1. Total Rewards and the Employee Value Proposition
April 28, 2014
Paige Clay
Partner, Client Management
Richmond, VA
Bill Howard
Principal, Health and Benefits Leader

2. EMPLOYEE VALUE PROPOSITION:
NOW AND IN THE FUTURE

3. Macro business issues across industries
Talent issues
Effectively executing global strategies on a country-by-country basis.
Identifying and exploiting local market opportunities.
Innovating new products, services, and value propositions to meet unique customer needs.
Attracting, growing, and retaining local talent to deliver on strategic opportunities.
Adapting to cultural norms while maintaining corporate and ethical standards in marketing products and services.
Many employers will face a significant challenge attracting and retaining key talent
Competition for talent is increasing
Technology is bringing flexibility, mobility to work
Companies will require a mobility strategy as changes in technology help the workplace take on a more flexible nature
The nature of work is changing
Jobs will be viewed not as long-term commitments but as experiences to add to one’s portfolio
The HR function is becoming more strategic
The prevalence of evidence-based tools will help make strategic human capital decisions
Source: Mercer experience and synthesis of Corporate Leadership Council, Oliver Wyman Group, and own research.

4. Employee Value Proposition (EVP): How did we get here?
An evolving employment deal that has been impacted by the shifts in our global economy and government regulation
“Old” deal
“New” deal
Career-long job security
Regular pay increases/promotions
Stable work environment
Work-life balance
Low- or no-cost health care benefits
Defined benefit plans
Training and development
Pay for performance with target at median of market
Constant change, M&A activity
Flexible work arrangements
Higher-cost benefits, wellness/health management, exchanges
401(k)/Cash balance plans
Key points:
Let’s step back and look at how we got into this situation.
First, the employment deal has been evolving, and while employees may accept that things have changed, they still see the new deal as a series of takeaways compared to the old deal, with its lifetime employment, rich benefits and steady promotions and pay increases.

5. Mercer’s point of view EVP influences engagement and, thereby, talent and business measures
EMPLOYEE ENGAGEMENT
TALENT OUTCOMES
BUSINESS PERFORMANCE
EVP
Offers:
Material rewards
Intangible rewards
Career value
Company reputation
Drivers:
Personal relevance of EVP
Rewards equity
Communication
Recognition
Empowerment
Teamwork
Leadership
Measures:
Discretionary effort
Attraction
Internal moves
Promotions
Turnover
Absenteeism
Results:
Quality
Productivity
Sales growth
Safety
Profit

6. How much of your EVP is actually about Material Rewards
How much of your EVP is actually about Material Rewards? Critical EVP questions to ask
Brand
Leadership
Promise
How is our EVP viewed externally?
What are we known for as an employer?
What types of candidates does our brand attract?
In what ways do leaders support or undermine employee engagement and the EVP?
Are leaders reinforcing the right messages?
What makes the work experience at our company different?
How will we ensure the integrity of our EVP?
Do we have success stories?

7. Workforce segmentation Understand varied employee perspective on rewards
55+
40–54
Wants expertise/ experience to be valued
Planning for retirement/retiring
Having company- sponsored health care options available during retirement
Access to “flexible” job opportunities that support simultaneous needs for education, work, volunteering, and/or leisure
Dependent care is an issue for about 1/3 of mature workers
Reduced physical demands
30–39
Works hard to be valued
Saving for a child’s education
Planning for retirement
Dealing with the stress of balancing work and family/ personal life
Taking care of an older parent
18–29
Wants company to value their individual contributions
Balancing work and family/personal life
Flexible work hours
Career advancement, including leadership opportunities
Saving for a child’s education
Planning for retirement
Wants to value their own contributions
New approaches to recruitment
Values informal workplaces, volunteer opportunities and flexibility
Career advancement opportunities, recognition, mentor access
Further education
Access to social networks and high-tech tools
Saving for a home
Some needs span generation groups: predictable income/benefits, having meaningful roles, opportunities for growth, being treated with dignity, and respect. These are the Universal Solutions to engagement
But Employers need to study and segment their workforce the way they study their customers
There are workforce segments besides the Generations that are important
Catherine will talk more about this …
Employee surveys and focus groups are effective ways to gather the employee perspective
9/18/2018 6 6

