Market Pay Changes and their Effect on the Retention Key Talent in Today’s Economic Climate

1. Market Pay Changes and their Effect on the Retention Key Talent in Today’s Economic Climate IPMA-HR National Conference 2010

2. Presentation Overview • Today’s Economic Climate • Current Trends in HR Programs • Compensation Trends • Examples • Questions and Answers

3. Three Year Economic View* * The Conference Board 2009

4. Economic View (Quarterly) The Conference Board 2009

5. Current Trends in HR Programs • An increasing number of organizations are reversing cost cutting measures taken during the recession • Efforts to attract and retain talent have been reduced if hiring freezes were in place and voluntary turnover was low • Increasing number of private sector employers are restoring 401(k) match • Only 5.5% of public sector employers reduced or suspended their 457 or 401(k) plan match • Fewer organizations planned or held holiday parties in 2009, others reduced party budgets relative to the previous year 5 Sources: Gallagher Benefit Services Minneapolis, WorldatWork, Watson Wyatt

6. Current Trends in HR Programs • 80% of employers who reduced their work week are expected to reinstate full weeks in the next 6-12 months • Very few public sector employers reduced hours (15.3%) • Economists project more than 500,000 additional jobs in state and local government, and companies that serve them, will be lost in the coming year • Most public sector employers: • Froze pay (59%) • Froze hiring (62%) • Restricted overtime (56%) • Restricted travel or education (55-66%) 6 Sources: Gallagher Benefit Services Minneapolis, WorldatWork, Watson Wyatt

7. Current Trends in HR Programs • 2010 Pay Increases • 60% of firms made planned 2010 merit increases (enterprise-wide) • Another 15% are planning workforce-segment increases • 11% of firms still have an enterprise-wide freeze • Another 12% are maintaining a freeze only for certain employee levels or business units • More organizations are expected to restore training program funding and ease/reverse restrictions on travel in 2010 7 Sources: Gallagher Benefit Services Minneapolis, WorldatWork, Watson Wyatt

8. Current Trends in HR Programs • 2010 looks brighter • 27% of firms are hiring/expanding the overall workforce • 3% have instituted broad-based reductions • 45% of firms are hiring at replacement levels only • 25% hiring talent to critical areas • Of those organizations that froze pay in the last 12 months, 90% had or were considering resuming normal pay practices for 2010 • Of those organizations that cut pay in the last 12 months, 70% have already restored or planned to restore rates and 20% said those pay cuts will remain permanent 8 Sources: Gallagher Benefit Services Minneapolis, WorldatWork, Watson Wyatt, Mercer

9. Current Trends in HR Programs • Talent Acquisition • 10% Focus on buying talent externally (new hires) • 15% Building talent from within • 75% Balance between new talent and building within • Voluntary turnover • More than 60% of organizations believe voluntary turnover will increase as the economy continues to recover 9 Sources: Gallagher Benefit Services Minneapolis, WorldatWork, Watson Wyatt, Mercer

10. Recovery Actions • Effect of the recession on organizations • 62% were recovering • 37% considering or implementing recovery actions • 25% recovering, but not taking or considering action yet • 22% did not experience any negative effects from the recession • 15% are still in recession (as of April 2010) Sources: Gallagher Benefit Services Minneapolis, WorldatWork

11. Top Priorities of Human Resources in 2010 • Controlling the cost of employee benefits • Healthcare coverage is expected to increase 7-8% in 2010 • 81% of organizations indicated that health care costs are not a factor when formulating salary budget recommendations • Attracting and retaining top talent • Over 65% of employers are concerned about retaining their key performers • 23% of employers provided retention awards in 2009 • Aligning HR programs with overall Organization strategy • Designing HR programs that motivates desired behaviors and contributes to Organization success 11 Sources: Gallagher Benefit Services Minneapolis, Milliman, World at Work, Mercer

12. Top Priorities of Human Resources in 2010 cont. • Linking pay to performance • Clearly identify key performance measures and make a strong link to compensation • Improving employee engagement • Especially true for top performers; presenting a challenge for retaining critical skills • More employers are implementing wellness programs and providing financial incentives for life-style changes as cost control strategies 12 Sources: Gallagher Benefit Services Minneapolis, Milliman, World at Work, Mercer

