BrexitImpact on Talent & Rewards

July 2016

Aon HewittTalent, Rewards & Performance

Risk. Reinsurance. Human Resources.

1

The Referendum Outcome and Next Steps

On 24 June the United Kingdom (UK) electorate has voted to leave the European Union (EU), which has been a surprise, particularly to financial markets. We expect the exit process through invoking Article 50 to begin sooner or later, though the process of negotiating a settlement with the EU will start immediately.

The Leave campaign has focused on two arguments: 1. Take back control as it relates to regaining sovereignty in setting UK policy, and 2. Migration as it relates to limiting free movement of people under the EU treaty.

Within the Leave campaign, there were differences in the priority of these two arguments.

1. The argument for taking back control has not generally implied a full separation from the EU in terms of free trade and access to the single market. 2. The migration argument focuses on moving away from the slow-growing EU economy and governing the movement of people into the UK from the EU by the same rules for non-EU workers.

The Remain campaign was based on the premise that the UK would be stronger in the EU as a negotiation partner for the rest of the world, including the economic benefits of free movement of people to support the growth of the economy. The UK’s Prime Minister (PM) who was on the Remain campaign has resigned, leaving the execution of the exit negotiations under Article 50 of the Lisbon Treaty to the new PM. The UK’s Conservative Party is expected to select a new PM from the candidates by the end of September 2016 and subsequently start the formal negotiations with the EU about the exit.

As the vote for Leave was by a very small margin with considerable majority support for Remain in Scotland, Northern Ireland and London, the new PM will face a challenge in brokering an exit agreement which unifies the voters rather than further divide them on the sensitive topics of immigration and collaboration with the EU.

A further challenge is posed by the unwillingness of the EU to create a situation for the UK far different from the deal other members and trade partners currently have, particularly around budget contribution and free movement conditions—which other members and trade partners have had to agree to in return for free access to the single market.

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• A survey of more than 1,000 business leaders found almost two-thirds believe the UK’s vote to leave the EU will be “negative” for their organizations, leading a quarter to plan hiring freezes, and five percent to report plans to lay off staff, reported the Financial Times.

• There are about 3.3 million EU citizens living in the UK, of whom about 2.1 million work. On the other hand, of the 1.2 million Britons living in the EU, 800,000 work. The right of these persons to continue to work outside of their home country in the long-term is unclear per the Economist/Migration Watch UK1.

• London could lose as many as 40,000 jobs, many in financial and professional services, with some organizations already announcing plans to relocate to other major European cities, according to Fortune.

• Greater London, which represents 22% of total economic output in the UK, is likely to be most negatively affected by migration restrictions.

The Numbers

1 http://www.migrationwatchuk.org/briefing-paper/354

2/3 believe the UK’s vote to leave the European will be “negative”

40,000

jobs could be lost in London

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Immigration Implications

Firms are likely to shore away resources in preparation for a negative turn. This will mean tight control over labor costs. Firms should develop workforce plans that model different scenarios, in preparation of a volatile external environment.

• Organizations operating in the UK will have to take quick stock of which employees will need sponsorship and which will not.

• For organizations with a large representation of non-UK employees, leadership will have to consider serious reorganization or reallocation of funds in order to pay for possible sponsorship.

Oxford University found that 75% of EU citizens would not be allowed to stay within the UK, which could rise to 81% if new UK-based rules come into effect, due in April2. A point-based rule for non-EU immigration would form the initial legal fallback option for EU immigration going forward, which prioritizes immigration based on skills and has set quota for each tier.

• UK expatriates will also have to be quickly identified, and organizations will likely have to find replacements. Critical skills around finance and general digital ability, two aspects already in high demand in the UK, will be the most in demand3.

• While many banks have openly discussed moving their headquarters out of London, it is unlikely they will do so over the next two years. However, depending upon the future available mobility of talent into London, firms might decide to establish/ expand satellite offices in EU countries, to hedge the talent risk.

• Several companies, in particular banks, have already announced plans to withdraw staff from the UK to the continent though this relocation is more likely based on wage arbitration for back office functions than a direct result of the Leave vote.

2 https://next.ft.com/content/43645264-12a7-11e6-839f-2922947098f0?siteedition=intl&_i_location=http%3A%2F%2Fwww. ft.com%2Fcms%2Fs%2F0%2F43645264-12a7-11e6-839f-2922947098f0.html%3Fsiteedition%3Dintl&_i_ referer=http%3A%2F%2Fass3 http://www.independent.co.uk/news/business/news/foreign-graduates-migrant-workers-eu-referendum-finance-tech-skills- shortage-a6889151.html

“Oxford University found that 75% of EU citizens would not be allowed to stay within the UK, which could rise to 81% if new UK-based rules come into effect, due in April.”

