2012 Talent Management & Rewards Study The High Stakes and Return on Getting the Employee Value Proposition and Total Rewards Right Marc McBrearty North American Leader, Data Services May 14, 2013 © 2012 Towers Watson. All rights reserved.

more likely to report their employees are highly engaged Companies face serious challenges when it comes to attraction, retention and engagement of talent. Our research reveals what it takes to get it right. 5X more likely to report their employees are highly engaged 2X more likely to report achieving financial performance significantly above their peers Companies that have adopted an increasingly integrated approach to Total Rewards strategy, design and delivery decisions — supported by an overarching Employee Value Proposition — are:

About the survey The 2012 Talent Management & Rewards Survey 17th annual study of employers’ views on trends and issues in rewards and talent management 1,605 participants 30 markets Fielded between April and June of 2012 Employee views captured via our Global Workforce Study 32,000 full-time workers 29 markets globally Fielded between February and May of 2012

Headlines: Attraction and retention challenges continue despite variable economic conditions Attraction – majority of employers report difficulty attracting pivotal employee groups: critical skill (72%), high potentials (60%) Retention – similar issues globally retaining key employees Significant variation across markets reflecting economic conditions Workforce Segment Problems Attracting Problems Retaining Critical skill employees 72% 56% High potential employees 60% 55% Top-performing employees 59% 50% All Employees 31% 25% Source: Towers Watson 2012 Talent Management and Rewards Study – Global.

Headlines: Ongoing disconnects between employee and employer views on drivers of attraction Attraction Drivers Employee View* Employer View* Base pay/salary 1 2 Job security 4 Career advancement opportunities 3 Convenient work location — Learning and development opportunities 5 7 Challenging work 6 Organization’s reputation as good employer Organization’s mission, vision and values * Ranking of reasons an employee would be attracted to an organization (from a list of 27 possible reasons). Sources: Towers Watson 2012 Global Workforce Study, 2012 Talent Management and Rewards Study — Global.

But, employers overvalue a few items relative to employees Headlines: Better alignment between employee and employer views on drivers of retention Retention Drivers Employee View* Employer View* Base pay/salary 1 Career advancement opportunities 2 Relationship with supervisor/manager 3 Trust/confidence in senior leadership 4 — Manage/limit work-related stress 5 Job security 6 Convenient work location 7 Learning and development opportunities Challenging work Short-term incentives * Ranking of reasons an employee would leave their organization (from a list of 27 possible reasons). But, employers overvalue a few items relative to employees Sources: Towers Watson 2012 Global Workforce Study,2012 Talent Management and Rewards Study.

Headlines: Working more and doing more with less in the workplace Item Employers Employees Employees have been working more hours than normal past 3 years 53% 50% Expect employees will work more hours than normal next three years 43% 47% Employees have been using fewer vacation days or taking less personal time off over the past three years 29% 40% Employees often experience excessive pressure in their job 48% 38% Sources: Towers Watson 2012 Global Workforce Study,2012 Talent Management and Rewards Study.

Headlines: Eligibility and targets for annual incentives are mostly stable, but more likely to be increasing than decreasing The trend is for higher performance expectations: Nearly four in 10 (38%) participants have raised expectations for organizational performance 30% indicated increasing individual performance expectations Percentage of organizations reporting changes in short-term incentive/bonus programs within the past 12 months Global Asia Pacific EMEA LATAM North America Eligibility Decreased 5% 8% 3% 4% 2% Stayed the same 83% 76% 85% 82% 89% Increased 13% 16% 12% 14% 9% Individual incentive targets 6% 75% 68% 74% 73% 84% 20% 26% 17% 24% Employers and employees alike indicate a ratcheting up of expectations And these challenges are having an impact on employee attitudes… Source: Towers Watson 2012 Talent Management and Rewards Study — Global.

Headlines: The top drivers of Sustainable Engagement are about the EVP, and can be affected by Total Rewards programs Leadership 1 Effective at growing the business Sincere interest in employees’ well-being Behave consistently with organization’s core values Trust and confidence in job being done Stress, Balance and Workload 2 Stress levels at work are manageable Healthy balance between work and personal life Work arrangements are flexible Enough employees in work group to get job done right Goals and Objectives 3 Good understanding of organization’s business goals and steps needed to reach those goals Understanding of how job contributes to the organization achieving its business goals Supervision 4 Treats me with respect Encourages new ideas and ways of doing things Acts in ways consistent with his or her words Effective career development conversations Image 5 Organization highly regarded by general public Organization conducts its business with honesty and integrity Source: Towers Watson 2012 Global Workforce Study — Global.