8. Increased focus on Total Rewards Think holistically to reinforce the Employee Value Proposition
Time off
Wellness programs
Dependent care
Workplace flexibility
Non-financial and status recognition
Commuter programs
Workplace facilities and perquisites
Money
Careers
Work/Life
Compensation
Benefits
Base pay
Guaranteed “bonuses”
Short-term incentives
Long-term incentives
Allowances
Financial recognition programs
Deferred compensation
Retirement
Savings
Medical/Dental/Vision/ Prescription Drug, etc.
Life insurance
Short- and long-term disability
Accident coverage
Performance and accountability
Career opportunity and pathing
Mobility
Leadership
Experiential rewards
Talent development
Employer perspective …
My value today
My financial security and protection
My future value
My quality of life
Employee perspective …
Think holistically – when considering a particular component of the rewards package, it is important to think about implications from changes to that component on other pieces of the puzzle. For example, some may want to thing about changing or scaling back benefits plans to free up more funds for performance-based cash – is this the right decision? Will employees value this? Will it provide the right kind of payback to the company?
9/18/2018 7 7

9. Comparison Costing Investment allocation Value proposition
Workforce segmentation Helps identify where differentiation in talent/reward programs will drive business performance
Organizational
Key talent
Preferences
Geography
Business unit
Business life cycle
Brand
Job level
Leadership
High performers
High potentials
Hot skills
Critical roles
Job family
Age
Gender
Culture
Career aspirations
Workforce segmentation helps to identify where differentiation in compensation programs will drive business performance
Segmentation is often used to guide investment decisions that blend consistency and tailoring of plan, program and policy designs
A majority of firms are segmenting total rewards for different workforce populations according to one or two criteria – the most common are job level, followed by geography and business or product line. Frequently, employers use base pay, and short-term incentive opportunity and eligibility, to differentiate rewards for these groups.
The question is whether this is sufficient to address the challenges of retaining the right talent while keeping rewards affordable and sustainable. Employers should closely examine their rewards investments to ensure they are aligned with the company’s areas of value creation.
Consider using these three groups – performance drivers, performance enablers and legacy drivers – as an additional filter to your current workforce segmentation strategy to better manage costs, address critical retention areas and ensure that rewards programs drive the right kinds of behaviors and outcomes.
Comparison Costing Investment allocation Value proposition
9/18/2018 8 8

10. THE BENEFITS SHIFT:
CURRENTLY B to B to C, FUTURE B to C

11. Defined Contribution Retirement Plan Environment and Trends
What is the industry doing to address these issues?

12. are satisfied with their 401(k) plan
Current retirement plan environment
Retirement readiness in doubt
Perfect storm of factors is creating insecurity and increasing importance of retirement benefits:
DB plan cuts / freezes / terminations
Poor S&P performance (two major market drops within 10 years)
More intense focus on retirement by Boomers
Possible Social Security cuts on the horizon
In the U.S.:
60%
are satisfied with their 401(k) plan
How did we get here?
Slide says it’s a perfect storm of factors. But it’s really not a perfect storm – storm passes quickly. We have an age group from 45 to 65 that can’t get caught up. They may be the lost generation. We have a 20 year time frame to be dealing with this. Steps taken now can help those from ages 20 to 45.
Poor S&P performance made the most impact on those who left the market and never got back in
In 1935, average length of social security benefit was 5 years. Average benefit is longer now. Status of social security – average life expectancy. 72 is the new 65.
Source: Mercer’s What’s Working Survey 11

13. Current retirement plan environment Benefit adequacy – why does it matter?
Worker confidence in having enough money to live comfortably in retirement has fallen
In 2013, 13% of respondents felt they were “very confident” with the highest level of confidence shown in 2007
Those workers who are “not at all” confident is at 28%
So how confident are workers in their ability to live comfortably through retirement? The latest 2013 EBRI Retirement Confidence Survey confirms the results from the Mercer Survey.
More than ½ (51%) expressed some level of confidence with 13% very confident and 38% somewhat confident. This conflicts with the stats we saw on slide 8 which indicated that 76% of baby boomers are somewhat or extremely confident.
Of greater concern is the fact that 28% are not at all confident.
What is the impact of delayed retirement on your workforce?

14. Current retirement plan environment Medical expenses
The EBRI survey results further showed that employees are concerned about not having enough money to pay for medical expenses in retirement.
A married couple age 65 with median drug expenses is estimated to need approximately $166,000 to have a 50% chance of meeting their retirement health care costs and approximately $287,000 to have a 90% chance. Source: Employee Benefits Research Institute, The Impact of Repealing PPACA on Savings Needed for Health Expenses for Persons Eligible for Medicare, Notes, August 2011
Having access to Health Care is one of the key reasons that employees are considering working longer.

