Towers Watson June 2015

towerswatson.
com
Insider
Volume 25|Number 6|June 2015
Seven Things to Know About Employee

Retention Risks
By Lucia Carrera, Richard Luss and Jing Wang
Over the last several years, increasing demand

for labor has created a more fluid job market.
The factors fueling the demand include
international expansion and the introduction
of new products, changes in organizational
strategy and a general upsurge in the
willingness of employees to pursue
opportunities at other organizations.
Far more organizations have increased hiring activity
over the last year than have cut back 48% versus
15% and attrition or turnover has increased more
often than not 35% versus 18%, according to recent
research. As a result, more than half of all organizations
globally report having difficulty retaining some of their
most marketable employee groups including
high-potential and top performers.1 These retention
challenges loom even larger in emerging markets,
where top talent can be especially scarce and wages
have been rising rapidly. Employees recognize these
challenges, as only 42% say their employer does a
good job of retaining talented employees.
While improving economies and greater corporate
profits have prompted an increase in demand for labor
generally and certain skills in particular, the question
remains: How do we identify those employees who
represent the highest retention risk or are most
available for poaching?
Measuring employee retention risk

To assess retention risk, we look at employees own
assessments of the likelihood of leaving their employers
within two years and whether they would prefer to stay
or leave given a comparable opportunity in another
organization. The first attribute addresses the selfreported likelihood of leaving, while the second reflects
desire to stay or to leave. We categorize the combinations

of responses into four categories of retention risk.2
Stayers have the lowest retention risk (Figure 1). They
have no intention of leaving their employer in the
immediate future and, even if a comparable opportunity
became available elsewhere, they would still prefer to
stay put. To lure them to another company would probably
require a much better opportunity. Fewer than half of
all employees are Stayers.
While employees in the Soft Stays group have no
intention of leaving anytime soon, their inaction does
not signal a strong preference to remain with their
employer. Rather, while these employees are not
actively looking, those with the right skills or in the
right situation who were offered an attractive opportunity
elsewhere might well jump at it. Soft Stays are too large
a group to ignore they are over one in four employees
and even if they remain with the company, their
attitudes may present productivity challenges.
The Leavers and the At Risk are the high-retention-risk
groups. These employees who number more than
one of every four workers say they are likely to leave
their employers within the next two years. Employees
In This Issue
1
Seven Things to Know About
Employee Retention Risks
5
IRS Says Self-Certification for
Hardship Distributions Not
Allowed
7
The Human Factor: How
Employee Attitudes Toward
Change Affect Change
Management
11
IRS Determination Letter
Program to BeCurtailed
13
Embedded Individual
Out-of-Pocket Maximums
Apply to Health Plans in 2016
15
More Than Hard Hats and
Safety: Engaging Workers in
the Natural Resource Sector
19
SECs Pay-for-Performance
Proposal Will Require New
Pay Calculations
20
Making Brick-and-Mortar
Retail Dance: Employees
Make the Difference
25
New FAQs Address ACA
Preventive ServicesMandate
News in Brief
12
Massachusetts Delays Paid Sick
Leave Law for Employers With
Preexisting PTO Policies
Figure 1. Fewer than half of all employees are Stayers

Employee
group
Stayers
Soft Stays
At Risk
Leavers
Attributes
Not likely to leave in the next two years
Would prefer to remain with their organizations even if a
comparable opportunity arises
Not likely to leave in the next two years
Would not prefer to remain if a comparable opportunity arises
Are likely to leave in the next two years
Would like to remain with their organizations even if a
comparable opportunity arises
Are likely to leave within the next two years
Would not prefer to remain if a comparable opportunity arises
Source: Towers Watson 2014 Global Workforce Study
See 2014 Global Talent Management and Rewards Study: Making the Most of the Employment Deal, Towers Watson, August 2014.
See The 2014 Global Workforce Study: Driving Engagement Through a Consumer-Like Experience, Towers Watson, August 2014.
% of all
employees
45%
28%
9%
18%
Insider | June 2015
Insider
Insider is a monthly newsletter developed
and produced by Towers Watson Research
and Innovation Center.
Either way, the question is:
Who are the Leavers and the At Risk?
Insider authors
Precious Abraham
Catharina Anandikar
Puneet Arora
Ann Marie Breheny
Cindy Brockhausen
Lucia Carrera
Khushboo Chaudhary
Lynn Cook
Matt Deruntz
Alec Dike
Stephen Douglas
Richard Gisonny
Anu Gogna
who leave their organizations for another firm typically come from one of these
groups. A would-be job applicant who initiates contact rather than being sought
out is probably a Leaver or an At Risk.
Russ Hall
Amy Johnson
William Kalten
Patrick Kulesa
Benjamin Lupin
Richard Luss
Brendan McFarland
Steven Nyce
Dave Ronald
Kathleen Rosenow
Steven Seelig
Urvi Shriram
Jing Wang
Reprints
For permissions and reprint information,

please e-mail Nancy Connors at
nancy.connors@towerswatson.com.
More information can be found on the
website: www.towerswatson.com.
Visit Insider online
towerswatson.com/research/insider
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Towers Watson
Research and Innovation Center
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Arlington, VA 22203
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The articles and information in Insider do not constitute legal,
accounting, tax, consulting or other professional advice. Before
making any decision or taking any action relating to the issues
addressed in Insider, please consult a qualified professional advisor.
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With Leavers and At-Risk workers making up about one-quarter of the employee
population and the need for most organizations to increase their recruiting and
retention efforts to support their business objectives it is important to
understand these people and what makes them tick. Every organization has to
determine which of their employees represent high retention risks and which
employees they should target for hiring based on their business strategy and
employment deal. Nevertheless, it can be helpful to start with a general
understanding of the characteristics of employees who are more likely to have
one foot out the door or to submit their resume in response to an opening.
Here are seven things to know about the Leavers and the At Risk (hereafter high
retention risks):
1. They are not lemons.
Picture this scenario. Someone wants to sell a car and advertises in the newspaper
and online. The advertisement attracts a potential buyers attention and the two
discuss terms. As you would expect, the seller extols the virtues of the car.
What is the one question running through the potential buyers mind? Thats right:
If this car is so great, why are you selling it?
This is what economists often refer to as moral hazard, which occurs in any situation
in which the seller knows more than the potential buyer about the product, a very
common occurrence. What often happens is that potential buyers assume the car,
or any product for sale, has problems and discount the price they are willing to pay
to reflect that assessment. But because that price is too low for a good car, the
only sellers are those whose cars have problems (often referred to as lemons),
thus justifying the buyers initial skepticism. The used car market thus becomes
what is known as a lemons market.
As an employer interviews applicants for open positions, that same suspicion may
come into play. If these would-be employees are so great, why are they available?
What do their current employers know that the interviewer will only find out after
theyre on the job? Contrary to such misgivings, however, roughly one-third of
high-retention-risk employees received a rating of exceeds or far exceeds
expectations in their most recent performance review, while only one in five got a
review below met expectations (Figure 2, next page). These numbers are not
that different from employees generally.
Moreover, many desirable employees fall into higher retention risk groups. More
than one in four employees who have been formally identified as high potential are
also in a higher retention risk group. Between 25% and 30% of employees in such
critical positions as engineers, nurses, sales professionals and IT professionals
also fall into these high-risk groups.
Too many high-retention-risk employees are top performers, high potentials or
have critical skills to ignore or downplay the retention challenges they represent.
2. They may come from unexpected sources.
There is a common perception that turnover risk is high at certain key points over
a workers career and very low at others. While high-retention-risk employees are
more likely than low-risk employees to have at least one year of experience but
Insider | June 2015
less than five (42% versus 27%), the evidence

suggests that people can be high retention risks at
any point in their tenure (Figure 3). For example, one
of 10 high-retention-risk employees has been with
their current employer less than a year
highlighting the value of re-recruiting employees from
their first day on the job. Likewise, almost one out of
four high-retention-risk employees has been with
their employer for 10 years or more.
Figure 2. Over one-third of high-retention-risk employees exceed performance

expectations
3. They feel blocked in their careers.
Among all employees, a lack of opportunities for

career advancement is the second most frequently
cited reason for leaving an organization, although
employees generally believe their opportunities for
career advancement have been improving.3
Nonetheless, more than 70% of high-retention-risk
employees say they have to leave their organization
in order to advance their careers, compared with only
about 30% of low-risk employees.
Figure 3. Retention risks do not drop dramatically until employees have been
with their organization over a decade
Employees who feel unable to move up may be

especially likely to leave because career advancement
often holds the key to a higher income and improved
financial position. This is particularly important to
the high-retention-risk group because:
4. They are worried about their finances.
Most people worry about their financial situation now
and then. This can be productive if it prompts changes
in behavior, such as reviewing current financial
status, checking the adequacy of retirement savings,
reducing unnecessary expenses, paying off debts,
saving for future purchases or retirement, or taking
advantage of discounted employer-provided services.
But recent Towers Watson research4 has shown that
low pay or minimal pay increases are a significant
source of work stress for employees, and excessive
stress and worry can undermine health and
performance at work.
Most employees who are high retention risks say
they often worry about their current finances as well
as their financial future. This may be a reasonable
response to their financial status, or their concerns
might overstate the facts or reflect a tendency to
worry. Regardless of the mix of causes, the outcome
is that high-retention-risk workers are about 70%
more likely to say that financial concerns and worries
are keeping them from doing their best work (Figure 4).
In addition to being a retention risk, these employees
are also likely to be a productivity risk.
3
Rating on last performance

review
All
Lower
risks
High retention
risks
Exceeds or far exceeds

expectations
39%
40%
34%
Met expectations
44%
44%
45%
Failed to meet/partially met

expectations
17%
16%
21%
Tenure with current

organization
Less than one year
All
Lower
risks
7.6%
High retention
risks
6.8%
9.9%
8.6%
6.8%
13.6%
Two years but less than five years
22.6%
20.5%
28.8%
Five years but less than 10 years
25.6%
26.0%
24.3%
10 years or more
35.6%
39.9%
23.4%
One year but less than two years
Figure 4. High-retention-risk employees are more likely to have money concerns

affect their productivity
Money concerns keep me from

doing my best work at my job
All
Lower risks
High retention
risks
22%
19%
32%
Figure 5. High-retention-risk employees are less engaged

All
Lower risks
High retention
risks
Highly engaged
40%
45%
28%
Unsupported
19%
20%
15%
Detached
17%
15%
21%
Disengaged
24%
20%
36%
But there is another reason to view high-retentionrisk employees as a potential productivity risk:
Too
many high-retentionrisk employees are top
5. They are less engaged.
performers, high
There is a strong correlation between retention risk

and employee engagement (Figure 5).5 Highly
engaged employees score high in all three elements
of sustainable engagement engagement, energy
and enablement while scores for disengaged
employees are below average in all three. Previous
Towers Watson research has shown a relationship
between higher levels of sustainable engagement
and better organizational performance.6 Moreover, at
potentials or have critical

skills to ignore or
downplay the retention
challenges they represent.
See Towers Watson, Career Management: Making It Work for Employees and Employers, October 24, 2014.
This research also shows employees financial priorities and the impact of recent economic events on their worries about their finances and their preferences for security.
See Global Uncertainty Fuels Workers Desire for Retirement Security, Towers Watson Insider, July 23, 2014.
See The Power of Three: Taking Engagement to New Heights, Towers Watson, February 2015.
towerswatson.com/research/insider 3
Insider | June 2015
the individual level, higher levels of engagement are

associated with greater productivity and, as we see
here, lower retention risk. The data also point out a
common fallacy. Many organizations believe that the
At Risk are predominantly disengaged and thus view
their possible departure as a potentially good thing.
However, only 36% of high-retention-risk employees
are disengaged, while over one-fourth of them are
actually highly engaged.
While the intention to leave (or the decision to remain)
with ones employer can affect engagement, it is more
likely that sustainable engagement drives retention
risk, or at least that engagement dominates. As a
result, an effective strategy for the key drivers of
sustainable engagement can also significantly reduce
retention risk, especially when combined with effective
programs to help employees deal with their financial
concerns.
In the absence of effective programs in these areas,
it is important to know two additional things about
high-retention-risk employees:
Almost
half of workers in
high-retention-risk groups
are already looking for a
new job.
6. They are more likely to embrace change.

