Talent Management and Rewards Survey. U.S. Report

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1 Talent Management and Rewards Survey U.S. Report

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3 Talent Management and Rewards Survey U.S. Report Table of Contents Introduction Ensuring Workers Get What They Need, While Organizations Realize Stronger Outcomes 2 Advancement Opportunities 4 Merit Increases and Bonus Funding 4 Performance Management 5 Leadership Development 6 Succession Management 6 Sustainable Engagement 7 Promoting Sustainable Engagement: Actions Organizations Can Take 9 Conclusion Talent Management and Rewards Study U.S. Report 1

4 Introduction As the global economy has become more complex and exerted more pressure on organizations, employees have felt the added burden. Ensuring Workers Get What They Need, While Organizations Realize Stronger Outcomes The level of volatility in the U.S. and global economies, and changes in workforce demand and availability combined with the financial issues now confronting employers have created a new set of challenges for American companies. In the U.S., economic growth has slowed to about 1.5% annually; unemployment remains around 8%, and the rate of job growth (roughly 150,000 jobs per month for the last year and a half) is barely sufficient to absorb new job entrants. As such, many organizations have continued to focus on cost management and improving the productivity of the existing workforce without increasing fixed costs by bringing in more workers. These conditions, and the high ratio of unemployed and underemployed people to job openings, result in U.S. organizations having little difficulty attracting and retaining employees in general (Figure 1). For example, a recent study showed only one-third of recent graduates say they have a job that provides what they want: one that will lead to a career and is secure.* Only one in 10 U.S. employers reports difficulty attracting or retaining recent university graduates, a reflection of today s labor market conditions. When it comes to attracting employees with critical skills and other top talent, however, more than 60% of our 2012 Talent Management and Rewards Survey respondents report significant difficulty a similar percentage to 2005 and 2006, when U.S. economic growth was stronger and the unemployment rate was much lower. Factoring in growing global competition, the situation has created higher employer demand for the right talent, and has driven the stakes for attracting and engaging that critical-skill talent even higher. Moreover, related research has shown us that employees are experiencing high levels of stress at work. As the global economy has become more complex and exerted more pressure on organizations, employees have felt the added burden. In fact, according to the U.S. Department of Labor, the use of overtime for eligible employees increased significantly over the past few years as organizations extended employee hours to increase productivity. Figure 1. U.S. organizations are having difficulty attracting and retaining employees with critical skills Problems attracting Critical-skill employees 46% 58% 63% 64% 66% 28% 52% 59% 61% All employees 18% 22% 29% 34% 28% 8% 15% 13% 13% Problems retaining Critical-skill employees 30% 39% 43% 49% 47% 16% 31% 36% 40% All employees 17% 20% 20% 27% 19% 5% 11% 11% 11% *Chasing the American Dream: Recent College Graduates and the Great Recession, Stone, Charley, Carl van Horn and Cliff Zukin, John J. Heidrich Center for Workforce Development 2 towerswatson.com

5 So why are companies having difficulty attracting top talent? One reason may be the mismatch that often exists between what an organization offers and what employees are looking for (Figure 2). Employees from recent college graduates to top talent in high-potential programs are focused more now on security issues and the broader employment deal. Many employers, on the other hand, continue to emphasize nonmonetary rewards such as challenging work and the organization s mission, vision and values. A decline in employee job mobility between organizations and an increased desire for security make it easier for organizations to retain employees of all types. In addition, there is close alignment between the way employers and employees view retention drivers (Figure 3). Under these conditions, employer misperceptions about what attracts employees are a significant problem. With quit rates and voluntary turnover generally low, organizations that don t offer what employees want have a harder time attracting the high-potential and critical-skill employees they need to more effectively compete in the current business environment. Figure 2. U.S. employer and employee views differ on key drivers of attraction All employees High-potential employees Reasons Employer Employee Employer Employee to join Challenging work Health care and wellness benefits Organization s values Organization s reputation Organization s financial performance Job security Organization s reputation Convenient work location Learning and development Health care and wellness benefits Challenging work Ability to impact performance Organization s values Organization s financial performance Job autonomy Job security Challenging work Organization s reputation Learning and development Convenient work location Figure 3. U.S. employer and employee views are more aligned on key drivers of retention All employees High-potential employees Reasons Employer Employee Employer Employee to leave Relationship with manager Work-related stress Flexible work arrangements Learning and development Trust/ Confidence in senior leadership Trust/ Confidence in senior leadership Job security Work-related stress Convenient work location Relationship with manager Relationship with manager Work-related stress Learning and development Ability to impact performance Flexible work arrangements Trust/ Confidence in senior leadership Work-related stress Convenient work location Relationship with manager Long-term incentives Talent Management and Rewards Study U.S. Report 3