15. Current retirement plan environment Delaying retirement
Retirement confidence
continues to erode:
In response, workers of retirement age expect shifting to 66 and older
The percentage planning to retire at age 66, or older, has increased significantly
In 2002, 18% of employees expected to retire at age 66 or older. In 2012, that number was 37%.
What if your employees can’t retire? What impact does that have on your business?
We looked at Health Care costs earlier. Disability and workers compensation costs can also increase with older workers.
Source: Employee Benefit Research Institute and Mathew Greenwald & Associates, Inc., 1993–2012 Retirement Confidence Surveys 14

16. Current retirement plan environment Changing retirement landscape and resulting challenges
Not in employees’ DNA
We are a spending society
We do not appreciate the time value of money
We are a society that values immediate satisfaction
We can be too optimistic
We can be paralyzed by the evidence of trouble
Why should employers care?
Concerns over retirement may create morale and/or productivity issues (78% of employers say employees are less productive when worrying about personal finances)
Requirement for competitiveness
Create differentiators in talent war and open opportunities for younger star performers
Retirement programs will be scrutinized by employees more and more and may become critical in attraction and retention decisions
Staff for special circumstances
Retain valued talent with proven quality/reliability track record
Fill vacancies
Address loss of critical knowledge
Offering appropriate retirement wealth accumulation opportunities is the right thing to do
No consensus of whose responsibility is it
Employees do not save enough
Government benefits need to go through changes
Employers are moving away from DB plans
Employees need to recognize that it is their ultimate responsibility for their well being
Difficulty in assessing how much is enough
Majority of Americans fear outliving their retirement assets more than death
Many factors influence the answer: Family structure; expenses targeted to be covered; earnings at retirement; risk coverage (inflation, medical costs rise; uncertainty of government benefits)
What are the challenges and why should you care?
We are facing a retirement crisis. Some of the challenges we face:
Not a society of savers – we want things now
Optimistic when things go well (market rising, for example – people want to jump in – buy high and sell low)
Whose responsibility is it? Paradigm shift – now just social security and 401(k) – can’t rely on employer. Less than 25% of income comes from employer contribution. Need to get employees to save
Why should you care:
Productivity – concerns over retirement and finances can create productivity issues
Talent drain
Benefits competitive 15

17. Defined contribution plan trends Being more effective
Improving benefit delivery within existing cost structure
Measure plan effectiveness and implement targeted interventions
Increased savings levels
Improve investment behavior
Measure impact of retirement adequacy on workforce migration
Change education programs to address maximizing Medicare & Social Security benefits
What are some things that can be done that won’t increase cost to employer?
Increase savings levels – stretch match for example.
Measure impact of retirement adequacy on workforce migration – why are people staying past retirement age? Is that an issue?
Education – our industry has failed miserably with education. All that works is the auto tools. If you are going to do it, look at it in the new light – segment population by age. Have SSA and Medicare reps come and present
Refer to T. Rowe Price Study: 16

18. Defined contribution plan trends Auto features
Expand role of “auto” features
Existing trends
Enrollment
Auto deferral escalation
New trends
Investment re-enrollment
Spend down menu with default approach
Focus on savings rate, not just participation
Investment refresh – default everyone to TDF unless they opt out
Dalbar numbers – Dalbar 2011 – 1, 3, 5, 10 and 20 year – S&P 500 to average participant returns. Participants always underperform. Too optimistic in good times and pessimistic in bad times. Participants can’t make own allocations on their plan.
Income replacement, not saving rate is key. Redefine how the plan works. 17

19. Defined contribution plan trends Auto features statistics
Only 45.9% of plans use automatic enrollment
81.7% use auto enrollment for new hires only
67.9% of plans have a default savings rate of 3% or less
Only 39% use auto-escalation without participant election
New hires only, not enough
Go above the match level – auto escalation to 15%
Cost issues – even with auto enroll, lessen the amount you match but still use auto enroll. Figure out how you want to spend what you have. Whole driver is what they put into the plan – don’t worry as much about the match , employees bailed out because employers didn’t match. Natural behavior is not working. Auto tools work.
Source: Profit Sharing Council of America 55th Annual Survey, 2011 18

20. Defined contribution plan trends Auto deferral percentage
Most common auto default rate is at 3%, but according to EBRI, even participants know that they need to be saving more. Only 31% either did not answer or believed that they need to save at 9% or less. Should encourage the behavior participants know they need to be doing. 19 19

