Chief Investment Officer) investment provider is used.

Considering all solutions that cover both investment and fiduciary servicesThe use of risk transfer has increased recently. One study found that 15% of plans had some form of risk transfer activity over a five-year period.2 When working with an advisor, an approach that considers all solutions covering both investment and fiduciary services can be helpful.

Understanding the overall performance of investments is important, but the whole investment management approach needs to be considered in the context of liabilities and overall objectives.

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Key elements of a sound investment process include:

• Reasonable estimates of the capital markets’ risks and returns

• Accurate modeling of the capital markets’ risks in the projections of portfolio results

• Ability to translate portfolio performance into measures specified by the investment objectives

• Integration of cash flows into portfolio projections

• Effective investment manager search and monitoring capabilities

In addition, organizations often require specialist fiduciary services to assist with alternative funding mechanisms (in-kind contributions of stock or other corporate assets, etc.), as well as selection of insurance carriers for a pension risk transfer through an annuity purchase.

Identifying and managing risk in complex investment portfoliosPlan sponsors have traditionally allocated portfolios to asset classes in line with capital-based (dollar) weightings. Typically these weightings are informed by the results of a process called mean-variance (M-V) optimization. Many of the inputs to M-V are estimations of various market statistics and assumptions of future returns.

With increasing portfolio complexity and many cross-asset class investments, risks are obscured by asset class buckets. This often leaves plan sponsors with a clouded view of the market factors that will drive the variability of their returns.

As part of a holistic approach to managing portfolio risk and investments, some solutions that plan sponsors should consider include:

• Using technology to segregate portfolio sensitivities to various macro market factors (interest rates, global equities, currencies, credit, commodities, etc.)

• Analyzing each investment to determine its marginal contribution to risk across the whole portfolio, as well as its sensitivity to the individual factors

• Comparing the outputs of this process with those of several well-known market benchmarks

• Determining a “risk budget” framework based on the sponsor’s comfort zone with the various factors that complement the asset allocation framework

• Continuously monitoring and adjusting the portfolio to keep it within the risk budgets while maintaining the asset allocation framework

The results should leave the plan sponsors more comfortable with the components of the portfolio and their role in accomplishing the plan’s goals. And, future portfolio returns should have fewer surprises than they would if the capital allocation framework was used alone.

All of these lenses into the portfolio’s risk allow for greater transparency and better investment and fiduciary processes, resulting in an enhanced level of governance supporting the prudent stewardship of the assets. Ultimately, improving fiduciary oversight and expertise could lead to reduced operational and administrative costs, and the opportunity to reinvest them in the organization’s talent to advance its employer-of-choice objectives.

1 Center for Retirement Research at Boston College, “Investment Returns: Defined Benefit vs. Defined Contribution Plans,” December 2015 2 Pension Benefit Guaranty Corporation, “Risk Transfer Study: Plan Years 2009 – 2013,” December 2015

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Overcoming Barriers to Absence ManagementAgnes Nines, Mid Atlantic Region Absence Management Practice Leader, Health & Welfare Consulting

Today’s forward-thinking employers of choice seek productivity gains through a healthy employee population that’s actively engaged in supporting the business. Researchers have linked employee health and productivity for many years,1,2 and the Centers for Disease Control and Prevention (CDC) recently estimated productivity losses due to absence at $225.8 billion, or $1,685 per employee per year.1 Medical claim studies also strongly connect presenteeism and absenteeism to a population’s health status.2

In light of this data and the economic and legislative challenges they’ve faced over the last several years, employers are taking notice. And yet, with compelling research clearly pointing to the advantages of a holistic absence management program, the adoption rate is still low.

Aggregating and unlocking unstructured data for meaningful metricsAll employers can benefit from a better understanding of their total benefits spend and the factors that influence it, but many are getting only a fraction of the story. Utilization and other data from multiple benefit and statutory plans and programs (medical, prescription drug, health risk assessments, leaves, disability, workers’ compensation, etc.) are too often delivered in varied formats at different times. The confusion caused by this disparate approach has made it difficult for employers to grasp even the possibility of aggregating their data. Add in privacy concerns, and linking meaningful data points can seem unachievable.

Employers that access and aggregate their data can gain an understanding of core issues driving benefit costs, absence and productivity limitations. According to the CDC, roughly half of all adults have one or more chronic health conditions,3 which generally fall into the categories of obesity, diabetes, heart disease, arthritis

and substance abuse. These underlying conditions drive both employee absence and healthcare costs.

The plight of the small to midsize employerSmall to midsize employers struggle to access meaningful data because organization-specific utilization reporting is often unavailable to them. Without this data they often give up on the process. However, it’s possible for these employers to identify health factors they have in common with a larger, more statistically credible population by evaluating the composition of their own workforce. Health information broken out by geography, industry, gender and age is publicly available. By comparing their organization’s demographics to this general health information, employers are better able to determine the diseases that are most likely prevalent in their own population. They can then use that information to establish targeted programs aimed at positively impacting employee health, absence and productivity.

Why absence management matters to employers of all sizesSimply put, healthy employees stay at work and return to work more quickly after a period of disability. This keeps skilled employees on the job and limits the time managers are distracted from core business functions.

