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Total Rewards and the Employee Value Proposition
April 28, 2014 Paige Clay Partner, Client Management Richmond, VA Bill Howard Principal, Health and Benefits Leader
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EMPLOYEE VALUE PROPOSITION:
NOW AND IN THE FUTURE
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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.
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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.
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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
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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?
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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
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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
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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
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THE BENEFITS SHIFT: CURRENTLY B to B to C, FUTURE B to C
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Defined Contribution Retirement Plan Environment and Trends
What is the industry doing to address these issues?
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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
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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?
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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.
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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
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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
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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
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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
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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
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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
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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
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Employee Health Plan Environment
So where are we? October 22, 2013
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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
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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
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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
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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
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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+
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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
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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.
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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.
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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
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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
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Retiree Health Plan Environment
So where are we? October 22, 2013
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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
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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
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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
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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
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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
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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
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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
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TOTAL REWARDS: WILL IT CONTINUE TO BE YOUR DIFFERENTIATOR?
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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)
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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
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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
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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
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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
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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
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CONNECTING YOUR GLOBAL WORKFORCE THROUGH YOUR EVP
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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
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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
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EVP capabilities Embedding the EVP using technologies that resonate with employees
“Human” Technology Computer Technology
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EVP capabilities It is still important to demonstrate the value of TOTAL REWARDS
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EVP capabilities Help employees with RETIREMENT PLANNING
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EVP capabilities Help build a CULTURE of HEALTH and WELLNESS
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THE IMPORTANCE OF YOUR EMPLOYEE VALUE PROPOSITION
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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
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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
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