21. Defined contribution plan trends Opt-out rates
In speaking with plan sponsors, the most common objection we hear around auto enrollment is that employees might be upset if they were auto enrolled at more than 3%. According to EBRI, the difference in actions is not significant between auto enroll at 3% and auto enroll at 6%.
Fidelity research also indicates that employees who are auto-enrolled in their workplace plans have nearly identical opt-out rates, regardless of income level or level of default percentage
Additional Info:
Speaking at the U.S. Chamber of Commerce Capital Markets Summit on April 10, Ronald P. O’Hanley, president, Asset Management and Corporate Services at Fidelity Investments, said the Pension Protection Act of 2006 (PPA) was a major stride toward improving individual retirement savings outcomes by expanding fiduciary safe harbors and enabling employers to more proactively drive workers to take advantage of and realize more benefits from their workplace plans.   
O’Hanley told Summit attendees that enabling automatic enrollment, automatic savings increase programs, and auto default to lifecycle investment strategies have had a major impact on getting more participants to enroll in plans and have been a key driver of improved outcomes for workers. However, he added that Congress needs to do more to fully realize PPA’s potential.  
“Policymakers should take steps now to increase the default savings rate to at least 6%,” O’Hanley urged, noted that Fidelity research has shown employees who are auto-enrolled in their workplace plans, regardless at what level and regardless of income level, have nearly identical opt-out rates. He also contended that policymakers should require auto-increase programs as part of plan design, unless employees choose to opt out of participating. “Automatic annual increase programs are the single most effective driver of employee contribution increases, accounting for close to a third of all contribution increases last year and nearly two-thirds of increases by workers in their early 20s,” O’Hanley noted.    20

22. Employee Health Plan Environment
So where are we?
October 22, 2013

23. Employee health plan costs Cost trends continue to outplace inflation and wage growth
Although premium contribution provisions have been relatively stable for the past decade, the cumulative impact of health care costs has eroded savings programs
JAY:
As we all know too-well, one of the key barriers to financial security is the cost of health care, including just the cost to maintain coverage, which has consistently risen at a rate above CPI since the turn of the last century
Historical cost increases have consistently exceeded wage increases, so even when employers maintain their premium contribution strategy at a fixed percent of total cost, employees’ premium costs have been rising in a way that cannibalizes their ability to save for retirement just as it does the same with their employers’ budgets.
Source: Mercer National Survey of Employer-Sponsored Health Plans

24. Factors that affect average annual total health benefit cost per employee Costs increase 2% for every 1 year the population ages
50% higher
than age 31
Source: Mercer National Survey of Employer-Sponsored Health Plans—based on Large Employers

25. Despite added cost pressure, most employers will continue to provide health benefits…
Percent of employers that are likely to terminate plans within the next five years
One thing we don’t expect to see is very many employers dropping their plans and sending employees to the public exchanges. About a fifth of the smallest employers are thinking about it, but among employers with 500 or more employees, all but 7% remain committed to offering employer-sponsored coverage.
Small employers
All large employers
Source: Mercer National Survey of Employer-Sponsored Health Plans

26. Many employers see CDHPs as central to their response to health reform Large employers
CDHP growth is accelerating – Prevalence and enrollment nearly doubled in just 3 years
Over the past three years we’ve seen both the percentage of large employers offering CDHPs, and the percentage of covered employees enrolled in CDHPS, nearly double. In 2012, over a third of all large employers offered a CDHP, and 15% of their employees were enrolled. Before reform, employers saw CDHPs as a way to promote consumerism and provide a low-cost plan option. Now, with many employers facing growing enrollment due to PPACA’s shared responsibility provisions, we’re seeing growth in CDHPs accelerate.
The larger the employer, the more likely they are to offer a CDHP – over half of very large employers -- those with 5,000 or more employees -- offered a CDHP in But while fewer small employers offer a CDHP – 22% -- enrollment is even higher than among large employers, at 17%. That’s because small employers are much more likely to offer a CDHP as their only medical plan.
Source: Mercer National Survey of Employer-Sponsored Health Plans

27. Growing employee acceptance spurs growth in CDHP-only programs Large employers
More employees choosing CDHP
% choosing CDHP when offered w/other medical plans
Full replacement becomes more common % of CDHP sponsors offering no other plan
Employer HSA funding drives enrollment
% choosing HSA when offered with other medical plans
Expect to offer a CDHP as full replacement 5 years from now
The Survey offers many examples of how and why the CDHP trend is growing. In programs where a CDHP has been offered as an option for at least three years, there has been steady annual growth in enrollment, reaching 27% participation in HSA-based plans and 40% in HRA-based plans, which tend to be richer.
Among large employers offering a CDHP, full replacement is becoming more common— 14% of HSA plans and over a quarter of HRA-based plans are now the only option offered to employees.
Further, the Survey shows that, perhaps not surprisingly, employers making significant contributions to an HSA are seeing much higher enrollment than those who are not.
With growing acceptance of this plan model by employees – and a growing need among employers to manage cost – more employers are willing to consider a full replacement strategy. In our 2011 survey, just 11% said they expected to offer a CDHP as a full replacement for at least some employees within five years. In 2012, this jumped to 18%.
Source: Mercer National Survey of Employer-Sponsored Health Plans+