Even though employers express many reasons for not developing a comprehensive approach to absence management, they can all profit from the efforts. The benefits include lower healthcare costs, compliant administration of corporate policies, risk mitigation and a more engaged employee experience – all of which lead to greater organizational productivity.

1 Centers for Disease Control and Prevention, Chronic Disease Prevention and Health Promotion > At A Glance Fact Sheets > Workplace Health Promotion > “Using the Workplace to Improve the Nation’s Health At A Glance,” June 2015

2 American College of Occupational and Environmental Medicine, “Health and Productivity as a Business Strategy: A Multiemployer Study,” April 2009 3 Centers for Disease Control and Prevention, Chronic Disease Prevention and Health Promotion > Chronic Disease Overview > “Chronic Diseases: The Leading Causes of Death and Disability in the United States,”

February 2016

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Structuring Executive Benefits to Support Corporate Objectives and GrowthJohn Neumaier, Executive Vice President, South Central Region

Cline Young, Executive Benefits Consultant

Compensation and benefits are on the minds of all employees – including top executives. These leaders are responsible for developing, nurturing and maintaining the crucial relationships, proprietary processes and valuable assets that make organizations competitive. So it only makes sense that holistic executive benefits planning should be a high priority. Yet, for some reason, executive total rewards plans rarely get the rigorous focus and thoughtful care they deserve.

Organizations have too much at stake to take a passive approach to executive benefits, including the ability to effectively attract, retain and reward their executives. Potentially, they could even compromise their long-term sustainability and success. Today – much like the rest of the workforce – fewer and fewer highly compensated executives are ready to retire, and most find themselves in the workplace longer than they may have anticipated. The fallout from this trend often includes unexpected strains on both health plan costs and succession planning. In addition, when skilled, ambitious and marketable younger executives don’t see any opportunities to advance, turnover occurs in the wrong places.

This situation creates a competitive risk that must be managed by balancing two sets of needs. Organizations should structure plans to support an aging workforce nearing retirement. At the same time, they need to ensure that benefits are dynamic enough to attract and retain the next generation of executive leadership.

Developing an affordable, sustainable plan that appeals to executives across the career spectrum One of the first steps to determining the strength of an executive benefits offering is to conduct a full review of current programs, along with a detailed analysis of workforce demographics and culture. A broad assessment allows organizations to: calculate potential savings from reducing the average retirement age; analyze current plan designs; and fully examine funding strategy and asset/liability ratios.

They can then use reliable insights to decide whether to enhance their current plan or design it anew, and define the right approach for that choice.

As a competitive requirement, modernized executive benefit programs focus on more than just retirement needs. They also address the retention of key roles to prevent a loss of talent that would prove extremely expensive. Tenure-based programs with performance-driven rewards are a solution worth considering. These programs are gaining in popularity because they can incentivize behavior without large cash outlays.

The prevalent disconnect between outdated plan designs and corporate objectives most often results from neglecting plan management and review. Quarterly reviews of all plans and annual reviews of funding and plan designs are essential. These best practices ensure that offerings remain competitive and functional, and are highly regarded by participants. In short, successful plan designs are meaningful to participants and affordable to the organization.

A successful plan is valuable to all plan participants and aligns appropriately with organizational objectives. There should be an increase in retirement preparedness and a decline in the average age of retirees, effectively creating opportunity for younger key employees. Key talent who participate in these plans will be enticed to stay longer and incented to retire earlier. And throughout their stay, they’ll grow company equity and profits.

Many organizations have difficulty reconciling the demographic needs of younger management versus older, more tenured management related to benefits and compensation. By analyzing their objectives for executive retention, recruitment and rewards, they’ll be able to create and implement a strategy that fits both their culture and demographics. When organizations also monitor the results and adjust their strategy when needed, they will drive a continuous level of leadership performance and sustainability that defines them as a preferred employer.

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Why It Pays to Have an Effective Executive Compensation StrategyJames Reda, Managing Director, Executive Compensation Consulting

The competition to recruit and retain executives has always been tough. Employers of choice need leaders who will not only drive profitability with their personal performance, but will strive to motivate and engage the organization’s workforce as a whole.

Today, a war for executive talent is raging across the business landscape. Stakeholders can have unrealistic performance expectations for senior executives in spite of this heated competition, resulting in unplanned turnover. In addition, the talent pool is becoming more homogeneous as executives move between organizations that are small and large, and publicly and privately held. Boards of directors and investors need to pay attention to these trends as they directly affect their ability to attract and retain key executive talent.

As organizations formulate plans to attract and keep these leaders, they struggle to address significant challenges, such as:

• Determining which incentive compensation vehicle is most appropriate

• Comparing executive compensation philosophies and corresponding compensation plans between privately held and publicly held companies

• Addressing the disparity of executive compensation programs between smaller organizations and larger organizations, and the long-term sustainability of those programs

The performance of an executive leader is inherently tied to the organization’s performance. And executive pay practices reflect the inherent truth that executives should be compensated based on their performance.

Pay for performance: The short and long of itPerformance-based awards are used by 95% of organizations with revenues greater than $1 billion. Stock options and stock appreciation rights (SARs), which are used by 63% of companies, account for

25% of the average total long-term incentive value. Stock options and SARs are common and valuable tools for retention of key employees, whether these payments are deferred over three to five years (a relatively short-term incentive) or deferred until retirement age upon departure from the company (a long-term incentive).

