The Total Rewards Professional in a Changing Business Environment WorldatWork Group Partnership Network Leadership Summit Fred E. Whittlesey Director, Global Compensation Amazon.com 22 March 2002

About the Speaker Fred Whittlesey is the Director, Global Compensation for Amazon.com, previously holding the position of Director, Compensation for Broadcom Corporation. Prior to this he was the founding Principal of Compensation and Performance Management, Inc. (CPM), a management consulting firm based in Newport Beach, CA. His 16 years of management consulting experience also included positions with Towers Perrin and William M. Mercer. Prior to founding CPM, he was director of the Western Region compensation consulting practice at KPMG Peat Marwick. Fred’s experience includes serving as an instructor for WorldatWorks’s certification courses, UCLA Anderson Graduate School of Management, and UCLA Extension on financial aspects of managing people in organizations. His recent articles include "Changing Employee Behavior in a Changing Workplace" appearing in Compensation and Benefits Management and "Designing Shorter-Tem Cash Incentive Compensation Plans" published in the book Incentive Compensation in Employee Ownership Companies by the National Center for Employee Ownership. He also appears in WorldatWork’s self- study course video for “Principles of Accounting and Finance” (T2). Fred received his MBA from UCLA with concentrations in human resource management and marketing. He graduated Phi Beta Kappa and Magna Cum Laude from San Diego State University with a BA in industrial/organizational psychology. He also earned the Certified Equity Professional (CEP) designation from the Santa Clara University Leavey School of Business Administration.

Where I’ve Come From… During the 1990’s boom, consulted to hundreds of companies on compensation and performance management issues (Founded CPM)

Where I’ve Come From… I thought I caught a dip (Joined BRCM)

Where I’ve Come From… I thought I caught a dip…boy, did I (Joined BRCM)

Where I’ve Come From… Let’s try this again… (Joined AMZN)

Where I’ve Come From… The poster child for underwater option companies… and total rewards in a changing business environment

Today’s Presentation  The Total Rewards…  Professional…  In a Changing..  Business Environment  What do WE do?  Bringing it Home to the GPN Organization

A Message from our Leader “…layoffs, corporate scandals, bankruptcies, recession, terrorism, and the like. There is no doubt that our world is in flux and it affects all of us, both at home and at work.” Anne C. Ruddy Executive Director WorldatWork 3/1/02 Letter to Members

Since We Last Attempted to Meet… markets closed recovery to Q levels decline to Q levels

Just Some of the “New” Issues…  Pay for time away from work due to crises  Unemployment benefits, severance, workers’ compensation for those affected  Safety of the workplace  Military leave compensation and benefits policy  Status of performance against goals impacted by extraordinary events  Exacerbation of simultaneous boom/bust labor economics  Impact on already-weak stock market  Pay levels for airport security personnel  Requests for increased benefits for international assignments

The Network’s Meeting Content But we seem to be talking about the same old issues…  National survey of employer-sponsored health plans  Drug screening and background investigations  The impact of pay on being an “employer of choice”  Fortune’s 100 best places to work  The future of health care  Human capital practices related to shareholder return  What your employees are afraid to tell their supervisors  Delivering HR information via the internet  A compensation philosophy – why do you need one?  Prescriptions for rising pharmacy costs  The wrong way to evaluate the HR function

The Network’s Meeting Content  …and still having to monitor regulatory changes…  California wage and hour law  OSHA update  Benefit life after EGTRRA  But some are addressing the turmoil…  Rumors of recession…job growth in certain industry clusters  Communicating tightened increases in recessionary times  Changing trends in compensation  Long-term incentive strategies for retention in a bear market  Managing compensation in changing economic conditions  Compensation strategies in a downturn economy

Let’s Back Up - Where Have We Come From? The Total Rewards concept evolved during an unprecedented economic boom

Total Rewards: WorldatWork’s Model Compensation The Work Experience Benefits Salary Short-Term Incentives Long-Term Incentives Health and Welfare Retirement and Savings Acknowledgement, appreciation, recognition Balance of work/life Culture Development Environment – job, place, company Employers were forced to expand the definition and value of their economic contract with employees

