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Optimizing Total Rewards: Controlling Costs and Maximizing Business Value Mark Englizian – Microsoft Allen Slade – Microsoft Tom Davenport – Towers Perrin.

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Presentation on theme: "Optimizing Total Rewards: Controlling Costs and Maximizing Business Value Mark Englizian – Microsoft Allen Slade – Microsoft Tom Davenport – Towers Perrin."— Presentation transcript:

1 Optimizing Total Rewards: Controlling Costs and Maximizing Business Value Mark Englizian – Microsoft Allen Slade – Microsoft Tom Davenport – Towers Perrin TM n May 14, 2002

2 1 Workshop objectives Explain Total Rewards Optimization What it is How it works Discuss how Microsoft used the approach successfully Answer your questions about optimizing your investment in employee engagement and retention

3 2 Workshop agenda Why should you be concerned about optimizing rewards? Microsofts people issues TRO overview and approach Microsoft case study TRO modeling Q&A

4 Why should you be concerned about optimizing rewards?

5 4 Q: Who agreed most strongly with this statement: People are our most important investment? Human resource executives Line management executives Strategic planning executives Financial executives Ex-spouses of CEOs Who agreed least strongly? Source: Towers Perrin People Strategy Benchmark Awareness and Attitude Study 4 4

6 5 Its time for a new metaphor Highest Cost What does the employee cost the organizatio n? Greatest Asset What is the employee worth to the organizatio n? Most Important Investor What is the organizatio n worth to the employee? Our employees are our... Prehistoric

7 6 What the organization delivers Base salary Variable pay Recognition Stock Pay Health care Retirement Savings Time off Benefits Total Rewards Career development Performance management Learning management Learning & DevelopmentWork Environment Leadership Work/life balance Trust and respect Organizational climate Line of sight/Involvement

8 7 Percent Saying A Lot of Personal Satisfaction Q: What gives people the most personal satisfaction? Getting promoted faster than expected40%50%60%70% 40% Source: Roper Starch Getting a bigger-than- average raise 40%50%60%70% Receiving a compliment/ memo from your boss 40%50%60%70% Knowing that you had a really productive day 40%50%60%70% 63% 53% 48%

9 8 The High TSR Talent Management Differentiators 0 or negative TSR 10%+ TSR 27% Reputation in the job market Competitive retirement benefits Incentive pay tied to performance Rewarding top performers Selecting skilled employees Providing recognition for talented employees Developing leaders Allowing employees to have their job their way NOTE: Company groupings based on five-year Total Shareholder Return (TSR). % of Employees Rating Their Company as Good or Excellent. Source: Towers Perrin Talent Management Study

10 9 Questions for participants What major reward issues are you facing? Are you more concerned about reward effectiveness (that is, employee behavior) or reward cost?

11 10 Concepts relevant to the rest of our discussion The deal Reciprocity Retention and engagement Total rewards Optimization

12 Microsofts People Issues

13 12 What were we thinking in Fall 2000? Historically, Microsoft had a winning rewards formula Stock that produced wealth under the right market conditions Conservative base salaries Small variable pay opportunity Generous benefits Engaging but challenging work environment The effectiveness of this rewards formula decreased as share price declined and competitors became more aggressive with cash compensation

14 13 What were we thinking in Fall 2000? (contd) Responses to attraction and retention challenges had limited success MS Poll suggested dissatisfaction with cash compensation Despite much data on employee attitudes, surveys not designed to identify the rewards that encourage people to join or stay The organization wanted to avoid the silver bullet approach to dealing with unwanted turnover

15 14 What were we thinking in Fall 2000? (contd) Therefore, total rewards response had to be Comprehensive, covering all reward quadrants Effective against competitors Reflective of the organizations status as an attractive albeit maturing company Clear link of rewards with contribution Flexible in accommodating individual needs but also administratively practical Effective in ensuring that the organization invests its reward dollars where they produce the greatest benefit (employee commitment and engagement)

16 HR mission: Create an environment where the industrys most talented people can do their best work Employee engagement Career development Mentoring Part-time/leave policy changes Rewards optimization Management matters Cultural attributes Management development road map Manager portal

17 16 Questions for participants Do any of these challenges sound familiar? What forms do they take in your organizations?

