Aon Plc · NYSE:AON
Aon — Aon Hewitt — 2012 Comp Forum Webinar
41 slides from Aon's conference presentation, October 2012
Slide 1: 2013 Compensation Planning Briefing
2013 Compensation Planning Briefing October 2012 Prepared by Consulting Performance, Reward, & Talent
Slide 2: Today's Discussion Topics
Today’s Discussion Topics Context for 2013 Compensation Planning Compensation Planning Trends and Guidance Re-thinking Pay for Performance Consulting | Performance, Reward, & Talent Proprietary & Confidential | AA/BBC/2013 Comp Planning Briefing.PPT/LS-02964 09/2012 1
Slide 3: Context for 2013 Compensation Planning
Context for 2013 Compensation Planning Compensation Planning Trends and Guidance Re-thinking Pay for Performance
Slide 4: Context for Planning: Current Economic Outlook
Context for Planning: Current Economic Outlook Continued recovery for domestic economy Highly volatile global outlook Low confidence in political processes Political uncertainty pending November outcome Continued cost containment pressures Focus remains on productivity Consulting | Perfo
Slide 5: Context for 2013 Compensation Planning
Context for 2013 Compensation Planning Where we stand 4 years after the financial crisis Financial markets have strengthened, but are still below pre-recession levels Global outlook remains volatile...major unrest in almost every region of the world Rebounding real estate market, yet foreclosu
Slide 6: Context for 2013 Compensation Planning: Looking ahead
Context for 2013 Compensation Planning Looking ahead Continued weak employment market – More unemployed dropping out from job searches – Increased under-employment Economic growth expected to be weaker in 2013 Expiration of Bush tax relief programs come January 2013 Potential movement to a t
Slide 7: Current Economic Outlook
Current Economic Outlook Dow Jones Industrial Average U.S. Jobless Claims U.S. Inflation Rate (CPI) 15,000 12,500 12,900 800,000 6% 10,200 600,000 500,000 10,000 398,000 4% 3.1% 366,000 400,000 1.7% 5,000 2% 1.4% 200,000 0 0 0% 2010 2011 2012 2010 2011 2012 2010 2011 2012 Conference Board Leading Co
Slide 8: Your Expected Business Results
Your Expected Business Results 60% 55% 45% Percent of Organizations 19% 13% 14% 14% 12% 11% 9% 6% 6% 6% 6% 4% 2% 1% 2% > 50% Below 25% Below 10% Below At Goal 10% Above > 10% Above 2011 2012 2013 Source: Aon Hewitt Survey—U.S. Salary Increases 2012/2013 Consulting | Performance, Reward, & Talent Pro
Slide 9: Compensation Planning Trends and Guidance
Context for 2013 Compensation Planning Compensation Planning Trends and Guidance Re-thinking Pay for Performance
Slide 10: Primary Data Sources
Primary Data Sources Aon Hewitt U.S. Salary Increase Survey 2012 and 2013 – Created in 1976 – Fortune 1000 companies – 1,305 participants in 2012 • Merit/overall salary increases • Salary structure movement • Variable compensation • Pay practices • Data effective as of June/July 2012 Unless othe
Slide 11: 2013 Compensation Planning Snapshot
2013 Compensation Planning Snapshot Salaried-Exempt Employees 2.8% 3.0% 2.7% 2.4% Salary Percent of Payroll 1.8% Increases 1 2 3 4 5 2009 2010 2011 2012 2013 Projected 12.0% 11.6% 12.0% 12.1% 11.3% Percent of Payroll Variable Pay 20091 2 2010 3 2011 4 2012 5 2013 Projected 38.0% Percent of Companies
Slide 12: Overall Salary Increases by Employee Group
Aon Hewitt U.S. 2012/2013 Salary Increase Survey— Overall Salary Increases by Employee Group Overall Salary Increases Percent of Payroll 3.0% 3.0% 3.0% 2.9% 2.9% 2.8%2.9%2.9% 2.9% 2.9%2.8% 2.9% 2.8%2.9% 2.8% 2.9% 2.8% 2.7% 2.7% 2.7% 2.7% 2.7% 2.5% 2.6% 2.5%2.6% 2.4% 2.4% 2.4% 2.4% Executive Salaried
Slide 13: Industry Overall Salary Increase Outlook for 2013
Industry Overall Salary Increase Outlook for 2013 Salaried-Exempt Employees 4 3.8 3.6 3.6 3.3 Percent of Payroll Mining/ Milling Computers & Energy Automotive Related Products 3 2.8 2.7 2.6 2.6 Building Materials Transportation 2.5 Health Care/ Government Medical Services Education 2 Perennial Indus
Slide 14: Variable Pay Budgets by Employee Group
Aon Hewitt U.S. 2012/2013 Salary Increase Survey— Variable Pay Budgets by Employee Group Variable Pay 12.0% 12.1% 11.8% 11.3% 11.6%11.5% Percent of Payroll 6.0% 6.1% 6.3% 6.2% 6.2% 6.0% 6.0% 5.3% 5.1% 5.2% 5.6% 5.0% 5.0% 4.9% 4.6% 4.7% 4.5% 4.4% Salaried Exempt Salaried Nonexempt Nonunion Hourly Uni
Slide 15: Projected Future Variable Pay Budgets
Projected Future Variable Pay Budgets Actual and Projected Variable Pay Spending for Salaried Exempt Employees 15.8% 16.2% 15.4% 15.0% 12.1% 11.8% 12.0% 11.6% 12.0% 11.4%11.2% 10.8% Percent of Payroll 10.8% 11.3% 10.5% 9.3% 9.7% 9.5% 8.8% 7.6%7.5%7.6% 8.0% 6.4% 5.7% 5.9% 4.2% 3.8% 15 . 16 . 17 . t.