28. Financial incentives are becoming the norm in health management programs, and participation rates are rising as a result
More employers are
driving engagement
through financial incentives, most often cash or contribution reductions
Large employers
Very large employers
We’re seeing continuing growth in the use of incentives to encourage participation – or even to reward employees for meeting their health goals. More than half of all large employers – and almost two-thirds of those with 5,000 or more employees – now offer financial incentives.
That’s because incentives work. Health assessment completion and biometric screening rates are significantly higher when incentives are used, and participation in lifestyle coaching, which requires a bigger commitment from employees, nearly doubles.
Large employers using incentives report higher participation rates
*Average % of identified persons actively engaged in program
Health assessment completion rate
Lifestyle management program participation rate*
Validated biometric screening rate 27 27

29. CDHP participants exhibit engagement around health
Traditional = health plan with no deductible or <$1,000 (individual), <$2,000 (family).
HDHP = High-deductible health plan with deductible $1,000+ (individual), $2,000+ (family), no account.
CDHP = Consumer-driven health plan with deductible $1,000+ (individual), $2,000+ (family), with account
Source: EBRI/Greenwald & Associates Consumer Engagement in Health Care Survey, 2013.

30. Spectrum of strategies associated with the ACA
Typical Strategies
Add low cost plan - 60% plan.
Move to CDHP.
Leverage wellness incentives.
Revisit eligibility.
New Considerations
Private Exchange.
Defined contribution.
Segmentation.
Unaffordable coverage.
Exit.
Leverage Medicaid.
Alternative Strategies
Minimum essential coverage.
Skinny medical plans.
Excepted medical plans – fixed indemnity, critical illness.

31. Private exchange uptake has begun among many large employers and is expected to rapidly accelerate
Private exchange growth has just begun
95% of private exchange lives will be employer-sponsored
65%+ of employees will likely choose different benefits than they have today 25 50
Millions of lives
PRIVATE EXCHANGE
2013
2014
2015
2016
2017
2018
Sources: Oliver Wyman Private Exchange Market Model, primary research

32. Why employers are considering a private exchange strategy
2015F
2010
2005
2000
Health Care Costs
Continued Cost Pressure
Drive cost efficiency through the healthcare supply chain
New competition among insurers, providers
Reduce administrative costs through standardization
Support new market entrants with exchange as distribution channel
Healthcare Reform
Support Healthcare Reform compliance
ACA taxes, minimum benefits, coverage requirements, etc.
Example: 40% excise tax in 2018 if costs are not managed below $10,200/$27,500 (single/family)
Shifting Responsibilities
Individuals
Employers
Empower Employees
Improve employee benefits appreciation
More choice, greater support
Addresses the needs of all employees and retirees
Full and part time employees, pre-Medicare and Medicare retirees

33. Retiree Health Plan Environment
So where are we?
October 22, 2013

34. After falling sharply in 2011, offerings of retiree medical plans
After falling sharply in 2011, offerings of retiree medical plans* hold steady in 2012 Percent of large employers
*Plan must be offered on an ongoing basis (i.e., new hires are eligible); includes plans with no employer contribution
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
2012
Source: Mercer National Survey of Employer-Sponsored Health Plans

35. Retiree medical coverage affects average retirement age Average retirement age for employees retiring in 2011, among large employers
Source: Mercer National Survey of Employer-Sponsored Health Plans

36. Average health benefit cost per retiree among large employers
Based on respondents providing both 2011 and 2012 cost
Source: Mercer National Survey of Employer-Sponsored Health Plans

37. Pre-Medicare retirees & public exchanges Strategy questions
Should employers look to the Public Exchanges to help bridge the gap for employees between active employment and Medicare eligibility?
Strategies depend on household income post-employment
Many employees continue working because they feel they need pre- Medicare medical coverage; but lower household income retirees may be eligible for substantial subsidies from the Public Exchanges
Considering subsidies from the Public Exchanges is an important financial planning component for retirees

