The Human Capital Agenda in EMEA Navigating the New Rules of Engagement

TABLE OF CONTENTS

THE PAY AND THE CRISIS ...... 1 . Sir Howard Davies

GLOBAL COMPENSATION AND BENEFITS: WHAT’S WORKING ...... 11 Chris Johnson, Johan Ericsson, Raymond Brood, Pat Gilbert, Ilya Bonic, Paul O’Malley, Anne-Magriet Schoeman

THE CHANGING FACE OF EXECUTIVE REMUNERATION ...... 21 Sophie Black, Bernd Thomaszik, Mattias Klefbäck, Bruno Fourage, Yolanda Gutierrez, Larisa Muravska

THE PAY FOR PERFORMANCE CHALLENGE ...... 35 Piia Pilv, Kimmo Sollo

TALENT MOBILITY GOOD PRACTICE TO STIMULATE ECONOMIC GROWTH . . 43 Pat Milligan, Mike Piker, Anne Schult, Joan Pennington

HOW MULTINATIONALS CAN ENGAGE AND RETAIN EMPLOYEES IN ASIA’S FAST-GROWING ECONOMIES ...... 57 Brenda Wilson, Hans Kothuis, Paul O’Malley

THE NEED FOR RIGOROUS STRATEGIC WORKFORCE PLANNING IN TODAY’S VOLATILE ENVIRONMENT ...... 65 Ephraim Spehrer-Patrick, Joan Pennington; Garmt Louw, Royal Dutch Shell

NEW INSIGHTS ON GLOBAL LEADERSHIP DEVELOPMENT ...... 77 Renato Dorrucci, Dagmar Wilbs, Eric Sarrazin, Sue Filmer

CHANGING TRENDS IN TALENT MANAGEMENT: WHAT WILL MAKE THE DIFFERENCE IN THE DECADE 2010–2020? ...... 89 Renato Boccalari

PEOPLE MANAGEMENT IN THE MIDDLE EAST AND NORTH AFRICA: WHAT HAS CHANGED AFTER THE CRISIS AND THE ‘ARAB SPRING’ ...... 99 Larisa Muravska, Tom O’Byrne

OPTIMISING HUMAN CAPITAL INVESTMENTS: ANALYSIS-BASED INSIGHTS TO ADDRESS IMPERATIVES FOR CHANGE AT OECD ...... 107 Brian Levine; Makoto Miyasako, OECD

GLOBAL GRADING FOR INTEGRATED COMPENSATION, PERFORMANCE AND TALENT MANAGEMENT ...... 113 Bernd Thomaszik, Antonis Christidis

STIMULATING ENGAGEMENT THROUGH DIFFERENTIATED REWARD AND ENHANCED PERFORMANCE: THE MAERSK JOURNEY ...... 121 Alex Penvern, a .p . Moller – maersk

AVOIDING BUSINESS RISK: THE HIDDEN BENEFIT OF SOFTWARE AS A SERVICE ...... 127 Brad McCaw

INTRODUCTION Welcome to our 2011 human capital anthology: The Human Capital Agenda in EMEA – Navigating the New Rules of Engagement.

The anthology assembles a selection of 14 articles on a wide range of human capital topics that should be of particular interest to organisations that are headquartered in Europe or have operations in the Europe, Middle East and Africa (EMEA) region .

This is the fourth edition of this annual publication, and the over- arching theme this year is employee engagement . Mercer’s recent research and the work conducted with client organisations in 2011 have proved that understanding employee needs and responding to their preferences are essential for employers to make those smart decisions and investments that can result in increased workforce productivity and economic growth .

Our publication is of particular relevance to multinational organisations, as they deal with unprecedented levels of complexity in today’s multi-speed global economy . Multinational employers have to calibrate their business and people strategies in real time to find simultaneous responses to the crisis in Europe, the slow growth in the West, and the accelerating pace of fast-growth emerging markets in Asia Pacific, Latin America, the Middle East, and the rising Africa .

The mix of articles in this publication covers some of the most burning concerns employers have to address in the short term – including pay and the crisis in the austere eurozone, containment of compensation and benefits costs, total reward solutions that are meaningful to distinct employee segments, global grading, leadership development, diversity, and talent mobility in the broader sense of the word . It also anticipates a series of longer-term issues that organisations will have to face in their vital quest for talent – such as strategic workforce planning, workforce analytics and metrics, upcoming shifts in reward and talent management paradigms, and new innovative ways of ensuring talent mobility collaboration between various stakeholders in a market, region or industry for future economic development . By putting together this collection of articles, our intention has been to bring to your attention the most critical issues organisations in EMEA are exploring today across the human capital continuum – from human capital strategy and talent management and rewards programme design to human capital operations and technology .

The publication combines Mercer’s intellectual capital pieces and points of view with real case studies shared by client organisations from various industry sectors, with the aim being to provide you with both research-based insights into market trends and practical examples of solutions that could possibly be of benefit to your organisation .

We hope these topics resonate with you and that you will find our selection of articles thought-provoking and inspiring . As always, Mercer will be delighted to offer additional insights and to work with you to find the right solutions in any areas of concern in the immediate or longer term .

With my sincerest wishes for a successful 2012,

Martin Meerkerk Mercer’s EMEA Human Capital Business Leader

H THE PAY AND THE CRISIS This article has been developed based on the keynote speech delivered at Mercer’s October 2011 EMEA Compensation & Benefits Conference by Sir Howard Davies, former Director of the London School of Economics and Political Science.

Political, economic and social pressures in Europe mean that the climate in which remuneration decisions are made is likely to be difficult for some time. As such, the job of remuneration/compensation committees and those who advise them is, and will continue to be, more challenging than it has ever been.

WHY PAY IS HIGH ON POLITICAL AGENDAS The letter from veteran US investor Warren Buffett to The New York Times recently,1 in which he explained that his tax rate was lower than that of any of the other 20 workers in his office, has had some interesting consequences. President Barack Obama has declared that he will propose higher taxes for millionaires as part of his re-election campaign – a move that is very countercultural in the US. There has been some resistance by the Republicans, but on the whole the proposal has been well-received, which indicates a mood change in the US.

In France, we have seen the so-called “billionaires’ revolt”, in which a group of the country’s wealthiest people, including L’Oréal heiress Liliane Bettencourt, signed a petition to pay more tax. And in the UK, Business Secretary Vince Cable used his speech at the Liberal Democrat party conference in September to attack top pay – again, something that might have been deemed too risky in the past. There are other similar manifestations of the changing political mood on pay in other European countries. Spain, for example, is questioning why large pension payments are made to board members of Spanish savings banks when most of those banks are bankrupt.

SHORT-TERM REASONS BEHIND THE MOOD CHANGE The fiscal deficits across Europe are leading governments to seek ways of raising additional revenue, and increasing top marginal tax rates is one option open to them.

1 Buffet WE. “Stop Coddling the Super-Rich”, (August 14, 2011) The New York Times.

1 In addition, there is pressure on real incomes in the “squeezed middle” – in many countries, median incomes have stagnated for several years. This is unlikely to change given the clear need for “internal devaluation” in many countries – that is, when exchange rate devaluation is not an option, as in the eurozone, a country’s only alternative is to increase its productivity and reduce labour costs in order to remain competitive. Since the eurozone was established a decade ago, Greek unit labour costs have risen by 40% more than Germany’s, with the equivalent figure for both Italy and Spain being 25%. These countries need a significant internal devaluation if they are to remain competitive against the leading economies in the eurozone, which means that incomes have to fall. The recent demonstrations in Greece suggest that the Greek people understand only too well that they face declining living standards for some time if they want to remain in the eurozone, and, understandably, they don’t like it.

Other countries are in very similar positions, and this creates a very difficult background against which to make wage decisions, because as J.M. Keynes famously said: “wages are sticky downwards.”

These problems are exacerbated by regions with soft economies, where employment prospects generally are poor and deteriorating. Growth has slowed in major Organisation for Economic Co-operation and Development (OECD) economies, such as the US, the eurozone and Japan. These economies bounced back from the 2008/2009 recession nowhere near as strongly as is typical after a deep recession when spare capacity is quickly brought back into use. That didn’t happen this time – hence, the weak recovery and current softening. Most countries are only just in positive growth, a position that compromises their ability to tackle unemployment.

Unemployment, which shot up during the recession, has remained very high. In the eurozone, it is around 10%, but this conceals some higher figures, such as the +20% figure in Spain. Unemployment is a lagging indicator, too, so it is likely to rise further given the current economic slowdown. And while this should, in theory, reduce the pressure on pay, that is certainly not evident at the top of organisations.

Added to this is the leading indicator of business confidence, which fell sharply at the beginning of this year, according to surveys throughout the US and Europe, with further adverse implications for investment and unemployment.

2 WHAT CAN POLICYMAKERS DO? In truth, they have little flexibility, because the drivers of economic policy in both Europe and the US already have both feet on the floor. Interest rates are close to zero, and although there is some scope for monetary easing, this has nowhere near as powerful an effect in stimulating growth as reducing interest rates does. And on the fiscal policy side, there is no flexibility at all: indeed, high levels of fiscal consolidation (10% of GDP in the US and 4% in the UK) are required in many countries in order to get back into a stable position.

So the big question in terms of the macro-economy is: where do we go from here? It is pretty clear that the economy has stalled, but whether it does so for a while and then recovers or goes further downhill is difficult to predict. According to some analysis by Morgan Stanley on the four previous occasions over the past 50 years when the economy began to recover from a recession and then quickly stalled, in two cases the economy entered a double-dip recession and in the other two it picked up again. So the odds are 50–50 – but one may lean towards the pessimistic side, considering that there are so few levers the government can pull to reverse the trend. The best estimate is that, for the time being, we are going to be in a pretty flat economic environment, with below-trend growth for the next couple of years. And within that scope, some countries face the additional challenge of trying to adjust their competitiveness within the eurozone. But it could be worse than that, and the risks are mainly on the downside.

LONG-TERM TRENDS IN PLAY Income equality has been increasing in many countries for some years: top pay has risen much more than average pay, and pay in the financial sector in particular escalated dramatically before the crisis. Measured according to the “Gini coefficient”,2 income became less equal in 19 of the OECD countries between 1985 and 2005, with the greatest discrepancy seen in New Zealand.

Income inequality rose in the UK, too, though by less than the OECD average. However, the Gini coefficient is a very aggregate measure of income distribution and conceals a more disturbing trend.

2 The Gini coefficient is a measure of the inequality of a distribution, a value of 0 expressing total equality and a value of 1 maximal inequality. It is commonly used as a measure of inequality of income or wealth.

3 For example, if you look at the top 10% and bottom 10% of incomes in the UK between 1975 and 2008, the top 10% have accelerated – a trend replicated in many developed (and developing) countries. And the disparity is even higher among the top 1% of earners, with the 10% of that top 1% seeing dramatic pay rises, pointing to a sort of “winner takes all” phenomenon right at the top of the income distribution curve. And in the banking sector, these trends are exaggerated further still, with relative pay (which started to rise at around the time of financial deregulation in 1990) now at an all-time high – even after the recession and government bailouts (at taxpayers’ expense) of many banks. No wonder resentment about top pay in the financial sector runs so high.

Some particularly egregious examples of this phenomenon have served to focus this resentment. Harvard Business School researchers found recently that by 2008, share prices of Bear Stearns and Lehman Brothers had risen by four to four and a half times what they were in 2000, before collapsing to zero, leaving shareholders with nothing or next to nothing.3 Over the same eight-year period, the top five executives in each of those firms received more than £1 billion in cash. Such calculations demonstrate that things have gone too far and inevitably feed into policy thinking.

And these are not isolated examples. Separate research shows that between 2006 and 2010, investment banks were paying their employees, on average, 2.6 times pre-tax profits. This leaves very little on the table for shareholders and affects share prices, which, in turn, feeds through into pension funds and insurance companies and, thus, the wealth of individual savers. There is only one industry in which pay as a percentage of revenue rivals that of investment banks – Premier League football clubs in the UK. According to a special report in The Economist in May this year, in the 2008/2009 season, Portsmouth paid out more than 100% of its revenue in wages (it has since gone bust) and Manchester City paid out 95%.4 Five clubs beat UBS in terms of the percentage of income they paid out in wages.

3 Bebchuk LA, Cohen A and Spamann H. “The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000–2008” (Nov. 24, 2009), Yale Journal on Regulation, Vol. 27, 2010, pp. 257–282; Harvard Law and Economics Discussion Paper No. 657; ECGI – Finance Working Paper No. 287. 4 “Special Report: International Banking” (May 12, 2011), The Economist, 2011.

4 But the bubbling resentment about top pay is about more than the politics of envy. There is some interesting academic research5 – led most notably by former Nobel Prize winner Joseph Stiglitz – that gives weight to the argument that this sort of top-wage inflation may have been central to the financial crisis. In the US in particular, but also in the UK, median incomes stagnated for 10 years or longer, and people compensated by increasing their credit, to the extent that household debt as a proportion of GDP rose to astronomical levels. People were essentially sustaining their living standards through credit, leading to the credit explosion that created the crisis. And, of course, high-risk credit was made available by banks, which, in the short term at least, made extravagant profits as a result.

So high pay is seen not just as an excrescence on the financial and real economy, but as comprising a set of trends that are central to explaining why our economy behaved as it did at the end of the last decade. This is why pay is such a toxic topic, and why the days are long gone when a senior Labour politician could say, as former Business Secretary Peter Mandelson did in 1998: “We are intensely relaxed about people getting filthy rich.” No one in politics is relaxed about people making a lot of money these days.

POLICY RESPONSES TO HIGH PAY Financial regulators, in particular, are taking a much closer interest in pay than they used to. Regulators formerly began by looking at the question of incentives and risk, but their interest now goes well beyond that, and, following a clear set of political instructions, that interest is spreading to the nonfinancial sector as well.

There has been a range of policy responses. Some are driven at a global level by the Financial Stability Board, instructed by the G20 finance ministers, and while implementation may differ in different regions, the changes are largely consistent. For example, regulators have required banks to disclose more detail on more people, to link incentives more closely to their risk appetites, to pay a larger proportion of bonuses in stock, to increase the deferred proportion of pay, and to introduce clawback mechanisms in order that bonuses may be clawed back if the expected profits fail to materialise.

5 Stiglitz JE. Freefall: America, Free Markets, and the Sinking of the World Economy, New York: W. W. Norton & Company, 2010.

5 In the US, shareholders have introduced “say on pay” resolutions, allowing shareholders to vote on remuneration committee resolutions – something that already existed in the UK. In some countries (notably the UK), finance ministries have imposed levies linked to bonus volumes. And some countries have imposed higher tax rates, which also, of course, affect nonfinancial employees.

REMUNERATION/COMPENSATION COMMITTEES HAVE AN UNENVIABLE TASK Remuneration/compensation committees are operating in a difficult economic environment. They have to factor in complicated long- term trends that broadly show a growth in inequality, and they have to navigate a set of confused policy responses by the regulatory community. What’s more, public and political scrutiny of their decisions is more intense – witness the column inches devoted to remuneration issues even in the UK’s least-biased newspaper, The Financial Times. And yet competition remains fierce – the war for talent is by no means over, and the rising demand for particular skills at one end of the spectrum is helping to fuel the growing income inequality with people at the opposite end of the spectrum whose services, products or labour can be performed more competitively in the Far East or China.

An additional problem for public companies, particularly in the financial sector, is the growth in the number of private and unregulated firms (notably private-equity firms and hedge funds), which don’t face the same disclosure constraints or exposure on pay decisions.

Finally, employee expectations have not adjusted well to this new environment – either in the financial sector or elsewhere. Employees still seem to think we will return to the good old days of the early 2000s, and that what we are going through at the moment is just an uncomfortable blip. But we are not going back there – we’re not going to get the kind of returns we saw on financial equity in the run-up to the crisis anytime soon. This is an area where people have not properly focused on what is going on, so they don’t really understand the changing trends.

6 HOW CAN COMMITTEES AND THEIR ADVISERS HELP THEMSELVES? First of all, remuneration/compensation committees need to ensure that executives understand what has happened to relative earnings, because most don’t. They also need to understand regulators’ motives and anticipate further interventions. Moreover, they should prepare a public presentation of the impact of potential pay decisions in advance, rather than make the decision and worry about how to present it afterwards. And they should better model the incentive effects of the pay schemes they propose.

One of the things that have gone most awry over the past few years is the plethora of pay and incentive schemes that have driven the risk-seeking behaviour that has caused companies such serious problems. And those behaviours and problems aren’t confined to the financial sector either. Recent work by McKinsey6 shows that the popularity of share buybacks over the past 10 years has been driven by earnings per share calculations for senior executives – if the earnings look a bit elusive, then you solve the problem by reducing the number of shares. That’s not great from a shareholder point of view – you’re pushing them to buy back shares when arguably they should be investing in growth opportunities instead. That phenomenon has not been as well understood as it should have been.

WHAT ABOUT THE FUTURE? The economic and social trends in Europe in particular will likely maintain the focus on senior executive pay for some time. In many countries, incomes will not rise, and in some places they may fall. We are seeing that already, for example, in Ireland, which is achieving an internal devaluation much more quickly than the southern European countries that are under pressure. The Irish are increasing their competitiveness quite quickly and have been doing so in part by absolute reductions in pay – especially in the public sector.

6 Jiang B, Koller T. “Paying Back Your Shareholders”, Corporate Finance Practice, May 2011.

7 In addition, relativities will likely be more in the spotlight and will require better explanations than companies have typically offered to date. What’s more, public acceptance of high pay for high performance will be less certain in the future. Political rhetoric around pay is developing in a number of places and the mood is, quite simply, different. And public acceptance of pay for failure is now close to zero. So companies will have to be particularly careful when making decisions to let people go with a large severance cheque to solve a problem.

ABOUT THE AUTHOR Sir Howard Davies was Director of the London School of Economics and Political Science from 2003 to 2011 and is one of the UK’s most authoritative commentators on the financial services industry.

He was Deputy Governor of the Bank of England from 1995 to 1997. In 1998, he became the first Chairman of the Financial Services Authority, when the Labour government asked him to create a single regulator for the UK financial sector. He has also worked for McKinsey and Company and was special adviser to Nigel Lawson, Chancellor of the Exchequer.

Sir Howard has published two books: The Chancellors’ Tales, which tells the story of how the British economy has been managed over the past 30 years, as told by the former Chancellors of the Exchequer in both the Labour and Conservative administrations, and, with co-author David Green, Global Financial Regulation.

He is a regular commentator and journalist and a columnist for The Financial Times, The Times and Management Today.

8 9 10 GLOBAL COMPENSATION AND BENEFITS: WHAT’S WORKING A year ago, few business leaders and economists envisioned a 2011 with debt downgrades and a stumble in the global economic recovery. While many occurrences are nearly impossible to predict, Mercer’s global compensation and benefits experts anticipate – with cautious optimism – areas of growth and a slow return to pay increases, but they also warn about short-term setbacks and highlight workforce demographic and employee engagement challenges across geographies and workforce generations.

Since the recession, all compensation and benefits professionals have needed to place even more emphasis on what is happening in the economy. In mid-2011, when organisations thought the global recession was in the past, several markets entered what many are calling a temporary soft patch, and even companies in relatively stable economies started to face new concerns related to inflation and talent retention. And in late 2011, developments in Europe added to the pressure.

With income inequality increasing in many countries, a debt crisis and austerity plans in Europe, and additional cost pressures coming from all angles just as the war for talent reaches a critical juncture, the climate for making compensation decisions is rather difficult. All this comes at a time when employees worldwide are saying that they are motivated most by base pay and career advancement – and unfortunately, many say they are dissatisfied with what their companies offer. This presents a challenge in 2012, as conservative salary increases are expected in most regions, averaging at about 2.7%–2.8% in Western Europe and the United States.

Furthermore, to make matters worse, the reality is that organisations today do not operate in stable labour markets, as Europe’s workforce in particular is shrinking and the worldwide workforce is changing in composition, education and age. Governments have been increasing retirement ages in response to the ageing of their populations, but organisations are struggling to deal with the current and future implications of ageing workforces in their people strategies.

Organisations should prepare to invest in training their older workforce segments in the right skills if they want to keep productivity levels up. Having four generations at work is obviously challenging, but creating synergies between generations – the baby boomers seem to resonate well with Gen Y, and Gen X with Gen Z – can result

11 in a stronger culture and increased performance. A sustainable workforce is key to competitive advantage, and more and more organisations worldwide are embarking on strategic workforce planning as part of their business planning.

AUSTERE TIMES AND CONSERVATIVE SALARY INCREASES IN EUROPE Employees in some European countries will experience another year of below-inflation pay raises in 2012, according to Mercer’s October 2011 Total Remuneration Survey snapshot survey data for Europe, the Middle East and Africa (EMEA).1 Companies across Western Europe are predicting that their employees will be given pay rasises averaging 2.7% in 2012. This represents the lowest increase across the entire EMEA region.

Employees in Norway are set to get the highest pay raises of 3.1%. Austria, Sweden, the UK, Belgium, Luxembourg, Italy and Germany are all anticipating pay raises of 3%. Employers in Finland, the Netherlands and France are anticipating passing on increases of between 2.8% and 3%. Employers in Greece, Spain and Malta are anticipating 2.5% pay increases for the majority of position categories, and Switzerland is looking at 2.1%–2.2%. Portugal (2.1%–2.2%) and Ireland (2%–2.3%) have the lowest anticipated pay increases. Typically, pay increases are higher in the northern states of the European Union compared with those in the south.

In countries such as Spain, the UK and Portugal, inflation is outpacing wage increases, and this is eroding quality-of-living standards. In other countries, such as Germany, Italy and France, wage increases are set to be above the rate of inflation, although in the case of France and Germany, the increases will be less than 0.5%. The 2009–2011 trend, however, is that inflation has been exceeding wage increases across Western Europe.

