1. watsonwyatt.com Winning People Practices University of South Florida 2007 HR-ROI Conference Jackie L. Greaner, Ph.D. February 15, 2007

2. Copyright © Watson Wyatt Worldwide. All rights reserved 2 Our Game Plan  HCI: Background  1999/2002 HCI Results  2005 Results – Key Findings  Winning People Practices

3. Copyright © Watson Wyatt Worldwide. All rights reserved 3 The Human Capital Index® (1999-2006)  Five iterations of WW ground-breaking Human Capital Index® (HCI) Research demonstrated: –Better people management is linked to superior shareholder returns –There are ‘global truths’ of people management across North America, Europe and Asia-Pacific –The HCI ranking can be a leading indicator of business performance Copyright © 2002 United Feature Syndicate, Inc.

4. Copyright © Watson Wyatt Worldwide. All rights reserved 4  Continue to reaffirm empirically “it pays to manage people right”  Help managers and organizations assess people investments  Provide HR with framework for examining priorities and monitoring metrics  Determine whether some practices offer a “bigger bang for the buck” than others  Further explore relationships between people practices and individual employee behavior (e.g., productivity, turnover) Why Study the Impact of People Practices?

5. Copyright © Watson Wyatt Worldwide. All rights reserved 5 HCI: The Business Case FINDING: Superior HC practices are a leading indicator of financial performance FINDING: Companies with best HC practices provide 3 times the shareholder return as companies with weak HC practices FINDING: Specific practices drive shareholder value, while others actually diminish it IMPLICATION: HC practices implemented now will help companies in the future IMPLICATION: HC outlays can be justified using quantitative data IMPLICATION: Companies can allocate resources to practices that generate the most value

6. Copyright © Watson Wyatt Worldwide. All rights reserved 6  First study in 1999 demonstrated link between superior HR practices and shareholder value creation  Questions on human capital practices plus a variety of financial outcome measures (TRS, Market Value)  Identified 30 people practices associated with 30% increase in market value  Five key dimensions: Recruiting Excellence, Clear Rewards and Accountability, Collegial, Flexible Workplace, Communications Integrity and Prudent Use of Resources The First HCI Report

7. Copyright © Watson Wyatt Worldwide. All rights reserved 7 Process Overview  Quick Process Review

8. Copyright © Watson Wyatt Worldwide. All rights reserved 8  750 large, public companies  Best HR practices provided 64% total return to shareholders 3X companies with weakest HR practices  To determine the relationship between HR practices and financial performance, Watson Wyatt compared 2 different correlations using HCI scores and financial data for 51 companies that participated in 1999 and 2002 HCI studies  HCI study shows which People practices(43 specific practices) had the most impact  Significant improvement in all practices leads to a 47% increase in market value 2002 HCI Study Details

9. Copyright © Watson Wyatt Worldwide. All rights reserved 9 Higher HCI Companies Create More Value 5-Year Total Return to Shareholders 5-Year TRS (1996-2001) 5-Year TRS (1994-1999)

10. Copyright © Watson Wyatt Worldwide. All rights reserved 10 About the 2005 HCI: Practices of High Performing Organizations  Study gathered data on budgets, programs and policies correlated with bottom-line performance  Focused on practices that could be measured objectively Detailed picture of which People practices differentiate high performing organizations

11. Copyright © Watson Wyatt Worldwide. All rights reserved 11 About the 2005 HCI Research  Included more objective items based on past research indicating correlations with firm performance or with behavioral metrics, e.g. turnover Examples: –How many job applications does your organization receive? –What is the average number of offers extended? –Approximately what percentage of non-entry level positions are filled by promotions from within, external new hires?

12. Copyright © Watson Wyatt Worldwide. All rights reserved 12 2005 HCI Metrics  Study uses 2 metrics: total return to shareholders and market premium  Total Return to Shareholders = TRS –Measure used to calculate total return on investment over a defined period of time  Market Premium –Extent to which market value of a company exceeds the cost of its assets –Represents the market's assessment of company’s ability to generate future profits from intangible assets like human capital

13. Copyright © Watson Wyatt Worldwide. All rights reserved 13  150 organizations representing all major industry sectors in North America  Average company size $6.4 billion in revenue and 15,400 employees About the Survey

14. Copyright © Watson Wyatt Worldwide. All rights reserved 14 HCI Key Findings – 2005  Employee Development –Best firms balanced approach to hiring non-entry level positions and fill 1/2 of the non-entry level positions internally. –TRS nearly 6 X greater –Maintaining Training budgets and having Flatter Organization structures also correlate to TRS.  Recruiting Excellence –Companies that fill vacancies more quickly reduce disruption and lost productivity. –TRS = 5X higher –Higher offer acceptance rates and Employee Referred rates correlate to higher shareholder returns.