There is a difference between being disengaged and
expressing a desire to work somewhere else, and
actually doing so. Its easy and low cost to say one is
ready to go, but actually finding another job involves
significant effort, change and disruption. So, many
people who say they intend to leave may not actually
go. This would be especially true for individuals who
prefer routines and like to stick to the traditional
ways of doing things.
Some employees, however, express a general
preference for change and, as a result, are much
greater retention risks. Most employees in the
high-retention-risk group say they enjoy new
experiences, embrace change and are happy to take
risks to get more out of life.
Some of this may be posturing especially since
many people consider these qualities as desirable.
Even many low-retention-risk employees claim to
share these traits. But the desire to see oneself as
happy to take risks to get the most out of life
even risks that might come with a significant
downside can also make it easier to leave your
current employer if another opportunity arises.
Having a self-image as someone who enjoys taking
risks may be priming the pump to transform
disengagement and a desire to leave into action.
And that points to another particularly important fact
about high-retention-risk employees:
7
7. They are already looking for a new job.

Not all of them, but enough to be worried. Over the
last month, 46% of employees in these highretention-risk groups have used an online or mobile
app to look for a new job, compared with roughly
13% of employees in the low-risk groups. Highretention-risk workers are also more than four times
as likely as other employees to report that one way
they cope with work stress is to look for a new job.
Conclusion
The global financial crisis did not put an end to the
long-term tightening of labor markets or the scarcity
of talent it just gave organizations some breathing
room to adapt. But the time for complacency has
passed, as hiring activity and turnover have ticked
up. More than one quarter of employees fall into a
high-retention-risk category, and many of them are
top performers or high potentials and possess the
critical skills necessary for hard-to-fill positions.
Employers will find it useful to understand the
characteristics of these employees: They are not
necessarily young or in that one-to-five years of
experience slot. Many of them feel that their career
has stalled and the only way to move up is to move
on. Others are worried about their financial situation
and that worry is affecting their productivity. Many
are also disengaged.
Almost half of workers in high-retention-risk groups
are already looking for a new job and are open to
perhaps even excited by the prospect of a
fresh start in a new job. Time might be running out
for keeping these employees. But, even if they stick
around, employers still need an engagement strategy
to keep their productivity from flagging.
A successful engagement strategy is fueled by a
deep understanding of employee attitudes and
needs. Employers can obtain such an understanding
through focus groups, a total rewards optimization
analysis, an employee engagement survey or
microsegmentation tools that open a window into
areas outside the work experience. This employee
research should be linked to predictive analytics to
develop models that help the organization understand
the factors associated with lower productivity or
increased turnover levels.
Organizations can also calculate the financial return
of these investments by modeling the financial
cost of turnover.7 Other analyses can examine the
relationships among employee characteristics,
program features, use of and satisfaction with health
To get an estimate of the financial cost of turnover at your organization, go to towerswatson.co1.qualtrics.com/SE/?SID=SV_3rTDdz1qmcYI5YV.
Insider | June 2015
and wellness programs, and retirement savings

behavior that are important to help address employee
well-being.
Together, these tools can give organizations a leg up
on recruiting new employees, boost retention and
productivity for current employees, and lead to better
financial performance.
About the study

The Towers Watson 2014 Global Workforce Study
covers more than 32,000 employees selected from
research panels that represent the populations of
full-time employees working in large and midsize
organizations across a range of industries in 26
markets around the world. It was fielded online during

April and May 2014. The study is designed to help
companies better understand their diverse employee
segments and the factors that influence employee
performance on the job by gauging changing attitudes
that affect attraction, retention, engagement and
productivity.
A
successful engagement
strategy is fueled by a deep
understanding of employee
attitudes and needs.
For comments or questions, contact

Lucia Carrera at +1 598 2626 2536,
lucia.carrera@towerswatson.com;
Richard Luss at +1 703 258 7549,
richard.luss@towerswatson.com; or
Jing Wang at +86 5990 1150,
jing.wang@towerswatson.com.
IRS Says Self-Certification for Hardship

Distributions Not Allowed
By Puneet Arora, Alec Dike and Stephen Douglas
The IRS recently warned plan sponsors

that plans may not authorize hardship
distributions based on self-certification
of hardship needs by participants.1 The
agency also reminded plan sponsors that
it is ultimately their responsibility to
ensure that their plans are being
administered properly, even if they
outsource defined contribution (DC)
plan recordkeeping to a third-party
administrator (TPA).
While the IRS has not issued a timing requirement,
compliance with the rules for hardship distributions
appears to be a high priority in IRS examinations, so
plan sponsors may want to review their administrative
practices and consider making changes. However,
sponsors may also wish to consider that the IRS is
already under some pressure to retreat from what
many view as a new position.
Background
401(k) and other DC plans often allow participants
to take distributions in cases of hardship. In 401(k)
plans, hardship distributions can generally be taken
only from accumulated elective deferrals (but not
from earnings on such deferrals), employer nonelective contributions (sometimes referred to as
1
profit-sharing contributions) and regular matching

contributions. In addition, some 401(k) plans may
allow hardship distributions of certain contributions
made before 1989.
Under 401(k) regulations, hardship distributions
must meet a two-prong test: (1) the participant is
experiencing an immediate and heavy financial need,
and (2) the distribution is necessary to satisfy that
immediate and heavy financial need.
The
IRS is already under

some pressure to retreat
from what many view as a
new position.
Immediate and heavy financial need

The determination of whether a participant has an
immediate and heavy financial need is generally
based on all the facts and circumstances. However,
the regulations list some circumstances that are
deemed to constitute an immediate and heavy
financial need and thus constitute safe harbors:
Medical expenses that would be deductible under
the tax code
Costs relating to the purchase of a principal
residence
Tuition and related educational fees for the
employee, employees spouse, children or
dependents
Payments necessary to prevent eviction or
foreclosure on a principal residence
Burial or funeral expenses for the employees
deceased parent, spouse, children or dependents
Expenses for the repair of damage to the
employees principal residence that would qualify
for the casualty deduction under the tax code
See Keep documentation for hardship distributions and Keep documentation for plan loans, Employee Plans News, Issue No. 2015-4, April 1, 2015.
Insider | June 2015
Plans generally base the availability of hardship

distributions on one or more of the safe harbor
situations rather than the participants specific facts
and circumstances, mostly because administering
hardships under specific facts and circumstances can
be cumbersome and time consuming, and requires
the plan administrator to exercise additional discretion.
Distribution necessary to satisfy immediate

and heavy financial need
According
to the IRS,
there is no rule in the
401(k) regulations
permitting participants
toself-certify the nature
of their hardship.
Under the regulations, a distribution is not considered

necessary if the employee has other resources
available to meet the financial need, as determined
by the relevant facts and circumstances. However, a
distribution is automatically deemed necessary to
satisfy a financial need if both of these requirements
are met:
The employee has obtained all other available
distributions and loans under the plan and all
other plans maintained by the employer.
Under the terms of the plan or another legally
enforceable agreement, the employee is prohibited
from making elective contributions and employee
contributions to all plans maintained by the
employer for at least six months after receiving
the distribution.
Most 401(k) plans use the deemed necessary
standard for this second prong of the test, so the
plan administrator doesnt need to inquire into the
participants financial status. Thus, participants are
generally permitted to take a hardship distribution as
soon as the plan administrator confirms that they
have obtained all other currently available plan
distributions and loans, and are restricted from
contributing to any plans for at least six months after
receiving the hardship distribution.
Reliance on representations from employees
The position taken by the IRS in its April 1 Employee

Plans News complicates the determination of
whether a plan participant has an immediate and
heavy financial need. According to the IRS, there is
no rule in the 401(k) regulations permitting
participants to self-certify the nature of their
hardship. Instead, the IRS says:
Also, electronic self-certification is not
sufficient documentation of the nature of a
participants hardship. IRS audits show that
some TPAs allow participants to electronically
self-certify that they satisfy the criteria to
receive a hardship distribution. While
self-certification is permitted to show that a
distribution was the sole way to alleviate a
hardship, self-certification is not allowed to
show the nature of the hardship. You must
request and retain additional documentation
to show the nature of the hardship.
The IRS position comes as a surprise to some plan
sponsors, as many TPAs that provide hardship
distribution processing services have allowed
participants to self-certify the nature of their
hardship. Some are urging the IRS to reconsider its
position and are arguing that the current stance is
contrary to statements made by IRS representatives
in the past and is not supported by the 401(k)
regulations or associated language.
Plan loans
The IRS newsletter also articulates the agencys
position on obtaining documentation for purposes of
plan loans made to purchase a principal residence
(most loans are not taken for this purpose).
The 401(k) regulations permit plan sponsors that are

not using the deemed necessary standard to rely on
an employees self-certification that the second-prong
standard is met. The representation must be in writing
or another form prescribed by the Commissioner,
and employers may not rely on an employees
representation given knowledge that the employees
need could be relieved by:
Under the tax code, participants must repay loans

from a qualified retirement plan within five years,
unless the loan is to acquire the participants
principal residence. While plans are not required to
allow a longer repayment period for such loans (or to
allow loans in the first place), many plans extend the
repayment period to 10 or 15 years for loans used
to buy a primary residence.
1. Reimbursement or compensation by insurance

2. Liquidating assets
3. Stopping elective contributions or employee
contributions to the plan
4. Obtaining another available distribution (such as
plan loans) under plans maintained by the
employer or by another employer
5. Borrowing from commercial sources
The article in Employee Plans News outlines the

documents that plan sponsors should obtain,
including documentation verifying that the loan
proceeds were used to purchase or construct a
primary residence. Moreover, the plan sponsor
must obtain documentation of the home purchase
before the loan is approved. IRS audits have found
that some plan administrators impermissibly allowed
participants to self-certify their eligibility for these
loans. The article does not say what, if any,
penalties were imposed on these plans.
Most plans, however, apply the safe harbor standard

when making a hardship distribution.
Self-certification not enough
Insider | June 2015
Going forward
Plan distributions that do not qualify for hardship
may not qualify under other distribution criteria and
thus could constitute a disqualifying event. If the IRS
adheres to this position, it could seek penalties from
plan sponsors. Given the strong reaction, it is certainly
possible that the IRS will reconsider its position.
Plan sponsors should review their policies and
procedures for approving hardship distributions and
loans to assess whether their practices comply with
the IRS current thinking and consider what role, if

any, their TPA will take in discussions with the IRS if
their services are not consistent with the agencys
position.
Puneet Arora at +1 703 258 8310,
puneet.arora@towerswatson.com;
Alec Dike at +1 312 525 2297,
alec.dike@towerswatson.com; or
Stephen Douglas at +1 914 289 3397,
stephen.douglas@towerswatson.com.
Plan
sponsors should
review their policies and
procedures for approving
hardship distributions
andloans.
The Human Factor: How Employee