6 In this year s survey, employers say they continue to provide 3% pay increases and project the same for next year. As long as inflation remains under 2%, these levels represent real-wage increases for most employees. Advancement Opportunities Opportunities for career are of critical importance to attracting and retaining employees. During the recession of , most U.S. organizations laid off staff, restructured, and cut back on investments in training and career development programs. And many older employees delayed their retirement due to the decline in the value of their homes and retirement assets. As a result, career narrowed. In 2010, employers were somewhat more likely to say career had improved, while employees, overall, were neutral. In 2011, employers were quite positive nearly a third (31%) said career had improved, and only 9% said they had worsened while employees were more pessimistic about their. This year, however, both employees and employers are more likely to believe have improved (Figure 4). Merit Increases and Bonus Funding Base pay continues to be a top driver of attraction and retention for U.S. employees; in fact, employees tend to be willing to trade other rewards for larger salary increases. Nevertheless, in the relatively soft labor markets of the past few years, companies have contained median merit budget increases, keeping them below prerecession levels (Figure 5). In this year s survey, employers say they continue to provide 3% pay increases and project the same for next year. As long as inflation remains under 2%, these levels represent real-wage increases for most employees. To strengthen the relationship between pay and performance, as well as to take pressure off year-over-year increases in payroll, organizations supplement merit increases with short-term incentives. Bonus-pool funding usually tracks fairly closely with profit growth. In 2010, when corporate profits were strong, coming on the heels of a very difficult year, the average funding level was more than 115% of target. In the past two years, however, when profits grew at a much slower rate, average bonus-pool funding has dropped below 100% (Figure 6). Figure 4. U.S. employers continue to have a more positive view about changes in career than employees do Employer Employee Employer Employee Employer Employee Worsened 17% 18% 9% 22% 8% 13% Remained the same 59% 65% 60% 65% 62% 63% Improved 24% 17% 31% 13% 31% 24% Figure 5. U.S. merit budget increases have been reduced since 2007 Executive Management Exempt Nonexempt salaried % 3.5% 3.5% 3.5% 3.4% % 2.9% 2.8% 2.8% 2.8% % 2.8% 2.8% 2.7% 2.7% % 3.0% 3.0% 2.9% 2.8% % 3.0% 3.0% 3.0% 3.0% 2013 (projected) 3.0% 3.0% 3.0% 3.0% 3.0% Source: Towers Watson Data Services Figures reflect medians inclusive of zeros. Nonexempt hourly Figure 6. U.S. companies continue to fund bonuses below target levels % 100.7% 78.3% 82.3% 85.2% 115.5% 95.4% 92.9% 4 towerswatson.com

7 This practice has allowed companies to continue managing costs without making cuts to other programs or to head count. In five of the last six years and six of the last eight U.S. bonuspool funding has been below target levels. At the same time, organizations have been ratcheting up expectations and asking employees to do more with less. Continuing to do this can lead employees to devalue bonus plans relative to other programs. Performance Management Assessing their performance management process in a number of areas, U.S. organizations see themselves as significantly less effective overall than the global norm (Figure 7). The areas in which U.S. companies see themselves behind the curve include linking salary and bonus increases to individual results, differentiating pay based on performance, and integrating competencies and career development into the process. When we asked U.S. employers to rate the effectiveness of their managers in the performance management process, they gave lower ratings than other organizations surveyed. U.S. companies see their managers as significantly less effective at essentially all aspects of performance management (Figure 8). Only one-third (34%) of U.S. companies agree they measure the effectiveness of their performance management process. Those that do are more likely than other organizations to report that they measure differentiation in performance ratings and merit or bonus payouts, and they are also more likely to conduct an after-the-fact review of the correlation between performance ratings and pay decisions. However, this group is still less likely than other organizations to assess whether feedback and coaching occur throughout the performance cycle (Figure 9). Figure 7. U.S. organizations are rated less effective at performance management than the global norm Effectiveness of performance management process in the following areas Global U.S. Linking bonus payouts to individual performance results 65% 44% Linking salary increases to individual performance results 62% 51% Differentiating pay based on performance, even for employees who receive the same performance rating 44% 32% Incorporating competencies into the performance management process 42% 35% Incorporating career development into the performance management process 37% 25% Figure 8. Managers in U.S. organizations are rated less effective at performance management than the global norm Effectiveness of managers in performance management Global U.S. Fairly reflecting overall performance in the employee s final performance rating 54% 44% Differentiating performance between high and low performers 54% 40% Fairly reflecting performance in pay decisions 54% 39% Acting with authenticity and building trust 52% 49% Working with employees to set appropriate performance goals for individual performance 52% 37% Giving employees regular coaching and feedback on their performance 39% 24% Utilizing performance results to determine development plans 38% 22% Conducting career development discussions as part of the performance management process 33% 19% Explaining possible career or available career paths 27% 13% Figure 9. More U.S. companies could benefit from measuring performance management effectiveness Of those companies that do measure the effectiveness of their performance management process Global U.S. Managers complete annual reviews on time 63% 72% Employees complete the process on time 59% 54% Extent of differentiation in performance ratings (e.g., differentiation of merit or bonus payouts) 55% 80% Extent of differentiation in merit or bonus payouts 51% 63% After-the-fact review of correlation between performance ratings and pay decisions 44% 57% Assessment of whether feedback and coaching happen throughout the performance cycle 35% 27% Talent Management and Rewards Study U.S. Report 5