15. Copyright © Watson Wyatt Worldwide. All rights reserved 15 HCI Key Findings – 2005 (2 of 2)  Turnover Management –Firms with “optimal turnover” TRS over 10 points higher.  Total Rewards –The best organizations make sharp distinctions based on performance and reap TRS 5X higher

16. Copyright © Watson Wyatt Worldwide. All rights reserved 16 Detailed Findings

17. Copyright © Watson Wyatt Worldwide. All rights reserved 17 People Practices: Development  Successful development practices include: –Maintaining a Training Budget 3 yr TRS 5X higher –Filling Non-Entry Level Positions by Promoting from Within and Through the External Market –Flattening the Organizational Structure Creating Fewer Levels and Salary Grades Limiting Use of Employee Evaluations of Superiors

18. Copyright © Watson Wyatt Worldwide. All rights reserved 18 A balanced approach to hiring from within is needed to maximize returns  Best firms fill 1/2 of their non-entry level positions internally  Firms that fill fewer positions internally (12%) have lowest returns (-2%)  Those that fill most positions internally (80% or more) have lower performance (32%) HighMediumLow % of non-entry level positions filled by promotion from within 80%50%12% Market Premium35%42%2% 3-year TRS32%56%-2%

19. Copyright © Watson Wyatt Worldwide. All rights reserved 19 Less hierarchical organizations allow for faster- paced business  Flatter organizations with fewer levels or salary grades tend to be faster paced  More employees per level or salary grade is associated with higher shareholder returns  Flatter organizations have market premium scores between 2 and 8 X greater than more hierarchical organizations Employ/ Level # of levels (20k ees) Market Prem. 3-year TRS Employ. / Salary Grade Salary Grades (20k ees) Market Prem. 3-year TRS High13231538.7%48%4674330.7%40% Low229874.5%33%10618915.4%31%

20. Copyright © Watson Wyatt Worldwide. All rights reserved 20 360°performance evaluations should be used sparingly  Employee evaluations are best used for feedback and career coaching  Improperly used, 360°evaluations can lead to less informative performance evaluations and inhibit senior managers LowHigh % of employees participating in evaluating immediate supervisors 0%30% Market Premium37.9%16.8% 3-year TRS47%31%

21. Copyright © Watson Wyatt Worldwide. All rights reserved 21 Better acceptance ratios correlate with higher market premiums  Firms that fill openings with one offer outstrip those that require two or more  One-offer firms have a roughly 3 X the market premium and 12 point higher returns LowHigh Number of offers typically made12 or more Market Premium41.2%14.2% 3-Year TRS44%32%

22. Copyright © Watson Wyatt Worldwide. All rights reserved 22 Employees hired through referrals have lower initial turnover rates  Using employee referrals can be faster and more efficient  Companies that hire more referrals have a market premium 3X higher than those that use fewer referrals More ReferralsFewer Referrals Percent of new hires from referrals 38%9% Market Premium39.9%12.8% 3-Year TRS48%23%

23. Copyright © Watson Wyatt Worldwide. All rights reserved 23 Companies that hire more quickly have higher shareholder returns  Faster recruiting reduces disruption and lost productivity  Organizations that fill positions in around 2 weeks outperform those that take 3X as long by 48 % FasterLonger Average Time to Fill Openings 2 weeks7 weeks Market Premium18.2%-1.3% 3-year TRS59%11%

24. Copyright © Watson Wyatt Worldwide. All rights reserved 24 People Practices: Turnover Management  One key to maximizing investment in human capital is to optimize turnover  By balancing departures and arrivals, a firm can extend its earnings potential Copyright © 1994 United Feature Syndicate, Inc.

25. Copyright © Watson Wyatt Worldwide. All rights reserved 25 Balanced turnover is associated with the best firm performance  Some turnover is healthy  Firms with too much (~ 43 percent) and too little turnover (~ 5 percent) had the lowest returns  Organizations with moderate turnover (~ 15 percent) had highest shareholder returns Turnover RateHighModerateLow Voluntary25%9%2% Involuntary18%6%3% Total Percent (assuming 20K employees) 43% (8,600) 15% (3,000) 5% (1,000) Market Premium14.2%28.1%1.1% 3-year TRS34%43%31%

26. Copyright © Watson Wyatt Worldwide. All rights reserved 26 The Voluntary Turnover Landscape 13.7% 2003 2004 2005 2006* Industry Benchmark 11.7% 9.6% 7.9% Areas of Concern  Overall Customer Service Organization  New employees  Hispanic and African American 12.0% Watson Wyatt’s Human Capital Index research suggest that companies with a 9% rate of voluntary produce the highest shareholder value 12.0% *As of 6/30/06 11.4%

