Human Capital Perspective

Update
Perspective
October 19, 2007

Compensation trends of the future:

Designing a sustainable global total
rewards strategy

Workforce and compensation research reveals some fundamental shifts

underway in the global labor markets that are already affecting companies
and have implications well beyond 2008 compensation planning. In this
article, we will describe these macro shifts and then discuss what you
can do to develop a longer-term total rewards strategy that will enable
you to attract, engage and retain the workforce you need at a sustainable
cost level. By anticipating these challenges, your company will be better
positioned to compete in the war for talent and win in the global business
environment over the next three to five years.

Global trends affecting the future of total rewards planning

Three major global trends are driving significant changes in standard
employment models and have profound implications for total rewards
For more information planning. The first is the emerging shortage of skills, knowledge and
about compensation trends experience available to employers given large-scale, global shifts in the
of the future, visit our demographics of the workforce. The second is the growing interest among
Compensation Planning an increasingly diverse global workforce in alternatives to traditional
2008 Resource Center career paths and work arrangements. And third is the continuous rise
at www.mercer.com/ of employment costs as a percentage of revenues. These three trends
are largely responsible for the challenges HR leaders are facing and will
compensation2008
continue to face in the coming years; they also point to some of the total
rewards solutions that best-practice employers have already begun imple-
menting today. Let’s take a closer look at all three.

The workforce itself is changing.

Employers across the globe who participated in Mercer’s Global Total Rewards
SnapShot Survey in 2006 reported that their number one challenge is
recruiting and retaining key talent. There are several demographic reasons
why this is becoming an ever more serious problem for employers.
 First, workers around the world are getting older. The baby boom cohort
is aging, while birthrates around the world have declined (see Exhibit 1).
This means not only that there is a scarcity of young talent in the pipeline
but also that many seasoned workers – those with valuable institutional
knowledge that can’t easily be replaced by new hires – will be moving out
of the workforce en masse in the coming years.

Exhibit 1. Aging of workforce contributes to shrinking labor pool

Population over age 60 ■ 2000 ■ 2025 ■ 2050
40

35

Percent of total population

30

25

20

15

10

0
Europe North Australia Asia Latin
America America
Source: United Nations Population Division
Today’s global workforce
is diverse, and not all Second, it is becoming more difficult for employers to recruit employees with
employees value the same the technical skills they need. For the last two decades of the 20th century,
things. for example, US Department of Labor statistics show a continuing decline in
the number of students enrolled in career and technical education.

Third, today’s workforce tends to be more geographically mobile, making

retention of workers more difficult for most companies. For example,
manufacturing work from around the world is moving to lower-cost
centers in Eastern Europe and China, while qualified professionals and
skilled trade workers are moving to more mature economies to take
higher-paying jobs.

Employees are demanding alternatives to traditional work arrangements.

Today’s global workforce is diverse, and not all employees value the same
things. This diversity is putting pressure on employers to move beyond
one-size-fits-all total rewards programs if they want to compete success-
fully for talent.

2 Mercer
 Mercer’s global What’s Working™ studies have found similarities, but also
significant differences, in what most influences employee commitment
and motivation. For example, while workers in Asia value base pay above
all other factors, those in North America value five other factors – including
work-life balance, being treated with respect and benefits – more highly
than base pay (see Exhibit 2).

Exhibit 2. Employees value different aspects of the employment relationship

How important are the following factors in influecing your commitment
and motivation at work?

North Asia Western

America Europe
Being treated with respect 1 2 2
The type of work that you do 2 3 1
Work-life balance 3 5 3
Benefits 4 7 9
Working in an environment where you can provide
good service to others 5 10 5
Base pay 6 1 4
The quality of the people you work with 7 11 6
Long-term career potential 8 4 8
Having flexible working arrangements 9 12 7
Learning or training opportunities 10 9 11
Promotion opportunities 11 6 10
Variable bonus/incentive bonus 12 8 12

Source: Mercer’s What’s Working Global Employee Survey

Different generations also have different priorities. For example, while

employees over 60 years old (the “Traditionalists”) tend to value security
and company loyalty most highly, those between 18-29 (the “Millennials”)
tend to value their contributions and learning opportunities and thus
are more willing to change jobs repeatedly, while those between 30-42
(“Generation Xers”) tend to value work-life balance most highly.