Attitudes Toward Change Affect Change
Management
By Khushboo Chaudhary, Richard Luss and Urvi Shriram
The dynamics of globally competitive

markets have accelerated the pace of
organizational change particularly as
the world economy recovers from the
financial crisis of 2008. In a global survey
of employee attitudes, many employees
reported that their organization had
been through significant changes over
the past year (Figure 1).
More than 70% of employees said their employer
had made major changes, such as a merger or
acquisition, downsizing, restructuring, sale of a
business unit or outsourcing of jobs during the
pastyear. In addition, nearly one in three indicated
their organization had grown or expanded during
thattime frame.
This pace of change is likely to continue. Over the
next three years, almost 70% of organizations expect
to pursue international market expansion, while
over half expect to pursue a merger or acquisition,
according to a recent employer survey (Figure 2).
Despite improving economic conditions, nearly one in
four (23%) employers anticipates a workforce reduction
during the next three years.
While these major changes are fairly common, other
more routine but still challenging transformations are
ongoing as well, such as the adoption of emerging
technologies; changes to reward program design;
and job redesigns affecting work hours, reporting
Figure 1. Most employees report changes at their organization in past year
Activity
% of employees who report their

organizations have done this
activity in the past year
Grown or expanded
32%
Acquired another organization
20%
Been acquired by another organization

Downsized
Filed for bankruptcy
Merged with another organization
5%
19%
1%
5%
Outsourced any jobs
15%
Restructured
16%
Sold significant business units

None of these
4%
28%
Source: Towers Watson 2014 Global Workforce Study1
Figure 2. Most organizations expect significant changes ahead

% of organizations that expect
to pursue this activity over next
three years
International market expansion
69%
Merger or acquisition
55%
Outsourcing/offshoring
55%
Workforce reduction
23%
Source: Towers Watson 2014 Global Talent Management and Rewards Study2
relationships and day-to-day business operations.

In this rapidly evolving environment, organizations
cannot afford to ignore the effects of change on their
employees, or the effects of employee attitudes
toward change on their own success.
See 2014 Global Talent Management and Rewards Study, Towers Watson, April 2014.
Insider | June 2015
Figure 3. Employee attitudes at organizations going through change lag those

at high-performing organizations
Variance from average: Globally
10%
Communication
Competitiveness
Leadership
Image 14
Compensation and benefits
Training
Career development
Performance evaluation
Engagement
Goals and objectives
Teamwork
Customer focus
Empowerment
Supervision
0%
10%
6
6
16
13
11
10
10
10
5
5
7
7
5
4
5
6
6
4
20%
8
8
7
6
6
6
4
4
Transitional vs. global average High performance vs. global average

Note: Shaded bars denote a statistically significant difference (p.05).
Source: Towers Watson Norm Database
Our research suggests that the impact of change can

be consequential and the returns on handling
it more effectively are substantial. As shown in
Figure 3, the attitudes of employees at organizations
going through significant changes tend to be less
favorable than those of other employees across all
work-related areas with the largest attitudinal
gaps in company image (14 percentage points) and
leadership (9 percentage points).3
While
slightly more than

half of change projects are
initially successful, in the
long run, only one in four
meets its objectives.
On the other side of the coin, employees at highperforming organizations tend to have much more
favorable opinions than those at organizations
undergoing significant changes or than employees
overall. The largest gaps between these organizations
and high-performing organizations are in the areas
of company image (24 percentage points),
communication (22 percentage points), leadership
(20 percentage points) and competitiveness
(19 percentage points).
Revamping the benefit program can also be disruptive.
Pension plan changes have broad impact, typically
leading to lower satisfaction with the plan and reduced
desire to remain with the employer particularly
among less engaged employees who had considered
the plan an important reason to join or remain with
the organization. Employees at organizations that
have made changes to their pension plans are more
likely to reevaluate their own retirement plans and to
worry about their financial situation, an important
factor in employee engagement and retention.4
Differences in employee attitudes are consistent

with another key finding in our research: the
prevalence of failed changes. Organizations that
manage both change and communication effectively
are 3.5 times as likely as other organizations to
report that they significantly outperform their peers
financially; and yet, while slightly more than half of
change projects are initially successful, in the long
run, only one in four meets its objectives.5 This same
research found that three areas stand out as critical
for organizations looking to improve change
effectiveness:
Focusing on the fundamental levers (leadership,
communication, involvement, training/learning and
measurement) that are known to drive success
Paying careful attention to employees evaluating
the culture, employee readiness for change and,
in particular, the impact of changes on people
Training managers to be catalysts for change and
holding them accountable
Attention to these key areas can help employers
succeed as they manage change. One of the
weakest areas for many organizations is in
evaluating their employees, particularly the impact of
employees general attitudes toward change. Yet
these attitudes will affect both the employers
chances of successful change and the employee
behaviors likely to be affected by change.
How do we measure employee

attitudes toward change?
The way employees feel about changes at work may
be influenced just as strongly by their own attitudes
toward change as by the changes themselves and
the way they are managed. We divide employees into
three groups, ranging from employees who prefer
change (one quarter of employees) to employees
who prefer stability (one quarter of employees).
Employees who prefer change:
Like new experiences
Embrace change
Are usually among the first people to try new
technologies
Are happy to take risks to get the most out of life
Employees who prefer stability generally dont agree
with any of the above statements. The remaining
50% of employees fall somewhere in the middle
tending to like new experiences and embrace change
without being early adopters or demonstrating a
preference for risk-taking.
See How Does Change Affect Employee Engagement? Towers Watson, January 2015.
See Attracting and Keeping Employees: The Strategic Value of Employee Benefits, Towers Watson Insider, May 2014.
See 2013 2014 Change and Communication ROI Study, Towers Watson, December 2013.
Insider | June 2015
Figure 4. Employees tend to prefer new technologies and ways of doing things
Degrees of preference toward new technology and new ways of doing things
Prefer A
1
Option A
New technology vs.
proven technologies
Prefer experimenting
with new technology
Prefer change
New ways of doing

things vs. traditional
methods
Prefer new methods
Prefer change
Prefer stability
Other employees
Prefer stability
Other employees
Neutral
4
3
56%
33%
4%
40%
17%
56%
50%
9%
67%
33%
Prefer B
Option B
7
35%
5%
22%
64%
Prefer proven technology
28%
45%
13%
23%
Prefer traditional methods
These attitudes are reflected in enthusiasm for new

technology versus preference for proven technology.
Employees in general lean toward trying new
technologies versus sticking with proven ones. As
shown in Figure 4, employees who prefer stability are
also more likely to prefer proven technologies to
trying new ones (50% versus 33%). Two in three
employees who prefer change also prefer trying new
ways of doing things, compared with only 28% of
those who prefer traditional ways of doing things. A
plurality of employees who prefer stability also prefer
doing things the traditional way (45%).
Overall, these preferences reflect a workforce that is
generally open to change in the abstract: both to
new technology and to changes in the way things are
done. Whether these general attitudes persist when
it comes to specific changes affecting their own jobs
may be a different matter, however.
Employees attitudes toward change

relate to their attitudes toward their
organization and organizational changes
Employees attitudes about change strongly relate to
their attitudes about their employer and changes at
their organization (Figure 5). Most employees who
prefer change agree that their organization is
changing at the right pace (61%) and that it
implements changes well (62%), while only onequarter of those who prefer stability approve of the
pace of change and even fewer agree that the
changes are implemented well.
Given their attitudes regarding how well their
organization handles change and the widespread
prevalence of change, it is not surprising that
employees who prefer stability tend to be less
engaged than employees who prefer change
(Figure 6). More than half of all employees who
prefer change are also highly engaged three times
the percentage of employees who prefer stability
(57% versus 19%).
Figure 5. Employees attitudes toward organizational change reflect their

preferences toward change
At my
organization:
Employees who
prefer stability
Other employees
Employees who
prefer change
We are changing at
the right pace
25%
41%
61%
Changes are well

implemented
21%
41%
62%
Figure 6. Employees who prefer change are also more engaged

Sustainable
engagement
groups
Employees who
prefer stability
Other employees
Employees who
prefer change
Highly engaged
19%
37%
57%
Unsupported
16%
20%
18%
Detached
19%
19%
12%
Disengaged
46%
24%
12%
The causation can work both ways in this analysis.

Highly engaged employees are attached to the
organization, receive the support they need to feel
enabled and are generally energized at work. As a
result, they are also likely to be better equipped to
embrace change within the organization when changes
do occur and may even prefer change. On the other
hand, disengaged employees may suspect the worst
from any change or fear they will not get the support
they need to successfully navigate these changes
and therefore have a preference for stability.
The relationship between preference for change and
turnover risk exhibits a different pattern (Figure 7,
next page). Normally, there is a strong relationship
between engagement and an employees preference
to remain with the organization. This is borne out by
the fact that employees who prefer change are the
most likely to be highly engaged and among the
most likely to be Stayers. Nevertheless, employees
who prefer change are just as likely as those who
prefer stability to be Leavers and more likely to be At
Insider | June 2015
Figure 7. Preference for change and turnover risk

Turnover risk
group6
Employees who
prefer stability
Other employees
Employees who
prefer change
Leavers
18%
20%
19%
5%
8%
14%
Soft Stays
37%
28%
22%
Stayers
40%
45%
45%
At Risk
Employees
who prefer
change might be
champions of change but
represent turnover risks,
while employees who
prefer stability may resist
change and represent
productivity risks.
Risk, despite being three times as likely to be highly

engaged. Thus, high levels of engagement do not
necessarily translate into unwillingness to leave.
Employees who prefer stability are significantly more
likely to be Soft Stays than employees who are more
open to change suggesting that their lack of
engagement is less likely to lead to turnover.
Both groups show a similar pattern in terms of the
relationship between perceptions of how well the
organization handled change and employee
engagement (Figure 8). Only 5% of employees who
prefer stability and who thought their organization
handled change poorly were highly engaged, while
almost two thirds (64%) of those who prefer stability
and approved of the way changes were handled were
highly engaged. A similar pattern emerges among
employees who prefer change (11% versus 86%).
The pattern of turnover risks associated with each
group is also interesting. Despite their general
reluctance to make changes, one in three employees
who prefer stability and who rate their organization
poorly on change effectiveness is at high risk for
turnover (Leavers and At Risk), with most of the rest
representing less than fully engaged employees who
are Soft Stays. However, when they approve of the
way their employer has handled change, the number
of employees who prefer stability and are at high risk
drops to roughly 10% consistent with the pattern
for engagement.
For employees who prefer stability, handling change

effectively is associated with higher engagement,
significantly lower turnover risk and less productivity
risk. Among employees who prefer change, more
than half of those who believe their organization has
handled change poorly are at high risk for turnover.
Employees who both prefer change and believe that
their employer handles changes well are less likely
to be in these high-risk groups; and yet, while 86%
are highly engaged, more than 20% still would be
considered significant turnover risks.
Together these two sets of data indicate that
employees who prefer change are more likely to
approve of the way their employer handles change
and to be highly engaged, but they are also more
likely to be turnover risks. On the other hand,
employees who prefer stability are less likely to leave
the organization but more likely to be disengaged.
A shorthand way of summing up these findings is that
employees who prefer change might be champions
of change but represent turnover risks, while
employees who prefer stability may resist change
and represent productivity risks.
Conclusion
The pace of change at most organizations is unlikely to
slow dramatically in the future and, given the returns
on handling change well, effective change management
will likely provide a sustainable competitive advantage
in the future. Despite its importance and the time
and effort devoted to studying the best levers to
drive success in these areas, only one out of four
changes achieves its objectives.
While the tools and processes for communicating
and managing change have improved, the people
side remains a challenge. Some employees are
fundamentally predisposed to embrace change, while
others have an affinity for stability. The differences
Figure 8. Perceptions of change effectiveness relate to engagement and turnover risk

