Enabling, Engaging, & Rewarding Employees A Study of Most Admired Companies

Enabling, Engaging, & Rewarding Employees A Study of Most Admired Companies Tom McMullen Mexico City (April 6, 2011)

Fortune survey of World s Most Admired Companies What is it? Fortune has combined the America's Most Admired Company (AMAC) survey and the World's Most Admired Company (WMAC) survey to generate one global ranking Candidate companies: Fortune 1,000 companies; non-us Global 500 companies of $10 billion+ and top foreign companies operating in the US Companies rated both overall and relative their industry peers by executives, directors and analysts A total of 667 companies from 33 countries were surveyed Industry rankings generated for 55 industries 2

All stars for 2010 1 Apple 2 Google 3 Berkshire Hathaway 4 Johnson & Johnson 5 Amazon.com 6 Procter & Gamble 7 Toyota Motor 8 Goldman Sachs Group 9 Wal-Mart Stores 10 Coca-Cola 11 Microsoft 12 Southwest Airlines 13 FedEx 14 McDonald's 15 IBM 16 General Electric 17 3M 18 JP Morgan Chase 19 Walt Disney 20 Cisco Systems 3

The value of reputation WMACs outperform industry peers and the market as a whole Total shareholder returns WMAC S&P 500 One year 42.3% 26.5% Three year 0.1% (5.6)% Five year 5.5% 0.4% Ten year 4.0% (0.9)% 4

This year s research Our focus This year, our research focused on employee engagement issues Explore organization approaches to retain and motivate employees in a tough economic environment and how they can reengage and reenergize their workforces as they prepare for recovery-related growth 5

02 The business case for engaging and enabling employees

Engaging and enabling employees to drive performance Work environments have to turn motivation into productivity Strategic intent Engagement Employee effectiveness Business results Enablement 7

The business case for engaging and enabling employees Employee performance Employee retention Customer satisfaction Financial success Increase in employees above performance expectations Reduction in turnover rates Customer satisfaction rates Revenue growth High engagement only High engagement + high enablement 10% -40% 71% x2.5 50% -54% 89% x4.5 Based on linkage case studies using Hay Group s global normative database 8

03 Lessons Learned from WMACs

Lessons learned from WMACs Key themes Linking employee engagement to organizational objectives Employee engagement in a downturn Employee surveys and other approaches to measuring and monitoring employee engagement Ensuring line manager involvement in and attention to engagement initiatives ROI on engagement efforts Communicating employee engagement levels externally 10

Weaving employee engagement into organizational fabric Most Admired Peer group Our company has a specific definition of employee engagement 81 94 HR staff across our company have a good understanding of what employee engagement is 79 88 Our company has developed an explicit employer brand 67 88 0 20 40 60 80 100 % Favorable 11

WMACs were able to take less severe actions amid the downturn WMACs made less extensive use of Most Admired Peer group Hiring freezes 14 30 Compensation freezes 19 36 Layoffs 10 23 0 10 20 30 40 50 % Very great extent / great extent 12

WMACs are emerging from the recession with more engaged and enabled people Rate now as compared with two years ago... Most Admired Peer group Employees loyalty to the organization 49 69 Ease of recruiting talent to fill key positions 57 73 Frustration among employees over work conditions not conducive to their success 31 44 0 20 40 60 80 100 % Greatly improved / improved 13

Ongoing measurement and monitoring Most Admired Peer group How would you rate the effectiveness of your employee survey program in generating action and change? 69 87 How successful has your company been in linking employee engagement to customer satisfaction? 58 71 0 20 40 60 80 100 % Favorable 14

WMACs ensure line manager involvement Most Admired Peer group Line managers own engagement initiatives 76 86 Engagement levels fostered by line managers are a factor in performance evaluations 75 77 Employee engagement metrics are incorporated into variable pay programs 65 66 Employee engagement is incorporated into leadership or management development programs 82 90 0 20 40 60 80 100 % Favorable 15

WMACs are realizing a greater ROI on engagement efforts I believe our efforts to engage employee have: Most Admired Peer group Created a competitive advantage 82 94 Reduced complaints about pay fairness and equity 69 83 Reduced turnover 67 94 Reduced employee performance problems Strengthened customer relationships 72 72 85 84 0 20 40 60 80 100 % Strongly agree / agree 16

WMACs do more to communicate engagement levels to outside stakeholders How frequently do you share information on employee engagement levels with... Most Admired Peer group Investors 33 45 Prospective hires 56 65 Current/prospective customers 30 51 0 20 40 60 80 100 % Very frequently / frequently 17

04 Perspectives from Reward Professionals

Research objectives Survey of over 650 WorldatWork members to: Identify reward practices impacting employee engagement Identify what works and what can be improved in the reward space in engaging employees Identify reward and engagement attributes and activities that enhance organization performance 19

Reward professionals believe: Intangible rewards and leadership have more impact on engagement than base pay, benefits, and incentives Short term incentives are the tangible rewards that have the most impact on engagement Quality of work, work environment, career development, and senior leadership are the intangible rewards that have the most impact 20

Impact of financial rewards on engagement Base salary level 41% 44% 15% Base salary increase 42% 39% 20% Benefits and perquisites programs 48% 37% 14% Short-term incentives or bonus programs 54% 30% 16% Long-term incentives or bonus programs 32% 44% 24% Financial recognition programs 32% 50% 18% 0% 20% 40% 60% 80% 100% % High % Neither % Low 21