In the UK, companies are budgeting for a median 3% pay increase for staff across all employee groups. Inflation in the UK is running at 5%, so despite the salary increases, with high travel, petroleum and food costs, employees will continue to feel financial pressure.

1 Mercer’s Total Remuneration Survey Quarterly Pulse Survey analyses the pay plans of 329 multinational organisations operating across 69 countries in EMEA. The survey provides information from multinationals on median base pay increases across all employee groups, including blue-collar and white-collar workers up to the management level.

12 In Eastern and Central Europe, pay raises are higher, averaging 5.7% across the region. At the lower end of the scale, Latvian employees are predicted to receive a 3%–3.1% pay increase, while employees in Cyprus and the Czech Republic are predicted to see raises of 2.9%–3.4%. Lithuanian companies are budgeting for 3.1%–3.5% increases, while Hungarian and Polish employers are anticipating 4%. In Bosnia-Herzegovina and Croatia, too, pay increases of between 3.5% and 4% are expected, with slightly higher raises expected in Bulgaria (5%). Companies in Turkey, Russia and the Ukraine are predicting raises of 7.8%–8%, 9.6%–10% and 10%, respectively, although this is more reflective of the small sample groups than a regional trend. The lowest increase is set to be Montenegro, where employers are anticipating pay increases of only 1.3%–2.5%. Companies may have smaller operations in these locations, and currency considerations could mean that higher increases may not actually translate into a large cost for multinationals. However, inflation is still a factor.

There was a notable difference in the three Baltic states in Q1 2011 compared with Q3 2011, as these countries were severely hit by the global financial crisis but have bounced back, highlighted by less conservative salary increase predictions. By contrast, salary increases in Belarus, Kazakhstan and Georgia have been scaled back and are now lower than previously predicted, reflecting the economic nervousness in these states.

INCREASED USE OF VARIABLE PAY A previous quarterly report issued by Mercer in June 2011 showed that companies were segmenting their pay raises in 2011; the largest base pay increases were focused on “rainmaker” staff in an attempt to kick-start company recovery plans following the financial crisis. Employees in managerial roles were receiving higher pay raises than those in executive positions, for example. By contrast, the latest data suggest that this has finished and that a “levelling out” is taking place, by which base pay increases are largely being equally applied across all employee groups. The data only deal with base pay – not variable pay. In the recent past, organisations with very limited budgets have focused on improving the base pay of their top performers to ensure their organisations’ survival. They are now trying to address the needs of all their employees by implementing broader increases but are increasingly using variable pay to retain and encourage their top performers – although many are also still using their base salary increase budget to further reward their highest performers.

13 THE MIDDLE EAST: MODEST INCREASES FOR MOST EMPLOYEES Employers across the Middle East are forecasting pay increases averaging 7.6%. Dramatic increases are anticipated in countries such as Pakistan (15%) and Yemen (10%–13%). Companies in Israel (3.0%–3.5%) are forecasting the lowest increases in the region, followed by Bahrain (4.5%–5%), Saudi Arabia (6%), Qatar (5.5%–6%) and Kuwait (6%).

In the United Arab Emirates’ unique labour market structure, nearly 80% of employees are expatriates who typically work in the region for three to five years. These employees are highly engaged, and cash is the most attractive element. Emirati employees value cash as well, but they also view the following elements as important: employer brand, job title, career development, respect and a work environment that respects religious and social commitments. For example, the employer brand should have high recognition locally and nation- ally, and working for such an employer should be seen as prestigious. As a result, governments and companies with strong local brands are seen as employers of choice.

AFRICA: LARGE VARIATIONS IN PAY INCREASES This area has the largest variation in forecasted pay increases due to the diverse nature of the region and the limited number of multinationals. Companies in Algeria are forecasting increases of 6.9%–7.3%, surpassed by forecasts from South Africa (7.4%–7.8%), Kenya (8%–8.8%), Nigeria (10%) and Uganda (10%–11%). Besides base salary, employers offer cash allowances,13th-month cheques and fringe benefits. Social security benefits are based on contributions, with varying levels of benefit where applicable, and medical provisions are offered mostly for employees, spouses and some dependents.

As for retirement funding, cross-border portable funds are a big challenge. There is a growing recognition of the value of nonguaranteed schemes. Company car allowances are extremely appreciated, and so is the option to buy the car from the company at a price below market value. Nonfinancial benefits meant to improve employees’ lifestyles vary from market to market but are highly valued. As an example, in Nigeria, employees are offered home electricity genera- tors and related maintenance as a precious benefit.

14 Africa’s growth and opportunities require highly skilled talent and engaged workforces, but challenges for employers and HR are numerous, from attraction and retention to remuneration management skills development and HR management competencies (hampered by accelerated mobility). There is growing emphasis on job evaluation and grading to facilitate mobility at senior levels across borders.

According to Mercer’s survey, 2012 salary increases in the fast-moving consumer goods, high-tech, nondurable and service industries are forecast to be in line with those in the general market, while, on average, forecasted salary increases are typically higher in the finance/banking and energy sectors. Salary increases are expected to be below general market in the durable and manufacturing industry.

ASIA PACIFIC: A BRIGHT SPOT Asian optimism is generated primarily by China’s huge economy and resources, and innovation is the source of growth and talent development. Multinationals are facing increased competition from local firms and should react with agility to the fast-moving changes in the local market. Local organisations have stopped looking at Western organisations for best practices and are trying completely new ways to get their workforces to perform at the highest productivity levels.

Asian employers focus on presenteeism2 and the role of the quality of leadership in raising engagement levels. In Asia, many people work for an individual – a leader – before working for a company. While Western managers tend to judge Asian managers relative to Western standards, they should be aware of local culture and the impact of their behaviour: Asian managers may not talk much in formal meetings, but they deliver. Top executives in China are receiving higher remuneration than their global headquarters leaders in Europe, and this should no longer be viewed with surprise, since they are the ones who are delivering growth. Training and development are of special importance to employees in China, with career advancement being the top engagement factor in this market – as soon as they have exhausted learning opportunities in one firm, talented employees tend to move on to another employer.

2 While presenteeism is often defined as attending work while sick, scholars have provided various other descriptions of the concept. For instance, Simpson (1998) claimed that presenteeism is “the tendency to stay at work beyond the time needed for effective performance on the job”. Presenteeism could therefore be considered an act of supreme engagement and organisational citizenship.

15 To stay competitive in the booming Asian market’s war for talent, recommendations for Western multinationals include:

• Drive global agendas while adjusting with agility to fast-changing local environments. • Understand local workforce needs, as they vary in each market. • Differentiate through recognition and flexibility, as “someone will always pay more”. • Focus on the “top line” before the “bottom line” in high-growth economies. • Invest in the best talent to face unpredictable Asian competition.

INSIDE EMPLOYEES’ MINDS: NAVIGATING THE NEW RULES OF EMPLOYEE ENGAGEMENT Regardless of the economic climate, organisations face engagement problems across regions as they struggle to hold on to their best employees. Loyalty has been eroding, according to Mercer’s What’s Working™ survey.3 In markets such as the UK, more than one-third (36%) of employees are not committed to staying, and a large portion of the workforce (23%) suffers from apathy – that is, they are not committed to either staying or leaving and are the most disengaged of all. Also, interestingly enough from a generational perspective, those most likely to leave are the youngest employees, who paradoxically are the most satisfied with their pay and benefits.

The business consequences of a disengaged workforce should be of great concern to all companies looking to remain competitive in today’s market. Lack of engagement can result in reduced growth and profitability due to declines in innovation, customer satisfaction, operational efficiencies, organisational performance and managerial responsiveness.

Regardless of geographical and economic conditions, the talent market keeps heating up, as good workers always have options. Stakeholder performance expectations keep rising, and ongoing cost pressures demand the right workforce investments. Rather than replace key talent, many organisations are looking to build on their existing talent.

3 Note: The survey was conducted between Q4 2010 and Q2 2011 amongst nearly 30,000 workers in 17 markets to examine employees’ views on their work. Results can be viewed overall as well as by age, gender, tenure, job level and industry.

16 To be successful at this endeavour, it is essential that employers first understand what’s going on inside their employees’ minds. What do employees value most, what perceptions do they have of work, what elements of the engagement deal are more/less important, and how do these elements vary by geography and age/generation? Based on this, organisations should then develop a blueprint that combines existing approaches with innovatory alternatives in the other components of total rewards to improve engagement, performance and productivity.

Engagement Factors: What Employees Value the Most in Europe

Rank France Germany Ireland Italy Netherlands Spain UK

1 Base pay Base pay Base pay Base pay Base pay Base pay Base pay

2 Type of work Type of work Job security Type of work Type of work Type of work Type of work

Retirement Bonus/other Bonus/other Career Flexible work Bonus/other Type of work savings or incentives incentives advancement schedule incentives 3 pension plan

Working for Retirement Career Flexible work Good Bonus/other Training respectable savings or advancement schedule workspace incentives opportunities 4 organisation pension plan

Supplemental Working for Retirement Career Career Flexible work retirement respectable savings or Paid time o advancement advancement schedule 5 plan organisation pension plan

Private Training Bonus/other Training Training medical Paid time o Paid time o opportunities incentives opportunities opportunities 6 insurance

GENERATIONAL INSIGHTS AND ENGAGEMENT IMPLICATIONS Mercer’s What’s Working survey revealed differences by age group in what employees value. For example, compared to the overall workforce in their markets, the youngest groups of workers (ages 16–24 and 25–34) in Mercer’s survey are more satisfied with their organisations and their jobs and are more likely to recommend their organisation as a good place to work, but they are also much more likely to seriously consider leaving their organisation at the present time.

Employers face the dilemma of accepting the situation or trying to change the employment habits of younger workers – by making significant upfront investments in new employees in terms of onboarding, training and development as they replace employees who leave, or by directing more resources now to retaining disengaged or apathetic employees.

The answers to these questions will vary by organisation, but they present economic and talent implications for all of them. It is essential for each company to understand its own unique value equation and whether a business case can be made to retain and extend the tenure of young workers.

17 EMPLOYEES WANT MORE TAILORED BENEFITS – AND FLEXIBILITY Employers can use their health and benefits packages strategically – not just to improve the health of their employees, but also to create a happier, more productive workforce. Progressive employers are also using flexible benefit plans, with a range of short- and long-term incentives, to facilitate cost sharing with employees, while enhancing the perceived value of benefits.

There is a distinct enthusiasm for changes in benefits provision, particularly amongst younger staff, which provides an opportunity for companies to better engage them and save costs during this period of financial uncertainty. Indeed, the desire by employees for greater choice continues to grow, although concern remains that employees are not sufficiently able to make informed decisions when the choice is available. Employees are looking for employers to use their bulk purchasing power to provide employees significant discounts on various products and services.

More and more companies are asking their employees what type of benefits they prefer and providing them with some degree of additional choice as well as introducing some very simple, low-cost benefits that meet employees’ needs today, such as health screenings, debt management schemes and personal car leasing. Many young employees enter the workforce with student loan debts and try to fund house deposits, buy a car, raise children and cover childcare and education costs, and employers could offer additional alternative benefits that meet such lifestyle demands. New meaningful benefits are immediate, cost-effective and can act as a foil for the low pay increases and limited career advancement prospects created by the poor economic conditions.

18 RECOMMENDATIONS FOR BOOSTING EMPLOYEE ENGAGEMENT • Keep base pay, career planning and promotions within market parameters and based on performance – both individual and company. • Discover the employee value proposition – what’s most important to your workers – and build a compensation plan with that in mind. • Align reward programmes with business strategy and use workforce segmentation to more effectively allocate limited rewards investments. • As young people enter the workforce and baby boomers look to exit, consider the changing generational diversity and the needs of different segments. • With budgets remaining tight, embrace total rewards and look at other creative ways to engage workers, such as career development, work/life balance and flexible benefits.

For more information on employee engagement and Mercer’s What’s Working surveys, visit www. mercer.com/insideemployeesminds and www.mercer.com/whatsworking.

ABOUT THE AUTHORS Chris Johnson is Mercer’s UK Human Capital Leader. Based in London, he can be reached at +44 20 7178 7343 or [email protected].

Johan Ericsson leads Mercer’s Compensation & Benefits Information Product Solutions in EMEA. Based in Stockholm, he can be reached at +46 8 505 30 899 or [email protected].

Raymond Brood is the Leader for Mercer’s Health & Benefits business in Benelux. Based in Amsterdam, he can be reached at +31 20 431 3880 or [email protected].

Patrick Gilbert is Mercer’s Employee Research and Employee Engagement Leader in EMEA. Based in London, he can be reached at +44 20 7178 5496 or [email protected].

Ilya Bonic is Mercer’s Global Information Product Solutions Business Leader. Based in Geneva, he can be reached at +41 22 869 3002 or [email protected].

Paul O’Malley leads Mercer’s Information Products Solutions business in Asia Pacific. Based in Singapore, he can be reached at +65 6222 5792 or paul.o’[email protected].

Anne-Magriet Schoeman is the Executive Director of Global Remuneration Solutions, Mercer’s affiliate in South Africa. She can be reached at +27 82 469 01269 or [email protected].

19 20 THE CHANGING FACE OF EXECUTIVE REMUNERATION The issues causing concern to shareholders, national regulators, the media and the public at large in relation to executive remuneration are converging. Across the globe, the fallout from the financial crisis is continuing to have an effect on executive remuneration.

Undoubtedly, the gap between executive remuneration and broader workforce pay has widened over the last years. Given the austerity measures being implemented in many countries, this is leading to increased scrutiny from shareholders and governments alike. The result is increased pressure for transparency and disclosure worldwide.

In Europe and North America, new regional and national rules and regulations are dampening executive pay inflation.

Deferral of a portion of short-term incentives (STI) and an increase in the use of long-term incentives (LTI) are becoming increasingly favoured as organisations attempt to balance risk and sustainability in their remuneration plans.

The intense pressure from regulators, the media, the public and shareholders is resulting in executive remuneration plans that have closer ties to business performance and value creation.

ASIAN REMUNERATION HAS SURPASSED EUROPEAN LEVELS Increased pay restraints in Europe and North America, combined with economic growth in emerging markets, are pushing pay for executives in Asia beyond levels in the West.

Historically, executives in Western economies have been paid the most, but the centre of gravity is moving inexorably east. In 2010, average executive salaries in Asia surpassed those in Europe, and it is anticipated that they will surpass those in the US by 2013.

The trend is spread across many emerging economies; in the Middle East, for example, executive salaries have already caught up with those in Europe. Pay in Western economies is being restrained by poor economic growth and continued pay scrutiny in the wake of the financial crisis. Asia has been largely unaffected by these issues and thus hasn’t had the brakes applied to executive remuneration as much as we’ve seen elsewhere. But rapid growth, leadership shortages and inflation have prompted concern over pay inflation in Asia.

21 HOT TOPICS IN WESTERN EXECUTIVE REMUNERATION Conducting an annual shareholder vote is likely to become a global norm following its adoption by the US. “Say on pay” (SOP) is in place in Australia, Belgium, Canada (voluntary), Denmark, Germany (voluntary), Italy, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland (voluntary) and the UK. The effect of failing a SOP is increasingly serious; five companies with failed SOP votes were sued by shareholders in the US.

The pay-for-performance relationship is also under increasing scrutiny. Most of the failed SOP votes in Europe and the US in 2011 were driven by pay-for-performance concerns.

In the UK, the Department for Business, Innovation and Skills (BIS) published a discussion paper1 seeking views on how links between listed companies’ performance and executive remuneration can be strengthened and how shareholders can be encouraged to hold companies accountable.

In the US, companies are expected to provide in 2012/2013 an explanation with a graph demonstrating the relationship between the compensation actually paid to executives and the company’s performance.

INSTITUTIONAL SHAREHOLDERS In the UK, the Association of British Insurers (ABI) released its updated guidance2 for remuneration committees on 29 September 2011. ABI made recommendations relating to total shareholder return (TSR) and salary decisions – which should not be made purely on the basis of benchmarking – and stated that it is not the role of shareholders to micromanage companies. Also in the UK, the BIS published a discussion paper whose resulting regulations will apply from 1 October 2012.

Institutional Shareholder Services (ISS) concluded the open-comment period for its 2011/2012 policy formulation process on 7 November 2011 – the publication of new guidelines was imminent as of press time for this article, but no major changes on previous guidelines were expected.

1 The full paper can be accessed at http://www.bis.gov.uk/consultations. 2 The full paper can be accessed at http://www.ivis.co.uk/ExecutiveRemuneration.aspx.

22 Institutional shareholder advisory firms (ISS, Glass Lewis) shifted their focus in 2011 from problematic pay practices (that is, excessive base salaries, guaranteed bonuses, uncapped incentive plans and generous benefits) to a pay-for-performance disconnect in recom- mending “no” votes.

In Europe, noteworthy is the EU Commission’s consultation on the EU corporate governance framework – the questions pertain to whether disclosure of remuneration policy, the annual remuneration report and individual remuneration of executive and nonexecutive directors should be mandatory and whether it should be mandatory to put the remuneration policy and the remuneration report to a vote by shareholders.

Across Europe, we are seeing organisations review their annual bonus performance measures to align with new strategic priorities. The use of bonus deferrals has increased substantially, in part as a spillover effect from the financial services industry, as deferral is seen as a best practice. Many organisations are also introducing clawback and malus provisions, but in practice, execution of a clawback is difficult and not seen very often, and may not be appropriate for all.

FINANCIAL SERVICES PRACTICES Across Europe, the financial services sector is undergoing cutbacks in the use of short- term incentives, which is offset by base pay increases and a much greater use of deferred compensation. According to Mercer’s 2011 Pan-European Financial Services Remuneration Survey, more companies are deferring part of their variable compensation – from 45% of companies in 2009 to 67% in 2010 – which has subsequently improved the alignment of bonus payouts with the time horizon of risks. The average period for a deferred bonus is three years, and the majority of companies have included a clawback feature, which allows an organisation to take back previous performance-based payments on the basis of restated financials or a breached agreement. In response to public concern, there have also been widespread reviews of, and reductions in, generous severance pay packages. In addition, financial services organisations have to align to Strengthening Capital Standards 3 (CRD3) requirements regarding the structure, amount and timing of variable remuneration payments, as well as the disclosure of remuneration (for example, pay/performance links, performance criteria).

23 KEY TRENDS BASE PAY Following the salary freezes implemented in 2010, executives generally received salary increases in 2011. In the US, 7% of companies had salary freezes in 2011, compared with 18% in 2010. In Europe, 5% of companies had salary freezes in 2011, compared with 12% in 2010. Salary freezes were implemented in 2011 in Ireland (29% of companies), Portugal (26%) and Greece (20%).

2011 executive salary increases remained conservative, however, with distinct differences by geography and industry sector. In the US, the average executive increase in 2011 was 3%, and the same was seen in Western Europe, with the highest increases seen in Belgium (3.4%) and the lowest seen in Portugal (1.8%). In Asia, the average executive increase in 2011 was 7%, with the highest being in Pakistan (15%) and the lowest in Japan (2.1%).

Looking specifically at industries, salary increases were above those in the general market in the energy and consumer goods sectors, and lower than those in the general market in the manufacturing and high-tech industries.

VARIABLE PAY The actual annual bonus payouts were higher in 2011 compared with 2010 and, on average, 2011 actual executive bonus payouts were made at target or above-target levels. No major changes were made to target and maximum bonus levels in the US or in Europe, but increases to bonus levels were seen in Asia, as part of the trend towards more variable pay mix. LTI grant levels also increased slightly in 2011 compared with 2010; due to recovered share prices, LTI grants generally were made before August 2011.

CEO PAY MIX In 2011, the executive pay mix continued to vary by region. The variable pay component of the CEO pay mix is expected to increase in Asia in 2012. See Figure 1.

24 Figure 1: 2011 CEO Pay Mix by Region

100% 10% 18% 25% 80% 20% 36% 48% 24% LTI 63% 60% 36% 17% STI Salary 40% 23% 70% 59% 48% 22% 20% 39% 29% 15% 0% Asia Sweden Denmark Europe UK US

Note: Totals may be more than 100% due to rounding.

ANNUAL BONUS PLAN – PERFORMANCE MEASURES The number of performance measures used in annual bonus plans is increasing – many companies use more than three to ensure a more holistic view of performance that includes both financial and nonfinancial measures.

With additive bonus plan designs (performance for each element is measured separately and then all outcomes are added together) being the most common in Europe, the question arises whether a certain financial threshold requirement should be met before any bonus100% is paid out.

If, before80% 2010, performance measures were mainly financial, in 2011 we saw a clear shift to a combination of financial and nonfinancial performance60% measures.

Due to an uneven global recovery in 2011, individual business units are facing40% very different economic environments – such as growth in Asia and a decline in Europe. Therefore, the newest bonus plans allow20% for more regional, business unit, operating company specific customisation of measures, performance ranges and payout curves to ensure0% relevance to local business and HR needs. In addition, we are also seeing increased interest in business unit specific LTI plans.

25 LTI PLANS In Europe, organisations continue to move away from stock options and towards performance share and long-term cash plans, with performance shares becoming the prevalent LTI plan design amongst large companies in Europe. See Figure 2.

Figure 2 – LTI Plan Comparisons

Share options Restricted stock/units

Performance shares/units Cash plan 80%

70%

60%

50%

40%

30%

20%

10%

0% US Denmark Netherlands Switzerland UK

As for performance measures, the trend is to move away from relative TSR as the only or main performance measure in LTI plans to internal financial measures to improve line of sight. This trend is due to the difficulty encountered in establishing and maintaining appropriate peer groups, to high TSR volatility in the current market, and to the perceived low motivational value of relative TSR.

We are seeing increased use of more customised and strategic measures that are more directly aligned with the company’s business strategy and reflect better the underlying economics of its particular business or industry. These company-specific measures have been introduced with the goals of helping executives and employees focus on how they affect company success, and of maximising “return on reward investment”.