Cost escalations are threatening the sustainability of

traditional rewards programs.
According to another finding in Mercer’s Global Total Rewards SnapShot
Survey, HR leaders globally cite keeping total rewards costs affordable and
sustainable as one of their biggest challenges. When rewards are defined
primarily as pay and benefits, they are right to worry. To illustrate the
challenge of keeping total rewards costs sustainable, let’s suppose an
organization’s cost of pay and benefits equals 60 percent of revenues in
2007. If we assume an annual 2 percent growth in employee headcount,
5 percent growth in revenues, 3.5 percent growth in pay and 12 percent

3 Human Capital Perspective Update

 growth in benefit costs – fairly realistic estimates for companies operat-
ing in mature economies – then the total cost of pay and benefits to this
organization five years out will equal 67 percent of revenue! (See Exhibit 3,
an example for illustration purposes.)

Exhibit 3. Assessing the sustainability of current costs

Escalating total rewards cost as a percent of revenue

70% 67%
64% 65%
61% 62%
60% Total
60% 15%
13% 14% benefits
10% 11% 12%
50%

Percent of revenue 40%

30% Total
50% 50% 50% 51% 51% 52%
pay
20%

10%

0%
2007 2008 2009 2010 2011 2012

The companies that Example for illustration purposes

succeed in the future
will be the ones that are
able to attract, engage How should global companies respond?
and retain the people The companies that succeed in the future will be the ones that are able
they need in a way that to attract, engage and retain the people they need in a way that is sus-
is sustainable from a tainable from a cost perspective. In our view, doing this requires moving
cost perspective. beyond traditional compensation planning toward the development of
a total rewards strategy that acknowledges a broader interpretation of
rewards with differing appeal to employees:

■ Compensation, which includes base pay, short-term and long-term

incentives, and recognition awards

■ Benefits, which includes health and other group benefits, retirement

plans, work-life programs, and perquisites

■ Careers, which includes performance management, career pathing,

training and development, talent review and succession planning

Two-thirds of companies surveyed by Mercer as part of our SnapShot

survey are now taking this holistic view, including not only compensation
and benefits in their total rewards mix, but also career opportunities and
alternative work arrangements.

4 Mercer
 Our research and work with global companies indicate that developing a
total rewards strategy for competitive advantage will require HR leaders
to take the following five steps:

1. Segment and reward employee groups according to relative

value creation.

2. Understand and plan for employee total rewards preferences.

3. Offer attractive non-cash compensation to appropriate

employee segments.

4. Maximize the return on limited total rewards investments

by differentiating pay based on performance.

5. Review and refresh your total rewards strategy.

1. Segment and reward employee groups according to relative value creation.

When companies align their total rewards strategy with their business
strategy, they help to ensure that expenditures are yielding the maximum
returns in terms of productivity. Achieving alignment requires under-
standing how your business creates value, mapping distinct employee
When companies align groups to the value creation process and then allocating total rewards
their total rewards accordingly.
strategy with their
■ Understand how your company creates value.
business strategy, they
This is predicated, of course, on understanding your business model
help to ensure that and revenue generating strategy, which involves answering questions
expenditures are yielding about the business lifecycle, business design, brand impact and geo-
the maximum returns in graphic requirements of your company, such as:
terms of productivity.
– How do we make money today – and will that change
three years from now?
– What skills and behaviors are required at different stages of
growth and decline?
– What business design supports our ability to make money?
– What are the skills and competencies required in those areas?
– What’s the value of our brand in attracting and retaining employees?
– Where do we want to be geographically? Do we need global
consistency or local focus in order to succeed?

5 Human Capital Perspective Update

 ■ Segment your workforce.
After you have clearly identified your business needs and the work-
force characteristics that propel your business forward, the next step
is to identify the corresponding workforce groups of employees that
create value for your organization. These segments may include:

– Performance drivers, who directly create value for the organization,

such as marketing in consumer products companies or research sci-
entists in pharmaceutical organizations
– Performance enablers, who support value creation by facilitating
the efficiency of performance drivers, including human resources or
finance staff at many organizations
– Legacy drivers, who created value for the organization historically,
but no longer drive competitive advantage; for example, production
and circulation functions in a media organization may become lega-
cy drivers as content is increasingly delivered online