% of employees in group who are:
Change
effectiveness
Highly
engaged
Employees who prefer

stability
High (top 25%)
64%
5%
5%
28%
6%
34%
Employees who prefer

change
High (top 25%)
86%
5%
16%
21%
Low (bottom 25%)
11%
43%
9%
52%
Employee group
Low (bottom 25%)
Leavers
At Risk
5%
High retention risks

(At Risk + Leavers)
10%

Employees who do not intend to remain with their employer over the next two years are identified as Leavers or At Risk the difference being that at-risk employees expect to
leave but would prefer to remain where they are, even if a comparable job were available elsewhere. Employees in both groups are significant turnover risks. Stayers intend to remain
at their organization and would prefer to do so even if a comparable opportunity arose they represent the lowest turnover risks. Soft Stays are interesting because, while they intend
to remain with the organization, theyre open to changing their minds if a comparable opportunity becomes available elsewhere. Their intention to remain with their employer more
strongly reflects their perception of a lack of comparable opportunities elsewhere than a desire to stay.
Insider | June 2015
between these employee segments are reflected in

their assessment of how well the company has
handled the changes, their engagement and their
retention risks. Some employees find change
energizing and a boost to productivity. But, these
same attitudes make these employees turnover risks
even when the organization successfully delivers
changes. Employees who are less comfortable with
change are more likely to be skeptical and even
critical of how it is handled. Some of these changeresisting employees may become retention risks, but
they are more likely to become engagement and
productivity challenges.
Recognizing the challenges these types of employees
can pose is an important step in managing changes
well, and helping them survive the process with their
productivity and engagement intact. For organizations,
the next step is to identify which employees might
prefer stability and which might prefer change the
subject of an upcoming article.
About the study

The Towers Watson 2014 Global Workforce Study
covers more than 32,000 employees selected from
research panels that represent the populations of
full-time employees working in large and midsize
organizations across a range of industries in 26
markets around the world. It was fielded online during
April and May 2014. The study is designed to help
companies better understand their diverse employee
segments and the factors that influence employee
performance on the job by gauging changing attitudes
that affect attraction, retention, engagement and
productivity.
Recognizing
the challenges
these types of employees
can pose is an important
step in managing changes
well, and helping them
survive the process with
their productivity and
engagement intact.

Khushboo Chaudhary at + 91 124 433 7052,
khushboo.chaudhary@towerswatson.com;
Richard Luss at +1 703 258 7549,
richard.luss@towerswatson.com; or
Urvi Shriram at + 91 124 433 7096,
urvi.shriram@towerswatson.com.
IRS Determination Letter Program to

BeCurtailed
By Russ Hall, Bill Kalten and Dave Ronald
IRS officials have informally announced

the agencys intention to sharply curtail
the determination letter program for all
individually designed retirement plans
starting in 2017.1 Many large employers
maintain individually designed plans, which
include both defined benefit and defined
contribution plans. These sponsors could
still obtain a determination letter for initial
qualification and upon plan termination.
Officials said the IRS would review some
types of intervening amendments through
the program, although they have yet to
specify which ones.
The officials indicated that, in lieu of periodically
reviewing plans for compliance with qualification
requirements, the IRS plans to provide model plan
amendments for most or all of the changes in its
annual cumulative list of changes in plan qualification
requirements. While this could be helpful, it would
not address some amendments not prompted by
changes in applicable rules, such as adding a new
benefit or converting a traditional defined benefit
1
plan to a cash balance plan. If such amendments are

not reviewed until plan termination, the IRS could make
a retroactive determination that the plan violated some
preexisting qualification requirement. The officials
expressed a desire to retain a remedial amendment
period for required and discretionary amendments,
so perhaps this concern will somehow be addressed.
At a recent American Bar Association meeting, IRS
officials discussed some additional possibilities for
easing the program cutback, including:
Training auditors not to nitpick sponsors who
use a model amendment but make a few tweaks
Making it easier to correct plan document failures
under the Employee Plans Compliance Resolution
System (EPCRS)
Expanding the Master and Prototype (M&P)
program to cover hybrid plans and employee stock
ownership plans (which the IRS subsequently
implemented)
Providing greater flexibility to go outside the four
corners of an M&P document
It appears that only individually designed plans will
be affected preapproved master, prototype and
other volume submitter plans should still be able to
obtain determination letters for all plan amendments.
Cycle A submissions (due January 31, 2017) will be the last filings accepted by the IRS under the current determination letter program for individually designed plans.
Insider | June 2015
Implications
If
the changes proceed as
planned, sponsors of
individually designed
retirement plans will face
significantly higher
compliance risks.
If the changes proceed as planned, sponsors of

individually designed retirement plans will face
significantly higher compliance risks. Under the
current determination letter program, a sponsor that
submits its plan for a timely review (and has timely
adopted any required amendments) can make any
changes requested by the IRS retroactively, without
being subjected to a penalty. Also, current IRS
reviews are not limited to amendments in the IRS
cumulative list. Rather, the IRS reviews the entire
plan document, including amendments not required
by law. A favorable determination letter verifies that
nothing in the document contravenes the Internal
Revenue Code or other IRS rules or regulations, and
no required provisions are missing. Because of this
broad scope, during a plan audit, the IRS is generally
precluded from raising compliance issues about a plan
document that received a favorable determination
letter, at least for the period before the audit.
The scaled-back program would shift the risk of a
defective or missing provision to the plan sponsor
and potentially to plan participants. This risk would
accompany all provisions required or added after the
News in Brief
Massachusetts Delays Paid Sick Leave Law for
Employers With Preexisting PTO Policies
By Cindy Brockhausen and Bill Kalten
The Massachusetts Attorney Generals Office (AGO) has established a
safe harbor under its paid sick leave law for employers that had a paid
time off (PTO) or paid sick leave policy in place as of May 1, 2015.
Employers that meet the safe harbor conditions in the recently issued
final regulations will be considered to be in compliance with the new
paid sick leave law through December 31, 2015. To be eligible:
The PTO or paid sick leave policy must provide full-time employees the
right to earn and use at least 30 hours of paid leave during 2015.
Beginning July 1, 2015, all employees not previously covered by the
PTO or paid sick leave policy including part-time employees,
seasonal employees, temporary employees, new employees and per
diem employees must either (a) accrue PTO at the same rate of
accrual as covered full-time employees or (b) receive a prorated lump
sum allocation (based on service after July 1, 2015).
PTO or paid sick leave earned under this transition rule must be
job-protected leave subject to the laws anti-retaliation provisions,
available for the purposes set forth in the new law, and, if unused, such
leave must be rolled over or cashed out. The final regulations, an Earned
Sick Time Notice, which employers should post in a conspicuous
location and distribute to employees, and other information about the
law are available at www.mass.gov/ago/earnedsicktime.
IRS initial determination letter. Such documentbased claims might arise through an IRS audit or
through a participant dispute about plan benefits. In
an audit, the sponsor could face penalties as part of
the correction process and might need to modify
benefit amounts retroactively.
If a plan were disqualified due to a defective plan
document, the trust would incur income tax for which
the IRS could seek payment from the trustee.
Trustees might seek additional protections from
sponsors for this exposure. The lack of a current
determination letter might also have implications for
mergers and acquisitions, annuitization of benefits
through insurance products and other transactions
where involved parties look to the current
determination letter for assurance that the plan
document meets all qualification requirements.
Finally, reduced oversight from IRS agents could
adversely affect participants if sponsors decide to
terminate their plans rather than continue without a
favorable determination letter.
Going forward
If sponsors of individually designed retirement plans
no longer receive determination letters between
initial qualification and plan termination, they will
need to find other ways to manage their compliance
risk. Periodic reviews of plan documents could
ensure that all required changes on the latest IRS
cumulative list have been made and that any other
plan amendments satisfy IRS rules. Some sponsors
already have such a process in place, and more
sponsors will likely look to internal or external
experts to conduct such reviews.
Any document defects discovered during such a
review may be submitted to the IRS through its
Voluntary Correction Program (VCP) for remediation,
which involves a submission fee but avoids IRS
penalties. Some sponsors might decide to adopt a
standardized plan, such as a volume submitter
document, although the standard language of these
documents significantly limits flexibility.
More details about the program cutback are
expected this summer, along with a request for
public comments.
Russ Hall at +1 914 289 3388,
russ.hall@towerswatson.com;
William Kalten at +1 203 326 4625,
william.kalten@towerswatson.com; or
Dave Ronald at +1 952 842 6344,
dave.ronald@towerswatson.com.
Insider | June 2015
Embedded Individual Out-of-Pocket

Maximums Apply to Health Plans in 2016
By Rich Gisonny, Ben Lupin and Kathleen Rosenow
The final 2016 Notice of Benefit and

Payment Parameters released by the
Department of Health and Human Services
(HHS) set the out-of-pocket limits for
essential health benefits (EHBs) in 2016.
The notice also included a clarification
indicating that the annual self-only,
in-network out-of-pocket maximum
(OOPM) applies to each individual, even
those enrolled in family coverage.
At first, it wasnt entirely clear whether this embedded
individual OOPM requirement applied to large fully
insured and self-insured health plans. But on May
26, HHS, the Department of Labor (DOL) and the IRS
(the departments) jointly issued a frequently asked
question (FAQ) confirming that the embedded individual
OOPM applies to large and self-insured group health
plans (but not to grandfathered or retiree-only plans).
The OOPM clarification applies to plan years beginning
on or after January 1, 2016.
Background
For plan years beginning on or after January 1, 2014,
the Affordable Care Act (ACA) required all nongrandfathered group health plans, including selfinsured plans, to establish an annual OOPM for
in-network EHBs within prescribed dollar limits. For
this purpose, out-of-pocket expenses include
deductibles, coinsurance, copayments or similar
charges, and any other required expenditure for
covered EHBs.
To determine which benefits are EHBs for purposes
of complying with the ACA, HHS considers a selfinsured group health plan to have used a permissible
definition of EHBs if the definition is authorized by
HHS (including any available state benchmark
option). Thus, many self-insured group health plans
have selected a state benchmark plan to define
EHBs for the purpose of cost-sharing limits (along
with the ACA prohibition against annual/lifetime
dollar limits). Self-insured health plans that fail to
adopt a permissible definition of EHBs must include
all covered expenses in the cost-sharing limit
required by law.
HHS final 2016 Notice of Benefit and

Payment Parameters
The HHS notice addressed a variety of benefit
provisions for 2016 affecting both the small group
and individual health plan markets. As described
above, the ACA requires that all non-grandfathered
group health plans adopt an annual OOPM for
covered, in-network EHBs for self-only coverage
($6,600 in 2015 and $6,850 in 2016) and family
coverage ($13,200 in 2015 and $13,700 in 2016).
Many group health plan administrators apply one
OOPM for self-only and another aggregate OOPM for
family coverage, so for an employee enrolled in
family coverage, the higher limit applies to the family
as a whole, regardless of the out-of-pocket expenses
incurred by any covered individual.
The
OOPM cannot
exceed $6,850 per
covered individual in a
family tier of coverage
in2016.
Under the HHS notice, however, group health plans

must embed an individual OOPM within any other
than self-only coverage limit. So, if one family
member incurs costs for EHBs that exceed the
statutorily required OOPM for self-only coverage, the
plan must pay 100% of that family members
remaining expenses, even if the aggregate out-ofpocket expenses of all family members have not
reached the cost-sharing limit for family coverage.
Plan design implications for 2016

