HR MATTERS

Issue 03 | March 2014 | towerswatson.com

Pensions revolution

Performance management

Employee engagement

HR technology

2 towerswatson.co.uk

Contents

HR MATTERS
04

06

09

Will Aitken examines

the impact of the tax
provision for DC pensions.

Steve Young reviews how

business leaders should
gather employee opinions.

There is an increasing
need for individuals to
supplement their State
pension. John Cockerton
analyses what the future
holds for pension savings.

Pensions
revolution

Employee
surveying

Pension
savings

12

14

Tim Richard gives

some guidance on how
companies can define
their HR technology
strategies and implement
a successful transition.

Yves Duhaldeborde
investigates the trends
in high-performance
companies and talks
about effective leadership.

HR
transformation

High
performance

18

21

Edd Collins looks at

creating fit for purpose
benefit programmes.

Chris Charman examines

the importance of
performance management
and how UK organisations
differ in their approach to
the subject.

Benefits
health check

Performance
management

 UK Budget tears up the pensions

tax rules
Major overhaul of tax provision for DC pensions
In the Budget delivered on 19 March 2014, the Chancellor
announced sweeping changes to the rules for income delivery
on defined contribution (DC) pension pots.

And overnight, DC pensions have become a more

attractive benefit, albeit with some possible strings
attached around changing investment and providing
guidance at retirement. Getting maximum value
from them will mean communicating effectively.

Will Aitken
Senior Consultant,
Benefits

Alongside these changes to DC pension income

delivery are consequential changes to the defined
benefit (DB) pensions regime, a proposed increase
in the normal minimum pension age and numerous
other tinkerings.
The annual and lifetime allowances remain
in place, and from 6 April 2014, these will be
40,000 and 1,250,000 respectively.

Changes to DC income delivery

Annuities have rarely been out of the news of late,
often portrayed as the latest financial services
rip off and a potential barrier to building public
trust in pensions. At the end of last year the
Financial Services Consumer Panel reported on
annuities, following which the Government had
said that it is currently considering the broad
range of research and evidence on decumulation
and how the market is working.

Clearly, it has given the matter a lot

of thought
Changes are being introduced in two stages,
the first from 27 March 2014, the second from
April 2015. The reason for the two-tier approach
is that the more sweeping changes taking
effect from the later date require changes to
primary legislation.
As is currently the case, 25% of the DC fund value
within the lifetime allowance (LTA) will be available
as a tax free lump sum. Any other amounts drawn
will be taxable at the members marginal rate
(an LTA charge on any amount in excess of the
members available LTA would also apply).

The small pot

commutation
threshold
will increase from

2,000
to

10,000
4 towerswatson.co.uk

Pensions revolution

From 27 March 2014:

The minimum income requirement to be able
to use flexible drawdown (under which there is
no restriction on the amount of a DC pot that a
member can withdraw) will reduce from 20,000
to 12,000.
The capped annual withdrawal limit will increase
from 120% of the equivalent annuity that could
have been purchased to 150%.
The trivial commutation limit (currently 18,000)
will increase to 30,000.
The small pot commutation threshold will
increase from 2,000 to 10,000. Within the
personal pension regime, small pot commutation
may take place three times (rather than twice at
present) again to 30,000 in total.

From April 2015:

There will be no withdrawal limits. From
minimum pension age, an individual will be
able to draw as much or as little (subject to
marginal rate tax) as he or she wishes. In other
words flexible drawdown will be extended to all
DC pots. Annuities and other income delivery
products such as drawdown will continue to
be available.

The

annual and
lifetime allowances
remain in place,
and from 6 April
2014, these will
be 40,000 and
1,250,000
respectively.

The Government is to consult on extending this

flexibility, but its starting point is that it may
remove the right of all members of DB schemes
to transfer to a DC scheme. It also proposes to
increase the minimum pension age to 57, from
2028, and to then maintain it 10 years below
State pension age.
This consultation runs to 11 June 2014.

So what are the immediate

implications?
People who had planned to retire in the short
term may now decide to stay on. They will need
to be informed of what the changes might mean
for them and how they might best take advantage
of them. But it could mean that people who have
already announced an intention to retire may
change their minds.

Post-2015, we expect employees to focus greater

attention on fund values rather than the amount of
income that can be produced from the fund. That
might mean some people will look at their fund
value and conclude that they can afford to retire,
whereas if they looked at the income their fund
could generate, they might have reached a very
different conclusion.
For all employers with DC arrangements, there is
a need to communicate with potentially affected
employees to help them understand what the
impact might be for them.

HR Matters 5

 Capturing meaningful employee

opinion data
When to census, when to pulse, and when to listen

Todays business leaders are inundated with a vast ongoing flow

of information. Technological advances allow us to track financial
results, customer behaviour and operational performance on an
up-to-the-minute basis.
It is therefore only natural for leaders to expect
that all business-relevant information including
employee opinion should be gathered and
reported on an equally frequent basis. But does
that really make sense?

The pitfalls of over-surveying

Steve Young
EMEA Practice Leader,
Employee Surveys

The first issue to consider is how frequently the

different types of employee opinions we are
measuring are likely to change. Consider two
questions commonly used to measure employee
engagement: Do you believe strongly in the
goals and objectives of this company? and Are
you proud to be associated with this company?
Responses to these questions are not likely
to change on an hourly, daily, weekly or even
monthly basis. The same is true for questions
that measure aspects of organisational culture.
Although responses to these questions may
change and, we hope, improve over time, such
change is noteworthy only if linked to a genuine
change in the work environment. For example,
opinions that change in response to a company
initiative or difference in behaviour are more
noteworthy than those attributed to the ups and
downs of everyday life in a big company. Indeed,
Towers Watsons experience suggests that a
quarterly check of employee opinion is frequent
enough, and even that is often too frequent.
Measuring engagement and culture too frequently
can lead one to over-interpret minor fluctuations,
which may be nothing more than measurement

6 towerswatson.co.uk

error or a reflection of confusion among employees

at being asked the same questions repeatedly
without experiencing any true change.

