Reward Management:

Closing a Growing Say/Do Gap

Reward Challenges and Changes Survey Report

2 | Reward Challenges and Changes Survey Report

Executive Summary

The evolution in views on how employees create value, fuel corporate growth and drive

competitive advantage has had an enormous impact on business success in the last decade.

Today, the lion’s share of corporate value — nearly three-quarters by some estimates — comes

from an organization’s people and their ideas, innovation and performance. Put another way,

competitive advantage is increasingly being achieved through investments in people and skills

rather than expenditures of capital for physical assets.

It’s no surprise, then, that a reward Our research shows that the challenge Broadly, the key findings show:
strategy that helps an organization of getting the reward equation right is
 A preoccupation with tactics versus
attract and retain key talent and — most more formidable than ever. A decade
strategy, particularly in terms of true
important — motivate them to drive of radical change on the business front
alignment with business needs.
business growth, has enormous power. has spanned the period of the Internet
Companies are not reaching for the
boom, bust and, now, “reboom”; the
large-scale strategies that will make a
For the last 12 years, Towers Perrin has increasing globalization of business,
significant difference in organizational
surveyed pay and performance practices capital and labor markets; and cycles
performance. They’re not effectively
to track how well organizations are adapt- of growth and recession, among other
segmenting rewards, truly differenti-
ing their reward programs to a dynamic developments. However, as our findings
ating performance, identifying their
business environment and fast-changing clearly illustrate, reward strategies and
high performers and key talent pools,
corporate strategies. Our surveys — each structures have not kept pace with these
or customizing rewards to meet their
one more global in reach — provide a market and business forces. Respondents
specific talent and performance goals.
rolling four-year view of process and report only modest or superficial changes
Instead, they are focused on tactics
program design trends and concerns in the reward and performance manage-
that are not likely to produce signifi-
and underscore the increasing difficulty ment practices they are putting in place
cant results: incremental changes in
companies experience in synchronizing to support their new business and people
variable pay plans and eligibility for
their reward practices with their strategic management models.
incentives, shortened or lengthened
and talent priorities.
pay communication cycles, changes
in the rating scale for performance
management, and implementation of
About This Survey new technology. This very focus on
tactics — “tweaking” programs year
The 2007 Towers Perrin reward challenges and changes survey, Reward Management: Closing a
in and year out — may be the chief
Growing Say/Do Gap, presents data from 637 HR and compensation executives at midsize and
large companies in 21 countries in North America, Latin America, Europe and Asia. Fifty-one obstacle to truly effective and effi-
percent of respondents come from organizations reporting more than $1 billion in revenues in cient program design and delivery.
2005. The survey builds on similar research from 1995, 1999 and 2003 to compare changes in
reward and performance management programs over time.

 Continued use of pay as a blunt instru-
 Getting the reward equation right is
more formidable than ever.
 Our data show that companies are not:
 creating the large-scale
compensation strategies that can
help drive enhanced performance
 effectively segmenting rewards
and differentiating performance
 identifying key talent pools.
 Companies must have the courage
to earmark a significant percentage
of their compensation budget for
high performers and key talent.
ment of behavior change. Pay remains
HR’s instrument of choice for driving
behavioral changes and achieving tal-
ent management goals, but it is not
fully delivering for a variety of reasons.
Paramount among them is evidence
that pay can only go so far in truly
engaging people. As our global stud-
ies of employees have repeatedly
shown, pay is critical in attracting
people to a company and position,
but is markedly less important in
retaining people and engaging them
in their work. Exhibit 1, which shows
the results of our most recent study
of the global workforce — covering
close to 90,000 employees across
18 countries — makes this very clear.
It highlights the aspects of the work
environment that have the most
impact on employee engagement,
virtually all of which center on the
more intangible and nonmonetary ele-
ments of the workplace. It confirms
that people bring their “head, heart
and hands” to their work with full
commitment and true discretionary
effort (the essence of engagement)
when they feel valued (especially by
leadership), connect with a broader
vision and see opportunities to learn,
contribute more and advance their
careers. Compensation alone does
not satisfy those needs.
Rather, compensation is most effec-
tive when it’s blended with an array
of related workplace programs that
collectively help people understand
Reward Challenges and Changes Survey Report | 3
EXHIBIT 1
Top Global Drivers of Engagement
1. Senior management sincerely interested in
employee well-being
2. Improved my skills and capabilities over
the last year
3. Organization’s reputation for social
responsibility
4. Input into decision making in my department
5. Organization quickly resolves customer
concerns
6. Set high personal standards
7. Have excellent career advancement
opportunities
8. Enjoy challenging work assignments that
broaden skills
9. Good relationship with supervisor
10. Organization encourages innovative thinking
Towers Perrin 2007 – 2008 Global Workforce Study
their role, their contribution and the
value they can bring. Compensation
can act as a driver of decision making
and behavior when companies have
the courage to direct a significantly
larger share of it to mission-critical
and high-performing talent. Unfortu-
nately, few companies adequately
differentiate and reward top talent,
which further compromises the effec-
tiveness of compensation as a driver
of valued behavior.
 Insufficient focus on the “human” side
of performance management. Most of
us know intuitively that the traditional
task-based, compliance-focused
approach to performance management
has yielded little sustainable success.
4 | Reward Challenges and Changes Survey Report
 Companies need to balance their focus
on compensation and performance
management technology with a high-touch
approach that touches people directly.
 HR clearly recognizes the importance
of developing and retaining top talent
and the need for better reward and
performance management…
… but many practitioners don’t feel
prepared to push for radical change.
Companies have invested in technol-
ogy to increase the efficiency of the
process, but technology, while a
valuable tool, does little more than
streamline the administration of
ratings and assessments. Companies
need to go beyond technology to
focus on the ongoing discussion
between managers and employees
about expectations, contributions,
development and performance.
Failure to recognize the greater pur-
pose of performance management —
and the tendency to treat it as a
high-tech activity rather than a
high-touch process — results in a
significant missed opportunity for
most organizations.
In short, our current survey findings
confirm an existing — and possibly
widening — say/do gap in HR’s approach
to reward design and delivery. Although
companies report that talent and work-
force issues drive their reward strategies,
their actions belie this focus. Our find-
ings show only a reprise of the tweaking
around the edges of program design,
delivery and communication that’s
characterized our previous survey
findings. What’s missing is the more
systemic and integrated approach one
would expect, given the magnitude of
the business challenges companies
face today, and the stated desire to
align reward programs with a broad
talent strategy and the critical drivers
of performance.
What our research also shows is that the
issue isn’t a lack of awareness about
what to do. Respondents uniformly
place issues like retaining top talent,
engaging employees and increasing line
of sight through more effective reward
and performance management at the
top of their priority lists. But they remain
unsure how to achieve these aims. Our
hypothesis — buttressed by our experi-
ence working with many organizations
in these areas — is that HR and com-
pensation professionals do not feel
equipped or supported to push forward a
more radical change agenda in support
of growth and talent objectives.
How can companies begin to close the
gap between their strategic intent and
the programmatic response? Based on
our research, we believe at least part
of the solution lies in focusing on
three areas:
 taking a more surgical approach to
rewarding the contributions of high
performers and those in mission-
critical roles
 giving employees better tools and
resources for managing the risks
inherent in today’s pay programs
 reinventing performance manage-
ment as a high-impact process that’s
high touch as well as high tech.
The rest of this report examines these
areas and our related findings in more
detail.