Group health plan sponsors will need to appropriately
credit incurred eligible health expenses toward the
plans OOPM. They must also consider whether to
separate EHBs from non-EHBs or use one in-network
OOPM for all health benefits.
To apply the embedded OOPM only to in-network
EHBs, the plan sponsor must clearly define which
expenses will be considered EHBs for purposes of
the plan. However, many employers, insurers and
third-party administrators (TPAs) would find this
difficult, if not impossible, to administer. As a result,
many employer-sponsored group health plans are
expected to apply the OOPM to both in-network EHBs
and non-EHBs to avoid the administrative burden of
separating them out.
Group health plans may have a higher cost-sharing
limit for family coverage (i.e., up to $13,700 in 2016),
but the OOPM cannot exceed $6,850 per covered
individual in a family tier of coverage in 2016.
Insider | June 2015
How the embedded individual OOPM

will work
Lets assume, for example, that a hypothetical group
health plan has the following design:
Single coverage OOPM in 2016: $6,850
Family coverage OOPM in 2016: $13,700
An employee enrolled in family coverage incurs $7,000
in expenses, then the spouse incurs $5,000, and then
the child incurs $2,000. According to the embedded
individual OOPM rule, and ignoring the effect of
any plan deductibles, covered participants and
beneficiaries would be responsible for the following:
Employers
should review
their group health plan(s)
before finalizing 2016
designs and pricing to
ensure that the OOPMs
conform to the law and
the recent guidance.
Employee incurs $7,000 expense. Employee pays

$6,850 (because he or she reached the maximum
allowable $6,850 individual OOPM); the plan pays
$150.
Spouse incurs $5,000 expense. Employee/spouse
pays $5,000 (because $6,850 + $5,000 is still
less than the $13,700 family OOPM); the plan
pays $0.
Child incurs $2,000 expense. Employee pays
$1,850 (because $6,850 + $5,000 + $1,850
reaches the $13,700 family OOPM). The plan
pays $150.
Group health plans with a family OOPM of $6,850 or
less do not have to adopt the embedded individual
OOPM because no family members out-of-pocket
expense could exceed $6,850. For example, if the
family OOPM were $5,000, no embedded individual
OOPM would be necessary.
Also note that the embedded individual OOPM is
based on the statutory limit for self-only coverage
rather than the out-of-pocket limit for self-only
coverage established under the plan. For example, if
the plans OOPM limits were $3,000 single/$7,000
family, the embedded individual OOPM in the family
coverage tier could still be $6,850, not $3,000
(although the plan could always choose to impose a
lower limit).
Embedded individual OOPM rule

applies to HSA-qualifying HDHPs
According to a FAQ from HHS and the FAQ recently
issued by the departments, the embedded OOPM
also applies to non-grandfathered HSA-qualifying
high-deductible health plans (HDHPs), and an employer
can offer an HDHP that complies with both the
applicable IRS HDHP limits and the embedded OOPM.
The HHS FAQ presents a scenario where, for 2016, a
plan offers an HDHP with a $10,000 family
deductible. This plan design would meet the
applicable rules as long as it applies an annual
OOPM of $6,850 to each individual in the plan, even

if the family $10,000 deductible has not yet been
satisfied. HHS clarified that this standard does not
conflict with IRS rules for HSA-qualifying HDHPs.
Moreover, with the exception of preventive care, an
HDHP may not provide benefits until the participant
meets the annual minimum deductible, which is
$2,600 for a family in 2016. HHS states in the FAQ
that, because the $6,850 self-only OOPM will exceed
the 2016 minimum annual deductible amount for
family HDHP coverage, it will not cause the plan to
fail to satisfy the requirements for an HSA-qualifying
HDHP.
Keep in mind that, for 2016, the embedded OOPM
limits are different from the IRS HDHP limits, which
are $6,550 for self-only and $13,100 for family
coverage. So, an HDHP participant with self-only
coverage could have an OOPM of $6,550, while an
individual with family coverage in the same HDHP
could have an OOPM limit of $6,850 (assuming the
plans are using the maximum limits).
Going forward
Employers should review their group health plan(s)
before finalizing 2016 designs and pricing to ensure
that the OOPMs conform to the law and the recent
guidance. They also should discuss administration
and implementation of the embedded OOPM with
TPAs and/or carriers. Some vendors are reportedly
concerned about having enough time to implement
the changes by 2016. Employers will likely want to
explore all available options with their vendors.
Rich Gisonny at +1 914 289 3377,
rich.gisonny@towerswatson.com;
Benjamin Lupin at +1 215 246 4333,
benjamin.lupin@towerswatson.com; or
Kathleen Rosenow at +1 507 358 0688,
kathleen.rosenow@towerswatson.com.
Insider | June 2015
More Than Hard Hats and Safety: Engaging

Workers in the Natural Resource Sector
By Amy Johnson and Patrick Kulesa
I do not consider my work area safe enough for my

family or the families of the team members for whom
I am responsible.
The [company] vision, and strategies employed to
reach that vision, seem to become more complicated
every time they are shared with employees.
People, good people, are leaving like never before.
It is impacting our reputation and making it more
difficult to attract the right people.
These comments from employees at natural
resource companies capture moments in time that
encapsulate serious challenges for the industry
today. The nature of the work is demanding, often
requiring long hours and physical effort that can
drain employees energy, stretch organizational
support and undermine employee engagement. As in
every industry, disengaged workers can erode
productivity, competitiveness, output and, ultimately,
overall business results.
Efforts to impact employee engagement in this
sector must be built on evidence-based, careful
research. Drawing on the opinions of more than
160,000 employees in 29 natural resource
organizations, this article identifies workplace drivers
that affect employee engagement and provides a
road map for designing a safe work environment that
supports excellent performance.
Drivers of sustainable engagement in

the natural resource sector
Engagement reflects the attachment between
employee and employer, but it also encompasses an
employees ability to deliver top performance and
capacity to excel. This combination of attachment,
capability and capacity is called sustainable
engagement and is a core measure in all 29
organizations included in the research.
Levels of sustainable engagement are low across
the natural resource sector, according to our findings.
Only 22% of workers in the sector are highly engaged
versus 40% globally, and 34% are completely
disengaged versus 24% globally.
What factors predict the highest levels of sustainable
engagement in the natural resource sector? Key
driver analysis across all 29 companies (using
multiple regression analyses) statistically derives the

top predictors of sustainable engagement (Figure 1).
The top two are driven primarily through senior
leadership behaviors:
Company image. This is an organizations ability
to establish a favorable reputation, especially
externally to stakeholders and to the general
public. Environmental and social forms of
corporate responsibility are vital to public
perception, and companies that have succeeded
in crafting a positive image in the eyes of their
people have more engaged employees.
Leadership. Leaders must deliver a bold vision of
what the organization stands for, inspire
confidence, act with integrity and authenticity, and
convey genuine concern for employee well-being.
Studies
across all sectors

show the strong impact of
leadership performance on
sustainable engagement.
The importance of top-down drivers company

image and leadership may come as a surprise,
but these findings are in line with studies across
all sectors, which consistently show the strong
impact of leadership performance on sustainable
engagement.
Figure 1. Top drivers of sustainable engagement
1 Company image
This company is highly regarded by the general public.
This company is socially responsible in the community.
This company is environmentally responsible.
2 Leadership
Company management is interested in the well-being of employees.
I believe leadership decisions are consistent with the core values of the company.
I believe senior leadership has a well-formulated business strategy for the present.
I believe senior leadership has a clear vision for the future.
I have confidence in the decisions made by the senior leadership team of this company.
3 Empowerment
I have a very clear idea of my job responsibilities.
It is safe to speak up in this company.
I have sufficient authority to do my job well.
I am satisfied with my involvement in decisions that affect my work.
4 Performance evaluation
I think my performance on the job is evaluated fairly.
The company makes adequate use of recognition and rewards other than money to
encourage good performance.
5 Safety
My work area is a safe place to work.
Safety rules are carefully observed, even if it means work is slowed down.
Corrective action is usually taken when unsafe conditions are brought to
managementsattention.
Source: Towers Watson employee opinion database
Insider | June 2015
Opinion
trends for the five drivers remained

relatively stable from 2010 through 2014,
suggesting that areas of relative weakness are
enduring.
Figure 2. Five drivers: Favorable opinions of natural resource sector compared
with all industries and with high performers (%)
Compared with:
All industries
Empowerment
69
High-performance
companies
Leadership
58
55
Current performance levels for the top

drivers
Company image
57
Figure 3. Five drivers: Favorable opinion trends over time

0%
20%
40%
60%
Company image
73
72
74
74
74
Leadership
72
72
73
73
74
55
57
58
57
Safety
A different pattern emerges for safety and

empowerment, with workers in the natural resource
sector having significantly more favorable opinions
than the all-industry average, albeit still trailing those
at high-performance companies.
62
83
82
81
79
81
n 2011
n 2012
n 2013
n 2014
100%
Natural resource companies struggle with the

top-down challenges of leadership effectiveness and
promoting a strong company image. We compared
opinions within the industry with both an all-industry
global average (drawing on employee survey results
from over 1,000 companies and more than eight
million employees) and with employees working in
high-performance organizations (drawing on employee
surveys at 27 companies whose financial performance
consistently exceeds industry-specific averages).
For both leadership and company image, natural
resource companies either equal or fall below
all-industry performance levels, and consistently fall
below high-performance companies (Figure 2), leaving
considerable room for improvement. The natural
resource sector falls significantly below both benchmarks
in measures of performance evaluation and image.
64
64
65
63
63
Empowerment
n 2010
80%
Empowerment Employee involvement, voice and

authority on the job, reflecting how well employees
are able to influence the work environment
through their direct actions
Performance evaluation The fairness of review
processes and the effective use of nonmaterial
recognition to encourage excellence
Safety Organizational effectiveness in correcting
unsafe work conditions, observing safety rules
and ensuring a generally safe workplace
Collectively, these top five engagement drivers
provide a set of marching orders, both for senior
leadership and local managers.
Safety
75
The other three largely manager-driven, bottom-up

drivers of sustainable engagement include:
As shown in Figure 3, opinion trends for the five

drivers remained relatively stable from 2010 through
2014, suggesting that areas of relative weakness
are enduring. An exception is in performance
evaluation, which has shown gradual improvement
over the period.
Crafting safety-focused environments

and a positive image
Safety has always been an imperative in the natural
resource sector. To identify aspects of work experience
that differentiate top safety performance, we use the
same data source across 29 companies to contrast
Insider | June 2015
strong safety environments (i.e., those with the most

favorable opinions about safety) with weak safety
environments. The top gaps between strong and weak
safety environments are shown in Figure 4. Two
themes prevail: empowerment and leadership.
Employee empowerment is a hallmark of strong
safety environments and is exemplified by:
Openness to employee ideas
Clarity of job responsibilities to focus efforts
appropriately
Adequate involvement in decision making
Strong safety performance is also linked to a specific
leadership style and set of capabilities. Specifically, a
strong relational management style is characterized by:
Open communication and contact with employees
A focus on developing employees abilities to
excel in their roles
Respecting employees regardless of job
Building confidence in leadership abilities
Ensuring responsible environmental policies and
practices are executed
Fair rewards and employee support for company
values also differentiate strong safety environments.
Collectively, cultures marked by empowered employees
and people-directed leaders are rated the safest.
While company image might be a less precise topic
to gauge and track, the same process applies. We
compare strong image environments receiving the
highest levels of favorable opinions on image-related
questions with weak image environments in Figure 5
(next page). The major theme across these gaps is
senior leadership effectiveness, marked by:
Building confidence in leadership abilities
Encouraging all employees to give their best effort
Recognizing top performance
Making decisions aligned with company values
Providing clear future vision
Not surprisingly, strong image companies are strong
leadership companies, fully aware of how the
behaviors of leaders shape company reputation. In
addition, overall fairness can be inferred from the
following elements:
Fair promotion decisions
Frequent performance feedback
Respect for all employees
Opportunity for employee input
Thus, companies with a strong image are serious
about treating all employees fairly. In both strong
safety and strong image environments, employees
endorse the companys values, suggesting that the
most successful organizations reinforce both
Figure 4. Opinion gaps: Strong versus weak safety environments

