Attracting and Retaining Top-Performing Technology Employees IEEE-USA Careers Conference November 3, 2000 Rick Beal 41

1. W A T S O N W Y A T T Attracting and Retaining Top-Performing Technology Employees IEEE-USA Careers Conference November 3, 2000 Rick Beal 415-733-4310 www.watsonwyatt.com

2. “I was insufficiently appreciative of the human dimension. I’ve learned that’s critical.” Michael Hammer, reflecting on the business reengineering movement

3. Agenda • Current Challenges • Recent Research Results • The Human Capital Index™ • Strategic Rewards® • Competitive Advantage of Top Performing Companies 4

4. Challenges in a Tight Labor Market • Critical challenges today: • Attracting the right people at all levels • Retaining (and motivating) them • Focusing on top performers needs • Engaging employees

5. Research • Human Capital IndexTM (HCI) • Strategic Rewards® • Survey of Top Performing Employees 6

6. The HCI Research Process: • Key Linkages to • Organizational Value • Recruiting Excellence • Clear Rewards and Accountability • Collegial, Flexible Workplace • Communications Integrity • Prudent Use of Resources 7

7. Human Capital Practices Create More Value Median 5-Year Total Return to Stakeholders (1/1/94-1/1/99) 103% High HCI Companies 88% Medium HCI Companies Low HCI Companies 53% Source: Watson Wyatt’s Human Capital IndexTM (HCI) Research

8. Linking Human Capital and Value Creation Recruiting Excellence 10.1% Clear Rewards andAccountability 9.2% Collegial, Flexible Workplace 7.8% 4.0% Communications Integrity Prudent Use ofResources -10.0% 0.00% Expected change in market value associated with a significant (1 SD) improvement in HCI dimension Source: Watson Wyatt’s Human Capital IndexTM (HCI) Research

9. Linking Recruiting and Value Creation Professional new hires are well-equipped to perform duties 2.3% Recruiting efforts are specifically designed to support business plan 2.3% Company has established reputation as desirable place to work 1.8% Hourly new hires are well-equipped to perform duties 1.7% Employees have input on hiring decisions 1.4% Formal recruiting strategyexists for hiring critical positions 0.6% 0.00% Expected change in market value associated with a significant (1 SD) increase in HCI practice Source: Watson Wyatt’s Human Capital IndexTM (HCI) Research

10. Rewards and Accountability and Value Creation Employees are eligible for stock plan programs 1.8% Company terminates employees who perform unacceptably 1.8% Company does a good job of helping poor performers improve 1.8% Top performers get significantly more pay than average performers 1.5% Company positions pay above market 0.8% Pay is linked to company’s business strategy 0.6% Employee performance appraisals used to set pay 0.4% Employees participate in profit- sharing plan based on firm’s overall success 0.4% 0.00% Expected change in market value associated with a significant (1 SD) improvement in HCI practice Source: Watson Wyatt’s Human Capital IndexTM (HCI) Research

11. Collegial, Flexible Workplace and Value Creation Flexible work arrangements 1.7% Culture encourages team work and cooperation 1.5% Perquisites do not varywith position 1.4% High employee satisfaction 1.4% Employees are on first name basis with top management 1.3% Titles are not designed todesignate authority 0.6% 0.00% Expected change in market value associated with a significant (1 SD) improvement in HCI practice Source: Watson Wyatt’s Human Capital IndexTM (HCI) Research

12. Communication Integrity and Value Creation Employees have easy access to technologies for communicating 1.8% Employees have the opportunity to give ideas and suggestions directly to senior managers 0.8% Financial information is shared with employees 0.8% Employees have input into how the work gets done 0.4% Business plans and goals are shared with employees 0.2% 0.00% Expected change in market value associated with a significant (1 SD) improvement in HCI dimension Source: Watson Wyatt’s Human Capital IndexTM (HCI) Research

13. Prudent Use of Resources and Value Creation Employees participate in profit sharing based on business unit’s success -0.8% Training programs are maintained even in less than favorable economic circumstances -1.0% Training is provided to employees for attaining higher level positions -1.9% Employees have input in evaluating their peers -2.5% Employees have input in evaluating managers -3.9% 0.00% Expected change in market value associated with a significant (1 SD) improvement in HCI dimension Source: Watson Wyatt’s Human Capital IndexTM (HCI) Research