95% of organizations used performance-based awards

63% of organizations use

stock options/ SARs

PERFORMANCE-BASED AWARDS

Narrowing the gapAt privately and publicly held companies under $200 million in annual revenue, total compensation paid to senior executives (salary, bonus and long-term incentive) is becoming more equitable. Executives at privately held companies receive compensation within 2–3% of the amount paid to their public company counterparts. The difference was larger five years ago and even larger 10 years ago. The closing of this gap indicates a homogenization of the pool for executive talent. Employers of choice, particularly those with annual revenues less than $200 million, must provide competitive compensation programs to attract and retain executives.

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For senior executive positions (CEO and direct reports), there is no distinction between compensation paid in higher or lower cost-of-living areas. This puts more pressure on ensuring compensation programs are competitive in size and structure.

Off-the-chart increasesIn 2014, the CEO of a manufacturing or nonfinancial services company with annual revenue of at least $50 billion (the largest of the groups analyzed) made, on average, eight times as much as the CEO of a company with annual revenue under $100 million (the smallest of the groups analyzed). However, it was the smallest group that saw the steepest five-year increase in total compensation. CEOs of these organizations earned $2,189,000 in 2014, or 135.9% more than their reported total pay in 2010 and 31.8 % more than their reported total pay in 2013. This dramatic executive compensation increase at smaller organizations – which outpaces increases at much larger organizations – clearly shows the smaller organizations’ desire to compete for executive talent by offering comparable incentives.

Increases of this magnitude are unbalanced, out of step with organizational profit growth rates and just not sustainable. This is particularly true for organizations with revenues under $100 million, where compensation rates have grown at a faster pace.

Strategic steps for smaller organizationsWith many options and structures available for executive performance-based programs, designing the most appropriate solution can be complex. Today the gap between publicly held and privately held executive compensation structures continues to narrow. Meanwhile, the cost trend for smaller organizations’ CEOs is growing at an alarming rate compared to the cost trend for larger organizations. An effectively designed executive compensation program requires organizations to assess the trends, identify the most appropriate compensation components and vehicles, and benchmark their plans against the marketplace.

Smaller private organizations are the most vulnerable in the war for executive talent. First, senior executive compensation has outpaced that at larger organizations and far exceeds historical increases. Second, there is little difference between compensation paid at smaller organizations for private and publicly traded companies. To attract and retain engaged, high-performing executive leaders who will drive organizational growth and success, smaller organizations must review and assess their compensation philosophy and accompanying executive pay programs at least every two years, and ideally every year.

136% increase in CEO pay for small employers from 2010 to 2014

INCREASE IN CEO PAY

Source: Harvard Law School Forum on Corporate Governance and Financial Regulation, “CEO and Executive Compensation Practices: 2015 Edition,” Dr. Matteo Tonello, The Conference Board, Inc., with James Reda of Arthur J. Gallagher & Co., September 2015

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Securing the Future with a Strategic Cost-of-Risk Approach Bill Ziebell, Executive Vice President, North Central Region

Mike Pesch, Midwest Region President

Controlling costs while attracting and retaining a competitive workforce continues to be a primary concern for employers. In today’s market, competitive organizations look beyond traditional strategies. They’re searching for new ideas to better contain both healthcare costs and overall operating expenses, while still offering a compelling and differentiating scope of rewards. So, what are these high-performing organizations doing to achieve this balance? It may boil down to how business leaders and financial decision-makers are starting to look at their overall cost of risk – by examining their insurance and benefit decisions holistically.

In the past, the cost of risk may have been a term used more commonly when analyzing insurance coverage, depending on the decision maker’s role. Cost of risk now refers to more than potential gaps, coverage losses and other insurance challenges. It also encompasses the cost of not having the right rewards (health and welfare benefits, compensation strategy, wellness initiatives, retirement benefits, etc.) to attract, retain and engage the necessary talent for long-term organizational sustainability. And, today’s complex regulatory environment adds another layer of potential risk – employers are faced with structuring a strong rewards program that aligns with the many rules and requirements related to healthcare reform.

Cost of risk: BenefitsTo help assess the cost of risk from a benefits perspective, employers should consider the following:

• What is the cost to the organization if employees are retiring at their desks? Will healthcare costs go up? Will other talent have limited career opportunities? And, could this impact productivity? Proper retirement benefits are not only meaningful to the employees, but also influence an organization’s bottom line.

• How would non-compliance with HR issues such as Department of Labor Laws or equal pay issues impact the organization? Besides being mired in fines, the employer could pay the cost of negative PR stemming from their actions, including difficulty attracting talent.

• Do executive benefits adequately protect the organization’s leadership? What would be the cost associated with losing key leaders?

• What are the risks related to employees’ overall wellbeing? How could the organization benefit from helping employees ease their personal finance worries and lower their emotional stress? Would employees be more engaged if they feel like they are part of a community at work? High-performing organizations are looking beyond health and disease management, and leveraging a total wellbeing approach.