[S]egmentation in your
company will depend
entirely on the role of
different employee
groups in creating value ■ Offer different total rewards to different employee segments.
and adding to your
bottom line.
Keep in mind that how employee groups are segmented will be unique
to each company. Specific job families, geographies or skill sets do not
consistently map to specific workforce segments across companies.
Rather, segmentation in your company will depend entirely on the
role of different employee groups in creating value and adding to your
bottom line. Take IT professionals, for example. For a retail chain that
partners with an outside vendor for IT services, they may serve as per-
formance enablers, while for an IT consulting firm, they may serve as
performance drivers.
Lastly, having identified distinct employee segments in terms of the
value they create for your business, you can then determine how to
allocate your finite total rewards dollars accordingly, offering premium,
standard or discounted rewards to various segments as appropriate.
For performance drivers – your value-creators – you must succeed
in attracting, engaging and retaining them through an optimal total
rewards mix depending on what is important to them. A more stan-
dard total rewards package may be appropriate for your performance
enablers, while the appropriate total rewards for legacy drivers will
depend on the value of retaining their institutional knowledge.

2. Understand and plan for employee total rewards preferences.

While the increasing diversity and evolving wants and needs of the global
workforce make total rewards planning today a more complex task, it also
opens up valuable opportunities for overcoming recruitment, retention and
cost challenges. But to take advantage of those opportunities, employers
must learn more about what actually motivates their employees.

6 Mercer
 ■ Survey your employees.
A first step toward planning for employee preferences is to survey
them about the work arrangements and total rewards elements that
are most important to them. You may be surprised to learn of the
relatively inexpensive – or even cost-neutral – things you can do to
improve attraction, engagement and retention.

■ Analyze other employee data.

Beyond analyzing survey data, you can also take advantage of new
statistical modeling techniques that allow companies to analyze
other existing employee data to better understand employee behavior.
Remember that what employees really care about – as measured by
things like making a decision to leave the company – is sometimes
different than what they say they care about. Broadened inputs provide
HR leaders with more robust information on which to build an effective
total rewards program.

■ Compare internal and external data.

Finally, you can compare internal survey data with reliable normative
data, such as Mercer’s What’s Working data on country- and region-
specific employee perceptions and attitudes about work, to help guide
Beyond analyzing decisions about how best to structure total rewards in a given market.
survey data, you can
also take advantage 3. Offer attractive non-cash compensation to appropriate employee segments.
of new statistical More and more companies are seeking to limit fixed costs by holding base
modeling techniques pay increases to modest levels while investing in other non-cash and vari-
able pay options. With a solid understanding of both your own business
that allow companies
needs and employee preferences, you may be able to identify high-value,
to analyze other
non-cash compensation alternatives, such as flexible schedules, alternative
existing employee data work arrangements, and career development and training opportunities,
to better understand that will allow you to better attract, engage and retain employees while
employee behavior. meeting your business objectives and managing costs.

■ Offer flexible work options to key employees.

It is becoming common for employers to offer key employees flexible
work options such as telecommuting, job-sharing, flex-time, compressed
work weeks, sabbaticals, and greater autonomy in scheduling and
delivering work. This trend speaks to what employees want and need
and how employers are accommodating them. While a 1999 Mercer
study, US Policies and Practices Survey, found that 32 percent of
companies surveyed had telecommuting arrangements, twice as
many had made them available to professional staff by 2006. And
while over half of companies surveyed in 1999 offered flex-time
arrangements, 95 percent offered them to professional staff by 2006
(see Exhibit 4).

7 Human Capital Perspective Update

 Exhibit 4. Increasing flexible work arrangements
Flexible schedule becoming common ■ 1999 ■ 2006
100 95%

80

Percent of employers
64%
60 58%

40
32% 31%
28%
20

0
Telecommuting Job-share Flex-time

Source: Mercer’s Policies and Practices Survey, 1999 and 2006

■ Consider alternative work arrangements.

Beyond flexible schedules, the use of temporary/contingent and
contract labor is helping companies balance their own business needs
Global HR leaders who
with employee demands – while getting the greatest returns for their
participated in the
total rewards expenditures. From the employer’s point of view, the
SnapShot survey say traditional model of permanent, full-time employees is not flexible or
that they are planning cost-efficient in addressing periods of under-capacity or over-capacity.
to increase their invest- And for employees, building a career through a variety of non-linear
ments in these areas work experiences that are a mixture of temporary, full- and short-term
[career development employment, and contractor assignments can provide even greater
and training] over the learning opportunities and better value than more standard career
next 12 months. paths. Given these advantages for both the employee and employer,
growth in the temporary/contingent labor market is expected to
significantly outpace total employment growth over the next decade.

■ Invest in career development and training.