14. What High Performing Organizations are Doing is What Top Performing Employees are Asking For and it Helps Reduce Turnover of Top Performers and this Leads to Better Performance The Good News: A Virtuous Cycle Exists

15. Strategic Rewards®: Base Pay Benefits Intangible Rewards Incentives • Annual survey of Strategic Rewards® practices • Attraction & retention - HR programs that make a difference • Employer practices survey among 400+ companies in North America • Survey of top performing employees among 3,600 star performers

16. ALL Companies are Having Difficulty Attracting and Retaining ALL TALENT • 83% have difficulty attracting critical skill employees • 65% have difficulty in retaining critical skills - regardless of industry • But now significant increases have resulted in: • Over 50% of employers having difficulty attracting non-critical skills and • 43% having difficulty retaining non-critical skills • and its now worse outside of high-tech Source: Strategic Rewards® 2001

17. And the Trend Will Continue 1970 - 1980 1980 - 1990 1990 - 2000 30 Percent Shortfall* of Younger Workers Over the Next Decade Change in Labor Supply Age of Worker 71.3% 25 - 34 22.3% -8.6% 24.8% 35 - 44 55.1% -3.1% * Demand for labor is increasing at 2 percent per year (or roughly 20 percent for ten years), which, combined with an almost 12 percent drop in the absolute number of workers age 25-44, yields a 30 percent shortfall. Source: Strategic Rewards® 1999/2000

18. New Employment Deal From fixed pay to variable based on performance From lifetime employment to an opportunity to contribute From a predictable career to individual opportunity and investment in self Top Performers Demand High levels of compensation and ability to build wealth Opportunities for advancement, job redesign, and new skill acquisition Career development, investments toward business literacy Top Performers Have Accepted the New Employment Deal in a Major Way Source: Strategic Rewards® 1999/2000, Supplemental Survey of Top-Performing Employees

19. What Motivates Top Performers? Source: Strategic Rewards® 1999/2000, Supplemental Survey of Top-Performing Employees

20. What Managers Don’t Know May Hurt ThemThe Perception Gap in AttractingPay Approaches Perceived as Very Effective 72% Paying above market 33% 47% Group incentives 15% Exempt overtime (time 35% off) 6% Top Performing Employees 40% Project incentives 13% Employers 31% Exempt overtime (cash) 6% Stock grant 53% 30% programs/stock options 44% Technical pay premiums 21% 51% Sign-on bonuses 31% 0% 10% 20% 30% 40% 50% 60% 70% 80% Percentage of Respondents (Percent responding "very effective") Source: Strategic Rewards® 1999/2000, Supplemental Survey of Top-Performing Employees

21. What Managers Don’t Know May Hurt ThemThe Perception Gap in RetainingPay Approaches Perceived as Very Effective 69% Paying above market 29% 54% Spot bonuses 18% 38% Exempt overtime (time off) 5% Top Performing 46% Group incentives Employees 20% Employers 44% Project incentives 24% Stock grant 51% programs/stock options 32% 41% Technical pay premiums 26% 26% Exempt overtime (cash) 9% 36% Retention/”stay bonus" 35% 0% 10% 20% 30% 40% 50% 60% 70% 80% (Percent responding "very effective") Percentage of Respondents Source: Strategic Rewards® 1999/2000, Supplemental Survey of Top-Performing Employees

22. Effectiveness of Non-Compensation Reward Plans in Attraction and Retention Percentage Responding Percentage of Companies Reward Plan “Very Effective” with Plan 76%  68%  27%  45% 73%  43%  27%  8% Opportunities for advancement 79% 30% 65% Learning new skills in current job 26% 53% Use of competencies for career path/development 16% 57% Career development (non-promotional) 20% 56% Flexible work schedules 29% 36% Work at home 28% 36% Reduced work week 30% 29% Sabbaticals 26%  Significant Increase +10%  Moderate Increase +5% Top Performing Employees’ Opinions Employers’ Opinions Source: Strategic Rewards® 1999/2000 and 2001, Supplemental Survey of Top-Performing Employees

