Weathering an Economic Downturn Rachel Breen Everaard July 15, 2008

1. Weathering an Economic DownturnRachel Breen EveraardJuly 15, 2008

2. Background • The Federal Reserve has predicted the possibility of a “severe and protracted downturn” lasting into 2009 • 1/3 of employers are considering lower staffing levels • 66% of organizations reported that the soaring fuel costs are having a moderate to very high negative effect on their business operations • Blue chip companies neared a so-called bear market this month, representing a loss of 20% from last year's high

3. Key Considerations Cost Control: Taking steps to manage human capital costs Risk management: Making sure workforce changes don’t undermine program effectiveness, governance or fiduciary responsibilities Talent management: Revisiting your talent management and rewards programs to increase workforce effectiveness Workforce optimization: Taking a hard look at workforce needs to be sure you’ve optimized your people assets HR effectiveness: Assessing the effectiveness of HR operations

4. People Cost Optimization Framework HR plays a critical role in supporting organizational objectives to contain and reduce costs – this is accomplished through four primary HR-related cost “levers” Business Strategy (Cost Reduction) Execution • M&A/Divestiture • Operations Closure or Shut Down • Joint Venture • Other Efficiency Targets Workforce Optimization HR Service Delivery Optimization HR Program & Plan Management Productivity Enhancement • Organization Restructuring • Workforce Planning • Workforce Transition • Sales Force Effectiveness • HR Service Delivery Model • Process Redesign • Technology Enhancement • Reward Cost Savings • HR Program Review • Risk Management • Vendor Management • Performance Management • Change Management • Training

5. Business Strategy (Cost Reduction) Execution Workforce Optimization HR Service Delivery Optimization HR Program & Plan Management Productivity Enhancement HR Program & Plan Management

6. Compensation Innovations • Differentiate – Identify cost-effective tactics that ensure the retention of high performers and more aggressive reallocation away from mediocre and poor performers • Grant large, cliff vesting RSU grants to key contributors • Consider multi-year cash based retention bonuses with interim payment possibilities based on company performance • Allow an additional week of paid time off for exceptional project delivery Example: Built a retention program for an oil & gas client to keep technical drilling employees on rigs. Retention bonuses were granted based on company and individual performance and were paid over a 3 year period.

7. Compensation Innovations • Be flexible – As employees are caught in cash crunches, offering short term relief can have high value to employees with no real incremental cost to the company • Institute Short term choice program for one-time cash awards in lieu of equity • Buy back underwater options for cash • Give gas/grocery cards • Extend 401K borrowing periods Example: In light of record gasoline prices, one healthcare company issued gas cards to employees to demonstrate their appreciation for the increase in discretionary income allocated to travel.

8. Compensation Innovations • Use soft dollars – The increased interest in flexible work schedules is an opportunity for employers to reduce the need for lay-offs • Cut back to 80% time • Grant an additional week of time off for a 5% salary reduction • Allow additional work-at-home days • Offer an unpaid sabbatical with benefits continuation Example: A steel-producer implemented a program to taper labor costs by using a progressive scale of reduced hours or wages.

9. Compensation Innovations • Understand the financial priorities – understanding which form of capital, cash or equity is more plentiful for the company can guide design decisions • Pay hiring bonuses at the end of the first year • Pay hiring bonuses in RSUs with 1 yr cliff vesting • Delay performance bonuses with a 10% premium paid for the delay Example: An investment bank looking to conserve cash at fiscal year-end to pay bonuses offered key new hires significant RSU awards to attract new talent.

10. Compensation Innovations • Measure the ROI – Calculating the all-in cost of each pay program relative to the pay delivered and discontinuing low-return forms of compensation can free up pay dollars to boost other forms of pay • Consider moving dollars to a more cost-effective form to increase the bottom line If administration costs are high for one form of compensation • Calculate costs associated with administration, operation, communication and management time • Reassess countless hours spent “differentiating” 3.8 vs. 4.2 salary increases. Example: If it’s costing $50 per year per employee to deliver stock worth $50, move $75 to the bonus pool and bolster the opportunity for differentiation and flexibility while improving ROI, with $25 dropping to the bottom line.

