Rewarding Key Talent

REWARD STRATEGY AND PRACTICE Rewarding Key Talent Tom McMullen and Mel Stark * While competition for key talent increases, Hay Group employee opinion norms indicate that 20% of employees plan to seek a new job in the next two years and another 20% plan to leave their organizations within the next five years. In order to help chart a path forward for retaining key employees, Hay Group shares critical benchmarking practices including: definition of key talent in use by organizations and how this talent is assessed and managed; reward strategies and reward programs in place for key talent; and how program effectiveness is measured. Economic recovery in the U.S. has been sluggish the past several years and competition for talent has become intense with many predicting that talent shortages will increase well into the next decade. Talent shortages are the result of several factors baby boomers retiring, slower population growth, increasing specialization and technical demands of jobs and increased global competition for talent. Retention of key talent those employees who are the strongest performers, have the highest potential, are in critical jobs or in roles where there are acute shortages of talent is even more important during economic recoveries when organizations compete even more aggressively for market share and labor. Key talent disproportionally contributes to current and future organization performance since these individuals most often become its organization leaders. While competition for key talent increases, Hay Group employee opinion norms indicate that 20% of employees plan to seek a new job in the next two years and another 20% plan to leave their organizations within the next ve years. These trends suggest a certain degree of unrest, if not signi cant discontent, in the workforce, which is not surprising since employ- * TOM MCMULLEN (tom.mcmullen@haygroup.com) is the North American rewards practice leader for Hay Group, and is based in Chicago. He has more than 25 years of combined HR practitioner and compensation consulting experience. His work focuses primarily on total rewards and performance-program design, including reward-strategy development and incentive-plan design. Prior to joining Hay Group, McMullen worked for Humana Inc. and Kentucky Fried Chicken Corp. in senior compensation analyst roles. He holds a bachelor's and master of business administration degrees from the University of Louisville. He is coauthor of the book The Manager's Guide Rewards. MEL STARK (mel.stark@haygroup.com) is vice president and regional reward practice leader in the New York metropolitan office of Hay Group. In his practice role and personal consulting, he is focused on adding clarity to clients' operations through cultural diagnostics, job analysis, work measurement, accountability mapping and organizational design. He holds a bachelor's degree from The American University in Washington, D.C., and a master's degree in business administration from Bernard M. Baruch College, as well as an advanced professional certificate in organizational behavior and development from New York University's Graduate School of Business Administration. He is co-author of the book The Manager's Guide Rewards. 31

Journal of Compensation and Bene ts ees are working harder as a result of organization downsizing over the past several years. In addition, base salary increases and incentive awards have been leaner in recent years relative to the past decade. These data may also highlight that the contract between the organization and its talent may also be changing with the connection between the two more tenuous than ever before. Advances in information sharing via social networking platforms also make it more challenging to retain talent as awareness and access to other opportunities has been heightened. Sites like LinkedIn.com, Glassdoor.com, salary.com, vault.com and facebook.com openly promote the capabilities and achievements of key talent as well as the organizations who aspire to employ them. It is clear that one of the foremost challenges for management today is how to retain, engage and reward its key talent. Reward leaders will be under increased pressure to ensure that reward systems are aligned with business and talent management priorities and that adequate strategies and programs are executed e ectively so as to not rely on reactive counter-o ers, special deals and exceptions to ensure that top talent is retained. Given the unique perspective that reward professionals hold and their vantage point on the role that rewards play in attracting, engaging and retaining key talent, we recently conducted two surveys to learn more about the reward strategies and management processes organizations are using to engage and retain key talent and how e ectively these strategies are working. One study, in partnership with Worldat- Work and Loyola University of Chicago, focused on general industry practices and another commissioned by a Fortune Global 300 organization focused on the practices of large multi-national organizations. In particular, we benchmarked the following practices in organizations: E De nition of key talent in use by organizations and how this talent is assessed and managed E Reward strategies and reward programs in place for key talent E How program e ectiveness is measured We had over 600 organizations participate in the two research studies. Respondents were typically senior corporate reward executives and we collected the information via structured questionnaires and telephone interviews. The research was conducted between December 2011 and February 2012. DEFINING AND IDENTIFYING KEY TALENT Our discussions with senior HR executives indicate that retention of key talent is one of their top challenges and that they worry about having the right talent necessary to successfully compete in the marketplace. Executives fear that their key talent is becoming increasingly frustrated in their organizations due to a variety of reasons noted above. Our survey research con rms this in Figure 1, with a signi cant percentage (68%) reinforcing the message that retention is a dominant organizational concern during the recovery and a majority of organizations expecting that a substantial number (54%) of their key employees will search for a better job as the economy improves. 32