23. Do Technology Companies Do Anything Different? Source: Strategic Rewards® 2001

24. Top Performing High Technology Employees Source: Strategic Rewards® 2001, Supplemental Survey of Top-Performing Employees

25. Top Performing Employees’ Responses Vary All Secretarial/Clerical/ Professional/ Managers/Directors/ Men Production technical Sr. Managers 1. Compensation 1. Benefits 1. Opportunity to 1. Compensation 1. Compensation develop skills 2. Benefits 2. Job security 2. Compensation 2. Benefits 2. Benefits 3. Opportunity to 3. Compensation 3. Benefits 3. Type of 3. Opportunity to develop develop skills people/culture skills 4. Opportunity for 4. Vacation/PTO 4. Freedom to work 4. Opportunity to 4. Opportunity for promotion independently develop skills promotion 5. 5. Opportunity to 5. Vacation/PTO 5. Opportunity for 5. Freedom to work Vacation/PTO develop skills promotion independently Women Earn $100K+ Earn Under $30K Age 50+ Under Age 30 1. Opportunity to 1. Benefits 1. 1. Job security 1. Benefits Compensation develop skills 2. Opportunity to 2. 2. Type of 2. Benefits 2. Compensation Opportunity for develop skills promotion people/culture 3. Compensation 3. Compensation 3. Benefits 3. Compensation 3. Freedom to work independently Opportunity to 4. 4. Vacation/PTO 4. 4. 4. Vacation/PTO Opportunity to Job security develop skills develop skills Type of 5. Freedom to work 5. 5. Opportunity to 5. Opportunity for 5. Vacation/PTO independently develop skills promotion people/culture Source: Strategic Rewards® 2001, Supplemental Survey of Top-Performing Employees

26. Technology Companies are More Strategic! • Despite the traditional view that technology companies place an inordinate premium on speed over thoughtfulness • 65% of Technology companies have a formal recruitment strategy • Compared with only 47% of non-technology companies • But only 25% of Technology companies have a retention strategy • This still exceeds the 16% of non-technology companies with a formal approach to retaining employees Source: Strategic Rewards® 2001

27. Are High Performing Companies Different? • High performing companies are winning the war for talent • Turnover rates are decreasing • Recruiting costs between 70% and 200% of annual salaries • Resulting in a median 17.8% five year return • High performing company program designs are based on: • Performance Improvement • Communication • Flexibility • Involvement • Measurement Source: Strategic Rewards® 2001

28. Performance Improvement • Significantly more high performing organizations approach their reward programs as a means of engaging people in improving business performance • Starting from this clearly articulated premise helps prevent programmitis - ie. programs du jour that don’t drive results Source: Strategic Rewards® 2001

29. Performance Improvement • Best Practice • Wal-Mart focuses intensively on how employees adapt during their first 90 days by assigning veteran employees as mentors. They go on to assess each new hire’s progress at 30-, 60-, and 90- day milestones. Results: reduced attrition rates by 25%. • Chevron’s IT unit provides efficient web-based staffing reallocation databases designed to match skills, growth opportunities and project team needs • Performance measurement — measuring performance against a specified set of job-related competencies: • Providing tools for employee development tied to rewards and geared toward enhancing organization success • Rapid identification of performance issues • Coaching and mentoring programs — providing non-direct report with contacts within the company to assist employees with direction and career-planning • Inplacement/Redeployment • Retrain to learn new skills • Utilize systematic web-based staffing processes

30. Communication • The best reward strategies and programs will not achieve their full potential if they are not • Clearly articulated and • Understood by employees Source: Strategic Rewards® 2001

31. Communication • Best Practices • Scient appointed a Chief Morale Officer who is responsible for fostering a positive culture, bringing people issues to the top of the company’s agenda, leading morale-building efforts, organizing company rallies, roundtable luncheons, employee recognition and awards. Results: a low 11 percent turnover compared to the 35 percent industry standard and a great recruiting-oriented website. • . • Toys ‘R Us identifies listening and acting upon their employees dissatisfiers in exit interviewers as one of the key reasons they were able to reduce turnover by 35 percent. • Communication — systematic strategy and processes for keeping employees in the loop • Making sure they believe the value the company places on them • Making sure they understand the value of what the company provides to them (benefits, opportunities, development, etc.) • Exit interviews — conducted by department managers, focus on underlying issues, find trends, implement recommendations