0%
20%
40%
60%
80%
100%
Safe to speak up
78
60
Clear job responsibilities
77
64
Employee involvement
91
79
Leaders develop employees' abilities
77
69
Company environmentally responsible
88
80
Support for company values
50
42
Confidence in leadership
53
46
Sufficient contact with managers

89
85
Employees respected
61
57
Employees paid fairly
67
64
Strong safety environments
Weak safety environments
80
Source: Towers Watson normative database
Fair
rewards and employee support for

company values also differentiate strong safety
environments.
operating safely and projecting a positive image to
all stakeholders. Finally, safety and image reinforce
each other such that strong safety environments
are socially responsible ones, and strong image
environments promote safe work conditions. A
comment from a worker in this sector summarizes
this point well:
We have a reputation of integrity and safety
and I think we should continue to work with
those as our foundation.
Insider | June 2015
Improving sustainable engagement

These findings point to several ways to improve
sustainable engagement in the natural resource
sector.
Leadership. Leaders behaviors influence
sustainable engagement directly. Many relational
aspects of leadership distinguish strong safety
Line
managers must ensure that quality performance

review processes are applied internally.
Figure 5. Opinion gaps: Strong versus weak image environments
0%
20%
40%
60%
80%
100%
Confidence in senior leaders

82
54
Leaders encourage giving best effort
77
57
Leaders recognize top performance

78
61
Leaders' decisions consistent with values
96
78
Support for company values
65
50
Employees respected
85
72
Employees given input
72
60
Frequent performance feedback

58
44
Fair promotions
78
65
Safe work conditions
82
70
Leaders have future vision
80
70
n Strong image environments
Source: Towers Watson normative database
n Weak image environments
environments, and a broad sense of leader capability

is a hallmark of managing company image effectively.
Organizations looking to improve leadership
effectiveness need a competency framework that
prioritizes these aspects of leadership, with methods
in place to build on that framework, such as
leadership assessments, performance goals and
development milestones to ensure accountability
and track and reward progress.
Empowerment. Ensuring employees can provide input
and effectively advocate in their work environment is
the core of empowerment, which drives sustainable
engagement directly as well as being a differentiating
feature of strong safety environments. Driving
empowerment is most directly a skill required of line
managers, and should be part of an effective
manager framework, reinforced with many of the
same tactics used to drive leadership.
Performance evaluation. Much like empowerment,
line managers must ensure that quality performance
review processes are applied internally. Many
options are available to empower managers with
technology-driven solutions. Leadership can further
support managers by providing ample time to review
performance effectively and emphasizing the
importance of the organizations performance cycle.
Safety and image. At a high level, safe work operations
and positive company image are foundational
elements for natural resource organizations. These
priorities are critical to driving business success and
can be supported through the differentiators identified
in this research, including focusing managers on
effective ways to empower staff, using employee input,
and directing leaders to the relational skills and
other business competencies associated with strong
safety and image environments.
The payoffs associated with improving sustainable
engagement can be substantial. With room to
improve compared with both other sectors and
high-performance companies natural resource
organizations can use these findings as a blueprint
for developing a people-centered strategy that builds
stronger employee engagement and improves
performance.
Amy Johnson at + 1 312 201 5852,
amy.johnson@towerswatson.com; or
Patrick Kulesa at +1 212 309 3746,
patrick.kulesa@towerswatson.com.
Insider | June 2015
SECs Pay-for-Performance Proposal Will

Require New Pay Calculations
By Puneet Arora, Bill Kalten and Steve Seelig
A proposal from the Securities and Exchange

Commission (SEC) would require proxy
statements to include a new pay-forperformance table with an accompanying
explanation. The proposed rule implements
Section 953(a) of the Dodd-Frank Wall
Street Reform and Consumer Protection
Act, which requires registrants to disclose
the relationship between executive
compensation actually paid and corporate
financial performance. If the rule is finalized
this year, calendar-year companies could be
required to provide these new disclosures in
their 2016 proxies.
The proposed regulation would require virtually all
companies to provide a new pay-for-performance table.
Currently, only about a quarter (27%) of Fortune 500
companies include specific pay-for-performance
disclosures in their proxies, according to Towers
Watsons research.1
Dodd-Frank requirement
Section 953(a) of the statute imposes the following
requirements:
The Commission shall, by rule, require each
issuer to disclose in any proxy or consent
solicitation material for an annual meeting of
the shareholders of the issuer a clear
description of any compensation required to
be disclosed by the issuer under [the proxy
disclosure rules], including information that
shows the relationship between executive
compensation actually paid and the financial
performance of the issuer, taking into account
any change in the value of the shares of
stock and dividends of the issuer and any
distributions. The disclosure under this
subsection may include a graphic representation
of the information required to be disclosed.
Pay-for-performance proposal
While there would be strict rules for the pay-forperformance table and the related narrative or
graphical explanation, companies could include

additional disclosures, provided such supplemental
information is not more prominent than the required
disclosures.
Definition of compensation
The proposed SEC definition of executive
compensation actually paid uses the Summary
Compensation Table (SCT) definition of compensation
as the starting point for the pay disclosure, with some
adjustments for equity awards and pension amounts:
Stock and option awards as they vest, based on
their fair value on the vest date (the SCT shows
fair value on the grant date; both values would be
disclosed, as would any underlying assumptions
that differed from those for the SCT)
Pension values, which would be the actuarially
determined service cost for the executive during
the applicable year (the SCT requires disclosure of
the increase in the present value of the accrued
benefits using financial accounting assumptions in
the applicable year; note that smaller reporting
companies2 would not be required to make
adjustments in pension amounts)
Salary earned for the period, even if deferred
(same as SCT)
Bonus earned for the period, even if deferred
(same as SCT)
Non-equity incentives earned for the period, even
if deferred (same as SCT)
If
the rule is finalized
this year, calendar-year
companies could be
required to provide these
new disclosures in their
2016 proxies.
Measure of performance
Performance would be measured by total shareholder
return (TSR), and the disclosures would have to show
values for both the company and its selected peer
group. Of the 27% of Fortune 500 companies already
disclosing pay for performance, 68% use TSR as
their performance metric and 39% use other metrics,
either exclusively or in concert with TSR, according to
Towers Watson research.
Executives covered
The SEC proposal applies to named executive officers
(NEOs) and requires two separate disclosures:
Compensation for the principal executive officer
Average compensation for other NEOs identified in
the SCT
See Towers Watson Survey Sheds New Light on How Companies Assess and Disclose Executive Pay-for-Performance Alignment, Executive Pay Matters, October 30, 2014. For our
latest analysis of pay-for-performance disclosures, see Explaining Pay for Performance An Inexact Science, for Now, Executive Pay Matters, March 25, 2015.
As defined by the SEC, a company with a public float of less than $75 million on the last business day of its second fiscal quarter qualifies as a smaller reporting company.
Insider | June 2015
Towers Watsons October 2014 survey found that

80% of companies disclosing a pay-for-performance
analysis included only the CEOs pay, so this
requirement will require an expanded disclosure for
many of those companies.
Time period
Dodd-Frank was ambiguous on the time frame for
measuring pay and performance. Under the SECs
proposal, the disclosures would cover a five-year
period (three years for smaller reporting companies),
phased in as follows:
Under
the SECs proposal,

the disclosures would
cover a five-year period
(three years for smaller
reporting companies).
In the first proxy following enactment, companies

would disclose information for three years,
followed by four years in the second proxy and five
years in the third and following proxies.
For smaller reporting companies, disclosures
would cover two years in the first proxy and three
years in the second and following proxies or
information statements that require this disclosure.
This is consistent with prevalent practice. The Towers
Watson survey found that 86% of companies
measure performance over either a three-year (49%)
or five-year (35%) period.
Absolute vs. comparative

The SEC proposal would require companies to
disclose compensation only for their own executives
in the new table. Many companies will likely consider
including supplementary disclosures, particularly as
they will have access to other company data.
Format of disclosure
To enable easy comparisons across companies,
disclosures would have to be tagged in an interactive
data format using eXtensible Business Reporting
Language (XBRL).
Going forward
The proposal was adopted by a 3-2 vote. SEC
Commissioner Luis Aguilar called it an important
step forward in the usability and comparability of pay
disclosure.
Republican members were far less enthusiastic.
Commissioner Daniel Gallagher called the proposal
another of Dodd-Franks intrusions into the realm of
corporate governance, while Commissioner Michael
Piwowar complained that the proposal is a highly
prescriptive measure that takes a one-size-fits-all
approach. Both Commissioners believe that the
emphasis on TSR will encourage a short-term focus
and be susceptible to gaming via tactics such as
stock buybacks and cuts in R&D spending, which
can undermine long-term value creation.
Comments to the SEC are due July 6.
Puneet Arora at +1 703 258 8310,
puneet.arora@towerswatson.com;
Bill Kalten at +1 203 326 4625,
william.kalten@towerswatson.com; or
Steven Seelig at +1 703 258 7623,
steven.seelig@towerswatson.com.
Making Brick-and-Mortar Retail Dance:

