Optimizing Rewards for Business Results and Greater Employee Engagement

© 2009 Towers Perrin

Optimizing Rewards for Business Results and Greater Employee Engagement

Lois Grubb, Vice President, Human Resources Elmhurst Memorial Hospital

Eric Parmenter, PrincipalTowers Perrin

August 4, 2009

© 2009 Towers Perrin 2

Presenters: Lois Grubb

Lois Grubb is Vice President, Human Resources for a 400+ bed community hospital with more than 500 physicians and 3,000 employees. She reports to the CEO and manages a group of 17 HR professionals

Prior to that, Lois was Senior Vice President, Human Resources for a $1.2 billion wholly owned subsidiary of AmerisourceBergen,a Fortune 24 pharmaceutical supply chain management company. Previously, she held HR leadership roles at Gundersen Lutheran Medical Center in La Crosse, WI; CNA Insurance; GD Searle and Co; and Mohr Development

Lois has an M.A. in psychology from Temple University, a B.A. in psychology from Immaculate College and is an award recipient from the Academy of Women Achievers, YWCA, City of New York. Other credentials include the Executive Education Program in Finance, Wharton School of the University of Pennsylvania, and Executive Education in Strategy and Marketing, Tuck School of Business, Dartmouth


Presenters: Eric Parmenter

Eric Parmenter is a Principal in Towers Perrin’s Health and Welfare practice. Located in the firm’s Chicago office, he has over 23 years’experience helping employers develop innovative total reward strategies that align with their business objectives

Eric is a recognized national leader in health care benefit design and delivery. He is a frequent moderator of panel discussions and speaker at seminars across the country. Eric is also an award-winning author of articles on human resource and employee benefit topics

Prior to joining Towers Perrin, Eric was Midwest practice leader for compensation and benefit consulting at Grant Thornton LLP. He also owned his own benefit consulting, outsourcing and administration firm

Eric holds a bachelor of arts degree in psychology from the University of Illinois, as well as multiple professional designations in underwriting, finance and human resources. Eric also holds an M.B.A. degree from the University of Chicago’s Graduate School of Business


Today’s discussion

Setting the Stage —Managing Talent in

Challenging Economic Times

Addressing Elmhurst Memorial’s Issues:

Total Rewards Optimization

Key Learnings


Signs that the global downturn is abating…

U.S. Consumer Confidence Index improved in March and April —and rose to an eight-month high in May

Although unemployment reached 9.4% in the U.S. in May, the rate of job losses decreased relative to prior months

DJIA and S&P 500 have advanced significantly since early MarchJanuary – February losses were nearly offset

Housing sales were up 11% in June


…haven’t eased corporate concerns and caution

Most U.S. organizations in a recent Towers Perrin survey project 2009 revenue declines

52% expect decreases of more than 5%33% anticipate a drop of 11% or more

A Q1 Business Roundtable survey of 100 CEOs revealed pessimism67% expect sales to decline in the next six months66% plan to shrink capital spending71% expect more job losses

Health care providers are concerned about the economy and the implications of health reform both as an employer and as a provider

Source: Towers Perrin Cost-Cutting Strategies in the Downturn, May 2009; Business Roundtable’s Q1 2009 CEO Economic Outlook Survey


Rising costs in a sinking economy mean employers and employees take a double hit

Shrinking income and purchasing power

Trade-offs between health care and other necessities

Job stress

Unemployment

Capital losses

Delayed retirement

Employees/Retirees Face…

Unbudgeted cost increases due toincreased utilization of medical and disability plans increasing numbers of covered dependents due to widespread layoffsincreased COBRA exposure postponed retirements

Lower employee engagement

Lower productivity

New concerns about health reform

Employers Face…


As a result of the economic crisis, employers are accelerating reward changes and/or moving in new directions…

53% are trying or considering benefit strategies they would not have considered otherwise

47% have closed their DB plans to new participants

Although less than 10% have suspended their 401(k) match, another 20% are considering it