Shortchanging Retention Potential: High-Performer and
Customization Programs Highlight Risks of Tactical Focus
 Retention of top talent remains a
key priority.
 Attracting the right people is rising
in importance.
 Many organizations have taken the first
step: identifying high performers.
 But they have not made significant
strategic changes to their reward and
performance management programs.
Respondents to our reward surveys have
consistently cited retaining top talent
as the most critical objective for reward
programs and, as Exhibit 2 (page 6)
shows, this year is no different. What’s
notable in our current findings, however,
is that attracting talent to the organiza-
tion — a goal closely related to retention
— is rising in importance as a reward
objective, while cost control is dropping
down the scale. These changes are not
surprising given companies’ recent shift
from cost management to growth as
a primary business strategy. A growth
imperative, coupled with deepening
talent and skill shortages, has made
executives more aware of the need to
develop a full pipeline of strong candi-
dates and create or sustain a high-
performance culture.
High-performer and customized reward
programs have generated interest for
their potential to increase employee
engagement and contributions to
results. But, since our last survey, few
organizations have made the kind of
changes to these programs that would
convey an increased commitment to
them. In fact, as our findings show,
changes to date remain informal and
limited, suggesting that in many organi-
zations these programs remain more
about style than substance.
Reward Challenges and Changes Survey Report | 5
There are some positive developments,
however. Many organizations have taken
the important first step of identifying
their high performers, and the majority
(76%) have implemented programs
aimed at recognizing and rewarding
them. But the way organizations are
delivering these programs may limit
their effectiveness.
HIGH-PERFORMER PROGRAMS
REMAIN LARGELY INFORMAL —
AND INEFFECTIVE
Only a quarter of respondents set aside
additional funds for their high perform-
ers, for instance and, of those, half
designate less than 1% of their merit
budgets to the programs. In addition,
companies are not setting pay differen-
tiation levels high enough to clearly
signal to top performers that they are
unique and that their contributions are
important to the organization’s success.
6 | Reward Challenges and Changes Survey Report

EXHIBIT 2
Key Reward Strategy Objectives: Past, Present and Future
% of respondents
0% 20% 40% 60% 80% 100%

Reward and retain the best performers

76
73
68

Achieve/maintain market competitiveness

47
59
47

Attract key talent to the organization

55
57
59

Link pay to the organization’s key success factors

60
54
51

Ensure internal equity

18
32
15

Improve employee understanding of the value of the reward package

17
30
31

Reduce/control labor costs

19
28
19

Be recognized as an employer of choice

35
25
38

Manage rewards on a total rewards basis

32
25
37

Increase employees’ productivity

22
25
22

Prior focus: 2003 – 2006 Current focus Future focus: 2007 – 2010
 Reward Challenges and Changes Survey Report | 7

 Companies continue to struggle with
effective salary differentiation for
high performers…
 …but they are providing them with highly
valued rewards, like additional promotion
and training.
 Companies need to make the move
to a truly holistic approach to reward
management — combining salary,
bonus, training and development, and
other monetary and nonmonetary
rewards into an integrated package.
In our consulting, we’ve observed that
the most successful companies take
pains to provide very significant salary
increases and bonuses to high perform-
ers — generally between two and three
times the average increase — and they
set incentive differentiation between
two and three times that of the average
performer. Yet, as Exhibit 3 shows,
salary and incentive differentiation at
most companies hasn’t moved much
over the years, and remains at 1.4 to
1.5 times that of the average performer.
USING PROMOTIONS TO REWARD
PERFORMANCE
Another positive note is that companies
are increasingly rewarding high perform-
ers with promotions and training — the
nonmonetary elements that employees
value most. As our series of Global
EXHIBIT 3
Differentiation for High-Performing Employees
% of respondents
0% 10%
Workforce Surveys has shown, these
so-called “relational” rewards have far
more influence on engagement and
motivation than pure financial rewards.
Their increased use also suggests a
greater appreciation for a truly integrated,
total rewards perspective.
Tempering this positive shift, however,
is the fact that the percentage of com-
panies using nonfinancial rewards hasn’t
changed significantly since our last sur-
vey. Clearly, the companies that “get it”
continue to take a holistic view and
provide the right rewards in the right
ways. But our data suggest that many
still haven’t made that leap from siloed
reward management to viewing all
aspects of the workplace and employ-
ment relationship as an integrated
package of rewards.
20% 30% 40%