Employees Make the Difference
By Catharina Anandikar, Matt Deruntz and Patrick Kulesa
This
article focuses on
five retailers and the
patterns uncovered across
separate linkage analytic
projects completed by
Towers Watson.
While brick-and-mortar retail stores have

ceded some ground to the Internet, a recent
study of 20,000 consumers1 highlights their
continuing importance for the industry:
Even in the U.K. a world leader in online sales

and a global source for innovations in digital
purchasing the Centre for Retail Research finds
online sales are projected to grow from 12.7% of all
purchases in 2012 to 21.5% by 2018.
90% of all goods sold in the U.S. involve a physical

store (Forrester Research puts the frequency of
offline purchases at 92% of all U.S. sales).
Half of the other 10% of goods are sold online
through a company operating retail stores.
Only 5% of goods are sold purely through online
retail, and most of those buyers also shop regularly
at physical stores; these are the consumers at
the heart of omnichannel retailing.2
Most shoppers still buy goods within the four walls

of a store. According to the American Customer
Satisfaction Index, however, satisfaction is declining
among brick-and-mortar shoppers and rising for
Internet consumers. The challenge for retail
organizations operating networks of stores is thus
clear: How do they improve performance in the
brick-and-mortar environment where the vast
majority of goods are still sold and give flagging
customer satisfaction a boost?
See A.T. Kearney, On Solid Ground: Brick-and-Mortar Is the Foundation of Omnichannel Retailing.
Omnichannel retailing refers to consumers increasingly using a variety of shopping channels, including brick-and-mortar stores, smartphones and computers, to purchase goods.
Insider | June 2015
A shopper in a physical retail store encounters sights

and sounds not available online: either well-organized
shelves or piles of damaged products; short,
efficient lines or long waits for the privilege of
spending hard-earned income. A primary determinant
of those experiences is an organizational asset who
is also physically front-and-center: the store employee.
Ultimately, employees shape customer experience
from how well the store is organized to the
efficiency of checkout to a customers satisfaction as
he or she exits the store.
Retailers seeking to understand the impact of their
people on business performance increasingly turn to
linkage analytics, which statistically correlate people
metrics with performance.3 Customer sentiment is
one important metric, but employee absence and
turnover, operational performance such as safety
incident rates and product waste, and top-line
financials such as sales are also explored.
This article focuses on five retailers and the patterns
uncovered across separate linkage analytic projects
completed by Towers Watson. The five organizations
are drawn from several types of retail, including
supermarkets and home furnishing stores, with
operations primarily in the U.S. or the U.K. All
maintain networks of brick-and-mortar stores, ranging
from several hundred to more than 2,400 locations.
In addition, each organization tracks a common set
of performance indicators, with results available
separately for each store:
Employee opinion Assessed through allemployee surveys
Employee behavior Rates of employee turnover
and absence from work
Customer satisfaction Measured through
surveys of customer shopping experiences
Product loss/damage Shrink, waste or stock loss
Financial performance Actual sales versus
projected sales or sales growth over time
All available measures are tracked in a common way
across stores per retailer, and all stores collect and
report each metric within the same time period. The
results enable us to explore linkages from people
performance to business success.
Common drivers of business

performance
As summarized in Figure 1, three aspects of
employee experience consistently predict store-level
business results across all five retailers: passion for
service, sustainable engagement and work-team
organization.
3
Figure 1. Keys to unlocking success in retail: Elements linked with performance

Greater
customer satisfaction
WORK-TEAM
ORGANIZATION
Physical conditions
People
Procedures
Stronger
financial results
Less employee
turnover/absence
Lower rates of
product loss/damage
Passion for service

Customer satisfaction is stronger and sales are
higher in stores where employees perceive a
stronger emphasis on creating memorable customer
experiences. This passion for service has two
dimensions: tone from the top and local supports.
PASSION FOR
SERVICE
Tone from the top
Local supports
SUSTAINABLE
ENGAGEMENT
Engaged
Enabled
Energized
Stores
with higher scores

on sustainable engagement
have higher sales, less
employee turnover and
lower rates of absenteeism.
These organizations are asking their employees to

what extent they perceive customer satisfaction as a
priority. Are the products and services of high
quality? Are internal processes aligned with the goal
of delighting customers? In terms of local supports,
employees are also rating accountability for
customer experience, understanding how employee
behaviors impact customers, agility and flexibility to
provide service, and focus on continuous improvement.
In sum, a convincing tone from the top emphasizing
the importance of service combined with effective
local supports that provide clear roles, flexibility and
accountability predict greater customer satisfaction
and higher sales.
Sustainable engagement
The financial benefits of a more engaged workforce
have been well-documented over the last decade.
Engagement the bond between employees and
employer is measured by employees buy-in to
goals and objectives, pride in organizational
membership and willingness to go the extra mile to
support success.
At a deeper level, these retailers are also measuring
employee enablement to excel and employee energy
to deliver results. Stores with higher scores on this
composite of traditional engagement, enablement
and energy collectively called sustainable
engagement have higher sales, less employee
turnover and lower rates of absenteeism.
This is often traced to the foundational work summarized in Rucci, Kirn and Quinns 1998 Harvard Business Review article on people-performance linkages at Sears.
Insider | June 2015
Work-team organization
The third differentiator of top performance is how
effectively work and teams are organized. Greater
work-team organization predicts higher customer
satisfaction, less employee turnover and
Figure 2. Effects of passion for service and work-team organization on
Overall customer satisfaction (%)
0%
20%
40%
60%
80%
100%
Company A
Company B
69.7
74.5
Company C
82.9
86.1
58.0
61.4
Company B
69.0
74.2
Company C
82.6
86.1
Company A
Passion for service
58.2
62.0
Bottom 10% of stores Top 10% of stores

Figure 3. Effects of passion for service and engagement on sales
Sales growth or variance from plan (%)
0%
2%
4%
6%
8%
10%
12%
Passion for service

Company C: Sales growth
2.3
4.8
Company D: Sales vs. plan
5.9
10.1
82.9
86.1
58.0
Figure 4. Effects of engagement and work-team
organization on turnover
61.4
Employee turnover (%)

0%
20%
40%
60% 69.0
80%
74.2
Company B
76
53
82.6
86.1
Company B
77
59

58.0
61.4
82.9
86.1
100%
absenteeism, and lower rates of product loss or

damage. We use three measures of work-team
organization:
Physical conditions Tangible work environment
features such as adequate lighting, comfortable
temperature and reliable tools
People Adequate staffing, flexibility in scheduling
and adequate opportunities for work/life balance
Procedures Efficient work processes, continuous
improvement in efficiency and reducing
bureaucracy, and adherence to safety protocols
This combination of working conditions, effective
staffing and scheduling, and efficiency-improving
procedures is the strongest predictor of outcomes.
The quality of the local team environment powerfully
affects retail store performance from customer
experience to stock quality to individual employees
deciding to stay and work to capacity.
Impacts: How much better are the best

performers?
What is the performance advantage of high scores in
passion for service, sustainable engagement and
work-team organization? To find out, the analysis
separated the top 10% of stores from the bottom
10% within each retail network for each survey topic.
Results for customer satisfaction, sales, employee
turnover and absence, and product loss were then
compared for top-scoring and bottom-scoring groups.
Figure 2 shows the customer satisfaction advantage
for both passion for service and work-team
organization. The gaps range from three to five
percentage points across these three organizations.
Although that difference might appear modest,
customer satisfaction scores have a notoriously
small range, and achieving a five-percentage-point
gain in customer sentiment is difficult, suggesting a
real opportunity to boost customer satisfaction by
improving low-scoring environments.
Figure 3 shows the sales advantage for high scorers on
both passion for service and sustainable engagement
in two retail networks. Sales growth was twice as
high in stores with the highest scores on passion for
service, and rates of actual sales versus projected
sales were nearly twice as high in stores that scored
highest on sustainable engagement. Across a large
retail network, such differences can translate into
millions of dollars.
Figure 4 indicates that stores with higher sustainable
engagement and more favorable opinions of workteam organization enjoy significantly lower rates of
employee turnover, with the advantage as large as
23percentage points.
Insider | June 2015
Finally, Figure 5 shows the effect of work-team

organization on product loss in two organizations.
In one case, the rate of waste is more than twice
as large in stores with the most unfavorable opinions
of work-team organization. For the other retailer,
the reduction in product loss resulting from a
five-percentage-point gain in work-team organization
saves roughly $14,000 per store, which totals
millions of dollars over the full network.
Driving sustainable engagement and

passion for service
How can a retailer instill a strong sense of
engagement and passion for customer service in
its employees? To find out, we performed multiple
regression analyses separately within the survey
data of each organization to determine the top
predictors of sustainable engagement and passion
for service. The results converge on three common
drivers of sustainable engagement:
Passion for service. Employee engagement is linked
to employees agility and flexibility in providing
service and working in a dynamic environment that
continually strives to improve service. Thus, a strong
service climate drives sales and customer satisfaction
directly as well as boosts worker engagement.
Career development. Engagement is also strongly
predicted by perceived opportunity for development,
growth and learning, and the belief that the best
performers will be promoted.
Leadership. Employees are more engaged by
effective leaders, especially those who inspire
confidence in their decision making and can be
trusted to treat employees with fairness and respect.
In short, strong relational leaders build highengagement environments.
Similarly, three topics are identified as top predictors
of passion for service:
Leadership. As with engagement, so too with
building a strong climate for service. Employees who
trust and have confidence in their leaders to foster
success report greater passion for service,
reinforcing the theme that leaders set the tone for
whether the culture supports success.
Values. Customer service must be practiced as well
as preached. Employees have more passion to serve
when they understand what behaviors reflect
organizational values in action and see leaders living
those values in their interactions with customers and
employees.
Figure 5. Effects of work-team organization on product loss

Percent waste vs. plan or shrink as percent of sales
0%
2%
4%
6%
8%
10%
Company E: Waste vs. budget
9.2
4.1
Company A: Shrink as percent of sales
2.3
2.0
82.9
86.1

58.0
Figure 6. The full performance linkage model
61.4
Organizational
values
69.0
74.2
Greater
WORK-TEAM
ORGANIZATION
Physical conditions
People
Procedures
PASSION FOR
SERVICE
82.6
Tone from the top
86.1
Local supports
Stronger
financial results
Less employee
turnover/absence
Lower rates of
product loss/damage
Career development. Employees who experience a

strong learning environment and perceived opportunity
deliver better service. This driver speaks to the
power of investment in people. Employees commit
to the value of service to the extent their
organization commits to their career aspirations and
desire to learn and grow.
Leadership
Career
development
SUSTAINABLE
ENGAGEMENT
Engaged
Enabled
Energized
Across
a large retail
network, such differences
can translate into millions
of dollars.
Figure 6 summarizes the full set of linkages

described across the five retail organizations. This
high-level picture shows two paths to success. First,
effective leaders who drive a learning environment
and practice the value of service in words and
actions establish a high level of engagement and
passion for service. Second, local managers need to
supplement that tone from the top through effective
working conditions, clear work processes, and
attention to the basics of staffing, scheduling and
work/life flexibility. In short, both business leaders
and local managers are critical to success and
should be developed and evaluated based on their
contributions in areas linked with top performance.
Insider | June 2015
Both
business leaders and

local managers are critical
to success and should be
developed and evaluated
based on their
contributions in areas
linked with top
performance.
Even
as Internet retailing
gains a larger share of
purchases, the retail
employee of the future
remains critical.
Implications for improving performance

in retail stores
These results offer a clear blueprint for driving greater
organizational performance by improving workforce
effectiveness. Three pillars in a performance
strategy are recommended.
Leadership effectiveness. Tone from the top is a
strong motivator of retail performance. Senior
leaders need to emphasize that service is critical,
even where direct contact with employees is rare
or challenging. Communications need to stress a
customer-first philosophy and why that mantra
matters to performance. Beyond words, leaders need
to be seen and heard reinforcing the value of service
in their interactions with employees and customers.
Leadership development programs should stress
concrete ways that leaders can make the value of
customer service real for employees whether by
directly servicing customers or continually reinforcing
the importance of desired employee behaviors.
Supportive line management. This obsession with
service must be practiced by line managers as well.
Managers serve as the support system for service
delivery by employees. Much emphasis needs to be
placed on work organization: the basics of scheduling,
staffing, managing workloads and balancing
employees schedules fairly and consistently.
Support in the form of work tools and efficient
procedures is also critical. Advocating for working
conditions that facilitate service flexibility and
support the customer service experience will
enhance store performance. Managers must do
more than set the table for success, however. They
should also directly reinforce behaviors that reflect
passion for service and ensure that performance
management processes hold staff accountable for
their actions. The line manager role is a challenging
one, and senior leadership should devote sufficient
time to managing down to support such efforts.
Rewarding careers. Career development plays an
important role in this discussion, driving both passion
for service and sustainable engagement. How can
employers offer attractive development opportunities
in a work environment marked by repetitive job
tasks, traditionally low wages and flat career
ladders? The findings do not demand a complex
career ladder or multiple promotion opportunities.
Rather, the drivers emphasize equity in career
management, which means promoting the best when
warranted, recognizing good performance and
investing in opportunities for staff to build their
skills. These options for delivering the employee deal
should be facilitated by leaders and applied
consistently by line managers. They require an
investment in training employees and recognizing

