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Playing to Win in a Global Economy

Canadian Findings
A Watson Wyatt report
Executive Summary

Attracting and retaining talent is becoming more critical — and more difficult — for Canadian organizations. With an aging workforce, younger workers in short supply and unemployment rates at a 30-year low, the competition for key talent is increasingly fierce. And organizations are feeling the heat.

Consistent with global findings, the challenge is compounded by the fact that many organizations do not fully grasp what employees or prospective hires value in an employment arrangement. The survey results highlight some important disconnects between what employers believe employees are looking for — and what employees themselves say matters most to them.

Some of the study’s key findings include:

Fully 68% of organizations report having moderate to great difficulty in attracting employees with critical skills, up significantly from past surveys. Similarly, 60% of organizations say they are having difficulty attracting top performers, again up noticeably from past findings.

Employers place pay and benefits lower on the priority list of prospective hires than employees do when asked to identify the top reasons that people join an organization.
An even bigger disconnect occurs regarding why employees leave. Here, employers overemphasize pay and career development, identifying them as the top considerations, while employees cite stress levels and the need for work/life balance.

Attraction and Retention of Talent

Finding the right talent is becoming increasingly challenging for Canadian organizations, which are rightfully worried about a looming labour shortage. Concerns about being able to find and retain the right talent are being fuelled by a tightening labour market that is being squeezed at both ends.

Based on the most recent Statistics Canada census data, the number of employees in the near-retirement age group (55 to 64) increased by 28% between 2001 and 2006, more than 5 times the national average of 5.4%. Population projections show that about 1 in 5 of the working-age population (15 to 64) will consist of people aged 55 to 64 in 2016. On the flip side, younger workers are in short supply. Within the next 10 years, the number of retirees could outnumber new entrants to the workforce.

Added to this, labour market conditions in Canada have been remarkable in recent years. Buoyant labour demand and substantial employment growth have led to a continuous decline in the unemployment rate, which reached a 3-decade low of nearly 6% in 2006. Some industries, such as finance and health care, are experiencing extreme tightness in their labour markets with unemployment rates less than 2%.

Of the Canadian employers that participated in this year’s survey, 68% report having moderate to great difficulty in attracting employees with critical skills, up significantly from both 2004 and 2005. Further, 60% have difficulty attracting top-performing employees, up from 40% in 2005 and 37% in 2004 (Figure 1).

Drivers of Attraction

Similar to the global findings, the Canadian results show critical disconnects between employer and employee views on the reasons that employees join an organization. Employers think prospective hires are most concerned about career development, employer reputation and company culture. Employees, in contrast, say they are most concerned about the nature of the work, base pay and job security (Figure 2).

The attraction factors are similar among top-performing employees and highly engaged employees (Figure 3). However, top-performing employees include promotion opportunities in their top items, while highly engaged employees include employer reputation and career development.

These findings indicate that employers are underestimating monetary factors when it comes to attracting employees, while employees see them as critical. Although compensation alone isn’t enough to keep an employee, a competitive rewards offering is seen as the price of entry to attract talent. Accordingly, it is important for organizations to ensure that prospective hires understand what is being offered with respect to pay and benefits. Of greater concern domestically, Canadian employers underestimate the value of base pay more than other regions, ranking it fourth in importance, as compared to other regions in the global study and Canadian employees who rank it the number 2 item.

Organizations would do well to ensure that prospective hires understand what is being offered with respect to pay and benefits. Employers might believe that company features such as reputation and culture attract talent, but prospective employees are more focused on their own needs — “what’s in it for me” — a point that should not be underestimated during the recruitment process.

Drivers of Retention

Retaining talent is also critical to business success, especially in a tight labour market. Here, too, the results show a disconnect between employers and employees on why people leave an organization (Figure 4). In this case, employers overestimate the importance of base pay and career development and underestimate the impact of stress and the need for work/life balance.

Stress levels and work/life balance were also the highest-rated factors for all employees and for the top-performing and highly engaged employee groups (Figure 5).

Organizational Actions to Enhance Employee Retention

Employers are acting to address some of the key reasons that employees leave, but their actions address issues related to stress and the need for better work/life balance to only a limited degree (Figure 6).