11. Additional HR Program & Plan Management Considerations The following are the programs/plans we will consider in implementing rewards cost reduction

12. Business Strategy (Cost Reduction) Execution Workforce Optimization HR Service Delivery Optimization HR Program & Plan Management Productivity Enhancement Workforce Optimization

13. Workforce Planning Workforce Planning: Global Technology Company Business Driver • Changing business strategy (acquisitions, expansions into Asia, onshore vs. offshore) drove need for integrating workforce planning into business and financial planning process Solution • Analyze/conduct workforce diagnostics, workforce assessment, and workforce modeling • Develop workforce planning process, tools and templates to align with business and financial planning • Develop a scorecard of metrics to measure workforce planning success Outcomes • Defined workforce competency model and labor cost model • Consolidated R&D centers based on current and future workforce needs • Right mix of onshore vs. offshore labor • Reduced “single point of failure” dependencies

14. Business Strategy (Cost Reduction) Execution Workforce Optimization HR Service Delivery Optimization HR Program & Plan Management Productivity Enhancement HR Service Delivery Optimization

15. Case Study: Insurance Company Business Driver • Redesign retained HR and ensure change readiness as part of an overall service delivery remodel that includes HR outsourcing. Support generalist transition toward business partner • Solution • Helped client collect customer input about business requirements for HR • Activity-based costing survey and design of generalist and Staffing roles • On-going communication, training, and readiness assistance • Coordination of outsourcing with overall HR strategy and service delivery • Outcomes • Successful implementation of service delivery model and outsourcing • Reallocation of retained HR headcount to emphasize business impact • Effective communication and stakeholder readiness to use new processes • Implementation to achieve targeted savings in business case • Enhanced strategic capabilities for HR reporting, consulting, planning

16. Business Strategy (Cost Reduction) Execution Workforce Optimization HR Service Delivery Optimization HR Program & Plan Management Productivity Enhancement Productivity Enhancement

17. Rewards Rewards and Recognition to Retain High Performers: Healthcare Organization Business Driver • Healthcare system had a paper-based performance management process that was not consistent among all the hospitals within the system • The system wanted to implement pay for performance to differentiate between high and low performers Solution • Implemented a web-based performance management tool • Redesigned job descriptions system-wide • Developed a new performance management evaluation process, forms, and ratings Outcomes • Aligned expectations for job standards based on common job descriptions across the system • Focus on pay for performance tied to individual goal setting process

18. Cost Reduction Value Examples

19. Workforce Optimization Cost Savings • Salary and benefits savings from reduction-in-force • Severance Solution savings • Eliminates FICA taxes – both employee and employer • Coordinates and offsets severance payments with State Unemployment Insurance (SUI) benefits • Coordinates severance payments with new employment income by stopping severance payments upon new employment • Early retirement option savings • Effective execution of talent development directly contributes to increased organizational effectiveness and profitability, leading up to as much as 15.4% advantage in total shareholder return* * Corporate Leadership Council

20. Assume 1,000 employees displaced with average severance of $20,000 per worker and State UI of 30% of salary Assume another job is found, on average, 80%* of the way through the severance period Severance Solution® Potential Savings • * National average (according to Bureau of Labor Statistics) is approximately 75%. If 75% assumed, savings would be greater.

21. HR Service Delivery Cost Savings • Process and technology redesign can lead to significant cost savings • Typical HR transformation savings range from 10 – 20% of total HR operating cost • Creating and delivering a competitive employment value proposition allows an organization to increase its access to candidates on the labor market by more than 50% and improve the commitment of current employees by up to 29%*

22. Productivity Enhancement Cost Savings • Effective execution of talent development directly contributes to increased organizational effectiveness and profitability, leading up to as much as 15.4% advantage in total shareholder return* • By refocusing performance management efforts on the strategies with highest impact, organizations can improve employee performance by up to 50%* • Employee absenteeism costs organizations an average of $660 per employee in direct payroll costs. A 1% reduction in an 8% absence rate for an employer with 20,000 hourly workers and an average annual salary of $40,000 per worker can equate to $6.5 million in savings per year** * Corporate Leadership Council ** 2005 CCH Unscheduled Absence Survey

23. Next Steps • Understand the key financial objectives for the upcoming year and beyond • Identify critical roles, knowledge/skills, and metrics based on business strategy, required skills, and criticality of knowledge • Conduct arewards program gap assessment against future needs and “best in class” practices in a downturn • Build a comprehensive plan for action with supporting business case • Decide on which initiatives to pursue first • Build a plan for gaining/sustaining organization support for action • Develop an evaluation strategy with metrics and scorecards to assess effectiveness

24. Rachel Breen Everaard Director, Human Capital Management