38. Eligibility for exchange premium tax credits Based on second-lowest cost silver plan in 2014
Requirements for tax credits subsidies:
Someone who is NOT enrolled in “eligible employer-sponsored coverage”
Someone who has a “household income” of at least 100% but not more than 400% of the federal poverty level based on family size ($11,490/$15,510 to $45,960/$62,040 using 2013 numbers for a single/two-person)
Someone who Is generally not eligible for Medicaid or Medicare (some exceptions apply)
Someone who is lawfully present in the US and not incarcerated
Individual Public Exchange Costs in 2014 (Based on 2013 FPL of $11,490)
% Poverty level
Annual household income
Plan value with cost-sharing credit
Maximum monthly employee contribution in exchange
% Household income
Dollars
<100%
<$11,490
Medicaid / Access gap
N/A
<138%
<$15,856
Medicaid (if expanded)
138%
$15,856
94%
3.00%
$40
150%
$17,235
87%
4.00%
$58
200%
$22,980
73%
6.30%
$121
250%
$28,725
70%
8.05%
$193
300%
$34,470
9.50%
$273
400%
$45,960
$364
>400%
>$45,960
No maximum
Full cost
[Explaining eligibility and benefits helps clients understand the employee perspective – and the company’s risk for shared responsibility penalties. Forecasting 2014 employee contributions and comparing them to this table is recommended.]
Let’s look at how employees can become eligible for Medicaid or tax credits. This is also how the company ends up paying the shared responsibility penalty.
The numbers in this table are Mercer’s reflect the 2013 published federal poverty level and Mercer’s estimates for income thresholds for new federal benefits for an individual in These are illustrative.
It’s important to know that the income thresholds we’re discussing are household income – not just what you pay the worker. A single person with two jobs or a family with both spouses working is tested against their total household income
In this table, we’re taking the perspective of an individual – no spouse or dependents. On the second row, a single person earning less than $15,856 in 2014 will be eligible for Medicaid if he/she lives in a state that expands Medicaid – which has no deductibles and no contributions. Medicaid is being vastly expanded, and anyone eligible for it should take it.
Let’s look at the row for someone at 200% of the federal poverty level with a household income of just under $23,000. In this row, look first at the columns on the right.
If the employee contributions you charge are more than 9.5% of the employee’s income, which is $182 a month, the employee could buy insurance through an exchange and get tax credits. The company pays the shared responsibility penalty. This also happens for employers that don’t offer health benefits at all. You may discuss actual employee contributions for reference.
This employee gets two benefits. First, they get a tax credit so a 70% value silver plan costs $121 a month. Second, they’ll also get a plan improvement to make the plan pay out at a 73% value.
The rest of this table works similarly. If the contributions the company requires are more than the employee contribution threshold set at 9.5% of their household income, then the employee may buy their insurance through an exchange using the tax credits for the premiums shown is the right column. The company pays the shared responsibility penalty each time this happens.
One thing to remember is that if paying the penalty costs the company less then having the employee in the company’s plan – and the employee would get better benefits at lower cost, it may be better to pay the penalty. This isn’t a test to be less than each threshold – it’s a strategic decision to decide where you want to be and what will help employees. 37

39. Retiree eligibility for public exchange subsidies
Household income post retirement (One retiree with DC plan)
Chart 1: Age 62 Retiree With Social Security Benefits, Income from a Defined Contribution (DC) Plan, and Investment Earnings from Personal Savings (if any). 38

40. The Health-Wealth Connection—making wise choices in health care can affect your retirement savings
Every dollar you spend on medical plan payroll contributions or out-of-pocket expenses reduces the amount you can save toward retirement
Most employees are over-insured; they choose medical plans with lower deductibles, lower copayments, but higher premiums and payroll contributions
By switching from a PPO Medical Plan to a Health Savings Account Medical Plan, our employee can retire at age 65 with $60,000 to $95,000 more in her account
To illustrate our point, here’s our hypothetical employee:
Age = 45
Medical coverage = Family
Annual salary = $80,000
Retirement savings rate = 5%
Employer match = 200%
Retirement age = 65
Annual salary increase = 2.5%
Annual rate of plan return = 5%
Starting retirement balance = $0
Medical plan assumptions:
Employer contributes $12,820/yr to either plan; PPO annual premium = $16,950, H S A = $14,274; employee pays difference
Employee out-of-pocket medical costs = $1,000/yr, moderate = $2,000/yr, high = $3,000/yr
Data source: 2012 Mercer National Survey of Employer-Sponsored Healthcare Media Industry Cut
Figures exclude employee contribution to spending account 39