80%

70%

60%

50%

40%

30%

20%

10%

0% KEY TRENDS BY GEOGRAPHY UNITED KINGDOM The UK executive compensation landscape in 2011 was dominated by governmental pressure on financial services companies to demonstrate a stronger link between pay, performance and organisational risk – specifically, to strengthen corporate governance and address the use of STIs at the expense of long-term sustainability. There is considerable frustration among companies outside the financial services sector that the banking crisis has had a spillover effect on them. Changes to the FSA Remuneration Code came into effect on 1 January 2011, with 31 July 2011 as the starting compliance date. The FSA directive originally applied to 29 organisations in the UK and now applies to 4,500 organisations. Organisations are under pressure to review their executive remuneration strategies. Organisations have some often- competing factors to address – particularly the need for talent retention balanced with employee engagement and corporate reputation.

Overall, companies must implement responsible executive plans that drive business performance and value creation, secure key talent, and withstand external scrutiny.

NORDICS Two major executive remuneration trends are taking place in the Nordics. The first trend is increased recommendations that management hold a certain amount of shares in the company being managed, by amending either STI or LTI design features. To accomplish this, organisations often are adopting a vesting period, deferring annual bonuses or introducing a general shareholding requirement for senior management. This is due to increased pressure from different stakeholders – primarily investors and authorities – for senior executives to have exposure to the share price development over a longer period.

The second major trend is the increased use of manager discretion and individual differentiation by using a balanced scorecard approach that incorporates both financial and nonfinancial measures for performance evaluation. Companies are increasingly looking for ways to gain more return on their reward investments within a limited amount of time.

First, companies need to review their LTI arrangements and evaluate how well they support and align with the long-term corporate and people strategies. Second, companies are increasingly realising that they need good linkage between their performance management systems and their reward programmes to provide a clear causational relationship between what they do and the decisions they make, and the rewards and opportunities that employees receive.

27 NETHERLANDS Mindful of the difficult economic situation of the past few years, many companies are cautiously moving forward and introducing incentives that can foster performance in the coming years. Due to difficulty in setting targets in a volatile business environment, companies are experiencing flatter bonus payout curves and are introducing voluntary management bonus investment plans with matching shares subject to performance conditions, as well as sustainability-related measures such as employee engagement.

Companies should consider replacing option plans with performance shares, moving away from TSR as a sole performance measure, introducing nonfinancial performance measures, adopting clawback provisions for payments made on materially misstated data and increasing management shareholding requirements.

FRANCE In terms of new trends in France, there is a new emphasis on defined benefit pension schemes as well as on LTI policies. Also, substantial changes have been made to regulations. A significant increase in employee/employer social insurance contributions has had a negative impact on the ratio and net/cost of these compensation schemes.

Many companies in France are conducting a complete redesign of their existing defined benefit pension schemes and LTI programmes or an analysis of possible alternatives in order to increase the global effectiveness of these schemes.

GERMANY In Germany, changes to the Stock Corporation Act (Aktiengesetz) have led to more intensive scrutiny of management board compensation. In 2009, the act was amended in relation to a shareholders’ rights directive, executive remuneration appropriateness and other aspects, such as caps and vesting periods. Especially for listed companies, now the majority of the variable pay must be linked to a midterm incentive and/or LTI. Germany is also seeing a review of incentive plans, with changes including a new focus on STI deferral plans (often used by the financial services industry), the introduction of new midterm incentives or the increase of existing LTIs. Performance-oriented LTI plans, such as performance share unit plans, are also coming into play more often as a way for companies to focus on both sustainable growth and share development.

28 Clients should ensure appropriateness of management board compensation by reviewing the compensation package, including performing a comparison of the pension benefits against those of a market- and industry-specific peer group. In addition, in order to sustain growth, remain flexible and comply with the requirements for listed corporations, companies should review current incentive programmes and align them to current business requirements. Overall, corporations have enlarged the supervisory board calendar to focus more on management board compensation and obtain an SOP vote in shareholder meetings.

SPAIN AND PORTUGAL More companies are linking rewards with strategy and risk. They see LTIs as an important element in executive remuneration packages, with an annual economic target of 40% of base salary. The most common packages are three- to five-year bonus schemes based on the strategic business plan or value of the company. Many of these changes are due to the increased competition for talent, changes to tax rules, new emphasis on linking strategy with rewards and rewards with risk, virtually flat salary increases, and no STI pay because of limited results.

With recent changes and new pressures, companies should rethink executive compensation strategies, look for best practices, and redesign short-term variable pay and LTIs.

ITALY In Italy, pay for performance is a continuing trend. Another interesting trend is the “new era” of disclosure and transparency for all executive compensation elements – in particular, for the listed companies – due to the 2011 recommendations set forth by CONSOB (Italy’s stock exchange regulatory authority). Besides, pure retention plans and “golden parachutes” for top executives are on the decline, peer-group comparison on executive remuneration and on Key Performance Indicators is growing, and there is a more balanced approach to the pay mix, with an increase in deferred compensation for variable pay for top and senior management. There is also increased focus on introducing clawback provisions for STI payments while stock ownership guidelines are being introduced for LTI plans.

Many companies are rethinking their executive compensation programmes and must ensure a better alignment between executive performance and stakeholders’ interests, finding a balance between

29 risk and sustainability in their remuneration plans. On the other side, leadership development and succession planning are increasingly becoming areas of focus for boards and remuneration committees, and the HR function is working on these areas.

THE GULF COOPERATION COUNCIL Executive remuneration practices and standards across the Gulf are rapidly catching up with those in the rest of the world. Amongst the region’s trends for 2011 are the introduction of deferred bonus plans, assurance that annual incentive programmes are linked more closely with specific corporate and division/business unit performance measures, and the introduction of LTI plans without increasing incentive pool costs overall. Mercer survey results forecast base salary increases in 2011 ranging from 6% to 7.5%; for many companies, this was the first pay increase in two years.

Companies should review the performance measures of their STI plans to ensure that they align with new business priorities. If they have not done so already, to increase their motivational and retention value, companies should also examine the merits of deferred bonus plans; they should move away from an overly prescriptive approach to broader performance assessment in determining LTI plan payouts.

NORTH AMERICA In Canada and the US, there is also intense scrutiny of executive pay. Shareholders, corporate governance advocates, legislators and regulators are demanding increased transparency in executive compensation programmes and stronger alignment of pay and performance. Management and compensation committees are under pressure to be responsive and accountable to stakeholders. More emphasis is being placed on rigorous pay-for-performance benchmarks, longer-term equity holding requirements, clawbacks and deferred bonuses in the financial sector. In the background, pay inflation is restrained with 2011 salary increases averaging around 3% in the US and Canada.

In the US, pay for performance is a continuing trend, particularly with regard to LTIs and a diminishing reliance on stock options. In addition, the legislative and regulatory environment, specifically SOP, coupled with increased scrutiny from shareholder activists, has caused many companies to rethink their executive compensation programmes. Companies are trying to balance multiple priorities: aligning programmes with revised business strategies, ensuring that

30 payouts are commensurate with performance, setting realistic goals in a world where forecasting remains challenging and being responsive to shareholders. Meanwhile, companies are becoming increasingly concerned about their ability to retain their management teams and other critical talent. As companies begin to see improvement, they are luring seasoned talent away from competitors or even from companies in other sectors.

ASIA In 2011, executive salaries in Asia increased by an average of 7%. Executive pay is increasing across the Asia Pacific region, especially in China, India, Indonesia, Vietnam, the Philippines and Malaysia. Contributing factors include continued strong GDP growth, accelerating inflation and, crucially, a scarcity of executive talent. The exception is the struggling Japanese economy, which is suppressing pay – keeping it below Western levels. The limited talent pool in this executive employee group and the competition to attract and retain talent is driving up pay in some sectors. This may prove unsustainable in the midterm, but in the meantime, it is leading to the use of innovative methods of attracting and retaining staff. There is evidence of LTI plans that reward not just over three or four years, but perhaps over 10 years or 20 years and even up to retirement.

In China, as mobility between local and multinational companies has increased, so the pay gap has narrowed. Companies in China are adopting many western European practices, ensuring that executive compensation is measured. In India, strong growth of around 9% has increased staff mobility and pay. This has not been matched by increased performance or delivery, however, so greater scrutiny by boards and compensation committees on fair use of remuneration benchmarks, increased use of performance criteria and more clawback provisions are likely.

Experienced executive talent is in short supply. The competition for executive talent has become even more acute with the rise in movement between local and multinational companies. As the pay gap between the two has narrowed, more Chinese companies have started to tap into executive talent from multinational companies and vice versa. Employers in China have come to realise that they should take a more holistic approach to their executive compensation, focusing on multiple incentive vehicles with multiple time horizons, pay for measurable performance and leadership development. The majority of listed companies currently use a single LTI vehicle that, in times of economic turmoil, they tend to simply stop using because it

31 is not sufficiently flexible to allow for adjustments. Companies should therefore explore alternatives beyond share option schemes and use multiple vehicles or the combination of different LTI schemes to help deal more effectively with negative market conditions.

PREDICTIONS FOR 2012 In 2012, we expect executive salary increases to be aligned with those of the general employee population. Higher increases are likely to be made in exceptional circumstances only. We anticipate an increased weighting on business unit and individual components in annual bonus plan designs to improve their motivational value by

KEY TRENDS PER INDUSTRY SECTOR Energy • Salary increases higher than in general industry due to retention concerns • Increases to target and maximum annual bonus plan levels • Move away from options to restricted and performance shares continues • Increased emphasis on longer-term executive share holding through share ownership requirements and holding periods

Life sciences • Salary increases higher in 2011 than in 2010, on average slightly above general market; however, varies per job function – Cost pressures for sales and in-house R&D function – W ar for talent in emerging research locations (Central Eastern Europe and Asia Pacific) • Slight increases to target annual bonus plan levels; no changes to target LTI levels

Consumer goods • Salary increases higher than in general market • Increased focus on peer group revisions • 2011 annual bonuses at median above-target bonus levels and significantly higher than 2010 levels • Changes to annual bonus plan performance measures to incentivise growth – with less weight on cash flow and cost management, and more on revenue growth • Practice of offering multiple LTI plan designs continues and share plans continue to be emphasised over share option plans • No major changes to LTI levels

High tech • Conservative salary increases in 2011 following executive salary freezes in 2010 • Difficulty in setting goals and selecting performance measures in current volatile environment, especially in cyclical sectors (i.e. semiconductors) – US companies grant shares without performance measures • Move away from options to shares to increase LTI retention value, as many option plans are underwater • Increased use of relative LTI performance measures

32 increasing line of sight. More diversity in LTI plan designs is likely, due to customisation of performance measures based on companies’ strategic priorities and per-employee level, as well as increased emphasis on long-term executive share ownership requirements and holding periods. To address the perception issue that all CEOs and executives are overpaid, there will be a strong improvement in how the executive compensation strategy is articulated and disclosed in annual reports.

Now is the time for organisations to ensure better alignment between executive performance and stakeholders’ interests, and to find a balance between risk and sustainability in their remuneration plans, by examining the linkage between the performance management system and reward programmes.

More information about executive remuneration in Europe can be found at www.mercer.com/execremeurope.

CONTACTS Sophie Black is a Mercer executive remuneration expert in the United Kingdom. Based in London, she can be reached at +44 20 7178 6990 or [email protected].

Bernd Thomaszik is Mercer’s Head of Reward Consulting in Central Europe. Based in Frankfurt, he can be reached at +49 69 6897 78 450 or [email protected].

Mattias Klefbäck is the Product Manager for Mercer’s Executive Remuneration Guides in EMEA. Based in Stockholm, he can be reached at +46 8 505 308 41 or [email protected].

Bruno Fourage is a Mercer executive remuneration expert in France. Based in Paris, he can be reached at +33 1 55 21 37 17 or [email protected].

Marco Morelli is Mercer’s Human Capital Business Leader in Italy. Based in Rome, he can be reached at +39 06 9670 8200 or [email protected].

Yolanda Gutierrez leads Mercer’s Human Capital business in Spain and Portugal. Based in Madrid, she can be reached at +34 914 569 444 or [email protected].

Larisa Muravska is Mercer’s Human Capital Business Leader in the Middle East. Based in Dubai, she can be reached at +971 4 327 8700 or [email protected].

33 34 THE PAY FOR PERFORMANCE CHALLENGE Pay for performance has faced new scrutiny in 2011. The following quotes taken from recent publications around the world sum up the prevailing mood on performance-related pay:

• “The current idea that big bonuses and high salaries result in better company performance is just a ‘myth’, says a new report from the High Pay commission in the UK.”1 • “While millions are still out of work, US CEOs received a 28% pay raise this past year. A lot of factors are driving the increase. Job performance isn’t one of them.”2 • “Executive remuneration [amongst] chief executive officers … in Australia is more likely to be linked to the size of the company rather than its performance.”3 • “Recent research conducted by the Central Planning Bureau of the Netherlands shows that the average income of executives of listed companies in the Netherlands increased 9% annually between 1999 and 2005 while economic value added and profits did not on average increase during the same period.”4

SAY ON PAY This year, in the US, where the Dodd-Frank Act introduced an advisory shareholder vote on executive compensation (“say on pay”), shareholders rejected about 2% of the remuneration policies. The main reasons for rejection were pay-for-performance concerns such as large increases in CEOs’ pay despite negative one- and three-year total shareholder returns (TSR) and large long-term incentive (LTI) grants that would vest based purely on time rather than being tied to performance measures.

And although fewer than five remuneration reports were rejected or withdrawn in Europe this year, the main reason given was – once again – misalignment between pay and performance. It is therefore of crucial importance now that remuneration committees annually validate the pay-for-performance relationship to avoid negative shareholder and public sentiment.

1 Tatton S. “Executive Pay and Company Performance – What Are We Paying For?” IDS eye (6 September 2011). 2 Bloxham E. “How to Get Paid Like a US CEO”, CNN Money – Fortune Management (6 July 2011). 3 “Australian CEO Pay ‘Linked to Company Size, Not Performance’”, Odgers Berndtson (10 June 2011). 4 Winter J. Corporate Governance Going Astray: Executive Remuneration Built to Fail, Duisenberg School of Finance Policy Paper No. 5 (August 2011).

35 VALIDATING THE PAY-FOR-PERFORMANCE LINK In order to validate and improve the pay-for-performance relationship, companies should at minimum:

• Holistically evaluate the current executive remuneration policy • Measure performance across multiple dimensions • Benchmark both performance and pay • Introduce corrective mechanisms and proper elements of judgement

HOLISTIC EVALUATION OF THE REMUNERATION POLICY Companies must consider all pay elements to ensure that they have properly assessed the alignment between pay and performance. Arraying these elements by their timeframe and performance alignment helps to illustrate their importance in telling the story of pay/ performance alignment.

High Performance shares/units/cash Annual incentives Stock options

Restricted stocks/units alignment Performance Performance Retirement plans Base salary

Low Perquisites

Short term Timeframe Long term

From a conceptual standpoint, companies will tend to achieve better alignment when the mix of awards provided is based largely on longer-term objectives and performance.

36 MULTIDIMENSIONAL PERFORMANCE MEASUREMENT Rather than rely only on one or two key measures, companies today must take a multidimensional view of value drivers. For example, from the perspective of shareholders, TSR is the primary measure of performance. However, since shareholders have varying investment time horizons, they will believe that different timeframes are appropriate.

In addition, it is less clear from management’s perspective that TSR, in either the short term or the long term, is always a reflection of the company’s and management’s performance – it could, in fact, simply be a reflection of the overall market’s performance. In some cases, TSR is influenced more by financial conditions affecting the broader economy or the industry than the company’s performance.

Pay for Performance (P4P) Balance Framework

Performance perspectives

Shareholders Measures Competitors

P4P BALANCE Timeframe Target setting

Internal goals

As such, other financial measures – such as operating income, revenue growth, return on assets, etc. – should also be considered in evalua- tions, as they may be better measures of performance and are arguably more within the control of the executive team. A multidimensional approach should create a balance between shareholder returns as well as absolute, relative and internal performance (compared with the prior year or budget, for example).

37 2011 executive remuneration trends in Europe show that companies are already taking a multidimensional view of performance. The number of performance measures used in annual bonus plans is increasing – many companies use more than three, with nonfinancial measures now augmenting financial measures in order to ensure a more holistic view of performance.

Due to the uneven global recovery in 2011, individual business units of any one company may be facing very different economic environments, with the biggest polarisation being between growth in emerging markets and the decline in Europe. Therefore, new bonus plans are allowing for more regional, business unit and operating company-specific customisation of measures, performance ranges and payout curves to ensure that they are appropriate for both local business and local HR needs.

The shift away from the external measure of relative TSR as the only or main performance measure in LTI plans continues, with internal financial measures now much more common. Not only do such measures provide a better correlation between an individual’s performance, a company’s performance and the likely financial reward, they also help avoid some of the problems that have beset the relative TSR measure. For example, it has proved difficult to establish and maintain appropriate peer groups, TSR is extremely volatile in the current market, and the motivational value of relative TSR is questionable.

Companies are also making greater use of more customised and strategic measures that are more directly aligned with their business strategies and better reflect the underlying economics of the business or industry than the traditional earnings-per-share (EPS) measure that was commonly used before 2010. Organisations have introduced these company-specific measures with the aim of helping executives and employees focus on how they affect company success and of maximising “return on reward investment”.

38 BENCHMARK PERFORMANCE AS WELL AS PAY Annual pay reviews should include a relative assessment of company performance versus peer groups on multiple performance measures over one- and three-year periods to ensure that pay is aligned with company performance.

For example, if a company’s actual pay level – base salary, annual bonus payout and vested LTIs – is in the third quartile compared with that of the peer group, then the company’s performance should also be in the third quartile to ensure alignment.

As another example, the assessment illustrated below relates actual value delivered to executives with what is generated for shareholders over a three-year period.

Individual companies that are within the zone demonstrate an appropriate pay-for-performance relationship.

3-Year Pay for Performance CEO Pay I LT Total base salary, short-term incentives and realised base salary, Total TSR In the chart above, the majority of companies display good alignment of pay and performance, while several appear to either pay too much for not enough performance, or too little for good outcomes.

39 INTRODUCE CORRECTIVE MECHANISMS A number of companies have introduced corrective mechanisms in Europe in 2011 to deal with unintended consequences of incentive plans. Prevalent corrective mechanisms are clawback and malus provisions. In addition, remuneration committees have started to exercise discretion to override any formulaic outcomes with incentive plans that have been perceived as unfair.

Clawbacks may be applied to an incentive award that has vested and has typically already been distributed to the executives. There are three categories of clawback provisions. Fraud-based clawbacks, as the name suggests, apply only to the executives who engaged in the fraudulent activity or misconduct that caused a financial restatement or some other problem in the company. Error-based clawbacks apply to executives who received an incentive payment based on incor- rect financials. And breach of noncompete or other restrictive covenant clawbacks apply to executives who violate restrictive covenants, such as nondisclosure agreements. Clawbacks are prevalent both inside and outside the financial services industry. However, they have not yet been tested in practice in many European countries and may not be enforceable under country-specific labour laws.

Malus is an arrangement that allows a company to prevent vesting of all or part of a deferred compensation award based on company or individual performance that is expected to be lower than was anticipated when the incentive scheme was structured. Malus provisions are currently mainly used only in the financial services industry.

The financial crisis that began in late 2007 heightened the need for remuneration committees to make discretionary decisions outside the established annual bonus and LTI plan rules due to flaws in target setting, unanticipated events and volatility of business performance. The new, revised country-specific corporate governance codes and institutional investor guidelines in Europe provide that remuneration committees should no longer rely only on the formulaic incentive pay outcomes but should instead make appropriate adjustments to align pay-for-performance linkages.

40 The Corporate Governance Code in the Netherlands, for example, clearly states that if a variable remuneration component conditionally awarded in a previous financial year would, in the opinion of the Supervisory Board, produce an unfair result due to extraordinary circumstances during the period in which the predetermined performance criteria have been or should have been achieved, the Supervisory Board has the power to adjust the value downwards or upwards.

In Germany, the Act on the Appropriateness of Management Board Compensation (VorstAG) that came into force in 2009 provides that the Supervisory Board should (previously the word “may” was used) reduce the Management Board’s compensation to an appropriate level, if the company’s situation deteriorates to such an extent that maintaining the previous level of compensation would be unfair. Therefore, by incorporating corrective mechanisms and a judgement element, remuneration committees’ decisions gain a deeper sense of integrity and reasonableness and deliver a more comprehensive executive remuneration message.

CONCLUSION Pay-for-performance analyses are not likely to be a cure-all, and they won’t eliminate all instances in which outside groups perceive a disconnect between performance and rewards. Instead, they are a tool that should be considered as a supplement to other best practices that represent sound governance and process in compensation planning. Paying for performance, and being perceived to pay for performance in all situations, can be a significant challenge. However, using a structured evaluation process and applying sound judgement and corrective mechanisms can continually reinforce the alignment of pay and performance.

ABOUT THE AUTHORS Piia Pilv is Mercer’s Executive Rewards Service Segment Leader for EMEA. Based in Amsterdam, she can be reached at +31 20 431 3864 or [email protected].

Kimmo Sollo is Mercer’s Human Capital Business Leader in the Nordics. Based in Espoo, Finland, he can be reached at +358 9 8677 4315 or [email protected].

41 42 TALENT MOBILITY GOOD PRACTICE TO STIMULATE ECONOMIC GROWTH In the latter part of 2011, the World Economic Forum (WEF), in partnership with Mercer, embarked on a talent mobility good practice research project1 that explores how talent mobility can impact economic development and growth. This article summarises some of the research findings and offers insight into how talent mobility good practice – supported by collaboration amongst governments, businesses and international institutions – can overcome the foundational issues that cause imbalances in human capital markets.

