The Reward Climate: Current Issues and Trends in UK Total Reward Management

1. The Reward Climate reward update employer of choice pensions equal pay total reward share plans

2. The Reward Climate Mark Childs Director, Total Reward Solutions & immediate past V-P Reward, CIPD

3. Aims • Identify current issues in UK reward • Review recent reward management trends • Explain the factors which are driving change • Forecast likely developments in the next 12 months

4. Method • Findings largely from CIPD’s 2005 reward survey • c. 500 organisations participated, from private, public and voluntary sectors • Organisations cover 1.5 million employees • Supplementary data from other recent surveys • Personal insights as a reward practitioner

5. Overview • Reward Strategy • Pay • Benefits • Pensions • Long Term Incentives

6. Reward Strategy • Increasing acknowledgement that reward is broader than pay alone • It is an holistic endeavour which: • integrates pay, benefits, incentives, employer brand and corporate purpose • encourages discretionary effort • creates engagement • focuses increasingly on business alignment

7. 45% of respondents have a reward strategy Reward Strategy • 1 in 5 companies of <50 employees and 3 in 5 companies of >5000 have a reward strategy • Sectoral differences continue to be significant • Drivers of reward strategy • Recruit & retain key talent • Reward high performers • Support business goals • In 2004 Manage Pay Costs featured strongly • 30% claim a “Total Reward” approach

8. Pay Issues • Widespread acknowledgement that there is no “right way” to manage pay • Descriptions such as appropriate, crafted, tailored and best-fit have replaced “best-practice” • Over 50% of employers are using some form of job evaluation system (44% in 2004) • National Minimum Wage still fails to register as a driver/issue in pay determination (tight labour market might help to explain this)

9. Job evaluation is alive and well Pay Trends • Individual contribution/merit is now the dominant factor in determining pay progression • Persistent pattern of larger companies tending to use formal structures e.g. grades of broadbands • Despite perceptions, job evaluation continues to grow in popularity but in a more innovative way • Take up of broadbanding in public and voluntary sectors continues to lag private sector • Skills based pay continues to decline and regional rates are growing in popularity

10. Increasing Influence Individual merit Market pricing Broadbanding Career grades Job families Declining Influence Collective bargaining The “going-rate” Narrow pay scales Spine point systems Spot rates Pay Influences

11. Bonuses are back and rising fast Bonus Trends • 69% of private sector organisations operate a bonus plan, compared to 23% voluntary,22% public • Annual bonus/incentive plans are being extended to cover a higher proportion of their workforces • 6% is the market median for clerical/manual workers and 20% for senior managers • Bonus earnings are recovering strongly (New Earnings Survey), especially financial services – watch out for the December 2005 data

12. Benefits Issues • 1 in 5 intend to make benefit plan changes in next 12 months – declining from a high of 1 in 3 in 2004 • 25 days holiday p.a. is the “market norm” – with entitlements increasingly harmonised • Childcare vouchers are the benefit most likely to be introduced this year (n.b. tax incentive) • Public sector is leading the pack in workplace creche provision (21% on-site in public sector) • Conflicting picture on private healthcare provision (n.b. recent Mercer’s survey)

13. The dash to Flex is real but overstated Benefits Trends • Rate of growth of Flex remains slow, but certain • 8% of all organisations have a Flex plan, but • 25% of >5000 report a flexible benefits plan • Flex is rare in <1000 employee organisations • Voluntary benefits appear in 25% of organisations • Fuel provision is evaporating, company cars are being parked, risk benefits are threatened • Long Term Disability under pressure • Dependants benefits declining under Flex

14. Benefits Influences • Desire for mass customisation is proving more deterministic than the tax system • Choice is becoming more influential than protection against the contingencies of life • Rising costs (n.b. insured benefits) are causing companies to review provision • Emphasis on choice is masking the declining financial value of core benefit provision

15. Pensions Issues • New entrants now more likely to join a DC plan, but majority of employees remain DB • DB remains prevalent in public sector, but competitive advantage is not being exploited • First signs of public sector change have emerged and are expected to intensify • Slowly dawning on people that employers’ average contribution is 12% DB, 7% DC* • Organisations with <250 employees typically offer stakeholder access only - no employer contribution * NAPF Survey

16. Share plans still matter Share Plan Issues • There is a continuing, widespread and irrational disillusionment with equity vehicles • Perception that most options are further underwater than Atlantis is just wrong • Value of share awards are going to become an important issue again in the recruitment market • Large numbers of employees are nesting some significant gains – due to hatch in 12-18 months • Accounting changes have not impacted share plans as drastically as they did pension schemes

17. Share Plan Trends • 40% of employers offer access to some form of share scheme • SAYE Sharesave remains the most popular vehicle • SIP has grown steadily, but note risk to employer • Executive Share Option Schemes are holding up • EMI continues to motor in SME sector • There is more innovation in share plan design

18. Equal Pay • 41% have completed an Equal Pay Review, up from 26% on 2004 • Private and voluntary sectors are catching up with leading edge public sector practice • All organisations are reporting a higher take up of Equal Pay Reviews, except small employers who generally report they do not have a problem • Reviews tend to cover age and race as well as gender

19. Pay & Bonus Forecast • Most will focus more on pay progression and retention of talent rather than pay inflation alone • Many will experience market pressure to extend participation in bonus schemes • Trend towards individual merit based awards or salary progression will intensify • Bonus earnings will step up during 2005 • Too many organisations will continue to focus more on design than communication of reward • Small companies will begin to realise they have equal pay issues too

20. Benefits Forecast • A growing proportion of the best companies will extend from benefits statements into Total Reward Statements • Flex and voluntary plans will continue to grow in popularity – dependents benefits will suffer • Family friendly will be a strong undercurrent in benefits provision – especially childcare vouchers • Free fuel provision will decline further and a good number will run down company car fleets

21. Pensions Forecast • Public sector will be slow to awaken the sleeping giant of its competitive advantage • By the time it does public sector pensions will be heading for declining value • Immediate vesting will increase costs and further reduce employer commitment to their pension scheme • Pensions has the potential to ignite some serious employee relations issues in the months ahead • A growing proportion of employees will save less than they need to in order to retire when they want to

22. Share Plan Forecast • A lot of HR practitioners will need to improve their understanding of share plans to earn a place at the decision-making table • There will be some rediscovery of the value of share based long-term incentives • Performance share plans will continue to grow in popularity, especially in US parented organisations • A declining proportion of employees will participate in executive share option plans in the short-term

23. Summary Reward climate continues to experience global warming and the patterns of the past will not necessarily inform future strategy