Some opinions require

regular monitoring
Are we to conclude that there is no value in
measuring employee views on a more regular,
ongoing basis? Not at all, but we need to focus
on exactly what we are measuring and how often
the views being measured truly change. For
example, more organisations are now interested
in measuring employee mood or overall sentiment
as well as the kind of water cooler conversations
that occur every day. Advances in technology and
the prevalence of mobile devices make measuring
these kinds of employee opinions easier and
less intrusive than ever before. Although no clear
link currently exists between employee mood or
sentiment and organisational performance, it is
plausible that over time, these sentiments may
influence the more stable employee opinions that
do reliably link to performance. Therefore, there
may be value in having a continuous ongoing scan
of this information as a possible leading indicator.
This information can also provide valuable context
to help inform more stable opinions such as
employee engagement and organisational culture.

Employee surveying

Another example of employee opinion that might

be valuable to assess on a more frequent basis
is employee reaction to a particular event or
business issue (for example, a new product
launch, recent acquisition or reorganisation),
which by definition is time-limited. This type
of assessment can send a strong signal that
employee input is valued. Indeed, better decisions
may ultimately be reached through this broader
input. There is a broad range of tools that enable
organisations to capture these kinds of opinions.
Some of the most popular include:
Social media analysis A regular culling of
comments made on internal and external social
media sites about the company and employees
work experience
Continuous polling An ongoing, always
open, single-question poll rating ones current
sentiment toward the company
Qualitative pulsing An open-ended
opportunity to respond to a single question
on a pressing topic
Online chats/jams A facilitated online dialogue
on a particular issue or business problem
Exit/entry surveys A brief survey
automatically deployed to all onboarding
and exiting employees
While none of these techniques may be suitable
for robustly measuring employee engagement or
organisational culture in a way that will reliably
predict business performance, they can be used
to collect other types of employee opinion on
a more real-time basis and therefore usefully

supplement the more stable opinions. In fact,

we have recently worked with several clients to
explore an overall listening strategy that combines
ongoing measurement of these kinds of opinions
with the more focused, intentional measures of
engagement and culture.

Developing a listening strategy

The listening strategy approach utilises a full
census survey taken on a 12-, 18- or even
24-month basis and shorter, focused pulse
surveys in between. The full census provides a
comprehensive picture of employee engagement
and organisational culture. The pulse survey,
typically including 20 or fewer questions and
involving a small representative sample of
employees, measures progress on the priorities
identified through the census. While circumstances
vary regarding when the pulse survey is deployed
relative to the census, it often occurs at the
midway mark between census surveys. Such an
interval may feel like an eternity given todays
technology, but this is not fundamentally a
matter of technology; it is a matter of the pace
of organisational change. One must consider
the time needed to implement solutions to drive
engagement and performance, and for employees
to experience the impact of those solutions.
Simply put, it provides no value to repeatedly ask
employees about a particular issue that has not
been addressed, even if you have created a terrific
app to measure their views seamlessly every hour.

Advances

in
technology and
the prevalence of
mobile devices allow
measuring these
kinds of employee
opinions easier and
less intrusive than
ever before.

Listening strategy
Pulse

Census
Social
media
analysis

Start

+9

Census
Social
media
analysis

months

+18

Social
media
analysis

months

Census

Pulse
Social
media
analysis

+27

months

+36

months

Continuous single question sentiment poll, aggregated/reported weekly

Exit/entry survey to all entering/departing employees, aggregated/reported monthly

HR Matters 7

Employee surveying

Note that this approach also uses a range of

techniques on a more regular basis to measure
employee sentiment as well as opinions on
particular business topics. For example, a
single-question poll measuring overall sentiment
is available continuously, and aggregated and
reported every week. Social media scanning is
also done continuously and reported on a quarterly
basis. All new and departing employees receive
a short survey upon their onboarding or exit, and
focused online chats and qualitative pulse surveys
are used to gauge reactions to unique events.
Of course, when embarking on this type of
comprehensive listening strategy, there are several
important factors to consider:
Communication. It is important to communicate
with employees and leaders regarding what
you are measuring with each listening tool and
why, and what follow-up actions may or may not
occur. Clearly the expectations will be different
for a census versus a pulse survey, and even
more so for any kind of social media analysis,
continuous polling or online chats.
Survey fatigue. A second issue is the need
to avoid survey fatigue, or the point at which
repeated surveying of employees becomes
overly burdensome or intrusive. Segmenting
the population so as to distribute participation
can be one solution here, although it may not
practically allow you to gather the insights
needed from the populations of interest.
Stressing the voluntary nature of participation is
another approach, which will likely differ based
on the particular tool.
Confidentiality and other policy considerations.
A final set of issues relates to confidentiality,
specifically to employee expectations and
employer policies regarding the mere collection
and analysis of data as well as how it will be
handled. Clearly, these issues vary greatly
depending on the particular listening tool
deployed and can have a range of impacts on
the information collected, known and unknown.
As in most cases, open communication and
transparency are generally the wisest courses of
action here. In other words, if you are regularly
monitoring your internal social network to
inform your people programmes, you should let
employees know this is the case.

8 towerswatson.co.uk

However these and other issues are ultimately

addressed, it seems clear that the future
of employee opinion gathering will involve a
combination of thoughtfully timed measurements
of engagement and culture along with ongoing
assessments of employee sentiment and
reactions to events as they occur.

 Pension savings
What does the future hold?

The Governments Autumn Statement set out that, in

principle, people should spend on average no more than
one-third of their adult lives in retirement, and gave rise to
headlines such as Work until you are 70.
While such headlines were designed to shock, they
did highlight the increasing need for individuals to
supplement their State pension through private or
workplace pension plans.