• The “war for talent,” a reference to a McKinsey & Co. prediction of a talent shortage made in the late 1990s, is being waged on a global scale. According to one study, the world could have a shortfall of 40 million college-educated workers by 2020.2 This means businesses are fighting to secure the right workforce like never before. The competitive implications heighten the importance to employers of making sure their rewards programs are tailored to employees’ needs and interests. If they’re not, there could be a substantial cost to overall business success.

1 Controlling employee benefit costs

2 Attracting and retaining a competitive workforce

3 Maintaining/decreasing overall operating cost

TOP EMPLOYER CHALLENGES1

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Cost of risk: Property and casualtyFrom a property and casualty perspective, total cost of risk can start with a simple calculation of premium, broker compensation and losses assumed within various program deductibles. But, what about those other costs that are harder for employers to measure?

• How might an uncovered claim (one that could have been covered) impact the organization’s future? Trying to save premium dollars could pose a risk to proper coverage, and the potential cost could very easily outpace any premium savings.

• How could a better safety and wellness culture impact the organization? While safety and wellness require a resource commitment, they can often result in long-term savings – by helping prevent claim situations and helping employees be more productive in their roles. Claim prevention is difficult to measure because it’s not possible to account for claims that were avoided. However, implementing a more strategic safety and wellness culture would most likely pay dividends in missed claims, injuries and employee absence. And, this approach can help organizations build an employer-of-choice reputation for their workplace. By aligning with a trusted partner and advisor, employers can limit or eliminate some of the added costs of maintaining a safety and wellness culture.

• Organizations transfer risk contractually to third parties every day, but what if that fails for a variety of reasons? They would need to consider the significant cost and risk implications in this scenario.

This cost-of-risk assessment is just a sampling of the type of questions to address when moving beyond insurance brokering, and taking a more holistic consultative approach to risk management. The graphic on this page helps illustrate and compartmentalize these issues, using Gallagher’s proprietary CORE360 framework.

Coverage Gaps

Insurance Premiums

Losses Within Deductible/Retention

Contractual Liability

Uninsurable/Uninsured Losses

Program Structure

360

1 Arthur J. Gallagher & Co., “2015 Benefits Strategy & Benchmarking Survey – U.S. National Report,” August 20152 McKinsey & Company, McKinsey Quarterly, “Talent tensions ahead: A CEO briefing,” November 2012

An integrated approach to managing the cost of risk can help employers determine what insurance and rewards mix is most meaningful to their business, so they’re not just spending more or less, but are spending right. Using a data-driven process and ongoing metrics aimed at helping to secure their organization’s future, employers can reinforce or grow their employer-of-choice status.

30 | 2016 HUMAN CAPITAL INSIGHTS & STRATEGIES REPORT Arthur J. Gallagher & Co. | AJG.COM

Employee Engagement & Safety – High Cost or High Return? Scott Hamilton, National Managing Director, Human Resources & Compensation Consulting

Employee engagement can take many different forms, from simple things like the way a phone call is answered, to senior employees mentoring younger ones, or salaried employees collaborating after hours on a special project. Highly engaged workers often see themselves as stakeholders in an organization’s success and wellbeing – embodiments of the organization’s culture. Employers with this type of workforce often self-identify as being an employer of choice or destination workplace.

Poorly engaged workers often have more unscheduled absences, accidents, and other red flags that indicate a lesser commitment to an organization’s success. Employers with low employee engagement may experience above-average turnover, more employee relations issues, low levels of cultural buy-in, and higher than average costs from employee accidents and related safety issues.

When companies consider the potential costs associated with increasing engagement and becoming an employer of choice, discussions quickly turn to the potentially large investment of time, money and resources, and the expected return on that investment. ROI metrics traditionally struggle to capture savings from decreased employee turnover, higher wellbeing and increased customer satisfaction. Lower medical costs are measurable, but cannot always be directly connected to higher engagement.

Employee engagement is an often overlooked, though simple and effective way to increase safety. Employees’ attitudes on safety in the workplace have broadened from concern about workplace accidents to behavioral health, burnout, stress management and prevention of workplace violence. The focus of this article is on the most measurable aspects of increased safety – participation in employee safety programs and decreased accident rates, both of which can result in higher engagement.

The high cost of low engagementHighly engaged managers and employees are essential to the development and administration of effective workplace health and employee safety programs. According to Bureau of Labor Statistics (BLS), nearly three million non-fatal workplace injuries and illnesses were reported by private-industry employers in 2014. Injuries accounted for 95.1% of the incidents, with the remainder being illnesses, totaling approximately 3.2 cases per 100 full-time employees according to the 2014 Survey of Occupational Injuries and Illnesses (SOII) conducted by the BLS.1 In addition, the SOII reports that for all private-industry employers, the median time away from work associated with a workplace-related injury or illness is nine days. Significantly, 29% of workplace-related injuries or illnesses exceed 31 days of time away from work.2

So what does this mean to a typical employer? What costs – direct and indirect – might they experience without a commitment to employee engagement? The hypothetical example on the next page shows how an employer with 1,000 full-time employees and a median annual salary of $42,900 could lose over $1.4 million annually, due to the potential costs of low employee engagement.