Reward Strategy and Practice Figure 1: The Challenge of Retaining Key Talent The primary objective of key talent development programs for most organizations is to ensure that they have a pool of future leaders within the organization and an adequate bench of incumbents with core skills that are in short supply. While some organizations restrict the de nition of key talent to the executive talent pool, in Figure 2 below we nd the majority of organizations (75%) de ne key talent to include roles below the executive level, often including the entire group of professional and managerial jobs in the organization. In order to e ectively retain key talent, you rst need to know who this talent is. To this point, Figure 2 also shows that a majority of organizations say they have a clear de nition of key talent and most organizations have identi ed who those individuals are. Moreover, a majority of organizations say that their de nition of key talent includes employees who are top performers, have high potential and/or are in critical jobs requiring unique skill sets. As you might suspect, the de nition of any of these terms can vary quite a bit across organizations, but we often see organizations being selective relative to the pool of employees they designate as part of their key talent group, which often is in the range of 10%-20% of all employees. 33

Journal of Compensation and Bene ts Figure 2: Identifying Key Talent We also found in our interviews with participating organizations that a majority of them do not openly or broadly communicate who is in the designated key talent group. While senior managers are usually aware of the composition of the key talent group, by design, the broader employee and management base are typically not told. However, participating employees may be aware that they are participating in a special program via informal communication with their managers and performance assessment feedback. In our research, we found that in most organizations the talent management strategy, applications, tools and processes are typically designed by the corporate talent management function and are executed by business unit management. Most organizations report formal assessments of key talent using structured processes often assessments of competencies, skills, potential and performance. Decisions about who becomes top talent within organizations are often a collaborative e ort with line managers, functional managers and HR with functional managers typically having primary input. The assessment process is usually annual, with talent assessments recon rmed as part of the key talent assessment cycle thereafter. Organizations also recognize the value of collaboration between line management, functional management and HR and often include 34 a cross organization calibration process to help ensure the consistency of values and assessments. WHY KEY TALENT LEAVES Figure 3 below shows the reasons why reward leaders believe that key talent leaves their organizations. The percentages represent the respondents who agree or strongly agree for the stated reason. As seen, cash compensation plays a major role with the following criteria all factoring in as significant reasons why key talent leaves organizations: E Opportunity to earn more pay elsewhere (77%) E Pay levels perceived as

unfair vs. outside organization (58%) E Pay levels perceived as unfair relative to employee contribution (53%) However, a number of other non- nancial reward criteria and employee enablement criteria also are causal factors in why key talent leave their organizations, including the following: Reward Strategy and Practice E Lack of promotional opportunity (67%) E Dissatisfaction with job or work responsibilities (56%) E Workloads are too heavy (52%) E Work-life balance issues (50%) Knowing which factors cause key talent to quit and which are less in uential provides important insights for crafting e ective retention strategies. Obviously, a balance of nancial and non- nancial reward vehicles are necessary to safeguard key talent within the organization. Figure 3: Why Key Talent Leaves Their Organization KEY TALENT RETENTION PROCESSES First, having processes to identify key talent is the most prevalent (85% of organizations) practice in retaining key employees as seen in Figure 4. In addition, 75% of respondents indicate that their respective process is seen as e ective or very e ective. The other processes reported most often used to retain key employees include: E Ongoing discussions with key talent about their futures with the organization (80%), 35 E Paying key talent above the labor market (75%), E Creating a succession plan to replace individuals critical to success (74%), and E Developing employees as candidates to replace key employees who may leave (73%)

Journal of Compensation and Bene ts All of these programs were also perceived to be e ective or very e ective in a majority of organizations (over 60% of organizations). While not as prevalent as other processes (at 65% of organizations), providing meaningful and enriching job designs for key talent is viewed as an e ective or very e ective process by 74% of organizations. In our follow up interviews with research participants, a majority of organizations have succession/assignment planning processes in place for key talent and a variety of internal development programs are often available speci cally for key talent such as special assignments, business simulations and leadership development programs. Note: while some organizations focus speci cally on executive leadership, others focus on building up high potentials early in their careers. It was somewhat surprising that internal and external coaching programs are not widely available in most organizations interviewed and if they are, it is typically on a very limited or selective basis. On the other hand, special projects are a large part of accelerating key talent development. Organizations also report providing more frequent access to senior executives within the company. Where available, these key talent development programs are fairly consistent across the organization. Figure 4: Methods Used to Retain Key Talent In our interviews with survey participants, we found that most organizations did not have substantial di erences in the overarching reward strategy for key talent vs. other employee groups, although in practice, most organizations expressed the stated intent that top talent should be earning more than others at comparable job levels; another instance where practice trumps policy. A number of organizations reported that they target 75 th percentile total 36