Another View: Four Elements of Compensation Cash Equity Goods and Services Time and Place Wage and salary Target-based incentives Activity-based incentives Discretionary payments Liquidation of other forms of pay Deferred cash (savings/retirement) Health and welfare benefits Work tools Leisure items Education and training Social activities Grant Option Purchase Common Second class Preferred Convertible Paid time off Unpaid time off Work schedule Work location Location rules Location value

Total Rewards in the Unstable Environment From…To…And Now… Cash Throwing cash at the problem War for talent Emergence of “hot skills” pay Unusual sign-on bonuses Incentive guarantees Aggressive upside on incentive plans Conserving cash in the downturn Layoffs depressing market salaries Incentive targets missed, cash compensation plummets Retention bonuses for restructuring Severance packages get scaled back Wondering where the cash went, and is going Executive pay guarantees and buyouts Direct pay cuts Region/industry diversity of pay increase practices Offshore locations rationalizing to US salary levels

Total Rewards in the Unstable Environment From…To…And Now… Goods and Services More for Everyone Every benefit and perk imaginable Flexible and individualized benefits Employer-paid benefits Ownership-based retirement vehicles Mega parties Less for Most, None for Some Popular criticisms of dot-com excesses Continuing shift to employee cost and responsibility for benefits Layoff lounge and x-websites You’ll Get Nothing (and like it) Budget constraints limit development, social activities Movement toward employee protection “Your job is your perk” mentality

Total Rewards in the Unstable Environment From…To…And Now… Equity Expanding the employee ownership model Mega-grants of options Expansion of all- employee plans Rapid global expansion of equity participation Rescuing the employee ownership model Repricing and option exchange programs Unusual option grant amounts and timing Increasing aversion to equity Questioning the ownership model Renewed debate over effectiveness of ownership Questioning of equity-based retirement vehicles Penalty and protection legislation

Total Rewards in the Unstable Environment From…To…And Now… Time and Place Recognizing the New Economy Employees dictating time and place Sabbaticals, telecommuting Flexible workforce Pets at work Recovering from the New Economy Return from dot- coms to traditional employers Appreciation for the old economy Voluntary unpaid time off as cost reduction Dealing with the Economy Temporary increased leverage for employer Delayed and rescinded offers Mandatory unpaid time off

Total Rewards Issues:  Total rewards model evolved and was defined during the boom times  Total reward value increased substantially during roaring 90s, raising the impact and the visibility of employee rewards  Perceived cost and visibility of total rewards invites scrutiny during current period of economic instability  Many progressive forms of rewards are perceived as easy to discontinue  Challenges to the model, and elements of the model, are coming from new and unexpected sources

Total Rewards Conclusions:  Total Rewards approach must be defined to change and respond quickly to the environment, going beyond a “list of stuff”  Well-defined philosophy and strategy must be articulated to guide decisions  Like any business issue, philosophy and strategy must have a financial basis  Won’t have the necessary “data” for years - discussions and actions are still piecemeal and reliant on anecdotal data  Absent authoritative data, many are compelled to opine on the issues

Professional Compensation Compensation & Benefits Benefits Legal Tax/Accounting Stock Admin Benefits Equity-Based Compensation Increased Variable Pay Complexity IT/HRIS Total Rewards T&D, OD, HR, ER… Decentralization/ Participation Line Management WWW Employees Total Rewards

Professional Issues:  Expanding scope of total rewards increased overlap between “comp” and non-rewards HR functions  Total rewards expertise now lies in many “non-HR” areas  Skill set is becoming too broad to master: CCP, CBP, GRP, CEP…  Other specialty areas are developing compensation expertise  Program design or modification may occur without HR input  Egalitarian culture of technology has eroded control over context of information  Rules of Engagement often differ from those in HR