Employees in this situation would likely contribute to higher workplace injury costs by missing training sessions – or worse – not believing new safety processes were important enough to implement. If, unfortunately, there was an accident, these disengaged workers may even accuse management of unsafe practices and protocols, driving turnover as misinformation causes other workers to look for easier, “safer” jobs with similar wages. Likewise, rumors and misinformation could also create reputational pressures on the employer, increasing “time to fill” on job vacancies and worsening the situation further. An employer could feel the need to respond by adding market-based premium compensation to offers, in order to counter such perceptions.

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Sample Costs of Workplace Safety at 1,000 FTE Employer With Annual Payroll of $42,900,000

Assumptions

Employees (FTE) 1,000

Median annual salary $42,900

Employer payroll (annual) $42,900,000

Employer turnover rate 15%

Turnover cost (% of median annual salary) 50%

Normal Direct Costs (Annualized)

Workers’ compensation (WC) premium cost ($1.85 per $100 of payroll)3

$793,650

Total Direct Costs $793,650

Normal Indirect Costs (Annualized)

Covered difference in injured employee compensation

$925,287

Cost of covering missing employee shift

Administrative time post-injury

Recruitment/training costs for replacement worker

Updated training cycle for 750 employees post-accident

Lost productivity to implement training

Increase in WC premium due to accidents

Total Indirect Costs

(OSHA estimates indirect costs of workplace health and job safety at 1.1x direct costs for employers of this size.)

Potential Costs Related to Low Engagement (Annualized)

20% increase in employee turnover due to safety concerns

• 1,000 employees x 3% turnover increase x 50% of annual salary amount for cost of turnover

$712,800

Increased length of job vacancies due to reputational concerns (additional 10 days per job)

• 1,000 employees x 18% turnover = 180 hires x 10 days @ annual salary amount

$328,985

Increase in market-based compensation to hire into turnover-impacted vacancies

• 1,000 employees x 18% = 180 hires x 5% increase over annual salary amount

$427,680

Total Potential Costs of Low Engagement $1,469,465

Safety programs can decrease accidents and increase engagementThe Occupational Safety & Health Administration (OSHA) administers federal workplace health, worker safety, and enforcement efforts. In March 2016, OSHA introduced updated Safety and Health Program Management Guidelines, which define a process-based approach to employee and workplace safety. These guidelines suggest that employers involve workers in all aspects of the program.

Steps typically include:

• Developing the program

• Reporting hazards and developing solutions that improve safety and health

• Analyzing hazards in each step of routine and non-routine jobs, tasks and processes

• Defining and documenting safe work practices

• Conducting site inspections

• Developing and revising safety procedures

• Participating in incident and close-call or near-miss investigations

• Serving as trainers for current co-workers and new hires

• Developing, implementing and evaluating training programs

The challenges of maintaining a safe and healthy workplace are significant on a good day. Add to the mix disengaged workers and a lack of stakeholder-level employee commitment to continuous communication, education and improvement, and the employer’s normal operational challenges become even more risky. Mitigating this risk with workplace safety programs has the potential to save significant dollars, increase employee engagement, and enhance the organization’s reputation as an employer of choice that continually seeks improvement on employee safety.

1Bureau of Labor Statistics, News Release, “Employer-Reported Workplace Injuries and Illnesses – 2014,” October 20152 Bureau of Labor Statistics, Economic News Release, “Nonfatal Occupational Injuries and Illnesses Requiring Days Away From Work, 2011,” November 2012 3 Wells Media Group, Inc., Insurance Journal, “2014 Workers’ Compensation Rates Ranked by State,” February 2015

32 | 2016 HUMAN CAPITAL INSIGHTS & STRATEGIES REPORT Arthur J. Gallagher & Co. | AJG.COM

Protecting Personal Health Information in a Vulnerable Age George K. Katsoudas, Division Senior Vice President, Compliance Counsel, Compliance Consulting

Business is no longer conducted out of a single storefront or office building. In the digital age, employers are likely to allow their employees to have choices in where they work and how they use technology. Remote work arrangements and virtual offices are increasingly common, and sensitive data is often accessed from airports, hotels and coffeehouses across the country. Not only is the prevalence of digital devices in the workplace at an all-time high, today’s workforce is diverse with each generation using technology in different ways. For these reasons, data protection for employees, and by employees, is of paramount importance.

Of particular concern for many employers is safeguarding electronic protected health information (ePHI). The potential for a breach of ePHI is now more prominent than ever before, and is being impacted by the demographic shift of the workforce. Millennials (age 18–34, the fastest-growing segment of the workforce) have a reputation as being the most plugged-in generation in the workplace, but they also are most likely to lose data or leave themselves open to hacking,2 increasing the possibility of a breach.

Employers of choice realize that in order to foster employee engagement, they need to offer flexible work situations both inside and outside the office, but they must also ensure that access is controlled. Employers need policies and procedures to make sure every member of their workforce understands the dangers, and agrees to take the needed steps to protect the organization’s ePHI.

For any organization, the consequences of an ePHI breach can include fines and the costs of undergoing a federal investigation, penalties and even civil lawsuits. In November and December 2015 alone, more than $5 million in penalties were levied against three organizations for violations of the Health Insurance Portability and Accountability Act (HIPAA).