8 Succession management is vitally important in ensuring that employees with critical skills and other top talent are not only placed in the right roles but are being groomed for. With the implementation of performance management technology and strong measurement capabilities in place at most U.S. organizations, we might expect higher success ratings in the performance management process than reported. Many employees report that their managers or supervisors do not have enough time for the people aspects of their jobs, and managers are integral to executing performance management well. Building manager capabilities in this area and reinforcing the value of the performance management process are critical to increasing effectiveness. Leadership Development Consistent with our global results, a high percentage of U.S. companies believe their leadership development programs support the desired culture of the organization (95% of U.S. respondents, 84% of global respondents). In the U.S., leadership development programs offer blended learning solutions. Organizations are moving away from university executive education programs and relying much more on assessment, coaching and experiential learning as key program elements (Figure 10). Additionally, 62% of U.S. respondents report that HR has primary responsibility for the delivery of leadership development programs. Succession Management Succession management is vitally important in ensuring that employees with critical skills and other top talent are not only placed in the right roles but are being groomed for. Most respondents report that the fundamentals of succession management are in place in their organizations. Specifically, three-quarters (76%) have implemented a process for identifying high-potential employees, and 84% are holding formal discussions about talent at the top levels of the organization. More than half (52%) of respondents have aligned development plans for their succession candidates with the knowledge, skills and abilities of their competency models. However, for the nearly four in 10 that have not implemented scaled competency models as part of succession management, further progress on the fundamentals should be a shortterm goal. Beyond the fundamentals, six in 10 U.S. organizations (61%) have expanded the depth of their succession planning by including pivotal or critical roles below top leadership levels. In addition, four in 10 U.S. companies (41%) also hold formal discussions about talent at all levels of the organization. However, room for improvement remains, as only 38% of respondents use talent pooling for key roles below the top executive team. Figure 10. Assessment, coaching and experiential learning are key program elements in U.S. organizations Which of the following activities or programs are included in the leadership development programs at your organization? 360-degree evaluation 84% Assessment using formal instruments 71% External coaching 71% Action learning (a learning process for individuals or teams working on real business problems learning by doing) 70% Internal coaching 70% Project assignments 68% Mentoring 64% Leaders teaching leaders 61% Simulations (learning tools that replicate real business situations, enabling companies to develop leadership, decision-making and other 48% capabilities in a risk-free environment) University executive education 47% Rotational assignments 35% Percentage of respondents More than half (56%) of respondents report that they look outside their own organization in order to identify and consider talent, and a similar number (52%) use succession management to promote cross-business and cross-functional talent sharing. Yet further progress can be made if companies reward leaders for exporting talent across the organization only one in 10 organizations (11%) do this today. In addition, as only about a quarter of respondents have instituted a formalized assignment management process, companies need to ensure that their succession candidates get job experience that builds their capabilities for high-level roles. 6 towerswatson.com