Slide 16: Industry Variable Pay Outlook for 2013
Industry Variable Pay Outlook for 2013 Salaried-Exempt Employees 20 17.8 17.1 17.0 16.2 Energy Food/Beverage/ 16.0 15 Tobacco Consumer Products Metals/Fabrication Telecommunications Percent of Payroll 12.1 7.8 6.0 Health Care/ 4.9 Medical Services Not for 5 Profits 4.2 Aerospace 4.1 Research/ Develo
Slide 17: Industry Comparisons
Industry Comparisons 2013 Total Cash Compensation Budgets 21.4% 18.2% 16.0% Percent of Payroll 15.7% 17.8% 10.4% 8.8% 12.7% 15.1% 7.1% 13.1% 7.8% 6.0% 4.2% 2.6% 3.6% 2.8% 2.9% 2.9% 3.1% 3.0% Health Care Energy (Oil/Gas) Not for Profit Research Banking/Finance Accounting/ Retail Development Consultin
Slide 18: A Dramatic and Ongoing Shift in Pay Mix
A Dramatic and Ongoing Shift in Pay Mix Change in the Total Compensation Budgets and Spending for Salaried-Exempt Employees (1991–2012) 12.0% 3.8% 5.0% 2.8% 1991 2012 Overall Base Salary Increase Budget Variable Pay Spending Source: Aon Hewitt Survey—U.S. Salary Increases 2012/2013 Consulting | Perf
Slide 19: Putting Our 2013 Plan Into Perspective: Variable Pay
Putting Our 2013 Plan Into Perspective: Variable Pay These Plans Have Survived the Greatest Challenge 12.0 12.0 12.1 11.3 11.6 10.8 10.5 10.8 Percent of Payroll 9.7 8.8 5.7 5.9 4.2 3.8 1990 1991 1992 1993 2000 2001 2002 2003 2008 2009 2010 2011 2012 2013 Expected 1991 Recession 2002 Recession 2009 R
Slide 20: Conclusions
Conclusions Increases to 2013 salary budgets are marginal and not indicative of any significant rebound No indication of an increase in salary spending even with stronger job creation Cost containment on fixed expenses (salaries) will continue for several years Alternatively, funding for var
Slide 21: Re-thinking Pay for Performance
Context for 2013 Compensation Planning Compensation Planning Trends and Guidance Re-thinking Pay for Performance
Slide 22: Premise: Differentiated Rewards Impacts Results
Premise: Differentiated Rewards Impacts Results We know from research that... – High performers are attracted to companies that pay for performance and recognize their contributions – High performers will leave companies that do not reward performance – Low performers will self select out of organ
Slide 23: The Business Case for Differentiated Rewards
The Business Case for Differentiated Rewards Relative Economic Service Value 191% 100% 8.6% Below Average Average Above Average Performer Performer Performer Source: Michael C. Sturman, et. al. Evaluating the Utility of Performance Based Pay, Personnel Psychology, 2003 Consulting | Performance, Rewa
Slide 24: The Business Case for Differentiated Rewards
The Business Case for Differentiated Rewards Difference in Contribution By Performance $955,000 $500,000 $43,000 Below Average Average Above Average Performer Performer Performer Source: Michael C. Sturman, et al. Evaluating the Utility of Performance Based Pay, Personnel Psychology, 2003 Consulting
Slide 25: We Can't Afford to Reward All Performers
We Can’t Afford to Reward All Performers 2 average performers = 1 outstanding performer 20 below average performers = 1 outstanding performer Highest performers are most marketable and most sought after There is always a strong talent market for top performing talent Consulting | Performance
Slide 26: We Can't Afford to Reward All Performers
We Can’t Afford to Reward All Performers Do the math: – Few if any CEO’s will publicly state (or believe) that their goal is to perform in the middle of the pack versus competitors – If most of our employees are average performers, how can we possibly expect to outperform our competition? Consulti
Slide 27: We Can't Afford to Reward All Performers
We Can’t Afford to Reward All Performers If we reward average, or below average performers, similarly to above average, and exceptional performers—the negative sorting effects will result in too many low performers and not enough high performers for the company to be a high-performing organization
Slide 28: The Intent of Pay for Performance
The Intent of Pay for Performance High The Ideal Level of Level of reward is Reward commensurate The Reality with results Provided produced Low Low High Value of Contribution Consulting | Performance, Reward, & Talent Proprietary & Confidential | AA/BBC/2013 Comp Planning Briefing.PPT/LS-02964 09/20
Slide 29: Company Experiences in Paying for Performance
Company Experiences in Paying for Performance 60% spread results to all employees 60% 54% Percent of Organizations 29% 23% 6% 3% 1% 1% Equally Distributed Some to Each Performance Majority to High Performers, All to High Performers Level Some to Average, None to Low Performers Merit Variable Pay Sou
Slide 30: What Are the Obstacles to Paying for Performance?