Incident That Initiated OCR Investigation

Penalty and Ongoing Requirements

Employee downloaded malware email attachment that enabled access to ePHI of 90,000 individuals

• $750,000• Corrective action plan • Annual compliance

reporting

Unauthorized mailing containing ePHI sent from vendor to employees

• $3.5 million • Policies and procedures

Laptop containing ePHI of 599 individuals stolen from workplace

• $850,000• Policies and procedures• Annual compliance

reporting

In addition to increasing fines, regulators will soon commence a new round of HIPAA audits. This requires leading organizations to put plans in place that prepare them for increased audit activity.

To protect themselves, employers need to ensure they have current and relevant policies and procedures to reduce the risk of an ePHI breach. While many employers may have established policies and procedures, very few are likely to have undertaken a thorough risk analysis. Such an analysis will often force an employer to revisit and revise their HIPAA policies and procedures.

“All too often we see covered entities with a limited risk analysis that focuses on a specific system, such as the electronic health record, or that fails to provide appropriate oversight and accountability for all parts of the enterprise,” said Office of Civil Rights (OCR) Director Jocelyn Samuels. “An effective risk analysis is one that is comprehensive in scope and is conducted across the organization to sufficiently address the risks and vulnerabilities.”1

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Employers that opt not to address these trends risk a lot. Significant penalties can result from an improper risk analysis, in addition to employee disengagement, stakeholder outrage and public embarrassment resulting from a breach notice.

Proactively and diligently protecting ePHI shields organizations from steep penalties. This commitment also shows employees that a high value is placed on protecting their data, reinforcing the employer-employee trust relationship and increasing the organization’s reputation as an employer of choice.

1 HHS.gov, “$750,000 HIPAA settlement underscores the need for organization-wide risk analysis,” December 2015 2 Harvard Business Review, “Do Millennials Believe in Data Security?” February 2014 3 FRSecure LLC, “OCR Enforcement by the Numbers – January 2016,” January 2016

$879,785 Average Cost of Settlement With Office of Civil Rights (OCR) for HIPAA Violations As of November 16, 2015, OCR has investigated and resolved over 23,939 cases by requiring changes in privacy practices and corrective actions by, or providing technical assistance to, HIPAA covered entities and their business associates. OCR has settled 26 such cases resulting in a total dollar amount of $22,874,400.3

34 | 2016 HUMAN CAPITAL INSIGHTS & STRATEGIES REPORT Arthur J. Gallagher & Co. | AJG.COM

HR Tech Trends That Deliver Bottom-Line ImpactRhonda Marcucci, CPA, Partner & Consultant, Gruppo Marcucci

The fact that technology plays an ever-increasing role in organizations’ HR and benefit operations is old news. What is new is that top trends driving HR and benefits technology in 2016 are more related to the desire to be an employer of choice. Unlike past tendencies, these tech trends are highly interrelated and collectively support employers’ talent management goals. It’s important for employers to watch these developments, which will drive their organization’s business approach and impact their bottom line.

TREND #1: Plug and playOne of the most significant trends is a shift by tech providers away from thinking they need to custom build everything (or buy a company that’s already done the work). Increasingly, they’re using an app strategy for HR and benefits technology.

Technology providers have developed application program interfaces (APIs) that make it easier to integrate with other providers’ software, for example, payroll companies are developing APIs to seamlessly connect with benefits technology software. As a result, providers can focus on their core business, and employers are able to use best-of-breed solutions with deeper integration capabilities.

The plug and play concept is evolving fast, not unlike the consumer app marketplace that exploded overnight. While it’s not as pervasive as needed for this industry, it is headed in the right direction.

TREND #2: PersonalizationEveryone expects a personalized technology experience. With the labor market beginning to tighten, personalizing the employment experience, from recruitment to retirement, is high on the list for employers that want to do whatever they can to attract and retain good talent. This includes a personalized application that allows employees to access information about all employment-related matters, as well as individually relevant interests and concerns, such as wellbeing.

Need to request time off? Want a copy of last year’s W2 to refinance a home? Lost your last paystub? Need to check your HSA balance? Employers can cater to all these needs on one platform, giving employees many reasons to check in on a daily basis.

The ability to engage employees with greater frequency is an employer’s dream, and technology delivers the means to make it happen. Free from the limitations of a static platform, technology can extend personalized experiences for a higher level of engagement. An example is custom communications that remind employees of an upcoming open enrollment deadline and include a link to take action.

TREND #3: Increased productivityApp and native technology that supports customized engagement encourages more employee accountability, which helps boost productivity. Applications can remind employees to schedule time off, enroll in certification training, get an expense report in on time, and more. These personalized messages also increase employees’ accountability because they address specific situations, such as “Don’t forget – your peer review feedback for Jane Doe is due Friday.”

Employers should benchmark where they are now, and then set realistic goals to move up the scale by using cost-effective technology to personalize the workplace and engage employees.

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This same technology can go beyond accountability, reinforcing positive, productive behavior through collaboration, peer recognition, constructive competition and personal interaction across distances. When providers configure applications to support a company’s culture, they also help create a work environment where employees are not only more accountable and productive, but also happier and less likely to leave for a competitor.

