Mercer Limited is authorised and regulated by the Financial Services Authority Registered in England No Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU Future possibilities for public sector reward 9 September 2009 Christopher Johnson, London

1 Mercer The impact of the downturn on the public sector UK credit rating under threat as debt hits £8.5bn 22 May 2009, The Times Budget 2009; Thousands of public sector jobs at risk 22 April 2009, The Guardian 350,000 public sector jobs to go 16 th June 2009, CIPD Darling to cut public spending, admitting difficult choices lie ahead 9 June 2009, The Guardian Average wage falls for the first time in at least 45 years, but not in public sector 27 April 2009, The Telegraph Prime Minister steps in to curb civil service pay rises 31 March 2009, Personnel Today The impact of the downturn on the public sector Public sector productivity falls 10 June 2009, The Financial Times

2 Mercer Now is the time to act… Spending cut of 7% and efficiency savings of £9b announced in 2009 budget Britain's national debt now stands at £703bn; The cost of maintaining this debt will increase as interest rates rise Credit ratings agency Standard & Poor have explicitly stated that the UKs future credit rating depends very much on the credibility of the next governments fiscal consolidation plans After the election the issue of cost-cutting will be more firmly on the agenda It will take time to implement change and for the effects to be realised The current crisis provides the need and opportunity chance for reform As governments assume a broader, more significant role in response to the crisis, it becomes more important that they should be effective and efficient There is a growing fiscal imperative Taxpayers will pay more for public services and will expect and demand more in return Out of crisis, opportunity

3 Mercer The public sector wage bill represents approximately 1/3 of public sector cost Workforce reform is the only way to navigate through the pressures on public sector costs Workforce reform Cultural change is needed A focus on improved efficiencies and cost savings should be ongoing as in any organisation Differentiation and segmentation are key to delivering this cultural change by rewarding desired behaviours and improved performance Key features should be… A push for shared services A more flexible, dynamic, differentiated approach to reward An increased focus on competencies and performance Key considerations are… Affordability Sustainability The level of service must be maintained despite cost reductions Employee engagement

A total rewards approach to incentivise employees

5 Mercer Base Pay Guaranteed pay Short term incentives Long term incentives Recognition awards Total rewards approach to incentivise employees The approach to total reward in the public sector is very different to the private sector total rewards model BenefitsCareers Workplace flexibility Commuter programs Workplace facilities & perquisites Experiential rewards Non-financial and status recognition Time off Wellness programs CompensationBenefitsCareers Work Lifestyle A holistic approach to reward helps to enhance employee engagement as well as manage cost Public sector practices differs from private sector Performance management Career pathing Training and development Talent review/ succession planning Depth Vs. breadth of experience Health and group benefits Retirement Work/life programs Voluntary benefits

6 Mercer Total rewards approach to incentivise employees Compensation The current state; – Base pay constitutes the majority of the public sectors compensation costs – Inflation linked pay increases – Pay progression linked primarily to service This model allows for little flexibility and is not sustainable Approximate break down of the public sector wage bill ManufacturingPrivate sector services Voluntary and not for profit Public sector 15%18%70%69% Percentage of companies using Service as a criteria used to manage pay progression, by sector Source; CIPD

7 Mercer Total rewards approach to incentivise employees Compensation Bonuses in the public sector have historically been viewed negatively – This needs addressing as variable pay is key to differentiating between high, middle and low performers and rewarding desirable behaviours – Language is important to peoples perceptions Variable pay can be used as a motivator of performance, a behaviour alignment tool or a tool for sharing success Bonuses in the public sector are nothing less than rewards for failure The Daily Mail, 22 July 2008 All70% Manufacturing and production 85% Private sector services 89% Voluntary sector30% Public services33% Use of cash based bonus or incentive plans, by sector; Maximum bonus/incentive potential as a proportion of base salary, by sector Source; CIPD

8 Mercer A shift in focus from base pay to variable pay would; Enable money to be targeted where it can have the greatest impact Provide a more sustainable approach to reward Attract high performers Help management of fixed costs Incentivise desired behaviours Key features should be; Goals focused on outcomes An integrated way of allocating the right quantity and quality of resources for each objective Clear accountability across organisations Accurate and consistent measurements of progress Benchmarking against best practice Compensation

9 Mercer Total rewards approach to incentivise employees Benefits and pensions Traditional differentiator for public sector organisations The public sectors reward offering has not moved with the times – The majority of private sector organisations now offer employees a flexible benefits package – It is rare to find final salary pension arrangements that are open to all outside of the public sector – DC scheme membership now exceeds that of DB schemes Both of these shifts can lead to substantial cost savings A reduction in pensions has been a key element of Swedish public sector reform Considerations; – Political sensitivities regarding some benefits – The impact of pension reform on the career proposition Public sector pensions must be tackled for the sake of the economy The Telegraph, 29 April 2009 Source; CIPD

10 Mercer Total rewards approach to incentivise employees Careers Careers element is an important driver of employee engagement, and therefore incentivisation, but is neglected by many employers Investing in employees careers can also be a cost effective way of increasing employee engagement There is a trade off in any organisation with the depth versus the breadth of experience that can be offered – The public sector has a strong career proposition built on the development of broad professional skill sets which conflicts with the need for technical expertise To increase value for taxpayers, organisations need to be clear about what core competencies are required to deliver service excellence Talent strategies are vital Skills – Leitch, apprenticeships Development and deployment Sourcing – internal, external, duration

11 Mercer Workforce trends drive people management programmes From homogeneity to heterogeneity Segmentation – type of work Talent requirements Skills strategy Performance management Level and mix of rewards Linkage between pay and performance Differentiation – performance Higher proportion of variable pay linked to performance Focus on individual and team, short and long term Greater use of spot rates/short progression linked to role and competence Discretionary benefits Tailored – employees voice Employee engagement driven and/or choice Opt for marketable expertise Flexible work environment Avoid perverse incentives Underpinned through common values and some coherence

12 Mercer Reward principles Meet business need and be affordable Business, operational and workforce needs are the drivers for a reward strategy Business cases outline benefits, risks and costs to justify investment Reflect nature of work Manage total reward Recognise performance Recognise and reflect workforce groups identified by function and skills utilised Organisations employing similar workforce groups encouraged to consider similar reward arrangements Reward reflects continuing value and contribution of an employee in given period Value and performance rewarded reflect contribution to organisation and impact delivery Total reward is tailored to attract, engage and retain the right talent as well as providing personal choice and flexibility Employers/employees need to develop a full understanding and appreciation of the value of the total reward package

13 Mercer Reward principles Manage all cash Base pay reflects job challenge and individuals competence in the job Variable pay reflects performance delivered against agreed objectives Face the market Support equal pay Reward levels aligned with agreed market positioning to attract, motivate and retain the right talent Reward competitiveness covers each element of total reward and the overall deal Eliminate direct and indirect reward discrimination and reduce any unjustified gender pay gaps Operate reward systems that are perceived by staff to be reasonable and transparent

Mercer Limited is authorised and regulated by the Financial Services Authority Registered in England No Registered Office: 1 Tower Place West, Tower Place, London EC3R 5BU