41. TOTAL REWARDS:
WILL IT CONTINUE TO BE YOUR DIFFERENTIATOR?

42. Total rewards context Most employers set pay strategy in a total rewards framework
Rewards aligned with employee value proposition
Market strategies:
73% target pay and benefits at median
11% target above median
Remaining below median, offset with other components
Focus on delivery to maximize value
Jeanie
Total rewards remains the guiding paradigm for strategic compensation planning—it was the theme of this year’s WorldatWork conference. Cash compensation along with benefits, careers and work/life complement the employer’s overall employee value proposition. Increasingly employers establish and communication their cash compensation and pay for performance plans as part of this larger TR strategy and value proposition.
In our recent Pay for Performance Survey Panel, we asked organizations to describe their pay strategy in terms of their target position to market for different components of total rewards. Not surprising, 73% of organizations say they target pay and benefits at the market median, with 11% targeting pay and benefits above the market median
Among the remaining organizations, we found a variety of strategies were employed, with organizations trading off and paying below median on some reward elements, which they then offset with richer benefits or incentive package or in some cases, work/life balance.
20% of organizations report using a segmented strategy, to attract and retain key talent in a competitive market.
What makes sense for your organization will depend on your overall business strategy, the market in which you compete for talent, and affordability—but whatever your strategy, effective communication and delivery of the rewards you do offer are key to maximizing the intended and perceived value.
Source: Mercer’s 2013 Pay for Performance Survey (Preliminary Results)

43. Companies tend to pay base salary increases at the median Base increases are set to remain steady into 2014
Jeanie
Base pay increases are set to remain steady into 2014 at 2.9%, compared to a median percentage actual change in 2013 of 2.6% and 2.4% the year before that, and still well above current or recent CPI increases
The reported rationale for those organizations reporting slightly higher increases is greater competition for their workforce or anticipated labor shortages.
Employers reporting a smaller anticipated increase indicated they are doing so in response to economic uncertainty or cost reduction initiatives
Most increases will be delivered on a fixed date, with 25% of those falling in April
* All averages exclude 0’s
Source: Mercer 2013/2014 US Compensation Planning Report

44. Source: Mercer 2013/2014 US Compensation Planning Report
There are differences by industry … But base salary increases tend to be paid at the median
Jeanie
Increases are expected to vary by industry—tracking higher for Oil and Gas at 4.3%, and lower for Healthcare and Education, at 2.6% and 2.5%.
Banking is the industry with the most significant increase in reported budgets over last year.
Source: Mercer 2013/2014 US Compensation Planning Report

45. Short-term incentives Bonus targets also tend to be paid at the median
Ownership Type
Executive
(Target %)
Management
Professional
(Non-sales;
Target %)
(Sales;
Office/Clerical/
Tech
Trades/Prod/
Service
Publicly Traded
45%
20%
10%
15% 5%
Privately Held
40%
17%
Not-for-profit
25%
11% 7%
Joint Venture
35% 8% -%
State-owned Enterprise 9%
The vast majority of participating organizations (83%) have short-term incentive plans for a least one segment of their employee population. Publicly traded organizations are more likely to provide short-term incentives to all employee groups; their target awards range from 5% of to 45% of base salary for Executives. The table below provides median short-term incentive targets (as a percentage of base salary) by ownership type for each employee group.
There are two key reasons the use of variable pay has increased: a) the theory that employees are more motivated when rewards are linked to an outcome or performance metric and b) flexibility that allows an organization to pay out more or less to their workforce depending on its financial performance in a given year. While lots of considerations flow into the determination of the “optimal” pay mix, most experts agree that the variable pay ratio can be both too high and too low. Variable pay ratios can be too high when employees do not see a connection between their own behaviors and the incentive pay or LTI pay they receive. In fact, performance ratings that drive incentive pay allocations often lack validity and many employees have roles that just don’t put them in a position to effect financial or stock performance. Conversely, variable pay ratios can be too low when organizations start experiencing an entitlement “culture” in which employees came to take certain reward levels for granted irrespective of their own or their employer’s performance.
Source: Mercer United States Compensation Planning Survey Report

46. Source: Mercer 2013/2014 US Compensation Planning Report
Short-term incentives Differentiation in incentive payouts for top performers are expected to be higher than for average performers across career streams
Jeanie:
83% of companies have short-term incentive plans in place for at least one segment of their population. High performers can earn 1.5 times the bonus payout that an average performer received. And depending upon the industry short-term incentive plan designs can provide up to 2 times the payout for a top performer vs. a middle performer. This increasing differentiation is becoming the norm.
Since 2012, 10% of organizations have increased the number of employee levels eligible for short term incentives. And 7% of organizations have increased the number of employees within the same level eligible for short term incentives and 91% have kept this number consistent.
Source: Mercer 2013/2014 US Compensation Planning Report 45