Keeping pace to finish strongWhile the technology that helps drive these trends is rapidly evolving, it’s in a relatively early stage – particularly personalization and plug and play. Many web-based platforms aren’t yet equipped with fully formed API integrations.

On the technology provider side there are tons of applications, but many are just interesting; they don’t address real needs. The good news is that significant investor activity in the HR tech space is helping to overcome challenges, including making software available for companies of all sizes.

Employers are well advised to “invest” as well – in HR technologies that deliver proven returns. Focusing on the plug and play, personalization and productivity trends is a good place to start. Ask HR tech providers what they offer to support personalization and productivity. If options don’t currently exist, ask about partnering to access plug-and-play technologies. Big providers have significant leverage to help employers get what they want. Smaller providers are often more flexible and already focused on partnering to offer a robust suite of services.

It’s important for employers to carefully consider how to best align their strategy with their organization’s needs. Starting small is okay. The spectrum of HR tools that support personalization and increased productivity is enormous. Employers should benchmark where they are now, and then set realistic goals to move up the scale by using cost-effective technology to personalize the workplace and engage employees.

Industry research has proven a bottom-line impact from HR technologies that are a good fit with organizational objectives. These efforts can pay off in tangible ways with happier, more productive employees who are the foundation of a sustainable employer-of-choice culture.

36 | 2016 HUMAN CAPITAL INSIGHTS & STRATEGIES REPORT Arthur J. Gallagher & Co. | AJG.COM

Top Three Global HR Trends to Watch in 2016 Richard Polak, Executive Vice President, Multinational Benefits & Human Resources Consulting

Global HR executives face a distinct set of challenges every year. Our rapidly, constantly changing world is growing more sophisticated, expanding its labor pool and pressing employers, at every turn, to find new and efficient ways to add value to their organizations. Multinational companies that want to compete as an employer of choice in 2016 and beyond will need to prepare for three important trends that are on the horizon.

TREND #1: War for talentThe implications of this trend, which describes an increasingly competitive landscape for recruiting and retaining talented employees, make it the most unique challenge in benefits and compensation history. Fierce competition for talent has crossed borders, with employers globally sourcing jobs that were formerly required for certain cities, regions or even countries.

An example that typifies this trend is an organization based in the United States that expanded its search for a compensation and benefits professional, because domestic applicants did not fit the job requirements. Candidates applied from each continent around the world, and in the end, the employer secured the position in Toronto, Canada. Three years later, the organization reported that this hire was very successful. The fact that the position was filled less expensively than it would have been in the U.S. only strengthened the value of the global sourcing decision.

All employers are in a war for talent that is no longer a local battle, and if they haven’t experienced it directly, they soon will. Global HR leaders must stretch their comfort zones, change their past behaviors and expand their thinking to attract, retain and engage top talent. As a lot of skilled jobs leave the U.S., the global skilled-labor workforce is

shifting. For example, the World Economic Forum reports that Russia and Iran have displaced Japan among the top producers of engineering graduates, while the U.S. has a tentative hold on second place.1

So, the search for talent that once focused locally or domestically has broadened to include the worldwide labor pool, and this approach to recruitment will continue to accelerate and become more competitive. Spain, Italy and many other countries are offering incentives for skilled labor to work in their country, regardless of their high unemployment rates. These incentives may include enticements such as fast-track visa approval and no social taxes. With these factors in play, structuring a meaningful global employer-of-choice strategy is becoming an even more important focus.

TREND #2: Global benefits managementEmployers will view or implement this trend differently. In its best iteration, the employer has a multinational advisor to help manage its benefits worldwide (see the graphic on the next page). The employer will ideally have an overall view of benefits around the world and the ability to manage them under this system. And, when benefits are managed effectively, that employer will also have governance oversight, compliance reporting, annual benefits renewal management and savings.

An efficiently operated global benefits management system (GBMS) or approach keeps benefit plans compliant, competitive and consistent, and provides cost-effective coverage and plan designs that support increased employee engagement. At a basic level, a GBMS manages the renewals of benefit programs across global locations. Similar to U.S. practices, insurance policies in other countries generally renew on an annual basis, and need to be analyzed and evaluated to ensure that employers are maximizing their benefits spend each year.

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TREND #3: Global wellbeing vs. global wellnessIn 2016, high-performing companies will change their traditional wellness strategies, which tend to focus on physical health, to holistic wellbeing strategies. A wellbeing strategy examines all aspects of an employee’s health, including financial, emotional, physical and all other factors that affect total health. This broader assessment allows employers to offer more targeted and meaningful programs that speak to individual needs, and in turn, lead to enhanced productivity.

In evaluating wellbeing programs, employers need to:

• Tread carefully, keeping cultural acceptance, compliance and legislation in mind

• Conduct a feasibility analysis to determine next steps – considering data related to diagnoses, risk profiles, biometric screenings, environmental factors, workplace factors, plan design, delivery and communication

• Look at ROI modeling to prove how wellbeing makes a valuable business case

For organizations that want to convert the opportunity presented by these top trends into a marketplace advantage, it’s critical to determine where to focus their limited resources. The first step is to identify and address the trend that’s most important to their organization. When choosing that priority, employers should consider their organizational culture and business objectives, and how the issues and insights related to the key 2016 trends align with those needs. Focusing on areas that will have the greatest impact will strengthen employers’ ability to compete on a global scale.