cash for top talent vs. 50 th -60 th percentile cash for other employees and most stated that they regularly assess pay differentials between the two groups. When there is a need to provide additional treatment for the key talent group, two mechanisms were reported as most often utilized in providing differentiation in compensation for key talent: E O -cycle/mid year base salary adjustments to provide accelerated increases. Most organizations report assessing this on a yearly basis as opposed to a career income or multi-year income basis. E Additional restricted stock grants, or cash bonus payments in lieu of stock. These are typically provided in addition to the provisions of the core STI/ LTI programs in place and are intended as a way to deliver additional compensation to key talent for their impact on the business. PROGRAM EFFECTIVENESS As we see in Figure 4, senior reward leaders de nitely have opinions as to the e ectiveness of di erent methods for retaining and developing key talent, Reward Strategy and Practice but a majority of organizations (53%) say they either do not formally evaluate the e ectiveness of these programs or they rely only on informal feedback from employees and managers. Of the remaining 47% of companies who formally measure the e ectiveness of their efforts, the primary ways that they do this are either via review of employee opinion surveys and/or review of employee turnover data. A smaller percentage of organizations conduct more extensive ROI analyses, although a number of organizations that we interviewed reported the likelihood of doing this in the future. The organizations that we interviewed indicated several common themes in terms of key performance indicators that they are using to assess the effectiveness of their key talent programs. These include: E Velocity / speed of key talent moving through the pipeline E The number or percentage of key talent who have been promoted E Growing the number and percentage of key talent throughout the organization E The retention rate of top talent 37 E Leadership program participation and success rates It's worth noting that few organizations mentioned top line/bottom line business or nancial measures as key measures of the e ectiveness of their key talent program. Several top reward executives interviewed indicated that their key talent programs are accepted at face value and viewed as e ective by their organizations, which mitigates their need to conduct more extensive ROI analyses. Most interviewed organizations mentioned that sponsorship or endorsement by the CEO and C-Suite is essential for program success. The availability of senior leaders, consisting of active participation, monitoring and managing the individuals in the key talent program as well as their engagement in providing direction and input to the program was often mentioned as key criteria impacting overall program success. Other themes impacting key talent program e ectiveness mentioned by those interviewed include: E Utilization of common and transparent talent management frameworks and processes within in the organization E Ensuring that the criteria

included in the key talent management program are aligned with the values and culture of the organization E A culture of sharing talent across borders and breaking down barriers such as the notion that the business units own the talent that work in those units. E More transparency and better communications about the program. E Minimizing expedient ( going for the available body ) moves to ll an open slot and reserving truly critical roles for key talent. CONCLUSIONS AND RECOMMENDATIONS Going forward, we see several key areas of focus that would bene t organizations in terms of improving their key talent management programs and how they reward their key talent. First, organizations need to develop clarity around what de nes top talent and particularly develop clarity around their de nition of high potential within the organization speci cally potential for what? Is it the potential for achievement relative to their current roles, future roles, general leadership competency pro les, etc. Organizations also need to de ne Journal of Compensation and Bene ts and clarify their communications strategy for key talent program management. A key question to consider is how to communicate the nature of participation in the program which would surely be seen as a reward while not raising expectations for additional rewards or de nitive, ongoing membership in the key talent program. As a part of this, the bene ts and risks of communication to the participants needs to be understood and considered. The messages, messengers and mediums of communications as well as the roles of corporate leadership, HR, business units, function leaders, line managers and the employee in key talent management processes should all be reviewed and clari ed. Providing transparency in key talent reviews and ensuring a substantive role of functional management should serve to minimize the sense of talent ownership within business units as well as improve assessment calibration processes. In terms of reward program management for key talent, organizations would be well served to clarify their reward strategy, principles, design and related reward communications for this group. In addition, the intended degree of di erentiation in rewards vs. other employee groups should be understood. The level of reward di erentiation for the key talent 38 group would include the following: E Di erentials across all cash compensation elements E Di erentials in treatment across non- nancial reward programs (e.g., development opportunities, training programs, coaching opportunities, access to executives, special projects) E Assessment of reward differentials on both a current year and multi-year basis and tracking career income (e.g., income over 5 years, 10 years). If not doing so already, organizations might consider some structured exibility in their base salary increase programs and restricted stock grant programs to provide for additional wealth creation opportunities when there are gaps between intent and current compensation practices for key talent. O -cycle increases and special programs for key talent can go a long way in reinforcing the value and importance of these resources to the organization. Assuming a relatively small population (e.g., 10-20% of employees) these key talent compensation programs should not cause a major bottom line impact in the organization's cost structure while helping safe-

guard against a premature exit of these most valued human capital assets. Reward Strategy and Practice We've all had the experience of having key sta leave the organization resulting in lost productivity, added search expense and, the likelihood that we wind up paying more for a newly recruited person while also waiting for them to get up to speed. It would serve organizations well literally paying for itself to be more conscientious about their processes for identifying key talent and ensuring the rewards o ered are commensurate with their performance and their promise for your organization. If you don't, it is likely that others will! 39