“ The success of any national or business model for competitiveness in the future will be placed less on capital and much more on talents. We could say that the world is moving from capitalism to talentism.”2 – Klaus Schwab, Founder and Executive Chairman, WEF, 2011

Talent is the fuel that drives the engine of the global economy, but there is a talent crisis impelled by serious imbalances in human capital markets. On one side, we see talent shortages. On the other, we see high unemployment rates and employability challenges slowing down economies and threatening future growth across the globe. The magnitude of talent risks requires concrete actions today by governments, businesses and educational institutions to enable economic growth tomorrow – in all regions of the world.

Although talent mobility can help solve the talent crisis, there is no globally recognised platform for addressing talent mobility challenges and exchanging practices and experiences amongst various stakeholders. The objective of this research project is not only to identify and share good practices, but also to inspire decision makers and stakeholders.

1 Over the summer of 2011, more than 4,000 talent mobility practitioners and experts were surveyed on talent mobility good practice in 45 countries – within North America (44%), Asia Pacific (27%) and Europe (24%) – in the private and public sectors, in academia, and in the civil societies across the world. Almost 60% of participating organisations report more than $1 billion in revenue. 2 Klaus Schwab, opening speech, WEF’s Special Meeting on Economic Growth and Job Creation in the Arab World, Dead Sea, Jordan, 21 October 2011.

43 FOUNDATIONAL ISSUES AFFECTING TALENT MOBILITY The research examined hundreds of private and public sector practices worldwide and included conversations with more than 100 business, government and academic representatives. To ensure diversity and global reach, more than 200 good practices were collected in multiple dimensions of talent mobility and various regions. The analysis of this material revealed that good practices directly address one or more of the following key impediments:

1. W idespread unemployability due to a lack of basic employment skills, particularly amongst people in underprivileged communities. This has exceedingly negative consequences for the individuals shut out of the labour market and the societies in which large groups of people lack economic opportunities – and the businesses operating in those markets need skilled people to drive growth.

2. Critical gaps between what skills employees possess and what skills businesses need. Because of these gaps, businesses cannot find the talent they need where they need it, and individuals may find themselves ill equipped for the jobs of the future.

3. Information gaps that make it difficult for labour markets to match workers to jobs effectively. Workers lack information about current job openings or future skill needs, while employers seeking talent cannot perfectly observe the actual capabilities of prospective employees.

4. Public and private constraints on mobility that impede the ability of markets to balance supply and demand by adjusting wages or the number of workers. These include both common government interventions, such as imposing minimum wage laws and visa restrictions, and private ones, such as imposing union rules or professional credentialing restrictions.

ORGANISATIONS’ TALENT MOBILITY PRACTICES According to the survey results, companies are overwhelmingly concerned with their abilities in terms of talent attraction and development (see Figure 1), and they employ talent mobility as a way to:

• Develop leaders and other talent • Increase the diversity of talent • Transfer knowledge • Retain top talent

44 Figure 1: What Were the Specific Objectives of the Practice?

Develop leaders 35% and other talent

Increase diversity 19% of talent

Transfer knowledge 17%

Retain top talent 16%

Lower costs 9%

Create career paths 8%

Place talent 8%

Standardise 6% processes Create talent pool to ﬁll gaps 6%

Optimise resources 4% Comply with immigration and 2% tax regulations

The programmes companies have implemented to address these concerns are predominantly “classic” in nature, as they fall in the areas of leadership and career development as well as international assignments. Companies are much less likely to implement initiatives on virtual mobility or moving youth to employment, and moving people across organisational departments or units turns out to be more prevalent than moving people across borders (see Figure 2).

45 Figure 2: What Type of Talent Mobility Is Your Practice About?

Leadership 73% Improving development employability 17%

Moving people Moving jobs within an 69% to people 13% organisation

Moving people 61% Job creation across countries 12%

Workforce development 55% Virtual mobility 11% and training

Moving people 49% Moving youth across occupations to employment 8%

Workforce 41% Moving unemployed planning to employed 4%

Extending and diversifying 41% Other 6% talent pools

Fostering brain 21% circulation

Almost half of companies rely on research, information sessions and intra-department coordination to design and implement their talent mobility practices, but stakeholder support is a significant obstacle, cited by a quarter of respondents, as are many of the elements necessary to successful expatriate programmes, such as designing attractive pay packages; finding people willing to work abroad; finding replace- ments; and visa, tax and social issues. Other key challenges include developing systematic processes and communications strategies.

While a small number of respondents reported using their talent mobility practices to affect the external labour market, the organisations surveyed clearly favour practices that affect their existing workforce. In fact, respondents said talent mobility practices are much more beneficial when used to attract, develop, motivate and retain their own talent rather than when used to address broader talent market challenges, such as talent shortages, unemployment or a lack of employability (see Table 1).

46 Table 1 Benefits – To What Extent Do You Believe Talent Mobility Does the Following? • Helps to develop leaders/leadership skills Very large • Helps to retain top talent and those with critical skills extent • Motivates performance through better career opportunity and development Large • Improves knowledge development and transfers within our workforce • Helps to attract top talent and those with critical skills extent • Smoothes operations by ensuring people are in place to do the job • Helps to address talent shortages by better matching labour supply Some and demand extent • Grows our workforce skills and develops its experience • Strengthens our competitive and/or comparative advantage Modest • Helps to maintain a common culture across our organisation • Increases workforce diversity extent • Increases overall employment and/or employability Minor • Accommodates values and aspirations of Gen Y and Millennials extent • Increases workforce productivity/lowers labour cost

Almost all survey participants believe that the benefits of talent mobility outweigh the costs, but organisations do have cost concerns and see the direct and administrative costs of talent mobility practices as the most significant. Organisations also worry that talent mobility is disruptive of talent and leadership development, the development of specialist knowledge, customer/client relationships and the smooth functioning of teams. In addition, they believe that talent mobility practices can be demotivating to those who are not mobile, can raise unrealistic career expectations for those who are, and can reduce opportunities for women or others within the organisation.

WHO IS MOVING? The people participating in mobility programmes are usually: • At the early stage of their careers. A third of respondents said moves most often come during the first five years of an employee’s career, while another third said a move is most likely when an employee has been with the organisation for five to 10 years. • Men and women. However, a little over a third said that men are more likely than women to experience a move. • Executives, managers and professional/technical employees. These were virtually the only talent segments targeted by respondents’ talent mobility practices. • Between 0% and 20% of the workforce in any one year. More than 40% of respondents move 5% or less of their people in a year, a quarter move 6%–10% and another quarter move 11%–20% of the workforce annually.

47 Despite the challenges, half of organisations’ talent mobility practices proved largely successful in meeting objectives, as measured by mobility rates, retention and participant feedback; only 10% rated their practices only modestly or not at all successful. Surprisingly, the impact of one-fifth of the practices was not measured in any way, and only 13% of practices were measured in terms of their economic impact. While a fifth of respondents said they could have done nothing differently to improve effectiveness, another fifth thought that better communication or more and better training would have helped.

COLLABORATION IS AT THE CORE OF REBALANCING GLOBAL TALENT MARKETS Our research shows that whether on the organisational level; within a country, industry or region; or across multiple professionals worldwide, collaboration has enabled stakeholders to grapple effectively with talent market challenges in order to significantly enhance growth. Moreover, the broader the cooperation, the more likely interventions are to address, simultaneously, all four sources of market inefficiency or failure – resulting in a much greater impact on talent issues.

Figure 3 Collaboration Is Core to Driving Economic Growth

Level 4

NGO Level 3

NGO

Level 2

Region Level 1 Organisation Industry Organisations International NGO organisations Country Governments

NGO Academia

NGO NGO NGOs Global

48 LEVEL 1: COLLABORATION WITHIN THE ORGANISATION Within an organisation, collaboration across functions, units and geographies is often critical in designing and implementing talent mobility practices that encourage economic growth. These practices can help develop employees within the organisation, close information gaps and better balance internal supply and demand. The key practices implemented by “best in class” organisations include:

• Forecasting of the supply and demand of critical talent • Career and leadership development, focusing on building critical skills • Integrated diversity and inclusion strategy • Global mobility philosophy aligned with talent development strategy • Strategic succession planning • Promotion of internal mobility across business units and job functions • Leadership accountability

REAL-LIFE EXAMPLES OF MOBILITY PRACTICES INSEAD: GLOBALISATION OF FACULTY AND STUDENTS

Problem • In the late 1990s, the centre of gravity of business was seen as shifting to the East with the rise of Asia. INSEAD – with its strong European roots in France – wanted to leverage this trend and was missing the adequate development of the Asian dimension across its different stakeholder groups – faculty, staff, students, alumni and corporate supporters.

Solution • In October 1999, INSEAD took a bold step: it opened a campus in Asia and became the first business school to have two fully fledged campuses with permanent faculty – one in Europe, the other in Asia. • INSEAD’s determination to make Singapore an “equal” campus has been essential to its success. This is done through several key mechanisms: − One common student-intake process – INSEAD applicants are selected in one process. Once admitted, they choose either the Fontainebleau or the Singapore campus to begin. − Student mobility – As the programme structures and contents are largely the same across the two campuses, students can shift at will between the two locations. − One process for faculty management – Faculty are hired, evaluated and managed through one shared process. There is no special local faculty; all faculty have to meet the same global standards for hiring and promotion. This is essential for maintaining parity in teaching and research. − One administration – The school maintains a unified organisational structure. There is one dean for the school, one chair for each department, one staff director for each key function, etc. Each dean/director performs with a global perspective.

Results • The school’s campus in Singapore has been very successful. It has grown rapidly in size – far faster than initial projections – and today, it is almost the same size as the mother campus in France. The culture of the whole institution has changed (for the better) with an infusion of new ideas and cultural values from Asia. The students are more global in their perspective and are highly sought after by corporate recruiters.

49 LEVEL 2: COLLABORATION ACROSS ORGANISATIONS WITHIN A COUNTRY When they cannot solve talent issues on their own, leading organisations are going beyond their own walls to collaborate with others to source and develop talent locally. On a country level, we found programmes that provide access to information on labour supply and demand, mitigate brain drain and facilitate the immigration of the highly skilled. Collaborative good practices within a country or across several organisations within a country include:

• Secondment of employees to other organisations • Partnerships amongst companies, governments or educators on the training, development and deployment of talent • Public-sector initiatives on sharing information on labour supply and demand • Public-sector-led programmes that mitigate brain drain and facilitate immigration

SAUDI ARAMCO: DEPLOYING AND DEVELOPING TALENT GLOBALLY Saudi Aramco strengthens both the Saudi economy and its own workforce through strategic workforce planning and development practices carried out in collaboration with multiple stakeholders.

Problem The company has been reliant on developing the country’s technical and managerial talent. Current and projected shortages of seasoned petroleum engineers and other experienced technical staff, combined with the risk of substantial turnover, have increased pressure on the company to optimise its utilisation and deployment of talent, develop the next generation of professionals and effectively identify, and tap new talent markets around the world.

Solution • Saudi Aramco developed and implemented a state-of-the-art strategic workforce planning methodology. Encompassing the company’s full-time workforce of nearly 60,000, the planning model forecasts talent needs, anticipates gaps and identifies effective ways to close those gaps. The company then uses this information to guide finely calibrated mobility and recruiting decisions. • Saudi Aramco makes massive investments in education, training and development in excess of $10,000 per employee annually, sometimes beginning pre-employment and extending across an employee’s career. Educational investments, via degree programmes, are focused on top Saudi universities and leading universities in the Western world, Asia and the Middle East. These investments help improve the quality of Saudi Aramco’s workforce and help adapt workforce skills, knowledge and capabilities to changing organisational needs. • Expatriate assignments are one of the key tools used to develop leadership and technical skills in the Saudi workforce. The company collaborates with its alliance partners throughout the world to place Saudi employees within their companies, giving them exposure to Western management practices and more diverse technology. The company also relies heavily on internal mobility at all career levels to broaden experience, better match people to jobs and strengthen engagement and motivation. Continued on bottom of the next page

50 LEVEL 3: COLLABORATION ON AN INDUSTRY OR A REGIONAL LEVEL On an industry or a regional level, examples of good practices include public/private partnerships designed to foster talent mobility and skill development, as well as industry associations working closely with the public sector to attract and develop talent. Collaborative good practices on an industry or a regional level include:

• Strategic talent assessment, development and deployment on an industry level • Matching of supply and demand through job fairs, job portals and university visits • Shaping of academic curricula through participation on university advisory councils • Subsidised internship programmes • Industry-specific training programmes and workshops

LEVEL 4: COLLABORATION ON A GLOBAL OR MULTI-STAKEHOLDER LEVEL Finally, when collaboration takes place on a global/multi-stakeholder level, we see sectors, governments, international organisations and academia working closely together to solve complex talent mobility issues. Often, these include all or a number of the good practices described previously, but working across multiple countries and regions. For example, private companies may develop innovative talent sourcing and development strategies by working closely with educational institutions, governments and nongovernmental organisations (NGOs) in multiple countries. There are also international development initiatives in the area of skill development and trade agreements between countries.

Results • The model helped the organisation manage its workforce in a time of surging demand and has helped the company address concerns about its talent pipeline and the prospective retirement bulge. • Recent ROI analysis suggests that the company is making highly efficient investments in training and education. Those who earn degrees and certifications through the Saudi Aramco Professional Development Programme do better than other employees over time, as measured by ratings, career and pay progress.

51 HOW MOBILITY PRACTICES CAN ADDRESS FOUNDATIONAL TALENT MARKET ISSUES The types of practices that governments, academia, NGOs, international organisations and businesses are using collaboratively to address foundational talent market issues include:

• Practices to address unemployability by preparing more people for employment or boosting demand through employment subsidies • Practices to address skills gaps through retraining and up-skilling • Practices to address information gaps to facilitate better matches between labour supply and labour demand • Practices to ease constraints on talent mobility so that the right talent can flow to the right places to fill critical needs

COLLABORATION VS. WAR FOR TALENT Businesses and industries are beginning to realise that competition for talent is not a zero-sum game. Those who think more strategically about managing talent are recognising that the key to growth is increasing collaboration beyond an organisation’s own “walls”. As labour markets become as global as capital markets, the most successful companies will be those moving out on this frontier to collaborate with governments, academia, international institutions and NGOs to find and develop talent. At the same time, with competition for investment and talent so strong, governments are often no more able to go it alone in their efforts to strengthen labour markets than are any of the other stakeholders. Permanent or temporary alliances increasingly are the avenues for getting things done.

In addition to understanding the macroeconomic and microeconomic issues affecting the movement of people to jobs and jobs to people, and taking action to develop and implement talent mobility practices that stimulate economic growth, stakeholders must keep in mind the concerns and needs of talent. The buy-in of talent is a prerequisite to any activity that aims to help people enter the workforce or develop their careers.

52 DEVELOPING THE RIGHT MINDSET Why are collaborative efforts still relatively rare? The answer is that collaboration itself is extremely complex and difficult to implement. Those who have done it well actually exhibit a different mindset when it comes to solving talent challenges.

Those leaders on the talent mobility frontier who practice what we have identified as “enlightened collaboration” are able to design and implement complex, multi-stakeholder talent solutions for mutual gain because they:

• Think broadly about the greater good rather than focusing only on their own objectives • Are comfortable with complexity • Think outside the box to drive innovation • Are sensitive and adaptable to different cultures • Can handle ambiguity and uncertainty • Are good at systems thinking • Are open to continuous learning and new opportunities • Have a long-term perspective • Have an entrepreneurial spirit and are willing to take the initiative and be accountable

A FRAMEWORK FOR EFFECTIVE COLLABORATION While the different case studies of good practices approach talent mobility from various points of departure, they share the following principles:

1. A clear, common understanding of the problem. This should then be translated into a clearly defined objective that all stakeholders can support.

2. A catalyst or driver of collaboration. Beyond a clear articulation of the problem, successful collaboration also requires an agent who can lead the effort, keeping all stakeholders connected and on task.

3. Clear and aligned “incentives” for participation and action. People are far more likely to collaborate when they understand that their interests are better served by joining forces with others to take the required actions than by acting alone or opting out. Successful collaborations must avoid the classic economic “tragedy of the commons” by properly providing incentives for the different parties involved so they all keep pulling their weight.

53 4. A governance mechanism ensuring that the information needed for effective collaboration is actually shared and becomes transparent to all. Effective collaboration requires that the parties agree what information is to be shared – and what can and should be reserved as privileged information. It also requires a “policing” mechanism to ensure that no party holds back information that the group had agreed to share.

5. P roof of concept. Keeping the collaborative effort going requires continuous feedback to stakeholders regarding the benefits of collaboration. Unless stakeholders see that they are getting a return for their efforts, they will redirect resources to other priorities.

Many stakeholders across all sectors are making great strides in talent mobility despite such challenges. Private and not-for-profit organisations, government actors and academic institutions need to recognise and fulfil their unique roles in collaborating with the other principal stakeholders to advance their talent mobility practices to achieve an ever-greater impact on talent market imbalances – and bring the practice of talent mobility in line with its promise.

For more information on this WEF research conducted in collaboration with Mercer, visit www.weforum.org and www.mercer.com.

CONTACTS Pat Milligan is a Mercer Senior Partner and President Talent, Rewards & Communication, as well as a Member of Mercer’s Executive and Operating Committees. Located in New York, she can be reached at [email protected].

Mike Piker is a Mercer Partner and Lead International Human Capital Consultant. Based in New York, he can be reached at +1 212 345 2138 or [email protected].

Anne Schult is a Mercer Senior Associate and the WEF/Mercer Talent Mobility Research Project Manager. Based in New York, she can be reached at +1 212 345 1449 or [email protected].

Joan Pennington is a Mercer Principal and Talent Management expert. Based in Amsterdam, she can be reached at +31 20 431 3992 or [email protected].

54 55 56 HOW MULTINATIONALS CAN ENGAGE AND RETAIN EMPLOYEES IN ASIA’S FAST-GROWING ECONOMIES AN INTERVIEW WITH MERCER EXPERTS IN HONG KONG AND SINGAPORE Brenda Wilson is Mercer’s Regional Talent Management Service Segment Leader in Asia Pacific, Hans Kothuis is Mercer’s Regional Rewards Service Segment Leader in Asia Pacific, and Paul O’Malley is Mercer’s Information Product Solutions Business Leader in Asia Pacific. Here they discuss the challenges facing multinationals in Asia’s powerhouse economies and how they can more effectively engage and retain the talent they need to grow their businesses in these markets.

Q: The “war for talent” continues around the globe, with demand outstripping the supply of key talent in many markets. What is the competitive situation of multinationals with respect to talent in Asia’s fast-growing economies?

Brenda Wilson: The competitive landscape has become increasingly more challenging. In China, for example, multinational companies are facing much stiffer competition for talent from both local companies and government-related organisations for several reasons. First, national pride has become a stronger motivator since the 2008 Olympics and, as a result, many more people want to work for the government. In 2010, about 1.4 million people sat for civil service exams, which was a 41% increase over 2009.

Second, while multinationals have to operate within the governance constraints of a global company, local companies and government organisations are much more nimble. If a significant increase in compensation is needed to retain a valuable employee, the local company can make the decision to offer the increase on the spot, whereas the multinational may be constrained by its global salary structure or the need to get permission from headquarters. This has helped local companies become hugely popular employers. Also, the fact that multinationals tended to react to the global economic downturn by cutting headcounts, freezing salaries or taking away bonuses – even in markets that remained relatively fast-growing – caused new graduates to look more favourably on local and government organisations.

57 Third, local companies and government organisations tend to dwarf foreign multinationals in size. This, combined with their traditionally hierarchical organisational structures, means that they can offer employees many more steps on the career ladder. By contrast, multinationals tend be rather flat, which slows down progression because there are fewer places to move.

Paul O’Malley: This means that multinational organisations need to move away from a one-size-fits-all approach and consider the strategy they need to adapt to be successful in markets like China. It is not simply about just allocating a bigger budget to developing economies; it is also about accepting that people management and rewards practices are different. Some organisations are doing this very effectively, but many others still tend to try to make as few modifications as possible to their global approaches. These firms will find it increasingly difficult to attract and retain talent. Organisations need to listen to their leaders in these markets and conduct employee research to determine what works and what will not have the desired impact. Imagination and flexibility are required with a focus on the business outcome rather than the imposition of specific imported approaches.

Q: Are multinational employers operating in these markets encountering any special challenges when it comes to engaging and retaining employees?

Hans Kothuis: One major challenge in these fast-growing economies is the imbalance between talent supply and demand. Increasing wealth in markets like China and India is spurring demand for companies’ products and services. Companies want to expand to take advantage of this booming demand and need more and more talent to do so. Although there are plenty of people in many of these markets, the problem is that only a tiny percentage of that talent has the skills and experience needed by these employers – and this holds true both for white-collar and blue-collar jobs. So the issue is really the employability of talent.

BW: Another challenge in these markets is the relatively high level of turnover. In China, for example, staff turnover hovers at around 14% to 17%, depending on the industry. While this may sound manage- able, it creates huge costs for organisations because of the labour imbalance that Hans was just talking about. In markets where it is very hard to find talent in the first place and where the investment required to groom the pipeline is huge, turnover of this magnitude is a very costly problem.

58 Finally, companies in these markets often cite a lack of managerial capability or insufficient HR depth to meet these major human capital challenges and flawlessly execute their talent management and rewards programmes to successfully engage and retain employees.

POM: European and US-based organisations may say, “We have talent shortages, too – just look at our ageing workforce”. However, the magnitude of the challenge is far greater in developing and fast- growing markets. You can go for months without being able to find suitable candidates for key positions, particularly leadership roles. Many organisations end up compromising their standards and hiring or appointing people to leadership positions before they are ready for them. While this approach fills a short-term immediate need, it creates a bigger long-term problem of a weak leadership team that is unable to lead, particularly through times of change. Organisations need to develop and implement a strategy to overcome these challenges. It is not easy, but with a focus on execution, it can be achieved.

Q: Given these unique challenges, what should multinational organisations do differently to engage and retain employees in markets like China and India?