GLOBAL BENEFITS MANAGEMENT

An example of how an advisor might support benefit programs across the globe

ABC COMPANY

Global Advisor

Compliant

Germany

France

Hong Kong

Brazil

UK

Other Countries

Competitive

Consistent

Cost Effective

1 Work Economic Forum, “Human Capital Report 2015 > Infographics and Shareables,” 2016.

38 | 2016 HUMAN CAPITAL INSIGHTS & STRATEGIES REPORT Arthur J. Gallagher & Co. | AJG.COM

About GallagherBrilliant benefit and compensation solutions build brilliant businesses.How will healthcare affect your organization? What steps do you take to ensure your HR policies comply with federal, state and country-specific regulations? How are you helping your employees save enough for retirement? What’s the best approach for developing a competitive total rewards program that establishes you as an employer of choice?

You need answers. A data-driven, holistic benefits and compensation solution provides them.

That’s what Arthur J. Gallagher & Co. does. Our trusted advisors get to know you, your business and employees. With that insight, we help you better manage your domestic and international benefits, HR, compensation and retirement challenges.

Our solutions help your people work better so they can make your organization perform better.

2016 HUMAN CAPITAL INSIGHTS & STRATEGIES REPORT Arthur J. Gallagher & Co. | AJG.COM | 39

ContributorsEMPLOYER-OF-CHOICE STATUS

James W. Durkin | Jim_Durkin@ajg.com

DATA-DRIVEN ENGAGEMENT STRATEGIES

Chris Dustin | Chris_Dustin@ajg.com

Chuck Reynolds | Chuck_Reynolds@ajg.com

David D. Rowlee | David_Rowlee@ajg.com

EMPLOYEE COMMUNICATIONS

Matt Frost | Matt_Frost@ajg.com

COMPENSATION & BENEFITS PLANNING

Kent Lonsdale | Kent_Lonsdale@ajg.com

Joe Milano | Joseph_Milano@ajg.com

HEALTHCARE PLAN DESIGN

Kevin Cipoletti | Kevin_Cipoletti@ajg.com

Mark Rosenberg | Mark_Rosenberg@ajg.com

Adam Wolff | Adam_Wolff@ajg.com

PRIVATE EXCHANGES

Rick Strater | Rick_Strater@ajg.com

VOLUNTARY BENEFITS

Tim Easterwood | Tim_Easterwood@ajg.com

EMPLOYEE WELLBEING

Ali Payne | Ali_Payne@ajg.com

Rebecca Kruske | Rebecca_Kruske@ajg.com

Kathleen Schulz | Kathleen_Schulz@ajg.com

RETIREMENT PLAN STRATEGIES

Nick Davies | Nick_Davies@ajg.com

Bill Kline | Bill_Kline@ajg.com

ABSENCE MANAGEMENT

Agnes Nines | Agnes_Nines@ajg.com

EXECUTIVE COMPENSATION & BENEFITS

John Neumaier | John_Neumaier@ajg.com

James Reda | James_Reda@ajg.com

Cline Young | Cline_Young@ajg.com

COST-OF-RISK STRATEGIES

Mike Pesch | Mike_Pesch@ajg.com

Bill Ziebell | Bill_Ziebell@ajg.com

WORKPLACE SAFETY

Scott Hamilton | Scott_Hamilton@ajg.com

HIPAA COMPLIANCE

George K. Katsoudas | George_Katsoudas@ajg.com

HR TECHNOLOGY

Rhonda Marcucci | Rhonda@gruppomarcucci-usa.com

MULTINATIONAL BENEFITS & HR

Richard Polak | Richard_Polak@ajg.com

16GBS27335A

Gallagher Benefit Services, Inc.www.ajg.com

Consulting and insurance brokerage services to be provided by Gallagher Benefit Services, Inc. and/or its affiliate Gallagher Benefit Services (Canada) Group Inc. Gallagher Benefit Services, Inc., a non-investment firm and subsidiary of Arthur J. Gallagher & Co., is a licensed insurance agency that does business in California as “Gallagher Benefit Services of California Insurance Services” and in Massachusetts as “Gallagher Benefit Insurance Services.” Investment advisory services and corresponding named fiduciary services may be offered through Gallagher Fiduciary Advisors, LLC, a Registered Investment Adviser. Gallagher Fiduciary Advisors, LLC is a single-member, limited-liability company, with Gallagher Benefit Services, Inc. as its single member. Certain appropriately licensed individuals of Arthur J. Gallagher & Co. subsidiaries or affiliates, excluding Gallagher Fiduciary Advisors, LLC, offer securities through Kestra Investment Services (Kestra IS), member FINRA/SIPC and or investment advisory services through Kestra Advisory Services (Kestra AS), an affiliate of Kestra IS. Neither Kestra IS nor Kestra AS is affiliated with Arthur J. Gallagher & Co., Gallagher Benefit Services, Inc. or Gallagher Fiduciary Advisors, LLC. Neither Kestra AS, Kestra IS, Arthur J. Gallagher & Co., nor their affiliates provide accounting, legal, or tax advice.

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