9 Six in 10 respondents continue to report that they still do not communicate succession status to individuals identified as successors. Nearly threequarters of companies promote employees who were not identified as potential successors. Despite the fact that nearly half of respondents (47%) have made progress in aligning succession management with other talent programs, it is disconcerting to find that when replacement decisions must be made, many companies are not using their own succession and talent review processes, but rather are working outside established succession processes. Sustainable Engagement A key element for employers seeking to improve results is building employees sustainable engagement levels. Sustainable engagement includes the following three aspects: Traditional engagement. The extent of employees discretionary effort committed to achieving work goals Enablement. An environment that supports productivity in multiple ways, e.g., having the tools and resources needed to perform productively Energy. Work experience that promotes well-being so employees feel energized Employees who are engaged, enabled and energized i.e., highly engaged are more productive, have fewer unscheduled absences and are lower retention risks. Our survey findings show that organizations with highly engaged employees tend to be more profitable as well. Companies can improve their return on reward and talent management programs by focusing on the top drivers of sustainable engagement. For more information on our Sustainable Engagement Model, see the Towers Watson 2012 Global Workforce Study (GWS) report, Engagement at Risk: Driving Strong Performance in a Volatile Global Economy. The top drivers of sustainable engagement among U.S. workers are: Leadership Stress, balance and workload Goals and objectives Supervision Organization s image Companies can improve their return on reward and talent management programs by focusing on the top drivers of sustainable engagement Talent Management and Rewards Study U.S. Report 7

10 In Figure 11, we outline the current assessment by U.S. employers and employees of U.S. company performance on each of the five top drivers of sustainable engagement. In the following section, we offer a series of recommendations to address the issues that have emerged from our Talent Management and Rewards Study, and GWS, related to each of the key drivers. Figure 11. U.S. employers performance on drivers of sustainable engagement Driver Employer view Employee view Leadership 64% of organizations have leadership development programs targeted to high-potential employees. 65% of all respondents have formal leadership development programs. 86% of these organizations say their leadership development programs support their long-term business strategy and goals. Only three out of 10 U.S. employees in middle management or above agree their organization does a good job explaining how they can advance in their career. Only 38% of these employees believe senior leaders are doing a good job developing future leaders. Stress, balance and workload Goals and objectives Supervision Image Organizations are placing greater stress on employees: 71% of organizations say employees have been working more hours over the past three years. 63% expect that employees will continue to work more hours over the next three years. 61% of organizations say that employees at their organization often experience excessive pressure on the job. Organizations think their performance management process is moderately effective: 55% rate it as effective in communicating performance expectations to employees. 43% believe it has helped create a high-performance work culture. Half (53%) of organizations are effectively communicating how employee actions affect customers. Fewer than half of organizations think their managers are effective at: Differentiating performance between high and low performers (40%) Holding helpful career discussions (19%) Fairly reflecting performance in pay decisions (39%) Building an effective employee value proposition (EVP) is a key to promoting the company s image. Most organizations are struggling to: Align their EVP with their brand in the marketplace (34% are effective) Do a good job delivering on their EVP (26%) Differentiate their EVP from others (21%) 51% of employees say they have been working more hours over the past three years. 46% expect to work more hours over the next three years. 30% often feel excessive pressure on the job. 68% of employees have a good understanding of the organization s business goals. 72% understand how their job contributes to the organization achieving its business goals. Fewer than half of employees think their managers are effective at: Differentiating performance between high and low performers (49%) Holding career development discussions in the past year that furthered employee development (45%) Making fair decisions about how employee performance links to pay decisions (49%) Align their EVP with their brand in the marketplace (38% are effective) Do a good job delivering on their EVP (37%) 8 towerswatson.com

11 Promoting Sustainable Engagement: Actions Organizations Can Take The good news is that organizations can take actions to improve sustainable engagement that don t require large hard-dollar investments. Below, we offer a set of recommendations that can be implemented to help drive higher levels of sustainable engagement. Some focus on plan design changes, but many rely on better execution of existing programs within the total rewards portfolio. 1. Take action for better leadership. Although organizations believe they are doing a good job of developing future leaders, employees in mid-career positions have a significantly less favorable view of their organization s leadership development programs and. Update your leadership competency model to ensure it is aligned to your business strategy, while focusing leaders on the right behaviors. Segment your population, and ensure that you target high potentials for leadership development programs. In your talent review and succession planning processes, identify high potentials, and create and monitor specific development plans to build leadership capabilities for the future. 2. Deal with employee stress, workload and work/ life balance. Organizations have raised the bar on both hours worked and performance expectations at the same time the work environment has eroded, causing employees to feel excessive pressure at work. Pay attention to the stress levels of your employees. Top performers and critical-skill employees are hard to find and difficult to replace. When employees are under excessive stress, try to rebalance workloads or extend timelines for deliverables when possible. Leaders and managers need to prioritize those things that must get done and eliminate those things with little value added. Reexamine work processes to determine if there are ways to streamline steps and reduce handoffs. 3. Clarify goals and objectives. Employees need to have a clear understanding of the organization s goals and how their job affects overall performance. Align your performance management programs to organizational goals and objectives. Provide frequent communication on how well the organization is achieving its goals. Help employees understand how their contributions affect the achievement of organizational goals, customer satisfaction and retention levels, and how organizational success in these areas will benefit them. Organizations have raised the bar on both hours worked and performance expectations at the same time the work environment has eroded, causing employees to feel excessive pressure at work Talent Management and Rewards Study U.S. Report 9