Impact of intangible rewards on engagement The nature of the job or quality of the work 69% 26% 5% Work environment or organizational climate 61% 28% 10% Career development opportunities 59% 29% 11% Work-life balance 55% 31% 14% Non-financial recognition programs 37% 47% 16% 0% 20% 40% 60% 80% 100% % High % Neither % Low 22

Impact of leadership on engagement Manager s assessment of employee performance 65% 25% 9% Coaching from managers or supervisors 55% 36% 9% Organizational objectives 53% 34% 13% Quality of senior leadership 49% 37% 14% 0% 20% 40% 60% 80% 100% % High % Neither % Low 23

Why people leave organizations From our employee opinion research database (4MM records), the factors that drive employees out of organizations include (in rank order) 1. Career development opportunities 2. Compensation 3. Work climate 4. Manager/supervisory conflict 5. Lack of challenging work 6. Direction of organization 7. Lack of recognition 24

Impact of employee and manager involvement in reward design on engagement Conventional thinking and the research suggests that participation in program design builds ownership and commitment. And in this study we found reward program involvement is linked to more positive views of effectiveness of reward strategies in engaging employees (r.35) However, we found very low levels of employee and manager involvement in reward program design, implementation, and evaluation. 25

Employee involvement in reward programs Design 4% 4% 16% 40% 40% Implementation 17% 42% 37% Evaluation 3% 18% 39% 40% 0% 20% 40% 60% 80% 100% % Always % Often % Seldom % Never 26

Manager involvement in reward programs Design 8% 29% 40% 23% Implementation 12% 31% 35% 22% Evaluation 6% 27% 37% 39% 0% 20% 40% 60% 80% 100% % Always % Often % Seldom % Never 27

Why is employee and management involvement so low?

05 Recommendations

Our top ten list Organizational Priorities 1. Make a business case for engaging employees 2. Measure and monitor engagement 3. Take action on survey results 4. Make everyone responsible for engagement 5. Connect people with the future Reward Priorities 6. Go beyond comp & benefits to a total rewards mindset 7. Include employees & managers in reward design and launch 8. Tailor total rewards to workforce segmentation 9. Use engagement metrics in performance criteria 10.Communicate the value of what you have 30

1. Make a business case for engaging employees Employee engagement should not be confused with employee satisfaction. Organizations that manage employee engagement most successfully clearly articulate how high levels of employee motivation support core priorities (e.g., enhancing productivity and innovation, fostering and sustaining strong customer relationships, and retaining top talent) 31

2. Measure and monitor engagement Employee opinion surveys are important tools for monitoring and managing employee engagement Surveys are two-way communication tools What is measured sends important signals to employees about values and priorities. Sharing results and a plan for action demonstrates respect for employee input 32

3. Take action on survey results The best companies make more frequent use of surveys than their peers and they use the input more effectively They indicate employee surveys are more effective in generating action and change They report doing more to link employee survey results to performance outcomes, such as customer satisfaction They say their best managers are more likely to take action 33

4. Make everyone responsible for employee engagement Engagement should be a priority for managers and employees at all levels Senior Leaders Share engagement index scores across functions Communicate expectations about engagement to management team Model engaging leadership behaviors Hold engagement conversations with top talent Incorporate engagement into performance evaluations People Managers Understand and align with functional leaders expectations Examine personal engagement Build skill in management behaviors that impact employee engagement Hold engagement conversations with top talent Human Resources Align employer branding to key engagement drivers Measure engagement levels and consult on key actions Coach and support people managers in engaging their teams Employees Discuss individual engagement factors with manager Participate in the employee survey and other feedback opportunities Provide feedback to managers about the effectiveness of engagement efforts 34

5. Connect people with the future Maintaining high levels of engagement requires connecting people with jobs and organizations and helping them to see a positive future for themselves and their organizations. Focus areas should include: Confidence in leadership Clear and promising direction Development opportunities 35

6. Go beyond compensation and benefits to a total reward mindset Help leaders and managers understand that rewards go far beyond compensation and benefits Build the core organization messages (employment value proposition) around what is meant by total rewards Develop tools for managers so they can effectively reward employees beyond the confines of compensation and benefits Develop and reinforce communications around total rewards 36

7. Include employees and managers in reward design and launch We do employee surveys every two years and make action plans based upon the survey results. One key finding is that we need to do a better job at communicating the total value of reward to our employees. Intangible reward Guaranteed cash Annual variable Heineken Benefits Long term incentives The real power is when you actually start talking with your employees. We design our reward programs, invest in new programs, and beef up current programs based upon the feedback we receive from our employees. McDonalds 37

8. Tailor total rewards to workforce segmentation Identify the most meaningful and valued rewards in the organization: Do reward values vary across the organization and work units? Recognize that different employees value different rewards: What do your boomers, generation X and Ys value? Build the manager s reward tool kit based on this understanding How can they use career development organization and job design non-financial recognition programs organizational work climate to reward employees? 38

9. Use engagement metrics in performance criteria The Most Admired Companies have more balance performance scorecards Balances timeframes, measurement level and measurement types MACs using human capital measures are double their peer groups Recognition that financial performance is driven by engagement Establish baseline measures so you can monitor trends Corporate Financial Short term Individual Non-financial Long term Human Capital Customer Social Responsibility Operational 39

10. Communicate the value of what you offer Best practices and sophisticated designs fail if they are not properly rolled out. Clarify and focus on a few direct messages and tools Use total reward statements Help line managers understand and use their tool kit to communicate reward value 40

What else is on your list? 41