18 Total Rewards Optimization (TRO) Overview and Approach

19 18 Suppose you knew all this...

20 19...and could determine this

21 20 What is the optimum allocation of that investment to maximize retention? What is the optimum level of investment in employees? $ Investment in Employees Base pay Bonus Health care Retirement plan Learning and development Retiree medical Work flexibility Thrift plan Paid time off Towers Perrins Total Rewards Optimization (TRO) enables organizations to invest in rewards that maximize ROI

22 21 Reflects cost constraints on investment Develops an efficient frontier of optimum allocation of investments in retention Determines an optimum investment level on the basis of program costs and turnover cost savings Optimum solution may be to Increase retention by changing allocation while maintaining the current level of investment Maintain current level of retention at lower level of investment by changing allocation Increase investment and retention to economically efficient level (marginal investment equals marginal turnover savings) + Conjoint Analysis Portfolio Optimization Optimum Level of Investment Optimum Allocation of Investment = Is a surveying method used for many years in marketing to capture subjective preferences Asks employees to make trade-offs among program features as opposed to assessing the features individually Is a more reliable forecast of behavior than traditional survey methods Our approach to TRO consists of two primary activities

23 22 Determining utilities Marginal Utilities of Reward Levels Current +5%+15% Levels of Reward Elements 3 Work Flexibility Manager Performance Nature of Job Bonus Training Stock Options Base Pay Sabbatical Tuition Reimbursement Career Path 401(k) Health Care

24 23 Determining utilities (contd) Marginal Utilities of Reward Levels Levels of Reward Elements 3 Work Flexibility Manager Performance Nature of Job Bonus Training Stock Options Base Pay Sabbatical Tuition Reimbursement Career Path 401(k) Health Care 3

25 24 Comparing utilities Relative Importance of Reward Elements 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% Work Flexibility Manager Performance Nature of Job Bonus Training Stock Options Base Pay Sabbatical Tuition Reimb. Career Path 401(k) Health Care for Base & Comparison Groups

26 25 0$100,000200,000300,000400,000500,000$600,000 Identifying optimal reward portfolios Change in Cost ($000) 2-Year Retention (%) 67% 70% 73% 76% 79% 82% 85% 64% 88% 91% 94% Current level of investment and retention (100,000)

27 26 Determining financial outcomes Work Flexibility Work at home up to 20% of time with supervisor approval Manager Performance Manager provides more autonomy, informal learning opportunities and business unit strategy information Nature of Job More opportunities for strategic projects and more engaging assignments Bonus No change to current performance bonus opportunity Training At least 40 hours of training annually per employee Work Flexibility Work at home up to 20% of time with supervisor approval Manager Performance Manager provides more autonomy, informal learning opportunities and business unit strategy information Nature of Job More opportunities for strategic projects and more engaging assignments Bonus No change to current performance bonus opportunity Training At least 40 hours of training annually per employee Stock Options No change Base Pay No change Sabbatical Eight weeks paid after four years Tuition Reimbursement No change Career Path Formal career map; extensive internal job markets 401(k) No change Health Care No change Stock Options No change Base Pay No change Sabbatical Eight weeks paid after four years Tuition Reimbursement No change Career Path Formal career map; extensive internal job markets 401(k) No change Health Care No change

28 27 Determining financial outcomes (contd) $0$22, %87.5% 15.6%6.2% -9.4% -$76,963 ($54,113) 237% Annual turnover rate Change in turnover rate Change in turnover cost Net change in cost Net as % of Change in Reward Cost Current Rewards Proposed Rewards Change in Reward Cost 2-yr retention %

29 28 Consider your target variable Retention Engagement

30 29 How much of a total cash compensation (base salary plus annual incentive) increase would you expect if you left your job? Source: Towers Perrin Talent Management Study Q: How much of a pay increase do people expect from changing jobs? Less than 5% 5 - 7% % % % % % % 51% or more

31 Microsoft Case Study

32 31 Project summary Objective: Create a data-driven framework for evaluating changes (improvements or take-aways) to compensation, benefits and other employee programs by analyzing the impact on retention and cost Scope: Focus on cost and the impact of rewards on retention, rather than other objectives behind reward elements (employee motivation, community relations, etc.)

