0. Presentation Title
Saturday, March 25, 2017
Optimizing Total Rewards: Controlling Costs and Maximizing Business Value
Mark Englizian – Microsoft
Allen Slade – Microsoft
Tom Davenport – Towers Perrin
May 14, 2002 TM n

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

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

3. Why should you be concerned about optimizing rewards?

4. Presentation Title
Saturday, March 25, 2017
Q: Who agreed most strongly with this statement: “People are our most important investment”? 4
Human resource executives
Line management executives
Strategic planning executives
Financial executives
Ex-spouses of CEOs
Who agreed least strongly? 4
It’s common to hear people refer to employees as assets or resources.
But where within the organization is the metaphor most common…
And where is it least common?
Source: Towers Perrin People Strategy Benchmark Awareness and Attitude Study

5. It’s time for a new metaphor
Presentation Title
Saturday, March 25, 2017
It’s time for a new metaphor
Our employees are our...
Most Important Investor
Highest Cost
Greatest Asset
“What does the employee cost the organization?”
“What is the employee worth to the organization?”
“What is the organization worth to the employee?”
Is the old metaphor correct?
In , more than half of large organizations downsized, thereby acting in keeping with the employee-as-cost way of thinking
As the decade moved on, low unemployment, importance of knowledge work brought about a new expression -people are assets.
But are they really? Consider that assets are:
Inert and passive
Owned by the organization
Prone to obsolescence and depreciation with use
MESSAGE: PEOPLE ARE NOT ASSETS - THEY ARE HC OWNERS INVESTORS
This distinction is worth emphasizing because metaphors count
Twain -”The difference between the almost right word and the right word is really a large matter - ‘tis the difference between the lightening-bug and the lightening.”
Challenge of changing Al Dunlap’s image from “Chainsaw Al”
Investor idea introduces need for a DEAL
Prehistoric
1991
1996

6. What the organization delivers
Presentation Title
Saturday, March 25, 2017
What the organization delivers
Total Rewards
Pay
Benefits
Base salary
Variable pay
Recognition
Stock
Health care
Retirement
Savings
Time off
Career development
Performance management
Learning management
Leadership
Work/life balance
Trust and respect
Organizational climate
Line of sight/Involvement
There are many ways to look at the ROI side of the human capital investment equation, but here are four categories we find useful:
Pay and benefits - financial rewards that increase the ability to pay the rent on an ever-nicer place to live
Learning and development - the opportunity to enjoy the experience of learning, to build more human capital for later investment, and to take on greater responsibility
Work environment - Elements that add up to engaging work - the essential interest and challenge of the job
Learning & Development
Work Environment

7. Q: What gives people the most personal satisfaction?
Presentation Title
Saturday, March 25, 2017
Q: What gives people the most personal satisfaction?
Percent Saying
“A Lot of Personal Satisfaction”
Getting promoted faster than expected 40% 50% 60% 70%
40%
Getting a bigger-than- average raise 40% 50% 60% 70%
48%
Knowing that you had a really productive day 40% 50% 60% 70%
63%
Receiving a compliment/ memo from your boss 40% 50% 60% 70%
53%
Source: Roper Starch

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

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?

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

11. Microsoft’s People Issues

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

13. What were we thinking in Fall 2000? (cont’d)
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

14. What were we thinking in Fall 2000? (cont’d)
Therefore, total rewards response had to be
Comprehensive, covering all reward quadrants
Effective against competitors
Reflective of the organization’s 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)

15. Part-time/leave policy changes Rewards optimization Management matters
2002 HR mission: Create an environment where the industry’s 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

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

17. Total Rewards Optimization (TRO) Overview and Approach

18. Suppose you knew all this...

19. ...and could determine this

20. What is the optimum level of investment in employees?
Presentation Title
Saturday, March 25, 2017
Towers Perrin’s Total Rewards Optimization (TRO) enables organizations to invest in rewards that maximize ROI
$ Investment in Employees
What is the optimum level of investment in employees?
Retiree medical
Paid time off
Thrift plan
Work
flexibility
What is the optimum allocation of that investment to maximize retention?
Learning and
development
Retirement plan
Base pay
Health care
Bonus

21. Our approach to TRO consists of two primary activities
Optimum Level of Investment
Optimum Allocation of Investment
Conjoint
Analysis
Portfolio
Optimization + =
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
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)

22. Determining utilities
Marginal Utilities of Reward Levels 1 2 3 4 5 6 7 8 9 10 11 12
Work Flexibility
Manager Performance
Nature of Job
Bonus
Training
Stock Options 3
Base Pay
Sabbatical
Tuition Reimbursement
Career Path
Current
+5%
+15%
401(k)
Levels of Reward Elements
Health Care

23. Determining utilities (cont’d)
Marginal Utilities of Reward Levels 1 2 3 4 5 6 7 8 9 10 11 12
Work Flexibility
Manager Performance
Nature of Job
Bonus
Training
Stock Options 3
Base Pay
Sabbatical
Tuition Reimbursement 3
Career Path 1 2 3
401(k)
Levels of Reward Elements
Health Care

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

25. Identifying optimal reward portfolios
67%
70%
73%
76%
79%
82%
85%
64%
88%
91%
94% C B
Current level of investment and retention
2-Year Retention (%) A
(100,000)
$100,000
200,000
300,000
400,000
500,000
$600,000
Change in Cost ($000)

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
Stock Options
No change
Base Pay
Sabbatical
Eight weeks paid after four years
Tuition Reimbursement
Career Path
Formal career map; extensive internal job markets
401(k)
Health Care

27. Determining financial outcomes (cont’d)
Current
Proposed
Rewards
Rewards
Change in Reward Cost $0
$22,850
2-yr retention %
68.8%
87.5%
Annual turnover rate
15.6%
6.2%
Change in turnover rate
-9.4%
Change in turnover cost
-$76,963
Net change in cost
($54,113)
237%
Net as % of Change in Reward Cost

28. Consider your target variable
Retention
Engagement

29. Q: How much of a pay increase do people expect from changing jobs?
How much of a total cash compensation (base salary plus annual incentive)
increase would you expect if you left your job?
Less than 5%
5 - 7%
8 - 10% % % % % %
51% or more
Source: Towers Perrin Talent Management Study

30. Microsoft Case Study

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.)

32. The project unfolded over about four months
Presentation Title
Saturday, March 25, 2017
The project unfolded over about four months
January 2001
February 2001
March 2001
April 2001
Step 2
Survey Administration
Step 1
Step 4
Step 5
Focus Groups and
Survey Design
Analysis, Interpretation and Recommendations
Implementation Planning and Results Monitoring
Step 3
Cost Calculation

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)

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

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

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

37. Q: Where is manager performance best (and worst)?4
Customer focus
Multitasking
Working with diverse workforce
Transforming ideas into words and actions
Recognizing and solving problems
Coaching and mentoring 4 4 4 4 4

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

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

40. Interactive Mini-Case
Presentation Title
Saturday, March 25, 2017
Interactive Mini-Case

41. 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
Where do we start???

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

43. Exercise 2: Hypothesize the reward elements
You’re 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 what’s 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?

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

45. Exercise 4: Interpret the curve
How much should you spend to reduce turnover?
50%
45%
40%
35%
Retention
Increase
Turnover
Savings
Cost
30%
Predicted Retention Increase
25%
10% 20 30 40 45
$12.3 mil
24.6
36.9
49.2
55.4
20%
15%
10% 5% 0% $0
($30)
($20)
($10)
$10
$20
$30
$40
$50
$60
$70
$80
$90
$100
$110
$120
$130
$140
Added Total Rewards Cost ($mm)

46. Q&A