Getting the most out of your People Strategies in 2011

Getting the most out of your People Strategies in 2011
Synopsis of the presentations

Our expertise Helping organisations improve performance through effective people, risk and financial management Benefits Retirement Health and Group Benefits Talent and Rewards Executive Compensation Talent Management Rewards Communication and Change Employee Surveys Global Data Services Risk and Financial Services Insurance Consulting Investment Services Reinsurance Brokerage Financial Modeling Software Risk Management Mergers and Acquisitions: From target evaluation to integration implementation

Hiring and Attrition are back…
India is once again witnessing increase in Hiring Numbers Most companies are facing issues in hiring mainly at the middle management and supervisory level. Today's middle management challenge will become a leadership challenge in a few years from now With Growth back on the radar, so is Attrition Better growth, better pay and personal reasons are the top three reason cited by employees when leaving an organisation We believe that internal factors like inequity of compensation or lack of differentiation are likely reasons that contribute to the ‘push’

Retaining top performers and keeping them engaged is the top HR challenge in India
Source: Towers Watson HR Pulse Survey 2010 5

Towers Watson’s View on Total Reward A framework that captures all aspects of the work experience
Pay Benefits Base salary Bonuses Recognition Allowances Geographical and shift allowances Long-term sickness benefit Pension Holiday Staff restaurant Relocation assistance Life insurance Career development Learning experiences Performance management Succession planning Training Talent mgt. Coaching Leadership Culture Involvement Diversity Work/life balance Interesting meaningful work Job security Learning and Development Work Environment

Medium Term Talent Management Challenges for India Inc.
Productivity and Cost Management Avoiding the middle management trap Management of Attrition Effective Talent Acquisition Key Medium Term Talent Management Challenges HR Service Delivery INTEGRATED HR PHILOSOPHY AND SYSTEMS

Growth Concerns Rising currencies Commodity prices/inflation
Asia still driving global growth in 2011: Concerns Rising currencies Commodity prices/inflation Asset bubbles 3.7 1.7 -2.2 3.1 2.4 2.0 0.4 -2.6 2.3 1.5 2.6 0.6 -4.1 1.4 0.8 8.3 5.5 4.9 7.8 6.4 2007 2008 2009 2010 2011 World US Euro Area AP (excl. Japan) Source: EIU Country Briefing Report, October 2010

In 2010/11, Companies Expect Retaining Key Talent To Get More Difficult, Especially In Asia-Pacific
Now compared to pre-financial crisis One year from now as compared to now Asia Pacific Fig 7. Companies expect retaining key talent to get more difficult, especially in Asia-Pacific Has retention of key talent become more or less difficult now compared to what it was pre-financial crisis? Do you expect it to be more or less difficult a year from now compared to now? 10

Most pressing challenges for HR in Asia Pacific
Source: Towers Watson 2009 Asia Pacific benefits trends survey report

2010 – 2011 Salary Increases: General Industry
Source: Towers Watson – Compensation Planning Report, October 2010 2011 Salary Increase presented are based on projected/forecasted figures shared by participating companies A total of 2,560 companies shared information for 2010 and 2,200 for 2011 General Industry figures

Benefits preferred by employees in Asia-Pacific
% of responses Source: Towers Watson HR Perspectives on Benefit Trends 2010

Benefits challenges in Asia-Pacific Irrespective of how much employers spend, some 40% of employees still don’t really value benefits % of responses Staff turnover rates are going up! Overall average of 11.6% indicating active movement in the labour market. Retail industry saw a significant 28.8% turnover in the period of 1 Jan 2010 – 1 Apr 2010. No of companies = 82 Overall average 11.6% Source: Towers Watson HR Perspectives on Benefit Trends 2010

Growing trend towards employee choice
More than one third of companies have or are considering implementing choice Source: Asia Pacific Employee Benefit Trends 2009 (Towers Watson)

About the TM&R Survey – Global Participants
Global Talent Management and Rewards Survey Conducted in May through June 2010 Captures the current landscape of rewards and talent management Represents 1,176 companies across 17 locations Employee Data from Towers Watson’s Global Workforce Study Conducted online in 22 markets around the world between November 2009 and January 2010 Includes over 22,000 full-time employees in mid-size to large organisations