Very significant differentiation — over 1.9 times that for average performer
14

Significant differentiation — between 1.5 and 1.9 times

26

Some differentiation — between 1.4 and 1.5 times

32

Little differentiation — between 1.2 and 1.4 times

16

No differentiation
6

Don’t know
7
8 | Reward Challenges and Changes Survey Report
 Promotions may not always be the best
way to reward performance — especially
if a promotion requires people manage-
ment skills and the candidate is weak in
that area.
 Formal career frameworks can help
companies take a broader view of career
progression, both by incorporating
additional career paths and better
focusing training and professional
development efforts.
 Most respondents still customize rewards
(develop specific reward structures for
specific roles) only for the sales function.
What’s more, despite the value employ-
ees attach to them, promotions are not
always the most appropriate way to
reward performance. Both the survey
findings and our own experience suggest
that promotions are not given out as
judiciously as they should be, especially
when they involve people management
roles. Managing employees — especially
in a performance-focused organization
— requires a combination of skills that
encompasses rational, emotional and
empathetic capabilities. Not every top
performer is equipped with the leader-
ship and communication skills to explain
performance goals and coach, to help
employees see how their actions affect
business outcomes and set goals
accordingly, or to evaluate performance
accurately and fairly.
The dissatisfaction our employee
respondents regularly express regarding
managers’ effectiveness also suggests
that promotion may not always be the
right reward for every high performer.
Some companies recognize that steps
up a career ladder don’t always have to
lead to people management roles. These
companies take a broader view of career
progression and incorporate additional
career paths as alternatives to the tradi-
tional managerial track, and are finding
innovative ways to use promotions as
rewards.
Career frameworks that provide organi-
zations direction for staffing, recruiting
and selection can help ensure the appro-
priate spend of development budgets
so that professional development and
training can be tailored to the needs of
specific roles, levels and expertise. This
benefits employee development while
ensuring that the individuals stepping
into people management roles are pre-
pared for the demands of the job.
CUSTOMIZATION NOT TAKING HOLD
Customized rewards (i.e., specific
reward structures for specific roles) are
another much discussed means of dis-
tinguishing valuable contributions to
the business. But, like high-performer
programs, they are more talked about
than practiced.
The majority of respondents customize
rewards only for the sales function,
despite the advantages such an approach
can yield in retaining and engaging
scarce or critical skill groups. We know
from past research that organizations
want to know how they can better lever-
age the roles most critical to executing
their strategies. Respondents to our
2003 survey, for example, told us that
they would increase their emphasis on
customer service and innovation to
create competitive advantage and fuel
growth. But despite this focus on people-
dependent business strategies, few
companies have customized rewards
for the roles most responsible for the
success of these strategies.

 Few organizations have the tools and
metrics to accurately identify and assess
the contributions of the various segments
of their workforce…
 …but that knowledge is critical to
improving performance. Organizations
need to understand:
 which roles drive the business strategy
 which rewards motivate the people in
those roles.
Reward Challenges and Changes Survey Report | 9
The failure of customization to spread And then there’s the delivery issue. When
broadly may reflect a lack of tools to more and more companies’ operations
ensure success. In our view, few organi- are far flung, how can they offer pack-
zations have the capability to identify ages that reflect individual preference
the contributions of different segments within a globally consistent strategy?
of the workforce, the right metrics to And how can HR ensure that everyone
assess and reward such contributions, understands the program and sees its
or the change management skills to value — without significantly increasing
manage the cultural implications of the cost of delivery? Part of the answer
moving to a more segmented approach. lies in a more sophisticated understand-
These issues are tremendously challeng- ing of what drives employee behavior
ing, to be sure; they bring additional in key areas, and how to evaluate and
complexity as well as concerns about assess the trade-offs of reward program
fairness and equity to program design decisions and choices (see “Total
and implementation. But failure to Rewards Optimization: A Balancing Act,”
address them prevents organizations page 10).
from realizing the full potential of
rewards as a management tool for
shaping behavior.
Segmentation is key. Our 2007 Global
Workforce Study shows that the value
employees place on various rewards dif-
fers markedly by age group, culture and
individual, even within a single company.
As a result, identical reward program
investments can produce very different
employee behaviors and levels of per-
formance and engagement. So organi-
zations need to understand not only
which roles are driving the organization’s
business strategy, but also which rewards
will motivate and engage the individuals
in those roles — an increasingly difficult
proposition given the growing diversity
of today’s workforce.
10 | Reward Challenges and Changes Survey Report
 The rewards employees value most are
often the least costly…
 …but, given today’s diverse workforce,
companies can’t assume they know what
employees want or what will elicit higher
performance.
 By asking employees to identify and
rank reward preferences, a Total Rewards
Optimization approach can pinpoint
rewards that will have the greatest impact.
Total Rewards Optimization: A Balancing Act
One of the biggest challenges companies face is ensuring that their investment in rewards —
often the single largest portion of their total labor spend — is achieving desired goals in terms
of performance, engagement, retention and a host of related objectives. Given today’s diverse
workforce, few organizations can safely assume they know what it will actually take to elicit higher
performance and contribution from employees.
Indeed, one of the most consistent themes we’ve seen in our research is that the rewards
employees value the most are often the least costly. Assuming pay and benefits are fair and
competitive, it’s frequently the case that a company can engage someone more fully with a
stretch assignment, high-visibility project or training opportunity than a pay raise.
The challenge comes in determining just what will make a difference to employees. One of the
most powerful tools to elicit this information is something called Total Rewards Optimization
(TRO), which uses a rigorous analytical process originally developed for consumer marketing
to pinpoint meaningful buyer preferences. In the work environment, TRO lets employees make
trade-offs among different reward components and enables employers to test how various
changes in the reward program would affect behavioral variables like engagement, retention
or performance. The findings help identify which rewards are most valued by which employees
and the probable impact of a shift in the program in terms of the desired variables.
The TRO process also analyzes the costs of various reward components and combines this
information with the results of the above analysis to define the “efficient frontier” for an
organization’s investment — that is, the optimal allocation of the overall reward investment
to maximize value for spend.
TRO provides insight into such key questions as:
 What’s the best level of total investment in employees?
 What’s the optimal allocation of that investment across the reward program to maximize
desired employee behaviors?
 How do the answers vary across and within targeted segments of the employee population?
More important, TRO provides assurance that the reward changes being implemented are those
that align with organizational cost goals, employee preferences and, most critically, desired
employee behaviors.
 Reward Challenges and Changes Survey Report | 11

