insuring the effectiveness of variable pay...aon u.s. 2017/2018 salary increase survey— variable...

Insuring the Effectiveness of Variable Pay May 2018

Prepared by Talent, Rewards & Performance

Presentation to WorldatWork 2018 Total Rewards Conference & Exposition

Proprietary & Confidential | BBC/Speeches/WaW. PPTx/TRP-LS-04029 05/2018 2

Today’s Discussion Topics

Context for Variable Pay As the Preferred Pay for Performance Choice

Insuring the Effectiveness of Variable Pay Plans


Context for Variable Pay As the Preferred Pay for Performance Choice


USA TODAY

The Washington Post

The Wall Street Journal

24/7 Wall Street

Sorry, you are probably not getting a raise next year

Many Workers Will Get Tiny Raises in 2018

The Latest Headlines

Your chances of getting a bigger raise or bonus in

2018 just went down

Your next big raise? Don’t hold your breath,

some economists say


2018 Compensation Planning Snapshot Salaried-Exempt Employees

2.7% 2.8% 2.9% 2.9% 2.9% 2.8% 2.9% 3.0%

2011 2012 2013 2014 2015 2016 2017 2018Projected

Perc

enta

ge o

f P

ayro

ll

Salary

Increases

11.6% 12.0% 12.0% 12.7% 12.9% 12.8% 12.7% 12.5%

2011 2012 2013 2014 2015 2016 2017 2018Projected

Perc

enta

ge o

f P

ayro

ll

Variable

Pay

Source: Aon Survey—U.S. Salary Increases 2017/2018.


Disposable Income Growth

Historical Real Disposable Personal Income Growth Rates

-0.4%

1.0%

2.5%

3.1%

-1.4%

3.6%

4.2%

1.4% 1.2%

-2%

-1%

0%

1%

2%

3%

4%

5%

2009 2010 2011 2012 2013 2014 2015 2016 2017

Source: Bureau of Economic Analysis


Impact of The Tax Cut & Jobs Act?

120+ companies announced cash changes

70%+ provided one time bonuses, from $500-$5,000

40%+ announced/ paid $1,000 bonuses

Nearly 40% increased wages, most common to $15 per hour

In addition, nearly 20 announced changes to retirement plans

About 50% are permanent increases to match formula

Other 50% are discretionary/ one time changes

50%+ are in the financial industry

1 provided benefit via cash balance vehicle

Other Other announcements to fund pension, reduce rates at utilities, charitable

contributions, and stock

Bonus &

Compensation

Increases

Retirement

Increases

Source: Aon analysis of public sources March 2018

Public Companies Announcing Compensation or Benefit Changes


A Dramatic and Ongoing Shift in Pay Mix

4.3% 2.9%

3.6%

12.7%

1993 2017

Overall Base Salary Increase Budget Variable Pay Spending

Change in the Total Compensation Budgets and Spending for Salaried-Exempt

Employees (1993–2017)

Why?

Fixed vs. variable

costs

Need to focus and

drive behaviors

Need to create

alignment

Perceived control

Shareholder/

analysts value it



About Our Sources

SIS

Aon U.S. Salary Increase Survey 2017 and

2018

– 41st annual report

– Fortune 1000 companies

– 1,062 participants in 2017

• Merit/overall salary increases

• Salary structure movement

• Variable compensation

• Pay practices

• Data effective as of June/July 2017


About Our Sources

VCM

Broad-Based Plans

Created in 1996

– More than 240 cash variable pay plans

– 38% of participants have more than 20,000

employees and only 5% of participants have

less than 1,000 employees

– 44% of participants have a revenue scope of

up to $3 billion and 56% of participants have

revenues o $3 billion or more

Plan characteristic driven database

– Prevalence

– Effectiveness


Prevalence of Broad-Based Variable Pay

Broad-based variable pay is a key component of companies’ total compensation programs

Use of broad-based variable pay is widespread and stable

61%

68%

60% 59% 61%

67%

72% 70%

78% 81% 80%

77% 78% 78% 80%

90% 90% 88% 89%

92% 90% 90% 91%

93% 89% 88%

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Perc

enta

ge o

f O

rganiz

ations

Organizations With at Least One Broad-Based Variable Pay Program

Source: Aon Survey—U.S. Salary Increases 1992–2017.