John Cockerton
Senior Consultant,
Benefits

Automatic enrolment is seeing millions of workers

saving for their retirement in a defined contribution
(DC) arrangement. Alongside this, defined benefit
(DB) contracting out is being abolished, which
for some DB schemes could prove to be the final
straw, resulting in them closing to future accrual.
Although the momentum is towards DC schemes,
the Government has been working on proposals
for a new type of pension Defined Ambition.
Defined Ambition is part of a strategy to reinvigorate
workplace pension provision, bridging the gap
between DB and DC pensions by sharing the risk
between employers and employees.
In an uncertain and ever-changing world, where the
Government keeps moving the goal posts, what
does the future hold for pension savings?

DB schemes now and in the future

In a recent survey, we asked senior finance, HR
and pension specialists how they expect their
pension plan design to change in the future. The
results showed that the number of DB pension
schemes closed to future accrual is expected
to increase from 37% today to 73% in five years
time, with just 2% of companies expecting to still
provide DB pensions to new entrants. The trend
for DB schemes that are closing to future accrual

continues to be to offer members contributions

into a DC scheme instead. However, when closing
their DB scheme to future accrual, companies
appear to be acknowledging the difference in
value of DB benefits compared to DC. Two-thirds
of companies in our survey are offering DB
members enhancements in excess of the current
DC contribution level, if only, in some cases, for a
limited period.
Of the schemes that are currently open to future
accrual (either to all employees or only existing
members), 43% expect to still be providing DB
pensions to some employees in five years time.
This highlights that closure to future accrual is not
the only option for companies.
The introduction of a flat State pension benefit will
bring with it the ceasing of contracting out. This
will lead to higher National Insurance contributions
for employers and employees in contracted-out
schemes (typically DB schemes). Our survey
indicated that, of those companies that have
considered the impact this might have on their
scheme, over half will take one of three actions:
close to future accrual, adjust the benefits, or
increase member contributions to reflect this
extra cost.

HR Matters 9

Pension savings

Scheme changes
DB pension schemes have a reputation for being
high risk, with a high level of funding volatility and
high associated costs. These are some of the key
reasons why the number of employers providing
future accrual is dwindling. DC schemes, on the
other hand, transfer the risk from the scheme,
or company, to the member. Removing this
risk means that costs are more predictable
for employers.
It is usually the case that a DB scheme will first
close to new members, and then at a later stage,
close to future accrual. At this second stage it is
natural to ask whether the existing DC scheme is
fit for purpose for former DB scheme members.
Recognising that by moving their former DB scheme
members to the DC scheme there is likely to be a
shortfall in expected pension, 66% of respondents
provide benefits in excess of those offered by the
existing DC scheme to members who were being
moved from a DB scheme. There are a number of

ways in which these enhancements are provided,

with the most popular option being enhanced
pension benefits. However, 3% of respondents offer
DB members additional benefits outside of the
pension schemes.
One motivating factor behind closing to future
accrual is often the desire to have equality
amongst employees. This may explain why
7% of our respondents revised their DC plan
for both existing members and DB members.
Furthermore, some companies (21%) smooth the
transition from DB provisions to DC by offering
short-term enhancements, so that in the long run
all employees will have access to the same level of
pension benefits. See Figure 01.
An alternative to DC schemes is a cash balance
plan. This is a means of sharing the risk of providing
retirement benefits with the employees, which is
broadly in line with the Governments idea of a
reinvigorating workplace pension saving.
Of
the schemes
that are currently

Figure 01. If you have closed your DB plan and moved members
to DC within the past three years, what did you offer to former
DB members for future service?
0%

5%

10%

15%

Existing DC plan no uplifts or enhancements

10
Existing DC plan higher employer contributions
Existing DC plan plus short-term enhancement
Existing DC plan plus increase in non-pension benefits
3
Revised DC plan for both DB and existing DC members
7
Revised DC plan for both DB members get enhancement
14
Other
10
Not applicable
14

10 towerswatson.co.uk

20%

open to future
accrual (either to all
25%

employees or only
existing members),
43% expect to still
be providing DB

21
21

pensions to some
53

employees in five
years time.

Pension savings

Contracting out
The biggest change in State pension design in
35 years, a shift away from the basic State pension
(BSP) and State second pension (S2P) to a new
single-tier State pension of around 140 per
week, has been well publicised. And as part of the
switch to a single-tier State pension, the ability for
occupational pension schemes to contract out on a
DB basis will also cease (in April 2016).
Currently, DB members, whether contracted
out or contracted in, accrue a BSP; but
contracted-out members give up S2P and the
scheme has to provide at least a certain level
of benefit in its place. In return, the company
and members pay a reduced level of National
Insurance contributions. When contracting out
ceases, if no action is taken, the level of benefits
payable from the occupational pension scheme
will not change, however the company will pay a
higher level of National Insurance contributions,
and therefore costs will rise. Furthermore, an
employee who has always been contracted out will
earn a higher State benefit in future, but will also
pay higher National Insurance contributions.
Our research indicated that of those respondents
who have considered the impact to their DB scheme
of contracting out ceasing, over half would consider
either closing to future accrual, reducing the level
of pension or increasing member contributions
to reflect the increased costs. See Figure 02.
Although 18% would be willing to accept the higher
costs, when we take a closer look at the data,
three-quarters of these schemes anticipate being
closed to future accrual within the next three years.
This might indicate that these schemes only contain
a small proportion of active members, therefore
such an increase in costs is likely to only represent
a small proportion of overall scheme liabilities.
Also the number of active DB members may be
small compared to the companys total employee
population and therefore the cost of DB future
accrual will be small relative to the overall pension
cost, including DC contributions.
About a third of respondents have not yet
considered the impact of the change. There
could be many reasons for this. For example,
the employer could have very few employees in
contracted-out employment, putting this issue low
on the agenda. It could be viewed that 2016 is still
a long way off, despite the need to consult with
employees to manage change. It is also possible
that some employers are awaiting the results of
the DWPs Defined Ambition consultation to see
whether there will be further flexibility that they may
find attractive.