Taking a Blunt Instrument to a Surgical Process:

Companies Miss the Mark on Pay and Miss the Opportunity
to Encourage Meaningful Change

With each of our surveys, we’ve seen contributions to results. As Exhibit 4

companies placing larger numbers of shows, organizations rely on a broad
employees in variable pay programs to array of plans that typically vary by
help lower their fixed costs and reward organizational level.
employees in line with their actual

EXHIBIT 4
Prevalence of Variable Pay Plans
% of respondents

0% 10% 20% 30% 40% 50%

Tiered incentive
47
47
26

Organization-wide or other cash profit sharing or incentive

41
38
33
Individual incentive
34
35
25

Project incentive
7
14
12

Team incentive
6
10
12

Gain sharing
4
5
6

Other
5
5
4

None
5
7
20

Executive Management/professional Nonmanagement

12 | Reward Challenges and Changes Survey Report
 Variable pay programs need to be tailored
to specific roles and contributions to drive
desired behaviors.
 Employees need to understand how
their day-to-day actions affect company
performance…
 …and how they can control the results.
But our results suggest this broad brush-
stroke approach is undermining the
effectiveness of variable pay. Because
these programs aren’t customized to
specific roles and contributions, they’re
not encouraging the desired behaviors
or helping employees connect their day-
to-day actions with business outcomes.
Nor does it appear current programs are
providing significant control over reward
payouts either.
A VIEW TO SUCCESS REQUIRES A
CLEAR LINE OF SIGHT
More than three-quarters of responding
organizations have changed their variable
pay programs in the past three years,
and nearly half expect to implement
more changes in the near future.
Surprisingly, the most common shift
is using company-wide performance as
a metric. Yet, because few employees
have a clear line of sight between their
actions and company performance, this
strategy is not likely to motivate them.
What this approach does, in essence,
is shift additional risk to employees by
tying more of their total pay to organi-
zational results without giving them any
real control over those results.
As Exhibit 5 shows, respondents clearly
understand that incentives are not a
one-size-fits-all proposition. They are
using a variety of plans and see clear
distinctions between plan types in terms
of objectives and what those plans sup-
port. Interestingly, though, they’ve made
virtually no shifts in their mix of plans
over the past four years. They also know,
based on their own success ratings
shown in Exhibit 6 (page 14), that the
most effective programs are those that
give employees the clearest line of sight
from their actions to business goals to
rewards. Note, for instance, that project-
based incentives get high marks while
the others — particularly company-wide
incentives — show much room for
improvement.
To enhance the effectiveness of any
incentive, companies must invest signifi-
cantly in improving managers’ coaching
abilities and employees’ business literacy
skills. Both employees and their man-
agers need to understand how their
individual activities relate to these
company-wide metrics so they make
the day-to-day decisions that contribute
to business success. And while some
respondents say they have begun training
and skill development efforts to foster
enhanced business literacy, many of
these efforts appear insufficient to ensure
the right skill base, and are not integrated
into the broader reward system.
 Reward Challenges and Changes Survey Report | 13

EXHIBIT 5
Types of Plans Used to Meet Different Objectives: 2007 vs. 2003
% of respondents

IMPROVEMENT IN OVERALL BUSINESS PERFORMANCE IMPROVEMENT IN TARGETED BUSINESS AREAS IMPROVEMENT IN UNIT/FUNCTION PERFORMANCE
0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100% 0% 20% 40% 60% 80% 100%
Project incentive Project incentive Project incentive
36 51 37
36 55 45
Team incentive Team incentive Team incentive
56 56 72
55 58 67
Individual incentive Individual incentive Individual incentive
53 40 36
55 41 39

Tiered incentive Tiered incentive Tiered incentive

88 49 61
86 52 62

Gain sharing Gain sharing Gain sharing

57 59 39
65 59 45

Organization-wide Organization-wide Organization-wide

88 39 38
87 39 36

IMPROVEMENT IN EMPLOYEE ENGAGEMENT

IMPROVEMENT IN INDIVIDUAL PERFORMANCE IN THE BUSINESS
Project incentive Project incentive
37 34
35 31
Team incentive Team incentive
22 33
27 43
Individual incentive Individual incentive
88 50
86 48

Tiered incentive Tiered incentive

62 48
60 47

Gain sharing Gain sharing

22 41
29 51

Organization-wide Organization-wide
36 47
34 46

2007 2003 2007 2003

14 | Reward Challenges and Changes Survey Report

KEY POINTS
 Companies clearly understand that
incentives are not “one size fits-all.”
 The most effective incentive programs
clearly link employee actions to business
goals to rewards.
Those deficiencies are reflected in the
results highlighted in Exhibit 7 (page 15).
Clearly, companies have some work ahead
to improve employees’ understanding
of how their performance impacts the
business. According to our respondents,
just 12% of rank-and-file workers pos-
sess this understanding to some degree,
while 42% have little or no understand-
ing at all. More surprising still, respon-
dents feel that only 9% of managers
and professionals demonstrate a com-
plete understanding of the link between
their performance and business results.
So it’s no wonder that their coaching
abilities are in question. Without full
understanding of how their actions
impact business outcomes, they can’t
function as effective performance
coaches to their teams.
SHIFTING RISK WITHOUT CONTROL
IS A HIGH-STAKES GAMBLE
In addition to investing in business lit-
eracy efforts, companies also need to
ensure that employees better understand
the link between performance and pay.
Specifically, they need to understand
the increased risk inherent in variable
pay plans, as well as the consequences
of their decisions in light of those risks.