27. Copyright © Watson Wyatt Worldwide. All rights reserved 27 The 2005 workforce profile shows a high rate of voluntary turnover and outside hires, good gender balance but little progress in achieving diversity Metric New Entrants 2005* Voluntary Terminations 2005 Current Employees 12/31/2005 Industry Comparison** Number96810187429 Median Age323339 Median Servicen/a2-3 years4-5 years GenderFemale – 51%Female – 55%Female – 58%Female – 55% Ethnicity: Caucasian75%80%84% African American/Black 8%9%6%10% Hispanic5% 4% N/A – included in other groups Asian/Pacific Islander8%6%5% * Includes only those still working for XYZ Corporation as of 12/31/2005 ** From the Bureau of Labor Statistics for Financial Services industry which includes: Banks, Insurance and Investment Services

28. Copyright © Watson Wyatt Worldwide. All rights reserved 28 People Practices: Total Rewards  Total Rewards strategies aid in –Aligning employees with organization’s objectives –Getting employees to give discretionary effort –Encouraging employees to stay  Total Rewards strategies that offer high returns: –Finding right mix of short- and long-term incentives –Using customer satisfaction in rewarding bonuses –Maintaining a larger merit increase and promotion budget –Making sharp merit distinctions between employees –Targeting benefit levels higher relative to the market –Maximizing executive eligibility for stock options, restricted stock and discounted stock purchase –Making more employees eligible for discounted stock purchase –Having a high employee stock ownership

29. Copyright © Watson Wyatt Worldwide. All rights reserved 29 Firms with a total rewards strategy outperform other firms  Looking at benefits and rewards holistically adds value to an organization  Firms with total rewards strategy have a market premium nearly 3X greater than those without Do you have a total rewards strategy? YesNo Market Premium36.9%-17.8% 3-year TRS37%33%

30. Copyright © Watson Wyatt Worldwide. All rights reserved 30 Incentives should figure prominently in a total rewards strategy  Previous HCI reports showed that paying top- performers significantly more associated with higher returns  True for short- and long-term incentives (STI/LTI)  STI/LTI should constitute a significant portion of rewards High STI / LTI High Salary Salary as % of Total Rewards63%79% STI / LTI as % of Total Rewards13%8% Market Premium48.9%-2.8% 3-year TRS44%25%

31. Copyright © Watson Wyatt Worldwide. All rights reserved 31 Firms must make hefty distinctions between high and low performers  Best organizations make substantial distinctions in short term incentives  Organizations that make largest distinctions and pay top performers more than 4½ times the payout of lower performers had a 3-year TRS 49 points higher High Differential Companies Low Differential Companies Payout to higher performing ees vs. lower performing ees 4.72.1 Market Premium30%6.7% 3-year TRS47%-2%

32. Copyright © Watson Wyatt Worldwide. All rights reserved 32 High-performing firms link customer satisfaction to bonus objectives  Customer satisfaction is an important bonus factor for those with direct customer contact  Firms that tie customer satisfaction to bonus objectives had a 3-year TRS more than 3X higher HighLow % of employees with direct customer contact with bonus objectives tied to customer satisfaction 77%0% Market Premium10.1%8.6% 3-year TRS73%23%

33. Copyright © Watson Wyatt Worldwide. All rights reserved 33 Firms should use stock-based incentive compensation  Firms with widest eligibility for stock options, restricted stock plans and discounted stock purchase plans surpass those that don’t Stock Option Restricted Stock Discounted Stock purchase HighLowHighLowHighLow % of executive/ managers eligible 93%5%36%0%98%0% Market Premium31.7 % 18.7 % 33.6%26.7%67%0.8% 3-year TRS38%37%50%24%57%27%

34. Copyright © Watson Wyatt Worldwide. All rights reserved 34 Winning People Practices  Maximize your return on human capital by focusing on: –Recruiting Excellence Fill key positions quickly Increase offer acceptance ratio Utilize employee referrals –Employee Development Maximize training Balance promotion from within with external hires Maintain fewer salary levels and grades Limit employee evaluations of managers

35. Copyright © Watson Wyatt Worldwide. All rights reserved 35 Winning People Practices (cont’d)  Total Rewards – Target benefit levels above market – Link bonus pay to customer satisfaction, when possible – Utilize STI, stock-based and other LTI – Stringently differentiate between high and low performers  Turnover Management – Balance turnover

36. Copyright © Watson Wyatt Worldwide. All rights reserved 36 For more information www.watsonwyatt.com THANK YOU

37. Copyright © Watson Wyatt Worldwide. All rights reserved 37 Appendix

38. Copyright © Watson Wyatt Worldwide. All rights reserved 38 HCI Leads Financial Performance 1999 Financial Outcomes = = Correlation B 1999 HCI 2002 Financial Outcomes 2002 HCI Correlation A X X

39. Copyright © Watson Wyatt Worldwide. All rights reserved 39 Key Links Between Human Capital and Shareholder Value (NA) Significant Improvement 47% Increase in Market Value Total Rewards & Accountability and Value Creation Collegial, Flexible Workplace and Value Creation Recruiting & Retention Excellence and Value Creation Communications Integrity and Value Creation Focused HR Service Technologies and Value Creation Expected change in market value associated with a significant (1 SD) improvement in HCI dimension