0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 3.9% 4.5% 4.2% 3.8% 5.7% 5.9% 6.4% 7.6% 7.5% 7.6% 8.0%

10.0% 8.4%

6.2% 6.2% 6.0% 5.3% 4.8% 5.0% 5.3% 5.5% 5.0% 4.6% 4.3% 4.0% 4.0% 3.9% 4.0% 4.2%

1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998Perc

enta

ge o

f P

ayro

ll

Variable Pay Awards for Salaried Employees 1981–1998 Variable Pay

Salary Increase

Dramatic Shift in Pay Mix


9.7% 10.8% 10.5%

8.8% 9.5%

11.4% 11.2% 11.8%

10.8% 12.0%

11.3% 11.6% 12.0% 12.0% 12.7% 12.9% 12.8% 12.7% 12.5%

4.3% 4.3% 3.6% 3.4% 3.4% 3.6% 3.6% 3.7% 3.7%

1.8% 2.4% 2.7% 2.8% 2.9% 2.9% 2.9% 2.8% 2.9% 3.0%

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018Projected

Perc

enta

ge o

f P

ayro

ll

Variable Pay Awards for Salaried Employees 2000–2018 Variable PaySalary Increase


Aon U.S. 2017/2018 Salary Increase Survey— Variable Pay Budgets by Employee Group

12.0%

6.0% 5.4%

4.8%

6.7% 6.1%

5.6%

12.9%

6.4%

5.4%

12.8%

6.8% 6.1%

5.5%

12.7%

6.8% 5.8%

5.1%

12.5%

6.8% 6.0%

5.4%

Salaried Exempt Salaried Nonexempt Nonunion Hourly Union

Pe

rce

nta

ge o

f P

ayro

ll

Variable Pay 2013 Actual

2014 Actual

2015 Actual

2016 Actual

2017 Actual

2018 Projected


13.0%


Industry Variable Pay Outlook for 2018 Salaried-Exempt Employees

20

0

15

10

5

Pe

rcen

tage o

f

Pa

yro

ll

Energy (Oil & Gas)

Food/Beverage/

Tobacco Banking/Finance

17.6 16.3 16.4

Telecommunications

9.6

Industry


25

Computers and

Related Products

14.0

12.5

5.3

Health Care/Medical Services

Insurance (P&C)

10.8


Industry Comparisons

2.8% 2.8% 3.1% 2.9% 3.0% 3.2% 3.1%

5.3%

17.6%

5.8%

16.4%

10.4%

14.0% 16.3%

Health Care Energy (Oil/Gas) Not for Profit Banking/Finance Retail Computers and RelatedProducts

Food/Beverage/Tobacco

2018 Total Cash Compensation Budgets

Variable Pay Budget

Base Salary Increase Budget


8.1% 8.9%

19.3%

13.4%

17.2% 19.4%

20.4%


Historical and Projected Participation In Variable Pay

4% 6% 9% 13%

17%

8%

20%

30%

40%

60%

25%

50%

65%

75%

100%

85%

100% 100% 100% 100%

1950 1970 1990 2010 2020 Projected

Hourly

Nonexempt

Exempts

Executives

Pa

rtic

ipatio

n L

eve

l

Year

Source: Aon Historical Data.


Eligibility for Variable Pay

14% 15% 13% 17%

14% 15%

25%

43% 47% 45% 43%

53% 51% 53%

73%

93% 92% 93% 94% 96% 95%

2011 2012 2013 2014 2015 2016 2017

Nonunion Hourly

Nonexempt Employees

Exempt Employees

Pe

rce

nta

ge

Elig

ible

Year

Source: Aon Survey—U.S. Variable Compensation Measurement™ (VCM™) 2017.