Towers Watson’s EVP & Total Rewards Index tracks organizations’ progress in developing and realizing their EVP Benchmarks of an effective EVP include: Total Rewards elements include: Developing a formal EVP Effectively communicating the EVP to employees Aligning the EVP with what the organization stands for in the marketplace Delivering on EVP promises Differentiating the company from competitors in the labor market Designing customized EVPs for critical employee segments Articulating a Total Rewards strategy aligned with the business and HR strategy Using business strategy and objectives to inform talent management and reward programs Creating specific objectives for each talent management and reward program to align them with the EVP Employing organizational analytics (i.e., business performance and analytics, workforce demographics, workforce performance data) to test the effectiveness of Total Rewards programs

The evolution of an effective EVP and Total Rewards strategy We defined four groups of organizations based on our EVP and TR Index Segmenting and Differentiating Communicating and Delivering Group 4 Integrated and Strategic Group 3 18% Tactical Group 2 23% Have differentiated their EVP from other organizations with whom they compete for talent Have customized EVPs for critical workforce segments More likely to employ organizational analytics to test the effectiveness of total rewards programs Group 1 26% Have effectively communicated their EVP to employees and delivered on their EVP promises 32% Have formally articulated an EVP and adopted a Total Rewards approach Greater focus on an integrated strategy for managing rewards and talent management Have stated objectives for each reward and talent management program Have not progressed in formally articulating an EVP or in developing a total rewards strategy Group 3 has accomplished the steps described for Groups 2 and 3 Group 4 has accomplished the steps described for Groups 2, 3 and 4

Achieving an effective EVP requires best practices in Total Rewards design & delivery Building Blocks for Effective Rewards Design and Delivery Best Practices in Design and Delivery Processes and Tools that Support Effective Implementation Core underpinnings to promote effective design and delivery Job Architecture Job Leveling Competencies Segmentation An effective Total Rewards strategy optimizes the Total Rewards portfolio: Foundational Rewards Performance-based Rewards Career and Environmental Rewards Effective execution has a critical impact on outcomes and requires: Performance Management Manager Effectiveness Implementation of Technology Monitoring

Organizations that have progressed their EVP and Total Rewards strategy are less likely to report attraction and retention Global Fast-growing economies Developed economies Group 1 Group 4 = Global sample 72% 56% Problems attracting critical-skill employees Problems retaining critical-skill employees Source: Towers Watson 2012 Talent Management and Rewards Study — Global.

Organizations that have progressed their EVP and Total Rewards strategy are realizing better financial and engagement outcomes Global Fast-growing economies Developed economies Group 1 Group 4 = Global sample 19% 13% Financial performance is substantially above peer group Highly engaged workforce Source: Towers Watson 2012 Talent Management and Rewards Study — Global.

An effective Total Rewards strategy optimizes the Total Rewards portfolio to meet business and workforce objectives

Foundational rewards: Base pay is the #1 driver of attraction and retention globally Organizations need to ensure the baseline competitiveness of salaries to support their attraction and retention goals Organizations with high EVP and TR Index scores are about 90% more likely to report that their base pay program supports attraction and retention goals Percentage agreeing with statements about the way the base pay program is currently designed and implemented Group 1 Group 2 Group 3 Group 4 Employees understand how their base pay is determined 39% 61% 63% 75% Our managers execute our base pay program well 38% 54% 67% 72% Our base pay program supports our attraction and retention goals 42% 62% 82% Our base pay program supports our long-term business goals, strategy and objectives 40% 51% 65% 76% Our base pay program supports our desired culture 34% 64% 79% Sources: Towers Watson 2012 Global Workforce Study, 2012 Talent Management and Rewards Study — Global.

Performance-based rewards: Achieving best practice in annual incentive design and delivery Group 4 companies are more likely to indicate effective execution of STI programs Short-term Incentive Programs Group 1 Group 2 Group 3 Group 4 Employees understand how their short-term incentive payouts are determined 51% 73% 76% 83% Our managers execute our short-term incentive programs well 44% 58% 65% Our short-term incentive programs support our desired culture 34% 60% 71% 84% Source: Towers Watson 2012 Talent Management and Rewards Study — Global.

Performance management: Differentiating pay based on performance Group 4 organizations are twice as likely as those with less evolved EVPs to report that their performance management process supports differentiating pay based on performance Percentage agreeing that their performance management process is effective at the following Group 4 Group 3 Group 2 Group 1 Linking salary increases to individual performance results Linking bonus payouts to individual performance results Linking bonus payouts to organizational performance results Differentiating pay based on performance even for employees who receive the same performance rating Sources: Towers Watson 2012 Global Workforce Study, 2012 Talent Management and Rewards Study — Global.

Conclusion The EVP is an effective tool in creating the right balance between employee preferences and employer needs — leading to stronger overall performance and improved financial outcomes Improve design and execution of Total Rewards programs Realize improvements in sustainable engagement and stronger business performance Communicate and deliver on promises to employees Segment and differentiate populations for greater engagement and cost management

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