Globally, the recession forced companies out of ‘business as usual’ mode and changed the employee mindset Theme of Renewal Looking forward, organisations must re- think the way they design and manage their reward and talent programs Theme of Security Employees are looking for job security, stability and opportunities to earn higher levels of pay (which may be unavailable in current organisation) In India, the slowdown forced companies out of ‘irrational exuberance’ mode and changed the employee mindset

The focus on cost control / management is here to stay
Pay, bonuses and training budgets are the programs organisations are most likely to change if economic or business conditions change substantially in either direction Pay, Bonuses and Training Budgets are the programs organisations are most likely to change if economic or business conditions change substantially in either direction Over the next 12 months, which actions is your organisation most likely to take if it has: to cut costs? additional funds to spend on labor costs? Program Top 3 Reduce pay increases 78% Increase salary increase budget 69% Reduce budgets for training and development programs 54% Hire more people Reduce or eliminate bonuses 57% Increase bonus opportunities 49% Lay off employees 41% Increase budget for training and development programs 55% Increase health care premiums that employees pay 18% Increase investment in better equipment for employees 27% Reduce employee hours, e.g., furloughs, reduced workweek, etc. 13% Increase bonus eligibility 14% Reduce contribution to retirement programs 8% Increase contributions to retirement programs 7% Reduce number of days of paid time off or vacation 6% Reduce health care premiums that employees pay 4% Increase number of days of paid time off or vacation 2%

Attraction Drivers in Asia
Economic uncertainty and company responses have affected drivers of attraction and retention Employers are having difficulty attracting and retaining top talent in general Critical Skill and Top Performers were reluctant to leave current employer due to uncertainty Severity of difficulty varies across regions as economic recovery is uneven Critical skill, Top performing and High potential employees are categories where Indian companies are facing maximum difficulty with retaining talent . Also, sustained economic growth means greater opportunities for talent and difficulties in attracting and retaining talent at all levels Attraction Drivers in Asia Employers underestimate convenient work location and benefits as factors candidates consider in deciding whether to join a company Retention Drivers in Asia Employers likewise do not share employees’ view on the availability of/better pension and better financial planning resources as retention factors

Retention drivers are also shifting, with increased emphasis on employee well-being
There are large gaps between employee and employer perceptions regarding the influence of security and flexibility on employee retention Employers underestimate the impact of pensions, job security and more flexible work arrangements on employees’ decision to leave their organisation Increased compensation Availability of/better pension Greater job security Improved work life balance Greater career advancement opportunity More flexible work hours All Employee 91% 86% 85% 84% 82% Employer 88% 30% 43% 66% 87% 27% Gap 2% 56% 42% 20% 3% Asia 89% 90% 94% 28% 47% 61% 59% India 79% 21% 51% 69% 37% 12% 45% USA 81% 83% 48% 70% 10% 49% 39% 15% 46% Percentages equal the percent of employees or employers responding to a moderate or great extent: How would receiving each of the following from a new employer influence your/your employees’ decision to leave your current organisation? Gaps are the difference between employee and employer percentages – may not add up due to rounding

What is an Employee Value Proposition (EVP)?
An employee value proposition is the experience offered by an employer in exchange for the productivity and performance of an employee. Employee perspective Employees’ connection with the EVP determines their level of discretionary effort in bringing the company mission, vision and values to life. Employer perspective A strategically designed EVP attracts, retains, engages and motivates employees to drive business success. Price – what's the value to me and what is expected of me in return Placement – how do I engage with it, where do I see it and how do I relate to it Product – what is on offer, what makes it unique from others, do |I like it and why Promotion – how's it presented to me, do I trust it, do I believe it? All designed to uniquely appeal to you! Three things to know when it comes to EVP… Employees often have choices when it comes to where they choose to work – the organisation that offers the ‘best’ EVP is the one they will join and stick with Employers have choices in creating their EVP to attract and retain the workforce they want Employers do not know what it is individual employees value on any given day, week or year (NOT sure about this last one) Ultimately – it comes down to ‘the give’ and ‘the get’ 22