Growth in Total Compensation Spending

9% 9% 8%

9% 9% 10% 8%

10% 10%

14% 14%

16%

0%

5%

10%

15%

20%

25%

1990 2000 2010 2018

Nonunion Hourly

Nonexempt Employees

Exempt Employees

To

tal S

pen

din

g a

s

Pe

rce

nt o

f P

ayro

ll

Year



25.0%

60.0%

15.0%

1.0% 0.0%

Helped Somewhat Helped Had No Effect Somewhat Hindered Hindered

Impact of Variable Pay on Business Results P

erc

en

tage o

f C

om

pa

nie

s

Impact on Business Results

Source: Aon Survey—U.S. Variable Compensation Measurement™ (VCM™) 2017.


Prevalence of Variable Compensation Plans By Type

1996 2006 2017

Business Incentives—Plans with combined financial and/or operating measures or

company, business unit, department, plant, and/or individual performance 55% 81% 81%

Cash Profit Sharing Plans—Plans that make equal payment (as a flat- dollar amount or

percent of salary) to all or most employees based on organizational profitability 22% 15% 15%

Individual Performance Plans—Plans whose payouts are based solely on individual

performance criteria; payout amount typically varies from one individual to another 17% 28% 18%

Gainsharing/Productivity Plans—Plans designed share a percent of cost savings of a

group, unit, or organization; the gains are typically shared uniformly among all participants 16% 6% 3%

Team Awards—Plans that provide incentives to individuals on a project or work team 13% 8% 7%

Special Recognition Plans—Plans that are designed to recognize special individual or

group achievements with small cash awards or merchandise 44% 53% 50%

Stock Option Plans—Plans under which stock options are granted to employees below the

executive level 21% 34% *

Patent Awards—Award given to an individual or group of employees involved in developing

an idea, product, or invention that received a patent * * 14%

*Broad-based stock option plans were significantly reduced in prevalence and as a result were removed from the survey starting in 2010

Source: Aon Survey—U.S. VCM 1996–2017.


Impact of Pay For Performance

Academic research studies tell us….

There is overwhelming evidence that incentives drive behavior and that the effect is substantial

Organizations placing more emphasis on pay for individual performance perform better on average

High individual performers are more likely to join and stay with organizations that more strongly pay for

individual performance


Design With Strategic Intent

Incentive Effect Sorting Effect

Bonus

Behaviors

Individual

Incentive

Results

Group


Strategic Impact By Plan Type

Plan Type

Incentive

Effect

Sorting

Effect Bonus Incentive Behaviors Results Individual Group

Business

Incentives

Cash Profit

Sharing

Individual

Performance

Gainsharing

Team Awards

= Primary impact


Evolution of Variable Pay

Break away from a one-size-fits-all approach to broad-based variable pay that includes a common set of

metrics and weights for all covered employees

– More plans that have a small common enterprise-wide measurement component and varying

measures and weights intended to better measure the performance of a business unit, function, or

department

Calibrated plans that are more tailored to the needs of the business will take the place of homogenous

plans

More “winners” and “losers” within the same organization based on different levels of achievement

Greater use of qualitative measures

Almost all broad-based variable pay plans will provide a way to increase or decrease bonus payouts

based on individual performance achievement


Insuring the Effectiveness of Variable Pay Plans


Employee

Organization

Shareholder

Variable Pay Value Proposition

Enhanced pay for

performance

Enhanced cost control—shift

from fixed to variable

expenses

Focus employees’ on desired

behaviors

Market competitiveness

Companies with lower fixed

costs (e.g., with variable

pay) are more attractive

investments

Employees aligned with

shareholder interests

Additional earnings

opportunity

Greater control over rewards

Clarification of expectations

Market competitiveness


Funding

Allocation

Award Form

Delimiters

Plan

Stretch Governance

Line of

Sight

Performance

Period

Objectives Measures

Anatomy of Variable Pay

Elig

ibility

Targ

ets

Plan

Documentation


Variable Compensation Management Pulse Survey

How satisfied is your company with how well the current short-term incentive plan(s) performed?