Figure 02. What changes are you planning to make to your DB plan
in response to the ending of contracting out in 2016?
0%

5%

10%

15%

20%

25%

30%

35%

40%

No change and absorb the higher NI costs

12
Pass NI costs to members by increasing contributions
6
Reduce level of DB benefit to allow for higher NI costs
15
Close the DB plan to future accrual
17
Not yet considered the impact of the change
34
Other

16

In summary
Published in early 2014, our Pension Strategy Survey reinforces
the trend observed in recent years: DB schemes continue to
change and close, and DC is the replacement scheme of choice.
The cessation of contracting out in April 2016 will drive further
change and that change will be varied: closure and other benefit
modification will be adopted in order to mitigate the costs of
contracting back in.
The DWP has consulted on a third way, Defined Ambition, and
is conscious of the cessation on contracting out as a driver
for change in DB schemes. Whilst some of the changes in the
consultation document appear relatively straightforward to
implement, others appear to require significant legislative change.
We currently await the outcome of this consultation and it remains
to be seen what can realistically be achieved before contracting out
finally ceases.
But one thing is clear: organisations should be thinking now about
the impact of these changes on their pensions arrangements,
considering which options will support their benefits strategy, and
starting to plan the steps needed to formalise the changes, consult
with stakeholders and implement change.

HR Matters 11

 HR transformation
Technologys role in the future of HR
HR has been working hard to respond to changing demands
over the past year. HR departments, especially in global and
multinational businesses, have been centralising, harmonising
and standardising wherever they can in order to achieve a
structure that enables them to adapt and deliver the services
in a way that suits the business as it evolves.
New technologies are at the forefront of these
changes with more companies implementing
Software as a Service (SaaS) and Cloud-based
solutions to help gain greater efficiencies in HR
and drive employee self-service.

Benefits of HR technology
Tim Richard
EMEA Practice Leader,
HR Service Delivery

Technology is not a panacea and needs to be

thought about holistically. The people delivering
HR, the HR processes and the technology must
all be in sync in order to provide the most efficient
and effective HR services to the organisation.
Technology is the key enabler of a leading practice
HR operating model, but most often changes
have to be made to processes, procedures,
and integrations with other systems during
implementation. In addition, roles for individuals
on the HR team typically change thus requiring
training and updating of skills.
It is always best to review the entire HR
operating model (including some policies) before
implementing or upgrading technology and assess
the impacts it may have on other areas within the
model (such as structure, HR talent, processes,
governance and vendors). Also, never forget the
power of a good change management programme
when introducing a big change like new technology
to your organisation. Approaching a technology
programme holistically ensures that the benefits
for your HR operating model can be realised when
the system goes live.

12 towerswatson.co.uk

Workday
Workday has made a big splash in the world of
SaaS-based HR technology over the last four
years, mainly for companies based in North
America. Today, Workday has very robust HR
functionality and is expanding rapidly with two
update releases per year in the areas of talent,
compensation, recruiting and HR analytics.
The software provider has been expanding across
EMEA and Asia over the past year and is gaining
momentum in those regions. Towers Watson has
been one of Workdays key integration partners
for the past nine years and continues to provide
implementation services for Workday in all regions,
with major expansion plans in EMEA.

SaaS solutions
All of the current research points to the fact that
Cloud and SaaS technology is gaining momentum
and is firmly here to stay. Our Towers Watson
HR Service Delivery Survey clearly shows that
SaaS solutions now make up the majority of new
implementations for replacement HR applications.
According to Forrester research, every software
generation improves on the fundamental
flaws of the past generations and SaaS has
improved significantly on the enterprise resource
planning (ERP) solutions of the past. However,
the largest gains have been made in technical
implementation time reduction, ability to quickly
upgrade functionality, user experience acceptance
and cost control.

HR transformation

After implementation and training, it is possible

for people within the HR organisation to make
the necessary changes as SaaS is based on
configuration and not customisation. This frees
HR directors from having to rely on expensive IT or
consultants to make required changes. Not that IT
support is not important. Reliance on IT will remain
for integrations, overall security and accessibility.

Cloud

technology

Our HR Service Delivery practice has been helping

clients define their HR technology strategies and
implement HR technology solutions since HR
systems came into existence and we have seen
a definite shift towards the Cloud. Based on our
experience, organisations that are considering
moving their HR systems to the Cloud should
consider the following:

What systems will they need to integrate

with? Often replacing the HR systems
that contain the majority of employee
data can impact the entire organisation.
Including finance and business operations from the
start can help tremendously once implementation
begins as they understand the ambitions and goals
for HR, managers and employees and can form a
partnership with which to achieve success.

Proper implementation procedures

are still required but can be more
streamlined. Process design sessions,
data conversion, building of integrations,
testing and training are all still needed, but often
to a lesser extent than in the past. Our guidance
states that a typical SaaS implementation will
take about 20% to 30% less time and effort than a
similar ERP implementation would take.

The growing base of installed solutions from

Workday has proven that this generation of
software is the trend for most companies
regardless of size. Based on the above, the
overall total cost of ownership is lower and
allows the HRIS/HR Operations function to take
ownership of the system.

Organisations still need to consider the

changes necessary on the people and
process side even more than they did
with ERP solutions. Given SaaS models
eliminate or reduce the ability to customise the
technology, it is more important to ensure the
end-to-end HR process fits the technology and
HR professionals are prepared to execute in
their assigned roles. It is no longer possible to
fit the technology totally to current HR practice.
SaaS is highly configurable and many things can
be completed in much the same way as before,
but those that cannot need to be changed. A
strong change management programme is highly
recommended to address this.

SaaS in the HR space operates most

effectively when implemented with
manager and employee self-service.
If your organisation does not currently
have self-service, it is recommended to slowly roll
out functionality over a period of time. This can be
easily planned for and should be considered as
SaaS solutions are more intuitive and user-friendly
than traditional ERP systems.