This suggests that there are still untapped opportunities, such as wellness-related initiatives and flexible work arrangements for employers to improve their ability to retain top talent.

Although the study shows the critical need to address stress and well-being issues, organizations cannot neglect the need to provide promotional opportunities, competitive base pay and improved line of sight (through pay programs that align with business objectives and clearly link pay and performance).

Total Rewards

In the face of looming labour shortages, organizations increasingly recognize that there is no single reward element that ensures the attraction and retention of talent. Instead, there are myriad considerations that employers must balance and integrate to create a compelling employment offer. Taking a holistic or total rewards perspective when defining and evaluating an employment offering can help an organization achieve the best return on its investment in people.

To understand how employers are changing the emphasis of their total rewards programs, the survey asked employers to indicate which offerings had received more attention or investment in the last 3 years (Figure 7).

As noted earlier, while the employer areas of focus overlap with the priorities cited by employees, the employer emphasis on employee wellness is limited.

Pay and Performance

Aligning rewards with performance is critical to business success and to ensuring that talent is effectively engaged in delivering results. Accordingly, the role of compensation in aligning employees with business objectives — primarily through links between pay and performance — continues to be an important focus for employers.

Employers’ Performance Expectations

In the face of a challenging and competitive business environment, employers are continuing to raise the performance bar for their employees:

36% expect the company financial performance targets related to the short-term incentive/bonus program to increase over the next 12 months.
33% expect individual performance expectations related to their short-term incentive/bonus program to increase over the next 12 months.

Forging the Links

Despite the critical importance of individual performance to organizational performance, both employers and employees give their organizations low marks for how they link pay and performance.

Figure 8 shows that both groups see managers as the weak link in the chain. However, organizations might not be equipping managers with the necessary tools needed to bridge the current gap, such as appropriate training, communication tools, information on how programs are structured and so on.

Interestingly, the responses from highly engaged employees on these items are 20 to 30 percentage points higher than the employer responses. This highlights the linkage between employee engagement and employee understanding of the business and how their performance is being managed.

Employees are also critical of how their organizations design and administer compensation programs. Although 77% say they have a good understanding of how their job contributes to the achievement of their company’s business goals, they are less positive about their pay plans and how they are communicated.

Only 55% of employees say they are satisfied with their base pay.
38% are satisfied with their incentive pay opportunity
40% think their organization actively communicates how its pay plans are designed
59% say they understand how base pay decisions are made. The numbers are even lower for bonuses (51%) and long-term incentives (43%).
The survey findings suggest that organizations need to engage managers more effectively in performance and compensation management. Stronger linkages between performance and rewards are needed if organizations are to engage employees in helping achieve business results.

Conclusion

The spectre of looming labour shortages highlights the need for thoughtful — and integrated — strategies to attract and retain talent while effectively managing performance.

Although employers can take certain immediate actions to better position what they have to offer, a strategic response to shifting demographics and a tightening labour market will demand longer-term systemic changes as well.

Employers will need to balance short-term actions, such as off-cycle pay increases, with longer-term and more holistic initiatives, such as those related to employee wellness and work/life balance. Although holistic actions generally require more time and effort, they often have more sustainable impact. It is relatively easy for another organization to offer higher compensation, but pay alone is generally not enough to ensure the attraction and retention of talent; other considerations are also critical.

Canadian organizations are making strides in designing and delivering effective reward offerings; however, the results show that there are still many opportunities to improve how they leverage and communicate their reward programs to support the attraction and retention of talent.

In light of the survey findings, Canadian organizations need to be increasingly proactive in addressing talent needs and performance barriers to sustain and grow the business. There are large disparities between those practices employers think are effective and what employees value.

By taking a longer-term view, employers are more likely to create the organizational infrastructure and environment required to attract, retain and inspire the talent they need to achieve lasting success. This longer-term view must consider both the foundational elements of pay and benefits, and the work environment factors that top their employees’ priority list.

Organizations that can successfully introduce holistic strategies to attract and retain talent will be better positioned to navigate the labour market challenges that are becoming more evident — and that will only intensify in the years ahead.

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