47. Non-monetary rewards Most organizations are using non-monetary financial rewards, work/life and development programs to reward employees
Organizations were asked to indicate other practices they have, are considering adding, considering eliminating or eliminated in the last two years. This included non-cash or intrinsic rewards that may be aimed at helping improve an employee’s work/life balance, helping with their learning and development, or simply rewarding then for a job well done. The graph below provides the prevalence of some of these practices.
Source: Mercer United States Compensation Planning Survey Report

48. CONNECTING YOUR GLOBAL WORKFORCE THROUGH YOUR EVP

49. EVP capabilities The four “A’s” guide the creation of the signature EVP
What components of an EVP can an employer offer that are unique and difficult to replicate?
Consider the four “A” words in design:
Aligned
Adapted
Aspirational
Authentic
Identify a signature process or program that will drive talent outcomes that are aligned with the organization’s business needs
If compensation and benefits are no longer differentiators, then what are you doing to evolve your culture to create the loyalty of your employees?
What is your EVP?
Talent and rewards programs typically provide the greatest opportunity to differentiate by talent segment and value added to the business

50. Sample EVP and Proof Points
EVP capabilities The core EVP needs to be clearly articulated and have proof points
Example – A company offers four star hotels and first class to come consultants who travel but not to other consultants. The first class is offered to those whose clients pay much more for services (e.g. M&A).
Gen Y:
I care most about my development – job rotations and other opportunities to build my skills are highly valued
I care about my career advancement opportunities and need to see progress early and often
I am all about community so I need an environment that let’s me stay connected with my cohort
Gen X
I’m starting to save for my child’s education so pay is important and I especially value the incentives I receive
I’m more interested in my career growth and potential – getting a promotion is a critical value driver for me
I also value flexibility in my work schedule because balancing my work and personal lives is critical
Baby Boom
I care about pay and am especially interested in my bonus potential.
Stable earnings growth is critical as I’m trying to balance saving for my retirement while paying for my children’s education (and maybe even caring for a parent)
I also want to be recognized for my experience and contribution
Traditionalists
I value any help I can get in planning for my retirement
I want a lot more flexibility in my work schedule – I have more to give, but I’m not interested in 60+ hour work weeks
My pension benefit is probably tied to my last years’ salary so stable growth in base pay is important
Sample EVP and Proof Points

51. EVP capabilities Embedding the EVP using technologies that resonate with employees
“Human” Technology
Computer Technology

52. EVP capabilities It is still important to demonstrate the value of TOTAL REWARDS

53. EVP capabilities Help employees with RETIREMENT PLANNING

54. EVP capabilities Help build a CULTURE of HEALTH and WELLNESS

55. THE IMPORTANCE OF YOUR EMPLOYEE VALUE PROPOSITION

56. Next Steps Addressing the issue
What you need to know before taking action
Actions to consider
Consequences of not taking action
Review existing long-term business plan and revenue projections
Profile of workforce, now and in the future, needed to execute your business plan
Review of existing benefits package and employee retirement plan
Understanding of the retirement behavior your program encourages
Understanding of employee options and current usage pattern
Model/forecast emerging workforce; assess alignment with business plan
Identify program features that encourage behaviors at odds with business plan
Modify existing plan
Incentives to retire early to open opportunities for “blocked” high potentials
Incentives to stay longer if additional tenure aids business plan execution
Revamp communications to ensure improved understanding and behavior
Loss of workforce engagement
Retiring “on the job” since cannot afford to retire
Departure of “blocked” high potentials
Not being able to operate business effectively due to misalignment of workforce
Forced into reactionary operating style due to lack of strategic plan/program designed to encourage desired workforce profile
There is a talent component to the solution – determining where there may be “blockers” to talent being able to move up; determining appropriate age for retirement. We will focus on the retirement plan in our discussion. Key is to look at benefit programs – understand what behavior your plan design is driving.
How many have auto enroll
How many have auto increase?
How many stay at 3% if not auto increase?
People need to save 15 to 20% - why is our plan design encouraging people to save 3?
Actions to consider?
If you do nothing, will find that employees retire on the job because they can’t afford to actually retire
Source: Mercer’s What’s Working Survey

58. The question isn't at what age I want to retire, it's at what income
The question isn't at what age I want to retire, it's at what income. ~George Foreman
Retirement Readiness is a pressing issue, and there is no silver bullet to address such a large issue. Our objective today was to show the link between Health Care and retirement plans so that decisions are no longer made in silos. We also wanted to get you thinking about what sorts of changes or thought process should be implemented within your organization. 57