Elements of the EVP which are key, in India
Security / stability, Opportunity to develop skills/ abilities, Variety of jobs / work experiences and Opportunity to develop innovative products / services are key aspects of the EVP in India Question: To what extent are each of the following, important elements of the way you view your company’s EVP in India? Element of EVP Important to a great extent (% of employees) A secure and stable position 51% A wide range of jobs and work experiences 50% Opportunity to rapidly develop skills and abilities 46% Opportunity to develop innovative products/services 45% Opportunity to earn significantly higher levels of compensation 45%

High Gain Actions for Building a Sustainable Model
Organisations with global consistency report higher level of talent and reward program effectiveness Provides a platform for getting the basics right FOCUS ON THE BASICS Those elements of the deal that are attractive across employee segments Competitive Base Pay Challenging Work Career Advancement Opportunities Convenient Work Location Vacation or Paid Time Off Security - retirement Formalise and Communicate EVP DEVELOP LEADERSHIP COMPETENCIES To ensure they can manage in the new and changing environment . DIFFERENTIATE Rewards based on employees’ performance Elements of T&R based on different employee segments DEVELOP GLOBAL CONSISTENCY Across regions, levels and talent and reward programs

Globalization Strategies
The modifier and adapter The collaborator The thought leader Develops strong capabilities of dealing with a developing market Designs products for low- income markets Innovates in processes to improve efficiency in developing locations Standardization to minimize training costs and human error Processes adapted to deal with poor infrastructure Takes advantage of similar conditions in other emerging countries with similar or lower level of development Partners on the basis of late- mover Low-cost advantages Back-end work, no brand value Very specialized Started servicing needs of developed MNCs in India Developed managerial skills, expertise and understanding of developed MNCs needs Now expanding to developed countries to To service clients better To increase client base BPO in IT, R&D and Legal Services These firms have acquired first mover advantages: Innovation and ownership of technology Acquisition of key assets Have built a global brand Globally distributed value chain This type of Indian MNCs are not common, but some interesting examples can be found in Renewable energy Biotechnology/Pharma

To Support Business and Growth Strategy
Acquire people or technology Expand geographically Gain market share Reduce costs: sales, marketing, inventory Goals of Buying Competitors Secure raw materials/inputs Improve quality Reduce costs: R&D, production, inventory Acquire hard-to-duplicate assets Respond to deregulation Enter higher-margin industry segment Goals of Buying Suppliers Balance market risks Expand product portfolios Enter entirely new businesses Integrate product line Goals of Diversification Own distribution network Freeze out competitors Reduce costs: production, inventory, sales Improve identity/visibility Goals of Buying Customers

Potential reasons for expanding into geographic markets
European Union Gain access to large capital, consumer and business markets Establish regional manufacturing or distribution centers Acquire unique assets or human capital CEE and Russia Gain access to emerging consumer and business markets Secure natural resources and raw materials Establish low-cost export manufacturing operations Gain access to massive and varied consumer and emerging business markets Secure natural resources and raw materials Establish low-cost regional and export manufacturing sites Acquire unique assets or human capital Japan, China, SE Asia and India Mexico and South America Gain access to emerging consumer and business markets Secure natural resources and raw materials Establish low-cost regional and export manufacturing sites North America Gain access to large capital, consumer and business markets Gain access to technology and R&D Acquire unique assets or human capital

Why do M&As fail traditionally?
Negative Impact Rank Top 10 Pitfalls in Achieving Synergies 1 Incompatible cultures 5.60 2 Inability to manage target 5.39 3 Unable to implement change 5.34 4 Synergy non-existent or overestimated 5.22 5 Did not anticipate foreseeable events 5.14 6 Clash of management styles/egos 5.11 7 Acquirer paid too much 5.00 8 Acquired firm too unhealthy 4.58 This is what CFOs are saying – Survey of Forbes 500 CFOs conducted in the mid 1990’s Indeed, most past studies have shown that the most common M&A pitfalls are people related 9 Need to spin off or liquidate too much 4.05 10 Incompatible marketing systems 4.01 Note: Survey of Forbes 500 CFOs. Assessed on a scale of 1 to 7, where 7 is high.