Professional Conclusions:  Need for rewards professional literacy in other HR specialty areas  Must abdicate “police” role for “advisor” role  Changes are even undermining HR’s traditional core role of administration  Must establish credibility through both content and process skills  Goods news: business leaders are now thinking about, and much more involved in, rewards issues  Bad news: total rewards leaders are not all thinking about business

A Simple Formula Source: Edward P. Lazear, Personnel Economics for Managers

Changing Globalization Changing Reward Issues And then add… Stock market “correction” …and rebound Dot-com deaths…and the return of dot-com IPOs Widespread layoffs…and the continuing war for talent Regional and sector economic downturns …and the recession we didn’t have Enron, Global Crossing, Andersen, etc. What Next? Terrorism and warfare The stalling of broadband Technology Organization Boundaries De- and Re- Regulation

Changing Issues:  Volatility of business environment is here to stay  Pace of change continues to accelerate but is not uni-directional  Pace of change exceeds traditional assess-design-implement cycle timeframe  No longer able to address “the issue” as “this year’s theme”  Total rewards field is not prepared for multivariate decision models  Survey data methodologies, even newer online models, cannot capture the necessary data in the time required  As total rewards scope has expanded, higher degree of change is designed into the topic

Changing Conclusions:  Must not be merely pro-active, but “projective” and thought-lead  Must think beyond HR issues to understand HR issues  Professional services industry restructuring renews pressure for traditional interventions  Formal survey methodology will be temporarily rendered less valid than anecdotal data from networking  Finding order in chaos, rather than imposing order on chaos, is a new role for most  Total Rewards issues are rapidly being co-opted by broader business issues

Business Environment Financial impact – corporate and individual - of rewards programs being revisited Earnings Charges Employee Taxation Investor Perception Corporate tax “breaks” Uncertain Performance Metrics Market Valuation Uncertainty Financial Reporting in Flux Soft but Uneven Economy

Business Environment Issues:  Business environment is currently dominated by financial measurement and reporting issues  Business was already being measured differently – e.g., balanced scorecard – which was reflected in reward system design  Employment relationship is being measured differently  Beyond business -- political, media, popular pressures will force accountability for reward practices  Even if we had a fully quantitative model of total rewards value, it would soon be obsolete

Business Environment Conclusions:  Increased level of financial skills are required for total reward professionals  Must understand basics of the business, beyond “job matches”  Business can “learn compensation” faster than rewards professionals can learn business  Coming challenges to the total reward model are going to be:  Financially complex  Politically tinged  Comingled with broader business issues

So What do WE do?  Present irrefutable data -- not just rewards data surveys (and not just the latest consulting firm sales pitch)  HR performance metrics  Human capital impact  True competitive data  Financial impact analysis  Be a business professional – (and not just the HR person)  Business understanding  Operations orientation  Tactical emphasis, balanced with strategic orientation Will this help us make money?* *or equivalent question for nonprofit/governmental entities

So What do WE do?  Lead change and tell them what’s new (and not just what the media has already told them)  Interpret business trends through HR issues to business needs  Be willing to point out inevitable but unpopular issues  Operate in a business environment (and not just the world of total rewards)  Balance employee concerns with financial and operational requirements  Speak in business terms, not flavor-of-the-month HR buzzwords  Continue to emphasize financial and quantitative elements Will this help us beat the competition?* *or equivalent question for nonprofit/governmental entities

Bringing it Home to the GPN Organization  Offer content based on quick-turn member input  Challenging for a large parent organization with broad scope  Tailor content and relationships to industry/region/demographic profiles rather than offering a stop on the national roadshow  Constrained by resource limitations in a parent organization  Radically experiment with membership and attendance profiles  Risky and time-consuming for a parent organization

Bringing it Home to the GPN Organization  Define, schedule, and execute program delivery on internet time  Centralized parent organization can’t accomplish  Move toward business-based content  Requires time and a change in contributors, difficult for a parent organization  Define the next generation of thinking and the professionals that lead it  Perfect joint role for the GPN members and the parent organization

And Now… What has changed since we started this presentation?