3%

40%

57%

0% 0%

20%

40%

60%

80%

ExtremelyDissatisified

MostlyDissatisified

Mostly Satisfied ExtremelySatisfied

Source: Aon Pulse Survey.



How did your company perform against its goals?

6%

12%

24%

35%

9%

15%

0%

20%

40%

> 50%Below Goal

25% BelowGoal

10% BelowGoal

At Goal 10% AboveGoal

> 10%Above Goal




What was your average award payout as a percent of payout target?

17%

6%

20%

26%

9%

23%

0%

20%

40%

> 50% BelowGoal

25% BelowGoal

10% BelowGoal

At Goal 10% AboveGoal

> 10% AboveGoal




How do you rate the relationship between the benefits of the plan and the costs?

6%

11%

49%

23%

11%

0% 20% 40% 60% 80%

Costs Outweight Benefits of Plan

Costs Somewhat Outweigh Benefits

Benefits are Equal to Costs

Benefits Somewhat Outweigh Costs

Benefits Outweigh Costs of Plan



High-Level Definitions of Design Elements M

easuring P

lan E

ffectiveness

Measures

Eligibility

Funding

Alignment

Line of Sight

Plan Mechanics

Targets

Participation

Requirements

Communication

Plan Administration

Identifies factors (financial, nonfinancial, and individual) to determine performance

Must be controllable and relevant to business

Considers eligibility for both exempt and nonexempt employees

Be as inclusive as possible

Means of funding and spend on variable pay as a percent of key financial parameters

Should be accrued, reflective of actual business results and sufficient

Analyzes ability of the individual to impact the performance measures

As much direct influence on outcomes as possible

Determines the degree of inclusiveness across all employee groups

Checks for common goals and clear linkages

Evaluates levers on which the plan operates

Reflective of pay philosophy and culture, balanced between realistic, and challenging

Assesses payout targets and degree of stretch built into target level of performance

Competitive with appropriate pay at risk given line of sight and role

Explores clauses associated with a variable pay plan

Clauses under which participation and payouts can be denied

Considers frequency, methods, and details of plan features that are communicated

Understandable and communicated goals, timing, and updates

Time required to evaluate performance, payouts, and frequency of review

Should include assessment of continuous improvement

Aon | Talent, Rewards, & Performance

Proprietary & Confidential | January 2016 33

Ineffective | 0-250

Partially Effective | 251-500

Effective | 501-750

Highly Effective | 750-1000

Inef

fect

ive

Zone

Partially

Effective Zone Effective Zone

Highly Effective Zone

Min

229.5

Max

775

Median

555

P25

455

P75

624

Lower Upper

0 1000

Average Database

Score

2015 to 2017 Overall Effectiveness Scores

Overall Effectiveness of VCM Database Plans

2015

532

2016

547

2017

496

525

34

Overall Effectiveness of the Plan by Component

Variable Pay Index™ Scorecard 2015 2016 2017 Maximum Score

Measures 69 76 69 150

Eligibility 59 68 55 100

Funding 51 53 44 100

Alignment 51 63 57 100

Line of Sight 49 45 38 100

Plan Mechanics 30 33 32 100

Targets 49 38 27 100

Participation Requirements 64 67 59 100

Communication 64 57 61 100

Plan Administration 45 47 46 50

Source: Aon Variable Pay Index™ (VPI™).


Funding

Allocation

Award Form

Delimiters

Plan

Stretch

Line of

Sight Performance

Period

Objectives Measures

Opportunities For Insuring Effectiveness

Elig

ibility

Targ

ets

Plan

Documentation

Yellow

Governance


Questions


For Further Information

Ken Abosch

Compensation Strategy, Development and Marketing Leader

Talent, Rewards & Performance

1.847.442.3580

[email protected]

mailto:[email protected]


About Aon

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solutions. We advise and design a wide range of solutions that enable our clients’ success. Our teams of

experts help clients navigate the risks and opportunities to optimize financial security; redefine health

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professionals located in 50 countries around the world.

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insuring the effectiveness of variable pay...aon u.s. 2017/2018 salary increase survey— variable...

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