Another non-cash compensation option that can help you meet
business objectives, employee demands and cost constraints is to
offer employees more in the way of career development and training
opportunities. Global HR leaders who participated in the SnapShot
survey say that they are planning to increase their investments in
these areas over the next 12 months.

While these investments can help employers more quickly develop

employees’ technical and leadership skills, they are also highly valued by
many employees and so can aid with attraction and retention. Mercer’s
What’s Working surveys of European employees, for example, show that
two-thirds of workers are satisfied with their jobs when there is a good
opportunity for continuous learning; however, where such opportunities
are lacking, only 17 percent of employees say they are satisfied.

8 Mercer
 4. Maximize the return on limited total rewards investments by differentiating
pay based on performance.
Recent research indicates that companies are increasingly differentiating
pay based on performance in order to wring the greatest return from
limited total rewards dollars. Mercer’s SnapShot survey study found that
in North America, for example, the highest performers earned one-and-
a-half times or more what is provided to mid-level performers (on a
percent-of-salary basis for both base salary increases and actual bonus
payouts). Low performers, on the other hand, earn half of what is pro-
vided to the mid-level. (See Exhibits 5 and 6.) Moreover, North American
employers strive for even more differentiation through their plan designs,
in which the maximum award opportunity for annual incentive plans is
often two times target or more.

Exhibit 5: Base pay increases as a function of performance

Percent of workforce Average pay increase

Highest-rated 12% 5.7%

Next highest-rated 28% 4.5%
Middle-rated 52% 3.5%
Low-rated 6% 2.0%
Based on the pace of Lowest-rated 3% 1.7%
change in the global
business environment Source: Mercer’s 2007/2008 US Compensation Planning Survey

as well as the fluidity of

most business strategies, Exhibit 6: Bonus payouts by performance
we recommend that you
Executive Management Professional Office/ Trades/
review and refresh your (Sales and Clerical/ Production/
total rewards strategy Non-sales) Technician Service
at least once every
Highest-rated 64% 27% 20% 15% 13%
three years.
Middle-rated 44% 20% 14% 11% 11%
Lowest-rated 30% 10% 7% 6% 4%

Source: Mercer’s 2007/2008 US Compensation Planning Survey

5. Review and refresh your total rewards strategy.

Keeping your total rewards strategy in sync with an ever evolving business
strategy can be demanding. It requires frequent review and revision if it
is to continue to deliver business results. Mercer’s SnapShot survey found
that, of the firms that said that their total rewards strategy is fully aligned
with their business strategy, over three-quarters had made changes to
their total rewards strategy in the last three years. In contrast, three-fifths
of firms reporting a weaker alignment had not revised their strategy in
the past three years. Following are suggested best practices:

■ Review strategy at least every three years.

Based on the pace of change in the global business environment as
well as the fluidity of most business strategies, we recommend that
you review and refresh your total rewards strategy at least once every
three years. This review should go far beyond one-year-out compensa-
tion planning and include all of the steps discussed in this article.

9 Human Capital Perspective Update


The Update is published by:
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New York, New York 10036
You are welcome to reprint short
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material with credit given to Mercer.
Visit us at mercer.com.
For more information
about compensation trends
of the future, visit our
Compensation Planning
2008 Resource Center at
www.mercer.com/
compensation2008
00907-HC
■ Communicate to employees using a variety of communication channels.
Organizations cannot reap the full benefits of a well-designed total
rewards strategy if employees are not aware of all of the elements
offered. You must effectively communicate to employees the value of
the total rewards package in order to maximize its value in attraction,
engagement and retention. According to Mercer’s SnapShot survey, HR
leaders in North and South America report that they are using at least
three vehicles to communicate with employees, particularly if they have
changed their total rewards strategies within the past three years. The
most popular methods include individual meetings, hard-copy person-
alized statements, and presentations to employees made by leadership.
The challenge for HR
Developing a sophisticated total rewards strategy that is tailored to vari-
ous workforce segments is a challenge. For organizations accustomed to a
traditional one-size-fits-all approach, change could be slow and strained.
But for organizations that take the steps necessary to better understand
their workforce – both the needs and preferences of the people they
employ and the contributions to value creation that various segments
make – the pay-off is a total rewards program that not only drives perfor-
mance but also helps to maintain sustainable employment costs.
Perspective Update author:
Steven Gross
Global leader, Broad-based Performance and Rewards Consulting
+1 215 982 4257
steve.gross@mercer.com
© 2007 Mercer (US) Inc.