12 Organizations have an excellent opportunity to differentiate themselves in the areas of design, delivery and execution of total rewards programs. 4. Improve management and supervision. Survey respondents are particularly critical of their managers and supervisors in areas related to effectively evaluating and rewarding performance, and explaining career to employees. Create clear criteria for different levels of performance, and have supervisors communicate this to employees during the annual performance management cycle. Make these criteria easy to find and accessible by all employees on company intranet sites. Conduct performance calibration sessions to ensure that performance ratings are as consistent as possible across the organization. Review pay decisions before they are final to ensure they reflect the company s payfor-performance philosophy and that high performers are rewarded appropriately. Teach leaders and managers how to hold effective career discussions, and reward those that do. Conclusion Emphasize that developing employees is a critical role for managers, along with meeting financial goals: Hold them accountable for development. 5. Enhance the organization s image. The EVP and corporate brand often play a dominant role in shaping employees perception of their company s image. Build and clearly articulate an EVP that is linked to your customer brand and what the company stands for. Ensure your EVP is considered in the design and execution of talent and reward programs. Integrate your EVP into all phases of the talent life cycle, from recruiting and selection, through to development and rewards. Educate employees on the EVP and its relevance to them using different communication tools such as social networking, web tools, print and face-to-face meetings. An Employment Deal That Works for Employees and Employers Alike As U.S. employers remain focused on cost management and improving productivity, and continue to seek profitable growth in a period of economic volatility, they need to craft an EVP aligned with what top talent and critical-skill workers are looking for. Differentiating the EVP for important workforce segments, aligning total rewards programs accordingly and driving higher levels of sustainable engagement can yield returns to organizations in terms of better attraction and retention outcomes, more focused and productive employees, and higher levels of financial performance. Organizations have an excellent opportunity to differentiate themselves in the areas of design, delivery and execution of total rewards programs. Organizations willing to drive design, delivery and differentiation of their EVP forward can create a successful future for both the organization and its employees. 10 towerswatson.com

13 About the Study The Talent Management and Rewards Study was fielded between the end of April and the first week of June In total, 1,605 respondents participated in the survey, including 278 in the U.S. As in the GWS, these responses were weighted to reflect the economic impact of each country based on the size of its gross domestic product. In order to be included in the survey sample, organizations had to meet a size threshold based on the number of employees or be part of a global organization. Two-thirds of the responses came from multinational organizations, and the remaining onethird were from domestic organizations. The average size was approximately 19,000 employees; median size was almost 4,000 employees. U.S. employers were somewhat larger, with an average of almost 24,000 employees and a median size of 7,700 employees. The survey responses came from a broad cross section of industries, with the largest number of responses concentrated in the manufacturing sector, followed by financial services, health care, and IT and telecom. Organization type Percentage Domestic 44% International 20% Global 36% Number of employees Percentage Greater than 10,000 39% Between 5,000 and 9,999 26% Between 2,000 and 4,999 21% Fewer than 2,000 15% Industry sector Percentage Energy and Utilities 7% Financial Services 17% General Services 8% Health Care 14% IT and Telecom 10% Manufacturing 30% Public Sector and Education 5% Wholesale and Retail 9% About the 2012 GWS The 2012 Towers Watson GWS, the latest in a decade-long series of global employee studies, was fielded in 29 markets around the world. It elicited responses from more than 32,000 full-time workers globally, including 3,606 responses in the U.S., across a range of industries and functions. About WorldatWork The Total Rewards Association WorldatWork (worldatwork.org) is a global HR association focused on compensation, benefits, work/life and integrated total rewards to attract, motivate and retain a talented workforce. Founded in 1955, WorldatWork provides a network of nearly 30,000 members in more than 100 countries with training, certification, research, conferences and community. It has offices in Scottsdale, Arizona, and Washington, D.C Talent Management and Rewards Study U.S. Report 11

14 About Towers Watson Towers Watson is a leading global professional services company that helps organizations improve performance through effective people, risk and financial management. With 14,000 associates around the world, we offer solutions in the areas of employee benefits, talent management, rewards, and risk and capital management. Copyright 2012 Towers Watson. All rights reserved. TW-NA towerswatson.com