 Most companies use a mix of plans to EXHIBIT 6

achieve results. Success of Variable Pay Plans
% of respondents

0% 20% 40% 60% 80% 100%

Project incentive
2007 40 55 4
2003 41 53 6

Tiered incentive
2007 36 57 7
2003 26 67 7
Organization-wide
2007 35 58 8
2003 28 59 13
Individual incentive
2007 32 64 3
2003 27 66 7

Team incentive
2007 28 66 5
2003 35 58 7
Gain sharing
2007 23 70 7
2003 19 72 9

Significant success in achieving goal Some success in achieving goal No success observed
 Reward Challenges and Changes Survey Report | 15

 Only 12% of nonmanagement employees
have a strong understanding of how their
performance affects the business.
Companies have to clearly communicate
all the scenarios that could come into
play as a result of employees’ participa-
tion in variable pay plans and provide
employees with the opportunity to
manage this risk.
In other words, as companies attempt
to lower fixed costs by tying reward
expenditures to performance, the
importance of employee control and
autonomy is being elevated. To transfer
more risk to employees without demoti-
vating them, organizations have to give
them the autonomy and tools to meet
the challenge of pay for performance.
It’s fundamental in concept, but our
findings suggest organizations continue
to struggle with putting the control fea-
tures into practice. And if employees
aren’t given the organizational resources
to manage greater pay risk, the result
can be an outright shift of costs to
employees. That, in turn, can quickly
lead to attrition or a workforce unwilling
to expend the discretionary effort that
brings long-term gains.

EXHIBIT 7
How Well Employees Understand the Impact of Their Performance on Business Results
% of respondents
 Only 59% of management and professional
EXECUTIVE MANAGEMENT/PROFESSIONAL NONMANAGEMENT
staff have a complete or strong under-
2%
standing of that link — which calls their
5% 9%
coaching abilities into question. 7% 12%

35% 42%
39% 52%

51% 45%

2007 2007 2007

Complete Strong Average level Low/no level

understanding understanding of understanding of understanding
16 | Reward Challenges and Changes Survey Report
Insufficient Focus on Human Elements of Reward Programs
Can Impede Behavioral and Performance Goals
 More companies have adopted new
compensation and performance manage-
ment technology — especially employee
and manager self-service applications…
 …but technology cannot take the place of
the human interaction that’s at the core of
effective performance management.
 Our respondents say managers are ill
equipped to adequately coach employees
or handle performance problems.
Performance management is another
area subject to significant changes.
Fully 90% of respondents reported
changes in this area in the last three
years, and a virtually identical percentage
expect to make more changes in the next
three years. Close to the top of the list
is adopting new technology (Exhibit 8,
page 17), typically to automate more
aspects of the process and enable
employees and managers to “self serve”
online, whether in setting goals, rating
performance or completing required
evaluations.
But technology is no substitute for the
human interaction that’s at the core of
truly effective performance management.
In our experience, even manager train-
ing in this area is often more about
learning to use a computerized system
than it is about learning how to coach
people or address performance problems.
And perhaps that’s not surprising, given
that it’s far easier to deal with perfor-
mance management as a high-tech
activity than as a high-touch process.
MANAGERS STILL A WEAK LINK IN
THE REWARD CHAIN
The emphasis on technology appears
somewhat shortsighted in light of our
findings. As Exhibit 9 (page 18) shows,
respondents see managers as posing the
most significant obstacle to successful
performance management. They believe
that managers are often unwilling to take
the time to thoroughly evaluate employ-
ees and are ill equipped to coach and
develop their direct reports. Employees
have similar views. According to our lat-
est Global Workforce Survey, only half of
the nearly 90,000 global respondents
believe their manager provides perfor-
mance goals that are challenging but
achievable, while just 48% feel their
manager handles performance reviews
fairly and effectively. In a similar vein,
only 43% say their manager effectively
coaches and builds employee strengths.
And a mere 36% agree managers handle
poor performers well.
While technology has enabled managers
to increase efficiency, it does little more
than streamline certain tasks. And
those tasks, while important, are merely
a means to facilitating that critical dia-
logue between managers and employees
about expectations, contributions and
performance. By treating performance
management as a high-tech activity
rather than a high-touch process, organi-
zations are missing the opportunity to
connect with employees and forge strong
links between individual performance,
organizational performance and rewards.
In short, technology becomes the tail
wagging the dog.
 Reward Challenges and Changes Survey Report | 17

That’s not to say technology isn’t needed. EXHIBIT 8

It can be a very powerful tool for sup- Changes to Performance Management Process: Proposed vs. Actual Changes
% of respondents
porting the performance management
0% 10% 20% 30% 40% 50%
process. Some leading companies, for
example, are creating technology-based Providing more coaching development for managers
linkage frameworks that allow employees 46
41
across the organization to measure their
42
progress against key operational goals.
Incorporating advanced technology
These systems are valuable for relieving
41
overtaxed managers from some of their 30
administrative duties and allowing them 38

more time to focus on coaching and Focusing more on career development

mentoring. But the bedrock of any 39
26
effective performance management 35
system is the manager who helps
Adding competency areas
employees set goals, evaluates their 31
progress against those goals, and regu- 32
21
larly motivates and coaches them.
Increasing the link to salary
25
29
19

Calibrating ratings across departments or teams

24
27
21

Introducing line-of-sight process into goal setting

23
30
22

Incorporating team and individual results

19
22
16

Linking the performance appraisal cycle and salary review cycle

14
32
14

Adding/including rating scales

9
21
7

Planned to change Have changed in Considering changing in

between 2003-2006 past three years next three years
18 | Reward Challenges and Changes Survey Report