“ India everywhere ”: Over the last 10 years, US$62 billion of Indian capital has been ploughed into M+A deals around the world * UK – Tata Steel buys Corus for $12 billion in 2006 Russia – ONGC buys Imperial Energy for S2.8 billion in 2009 UK – Samvardhana Motherson buys VisioCorp for $38.3 million in 2009 USA – Essar Group buys Minnesota Steel for $1.65 billion in 2008 Germany – Suzlon Energy buys RE power for S1.7 billion in 2007 Portugal – Wipro buys Enabler for S52.3 million in 2006 Japan – Lupin buys Kyowa Pharma For an undisclosed amount in 2008 Malaysia – Avantha Group buys Sabah Forest for $261 million in 2007 Brazil – Shree Renuka Sugars buys Equipav SA for $329 million in 2010 Australia – Samvardhana Motherson buys Empire Rubber for $5.2 million in 2007 South Africa – Apollo Tyres buys Dunlop Tyres for $62 million in 2006 * Source: October 2010 issue of Fortune Magazine ( 31

Key M&A process steps for HR
Note: All deals are different; this timeline represents typical sequence of events. Implementation Integration Planning Due Diligence Manage deal price and risk Secure top team Manage the messages Prioritize and manage activities Plan Develop change management plan Design and implement staffing model Align Total Rewards Measure synergies Define and implement HR service delivery Execute Ongoing

HR Professionals can contribute at each stage of the deal to assist in…
Stage 1: Target Evaluation Finding compatible business ventures and partners Stage 2: Due Diligence Ensuring the deal is sound and establishing the value proposition Stage 3: Integration Planning Defining the blueprint for all aspects of the merged entities Stage 4: Implementation Executing the merger integration plan for the new enterprise

HR Due Diligence ― key questions
What are the people assets we are acquiring? n Profile key management Organization chart Skill profile/development programs Demographic characteristics How will the people fit together? Cultural barriers Incompatible job definitions Incompatible reward structures Incompatible process and structure Duplicate jobs! Is the people cost reasonable? Benchmark a few jobs Benchmark staffing levels in a few functional areas What is the root cause? Inadequate skills? Demographics? Expatriates Potential redundancy/ Workforce flexibility? Goodwill issues/morale Procedure steps Legal barriers Union issues Temporary/contract workers Adverse balance sheet impacts? Change of control triggers Pension, welfare liabilities understated Contracts with executives may contain future liabilities Book accruals understated, e.g. vacation, sales commission Adverse revenue impacts? Sales incentive design Likely employee turnover Retention plans Pending industrial disputes Adverse margin impacts? Understatement of ongoing program cost Severance payments Commitments to future cost increases Collective agreement commitments Relocation expenses Other? Compliance Illegal payments Discrimination Acquired rights Payroll & HRIS

Why is leadership critical to success?
Set priorities right and create business momentum Provide employees with commitment, engagement, confidence and comfort To inspire a sense of purpose, coherence, community and trust To be a comforting anchor in a turbulent sea of change Research has shown that leadership becomes the most important driver of engagement during periods of disruption Leadership involvement and employee perception of leaders are key drivers of change Belief that leadership cares affects employees’ willingness to change Companies that foster a high degree of leadership involvement and supportive cultures have a clear advantage Source: From Responsibility to Action: Making Benefit Change Work. A Towers Watson study of 140 employers and 2,380 employees in large organizations

Culture is ranked as the most challenging people issue in M&A
Most Challenging People Issues in M&A Deals Focus on cultural alignment Effective leadership from top team A well-executed employee communication program Integrating benefits, pay and other reward programs on a global basis Selection of the top team Source: Towers Watson Track Survey. Note: Percentages reflect the answers of those respondents who have completed at least one deal in the past three years.