What Are the Obstacles to Paying for Performance? Insufficient funding Skewed performance distributions Faulty goal setting—no clear definition of “performance” Unrealistic employee expectations Poor modeling by executives Only strong performers remain Managers lack skills Affinity t
Slide 31: Skewed Performance Distributions
Skewed Performance Distributions Desired Performance Actual Performance Percent of Percent of Employees Employees Exceeds Most 10% 25% 55% Exceeds Some 20% 30% 95% Meets All 50% 40% Meets Some 15% 5% Does Not Meet 5% 0% Desired Performance Actual Performance Consulting | Performance, Reward, & Talen
Slide 32: Affinity to Take Care of All Levels of Performers
Affinity to Take Care of All Levels of Performers Exceeds Most 6.0% 3.6% 10% 12% Exceeds Some 4.5% 3.2% 6% 8% Meets All 3.0% 2.6% 2% -or- 0% Meets Some 1.5% 2.0% 0% 0% Does Not Meet 0.0% 1.0% 0% 0% “Comp Impact of Where we 101” Actual should be heading performance distribution Assumes a 3.0% Budget
Slide 33: Rethinking Our Approach to Pay for Performance
Rethinking Our Approach to Pay for Performance Design Execution – Carve outs – Manager selection – Automatic zeros – Manager training – Lump-sum merits – Manager accountability – Common increases – Focus rewards on best – Targeted range penetration performers through market adjustments – Insist
Slide 34: Illustration: Carve Out
Illustration: Carve Out Exceeds Most 4.3% 8.0% Exceeds Some 3.8% 6.0% Meets All 2.8% 2.2% Meets Some 2.0% 1.5% Does Not Meet 0% 0% Merit Budget Merit Budget Before Carve Out After Carve Out 3.0% Budget 2.5% Budget 0.5% Reserve Consulting | Performance, Reward, & Talent Proprietary & Confidential | A
Slide 35: Illustration: Lump-Sum Merit
Illustration: Lump-Sum Merit Merit Lump Sum Exceeds Most 4.3% 10% — Exceeds Some 3.8% 6% 2.0% Meets All 2.8% — + 2.8% Meets Some 2.0% — 2.0% Does Not Meet 0% 0% — Merit Budget Lump-Sum Before Merit Approach Lump-Sum Approach 3.0% Budget Note: A 1% reduction in salary increase cost translates to 2.5%
Slide 36: Rethinking Our Approach to Pay for Performance
Rethinking Our Approach to Pay for Performance Value from different pay for performance strategies – Strategy 1: No pay for performance link • All performers receive the merit pool average (4%) – Strategy 2: More aggressive link 5% to 8% for above average performers 4% increases for all others
Slide 37: Rethinking Our Approach to Pay for Performance
Rethinking Our Approach to Pay for Performance Value from different pay for performance strategies: – Strategy 1: No pay for performance -- $1.6 B total service value – Strategy 2: More aggressive link -- $1.9 B total service value – Strategy 3: Most aggressive link -- $2.1 B total service value S
Slide 38: Rethinking Our Approach to Pay for Performance
Rethinking Our Approach to Pay for Performance Specific findings: – 85% more high performers stayed with organizations who had high explained pay dispersion than who had low explained pay dispersion – 80% more high performers worked for organizations the next year that provided high explained pay
Slide 39: Rethinking Our Approach to Pay for Performance
Rethinking Our Approach to Pay for Performance We know from research that... – High pay dispersion strongly connected to strong performance yields: • Higher team/organizational results • High retention • High attraction – The dispersion in pay must be explainable by productivity and results – Orga
Slide 40: Rethinking Our Approach to Pay for Performance
Rethinking Our Approach to Pay for Performance Next year at this time we hope to see: – Higher pay dispersion between levels of performance – Greater use of alternative pay delivery strategies – Increased use of variable pay at all organizational levels – Continued growth in the inclusion of an in
Slide 41: For Further Information
For Further Information Ken Abosch Lincolnshire, Illinois [email protected] Frank Belmonte Lincolnshire, Illinois [email protected] Consulting | Performance, Reward, & Talent Proprietary & Confidential | AA/BBC/2013 Comp Planning Briefing.PPT/LS-02964 09/2012 40