Mobile technology. SaaS technology

allows for a much more robust and
simple approach to rolling out mobile
technology than software generations
before. Apps can be installed on various types
of mobile devices like the iPad, iPhone and
Android-based tablets/phones. It is possible to
roll out mobile applications utilising the same
processes that are used through the Cloud browser
applications, thus eliminating the need for separate
code that was required in the past. This not only
improves performance, but also removes the need
for special software to run mobile applications.
It is just a matter of turning on mobile technology
in the Cloud.

Process

design
sessions, data
conversion, building
of integrations,
testing and training
are all still needed,
but often to a
lesser extent than
in the past.

Security and data privacy. Although you

will be sharing a server with multi-clients
(multi-tenant) applications, the protocols
put into place by the vendors ensure
that your data is protected. They are aware of the
nature of the EU Data Privacy regulations and will
work within collaboration to ensure that they are in
compliance and will explain how they are meeting
the requirements.
It is important to remember that many companies
are going through these changes at the moment, so
you are not alone. Transitioning from traditional ERP
systems to the Cloud successfully can enhance
the service delivery of the HR function and provide
significant benefits to the business.

HR Matters 13

 Tracking people priorities and trends

in high-performance companies
HR needs to focus on key HR programmes and elements
of effective leadership
As the global economy continues its slow recovery, there
are signs of a renewed focus on organisational investments
in people.

Yves Duhaldeborde
Director,
Employee Surveys

For example, results from the most recent

Towers Watson Talent Management and Rewards
Study, a global survey of over 1,600 organisations
talent practices, indicate that more employers see
employee advancement opportunities improving
today than they did 24 months ago. These efforts
are driven in part by the fact that labour markets
are slowly heating up. More employers report
difficulty retaining critical-skill employees, as well
as those in high-potential and high-performing
employee groups.
If, in fact, companies are increasing their emphasis
on and investment in people programmes, we
should expect to see employees developing
favourable attitudes toward critical aspects of their
work environment as we emerge from the depths of
the Great Recession. The companies best equipped
to lead this trend are likely to be those with strong
financial performance.
Towers Watson maintains a benchmark that tracks
opinions of employees in high-performance
organisations and companies with performance
levels above sector averages for a range of
financials, including top-line and bottom-line
results, as well as return to shareholders
(see page 6). Trends showing more favourable
employee opinions in these companies suggest
that the best organisations are investing more
in their people. Furthermore, the topic areas
improving the most over time reflect the people
priorities receiving the greatest attention from this
elite group during the post-recession recovery.

14 towerswatson.co.uk

Five-year employee opinion trends in

high-performance organisations
Our research examined trends in high-performance
organisations during the five-year period from
2009, when global gross domestic product trends
began to improve, through 2013. The results show
that four major topic areas gained substantially
over this period. These topic areas reflect broad,
company-wide issues, as well as issues pertaining
to local work conditions:
Career development. People practices related
to career planning, recruiting, training and the
creation of long-term career opportunities
Empowerment. The enabling of employees
voices in the workplace and ability to innovate
Rewards and recognition. Competitive pay and
benefits, as well as nonmaterial rewards
Leadership. Senior leaders effectiveness
at decision making, communication and
change management
Trend results for each of these four areas are
summarised opposite. The survey questions
with the strongest trends are used to illustrate
each topic.

High performance

Career development. Employees in high-performance

companies are increasingly satisfied with the
emphasis placed on valuing and fostering talent,
and the availability of long-term career opportunities
and training. Figure 01 shows trends over the last
five years, with improvements ranging from seven
to 12 points on the percent-favourable metric, a
measure of the percentage of employees selecting
the top two boxes of a five-point scale, averaged
over all organisations. Improvements are apparent in
promoting, recruiting and retaining the best people,
and in providing training and long-term opportunities.

Empowerment. High-performance companies are

also improving over time with regard to managing
open, supportive cultures that encourage new
ideas and empower staff to delight customers.
Figure 02 highlights trends in this area over the
last five years, with improvements of seven points
in each case.

Figure 01. Career development

High-performance companies are promoting, recruiting and retaining the best people, and offering
long-term opportunities and training
80%

60%
57

60

61

55 74
73
68

74
70 70 72

64

66

79 80

74
59

57

53

56

61

65 67

64

61

66

40%

20%
0%

My company does
a good job recruiting
the right people for
future needs

This company
does a good job
promoting the
most competent
people
2009

8
I think this
company offers
long-term
opportunities

My company
does a good job
retaining its most
talented people

Training needed to
increase eligibility
for a better job

Our

research
examined trends in
high-performance
organisations during

2010

2011

2012

the five-year period

2013

from 2009, when

global gross domestic

Figure 02. Empowerment

product trends

High-performance companies have environments in which it is safe to speak up and

suggest ideas without penalty, and employees have flexibility to do right by customers

began to improve,
through 2013.

100%
83 86 84 86

80%
60%

67 69 68 69

90

74
60 60 58 63

67

40%
20%
8
0%
I have enough
flexibility in my
job to do what is
necessary to provide
good service to
my customers

Most of the time

it is safe to speak
up in this company

2009

2010

2011

2012

11 12
6

This company
has established
a climate where
innovative ideas
can fail without
penalty

2013

HR Matters 15

High performance

Reward and recognition. Employees in

high-performance companies are increasingly
satisfied with the competitiveness of compensation
and benefits, as well as nonmonetary forms of
recognition. They also report feeling that their
employers have a greater appreciation for their
contributions. Figure 03 shows trends over the
last five years, with improvements ranging from
seven to eight points.

pace for change and make decisions in line with

company values. Figure 04 illustrates trends over
the last five years, with improvements of six to
12 points.
There is a payoff for organisations showing
continued improvement in all of these aspects of
employee opinion. Specifically, the trend analysis
reveals that employees in high-performance
organisations report their company is more
highly regarded by customers, and is perceived
as more competitive with regard to the quality of
products and the delivery of customer service.
Figure 05 shows trends over the last five years,
with improvements ranging from eight to 10 points.