13. Pay Programs in 2010-General Market • In 2010, General Increase/COLA budget increases went from 0% (2009) to 1% (2010); 2011 projections expect another 1% rise to 2% • Merit budget increases went from 2.5% (2009) to 3.0% in 2010; increases are expected to level off at 3.0% for 2011. • Organizations using variable pay leveled off at 80% in 2010. Variable pay fell only slightly in 2010 while salary budgets and structure adjustments dropped significantly. 13 Source: Gallagher Benefit Services Minneapolis, IPMA-HR, World at Work

14. Pay Programs in 2010-General Market • In 2010, 2.5% of organizations reported a 0% Salary Budget Increase, well below the 10-year average of 3.8%. • About three in four organizations are budgeting for pay increases between 2% and 4%. Of those organizations awarding base salary increases, 86% of employees are expected to receive an increase which is up 6% from 2009, but well below the 91% in a typical year. 14 Source: Gallagher Benefit Services Minneapolis, IPMA-HR, World at Work

15. Pay Programs in 2010-General Market • Despite signs of improvement in the general economic environment, 36% of private organizations are freezing their salary structures • Roughly 10-15% of both public and private sector employers are planning on freezing their salary budget • More employers are planning on restoring the salary reductions made in 2009 • 15% of public employers renegotiated union agreements in FY09 • 12% of public employers plan on renegotiating union agreements in FY10 15 Source: Gallagher Benefit Services Minneapolis, IPMA-HR

16. Projected 2010 vs. 2009 Structure and Salary Budget* * All percentages do not include zero reporting 16 Source: Gallagher Benefit Services Minneapolis, World at Work

17. The Real Value of Pay Increases 17

18. Total Rewards Model Development / and Training WorkEnvironment Compensation Benefits Base Pay Variable Pay Long-term Incentive Deferred Compensation Spot Awards Discretionary Bonuses Retirement Medical, Dental, Pharmacy and Vision Life Insurance STD and LTD Other Perks Legally mandated benefits Learning and Development Career Opportunities Tuition Reimbursement Job Growth Vacation Wellness Dependent Care Community Involvement Telecommuting Flex Time Affiliation 18

19. Hourly Workers Payroll Breakdown December 2008, BLS Data Proportions vary by job level and from organization to organization 19

20. Elements of Pay Strategy Pay strategy is defined by how an organization competes for talent in the marketplace • Four key elements strategy: • Defining the market: regional, industry, organization size • Deciding pay level relative to the market • Setting the type of pay structure (step, open ranges, no structure, ranges) • Determining the basis for granting increases: length of service, performance, competency/skills, across the board 20

21. Opportunities for Aligning Rewards • Start with drafting a compensation strategy/total rewards strategy • Articulate the organization’s strategy and objectives • Identify measures (metrics) tied to progress made on business objectives (performance) • Qualities of good metrics: understandable, reportable, meaningful and influence-able. • Incorporate measures in the performance management system • Report on progress toward goals • Link rewards to goal achievement 21

22. Strategies for Reducing Layoffs • Offer Work Share Programs, if available in your state • Reduce workweek (20-60% of scheduled time) with proportional decrease in compensation • Loan employees to other employers (costs reimbursed by other employer) • Redeployment and cross-training • Offer unpaid sabbatical leaves for up to one year 22

23. Strategies for Reducing Layoffs cont. • Offer Voluntary time-off without pay • Mandatory time-off without pay (furloughs) • Phased Retirement • Require use of accumulated paid time off/vacation/sick leave time • Organizational restructuring • Enhance effectiveness of performance management program and eliminate weakest performing employees 23

24. Strategies for Maintaining Employee Loyalty • Be open and direct about the financial conditions • Solicit, and listen to, employee input regarding alternative solutions • Share organization strategies regarding service delivery • Increase face-time with employees to promote employee engagement 24

25. Public Employer Initiatives • City of Renton Furlough Program (2009) • Cut city expenses and help balance the City’s budget • Help close the 2009 budget gap while preserving jobs and continuing to provide city services • All employees, excluding fire, police, and emergency staff • Waukesha County Voluntary Unpaid Leave (2009) • Mitigate revenue shortfalls • 1,400 employees eligible for up to 40 hours of unpaid leave • County of San Diego Contract Modifications (2009) • Negotiated with the 5 labor unions and modified current labor contracts • Assessing and modifying retirement plans 25

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27. Questions or Additional Information • Bruce G. Lawson, CCP Managing Director Phone: 602-840-1070 Email: bruce_lawson@foxlawson.com • James C. Fox, Ph.D. Managing Director Phone: 651-635-0976 x12 Email: jim_fox@foxlawson.com 27