52% are increasing employees’ share of health care program costs

62% are tightening prescription drug coverage

38% of organizations are focusing more on cost reduction than talent management

Most are holding the line on salaries by cutting merit budgets, freezing salaries or delaying planned merit increases (in that order)

Source: Towers Perrin Compensation in Crisis Pulse Survey, January 2009; Towers Perrin Benefits in Crisis Pulse Survey, March 2009


…and reacting to changes in the economy

North American employers tell us employees are

Postponing retirement (68%)

Requesting financial education or retirement planning (40%)

Using employee assistance programs (35%)

Source: Towers Perrin Benefits in Crisis Pulse Survey, March 2009

Moving to fixed-income investments (55%)

Increasing loans and withdrawals from retirement savings plans (50%) — or reducing participation in these plans (44%)

In the U.S. specifically, employers tell us employees are


The outlook for health care and hospitals

Health care and education have been hit less than other U.S. industries with fewer job losses

some hospitals are performing well given the economyothers hospitals are experiencing flat or decreasing revenues

Fewer dollars are being spent on elective procedures

Accounts receivable are growing, with more defaults on outstanding bills

Patients skip important screenings and tests due to insurance worries

Charitable care is increasing

Impending health care reform legislation creates significant uncertainties for the future


Today, hospitals face unprecedented demands and new challenges

Employer ChallengesSustainable growth and improved performance Operating cost and risk pressuresInnovation and quality improvement Employee engagement and patient satisfactionFlexible, “on demand” workforce to address talent shortages and gapsPublic relations and network contractingNew competition for labor

Employee Needs

Financial securityInspiring leadershipChallenging workInvolvement and controlInformation and knowledgeWork/life balancePhysician experience and engagement

Demographic Forces

Aging workforceIncreasingly diverse workforceChanging patterns of retirementIncreased job mobilityTalent shortagesAnticipated dearth of leadership

Market Forces/Financial Pressures

Ballooning accounts receivablesReduction in elective care and some needed careIntense competition and shrinking reimbursementGovernance pressures and regulatory oversightMounting regulatory pressures and opportunitiesTransforming technologies and outsourcingCollective bargaining activitiesConsumerism payment strategiesTransparency and quality Aging infrastructure and need to replace facilities


Labor and related costs accounted for 62% of the expense growth for hospitals (from 2001 to 2006)

Labor is now the single largest operating cost item typically equal to more than 40% of revenue

Intensity and other 8%

Change in number of services provided

30%Costs of goods and services purchased62%

All other12%

Prescription drugs4%

Professional liability insurance2%

Professional fees3%

Wages, salaries and employee benefits41%

Source: AHA analysis of 2001-2006 expense growth rates by category


The drivers of attraction, retention and engagement for employees in health care

Competitive retirement benefits

Reputation of the organization as a good employer

Caliber of coworkers

Reasonable workload

Career advancement opportunities

Convenient work location

Flexible schedule

Vacation/paid time off

Competitive health care benefits

Competitive base pay

Top Attraction Drivers

Senior management acts to ensure organization’s long-term success

People in my unit work well together as a team

Unit has skills needed to succeed

Organization quickly resolves customer concerns

Fairly compensated compared to others doing similar work in my organization

Can impact customer satisfaction

Good relationship with supervisor

Understand potential career track within organization

Ability to balance my work/personal life

Satisfaction with the organization’s business decisions

Top Retention Drivers

Competitive career development

Unit has skills needed to succeed

Improved my skills and capabilities over the last year

Can impact quality of work/product/service

Input into decision making in my department

Organization rewards outstanding customer service

Organization quickly resolves customer concerns

Seek opportunities to develop new knowledge/skills

Organization’s reputation for social responsibility

Senior management sincerely interested in employee well-being

Top Engagement Drivers

Source: Towers Perrin 2007 – 2008 Global Workforce Study, U.S. Hospital Cut, October 2007



Setting the Stage —Attraction and Retention in




Key Learnings


Elmhurst Memorial Healthcare (EMHC): Key issues

Community hospital located in western suburbs of Chicago

Three components to our business acute care not-for-profit hospitalElmhurst Clinic home health/hospice