EXHIBIT 9
Performance Management Challenges
% of respondents

0% 20% 40% 60% 80% 100%

Managers unwilling to take time to thoroughly evaluate employees

2007 27 55 18
2003 34 55 11

Lack of funds to reward high performers

2007 27 36 38
2003 33 39 28
Managers have not received adequate training on how to be an effective coach
 Technology allows managers to streamline 2007 25 56 19
administrative duties and focus on coach- 2003 29 55 16
ing and mentoring, assuming they have Managers are not adequately rewarded/recognized for managing performance
the skills and information to do these 2007 20 49 31
critical things. 2003 29 47 24

Employee mistrust of performance evaluation rating

2007 20 52 28
2003 18 54 28
Lack of useful technology
2007 20 39 41
2003 18 54 28

Insufficient development opportunities

2007 17 49 35
2003 18 51 31

Too difficult to administer

2007 12 46 42
2003 16 45 39

Managers have too many employees to evaluate

2007 11 50 39
2003 12 50 38
Insufficient support from top management
2007 10 34 56
2003 16 33 51

Significant challenge Some challenge Not a challenge

 Reward Challenges and Changes Survey Report | 19

It’s important for organizations to However, as Exhibit 10 shows, only a

 Managers play a critical role in the
success of reward and performance
management:
 in talking to their reports about their
roles in the organization’s success
 in coaching and mentoring
 in helping employees choose appropriate
training and development opportunities
 in setting expectations regarding
rewards.
acknowledge the critical role managers
play in the reward delivery and perfor-
mance improvement process and then
equip them to effectively fulfill it.
Employees’ ability to gain line of sight,
understand how their roles support
broader organizational goals and how
their day-to-day actions affect longer-
term business outcomes come directly
from conversations with managers —
and not from electronic charts of per-
formance protocols or other technology
applications (see “Linking Employee
Actions to Drivers of Value for the
Business,” page 22).
fifth of respondents think their perfor-
mance management programs adequately
equip managers to identify, develop and
reward high and low performers, and
there’s little evidence they plan to
address this issue in the future. The
percentage of respondents who said
they will focus on coaching in the next
three years has not changed since our
last survey, a finding that once again
highlights misalignment between HR’s
actions and its strategic intentions.

EXHIBIT 10
Effectiveness of Performance Management Systems
% of respondents
0% 20% 40% 60% 80% 100%

Communicating the organization’s mission, vision and values

21 33 46

Equipping managers to identify, develop and reward high performers, and deal with low performers
20 38 42

Improving link to business results

20 37 43

Providing managers and employees with appropriate information

18 46 37

Increasing employee involvement/commitment

16 40 44

Differentiating employee performance based on role and business contribution

15 41 44

Giving employees more control over their contribution

14 36 51

Helping employees see how their activities/decisions affect business results

14 31 55

Extremely/very effective Effective Not/somewhat effective

20 | Reward Challenges and Changes Survey Report
 Only 18% of respondents believe their
companies give managers the information
needed to manage reward and perfor-
mance programs.
 To drive the right employee behaviors,
managers need a range of strategies and
tactics:
 face-to-face meetings
 mentoring and coaching programs
 rigorous performance management
 segmented reward programs.
COMMUNICATIONS STILL ROTE
AND INEFFECTIVE
Our Global Workforce Survey and other
research have found that employees are
growing increasingly skeptical of pay-for-
performance models, and question the
fairness of performance evaluations and
incentive and bonus practices. In light
of those findings — and respondents’
belief that managers are not skilled in
performance management — one would
expect to see companies giving managers
more guidance in making pay for per-
formance understandable to employees.
Yet a mere 18% of respondents think
their companies provide managers — or
employees — with sufficient and appro-
priate information to effectively manage
reward and performance programs.
While respondents tell us they are giving
managers additional information about
the organization’s pay guidelines and
policies, salary structures and merit
budgets, that alone won’t help managers
guide their teams toward adopting the
behaviors that will drive growth for the
organization and produce the desired
rewards for the employee.
In our experience, successful companies
accomplish these more nuanced and
complex aims through tactics ranging
from face-to-face communications with
employees (as opposed to mass print
and e-mail communications), consistent
mentoring and coaching efforts, and
more rigorous performance management
systems. In addition, some companies
are evaluating more critically their
managers’ ability to conduct these
activities, giving special attention to
managers’ skills at conducting face-to-
face conversations.
For example, some companies now
screen for these capabilities as they
consider candidates for managerial
positions. Others are making employee
conversations a discrete part of man-
agers’ job descriptions, then measuring
both the frequency and effectiveness of
their dialogues with employees.
HR’s focus, then, should be on designing
a performance management framework
that integrates all the people manage-
ment and reward processes into a
comprehensive and seamless experience
for the employee. Our data do indicate
that companies are increasingly linking
performance management to other
processes (Exhibit 11) but, to date, the
links are not consistent, nor are they
being consistently applied over time.
 Reward Challenges and Changes Survey Report | 21

EXHIBIT 11
How Performance Management Links to Other Programs
% of respondents
0% 20% 40% 60% 80% 100%

Determines salary increase

71
70

Identifies development and training opportunities

67
67
Assists in career management/planning
67
62

Assists in succession planning

59
 HR’s imperative is designing a holistic 48
rewards and performance management Determines promotions
program that is seamless to the employee 46
and gives managers the support they need. 46

Determines the individual component of the incentive program

44
36

Determines eligibility for variable pay

29
30

Is a threshold for incentive award payouts

24
22

Determines eligibility for long-term/stock awards

16
17

It doesn’t link to any other programs

4
4

Other
3
2

Don’t know
2
2

2007 2003
22 | Reward Challenges and Changes Survey Report

What’s Getting in HR’s Way?