HK: The first thing employers need to do to improve engagement and retention is to take a step back and think more deeply about recruitment. Because the demand for employable talent in both China and India is greater than the supply, many companies are casting a very wide net and lowering their recruitment standards in order to find enough people. Many companies want to have the first-mover advantage at all costs. But this is a dangerous approach. Instead, companies should find ways to improve the quality of the talent they are recruiting, becoming more rather than less stringent in their hiring standards and becoming more selective. It may sound counterintuitive, but companies need to grow more slowly and delib- erately in order to create sustainable companies.

BW: I agree that being clear in advance about what it takes to be successful in the organisation is really important. Otherwise, you are likely to invest in a large number of people who will then leave the company after a year or two. And, in fact, that is what is happening in China, where there are a lot of “quick quits”, especially among 25 to 27 year olds – 70% of whom leave their employer after one to three years. So a key piece of the retention puzzle is being very deliberate on the recruiting side – knowing who is an appropriate candidate for your organisation.

59 POM: Brenda and Hans are correct, but what if your global CEO has just told investors that your organisation is expected to grow by 40% in emerging markets in 2012 to offset low or no growth elsewhere? You are in a tight spot where, very often, you have to set your principles aside and make some hiring and rewards decisions that you would prefer not to make. It is a tough position to be in, and it requires perse- verance and energy to address these challenges in a positive manner. Many HR professionals who are trained in mature markets struggle with this.

Q: What about once employees are on board? What do employers need to do to engage and retain them?

BW: The most important thing is that organisations maximise the value proposition offered to their employees through total rewards – and by that I mean not just pay and benefits, but also careers, work/ life balance and even the work environment itself. It’s critical that organisations get all these pieces right. Yet what so often happens is that companies focus on one or another, but they don’t create a competitive advantage and stickiness with their employees because they’re not focusing on the entire value proposition.

HK: Many of the new competitors we just spoke about are competing for talent by offering 30%, 50% or even 100% salary increases in order to win them away from multinationals. The approach of simply matching these offers is a short-term one and usually unsustainable. Instead, companies should offer a complete employee value proposition, as Brenda described. For example, research shows that employees are concerned not only with pay, but also with things like medical benefits. Other valued benefits include paid time off, retirement benefits – which still are not very generous in many companies in Asia – and certain perquisites, such as the use of a company car, that confer status on more senior employees. (See the exhibit, “The Most Valued Elements of ‘the Deal’ in Asia Pacific”.)

POM: No matter what you pay employees in a developing market, somebody else will be prepared to pay them more. So you need to ensure that your employees do not want to leave your organisation – as soon as they accept a call from a headhunter (and there are scores of them in developing markets), they are more or less gone. Employees need to believe that they are being rewarded fairly relative to the external market and that there is internal equity. Communication and frequent contact with employees are critical – particularly by supervisors, managers and leaders. Your workers need to feel wanted and supported. The nonfinancial components of total rewards or the

60 employee value proposition are often far more important than adapting, say, a target-market position of the 75th percentile for compensation. Continuous learning and development are critical so that employees see they are achieving career advancement and not just repeating the same tasks every day.

The Most Valued Elements of ‘the Deal’ in Asia Pacific Rank 1 2 3 4 5

Working for Career Training India Base pay Type of work a respectable advancement opportunities organisation

Supplemental Bonus Career Training China Base pay retirement or other advancement opportunities savings plan incentives

Good Bonus Hong Career retirement Base pay or other Paid time off Kong advancement savings or incentives pension plan

Bonus Career Flexible work Singapore Base pay or other Type of work advancement schedule incentives

Source: Mercer’s What’s Working™ Survey, 2011

BW: As Paul suggests, how people are developed, mentored and promoted can also have a major impact on engagement and retention and on business success. By developing clear criteria around the types of technical competencies and knowledge that are needed at each stage in one’s career, organisations can help employees better understand what’s available to them and give them more control over their own careers. The clarity can also help prevent people from being promoted before they are ready and then burning out.

Q: What other things can multinational employers do to better engage and retain employees in these competitive markets?

POM: When I first came to Asia, I believed that the answer was to adapt the most progressive, sexiest and innovative initiatives you could find. I have since changed my mind! I now believe the solution involves going back to basics and achieving 100% on execution.

61 Adapt a practical and simple strategy and then work really hard and fast on implementation. Respond to employees’ concerns very quickly. Issue letters within 24 hours of a final interview, or else the person will have accepted another offer. Realise that employee engagement is a 24/7 business – after all, there is a reason it is called a “war” for talent. “Execute, execute, execute” is the name of the game – it is hard work, but organisations that do so will achieve their ambitious business objectives in these markets.

HK: Companies need to have very good onboarding, training and mentoring programmes – and they need to offer training that is not just technical or vocational, but also about problem-solving, self-management, taking risks and innovating. Some companies have taken the initiative to set up their own college or university because they recognise that they need those long-term approaches to improving the talent supply. I believe that the most successful companies will be the ones that take mentoring and training seriously, instead of rushing people into tasks for which they are not ready. Even if these companies give up first-mover advantage, they may have a competitive advantage in the sense that they may be more sustainable over the longer term.

BW: Beyond developing programmes that deliver value to employees, companies in China, India and Southeast Asia also have to improve the execution of these programmes if they are going to win the war for talent. Today, these programmes often fail on the retention and development side because a key element is missing – managers are not good at people management. Many may be really good technical managers, but they fall down when it comes to day-to-day interactions with employees. Yet these managers are the execution channel for many rewards and talent management programmes. To improve, companies need to not only better define the roles and responsibilities of the manager, but also build in the reward mechanisms to ensure that managers are properly acknowledged and rewarded for supporting those employees they manage. Of course, companies also need to give their managers the training and development needed to become good people managers.

In addition, companies need to build their HR capabilities. Given the challenging talent situation in Asia’s fast-growing economies, the demands on HR are greater than in other markets, yet HR as a profes- sion is still relatively new in these markets.

62 Finally, to win the war for talent in Asia’s highly competitive and quickly growing markets, multinationals need to be very serious about the talent supply-and-demand situation and the long-term talent challenges. Companies that want to build their resources in these fast-growing economies will have to pay to do it – either because they will continue to lose talent to their competitors or because they invest thoughtfully and meaningfully in the talent they have.

Another point I’d like to make is that when organisations are thinking about attraction and retention, they are often looking for quick solutions or the next best thing, whereas diagnosing and addressing attraction and retention issues needs to be viewed as a system. The system has a variety of moving parts, as it isn’t usually one factor that causes a candidate to accept the offer and it isn’t usually one factor that causes the employee to quit. Thinking holistically can actually reveal potential attraction and retention hot spots.

ABOUT THE INTERVIEWEES Brenda Wilson is a Partner in Mercer’s Human Capital business and Regional Talent Management Service Segment Leader in Asia Pacific. Based in Hong Kong, she can be reached at +852 3476 3813 or [email protected].

Hans Kothuis is a Principal in Mercer’s Human Capital business and Regional Rewards Service Segment Leader in Asia Pacific. Based in Hong Kong, he can be contacted at +852 3476 3817 or [email protected].

Paul O’Malley is a Senior Partner and Mercer’s Information Product Solutions Business Leader in Asia Pacific. Based in Singapore, he can be reached at +65 6398 2622 or [email protected].

63 64 THE NEED FOR RIGOROUS STRATEGIC WORKFORCE PLANNING IN TODAY’S VOLATILE ENVIRONMENT The almost quotidian reports of high unemployment in many European countries make it difficult for many to comprehend the severity of the long-term talent and skills shortages organisations are facing around the world. But the reality of demographic shifts (not least ageing workforces) and economic and operating pressures (causing recruitment freezes) is combining with increasing competition, accelerating globalisation and technological change to pose a major risk for employers’ future competitiveness. This will become particularly relevant at the point when economies start to pick up again.

So, although current apparent talent surpluses in some segments of the employment market might tempt some to put workforce planning on the back burner, the depth and scale of talent shortages will become starkly obvious as economies recover. If organisations leave it until then to address the shortage, they may find they are too late.

ANTICIPATING TOMORROW’S WORKFORCE CHALLENGES Indeed, there is already ample evidence of this growing workforce challenge. Oil and gas companies are delaying major exploration and production projects at a time of record prices because of a dearth of scientists and engineers. Aerospace companies are unable to meet ramped-up delivery schedules. Rail and transport companies are searching in vain for the next generation of engineers, drivers and maintenance workers. And power companies face five- to 10-year skill development cycles for some critical jobs.

What’s more, the very uncertainty and volatility characterising today’s business environment make the need for rigorous, numbers-driven workforce planning even more urgent. Therefore, strategic workforce planning is more, not less, critical than it has ever been.

65 The key role talent plays in business growth is underscored by this year’s Conference Board research,1 which found that global CEOs’ top two priorities in 2011 were business growth and talent. The top five strategies cited to meet the talent challenge are:

• Improve leadership development programmes and grow talent internally • Enhance the effectiveness of the senior management team • Provide employee training and development • Improve leadership succession planning • Hire more talent in the open market

These imperatives, along with others on the list – investing in automation and technology to improve workforce readiness, and increasing diversity and cross-cultural competencies, for example – are all elements of strategic workforce planning.

Strategic workforce planning or management is the business’s ability to identify, based on the business strategy, the supply of and demand for roles and capabilities, both current and future, and to determine the optimal solution to close identified gaps in workforce quantity, quality, timing and location.

WHAT STRATEGIC WORKFORCE PLANNING INVOLVES IN TODAY’S ENVIRONMENT The growing popularity of strategic workforce planning over the past few years has inevitably led some to dismiss it as the latest management fad. But if we think of it, at the simplest level, as a way of ensuring that you have the right number of employees with the right skills in the right places at the right time in order to execute business strategy, the business case is incontrovertible. And although it might sound obvious, most companies have not been in this position – witness the talent problems cited earlier. To date, the typical approach to workforce planning has been largely short-term and reactive.

It’s even more difficult to get away with this knee-jerk approach these days, given the growing range of contradictions and tough choices organisations face in managing their workforces.

1 The Conference Board CEO Challenge 2011: Fueling Business Growth With Innovation and Talent Development.

66 For example, they may have talent surpluses in some areas and talent shortages in others. They value and seek diversity yet benefit from a single, cohesive culture. They want less hierarchy but place growing emphasis on leadership. The reward pot is depleted, but the need to retain top talent is greater than ever. They emphasise workforce segmentation but need to keep all employees engaged. And although they need greater workforce performance, they have fewer resources to drive it.

MATURITY OF WORKFORCE PLANNING Indeed, given the need to manage these apparently competing interests, you could argue that strategic workforce planning is coming of age.

Workforce planning has evolved through a number of different levels of maturity, and different companies are at different stages of the journey. Traditionally, it was driven by finance and budgets, and amounted, effectively, to budget-driven headcount planning. Then, because of the need to gain clarity around different segments of the workforce in order to understand both internal and external labour market dynamics and workforce mobility and supply, it developed to encompass workforce analytics. It has now become more strategic and developed into the forms of strategic workforce planning and human capital planning.

Figure 1. Maturity Levels of Workforce Planning

Level 4 Human capital planning Strategic planning Level 3 Strategic workforce planning

Level 2 Workforce analytics

Level 1 Budget-driven headcount planning

67 Level 1: Budget-driven headcount planning involves the collection of headcount data, static analysis of that data (cost-based demographics, for example) and static reporting. Early practitioners of this approach were hobbled by the lack of a defined methodology and the lack of tools and technology to help them.

Level 2: Workforce analytics involves collating internal and external labour market data, analysing them and, from that analysis, identifying competency and skills gaps within the workforce. The challenge facing practitioners in this level of maturity is in drawing conclusions from workforce analytics (for example, determining the impact of defined HR policies on employee turnover or productivity).

Level 3: Strategic workforce planning involves having a shared understanding between business leaders and HR of prioritised employee segments, as well as which skills and roles are critical in strategy-based scenario planning.

At level three, organisations should segment employees according to the impact they have on the corporate strategy. So, for example, the “strategic” segment includes roles that drive the strategy, with the aim being to strengthen investment in those roles over time. The “core” and “necessary” segments include roles that support the strategy, with the investment over time being to protect the core roles and to streamline or outsource the necessary ones. And the “misaligned” segment covers roles that are affected by the strategy rather than in any way contributing to it. The investment required here is to redeploy such roles.

THE ROLE OF ANALYTICS IN STRATEGIC WORKFORCE PLANNING As data become more available and refined in organisations, workforce analytics play an ever-more important role in strategic workforce planning. Leading organisations have the ability to analyse their workforce data to understand the drivers of retention, productivity and the total return of their human capital investments.

The Mercer iKnow platform is a next-generation workforce analytics and planning solution that bundles human capital data, strategic consulting services and proprietary technology to enable organisations to make fact-based human capital decisions.

68 The main challenge at this level is to ensure that an appropriate governance of workforce planning processes is in place – organisations typically establish this once the workforce planning and analytics processes are in place.

Level 4: Human capital planning, the most sophisticated level of strategic workforce planning, is the stage where human capital planning is integrated with human capital solutions, where there is a centre of expertise to facilitate and monitor the workforce planning process as well as analytics activities, with a company-wide governance of the process. This includes appropriate and timely involvement of all key players in the organisation: Finance, business leaders, IT and HR. In some organisations, a Centre of Expertise is implemented to manage this process, often in combination with facilitating the human capital and HR strategies of the organisation.

HOW TO ACTUALLY DO WORKFORCE PLANNING Strategic workforce planning helps organisations reconcile some of the inherent contradictions involved in creating and maintaining the workforce they need to grow the business, while at the same time mitigating the risks. The three primary concerns it addresses are quantity, quality and location.

Critical Questions in Workforce Planning Answering critical questions to mitigate risks, while delivering the workforce needed to maintain and grow the business

• How many people do we need to operate – and grow – the business effectively? And how does that break down by business line, function and level? QUANTITY • To what extent does the current workforce profile meet these requirements? How will this profile be affected by future hiring, promotions, transfers, turnover and retirement?

• What are the critical workforce segments? What skills and capabilities are most at risk? Where, and how deep, are the critical gaps? • What new skills and capabilities do we need to support existing and new business products and services? Are there performance or QUALITY productivity thresholds? • How quickly can internal candidates fill these roles? How easily can we find external candidates? Are there alternative sources for the roles and skills that are most critical and in demand?

• In what geographies will these people work? • How do these geographic choices affect product or service delivery LOCATION or cost efficiency? • What are the best locations in which to find future talent?

69 A PROVEN PROCESS FOR SUCCESSFUL STRATEGIC WORKFORCE PLANNING There is a defined process for successful strategic workforce planning, beginning with the setup phase, segueing into strategy setting and preparation followed by workforce analysis, and concluding with the workforce plan. The process is characterised by a series of interviews, workshops, follow-up activities and outcomes, with the main activities, methods and deliverables for each key work step in the process set out upfront. Involving stakeholders from day one will ensure that project outcomes are in line with business leaders’ expectations.

SETUP The overall process starts with a setup phase to define the technical requirements. This covers issues including what the strategic workforce planning process for the organisation will look like, which roles will be involved in the process and how they will be involved. It also involves deciding what tools and templates you need to help you through the process, along with required IT support. You must also determine a realistic implementation time plan.

Next, follow nine steps covering strategy setting and preparation, workforce analysis (supply, demand and gap) and workforce plan (solutions).

STRATEGY SETTING AND PREPARATION 1. Str ategic alignment – What are the main strategic focus areas and objectives of key stakeholders that need to be considered during the workforce planning process? What are the priorities of the business and, therefore, the critical roles? 2. W orkforce structure – What is the current workforce architecture? Which jobs and job groups exist?

WORKFORCE ANALYSIS (SUPPLY, DEMAND AND GAP) 3. W orkforce projection – How will the workforce develop? What potential structural risks will emerge (demography, for example)? 4. External employee markets – What is the external market situation for specific roles in defined geographies? 5. W orkforce demand – What are the workforce demands in the future? What are the drivers of workforce demand (especially for critical roles)? 6. Gap analysis – What are the potential gaps (based on a range of different scenarios)? What risks do the identified gaps pose?

70 WORKFORCE PLAN (SOLUTIONS) 7. Prioritised solutions – What are potential solutions to close the gaps and to mitigate risks? Which solutions have the highest priority? 8. Benefits of defined solutions – What is the business case for the defined solutions outlined? How feasible, costly and risky are the defined solutions, and what is the timeframe for them? 9. W orkforce plan – Which strategic solutions should be pursued in the short, mid and long term?

Figure 2. Strategic Workforce Planning Process

Analysis Solutions I Current and Quantity Quality Location future workforce Recruit

II Develop Criticality of Redeploy roles and skills Turnover/exit Workforce lue Risks asibility III Va

Timing plan

Competency/ Partner/joint venture Fe Cost/invest productivity gaps Insource Strategic setting Strategic IV Outtask/sub-contract Internal/external labour markets Co-/outsource

Typically, the different supply and demand scenarios and resulting gaps as well as related risks identified are summarised in a workforce report. The actionable workforce plan describes prioritised solutions and their positive impact on identified workforce gaps.

Scenario-Based Strategic Workforce Planning Scenarios will reveal not only how to close the gaps, but the related impacts on other human capital dimensions.

Demographics Structure Hot spots Age Shape of the “pyramid” Critical skill gaps

Gender Spans of control Key development areas

Exempt/nonexempt Staffing ratios (e.g. support Redundancies vs production staff) Locations Key locations/markets

Leadership pipeline

71 LESSONS LEARNT Strategic workforce planning is one thing. Successful implementation is another, with its own set of challenges. The good news, however, is that most organisations face similar challenges, and the way they have met these challenges provides valuable lessons for other companies.

Here is a selection of lessons learnt from various cases.

1 Make the process and tools simple and efficient to use.

Establish a common language so that the results can be replicated throughout 2 the organisation.

Develop managerial and HR capabilities at a rate that people feel 3 comfortable with.

4 Develop definitive and consistent data that can be used across the organisation.

Conduct strategic workforce planning not only on a company level, but 5 also on operational levels of the organisation (for example, for departments, business units).

It’s also important to remember the following:

1 The crux of strategic workforce planning is enquiry, not just number crunching.

Companies need both broad directional insights and granular details about 2 their workforces.

3 Strategic workforce planning will ultimately lead to workforce segmentation.

Decisions based on costs alone often end in disappointment, so be cautious 4 about the cost-savings potential.

5 Build strategic workforce planning capabilities over time; don’t do it all at once.

72 STRATEGIC WORKFORCE PLANNING AT ROYAL DUTCH SHELL The following is an excerpt from a Mercer Q&A with Garmt Louw, Executive Vice President, Talent and Development at Royal Dutch Shell.

Mercer: How does strategic workforce planning work at Royal Dutch Shell?

Garmt Louw: Strategic workforce planning drives our resourcing strategy. For each core segment, we look at the resources required to fulfil the business strategy, use workforce analysis to identify what we already have to supply those requirements, and then map those two things against each other to determine a resourcing strategy that is aligned with the business strategy. We then use key performance indicators to drive and monitor our performance.

Mercer: Has your strategic workforce planning always been so well thought out?

GL: Not at all, and we’re still learning to do it better. In the past, our workforce planning had a short-term focus, was based on a short-term business plan and was largely reactive – we often resourced for new business or growth “after the event” year to year. What really sparked us to raise our game were the concerns from senior leaders about the midterm to longer-term resourcing challenges. Our subsequent strategic workforce planning efforts have helped to continue that dialogue, underpinned with clear data and better insights.

Mercer: How different is your approach today?

GL: Now our strategic workforce plan factors in potential business growth or global shifts in business footprints to our resourcing decisions. Based on the respective midterm business strategies, we develop multiple scenarios and multiple probabilities. And we look right across the business to see what professional skills we have, need and are likely to need, hiring both graduates and experienced people. We now have one common global process, schedule and set of tools for workforce planning. That allows us to model forward resourcing requirements, taking into account staff progression and attrition. Our strategic workforce planning allows us to make tangible input into long-term business tables and business plans, so we can be, as the name suggests, much more strategic in our contribution.

Mercer: What sort of typical resourcing scenarios do you model?

GL: Typical resourcing scenarios include the “base case”, which reflects the business plan; a “high case”, which assumes that all known projects go ahead and optimisation projects are brought forward; and the “low case”, which assumes that business growth is minimal. And we model these five to10 years into the future. We also look at things like what would happen to the workforce over the next 15 years if there was no recruitment, and what would happen if we recruited at 10% a year (graduate and experienced hires) – and we do this across all the different job levels.

Mercer: What was the benefit of moving to strategic workforce planning?

GL: Senior leaders feel better informed about strategic resourcing dimensions and it informs their investment priorities, execution risks assessments and decisions around delivery models. Business HR leaders are better positioned to protect medium- to long-term resourcing in the face of shorter-term business cycle pressures. To justify the time and investment for running a workforce planning process in your organisation, you have to ask yourself: would I have done the same (in terms of HR programmes and activities) if we did not have the insights from our strategic workforce planning process? And for us the answer was clearly “no” – strategic workforce planning was a paradigm shift in how we analyse and prioritise workforce topics in our organisation.

73 For more information about strategic workforce planning, visit www.mercer.com/workforceplanning and www.mercer.com/workforceanalytics.

CONTACTS Ephraim Spehrer-Patrick leads Mercer’s Strategic Workforce Planning service segment in EMEA. Based in Frankfurt, he can be reached at +4969 689778 455 or [email protected].

Joan Pennington is a Mercer Principal and leader of Mercer’s Talent Management service segment in Benelux. Based in Amsterdam, she can be contacted at +31 20 431 3992 or [email protected].

Garmt Louw is Executive Vice President Talent and Development at Royal Dutch Shell. He is based in The Hague.

74 75 76 NEW INSIGHTS ON GLOBAL LEADERSHIP DEVELOPMENT At a time when many companies are globalising their markets, many organisations today either lack global leadership talent and a culture of mobility or have failed to build rigorous and standardised performance management systems to assess and deploy their leadership talent across the globe. Thus, global leadership development is, at best, hit or miss.