Compete in a crowded marketplace

Challenge of building a new hospital


Employee EngagementMeasuring engagement Understanding drivers of engagement Understanding linkage between engagement and financial results

Begin with an integrated strategy framework

Business Context

Performance Management

Rewards and RecognitionEnsuring consequences for performance and behaviorUnderstanding what different segments valueSetting principles to guide decisions

Training and Development

Recruitment

Strategic WorkforcePlanning

Talent Management


Positioning for business results: It’s really about alignment

EMHC’S Mission, Vision

and Values

HRStrategy

Monetary Total RewardsPay (base and incentives)Benefits

Nonmonetary Total RewardsCommunicationPerformance ManagementWork Environment/CultureRecognitionLeadershipCareer Development

The Employment Deal

High levels of trust, commitment and loyalty

Employer-of-choice status

Outside recognition/awards


The first step in EMHC’s journey: Focus on rewards benchmarking and optimization

Human Capital Optimization

Reduce expenditures and growth rate for fixed-cost rewards Eliminate programs with low perceived valueStreamline reward practices for greater efficiency

Cost/Risk Reduction

Increase the variable component of rewardsRedirect the overall reward spend toward pivotal rolesEnsure transparency of reward system practicesStrengthen manager effectiveness and support system

Performance EnhancementRewards

Optimization


The chosen reward changes and implementation plan will be based in part on the answers to a series of questions

How will reward changes impact employee engagement? Given key engagement drivers, can we navigate change to minimize disruption?Can the reward portfolio be restructured to balance cost and employee perceived value?

What workforce disruption risks are acceptable?

Are metrics underlying incentives consistent with goals for growth and profitability?Do employees have a clear line of sight to what drives business performance, and do rewards reinforce the right behaviors and decisions?Is the distribution of reward spend across roles reflective of their pivotal nature?

Do rewards align with desired business performance?

How competitive are EMHC’s rewards versus the market?

Is the reward mix appropriate for employees and the company?

ConsiderationsIs EMHC’s current emphasis on fixed-cost rewards hampering business performance and flexibility? Do employees appreciate the level of security provided? Would greater emphasis on variable pay better attract critical skills?Are employees behind the curve in preparing for retirement and taking responsibility for their health?

What is the desired competitive position for rewards overall, and by component?Are there reward trends that could help attract and retain critical talent?Is EMHC within acceptable cost levels versus competition for customers?

Framing the Issues


Understanding what attracts employees and the key elements of the work experience that motivateemployees will be critical to success

Note: Percentages represent percentage of respondents including item in their top 5.Source: Towers Perrin 2007-2008 Global Workforce Study, — U.S. and U.S. Hospital Cut, October 2007

—

4

3

2

8

1

Age Under 25

—574Career advancement opportunities

8443Flexible schedule

1225Competitive health care benefits

38——Competitive retirement benefits

6332Vacation/paid time off

2111Competitive base pay

Age 55 or Older

Ages 45 to 54

Ages 35 to 44

Ages 25 to 34Attraction Drivers

Source: Towers Perrin 2007 Global Workforce Study ⎯ U.S. Hospital Industry

Maximizing earnings (47%)

Doing exciting, challenging work (49%)

Having adequate benefit protection (58%)

Having a secure position for the long term (61%)

Having good work/life balance (69%)

Top Motivation for Work Overall Top Motivation for Work — Hospitals

Having good work/life balance (70%)

Having a secure position for the long term (63%)

Having adequate benefit protection (63%)

Doing exciting, challenging work (50%)

Maximizing earnings (48%)


The challenge is to build people programs that create competitive advantage

Optimal reward programs will attract, retain and engage employees and drive quality and operational performance

Operational Performance

Improved productivityImproved financial and clinical performance benchmarks Reduced costsCompetitive advantage

