A Total Rewards lens can bring the new U.S. tax law into focus

This blog was originally published on the Willis Towers Watson Wire, February 15, 2018.

Many, but not all, corporations are in the enviable position of determining how to spend expected savings created by the Tax Cuts and Jobs Act of 2017 (TCJA). There are any number of ways to do this, including, for example: Acquisition for growth or synergies, building new facilities to expand manufacturing or distribution, funding additional research and development, and investing in talent. What might surprise you is that nearly half (48%) of companies we surveyed are considering investing in employee human capital and benefits programs.

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In fact, well over twice as many companies are planning or considering changes to their broad-based employee compensation plans (64%) or Total Rewards strategies as those that are thinking about share buybacks or dividend payments (26%), according to a Willis Towers Watson survey conducted weeks after President Trump signed TCJA into law on December 22, 2017. And it’s considerably more than those that are thinking about paying down debt (38%).

Companies seem well aware that there’s an enormous economic opportunity to invest in people programs and examine possible changes through a Total Rewards lens. The right program can attract and retain highly skilled or needed talent and modernize the workforce with new kinds of workers. 

Three approaches to Total Rewards changes

Companies are embracing three approaches to harnessing freed funds from the drop in the corporate tax rate from 35% to 21% under the new U.S. tax law. It’s important to note, though, that the impact of the law will be different for each organization.

1. Generally speaking, these companies fall into three categories: Early adopters of change were, in all likelihood, able to act immediately because they had developed plans and/or specific tactics that were ready for execution and simply needed funding. TCJA makes that possible.
2. Those looking to update and modernize Total Rewards programs to succeed in a new environment in which talent markets, workforce demographics, employee preferences and how work gets done are changing.
3. Those trying to meet heightened employee expectations about the potential ways that companies can use the funds released as a result of the new tax law.

The majority of employers are still analyzing which changes will have the highest impact and generate the greatest value. While it’s urgent for companies to act, given that employers are seeking to optimize what can amount to multi-billion dollar investments in human capital and benefit programs, it’s also important to take a thoughtful, analytical approach that delivers strategic benefits.

But how do you direct Total Rewards dollars to programs that matter most to key employee groups in a way that delivers the highest ROI to your organization?

We recommend the following steps:

• Understand which rewards your talent values most. For a Total Rewards investment to maximize ROI, employers need to communicate with employees. For larger employers, Total Rewards Optimization (TRO) is a good place to start. Quite simply, it uses a conjoint analysis survey to create a series of rewards preferences that are methodically narrowed down so it’s clear what’s important to employees. A sound base of employee feedback makes meaningful action possible.
• Look across workforce segments to understand differences among the rewards preferences of talent and the impact of those preferences on their behaviors. An employee population is segmented by job role, pay range, tenure, age, geography and more. Each has its own set of needs and values. There’s also a fluidity to those needs depending on changes at a company, and more broadly, the economy. The beauty of TRO is that it makes it easier to understand the needs of different constituents and also revisit the conversation with employees to determine if the rewards they value remain constant or have changed. For instance, young IT workers may value a rewards portfolio/mix that includes paid time off for employee training. Mid-career or older employees may have a different value proposition, and prefer to tradeoff salary increases in favor of more generous retirement benefits.
• Know how much to invest and get the best possible results for the smallest possible investment. Once an employer understands what employees value, it also needs to understand what’s fiscally prudent. When employee preferences are overlaid on financial data using sophisticated analytics, it’s possible to allocate your reward investment in the most effective way.
• Develop a communication strategy, including talking points for executives and managers. Many employees are aware that tax reform will leave their companies with additional funds to either invest or disperse. So it’s important to explain to employees what actions are planned, or why action is being deferred. That discussion can communicate a company’s philosophy on how the savings will be used, simply acknowledge the windfall, or for executives, detail the implications for annual- or long-term incentives. Whatever the focus, it’s important that leaders and people managers are prepared with talking points to make their program feel personalized and relevant to participants

Informed decision making

Benchmarking strengthens Total Rewards decision-making, and findings from our survey can help employers understand actions taken or contemplated by other companies. Many companies have taken at least one action, or are planning or considering investments in their people programs in several key areas: Hiring and expansion/financial transactions (60%); benefits programs (66%); broad-based employee compensation (64%); and executive compensation (40%). Employee benefits and compensation, in particular, are areas your competitors may be looking to change, our survey found. Actual or planned changes reported in our survey cover 2017 to 2019.

• Health care: Increasing the employer subsidy or reducing or holding flat the employee payroll deduction (27%) or making plans more generous by reducing point-of-care costs to employees (16%)
• Retirement: Increasing or accelerating pension contributions (19%), or increasing 401(k) contributions (matching or non-matching) (26%)
• Family leave: Adding a new, paid program in accordance with the Family Medical and Leave Act (25%)

• Some are choosing a broad-based approach: Wage increases (20%) or profit-sharing, or a one-time bonus for all employees (21%)
• Many are targeting wage increases for lower-paid employees (26%)

Capturing the opportunity

The new U.S. tax law presents companies with a significant opportunity to deliver value to shareholders, customers and employees. A Total Rewards lens can help deliver economic value and build a path that attracts and retains the workforce for their future. 

Blog Contributor

John Bremen is Managing Director of Human Capital & Benefits, North America, at Willis Towers Watson. John works with boards and senior executives to align human capital and benefit strategies and practices with business strategies in order to drive broad-scale organizational performance. He has deep expertise and consulting experience in the area of Total Rewards, and is a recognized subject matter expert and thought leader in this space. John is a longtime WorldatWork member and volunteer, and served as Chairman of its Compensation Advisory Board for many years.