service delivery, even in small ways that
acknowledge staff efforts to meet challenges and
practice the value of service. Senior leadership and
line management both play a crucial role in designing
and delivering a broad career development and
reward strategy.
Employees play a direct role in the major reasons
shoppers buy in physical stores:
Touch and feel the product. The quality of the
experience in the shopping environment is a direct
result of employee action or inaction.
Get questions answered. Store employees can
answer questions about products and pricing, an
exchange that will deliver greater returns when
carried out by highly engaged employees.
Speed. Shoppers can take home their purchases
immediately without waiting for shipping.
Employees play a direct role in the efficiency of
that transaction and managing any challenges that
arise.
Security. Online purchasing carries the risk of
Internet hacking and piracy. A quality interaction
with a store employee can affirm the security of
in-store purchases and reassure consumers of
their ability to return and exchange goods as
necessary.
Even as Internet retailing gains a larger share of
purchases, the retail employee of the future remains
critical. Consumers using omnichannel approaches
search online for products but then shop in stores to
touch and feel merchandise, possibly even returning
home to compare prices before finally buying. Store
employees will continue to play a pivotal role in that
purchase cycle. So, too, will leaders and managers
those tasked with developing the competencies
needed to drive engagement and passion for service
among store employees whose actions can enrich or
frustrate the experience of shoppers by the millions.
Catharina Anandikar at +44 20 7170 3841,
catharina.anandikar@towerswatson.com;
Matt Deruntz at +1 312 201 5590,
matthew.deruntz@towerswatson.com; or
Patrick Kulesa at +1 212 309 3746,
patrick.kulesa@towerswatson.com.
Insider | June 2015
New FAQs Address ACA Preventive

ServicesMandate
By Rich Gisonny and Kathleen Rosenow
New frequently asked questions (FAQs)

jointly released by the Departments of
Labor, Health and Human Services, and the
Treasury focus on required preventive
services in group health plans. The FAQs
address coverage for BRCA testing, FDAapproved contraceptives, sex-specific
recommended preventive services, wellwoman preventive care for dependents and
colonoscopies. Under the Affordable Care
Act (ACA), non-grandfathered group
health plans must cover these preventive
services at no cost to participants.
There is no effective date for most of these FAQs,
which implies that group health plans should already
be in compliance. However, the requirement for
plansto cover at least one form of contraception
for each method identified by the Federal Drug
Administration (FDA) does not take effect until plan
years beginning at least 60 days after the FAQs were
published (May11), which will be January 1, 2016,
for calendar-year plans.
Background
The ACA requires non-grandfathered self-insured
group health plans and health insurance offered in
the individual or group market to provide benefits, at
no cost to participants, for the following categories
of preventive care:
Evidenced-based items or services recommended
by the U.S. Preventive Services Task Force
(USPSTF), with the exception of its 2009
recommendations for breast cancer screening,
mammography and prevention
Routine immunizations for children, adolescents
and adults that are recommended by the Advisory
Committee on Immunization Practices
For infants, children and adolescents, evidenceinformed preventive care and screenings endorsed
by the Health Resources and Services
Administration (HRSA)
For women, evidence-informed preventive care and
screening endorsed by HRSA or the USPSTF
If a recommendation or guideline does not specify
the frequency, method, treatment or setting for a
recommended preventive service, group health plans

may use reasonable medical management techniques
to apply the coverage.
New FAQs clarify scope of required

preventive care coverage
BRCA testing coverage
The USPSTF recommends screening women who
have family members with breast, ovarian, tubal or
peritoneal cancer using one of several screening
tools designed to identify a family history that may
suggest an increased risk for potentially harmful
mutations in breast cancer susceptibility genes
(BRCA 1 or BRCA 2). A previously issued FAQ clarified
that women with positive screening results should
receive both genetic counseling and BRCA testing, if
appropriate, as determined by a health care provider.
Plans
must cover, without

cost sharing, at least one
form of contraception in
each of the 18 methods
identified in the FDAs
Birth Control Guide.
The new FAQ states that plans must cover without

cost sharing recommended genetic counseling
and BRCA genetic testing for women who have not
been diagnosed with BRCA-related cancer but who
previously had breast cancer, ovarian cancer or other
cancer. So, as long as a woman has not been
diagnosed with BRCA-related cancer, a plan or issuer
must cover preventive screening, genetic counseling
and genetic testing without cost sharing, as
determined by the attending provider.
FDA-approved contraceptive coverage

The HRSA Guidelines recommend all FDA-approved
contraceptive methods, sterilization procedures, and
patient education and counseling for all women with
reproductive capacity, as prescribed by a health care
provider. A 2013 FAQ clarified that this includes
prescribed barrier methods, hormonal methods and
implanted devices, as well as patient education and
counseling. The FAQ further clarified that plans may
use reasonable medical management techniques to
control costs and promote efficient delivery of care,
such as imposing higher cost sharing for branded
drugs versus generics, as long as such management
allows for medically necessary alternatives without
cost sharing. The new FAQs provide additional
guidance on coverage for contraceptives and
allowable medical management:
Plans must cover, without cost sharing, at least
one form of contraception in each of the 18
methods identified in the FDAs Birth Control
Guide. The required contraceptive coverage must
Insider | June 2015
The
FAQs repeatedly note

that health plans may use
reasonable medical
management techniques
to control costs and
promote efficiency.
also include necessary clinical services, including

patient education and counseling. While all 18
methods of contraception must be covered, the
plan may limit cost-free contraceptives to one per
method. Because earlier guidance might have been
interpreted differently, compliance is not required
until January 1, 2016 (for calendar-year plans).
Plans may apply reasonable medical management
techniques, including imposing cost sharing on
some items and services. However, plans must
offer an easily accessible, transparent and
sufficiently expedient exceptions process that
does not unduly burden women or providers. If a
provider recommends a service or FDA-approved
item based on medical necessity, the plan must
cover it without cost sharing. Moreover, claim
determinations must be made within a time frame
and in a manner that reflects the nature of the claim
(e.g., pre-service or post-service) and the medical
exigencies involved for an urgent care claim.
If multiple services and FDA-approved items within
a contraceptive method are medically appropriate
for a woman, the plan may use reasonable medical
management techniques to decide which products
to cover without cost sharing (unless the attending
provider recommends a particular service or
FDA-approved item based on medical necessity).
A plan or issuer that covers oral contraceptives
(such as the extended/continuous use contraceptive
pill) cannot impose cost sharing on all items and
services within other FDA-identified hormonal
contraceptive methods (such as a contraceptive
ring or patch) because one form of contraceptive
must be available at no cost in each method. For
hormonal contraceptive methods, coverage without
cost sharing must include (but is not limited to)
all three oral contraceptive methods (combined,
progestin-only and extended/continuous use),
injectables, implants, the contraceptive ring, the
contraceptive patch, emergency contraception
(Plan B/Plan B One Step/Next Choice), emergency
contraception (Ella) and IUDs with progestin.
Coverage of sex-specific recommended

preventive services
Health plans may not limit recommended preventive
services based on a plan participants sex assigned
Towers Watson is a leading global professional services company that helps
organizations improve performance through effective people, risk and financial
management. With 16,000 associates around the world, we offer consulting,
technology and solutions in the areas of benefits, talent management,
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at birth, gender identity or recorded gender. For

example, if a provider determines that a recommended
preventive service is medically appropriate such
as providing a mammogram for a transgender man
with residual breast tissue and the individual
otherwise meets all coverage requirements, the plan
must cover the recommended service without cost
sharing, regardless of sex assigned at birth, gender
identity or gender as recorded by the plan.
Well-woman preventive care coverage for

dependents
If a plan covers dependent children, coverage without
cost sharing is required for recommended womens
preventive care services for dependent children,
including those related to pregnancy. The ACA
requires non-grandfathered group health plans and
health insurance issuers to cover recommended
preventive care services, without cost sharing, for
all plan participants, including dependent children.
So, health plans must cover without cost sharing
recommended well-woman preventive services for
dependent children that the provider determines are
developmentally and age-appropriate.
Coverage of colonoscopies
If a colonoscopy is scheduled and performed as a
preventive screening procedure for colorectal cancer,
the plan may not impose cost sharing on related
anesthesia services that the provider has
determined are medically appropriate.
Conclusion
Employers are encouraged to review their group
health plans to determine whether coverage is being
provided at no cost to participants for the full range
of preventive services described in the new FAQs, as
well as in previous guidance and recommendations.
The FAQs repeatedly note that health plans may use
reasonable medical management techniques to
control costs and promote efficiency. Consequently,
as employers evaluate the financial and health care
delivery consequences of any expansion in covered
preventive services, they may also consider
reasonable cost-saving medical management
strategies.
Rich Gisonny at +1 914 289 3377,
rich.gisonny@towerswatson.com; or
Kathleen Rosenow at +1 507 358 0688,
kathleen.rosenow@towerswatson.com.

Towers Watson June 2015

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Seven Things to Know About Employee

Over the last several years, increasing demand

Measuring employee retention risk

desire to stay or to leave. We categorize the combinations

Figure 1. Fewer than half of all employees are Stayers

Source: Towers Watson 2014 Global Workforce Study

Insider | June 2015

Either way, the question is:

Who are the Leavers and the At Risk?

For permissions and reprint information,

Need Training in Employee Benefits?

Insider | June 2015

less than five (42% versus 27%), the evidence

Figure 2. Over one-third of high-retention-risk employees exceed performance

3. They feel blocked in their careers.

Source: Towers Watson 2014 Global Workforce Study

Among all employees, a lack of opportunities for

Employees who feel unable to move up may be

Rating on last performance

Exceeds or far exceeds

Failed to meet/partially met

Tenure with current

Two years but less than five years

Five years but less than 10 years

One year but less than two years

Source: Towers Watson 2014 Global Workforce Study

Figure 4. High-retention-risk employees are more likely to have money concerns

Money concerns keep me from

Source: Towers Watson 2014 Global Workforce Study

Figure 5. High-retention-risk employees are less engaged

Source: Towers Watson 2014 Global Workforce Study

many high-retentionrisk employees are top

5. They are less engaged.

There is a strong correlation between retention risk

potentials or have critical

Insider | June 2015

the individual level, higher levels of engagement are

6. They are more likely to embrace change.

7. They are already looking for a new job.

To get an estimate of the financial cost of turnover at your organization, go to towerswatson.co1.qualtrics.com/SE/?SID=SV_3rTDdz1qmcYI5YV.

Insider | June 2015

and wellness programs, and retirement savings

About the study

markets around the world. It was fielded online during

For comments or questions, contact

IRS Says Self-Certification for Hardship

The IRS recently warned plan sponsors

profit-sharing contributions) and regular matching

IRS is already under

Immediate and heavy financial need

Insider | June 2015

Plans generally base the availability of hardship

Distribution necessary to satisfy immediate

Under the regulations, a distribution is not considered

Reliance on representations from employees

The position taken by the IRS in its April 1 Employee

The 401(k) regulations permit plan sponsors that are

Under the tax code, participants must repay loans

1. Reimbursement or compensation by insurance

The article in Employee Plans News outlines the

Most plans, however, apply the safe harbor standard

Self-certification not enough

Insider | June 2015

I do not consider my work area safe enough for my