HR arguably has more power, insight and
tools for balancing employees’ needs
with organizational priorities and cost
goals than ever before. So what’s
required to strike a fair balance between
these often competing needs? In our
view, companies need to overcome
three hurdles:
 HR and senior corporate management
need to agree on the role of rewards
in driving performance. Despite the
lessons of the current business cli-
mate, senior management at many
companies continues to view people
as a cost, not as an asset or a strate-
gic investment. As a result, HR may
still be under a strong cost-cutting
mandate.
 HR and senior corporate management
need to have a formal method for
measuring the return on investment
(ROI) of reward programs. ROI is a
common measure to support capital
and marketing expenditures and
legitimize, in the eyes of executive
and board leadership, the payoff for
any proposed cost outlay. HR needs
financial data and fluency to make
a rigorous case for investment in
talent strategies. Otherwise, it will
continue to be limited to relatively
low-budget, piecemeal activity, such
as shifting more fixed compensation
costs to a variable structure.
 Senior corporate management needs
to clearly support HR’s transition
from a tactical to a strategic role. Our
long-term outsourcing research shows
that companies outsource HR func-
tions for two reasons: to reduce costs
and to free HR to focus on more
strategic issues. And while our out-
sourcing data show that companies
do save money, there has been little
or no change in HR time spent on
bigger-picture rewards and compen-
sation design. This suggests the
problem lies not just in freeing HR
from “administrivia,” but in defining
a new role and providing the training,
support and structure to enable the
shift to a strategic partner role.

Linking Employee Actions to Drivers of Value for the Business

Managers can’t provide employees with a line of sight between action
and business outcome if they themselves don’t have a clear, big-picture
view. We work with companies to help build this view using a proprietary
“value driver” methodology that deconstructs an organization’s finan-
cial drivers of value into component actions to define how workers
contribute financial value.
We start by clarifying broad organizational strategy and then define the
success factors critical to realizing that strategic aim. We then identify
the business drivers underlying those success factors (e.g., increasing
sales and customer loyalty, improving operational efficiency, and devel-
oping employee skills and abilities). This in turn supports the develop-
ment of “value trees” for each key business driver, which serve as the
starting points for developing performance goals for departments, teams
and individuals. They can also form the basis for performance-based
compensation as well as learning and development programs.
Individual employees are given specific performance targets that link
directly to key branches of the value tree. For example, a sales manager’s
performance might be measured against the total revenue generated
in a quarter, while a customer service department’s success might be
gauged by customer satisfaction levels.
The manager’s role is to ensure that employees understand the perfor-
mance metrics and the connection between their day-to-day actions and
the organization’s overall success. Managers must also be capable of
fairly and accurately evaluating each employee’s performance against
his or her goals — no easy task, given the extent to which individual
employee goals can vary in degree of stretch and business impact.
However, it is the very precision inherent in this process that ensures
genuine alignment among corporate, functional, team and individual
performance goals.

The Road Map to Success
 Senior management needs to shift its view
of employees from seeing them as a cost
to seeing them as an investment.
 HR must move from the tactical to
the strategic and from incremental
to significant change in rewards and
performance management — and
thereby define a new role for itself.
Reward Challenges and Changes Survey Report | 23
At the end of the day, our survey findings
suggest the current approach to reward
design and delivery, no matter how well
intentioned, is unlikely to yield desired
results. Breaking free from the cycle of
incremental tweaks and adjustments to
existing programs requires new thinking
focused on discontinuous change —
that is, big, bold systemic change that
represents a radical departure from the
past and supports strategic vision for
the future.
Like any evolving entity, an organization
becomes what it rewards. At present,
too many companies fail to grasp the
connection between poor performance
and a misaligned reward strategy.
In an era of accelerated business change,
most organizations review their strategic
objectives every three to five years —
at least — to keep pace with shifting
competitive and market dynamics. But
how often are they reviewing their reward
strategies to ensure that they’re in sync
with new business goals? Over the 12
years that we’ve been surveying compa-
nies on reward challenges and change,
most have probably changed business
strategies two or three times yet, as our
surveys indicate, reward strategies have
stayed essentially the same.
Once a new strategy has been developed,
the organization needs to design, imple-
ment and communicate rewards in ways
that address employees’ sense of fairness
and their need to understand the “deal.”
Employee engagement throughout the
world is very low — 21% according to
our 2007 Global Workforce Survey —
and mistrust of the fairness and accuracy
of pay-for-performance programs is per-
vasive. What’s more, as organizations
implement the bold new approaches
that will help them break the current
rewards mold, they will also be asking
employees who are already weary and
increasingly wary of compensation and
benefit changes to withstand yet another
round of them. The pressure will be
on HR to show that the organization is
aware of the impact such changes have
on the basic employment contract and
that it is committed to providing the
tools, resources and management that
can help employees make those
changes work for them.
24 | Reward Challenges and Changes Survey Report

 The goal: Break the link between poor
performance and a misaligned reward
strategy, and forge a link between
organizational goals and individual
employee performance:
 Define the deal.
 Communicate.
 Keep it fair.
 Review it to ensure it’s always in sync
with evolving business goals.
It’s a risky proposition, but the odds
of success can be highly favorable if
organizations identify required changes
in terms of desired business outcomes
and employee needs, and sequence
those changes based on a thorough
analysis of:
 the efficiency they can bring to pro-
cesses and systems, especially in terms
of managing reward expenditures
 the effectiveness of revamped pro-
grams and practices in promoting
desired behaviors and actions on the
part of employees
 the strategic relevance they will have
in meeting the specific goals of the
business over the long term.
In practice, HR needs to make a greater
commitment to knowing the business
and its employees, and revamping
rewards accordingly. That means, for
example, genuinely customizing rewards
to a more segmented workforce to ensure
that every high-potential employee is
motivated to support business outcomes.
It also means optimizing rewards so that
they “arrive” at a time and in a form
that ensures employees can make the
connection between their actions and
the outcome. And it means personalizing
the experience by making the employee-
manager relationship the foundation of
the performance management process.