32. Flexibility • The most successful firms are more likely to report reward plan flexibility • The impact of the need to operate at internet speed requires a nimble response Source: Strategic Rewards® 2001

33. Flexibility Best Practice Rockwell instituted a new innovation program designed to celebrate and reward with stock options not only patents but business process improvements. A key goal is to harvest the innovations currently unidentified. Silicon Valley Bank developed a concept of an full lifestyle portal for their employees on the company HR-intranet. Designed to address all life events - it acts as a concierge on the web for employees. The result is a closer relationship between the Bank and its employees, a better understanding across functions of many of the bank’s services and improved productivity due to reduced distractions and hassles in trying to resolve problems. • Multiple Incentives • Its not just about options • Adjust to evolving conditions through other forms of incentive • Vary short-term objectives vs. mid and long-term • Adjust to People Needs • Flexible scheduling/ Job shares • Floating hours at either end of the business day, split workday, shift, work week • Address demographic changes • Virtual office/telecommuting • Productivity generally remains the same or increases - overcome hesitancy to provide

34. Employee Involvement • Employee involvement in reward plan design is essential if programs are to be customized to target audiences • This approach is utilized by a minority of organizations - but it is much more common among high performing companies Source: Strategic Rewards® 2001

35. Employee Involvement Best Practices Harley-Davidson increased employee participation and challenged employees at the same time when it asked them to take an active part in building a better motorcycle. Through this effort, many innovative worker-designed items are now utilized throughout its plant. Scitor, near the top of the Top 100 Best Places to Work, communicates its unique environment internally and externally. Scitor takes the position that all benefit and reward programs belong to the employees and should provide the best possible benefits. Scitor seeks thorough employee input in all proposed changes. • Recognition and rewards usage and design • Employee design of cash and non-cash awards given to individuals or teams based on performance • Implement innovative employee ideas • Recognition motivates top performers • Social communities • Encouraging the development of social ties among key employees binds employees to a social network at work • Separate locations for technical/creative groups • Off-site, think tank environment

36. Measurement • High performing organizations are much more likely to measure their reward plan results • The old adage of what gets measured gets accomplished is directly relevant Source: Strategic Rewards® 2001

37. Measurement Best Practices Prudential established their “Building Management Capability” program, centered around a planning model that projects skill/talent needs and attrition rates. This program enables managers to develop targeted retention initiatives and more cost-effective succession plans for filling skill/talent gaps. UPS identified their drivers as hot skill employees and expensive to bring on board due to the huge learning curve in getting familiar with their routes. After analyzing the reasons drivers left, it determined that the number one reason was the task of loading packages before each run. To reduce turnover, they eliminated the loading task from the driver’s job and hired a new group to load them. Driver turnover rate fell dramatically. Of course, turnover in this new position is astronomical, but it is fairly simple to learn and recruit for this position. • Measurement - Asking early and often: • Retention is a critical business measurement but it is rarely a part of a manager’s performance metrics • Company culture, people practices, policies shape an employee’s commitment level and retention • Research consistently validates the significance of management’s role in employee retention • Find out what issues exist before the turnover begins, make adjustments based on the feedback to the work environment and to management style

38. Key Strategic Rewards® Messages • Top performers are self-motivated and recognize their value as free agents. • Take money off the issues table by paying above market for top-performers - engage them through their primary motivators. • They will leave for money but it isn’t the primary driver. • Competitive differentiation comes from understanding and capitalizing on individual employee’s needs. • Non-Technology companies are closing the gap in the war for talent • The old advantages of stock and casual, non-bureaucratic work styles have been adopted across industries • Technology companies lead by maintaining a strategic people vision

39. Key Strategic Rewards® Messages • Play to win • The future will be created by Human Capital • High performing companies have gained competitive advantage by insuring their compensation programs are: • Performance-Oriented • Well-Communicated • Flexible • Based on employee involvement and • Measured.

40. “The New Economy is heavy on intellectual capital. The sharing of knowledge is what really makes it go. Today, teamwork and empowerment are crucial to success.” John Chambers Chairman & CEO Cisco Systems 1995–Present 1995 Market Cap $9 billion 1995–Present has created $480 billion in shareholder value