33 32 Focus Groups and Survey Design January 2001 February 2001 March 2001 April 2001 Analysis, Interpretation and Recommendations Implementation Planning and Results Monitoring Cost Calculation Survey Administration Step 1 Step 2 Step 4 Step 5 The project unfolded over about four months Step 3

34 33 Initial insights The results were similar across job family, level and tenure However, the highest stock-rated population has a higher preference for stock, bonus and sabbatical... And an equal preference for base pay, as compared to the lowest stock-rated population Traditional reward levers (in isolation) have poor payoffs Nontraditional rewards have high payoffs (in isolation)

35 34 Actions Policy changes we are already driving… Invest in manager effectiveness Eliminate no poaching rule Expand LOA … are projected to have the following impact $20m investment 21% decrease in attrition (from 10% to 7.9%) $30m reduction in cost of attrition Net savings of $10m

36 35 Innovations Interactive decision tool Data dialogue driving decisions Conjoint Put employees into the domain of constrained choices Collaboration Between cost data and attitude data Between Compensation, Research and Finance

37 36 Deal scenarios Trade Bonus for Base Maximize Payoff Maximize Retention Cut Cost Fixate on Cash Salary Improve Retirement Benefits SCENARIOELIMINATEADD CHANGE IN REWARD COST CHANGE IN ATTRITION CHANGE IN TURNO VER COST (SAVINGS) NET COST (SAVINGS) No Bonus NA No bonus NA +10% base pay Improve manager effectiveness Remove no poaching 40 hours of training Improve nature of job Paid sabbatical Telecommuting Improve manager effectiveness Remove no poaching 40 hours of training Improve nature of job Paid sabbatical Telecommuting +10% base pay Double 401(k) match

38 37 Q: Where is manager performance best (and worst)? Customer focus Multitasking Working with diverse workforce Transforming ideas into words and actions Recognizing and solving problems Coaching and mentoring

39 38 Help people interpret information from multiple sources Build teams with diverse backgrounds, skills, perspectives Help people discover how they contribute Managers see their roles evolving NOW 3 TO 5 YEARS FROM NOW CONNECTING PEOPLE WITH GOALS TEAMWORK COMMUNICATION

40 39 NOW 3 TO 5 YEARS FROM NOW 51% 62% 37% 58% 40% 53% 0% 100% Managers see their roles evolving (contd) Give people opportunity to earn what they value most Introduce many learning options, help people choose Help people take change initiative CHANGE COACHING REWARDS

41 Interactive Mini-Case

42 41 Where do we start??? Mini-case study: B&C Inc. Business: Clothing retailer with 20 stores in the Northeast Revenues: $1b Employees: 10,000 front-line employees (cashiers, stockers, sales clerks) Presenting issue: Unwanted turnover of 100% per year at a cost of more than $30m per year; customer satisfaction scores at an all-time low Situation: Highly autonomous store management with many silver bullet horror stories; Wall Street expects 5% profit margin improvement

43 42 Exercise 1: Frame the problem You have three minutes in the elevator to convince the CEO to take action to analyze and act on a turnover problem. What will you tell her about... Where the problem is most acute Which implications are the most dramatic Cost of turnover Revenue lost from customer dissatisfaction Institutional knowledge lost How employees and managers will be engaged in solving the problem

44 43 Exercise 2: Hypothesize the reward elements Youre conducting a focus group to pin down the reward elements to be analyzed. What kinds of questions will you ask to... Get a sense of whats important to people? Ensure that you have information on the full range of total rewards? Ensure that you are specific about elements within reward categories? Use terms that have meaning for employees?

45 44 Exercise 3: Interpret results Your survey produces these results. How would you explain these to the CEO? Pay Learning & Development Supervision Benefits Perceived Value

46 45 Exercise 4: Interpret the curve How much should you spend to reduce turnover? 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% ($30)($20)($10)$10$20$30$40$50$60$70$80$90$100$110$120$130$140 $0$0 Added Total Rewards Cost ($mm) Predicted Retention Increase Retention Increase Turnover Savings Cost 10% $12.3 mil

47 Q&A


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