Toward an Effective Reward Strategy

 Connect with the business strategy to create a high-performing culture. An organization

becomes what it rewards — and too many companies fail to grasp the connection between poor
performance and a misaligned reward strategy.
 Support the “employment brand.” Organizations need to design, implement and communi-
cate rewards in a way that addresses employees’ sense of fairness and their need to clearly
understand “the deal.”
 Generate maximum return on the reward program investment. Given the size of reward
budgets today, organizations can’t afford to make investment decisions without a very clear
understanding of the return they want on the investment — and the level of investment most
likely to generate that desired return. Increasingly, organizations are defining return in terms
of the employee behaviors they want to promote, such as retention or engagement. And they’re
using a variety of sophisticated, analytic tools to evaluate the extent to which a current or
proposed program will deliver that return. What they often discover in this process is that they’re
overspending in some areas or underspending in others, relative to what they want to accom-
plish with the program. Tools like Towers Perrin’s Total Rewards Optimization help identify a
so-called “efficient frontier” — the point at which required spend aligns with desired return —
to balance the efficiency, effectiveness and impact of reward programs.

 HR must thoroughly understand the
business and employees before it makes
bold program changes:
 to ensure optimal outcomes
 to make the most of available rewards
 to help managers personalize the
reward and performance management
experience for employees.
Reward Challenges and Changes Survey Report | 25
Finally, future changes to programs
need to reflect a reward system of inter-
locking elements that work in tandem.
Determining competitive pay rates and
developing the right pay structure are
undeniably part of that system, but
achieving true behavior change demands
much more. That’s why the role of the
manager is so critical.
Managers need to know how to deliver
critical pay and performance messages.
They need to be able to decipher the
organization and its business for employ-
ees and help them understand what
they’re working for and why. They must
help employees know what, exactly, they
need to do to make a difference to the
business — and their own reward pack-
ages. And managers need to act as
performance coaches, building business
literacy and increasing line of sight so
their employees can see a clear link
between the strategic goals of the busi-
ness and their role in advancing them.
Finally, they need to provide regular, fair
feedback and effective empowerment
so employees can sustain and increase
their contributions to the organization.
CLOSING THE GAP BY BUILDING
BRIDGES
As our survey results show, organizations’
reward and performance management
programs have not kept pace with the
changes in market and business forces.
However, the good news is that respon-
dents also recognize that many of their
programs are not where they should be
and are taking — or will soon take —
steps to bridge the gap. In our consult-
ing experience, there are several key
actions employers should consider to
bring their reward and performance
management programs into alignment
with their business objectives.
Clarify Your Strategy. In large measure, a
reward and performance management
program is dependent on the goals of
the organization and the challenges it
faces in achieving those goals. A com-
pany focused on new product develop-
ment will have different performance
needs than one with a customer service
strategy. A company with a pipeline of
new talent will structure its program
differently from one competing for tal-
ent. When HR partners with both top
management and line management to
understand goals and issues, a high-
impact reward and performance strategy
begins to emerge.
26 | Reward Challenges and Changes Survey Report

Identify Critical Roles and Top Performers Coaching employees to improve per-
— and Reward Them. High performers formance, helping them gain a degree
and those in mission-critical roles are of business literacy and working with
the people you do not want to lose — them to develop a career path are also
and the very people your competition important managerial skills — and they
would like to hire away from you. usually require training for managers to
Retaining top talent is less expensive get them right.
and more efficient than constantly
Understand Which Reward Elements
searching for and training replacements.
Drive Employees — By Segment. As
So it makes sense to structure a reward
the employee population grows more
program that recognizes top performers
diverse and complex, understanding
and provides them with variable rewards
what motivates an individual employee
that are significantly higher than those
or segment of employees becomes
received by average performers. While
critical to driving engagement. A Total
some of these rewards are monetary,
Rewards Optimization approach, which
others can include additional training
helps companies determine the best
and development opportunities, the
mix of rewards both across the organi-
chance to work in another country, or
zation and among specific employee
stretch assignments. Be aware, however,
groups, can help management make
that promotion to people manager may
the most of its budget — and may
not be a good option. Not all top per-
uncover some new and surprising
formers make good people managers,
reward options.
and you may end up turning a top per-
former into a mediocre manager. Use Technology — But Understand Its
Limitations. Relatively new tools such
Train Managers to Manage Performance.
as manager and employee self-service
For a performance and reward program
portals can help companies streamline
to be effective, managers must be able
their reward and performance programs,
to understand the program and commu-
but an overreliance on them can actually
nicate it to their employees. Specifically,
cost an organization employee goodwill.
they need training to understand the
Technology is not a substitute for face-
concept of “line of sight”: linking
to-face interaction with a well-trained
employee actions directly to the goals
manager who can help an employee
of the company. Managers also play a
understand his or her current role in
critical role in helping employees set
the organization, how it relates to the
annual goals based on that line of sight
organization’s overall goals, and how he
and discussing in detail how employees
or she can best manage both day-to-day
are performing against those goals.
performance and career options.
 Reward Challenges and Changes Survey Report | 27

ABOUT TOWERS PERRIN

Towers Perrin is a global professional services firm that helps organizations
around the world optimize performance through effective people, risk and
financial management. The firm provides innovative solutions to client
issues in the areas of human resource strategy, design and management;
actuarial and management consulting to the financial services industry; and
reinsurance intermediary services.

The firm has served large organizations in both the private and public sec-
tors for over 70 years. Our clients include three-quarters of the world’s 500
largest companies and three-quarters of the Fortune 1000 U.S. companies.

The Human Capital Group of Towers Perrin provides global human resource
consulting and related services that help organizations effectively manage
their investment in people. We offer our clients services in areas such as
employee benefits, compensation, communication, change management,
employee research and the delivery of HR services.
www.towersperrin.com

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