Total Rewards Strategies in a Down Market DEBORAH MARSH December, 2002

Total Rewards Strategies in a Down Market What’s in store in 2003? Deborah Marsh,

Nightly News Tough economy  Depending on who you talk to, not as bleak as before Market still down  Stock options still underwater in most companies Unemployment still high

Nightly News (cont.) Demographic shifts continue  Retirement delayed  Mothers with preschoolers make up the fastest growing segment of the workforce Technological advances continue to create new ways of working  Telecommuting  Flexible work hours

Still only a finite number of the required talent !

What does this mean to Managers? Concern about cash and equity plans and the ability to continue to remain competitive in the labor market Total Reward budgets are tight, so we need to use them wisely while still achieving the goals of attraction, retention, and motivation Continue to search for ways to set the company apart in a cost effective manner More than ever, need to communicate Total Rewards Philosophy and elements Continue to search for administrative efficiencies  Employee Self Service  Outsourcing

What’s Happening?- Compensation Continued focus on market Time between increases is up (18 months) Annual increases are down but not as much as we thought  From 4 – 4.5% for past five years to 3.7 – 4.0% according to WorldatWork 2002 Salary Budget Survey Fewer employees will receive an increase this year  94% in 2001 vs. 85% today Performance is king!

Pay for Performance More of a reliance on pay for performance Companies striving to provide the lion’s share of rewards to top performers Attempts to rid employees of “entitlement” mentality Efforts to revamp performance management systems  Ranking “in”  Efforts to reward based on what people bring to the organization rather than current activities Caution – Little faith on the part of the workers that such systems work

Incentive Pay Trend has been to increase variable pay to make compensation contingent on organization’s ability to pay Deadly behavior: pay out anyway! Many organizations revamping targets mid-year Lots of explaining to do!

Compensation Strategies Utilize pay for performance whenever possible Use your total rewards budget wisely— pay your top performers as top performers in the labor market Correct distortions in compensation mix created by outdated “hot skills” premiums or salary structures ahead of market Lose your “closed” compensation system

Keith’s Quote: “After the lay-offs, they want me to work twice as hard for half the compensation”

What’s Happening? - Stock Options Companies are increasingly tying stock option grants to performance* The goals of stock option programs have not changed since 2000  Attraction, retention, and motivation of employees  Creating an ownership culture Even Companies with a drop in option value have not changed pattern of use  Of those that experienced a decline in stock price the most common strategy was increasing grant size Companies awarded the same number of options in 2002 as 2000, however the overall value of options was less * From WorldatWork/Segal Sibson Hot Topic Survey

Stock Option Strategies More grants Accelerate future stock option grants into the current year More frequent granting schedules Cancel and reissue 6 months later Performance based vesting Reduce maximum option term Shift from economic value approach (such as Black-Scholes) to a flat-share guideline approach Restricted stock swaps

Stock Option Strategies (cont.) Before you take out your eraser evaluate your total compensation program:  What is the business outlook for the future?  What challenges, if any, are you facing in recruitment and retention?  What is the recent history of all compensation payouts? If your industry or market is permanently altered, or your total compensation program was never effective, it may need to be revised If over the long-term, your stock option strategy still works, tweak or keep

Stock Option Strategies (cont.) COMMUNICATE!

What’s Happening? - Benefits Even with all of the attention and scrutiny post-Enron, use of company stock in 401(k) programs remains the same  Focus is on education Some employers are questioning benefit “fit” Most attention in company programs has been on medical plans

What’s Happening? - Work Environment The last component of “Total Rewards” Now, more than ever, can be used to set yourself apart inexpensively Demographic changes, especially large number of women in the workforce, has generated the need for work/life programs  More women earning professional and graduate degrees  More women starting businesses  Women are increasingly becoming the breadwinner

What’s Happening? - Work Environment (cont.)  However…  The number of Americans living alone surpassed the number of married couples  What singles want is parity in benefits  Shifts since 9/11  Changing sense of individual material success  Shift of priorities to family, community

What’s Happening? - Work Environment (cont.)

Work Environment Strategies Something for everybody  How much does it cost to implement telecommuting?  Flexible schedules? Opportunities exist now more than ever to provide trade-offs (traditional compensation and benefits for work environment) Be sure to evaluate your own demographics and culture first

Putting it all together… Don’t squander your Total Rewards budget  Evaluate fit  Is it still meeting your goals for attraction, retention and motivation ?  Pay for Performance!  Make sure your top performers get the lion’s share of increases, incentive payments, and equity  Make sure your performance management system works and is understood!

Putting it all together… Guarantee less—offer more! Don’t forget the work environment component Communicate, communicate, communicate !