Leadership. Employees in high-performance

companies are increasingly satisfied with senior
leaders general ability to manage the company
and also, in more specific areas, to communicate
down the line to all employees, set the right

Figure 03. Reward and recognition

High-performance companies offer competitive pay and benefits, and provide nonmonetary rewards;
in addition, employees feel valued by supervisors
100%
80%
60%
49

40%

There

is a payoff

20%

for organisations

0%

51

55

62

57

66 66

69 69

61 64 63

68 69

79

Benefits are as good

as or better than
those of other
organisations

Pay is as good
as or better than
that of other
organisations

improvement in all
of these aspects of

85 86

48

showing continued

80 81

This company makes

adequate use of
recognition and
rewards other than
money to encourage
good performance

employee opinion.
2009

2010

2011

2012

My supervisor
values my
contribution

2013

Figure 04. Leadership

High-performance companies are well managed, make decisions consistent with values, have
leaders who communicate down the line and make changes at a reasonable pace
100%
80%

87
81 79 85 84

81 81 81
75 77

60%
57 59

60 63 63

56 59

64 67 68

40%
20%
8
0%
Management
decisions are
consistent with
values

In my judgment,
the company as
a whole is well
managed
2009

16 towerswatson.co.uk

2010

2011

2012

Top management
is doing well
communicating
down the line
2013

The pace of change

is about right

High performance

The takeaway
With the effects of the global recession
still lingering and global growth still tepid,
organisational investments in people may likewise
grow at a slow rate. Given the need to prioritise
limited resources, it can be useful to identify the
areas where the best financial performers are
directing their investments. Generalising from
the results just examined, it appears that these
companies are focusing their efforts on key HR
programmes and elements of effective leadership.
From an HR programme perspective, the high
performers are focusing on talent management
initiatives, competitive compensation and
benefit programmes, and effective nonmaterial
recognition. From a leadership perspective, these
organisations are striving to excel in three areas:
managing change at the right pace, staying true to
company values and ensuring employees have a
voice in the workplace.
The trends reveal a clear payoff for organisations
that invest in these areas. Employees in
high-performance companies perceive themselves
as being held in higher regard by customers and
view their organisations as more competitive in
product quality and customer service delivery.

Focusing on the aspects of the employer-employee

relationship reviewed here provides any company
with the opportunity to measure and benchmark
its performance across a set of topics of particular
importance to some of the worlds best-performing
companies.

Figure 05. The payoff

Employees in high-performance companies report improved competitive
position and regard from customers
100%
80%

84

87 86 86

92
74
69 66 70

60%

77
69

71 71 74

79

40%
20%
0%
Organisation is
highly regarded
by customers

2009

2010

Quality of products is as
good as or better than
that of our competitors

2011

2012

Customer service
is as good as or
better than that of
our competitors

2013

What distinguishes the high performers?

The 2013 global high-performer group identified by our research is comprised of 26 organisations
from a range of industry sectors, including financial services, manufacturing, pharmaceuticals
and health care, professional services, retail and telecommunications. These organisations
outperform their peers in two key areas:
Financial performance. High performance is first and foremost about financial success.
To evaluate companies fiscal performance, Towers Watson collects indicators of bottom-line
performance and profitability, such as gross profit margin, earnings, and revenue growth.
In addition, several measures that reflect the value of an organisation to its shareholders are
examined, including return on capital and return on equity. In all cases, performance relative to
sector-specific averages is calculated for each financial indicator. Therefore, to be designated a
high performer, an organisation must first display financial performance across this full range of
financial indicators that is consistently above industry averages for current-year results, and at
least on par with sector performance over the last three years.
Employee opinion scores. High performance is about more than just great financials. As an
organisation may be financially successful and yet a difficult place to work from an employee
perspective, an additional screen is applied before selecting the final list of organisations
to be included in the high-performer group. Specifically, the employee opinion scores of
organisations recognised for excellent financial performance are compared with each other.
If an organisations scores fall significantly below those of the others across most or all
available survey topics, the organisation is removed from the group. In this way, the final set
of companies represents environments that are both financially successful and judged by
employees as effective at managing people and culture.

HR Matters 17

 Benefits health check

Creating fit for purpose benefits programmes
Over the last few years organisations have experienced
enormous changes to their benefits programmes, driven
by legislative changes, difficult market conditions and the
growing financial burden of legacy DB pension arrangements.

Edd Collins
Consultant, Benefits

As a result, the vast majority of organisations

offer benefits that are now very different from
the programmes that were originally designed,
costing more than originally anticipated, carrying
greater risk than desired, and no longer meeting
the employers objectives or the employees
needs. Employers may therefore want to reassess
the benefits programmes they offer to ensure
they remain fit for purpose and support the wider
business goals.
We recently explored this issue with an audience
of mid-tier employers (those with less than 2,000
employees and/or with defined benefit (DB) assets
less than 1bn), more than 60 of which completed
a Benefits HealthCheck Survey assessing the
ongoing appropriateness of their benefit provision.

The high costs of benefits provision

According to the survey, more than one-third of
respondents said their overall employee benefits
package now costs more than 20% of salary costs.
Perhaps unsurprisingly, those offering DB pension
plans experienced higher benefit costs than those
with only defined contribution (DC) arrangements.
This raises the question as to whether employers
that continue to offer DB benefits are fully aware
of the implications of this decision. In particular,
some employers will need to consider whether the
associated higher costs will affect their ability to
remain competitive with peers who may have a
significantly lower cost base.

18 towerswatson.co.uk

On the other hand, it may be that for some

employers with open DB plans this level
of benefit provision remains appropriate.
However, they will need to ensure that the
additional costs are offset by increased
employee appreciation and engagement.