Organisations that are investing heavily in the processes that effectively groom global leadership talent will have the ultimate competitive advantage. While we know a lot about how to build global leaders, too few companies are applying this knowledge in a disciplined manner. Mercer’s global leadership research, conducted in partnership with Jay Conger, Professor of Leadership at Claremont McKenna College and Visiting Professor at the London Business School, has revealed that a startling number of companies are poorly prepared, and it offered vital information that helped develop a better global leadership capability model. This article describes our research findings.

THE ANATOMY OF A GLOBAL LEADER: THE CORE CAPABILITIES Successful global leaders – those individuals who work across geographic and cultural boundaries and represent 1% to 4% of the overall management talent in an organisation – possess more competencies, skills and abilities than their domestic counterparts. Continually embracing new and ambiguous situations, they thrive on challenges, reflecting openness to new ideas, behaviours and ways of thinking as well as the ability to make mental and behavioural adjustments to suit each national context.

While no universal personality type characterises the global leader, we have identified three separate but complementary clusters of capabilities that every current or aspiring leader must possess in order to lead effectively in a global environment.

Each of the three clusters consists of several capabilities.

77 There are the baseline competencies inherent in the leader’s natural receptivity to cross-cultural experiences. Certain individuals are energised by experiences outside their home culture – they enjoy spending time in new cultures, and they are inclined to experiment with their behaviour to successfully adapt to the demands of a new culture. These baseline competencies acknowledge that unique attributes will motivate individuals to seek out global assignments and learn from them. Known as the global baseline leadership capabilities, these are the foundation requirements for a career in global assignments and include the leader’s catalytic learning capability, sense of adventure, entrepreneurial spirit, and sensitivity and responsiveness to cultural differences. These capabilities reflect the need for global leaders who are not only fast learners, but are also entrepreneurs who can skilfully adapt their styles and mindsets to new worlds.

The second set of competencies, the global leadership skills and knowledge, emphasises the importance of skills and knowledge, including the skills required to lead multicultural teams and to successfully network in a new culture. The knowledge capabilities include cultural literacy and value-added expertise unique to the demands of the organisation’s culture, strategy or best practices. With these capabilities, global leaders are able to build effective working relationships and socialise corporate goals and norms in distant operations.

The third cluster includes the mindset requirements for global leadership roles. It addresses the strategic decision-making side of leadership. A global mindset is necessary to assess the complex and often nuanced information that is presented to decision makers in global environments. This cognitive capability includes the ability to be comfortable with cultural complexity and its contradictions, the ability to perceive opportunities in uncertain markets, and the capacity to think systemically and incorporate an extended time perspective.

78 A STAGE-BASED APPROACH TO GLOBAL LEADERSHIP CAPABILITIES Before the CEO role can be reached in the leadership pipeline model, five important leadership passages must occur.

The first passage is from managing self to managing others – in other words, the transition to a front-line manager. Select individuals who possess attributes such as a catalytic learning capacity, a sense of adventure and an entrepreneurial spirit. Then start the long-term grooming process, assigning junior talent responsibility for global team projects or, at a minimum, membership in them. Also consider short international travel assignments. At this stage, introduce cross-cultural training, assign an experienced mentor and provide 360-degree feedback from team members on the individual’s leadership skills and cross-cultural sensitivity. If the individual has received positive feedback on all areas, consider an overseas assignment for him or her.

The second pipeline passage is from managing others to managing managers. At this stage, global skills and knowledge capabilities are cultivated, and networking competence comes to the forefront. Ideally, the potential global leader will have his or her first significant international assignment, with a duration of two to three years, in a country with strong upside potential for market growth but also a very distinct culture from the individual’s home country. The individual would receive cultural training before the assignment, followed by mentoring, and could juggle both local and global projects.

The third and fourth pipeline passages are from leading managers to leading functional managers and then to leading business managers. These stages demand a more holistic approach and strategic mindset. By the end of these passages, the global leader should have completed international assignments in at least two or three countries and, ideally, in organisations and markets in different stages of maturity.

The fifth passage, from leading business managers to leading business group managers, focuses on a group of businesses, not just one. Individuals must be proficient in evaluating strategies, developing and coaching business managers, creating a portfolio strategy, and correctly assessing the right core capabilities to succeed and have the full complement of global leadership capabilities.

79 HOW DO GLOBAL LEADERS REALLY DEVELOP? As highlighted, there are several ways in which global leaders are developed. Our research shows that expatriate assignments are considered the fast-track path to global leadership development. Multicultural teams provide opportunities to learn about critical differences in national, functional and corporate cultures. Frequent international business travel can also provide opportunities to work with various international office locations and cultures and to gain a global point of view while networking and learning about cultural differences in communications and style. Amongst more conventional training and development methodologies, mentoring by very senior leaders who have already achieved a global leadership position is highly effective to inspire and support emerging global leaders.

BARRIERS TO DEVELOPING GLOBAL LEADERSHIP TALENT There are many reasons so few companies have succeeded at developing a deep bench of global leadership talent – most often, we found that companies had a laissez-faire approach to leadership development, assuming that the “best” talent would quickly learn and perform effectively. Often, the executive team itself lacks international experience and therefore has little appreciation for its value.

Many of the firms interviewed for this research placed little value or reward on global mobility. In some cases, line managers sincerely believed that they would be penalised for taking international assignments, seeing colleagues who moved overseas lose critical visibility and influence with decision makers at the corporate centre, making international assignments seem too risky. Another barrier is that leaders who have deep familial and cultural roots in their home countries may resist expatriation. Despite their high potential for global leadership, relatively few of these professionals are willing to take up the challenges and responsibilities of being a global leader, due to the high personal demands placed on them and the impact on their families. From the organisation’s standpoint, deploying expats is costly. It is usually far more cost effective to promote local talent into leadership roles in many of the company’s global operations. Finally, even though many organisations tout the importance of global leaders, we found that companies failed to integrate the concept into their talent management systems.

80 DETERMINING GLOBAL LEADERSHIP POTENTIAL Assessing global leadership potential within an organisation can be challenging. It is very easy to mistake native leadership potential for global leadership potential, and assessors sometimes lack the knowledge of what constitutes effective global leadership. Variations in standards and practices across a company’s geographic operations also complicate the assessment process.

Our recommendations for identifying candidate potential include the following:

••Assess a candidate’s motivation to lead in cross-cultural contexts and his or her depth of interest in other cultures, adaptability to new environments and desire for international assignments.

••Use the previously discussed global leadership competency model as a foundational framework for assessing global leadership potential. For example, catalytic learning capability, entrepreneurial spirit, cultural literacy, extended time perspective and other factors can be assessed using empirically validated measurement instruments.

••Measure the candidate’s readiness and potential by obtaining 360-degree feedback (for example, from supervisors, peers and subordinates). Such multisource data collection would help ensure reliability and identify the qualities needed for success.

••Give appropriate weight to the various capabilities while making selection decisions for different leadership positions. For example, if the leadership position involves leading a group of businesses, the global mindset capability should receive more weight in the determination of potential. However, if the leadership position requires extensive work with peers and important external stakeholders, then sophisticated networking competency may warrant greater weight.

81 HOW TO GET STARTED AT BUILDING YOUR GLOBAL LEADERSHIP POOL Start building your global leadership pool by persuading management that the organisation needs to focus on a global talent pool, and make this a priority for HR and the CEO in particular – use projected growth rates for global markets and supply chains and highlight critical gaps in the leadership talent for critical and emerging markets.

Acknowledge that you need a distinct global leadership capability framework that recognises the baseline requirements for leading globally, as well as the unique demands of your organisation, its culture and industry:

••Institute mandatory cross-cultural training before individuals begin their international assignments.

••Start a simple mentoring programme globally for those being groomed for these assignments.

••Set up career and development plans so that managers can express an interest in overseas assignments and apply for them.

••Identify a high-potential global talent pool.

••Think about the full complement of assignments for development, from multiyear overseas assignments to short-term in-country projects to global team projects.

••Carefully categorise your overseas roles using a “stepping stone” developmental framework.

••Build standardised and rigorous performance management and talent management systems that are global.

The process for developing this framework requires an unrelenting commitment supported by rigorous and integrated talent management practices.

82 A LOOK AT BEST PRACTICES Organisations that have successfully groomed global leaders tend to have in place certain best practices. If your organisation is new to developing global leadership talent, you must centralise your global leadership talent initiatives and put them under a separate corporate HR function.

It is important to establish a high-potential talent pool for global leadership roles. Start small and ensure that the talent cascades down to director levels – successful companies cultivate global leadership capability early in a manager’s career. Identify jobs that are the most appropriate grooming opportunities for global leadership.

Open job postings are an important best practice, especially at junior levels, giving employees the opportunity to identify themselves as candidates for open global leadership positions. However, high-potential identification processes should also supplement open postings.

To ensure a successful onboarding experience into global leadership roles, establishing a programme of host-country mentors is a common best practice. The mentors must be well-established within the host country, possess a coaching capability and not be the expat’s direct supervisor. Training investments in building mentorship skills are required to make the programme effective, given that a mentor’s mindset and abilities are not to be taken for granted, especially amongst most EMEA senior leaders.

Also helpful is cross-cultural training specific to the country or region to which the individual is being assigned, as is addressing the family side of the expat global leader – identifying opportunities for spouses to find work, if they so desire, and providing information on schooling, daycare and integration into the community to prepare the family for the challenges they will face in a move to a new country.

Although somewhat rare, the administration of a 360-degree feedback survey – ideally, in the first three to six months – is a best practice for global leaders. The data will help quickly assess the areas in which individuals need to adapt their leadership approach to the new environment.

83 At the executive level, it is also important to reinforce the importance of global leadership through your executive education programmes. Finally, your CEO and his or her executive team must reinforce the importance of a global leadership capacity through active involvement in the identification and reviews of the global leadership talent pools. In all of our best practice firms, the senior team was highly committed on multiple fronts to the critical role of global leadership talent.

MOST EMPLOYERS IN EUROPE LACK A STRATEGY FOR DEVELOPING WOMEN AS LEADERS, MERCER SURVEY SHOWS Gender diversity is a hot topic in Europe at the European Union (EU) level but also at various European country levels. It is obvious that there is a decrease in the number of women climbing up the career ladder. As a matter of fact, at entry level, our research showed the gender split clearly balanced at a 50–50 ratio, but when it comes to reaching executive/board-level positions, the numbers are clearly below the European Commission recommendation of 20%. For example, in the Financial Times and the London Stock Exchange top 100 companies, we can only find 11% female executive/board-level leaders, and in the German DAX 30 companies, only 2.2% are female executive/board-level leaders, whereas the US Fortune 500 companies have 15% female executive/board-level leaders. Currently, there is considerable controversy over mandatory versus voluntary quotas for women in executive positions. The EU plus more and more country governments are contemplating mandatory quotas to ensure change. Interestingly enough, most women themselves are against mandatory quotas.

Although global organisations strongly believe in the value of gender diversity in leadership, women represent less than 14% of corporate executives at top publicly traded companies around the world, while they make up 40% of the global workforce, according to Pipeline’s Broken Promise, a recent report by the research group Catalyst. The report also underscores how, starting from their first job placement, women lag behind men in career advancement and compensation, and pay a higher penalty for pursuing a nontraditional career pathway – trends that imperil the leadership pipeline for women.

84 Gender diversity must be viewed as an economic human capital issue and not a feminist topic. Surveys conducted before and after the crisis show that diverse leadership has a positive impact on business performance. Nevertheless, despite efforts made by organisations in Europe to achieve a diverse workforce, 67% of them lack a clearly defined strategy or philosophy for the development of women for leadership roles, according to the Women’s Leadership Development Survey, conducted by Mercer in conjunction with Talent Management and Diversity Executive magazines in December 2010.1 Furthermore, more than two-fifths (41%) of employers do not offer any activities or programmes targeted to the development needs of women leaders.

When asked about the types of programmes currently offered that are specifically targeted to the needs of women leaders, employers listed flexible work arrangements, mentoring, coaching and diversity sourcing/recruiting. Additionally, organisations were most concerned about having enough women in the leadership pipeline (30%), followed by retaining women once they reach leadership levels and having work/life balance that attracts and retains women (both at 23%).

Work/life balance 1 Lack of executive sponsor 2 Willingness to relocate 3 Limited social network and connections 4 Lack of confidence 5

According to the 450 survey respondents from Europe, the top five factors preventing women in their organisations’ leadership talent pools from advancing to the next level are work/life balance, lack of an executive sponsor, willingness to relocate, limited social network and connections, and lack of confidence.

1 The survey received responses from more than 1,800 human resource, talent management and diversity leaders worldwide.

85 For more than 50% of respondents, the difficulty for women to handle work/life balance comes first. This is, of course, related to maternity and the fact that women are still playing the major role in family activities in Europe. Lack of executive sponsor (43%) comes second as an obstacle for growing women in leadership, but this actually has a triple reading: first, it refers simply to the basic lack of support from leadership; second, to the gap between what many respondents call “lip service” from executives and what they actually do when it comes to staffing leadership positions; and third, to some mechanical inertia from the past, as there are more men in the existing high-potential and leadership pipelines as well as in the social networks.

Lack of willingness to relocate (27%) comes third, and it is of course related to the “family” and the “dual career” limitations, followed by insufficient network for women and lack of confidence. This fifth factor is of particular interest, on the one hand because only European survey respondents indicated it among the top five barriers and on the other because of the different cultural nature of this factor, which is about how women are perceived and – more importantly – how women perceive themselves with regard to what it takes to be a leader. Also related to this point, many of the survey respondents challenge the way the leadership competency models are defined and suggest that there might be a “male bias” in those descriptions.

Survey respondents also reported that women in their organisations believe the employer provides only moderate (39%) or minimal (27%) support for women leaders – only 7% said women perceived the organisational support to be strong. Many companies do offer virtual training, peer coaching, intercultural programmes or business simulations, and those that provide real opportunities and recognition will likely be the ones that keep the talent.

Mercer’s recommendations regarding women’s leadership development are as follows:

••“Walk the talk; it’s time for action” – Measurable progress – Diversity-balanced career opportunities/promotions

••“Make a deal with reality” – Promote work/life balance – Provide flexible work arrangements

••“Challenge the existing leadership model” – New profiles, skills and competencies – Integrated leadership development programmes

86 Organisations in Europe should set realistic expectations to ensure adoption and full deployment of their diversity initiatives. The challenge of women’s development should be set in the wider frame of the need for a comprehensive leadership strategy leveraging diversity. Leadership succession and development is ranked number one in all executive surveys as the top concern for the next three to five years. It’s not just a matter of facing the demographic shifts from a quantitative point of view, filling the gaps with emerging majorities, such as women, Generation Y, etc.; it’s also about shaping leadership profiles and related development tools targeting the (new) needed to be effective in the slow-growth, globalised world emerging after the financial crisis and coping with the eurozone debt crisis.

More information on these topics, including the full reports of Mercer’s research on global leadership and women’s leadership development, can be found at www.mercer.com/leadership.

ABOUT THE AUTHORS Renato Dorrucci is Mercer’s Talent Management Service Segment Leader in EMEA. Based in Rome, he can be reached at +3902 7241 31 or [email protected].

Dagmar Wilbs is Mercer’s Human Capital Business Leader in Germany, Switzerland and Austria. Based in Frankfurt, she can be contacted at +4969 689778458 or [email protected].

Eric Sarrazin is Mercer’s Talent Management expert in France. Based in Paris, he can be reached at +331 55 21 36 28 or [email protected].

Sue Filmer is a Mercer Principal and Talent Management consultant in the UK. Based in London, she can be contacted at +44 20 7178 5546 or [email protected].

87 88 CHANGING TRENDS IN TALENT MANAGEMENT: WHAT WILL MAKE THE DIFFERENCE IN THE DECADE 2010–2020? This article is the English version of a thought leadership piece published in the March/April 2011 edition of the Italian publication Sviluppo & Organizzazione by Renato Boccalari, Mercer Tesi’s Career Management & Role Development Practice Leader in Italy. Renato identifies changing trends in talent management practices over the first decade of the millennium and explores how they can offer competitive advantage in the war for talent.

Based on Mercer’s international research and some pioneering work being done by a number of multinational organisations operating in Italy, we have identified several trends in talent management that have emerged as companies deal with major shifts in the current and future business environment.

TALENT AND THE BUSINESS Talent management will be increasingly higher on leaders’ and managers’ agendas over the next 10 years. Leading organisations are already working on aligning their people and talent strategies to their evolving business strategies, as they understand that only a truly business-oriented talent management roadmap will generate tangible value and competitive differentiation for the firm (see Figure 1).

Figure 1: Business-Oriented Talent Management Roadmap

BUSINESS Outstanding Business performance strategy Talent management process and competitive leadership 2 3 4

Segmentation How to How to How to identify develop motivate

Value 1 External 5 recruiting results Leadership Tailored Internal pipeline rewarding Tailored scouting development and focused value propositions Di erentiation by strategic segments

• Attraction Human capital • Engagement and talent • Development strategies • Retention HUMAN CAPITAL

89 The work we carried out in recent years with many multinational firms operating in Italy has shown that an effective talent management process can offer concrete value to all business stakeholders, if it is inspired by and based on these three principles:

• Linkage with the business throughout the process. The end-to-end linkage with the business starts with the alignment of business to human capital and talent strategies by defining “talent” from a business perspective, and this is already current practice in numerous organisations. Embedding talent selection, development and engagement activities in ongoing business tactics and operations is something that pioneering organisations are now doing with proven results. The other end of the talent management process links back to the people and business strategies through thorough measurement of human capital key performance indicators for attraction, development, retention and engagement, as well as measurement of business performance.

• Strong involvement of line managers in every phase of the process. Business-oriented talent management requires the direct involvement of line managers in each and every phase of the talent management process, from talent definition based on key business success factors to talent assessment and development by challenging talent in the operations field of the business. This is instrumental to the success of human capital and talent strategies, as it guarantees increased managerial commitment and high return on talent investments.

• Participative and transparent approach following the principles of “democracy” and meritocracy of talent. There should be no barriers when it comes to talent scouting and recognition. Talent selection should be open to all employees at an organisation, regardless of level, role, age, gender or geography. The more an organisation views and manages its talent as an “open club” that can be joined and not as an exclusive “aristocratic” circle, the broader the motivational impact of talent management will be within the organisation.

90 MAJOR SHIFTS IN THE WORLDWIDE BUSINESS ENVIRONMENT There is no doubt that we live in a world currently governed by three macro trends:

• Digitisation and exponential acceleration of technological change • Further globalisation of the economy • Economic downturn with structural impacts

Each of these three macro trends is responsible for a series of changes that we have noticed in the talent management practices of leading multinational organisations operating in Italy, and we have identified 10 change drivers that have a clear impact on talent management:

1. T oday, a multitude of key success factors are responsible for global competitiveness. 2. Ther e is an increasing need to focus on core business and distinctiveness. 3. Because of talent shortages, there is an imperative need for enlarging the talent market. 4. Busines s processes are increasingly knowledge-intensive. 5. Industries are increasingly digital and technology lifecycles are shorter and faster. 6. Firms focus more than ever before on differentiation and innovation to achieve competitive advantage. 7. W eb-based social media and networking are expanding. 8. Or ganisational structures are flatter (less hierarchical) but more multidimensional. 9. W e are witnessing increasing globalisation of markets and business strategies. 10. Due to the economic downturn, firms have limited financial resources to reward and motivate talent.

By matching these change drivers with the key phases of the business-oriented talent management process depicted in Figure 1, we have tried to understand their combined impact on talent management practices and systems, and by observing them during several pilot projects and real case examples from various multinational firms, we have identified 10 specific trends driving the way talent will be segmented, selected, developed, rewarded and engaged in the future (see Figure 2).

91 Figure 2: Change Drivers and Their Impact on Talent Management

Talent Impact on talent management Change drivers management roadmap Multiple shifts in talent management practices and systems Multitude of key success From mono-dimensional segmentation factors that have to be focused on managerial high potential Segmentation managed as source of global to talent-portfolio approach to segmentation competitiveness of key talent Increasing need to focus From traditional off-the-job hiring processes on core business and on to talent scouting and testing in the operations distinctiveness field of the business Talent shortage and need for Recruiting From talent scouting and development “talent market” enlargement of selected high-potential individuals to broadening talent identification to entire population in a firm Business processes becoming From HR-driven development processes increasingly “brain/know- to line manager involvement in talent how” knowledge-intensive development as part of the business Increasingly digital economy From long sequential development processes and increasing speed of to fast, simultaneous, business-integrated technology lifecycle Leadership development and learning processes Competitive strategies more development From traditional managerial training processes focused on differentiation and to action-oriented learning processes directly innovation related to business innovation Expanding web-based social From traditional classroom training media and networking to e-learning and web-based professional networking and knowledge sharing Organisational structures From vertical career development becoming multidimensional to mobility and development based on but flatter (vs. hierarchical) Career diversification of experiences Increasing globalisation development From career development within domestic of markets and corporate borders to international career development and strategies access of local talent to positions abroad Economic downturn and From monetary and tangible rewarding lack of financial resources to to intangible and flexible rewarding, and Rewarding motivate and retain talent engagement through stretched assignments and professional development opportunities

STRATEGIC TALENT SEGMENTATION In order to develop the professional and motivational profile of key talent for an organisation, the firm first needs to identify what type of talent is needed. Once you have determined the types of talent needed in the overall “talent portfolio”, you can then create tailored value propositions for each profile. The shift here is from a monolithic approach to talent to a “portfolio” approach. This is a natural reflection of the complexity of global firms, of their multidimensional organisational matrixes and key success factors.

An example of this trend is represented by the three types of talent segmentation represented in Figures 3A, 3B and 3C, which characterise the evolution from the 1980s to today. Notably, there is a transition from one-dimensional segmentation focusing only

92 on managerial high potential to a talent-portfolio segmentation approach, which identifies both high potentials and know-how holders based on managerial and professional competencies alike, and finally – as shown in Figure 3C – to a new segmentation model, which focuses on soft, intangible factors such as engagement.