EmployeeBehaviors

Attracting the right talentEngaging talent in the right behaviors aligned with a desired cultureMotivating talent to be healthy and productiveRetaining the right talent

LoyalInformed consumerEffective decision making/compliance with careConsistent with the hospital’s clinical and quality initiatives (quality, safety and cost-effectiveness)

Patient Satisfaction/Quality of Care

People Programs and Processes

Pay Benefits

Learningand

Development

WorkEnvironment

2009 Focus — Relational Rewards

2008 Focus — Transactional Rewards


The rewards landscape: The evolution

Pay Benefits

Learning andDevelopment

WorkEnvironment

Transactional RewardsShort-term focusCritical to attracting top talent

Relational RewardsLong-term focusCritical to retaining top talent

Investment in Transactional Rewards ⎯ Pay and Benefits

Investment in Relational Rewards ⎯ Work Environment and Learning and Development

Maximizing Return on Reward Investments% ROI

In the long run, relational rewards provide a higher ROI

$ InvestmentAdditional Investment

Fair/Reasonable Investment

Superior Returns

Competitive Returns


Getting started at EMHC: Employee engagement survey findings

Input from the employee engagement survey provided focus to the strategy and implementation

For EMHC — input about pay and benefits led us to conduct an analysis of EMHC’s base-pay practices

Towers Perrin conducted a review of EMHC’s benefits and their market competitiveness


What are the engagement mindsets at EMHC?

Fully Engaged25%

Complacent59%

Disengaged16%


On the pay front, how does EMHC compare with other local health care organizations?

Base Pay

Source: Metropolitan Chicago Healthcare Council (MCHC)

Of the 50 EMHC Positions Surveyed, the Majority Were Either at Market or at the High End of Market

Lower end of market

At market

Higher end of market


All EMHC benefit programs were benchmarked against the market

Source: Towers Perrin Competitive Benefits Review, 2008

Medical

Dental

Vision

Short-Term Disability

Long-Term Disability

Basic Life/AD&D

Voluntary Life/AD&D

Pension

403(b) Savings

EAP

Paid Time Off

At marketLower end of market Higher end of market

Benefits


EMHC tactics/program changes reflect the strategy, employee input and program performance assessment

PayPay Benefits

Learning and

Development

WorkEnvironment

The Deal

Pay and Benefits — Transactional Rewardsfocus for 2008 and early 2009

Learning and Development and Work Environment — Relational Rewards

focus for the balance of 2009 and 2010

Early results of engagement pulse survey are promising


Early results of engagement pulse survey are promising

My supervisor used the feedback to make changes59% favorable EMHC57% favorable healthcare norm

All in all, I’m satisfied with my job80% EMHC 200969% EMHC 200773% healthcare norm

I understand how my benefits compare64% favorable62% healthcare norm

I understand how my wages compare61% favorable

I understand how my performance impacts the organization’s performance

91% favorable


Introduce a new employer-employee partnership

Hold employees accountable

to perform, based on company values

In return, providea comprehensive

total rewards program

Together, we will deliver stellar results

PartnershipRespectIntegrityDeterminationExcellence

Outstanding clinical quality/outcomesExceptional patient satisfactionStrong financial performanceSignificant market growthSafety at the core of all we do

Benefits

Learning and

Development

WorkEnvironment

Pay

You



Setting the Stage —Attraction and Retention in




Key Learnings


Key learnings: Managing the partnership and moving forward together

Create a comprehensive strategyDevelop a total rewards strategy that supports business needs, and align programs accordingly

Communicate and manage changeCommit to regular dialogue about total rewards and what it means for employees

Provide transparencyProvide information about pay and benefit levels, and how they correlate with employee performance

Move from transactional rewards to relational rewardsPay and benefits must be competitive; you must pay to play, but you win through exceptional learning and development and work environment gains


Thank you

Questions?


Our contact information

Lois GrubbVice President, Human ResourcesElmhurst Memorial [email protected]

Eric ParmenterPrincipalTowers PerrinChicago Office71 South Wacker DriveSuite 2600Chicago, IL [email protected]