Aligning benefits strategy and

business needs
The HealthCheck revealed that around 60% of
respondents believed they had a consistent
philosophy and strategy across their employee
benefits, and that this strategy was aligned with
their business needs. This is good to see and is
particularly important in the current environment
to ensure that business resources are allocated
efficiently and used to deliver tangible benefits
back to the business. However, more than half of
all employers admitted that they did not have any
metrics in place to assess how successful their
benefits plans were in supporting their business
needs in practice. Further, of the companies
that did have metrics in place to assess the
effectiveness of their benefits plans, few were
confident that they were using the right metrics or
monitoring these metrics on a regular basis.
With over half of employers saying they had
reviewed one or all of their pension or benefit
plans in the last year, it is clear that there
is a desire to align benefits with business
needs. However, this should not be limited to
one-off, infrequent reviews, but should instead

Benefits health check

be incorporated into an ongoing monitoring

framework. The ability to both measure and
monitor how well pension and benefit provision is
working will be essential in ensuring that these
plans remain fit for the future.

DC pensions
The HealthCheck also showed that for those
organisations with DC arrangements, unsurprisingly,
auto-enrolment has been top priority recently,
with work to review plan investments and improve
governance also featuring.
Going forward, improving DC member engagement
was top of the agenda. There is still a significant
gap in interest and engagement between some
new joiners of DC schemes often the result of
auto-enrolment and those really paying attention
and taking the necessary actions to maximise the
value of future pensions and to safeguard their
financial futures.
It is clear this gap has to narrow quickly if
employers are to get the full benefit of the
investment in their benefits packages, and
to ensure better outcomes and levels of
understanding for the members of their scheme.
Alternatively, some employers may want to
consider a two-tier approach to DC, where their
spend is only targeted at those employees who
appreciate its value, either through the use of
nursery schemes or by reshaping the contribution
structure to put more of an emphasis on matching
contributions. See Figure 01.

Figure 01. DC plans top three employer

planned actions

For those organisations with DB plans,

de-risking has been, and will continue to be,
high on the agenda, according to the survey.
The most common actions taken by companies so
far are typically first-phase de-risking activities,
for example closures to new entrants and future
accrual, while work to diversify pension schemes
investments has also been common.
The survey shows that the most popular company
actions for the coming years are likely to
focus on second-phase de-risking, either
via buy-in/buy-out solutions, interest-rate
hedging or other liability management exercises.
Liability management processes are increasing
in popularity now that the Code of Good Practice
on Incentive Exercises has been tried and tested
and IFAs advice models have become more
established and settled. 2013 was also a record
breaking year for bulk annuity and longevity
hedging transactions, with over 16 billion of
liabilities hedged, and we expect this trend to
continue, with further records broken in 2014.
See Figure 02.

The

HealthCheck
revealed that around
60% of respondents
believed they had a
consistent philosophy
and strategy across
their employee

Figure 02. DB plans top three employer

planned actions

benefits and that

this strategy was
aligned with their

business needs.

1
3

1
Interest rate
hedging

3
Yr
2

Increase
governance
focus

DB pensions

Improve
member
engagement

Yr
1

Buy in/
buy out

Liability
management

Yr
3

Introduce
annuity
broking

HR Matters 19

Benefits health check

Other benefits options

The HealthCheck identified that employers had
to-date largely focused on using cost-effective
solutions to meet their employees needs.
Introducing salary sacrifice, for example, had
evidently been a quick win for employers in the
past few years, and health benefit reviews and
death-in-service redesigns had also been popular.
The survey suggests this trend was expected to
continue, with a number of employers planning
to introduce flexible benefits programmes for
their employees if they hadnt already, as a way
of introducing further benefits without increasing
cost. However, the survey also revealed an
interesting shift in focus towards prevention rather
than cure for future actions, with employers most
focused on developing wellbeing programmes for
their employees.
Absence management is becoming an increasingly
costly issue for employers to deal with and an
ageing workforce is likely to mean that healthcare
benefits increase in importance to employees.
Employers that take a proactive and preventative
approach to the wellbeing of their employees are
likely to reap the rewards of this more than ever in
the future. See Figure 03.

Figure 03. Other benefits top three

employer planned actions

2
Introduce
flexible
benefits

1
3
Develop
wellbeing
programme

Review
healthcare
benefits

The Benefits HealthCheck what did

we learn?
The key messages coming from our delegates,
at both the event and through the HealthCheck
Survey, were fourfold.
First, a key challenge facing plan sponsors is
how to develop a successful long-term strategy
for managing DB pension risk, particularly in
an ever-shifting legislative landscape. With the
cessation of contracting out in 2016, change
remains on the agenda, but it is equally important
to consider further actions to manage this
risk to ensure that it does not start driving
business decisions.
Second, the role of pensions and benefits
practitioners is evolving as governance and
regulatory commitments grow, the workforce
changes and pension and benefits are increasingly
seen as a vital part of wider-reward strategy.
Benefits programmes, therefore, need to be
managed within the wider business context and
cannot be viewed in isolation from everything else.
Third, as DC arrangements increase in size and
number, member engagement and education is a
big priority. Having a clear framework would help
employers reduce governance costs and help
companies decide how to approach this rapidly
evolving area, ensuring that attention is focused in
the right areas.
And finally, although cost continues to be a driver
for change, there is still room for paternalism to
be reflected in the level of pension and benefit
provision. While employers should continue to
look for cost-effective solutions, this need not
translate into a race to the bottom. Retaining
and recruiting talent remains a key concern and
benefits programmes can continue to play a big
part in this.

20 towerswatson.co.uk

The

HealthCheck
identified that
employers had
to-date largely
focused on using
cost-effective
solutions to meet
their employees
needs.

 Ticking all the boxes?