Figure 3A: Potential – Performance Matrix

Question A mark Star

Well M placed POTENTIAL

High B Critical performer

B M A

PERFORMANCE

Figure 3B: Managerial Competencies – Professional Competencies Matrix

HIGH GROWING Build POTENTIAL AND RESOURCES conditions and COMPETENCIES To invest in competence Quick career A development for the development/ “To develop” in the role development of immediate “To employ” the career

WELL PLACED • Pay for (job holder) Give training perform- • Diversify for the ances and • Use in M development competencies other roles “To maintain” in the role • Development (mobility) for opportunity

• Keep in the KEY CRITICAL KNOW-HOW RESOURCES • Keep in company MANAGERIAL COMPETENCIES HOLDER Reallocate the role • Pay for B or bring out • Pay for perform- “To reallocate” perform- ances and “To retain” ances competencies B M A

PROFESSIONAL COMPETENCIES

93 Figure 3C: Leadership – Professional Competencies – Engagement Matrix

ENGAGEMENT A High Medium M Low LEADERSHIP

B M A

PROFESSIONAL COMPETENCIES

IDENTIFYING AND RECRUITING TALENT A key issue for employers is the shortage of talent, both qualitatively and quantitatively. With the baby boomers ageing and eventually leaving the workforce, businesses will be left with a younger but less experienced employee population – and this could represent a real problem for businesses. This will likely lead to a radical shift from the practice of recruiting young talent from outside the organisation to that of searching for and building talent inside the business itself. An example of innovative internal talent recruitment is offered by a leading diagnostics systems firm, which has introduced a talent scouting programme. The intent of such “democratic” activities is motivational, as the message behind them reaches and engages the entire workforce.

Leading organisations are also reconsidering the value propositions to their 50- and 60-year-old populations. These firms question current practices that encourage older employees to retire, as they realise the essential role this generation has to play in preserving and transferring the core know-how of the organisation to the younger generations.

Overall, the same programmes aimed at hiring young talent from the market will start to be carried out with new and more business- specific selection methodologies, based on testing talent in the field through real-life experiences, challenges and projects that focus on specific business tasks.

94 LEADERSHIP PIPELINE DEVELOPMENT The results of a Mercer study conducted in 2010, The Future of Talent Management Survey, indicate that the top five talent management priorities over the next three to five years will be leadership succession, leadership training/development, key talent/high-potential identification, performance management and succession planning.

This survey and other international studies also highlight how the economic downturn is changing the leadership paradigm. The profile of the leaders of tomorrow now encompasses such competencies as resilience, self-engagement, positive outlook, multicultural sensitivity and the capability to deal with organisational ambiguity, paradoxes and complexity. These leadership competencies are particularly vital for organisations to successfully navigate in a slow-growth economy, and the competencies may have differed if the current scenario were one of continuous economic growth.

The increasing focus on core business combined with the hastening of business lifecycles will lead to programmes that develop future leaders through a blend of self-awareness work that explores deep behavioural competencies and action learning in alignment with business timetable and objectives, as shown in Figure 4.

Figure 4: Integrated Path of Leadership Development

Leadership Action Assessment role learning programme programme

Creating Linking/ Learning awareness applying

360˚ Leadership Peer multireviewer lab coaching feedback programme programme

95 Fast innovation combined with the new technologies will radically modify the learning processes and will offer multiple opportunities for virtual networking and remote knowledge sharing. Managerial training is also changing, as it is multiplying its learning channels. Traditional classroom training methodologies are being integrated with e-learning and multimedia tools, while collective learning tools are merging with individual personalised learning tools (see example in Figure 5).

Figure 5: Multimedia Approach to Managerial Training at Leading Italian Organisation in the Beverage Industry

In the classroom

Case Role play history

Method- ology Consulting CLASSROOM Before every seminar 3 days After every seminar

Access to multimedia • E-learning to learning room for: deepen matter • Training trailer • Didactic material Trailer/ﬁction • Pre-work • Forum/social as training support • Preliminary training network • Introduction • Multimedia library reading/video ONLINE/MULTIMEDIA

MOTIVATING AND REWARDING The key word in the coming years will continue to be “engagement”, and we will see shifts in what keeps employees motivated and engaged. At a time when companies are seeking higher quality at a lower cost and are asking people to work more for the same or less pay, employers will need to use different tactics to reward employees. According to the results of Mercer’s recent What’s Working™ survey, employees are happy with their jobs when the job is interesting and challenging, when they are treated with respect, when they work in an attractive and stimulating environment, and when they are inspired by their leadership.

96 As such, performance management will have to become a truly merit-based tool that will enable pay for performance. Performance management systems will be changing in three areas. First, objective setting for individuals will no longer be undifferentiated, but will be commensurate with the potential of each individual to contribute to business success. The achievement of objectives will therefore be rewarded in a more tailored fashion. Second, the performance will be linked more to individual development, so the line manager will be involved in the prospective assessment of resources and will propose opportunities that correspond to the potential and interest of each individual. Finally, the process will be driven more and more by the individual. The employee will direct his or her own career progression through more self-learning and development through new web- based technologies, as the classical development through top-down cascading of knowledge will no longer be able to keep up with the pace of changes.

MEASURING BOTH BUSINESS AND HUMAN CAPITAL RESULTS The growing need for informed investment decisions will lead to more evidence-based approaches to strategic human capital management and will require more structured quantitative and qualitative analyses to understand business scenarios, organisational capabilities gaps, and internal and external labour market dynamics. External market changes will demand improved workforce and talent planning based on more precise forecasts.

One common way to measure the impact on business of talent management interventions will be to assess and develop key talent by testing their skills in specific business environments. This approach measures both human capital and business performance. Talent scouting and career-building methodologies, such as action learning and project work, will make the relationship between individual, collective and organisational learning even stronger. At any rate, this evolution implies that HR professionals will partner with line managers to measure the qualitative aspects, such as competencies and behaviours, as well as their impact on business results.

ABOUT THE AUTHOR Renato Boccalari is a Mercer Tesi Human Capital Principal and Leader of the Career Management & Role Development practice in Italy. Based in Milan, he can be reached at +39 02 724131 or [email protected].

97 98 PEOPLE MANAGEMENT IN THE MIDDLE EAST AND NORTH AFRICA: WHAT HAS CHANGED AFTER THE CRISIS AND THE ‘ARAB SPRING’ AN INTERVIEW WITH MERCER EXPERTS IN DUBAI In this interview, Larisa Muravska, Mercer Partner and Human Capital Business Leader in the Middle East, and Tom O’Byrne, Mercer Principal Head of Market Development efforts in this region, share their views on people management developments in the Middle East and North Africa (MENA).

Q: Generally speaking, what was the impact of the global economic downturn and of the “Arab Spring”1 on economies in MENA? What do you expect to see with respect to the economy in 2012?

Larisa Muravska: Broadly, economic activity across the MENA region has been solid in some areas, but confidence and optimism have been buffeted by pockets of social unrest in Libya, Tunisia, Yemen, Jordan, Bahrain, Kuwait, Syria and beyond. This has been a unique period in the Middle East in the modern era. Each country has had its own experience. Some have changed leaders and political structures, some are still experiencing periods of intense civil unrest, and others have used the events to reinforce or introduce a range of economic, political, social and/or fiscal reforms. As a result, the past year’s turmoil has introduced an element of uncertainty and caution across the region.

Tom O’Byrne: In some areas, such as the Arabian Gulf, we have seen continually high prices for oil and gas, which have contributed to the economies of oil exporters, and we have also seen continued strong public-sector spending programmes. In terms of 2011 economic performance, a recent report from the International Monetary Fund2 differentiates between oil exporters (whose economies grew by 5%–7%) and oil importers (whose economies grew by closer to 2%).

1 The “Arab Spring” refers to the series of demonstrations and protests occurring in the Arab world that commenced on 18 December 2010 and developed throughout 2011. Revolutions occurred in Tunisia and Egypt; a civil war erupted in Libya, resulting in the fall of its regime; civil uprisings occurred in Bahrain, Syria and Yemen; major protests were held in Algeria, Iraq, Jordan, Morocco and Oman; and minor protests were held in Kuwait, Lebanon, Mauritania, Saudi Arabia, Sudan and Western Sahara. 2 International Monetary Fund. Middle East and Central Asia Regional Economic Outlook, October 2011.

99 Looking forward, the MENA market uncertainty continues to be affected by outward-facing firms watching – or, in some cases, feeling – the impact of the European crisis and economic activity in the United States. This is particularly relevant for multinational firms headquartered in Europe or the US with operations in the MENA region, or local and regional firms whose business models depend on European or US-specific trade or services.

It is unlikely that 2012 will bring about any short-term turnaround in mood or economic performance in this region in general, although, as always, there will be pockets of prosperity. For example, Mercer’s latest Total Remuneration Survey (TRS) results for Saudi Arabia, the United Arab Emirates and Qatar (three of the largest oil- and gas-exporting economies) predict 2012 salary increases of between 5% and 6% for workers in these regions, although this will most likely be an exception.

Q: What are some of the key human capital challenges facing organisations in the MENA region today? Were any of these challenges affected – either positively or negatively – by the economic downturn?

LM: It is important to understand that the MENA region is a kaleidoscope of more than two dozen countries, economies and organizations – all with equally diverse business strategies, growth opportunities and human capital challenges. At its broadest, the region’s biggest human capital challenge has economic, social and political components: creating the necessary conditions and opportunities to create sustainable employment for a vast population ages 15 to 30. Hence, for some countries, the issue is job creation and economic growth and development. For others (like the Gulf economies), the challenge involves improving human capital engagement and productivity within an organisational framework.

TOB: At a practical level, this means having the right organisational structures and processes in place to maximise efficiency and business performance; having the right mix of talent in the right roles and performing the right tasks to help organisations grow or compete; and having the right mix of talent and reward mechanisms in place to attract, develop, engage and retain the highest calibre of talent possible. The downturn has heightened the focus on performance and reward. The uncertainty has produced a huge new regional talent pool of individuals looking for opportunity, stability and certainty. And organisations are grappling with the challenge of keeping their existing best employees engaged at a time when competition for talent is beginning to re-emerge.

100 Q: How do human capital challenges compare for companies in the Middle East versus foreign companies with operations in the region? What should international organisations that are expanding into or operating in the Middle East be aware of?

LM: While talent challenges are broadly similar for local and multinational firms alike, each group has its own unique challenges. Results of Mercer’s TRS across a number of Gulf markets show that the compensation gap between the two groups can be significant. For example, in remuneration practices amongst local and regional firms, guaranteed cash allowances can outstrip those paid by multinational firms by 20%–40% at times, even though in some markets base salary components might not be too far apart. This can be explained by the fact that local companies employ a higher proportion of nationals who usually receive more generous allowances and benefits.

TOB: At the same time, increasing national employee engagement and skills and helping workers grow in their careers is a priority for many companies.

At a wider level, human capital challenges amongst regional and local firms tend to be in line with organisations that are in growth, start-up or transitional stages – that is, nascent organisational structures, with business shifts and priorities being dominant and HR still being somewhat transactional and reactionary in nature. Even though the pendulum has moved considerably in the past decade, HR still struggles to have a consistent seat at the leadership table, although the more progressive organisations are showing considerable change and agility in this area.

Q: What trends have you seen regarding the global or regional expansion of companies from the Middle East? How does this affect their human capital challenges?

LM: Middle East companies wanting to expand beyond their local or regional borders have historically adopted a range of practices broadly in line with their counterparts elsewhere. In some sectors (for example, oil and gas, telecommunications and financial services, amongst others), there is a tendency to make strategic mergers and acquisitions (M&A) to ensure rapid positioning in a new market with the talent, market share and business potential to expand rapidly. For others (for example, transport, logistics and resource exploration), the opportunity lies more in first-mover advantage, making strategic bets on the opportunities of an emerging – or even frontier – market to buttress or balance business performance. Especially in these

101 times of global uncertainty, organisations that are underpinned by resource-rich economies and with access to capital and solid cash flows are not averse to moving into mature markets in Europe, North America and Asia and are buying assets that can rapidly add to economies of scale or market presence (such as real estate, construc- tion and manufacturing).

TOB: The human capital challenges this acquisitive approach can present are the same for all: understanding and then maximising the value of the deal at all levels, ensuring knowledge retention and transfer where most appropriate, and marshalling talent in every way possible in the new, expanded organisation. At the other end, Middle East firms keen on expansion are looking to answer questions around formalising and enhancing their policies, competency frameworks and career paths that facilitate talent mobility, especially if the firms are local and there is reluctance amongst some employees to move away from the headquarters.

Q: How are Middle Eastern companies addressing today’s human capital challenges? What actions are they taking? What are the obvious trends in the Gulf Cooperation Council (GCC)? Are their HR functions up to the task?

LM: At a government level, debate around one distinct human capital trend in the GCC continues, and is worth noting. At a structural and national policy level, each of the GCC states (Oman, Saudi Arabia, Kuwait, Bahrain, United Arab Emirates and Qatar) has in place a clear strategic vision that, in part, places great emphasis on the development of its national (that is, local) human capital. The dilemma is that historically, much of the local national workforces in each of these countries has opted to work in the government or semi-government sector – for a range of cultural, work/life balance and compensation reasons.

TOB: The challenge, in time, will be to entice those in – or attracted to – the public sector to join the private sector, where job opportunities, employment growth, and professional and personal development opportunities will be far more prevalent. In part, this is being tackled by requirements for all employers to employ local nationals (some using quotas and others using preferred sectors or roles) in their workforces. At a broader level, however, it has spawned efforts around workforce planning, career path development, succession planning, leadership assessment and development, and graduate intake and graduate development programmes targeted specifically at this pool of talent.

102 In the private sector, the challenge continues to be ensuring that HR is equipped with the requisite skills, structural authority and business responsibility to become an effective partner and enabler towards improved business performance. Mercer studies in 2010 show that while the level of acceptance and professionalism towards and shown by HR has shifted considerably, impediments remain. These are dominated by concerns from the business side that HR lacks sufficient business knowledge to be an effective partner. Increasingly, however, some progressive organisations are using HR to drive transformation (for example, strategy reviews, M&A, realignment and business repositioning). In 2011, the key issues have been around engagement and performance effectiveness, and these are likely to energise HR departments well into 2012.

Q: What should organisations in the Middle East do differently if they want to be successful in managing human capital over the next few years?

LM: Organisations can take three steps to better ensure that their people and business strategies are aligned.

First, identify what drives employees to want to come to work and want to continue to stay at work and contribute effectively to business goals. Only when business and HR leaders know what engages their employees to outperform can the right structures, processes, programmes and people be put in place to maximise the return on the heavy investment that companies make on talent.

Second, understand the extent to which the various elements of their “people strategy” are aligned with the business strategy, how to right the things that are wrong, and what to do to ensure that the right things continue to be the right things. This involves a deep investment of time and effort to see the people dimensions – present and future – of an organisation’s business strategy and planning. It also requires a systematic approach to designing and developing a roadmap of the elements that are needed to fill in the gaps, as well as an execution strategy and review programme to make sure the work needed gets done correctly.

103 Third, develop a better sense of how to see, value and measure the ROI from people. This means a more sophisticated approach – with clear performance metrics – is needed for every step in the employee lifecycle, from competency-based recruitment and professional development through to clear roles and responsibilities with transparent performance objectives and reward mechanisms, and to consistency around leadership styles, expectations and behaviours. Only when HR has the tools and skills to help the business understand how to see, value and measure the employment ROI can the true value to an organisation of its human capital be realised.

ABOUT THE AUTHORS Larisa Muravska is a Mercer Partner and Leader of the Human Capital business in the Middle East. Based in Dubai, she can be contacted at +971 4 327 8700 or [email protected].

Tom O’Byrne is a Mercer Principal and Head of Market Development in the Middle East. Based in Dubai, he can be reached at +971 4 327 8700 or tom.o’[email protected].

104 105 106 OPTIMISING HUMAN CAPITAL INVESTMENTS: ANALYSIS-BASED INSIGHTS TO ADDRESS IMPERATIVES FOR CHANGE AT OECD This article was developed based on a presentation delivered at Mercer’s EMEA Compensation & Benefits Conference, held on 6–7 October 2011 in Lisbon, by Brian Levine, Human Capital Strategy Consultant at Mercer, and Makoto Miyasako, Head of the Strategy and Business Analysis Group, HR Management, at the Organisation for Economic Co-operation and Development (OECD).

There has been a clear evolution over the past few years in how organisations inform their human capital decisions. They have been shifting focus from the use of market data to benchmark pay “rates” and practices to analysing robust, organisation-level data maintained in the human resources information system (HRIS) and supporting systems to understand the drivers of key workforce outcomes. Through application of statistical models to such data, organisations can obtain strategic insights on human capital priorities. The objectives of such workforce analytics are refining people strategy and optimising organisational performance.

ABOUT THE OECD The OECD is “an international public organisation” financed and governed by its 34 member countries. Its primary activities are to provide research and advice on social policies, and its workforce consists largely of economists, statisticians and specialised policy analysts. Its structure mirrors the national administrations it represents: it has 2,800 staff, half in professional and half in support roles. Located in Paris, its employees are, in principle, recruited from 34 member nationals. Around 35% of its employees are French, 11% British and 9% American.

THE ENVIRONMENT AND IMPLICATIONS FOR THE OECD Significant macro-economic and social changes are now calling for the reform of HR policies and practices. A primary change is the shift in global economic power, reflected in the expansion of the old G7 – the “club of rich countries” – into the G20. Interests of the member countries have broadened. Also, the funding model has become more unpredictable. Today, governments are much more demanding and an increasing amount of funding comes with specific projects attached – and it can be difficult to anticipate what those

107 projects might be. The main policy work of the OECD has become, necessarily, more multidisciplinary, which means that the organisation has to work in a more holistic and integrated manner than it has in the past.

Adapting to these changes carries implications for the organisation’s human capital strategy. Essentially, it needs to complement its specialists with generalists, those with a broader perspective; it has to use its financial and human resources more effectively to meet changing needs; and it needs to act in a more coherent fashion in its human capital management rather than in a decentralised manner.

The HR team moved to address these imperatives through an analytic assessment designed to find out how people were moving up, through and around the organisation, what kinds of movements led to success and might be exploited to generate the right kind of expertise, and how the organisation could capitalise on that knowledge to meet the challenges ahead. Given the organisation’s analytic “product” and highly technical leadership, an analytic approach would make the most effective business case for change.

THE VALUE OF RICH ANALYSIS For a professional services firm trying to temper increasing turnover amongst high performers, statistical analysis provided some important insights.

Examination of the drivers of pay revealed significant value in advancement (that is, the pay increase associated with a promotion) as well as significant value associated with an employee’s performance. But those apparent alignments masked a significant concern, revealed when a more holistic examination of workforce dynamics was undertaken.

An analysis of turnover showed that the organisation was more at risk of losing not only its highest performers, but also those who received higher pay increases and long-term incentive awards. Increasing apparent randomness in the allocation of ratings, under a fixed distribution, was the culprit, as supervisors sought to distribute a limited number of high ratings across their critical employees over time; employees chose to leave after receiving high ratings and/or high payouts that were unlikely to be achieved in the next year.

The turnover analysis did, however, reinforce the effectiveness of the career trajectory – that is, through the impact on retention of both base pay growth and promotions.

The organisation sought to more thoroughly communicate and leverage the value of career and to improve the validity/implementation of its performance management system.

108 COMPARISON TO THE FRENCH MARKET A comparison between pay norms in France and patterns at the OECD revealed some interesting differences that pointed to priorities for change. First, though those changing roles are generally less well-paid relative to their new peers, the difference in pay at the OECD for those making such changes was reflective of a more modest pace of pay progression than what is generally seen in other French organisations. Career incentives at the OECD, and the related ability to engage employees through those incentives to commit to the organisation and excel, appeared to be relatively weak. Second, the impact of above-average performance on pay was weaker than what was seen elsewhere; the value proposition to high performers needed to be examined.

RESULTS OF DEEPER ANALYSIS The organisation employs broadly two types of labour: “A grade” specialist staff – policy analysts and economists, who are recruited internationally – and “B grade” support staff. The very distinct nature of these groups means that there is scarcely any progression from B- to A-grade roles. Few people grow up and learn “the trade” within the OECD, and few, therefore, really understand the different parts of the organisation and how they can be brought together effectively to meet member countries’ changing priorities. The organisation has traditionally hired specialists, not developed them, and, in fact, expected the majority of them to leave after fixed, short-duration assignments. There had been very little movement between directorates (OECD’s departments) because of the specialist nature of the jobs.

A deeper dive into the drivers of turnover (what employees value and what engages them; see Figure 1) and of promotion (what drives employees to succeed), using statistical analysis, yielded even more interesting results. Despite the lack of frequency, those who did change directorates were 85% less likely to leave than those who did not – the very largest driver of retention, even relative to financial rewards and within-directorate promotions. Such changes were also

109 associated with a 137% increase in the probability of advancement. Those learning broad skills within the organisation were engaged by the opportunities and, themselves, highly successful. Expanding such developmental opportunities seemed to be a way to improve the value proposition for high performers and, at the same time, meet the OECD’s need to more fluidly meld its different areas of expertise to meet changing client demands, by creating more broadly skilled talent.

Figure 1: Drivers of Promotion Human capital, rewards and performance Percentage di erence in probability of promotion next year Less likely to be promoted More likely to be promoted

-100% -50% 0% 50% 100% 150% 200%

Promote this year -64% New hire -53% Changed from “temporary” -34% Contract type: ﬁxed vs. indeﬁnite -33% Annual salary (10k+) -30% General experience/age (5+ years) -22% French citizenship -19% In larger department (10+ employees) -15% Change job or job family (within grade) Tenure Level to supervisor (1+) 14% Supervisor’s own span (2+ employees) 30% Took management training 46% Rating: outstanding vs. satisfactory 68% Rating: excellent vs. satisfactory 108% Changed directorate (within grade) 137% Supervisor vs. individual contributor 176%

The models on which these results are based control for individual attributes and organisational factors. All e ects are signiﬁcant at the 5% level unless otherwise noted. Models account for directorates, grades and job families. Note: The e ect is signiﬁcant at the 10% level.