Getting the most out of your people strategies in 2011
Employee health and wellness 37 37

2011 Global Medical Trend Survey – Key Findings
Responses from 170 leading health insurers who provide medical insurance solutions to employers in 37 countries throughout Asia, Africa, Europe and the Americas. 95% of the countries show a medical trend that exceeded the rate of general inflation Almost three-quarters (72%) of survey respondents say they expect higher medical costs over the next five years The average medical cost trend for 2009 was 10.2% and is projected to be 10.5% in Asia Pacific is expecting double digit increases The rate of medical trend is two to three times the rate of general inflation Medical trend is expected to be 2.5% higher in Emerging economies than in Advanced Economies Wellness service offerings are growing in prevalence and some form of wellness feature is now typical in all regions

Escalating healthcare costs in Asia-Pacific
Cost of healthcare in Asia-Pacific was estimated at US$880 billion in and will surpass US$1trillion in 2010 * Medical insurance costs are increasing around the region: Faster than salary growth Faster than CPI Country Cost Increase India 12.3% China 9.4% Indonesia 14.2% Japan 4% Malaysia 9.6% Philippines 10.3% Singapore 8.4% South Korea 10.0% Taiwan 17.3% Thailand 9.0% Average 10.2% Source: 2011 Towers Watson Global Medical Trends study * Source: WHO World Health Statistics 2009 39 39

Successful incentive and engagement programs have common features
Aligned with overall people and corporate goals Visibly supported by CEO, executive team and mid management Consistent with organisational culture Communicated early, often, and fully Meaningful and timely rewards or penalties Members have access to tools and resources to succeed Members can easily ascertain their reward status Streamlined administration Incentive program is sustained, even if targets and goals evolve over time Comprehensive measurement plan in place to allow revision of program 40 40

Companies with the most effective Wellness programs have:
Companies with the most effective Wellness programs have: 1.2 percentage points lower medical trends 1.8 fewer days unplanned absence per employee 28% higher shareholder returns over a five-year period 11% higher workforce productivity Lower turnover, fewer lost days for disability, lowest levels of presenters and greatest improvement in lifestyle risks Source: 2009/2010 Report, published by Towers Watson. 41 41

Pioneering Health care survey (a follow on to our 2009 survey)
Industry Group Percentage of Companies IT / ITES 41 Manufacturing 37 Financial 17 Education, Healthcare & Medical Sciences 12 Oil & Gas 9 Food & Beverages 8 Business & Professional Services 7 Construction, real estate & Engineering 6 Wholesale & Retail trade Transport, Storage & Logistics 5 Information & Mass communication 4 The survey “Group Healthcare: Healthcare trends 2010”, was conducted in the third quarter of 2010 for 154 large employers in India across various industries The survey throws light on the current practices and experiences of these companies with respect to their health care provisions It also helps identify the future outlook and strategies being planned to combat the key issues and challenges faced by the industry 42 42

Key findings related to provision of healthcare
Employee welfare is the main objective of providing healthcare benefit Majority of the sample (62 percent) reported an average premium cost escalation ranging from15 to 25 % in the last three years. This compares to 30 percent of the respondents reporting an average premium cost escalation in the range of % last year. More than half the survey respondents are keen to align their current benefit provision to the market. A shift from protective to preventive health care 55 percent of the respondents reported a claim ratio of 100 percent or higher. The top three priorities for employers in the current healthcare scenario are Controlling cost of employee health programs Increasing quality of health care Providing incentive programs to improve employee health/wellness

Key findings related to managing risk Strategies and Actions
The survey listed more than 20 strategies ranging from sharing of claim costs to parental cover to others Maximum yearly limit on total claims amount seems to be the most popular current strategy Making parental cover co pay or fully paid by employees through a separate policy is the most popular strategy in the coming year or two Co pay is a prevalent practice at the moment. However it is observed that surprisingly not many have claims sharing process planned for the next two years even while the claim ratio is greater than equal to 100 percent for around 55 % of the respondents Sixty six percent of the surveyed companies made some changes to the benefit design within the last three years but only 18% of the companies had a reduction in the insurance premium