A study of performance management practices in the UK
An overwhelming majority of our respondents (96%)
believe that performance management is important for their
organisation, yet only 64% reported having either an effective
or very effective approach.
In fact, not even a third of this group reported that
their approach has caused a marked improvement
in employee performance, despite this being a key
driver for almost 80% of respondents.
Our December 2013 survey gathered data on a wide
range of topics relating to performance management
from over 100 UK-based organisations, representing
a wide range of industries.
Chris Charman
Director, Reward

So what lies behind this headline?

Our report reveals more about how performance
management is actually used in organisations
today. We see a striking degree of similarity in the
features of performance management processes
across organisations, despite a reported wide
range of drivers for having it in the first place.
Furthermore, we see very little tailoring of the
process to meet the diverse needs of different
employee populations. Although performance
management is widely used to identify high
potentials, for example, it is not used to manage
their performance any differently than the rest
of the employee population. Has best practice
meant a uniformity of practice which, despite the
bullish rhetoric, made performance management
just another box to be ticked?
Is there an opportunity to revisit the process and
tailor it for different segments to better meet
their individual needs? When it comes to setting
goals, only 11% of our respondents conduct any
kind of calibration either before or after the goal
setting process. It strikes us that this is a missed

opportunity to ensure consistency from the very

outset. Moreover, investing a little time at the start
of the cycle could potentially reap huge benefits
later on in the year when those challenging
discussions around parity of objectives come up.
When it comes to assessing performance, the
vast majority take a balanced view in evaluating
performance against specific objectives and
competencies (the what and the how),
however, there is much less consistency when
it comes to calibrating these evaluations even
less communicating them. In fact only 34% of
respondents stated that they were open about
the calibration process. Our employee research
tells us that the clarity and perceived fairness of
performance management has a significant impact
on employees levels of engagement. This strikes us
as a further opportunity for organisations to make a
relatively small change that will have a big impact.
Despite the perceived importance of performance
management to an organisation, very few are
investing significantly in ensuring their managers
are well-equipped to deliver it. In fact, only 17%
of our respondents said that their organisations
provide comprehensive in-person training, with the
majority opting for a self-directed approach.
For something this important, that impacts each
and every employee and drives organisational
performance the key driver for doing it in the
first place according to our respondents is it not
worth investing a little more?

HR Matters 21

Performance management

So what is the prize? Why should you

be concerned?
Let us think about the financials: over 90% of the
organisations we surveyed said that performance
management has a direct influence on determining
base pay and incentives or was the primary
influencer. 93% of organisations differentiate on
base pay and bonus at the individual level and
spend, on average, 9% of their base-pay bill on
this each year 9% being the typical value of
the base-pay review pot (3%) and bonus pot (6%)
combined. Therefore, the typical UK organisation
will have 9% of their annual base-pay bill directly
influenced by this one process. In our experience,
the typical people cost of a business constitutes
some 50% to 70% of the total cost base of an
organisation. This seems like a lot of money
hanging on one process one process that seeks
to focus peoples attention on doing the right thing
for business success.
Let us think about engagement and retention:
Towers Watson research for many years has
pointed to career development and skills growth
as key drivers of engagement and retention for
key talent groups and professional knowledge
workers in particular. performance management
is the vehicle for improving this aspect of the
employee experience, which is closely correlated
to sustained engagement, which then aligns to
improved business performance.

Only

17%

of respondents
said that their
organisation provides

comprehensive
in-person
training

Our point of view

Our research and experience of working with
leading organisations around the world leads
us to believe that more value can be gained
from performance management and we would
recommend organisations think about the following:
1. Targeting and tailoring performance
management to meet the unique needs of
different segments of the population do high
potentials need to be treated differently to high
performers, for example. Do all parts of your
organisation need to be set objectives?
2. Think flexibly about competencies and how
they can be more tailored to different employee
groups. Use a core set of competencies and
a menu that can be chosen from for different
job families to increase the specificity of
competencies. By being more relevant,
performance discussions can be more
meaningful and aid fair differentiation.
3. Be more open and communicate more about
the approach to managers and employees.
Do not be afraid to talk about the curve if
you use one and certainly do not make
processes hidden.
4. Invest in manager training to enable more
effective and empathetic performance and
development discussions.
5. Increase the emphasis on calibration at the
goal-setting stage to the level invested at the
performance-rating stage in order to focus on
direction of travel not just on arrival.
6. M
 eeting employees once or twice a year to
work through the basic steps in the process is
not enough to ensure continuous development.
performance management should be part of
business as usual if it really is the business
process companies say it is.
7. For employees to feel engaged by the process,
they need to have an active and regular role
in it joint setting of goals and joint evaluation
of performance.

22 towerswatson.co.uk

Our

employee
research tells us
that the clarity and
perceived fairness
of performance
management has a
significant impact
on employees levels
of engagement.

A new perspective

2014 Talent Management and Rewards Study

launching soon

To learn more about how organisations are managing their talent management and reward programmes, we invite you to
participate in our 2014 Global Talent Management and Rewards Study.
We will explore changes to reward and talent management strategy, design and implementation, as we focus on a fresh
perspective for the future of talent management and rewards.
All participants will receive a complimentary copy of the survey report, which will include revealing insights to help answer
some of your most challenging talent management and rewards questions:
How are reward programmes governed and designed?
How do organisations design a sustainable and successful employee value proposition?
How does cost management affect reward and performance management?
How do organisations effectively manage their talent pipeline?
For further information, or if you would like to participate, please contact your usual Towers Watson consultant, or
Kylie Russell on +44 20 7170 3491 or kylie.russell@towerswatson.com

Benefits
Risk and Financial Services
Talent and Rewards

Towers Watson is represented in the UK by Towers Watson Limited.

towerswatson.com

About Towers Watson

Towers Watson is a leading global professional services
company that helps organisations improve performance
through effective people, risk and financial management.
With more than 14,000 associates around the world, we
offer consulting, technology and solutions in the areas
of benefits, talent management, rewards, and risk and
capital management.

Towers Watson
71 High Holborn
London
WC1V 6TP

Towers Watson is represented in the UK by Towers Watson Limited.

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