The analysis further revealed that autonomy drove significant value at the organisation, in that those reporting to supervisors with larger Absence of a global HRIS 40% spans of control were less likely to leave and more likely to succeed. No clear business case 7%

Such autonomy could do more than help address the OECD’s talent Lack of support from 8% challenges, to the extent that it could drive “outside the box” thinking Corporate leadership Resistance at local or Line of required by the member countries. 38% Business level Experience/skills of global 18% HR function Experience/skills of local human 32% resource sta Absence of a Global 21% Compensation Strategy Resources/time to develop 63% and implement

0% 10% 20% 30% 40% 50% 60% 70% 110

0% 10%20% 30% 40% 50% 60% 70% MOVING FORWARD The external marketplace is demanding that the OECD provide more rounded and flexible talent. Analytic review of the OECD’s human capital strategy pointed to opportunities to achieve that and reduce its own talent risks by expanding internal mobility and providing for greater employee autonomy. A key challenge is to ensure that such steps do not compromise the depth of its specialist expertise, the core of the organisation’s long-standing value proposition. Achieving balance will be a critical imperative for the OECD to continue to achieve its current standards of excellence and also to meet the challenges of tomorrow.

KEY TAKEAWAY Look across a broad set of practices to drive desired results.

Energy

Performance Workforce Capabilities and structure and sourcing accountability

Recognition Communication Leadership and reward and connecting

Economics

More information about workforce analytics and metrics can be found at www.mercer.com/workforceanalytics.

ABOUT THE AUTHORS Makoto Miyasako is the Head of the Strategy and Business Analysis Group, HR Management, at the OECD. He is based in Paris.

Brian Levine, PhD, is a Principal and human capital strategy expert in Mercer’s Global Human Capital consulting business. Based in New York, he can be reached at +1 212 345 4194 or [email protected].

111 112 Global grading for integrated compensation, performance and talent management In a fiercely competitive global economy, businesses face increasing demands to achieve growth and profitability, so it is vital that they have workforces that are engaged and motivated to compensate for resource constraints. For international companies, another essential practice is to ensure transparency in corporate management and have clear comparability of tasks and responsibilities. An efficient, transparent, flexible and easy-to-use job-grading structure can not only help ensure effective and integrated human resource (HR) management, but also aid in the attraction, motivation and retention of talent. Many companies, though, lack cross-HR governance and have several structures and systems for compensation management, performance measurement and staff development, without any unifying features in place.

As organisations strive to maintain a competitive advantage in a challenging global environment, many are turning their attention to some foundational tools. Global levelling – the process of system- atically establishing the relative value of different jobs within an organisation – provides a framework to effectively implement talent and compensation management across borders.

Indeed, global grading enables companies to evaluate positions in the organisation, map them and make them comparable, thus creating the basis for consistent, cross-national compensation and performance management. A grading system helps promote coher- ence between jobs in different business units, departments and locations, letting you better manage costs and talent and determine optimum compensation rates through internal and external benchmarking. What’s more, a grading system allows organisations to develop employees and enhance their value by setting annual targets, assessing performance and making any staff adjustments, if needed. It allows reproducible and specified evaluation of performance, potential and management skills.

Global grading at a worldwide leading sports APPAREL organisation headquartered in Europe One company that has benefited greatly from a global grading system is a leading sports apparel multinational headquartered in Europe with 45,000 employees in more than 180 countries. The company has had tremendous growth – and the challenges that come with it – over the past decade, which made its leadership look for a solution to meet the organisation’s HR management needs.

113 Sometime around the millennium, the organisation recognised the need for a company-wide compensation system that could be applied uniformly across all parts of the business. While performance-related remuneration systems had been developed for some groups of employees, the company still lacked uniform regulations – a key concern, particularly in dealing with acquisitions, when staff reorganisation is typically prevalent and the integration of functions or elimination of redundancies is paramount. The company was also concerned about talent management, and it wanted to ensure that employees were receiving market-driven and performance-based pay, both in basic salary and in bonuses and other benefits. Furthermore, it was important that the new system align with the organisation’s business model to drive value.

TALENT MANAGEMENT TOP REASON EMPLOYERS PURSUE GLOBAL LEVELLING, NEW MERCER SURVEY SHOWS According to Mercer’s 2011 Global Levelling Survey, the primary objectives for evaluating jobs and implementing a global grade structure are to support the development and career paths of employees (68%) and to facilitate the implementation of global pay or rewards programmes (65%). See Figure 1.

Beyond simply helping with pay decisions, companies worldwide and in Europe are seeking much more from their global levelling strategies, such as defining employee career paths, linking jobs to specific behavioural competencies and assessing pay equity. Organisations that have long used global levelling structures to underpin pay now realise the impact this same infrastructure can have on the clearer definition of career paths and mobility-related decisions. Global levelling is an area of increasing interest for both the Compensation & Benefits and Talent Management departments of an organisation.

Figure 1: Objectives for Implementing a Global Grade Structure

Facilitate talent mobility 50%

Get greater value from 13% global HRIS or ERP

Manage costs 24%

Facilitate implementation of global pay or rewards programmes 65%

Support/incent cross-country/ 28% business collaboration

Support career pathing and 68% employee development

Reinforce common organisational 48% culture and values

0% 10% 20% 30% 40% 50% 60% 70% 80% Continued on bottom of the next page

114

01020304050607080 Mercer’s analytical job evaluation system, International Position Evaluation (IPE), was used to develop a global remuneration system through a series of steps:

1. Identify all the relevant technical and management positions globally. 2. Structure the descriptions of job responsibilities in accordance with IPE criteria. 3. Assess each job’s responsibilities and validate the evaluation results on different levels (business area, region, group), with the goal being to group the positions by similar weights and functions in professional and managerial groups. 4. Assign jobs grade levels, considering the following factors: impact, communication, innovation and knowledge. 5. Define fair market salary ranges for each group, additionally setting them for top performers.

This exercise led to the creation of a Performance Evaluation and Planning (PEP) process, which was integrated with the firm’s existing Global Salary Management System (GSMS). Now, salary increases and bonuses are determined by evaluating not just individual performance and relative value contribution to corporate success, but also the compensation market environment and the financial planning of the group. Depending on the positioning in the appropriate salary band, achievement has a strong influence on the amount of salary adjustment.

While global levelling has long been used for companies’ executive roles, an increasing number of organisations are implementing grade structures for their other employee groups. Mercer’s survey shows that 85% of organisations report grade structures for executives and just as many for managers and non-sales professionals. Years ago, only about half of multinational companies had global grade structures for employees that weren’t executives. This increase in the use of global grading for populations other than executives is likely directly related to organisations’ focus on facilitating talent mobility and implementing meaningful career paths for their employees. Challenges of global levelling According to Mercer’s survey, more than one-third (36%) of organisations expect to modify their current approach to global levelling or implement a new compensation management structure in the next two years. Yet finding resources and time to do so may be challenging. The biggest obstacles organisations face with employing a global grade structure are

Continued on bottom of the next page

115 The multinational used Mercer’s IPE system to establish position classes, or job values, to build and grade job families so that these classifications could be used for further communication. Individual employee performance is critical for the execution of business plans, and the company wanted to differentiate pay based on performance.

Buy-in on the system from senior management and other stakeholders was pervasive, as IPE was perceived as very user-friendly, scalable and relevant for a global organisation. Line managers found the system beneficial because they were able to see exactly how the system connects different parts of the compensation package. They use it with ease and have found that it’s a consistent and validated process.

resources and time, reported by almost two-thirds (63%) of organisations. These challenges are followed by the absence of a global HRIS (40%) and resistance of leadership (38%). See Figure 2.

The barriers to implementing global grades have changed considerably. While the absence of a strong business case and lack of support from corporate leadership were frequently identified as major challenges in the past, the value of having a global grading structure has clearly become more evident to business leaders today.

Mercer’s 2011 Global Levelling Survey examines trends in strategies around grading and job evaluation and includes responses from more than 380 organisations across all industries.

Figure 2: Obstacles Organisations Face in Employing a Global Grade Structure

Absence of a global HRIS 40%

No clear business case 7%

Lack of support from 8% corporate leadership Resistance at local or line of 38% business level Experience/skills of global 18% HR function Experience/skills of local human 32% resource sta Absence of a global 21% compensation strategy Resources/time to develop 63% and implement

0% 10% 20% 30% 40% 50% 60% 70%

116

0% 10% 20% 30% 40% 50% 60% 70% The benefits of having a global evaluation system in an M&A situation The true value of IPE was seen just a few years later, when the group made a new acquisition. That was one of the key moments when the benefits of a global evaluation system proved vital. Previous acquisitions had not been nearly as easy to integrate, but the grading system allowed a quick and efficient integration.

The PEP process, in combination with the GSMS, supported the successful implementation of group-wide employee structures and talent management programmes by identifying future managers and high-potential employees. In addition, employee motivation and retention improved as employees received salary adjustments to market levels and got to take part in a bonus programme that rewards performance significantly.

Introducing and Developing IPE Building up a solid framework to support HR management

2001/2002 Job descriptions Job evaluation

2002/2003 Design and rollout of GSMS

2005/2006 HR due diligence to integrate acquisition Review of global grades (100 jobs)

2008 Review of GSMS grades (90 jobs)

PEP could not have been properly implemented if the company had not already implemented and paired the group-wide grading system with updated job descriptions and the GSMS. In addition, the consistent structure enabled the smooth integration of the organisational structure and compensation management system of the acquired firm into the group.

117 Integrated Approach to HR Management Reward talent and overall HR management today are in a better position than before implementing GSMS.

Succession Leadership excellence management

Leadership excellence Actual performance Performance Talent management management

Performance culture

Strategy/strategic business plan

Vision/mission

When setting up an appropriate job-levelling system and integrated HR management, the basic premise must be to develop a grading system that is flexible enough to be applicable to any business model and organisation. It must also evaluate the value of the employee’s contribution to the organisation and the comparability of the positions and external benchmarks. Modern grading systems should be able to accomplish all of this and yet be easy to implement and communicate.

More information about the various applications of IPE can be found at www.mercer.com/ipe.

ABOUT THE AUTHORS Bernd Thomaszik is Mercer’s Head of Reward Consulting in Central Europe. Based in Frankfurt, he can be reached at +49 69 6897 78 450 or [email protected].

Antonis Christidis is Mercer’s Head of Workforce Rewards in EMEA. He can be reached at +44 0 7789 03 0234 or [email protected].

118 119 120 STIMULATING ENGAGEMENT THROUGH DIFFERENTIATED REWARD AND ENHANCED PERFORMANCE: THE MAERSK JOURNEY It may come as no surprise that the A.P. Moller – Maersk Group is on a journey. With the world’s largest container shipping line amongst its diverse portfolio, the Group has been on more journeys than most. What may come as a surprise is the nature of the current journey – to drive a culture of pay for performance throughout the organisation, starting with its headquarters in Denmark, where an egalitarian culture often prevails.

This has been the challenge facing Alex Penvern, Head of Group Compensation, Rewards and Executive HR at A.P. Moller – Maersk Group, since he joined the team in 2008. Today, the company can demonstrate a clear link between greater engagement, differentiated reward, and enhanced individual and corporate performance.

The A.P. Moller – Maersk Group is a Danish diversified conglomerate employing more than 100,000 people in approximately 130 countries. With interests primarily in shipping and oil and gas, the various business units of Maersk are characterised by the asset-intensive nature of their operations.

THE STRATEGIC VALUE OF REWARDING INDIVIDUAL PERFORMANCE In this world of multimillion-dollar ships and oil concessions, it is easy to discount the relatively small cost of remuneration. However, though reward costs might not be as high on the agenda as they might be in more labour-intensive industries, the strategic value of rewarding performance is definitely at the top of the minds of senior management.

“Given the value of the assets they look after, the company has high expectations of its leaders – and also of people at all levels. We believe that they will work harder, run faster and achieve more if we differentiate between the best, the good and the slightly less good”, says Penvern. “So it is not only absolute performance we reward – we focus significantly on performance relative to peers.”

121 ESTABLISHING ONE SCALABLE AND TRANSPARENT REWARD STRUCTURE This has not always been the case. Less than five years ago, rewards in the company were characterised by discretionary bonuses, often awarded with little transparency. One of Penvern’s first challenges was to create a scalable reward structure that was understandable and could, over time, be rolled out across the organisation.

The starting point was an executive compensation structure that focused on a relative distribution that was arrived at via conversations between the CEOs of every business within the Group. These conversations are based on a range of different performance criteria, happening in an annual session – itself a part of the performance management cycle. The outcome is a relative performance distribution of the company’s highest, successful and less effective performers.

“The company believes that our people are motivated by this constant striving to do even better”, says Penvern. “You can never rest on your laurels or spend too long patting yourself on the back, because you know how hard everyone else is running. We want people who thrive in this atmosphere.”

This is reinforced by a carefully considered distribution of rewards to the highest performers. Since the introduction of the pay-for-performance scheme, fewer very high performers are securing a significantly larger share of the bonus on offer.

“The highest-performing men and women receive nearly double the bonus opportunity that they did four years ago”, says Penvern. “But in order to realise that bonus opportunity, they need to run as fast as they can in order to keep up with or stay ahead of the pack and the market.”

While Penvern cites the value the company creates in this performance culture, he believes that the transparency of its bonus system is just as important.

122 THE LINK BETWEEN PAY FOR PERFORMANCE AND ENGAGEMENT “We used to have discretionary bonuses but found with those that the correlation between pay and performance was almost zero – surprisingly”, he recalls. “This was a huge problem, as we know that the lower the link between pay and performance, and the less people can see this link, then the worse our employee engagement becomes.

“We also know that engagement predicts individual performance, team performance and customer satisfaction – the higher the first, the higher the other three. These factors are also linked to the leader’s performance – as his or her performance improves, this drives up the average performance score in the team. External research also shows that engagement predicts performance, customer satisfaction and financial results much more strongly than the other way around.”

123 MEASURING SUCCESS So, engagement is critically important to performance and to bottom-line results, and a major factor in driving engagement is pay for performance – and, specifically, people’s belief that there is a link between how they perform and how they are rewarded.

Penvern notes this is the real measure of the success of the drive towards pay-for-performance. The number of A.P. Moller – Maersk employees who agreed with the statement in the employee engagement survey, “I believe that my pay and performance are linked”, rose from 45% in 2008 to 57% in 2011, aligning A.P. Moller – Maersk with the top 25% of companies that use this as a criterion of engagement. This proportion rises to 80% amongst employees in the head office, where schemes for executives, directors and professional staff are fully embedded. Not surprisingly, the company is now looking to roll out pay-for-performance schemes across the majority of its businesses around the world, where it makes business sense.

The lesson is clear. You build employee engagement and drive performance both by having a clear and transparent scheme that links pay and performance and by communicating this consistently in order to reinforce the belief that pay and performance are linked. It’s critical to walk the talk, and if you succeed, it is, as Penvern concludes, “a virtuous circle”.

CONTACT Alex Penvern is A.P. Moller – Maersk Group’s Global Head of Compensation, Rewards and Executive HR. Based in Copenhagen, he can be contacted at [email protected].

124 125 126 AVOIDING BUSINESS RISK: THE HIDDEN BENEFIT OF SOFTWARE AS A SERVICE Software as a Service (SaaS) is now the predominant architecture and delivery model for the majority of HR technology and continues to be a very hot sector of the enterprise software industry in general.

There are several definitions for SaaS, but we broadly define SaaS as software that is delivered over the Web from a platform that is shared across multiple clients and purchased as an annual subscription, as opposed to “licensed” software, which is typically purchased upfront, with annual maintenance and installed on the client’s premises.

In this article, we explore the reasons HR and IT, the primary users, have been purchasing and implementing SaaS, and the overlooked primary benefits of SaaS – certainty and the minimisation of business risk.

EXPLORING THE MAIN ARGUMENTS IN FAVOUR OF SAAS Several reasons are cited by analysts and HR leaders for their increasing appetite for SaaS rather than traditional licensed, on-premise software. First and foremost is the total cost of ownership. From a software-licensing perspective, this will depend on the “shelf life” of the software, with the break-even point occurring between three and 10 years. However, the more significant savings tend to come from professional services: while a typical Enterprise Resource Planning (ERP) implementation may take upwards of a year, a typical SaaS implementation would take around two to four months, with little or no work needed for hardware or network infrastructure. This compressed timeframe is largely due to the increased configurability of SaaS solutions, but also to the implementation strategies and methodologies employed by software vendors.

IT also makes the case that true SaaS – as opposed to what one vendor calls “SaaS impostors” – has an architecture that is superior to legacy systems in many respects. One top analyst has even discovered that one of the largest ERP vendors has lines of COBOL programming buried in its product. Clearly, there is well-designed and poorly designed SaaS software. However, when designed well, the architecture allows for more configurability, data integration between different components of the system and scalability of both functionality and users. Importantly, it also allows for automatic upgrades, albeit often at a time of the vendor’s choosing. However, given this, it does beg the question: how do the license vendors maintain any market share at all? The answer is complex and lies in the amounts already invested in legacy software and the ability of

127 an organisation to shift strategy, and often the perception that “big is beautiful”. From a commercial standpoint, the CFO is often attracted to SaaS because it eliminates any upfront capital expenditure on either software or hardware and spreads the cost more evenly over the contract term. Many SaaS vendors will also offer some flexibility with regard to headcount, although it is worth noting that few vendors offer software truly “on demand”, even if they market it as such.

It is also attractive for businesses to be seen using the latest software in technology, and although SaaS has existed for more than a decade, compared with traditional licensed business software, it is still considered cutting-edge. Mercer contends that organisations stay ahead of the competition not just by purchasing great software, but also by ensuring that they have a human capital strategy that is aligned to their business goals and that they have well-designed processes to support that strategy and a robust methodology to implement it. Ultimately, how an organisation implements its talent and reward strategy is as important as what tool it uses to implement it.

MERCER’S SAAS SOLUTION: HUMAN CAPITAL CONNECT Human Capital Connect (HCC) is Mercer’s SaaS solution for compensation planning and talent management. HCC ensures that our customers achieve their desired business outcomes by combining:

• Flexible, intuitive and engaging web-based technology, including complimentary iPad functionality – our solution is designed for large enterprises to manage even the most complex processes

• Mercer’s expertise and true best practices in both human capital consulting and project implementations

• Embedded intellectual capital based on our experience as one of the world’s largest providers of talent and reward consulting

More information can be found at www.mercer.com/humancapitalconnect.

128 Finally, analysts will often cite the benefit of having client data shared on a single database and the ability to analyse very large data sets across multiple organisations.

There are indeed some current applications, such as monster.com, which uses its scale as the largest job board to extrapolate and publish data on the job market, but this kind of analysis is still in its infancy and in any event, those insights tend to be freely available and don’t just benefit the paying customer.

THE OVERLOOKED BENEFIT OF SAAS: DE-RISKING YOUR INVESTMENT In uncertain economic times, the top item on the executive agenda for most investment decisions is risk. This consideration then cascades down, formally or not, into managers’ personal performance goals.

Seasoned HR executives have too often been burn victims of licensed software implementations that promised seamless integration, breadth and flexibility of functionality, and the confidence of a big brand name but delivered none of those things. Several organisations have invested seven-figure sums into systems that are so unwieldy that they provide little benefit beyond what could have been achieved on a simple spreadsheet.

Naturally, managers and executives look to get the best value from their investments and have to work within their set budgets. However, their top priority is about more than just containing the initial expense; it’s about avoiding ugly surprises. There is nothing more embarrassing for the HR or IT sponsor than to have to petition the organisation for an increased budget to cover unforeseen costs.

These unforeseen costs are almost inevitable with licensed software, and few organisations have adequate contingency plans. Increased costs occur because the business begs for customisations in order to plug functionality gaps, and then the associated maintenance and upgrade costs spiral. SaaS has the benefit that due to its architecture, it cannot be customised under any circumstances for any single client: there is simply no technical mechanism for doing so. By not being able to customise the software, HR and IT can legitimately tell the business that its “widgets can’t be built”.

129 By staying on a common platform, upgrade costs are negligible or nil. There is no server hardware to maintain, so there are no surprise outages or malfunctions to spend time and resources on.

As mentioned earlier, due to the annual or monthly subscription nature of SaaS, in addition to a lower overall total cost of ownership, the payments are much more evenly spread over the course of the contract term versus a license purchase, for which organisations make the front-loaded capital investment upon contract signing. From a risk perspective, with a license purchase, even if the customer is dissatisfied, the customer is past the financial point of no return and has no option but to persevere.

That’s not to say that there are never any further costs after purchasing SaaS software. Often an organisation will need to purchase more licences as more business units come online or headcounts grow. It may also elect to purchase additional modules. A good implementation process would also allow for regular health checks and associated process and content improvements. However, all these items are discretionary and add value to the organisation. It’s like the satisfaction of paying to add an extension on to your house versus having to fix a leaking roof.

IN SUMMARY: SAAS = PREDICTABILITY For an HR or IT executive, SaaS means predictability. Costly customisations can’t and won’t happen. Upgrades aren’t an ordeal for HR, IT and the business users. Buying and maintaining hardware becomes someone else’s concern. There are several strong reasons to invest in a SaaS solution, but the primary one is the predictability of costs.

ABOUT THE AUTHOR Brad McCaw is a Principal in Mercer’s Human Capital Operations and Technology service segment. Based in London, he can be reached at +44 20 7178 5302 or [email protected].

130 131 For further information, please contact your local Mercer office or visit our website at: www.mercer.com

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