Emerging trends impacting healthcare benefit provision
Business Drivers Attraction and retention Improve employee productivity Cost control Tax efficiencies Insured health care costs Higher than average 15 – 25% increase in premiums Increase in premium costs less than increase in claim ratios Medical inflation likely to outstrip price inflation in the future Health care Employer concerns Higher costs due to new medical technologies Poor employee understanding of how to use the plan/seeking excessive care Providers recommending too many services Employees High perceived value Not aware of benefit dollars spent due to lack of effective communication Inefficient utilisation – need to improve employee engagement? Contain future cost inflation by capping benefits Risks and Constraints Systems integration Data quality Administration and communication challenges Internal resource/budget Employee relations – employee mistrust and cynicism Internal stakeholder management Aligning pay and benefit years – timing for enrolment 45 45 45

Getting the most of your people strategies for 2011
Managing employee benefits risks 46

Main principles addressed by accounting standards
Cash basis or Actuarial basis Choice of Assumptions Measurement Recognition How the cost is recognised in the over a period of time Accounting for variability How to recognise differences of actual vs expected Disclosures Format of presentation 47 47

For accounting purposes, employee benefits are classified into 4 types
Examples are wages, salaries, paid annual leave, non-monetary benefits like medical care, housing etc. Short - Term Benefits (which cannot be carried forward beyond twelve months) Other Long Term Employee Benefits Examples include long-service leave, long-service awards, sabbatical leave etc. Post employment benefits Examples are gratuity, defined benefit pension, post-employment medical care Termination Benefits Due to termination before normal retirement date or Voluntary redundancy (e.g. VRS) 48 48

Inputs for a Actuarial Valuation
Membership Data Plan Provisions Actuarial Assumptions Actuarial Liability

Actuarial Assumptions for Accounting valuations
Long term nature of the liabilities Best Estimate - An unbiased outlook Chosen by Company having taken advice from the actuary in concurrence with the auditor Set by employer with advice of “qualified actuary” and in concurrence with the auditor ? Are an Enterprise’s “best estimate” Should be Unbiased and Mutually Compatible Financial assumptions: market expectations at the balance sheet date: over the period the obligations are to be settled – Entity specific or Scheme sensitive? 50 50 50

Actuarial Assumptions – Where HR plays a key role
Financial Assumptions Salary increases Demographic Assumptions Employee turnover Leave utilisation / encashment rate 51 51 51

Actuarial Assessments as a business tool
Key is financial impact on P&L and Balance sheet Change in Benefit Design Business case for new benefit plan (if long term) Financial projections and budgeting Due diligence for a merger/acquisition Impact of change in corporate structure Decision to fund retirement benefits Ensure appropriate assessments Assistance for assumption setting Salary and attrition analysis Leave availment and balance utilisation

India: Benefit current issues
Convergence with IFRS – Accounting for long term employee benefits from April 2011 Updated accounting standards AS15 and AS36 More news on International workers Provident Fund – October 2010 Proposed Payment of Bonus Act change of eligible population – September 2010 Eligibility increased to Rs 15,000 per month Amount raised to 11% of a maximum of Rs 5,000 per month salary Provident Fund declares 9.5% interest for FY11 – September 2010 Companies with an exempt PF Trust will need to match this rate to credit to its employees Increase in the eligible population to be covered by the Employee State Insurance Act– May 2010 The threshold earnings criteria to determine eligible employees is now Rs 15,000 per month 53

India: Direct Tax Code current proposal - Benefits
Key highlights (effective date planned April 2012) Superannuation: No requirement for employees to pay tax on contributions exceeding Rs 100,000. Proposed tax deductibility limit to be shifted back to the employer Pension: Allowance of up to 10% of salary employer contribution to an approved pension fund tax exempt for the employee Medical reimbursement: Tax exempt limit for out-patient care increase to Rs 50,000 (from Rs 15,000) Medical premiums: premium paid by individuals to a medical policy exempt from tax up to Rs 50,000 Deductions for long term investments: individuals will have a Rs 100,000 exemption for long term investments to the Provident Fund, New Pension Scheme as well as Rs 50,000 towards the payment of premiums for life and health insurance, tuition fees Perquisites: The current draft Bill makes no mention on the treatment of perquisites. Expected that perquisites will remain but the precise valuation method is to be confirmed later 54

Thank you Towers Watson India Private Limited
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