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• The labor market will be seriously impacted by Brexit, tightening significantly in the UK, and most likely loosening in others. This means that talent will be more difficult to find in the UK4, adding more pressure to an already volatile labor market.

• Nearly 80% of tech workers believe Brexit would make it more difficult to address the current skills gap, according to a survey released this month by Tech London Advocate, a tech lobby group.

• About one in three workers in UK startups come from outside the UK, and most of these international workers are from the EU, according to research published last year by start-up accelerator Wayra.

• Roughly 40,000 EU citizens work in London alone, with a total number of jobs in financial and professional services of 360,000, according to government statistics.

• In the UK construction sector, 12% of the 2.1 million construction workers come from abroad. This sector in the UK will certainly see wages increase, putting pressure on firms’ margins.

• Depending on the outcome of the exit agreement, the current quota would be insufficient to sustain the required amount of workers in healthcare, financial and professional services as well as construction, manufacturing, hospitality and agriculture expanding the wage pressures to all major economic sectors in the UK.

• With increasing uncertainty, firms will pay closer attention to hiring people with adaptability and learning potential. People that can jump from problem to problem and be focused on solving issues rather than the method.

Acquisition and Development Impact

4 http://world.einnews.com/article/330792459/TscvKgLW_m6pzH0t

80%

of tech workers believe Brexit would make it more difficult to address the current skills gap

12%

of the 2.1 million construction workers come from abroad

Nearly

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Total Rewards Implications

• As the labor market tightens, organizations will have a more difficult time finding talent, leading to an increase in compensation to attract workers5. We are likely to see this happen in the UK as organizations scramble to attract workers.

• Companies need to consider how their talent spend and pay mix may change significantly for relocating employees from the UK to other EU hubs for key jobs.

• Currency fluctuations may have a dramatic impact on compensation this year, while rapidly evolving UK laws may impact pay governance in the future.

• Stock markets will respond negatively, at least in the short term, with strong potential for a full recession in the UK. Pension plans and other stock-market invested vehicles will be hit.

• Firms should communicate to employees that it’s in their best interest to stay engaged in the stock market with their retirement accounts, as many employees react to market swings with withdrawals.

• Though the stock market has recovered from an initial sharp decline in the first two days after the vote, the long-term economic outlook for the UK and for the EU are lower than before the vote which will likely continue to reduce shareholder confidence, according to the Financial Times.

5 https://www.dol.gov/dol/aboutdol/history/herman/reports/futurework/conference/trends/trendsV.htm

“Companies need to consider how their talent spend and pay mix may change significantly for relocating employees from the UK to other EU hubs for key jobs.”

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• Leaders across the world must communicate, quickly, and clearly, what the impact (or the lack thereof) Brexit has on the business in multiple scenarios.

• Leaders also need to articulate their strategy for moving forward beyond Brexit including the ripple economic effects that have been set in motion. Employees are likely to get worried, and in the absence of direction, may assume the worst.

• The talent pool for leadership will contract along with overall labor tightening, which is an opportunity to develop the next generation of leaders. We are seeing a similar phenomenon in the US labor market6.

Leadership Challenges

6 http://www.bloomberg.com/news/articles/2016-01-21/as-boomers-retire-companies-prepare-millennials-for-leadership-roles

“Employees are likely to get worried, and in the absence of direction, may assume the worst”

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Culture Considerations

• The ability to manage ambiguity in an agile manner is underscored by this event. Firms must assess for those capabilities when hiring.

• Volatility will cause people to seek safety and security, and thus organizations should be checking in with employees frequently on their engagement levels.

• Confidence in the organization is consistently a strong driver of engagement; leadership needs to give employees reason to believe smoother waters are ahead.

• With a recession looming, we are likely to see employee engagement as a whole dip. We typically however see a lag of about a year before seeing impact on engagement results. In the immediate term, employees will be more focused on job security. Pay and other “here and now” factors are likely to emerge as key drivers, rather long-term career considerations.

With many questions yet to be answered on the exit agreement, we recommend monitoring the developments closely through a multidisciplinary Brexit task force. The task force should monitor the legal, talent, operational and financial implications closely and develop scenarios for your organization, while keeping a tight watch on engagement and addressing employee concerns over Brexit as they arise. Leadership should minimize ambiguity as much as possible through internal and external communications to limit retention issues and ensure maximum productivity during this challenging period.

“Confidence in the organization is consistently a strong driver of engagement; leadership needs to give employees reason to believe smoother waters are ahead.”

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The UK’s decision to leave the European Union is one of the biggest political and financial stories of the last decade. The implications for the UK, Europe, and countries around the world will be felt for years to come. In order for organizations to navigate through the uncertainty that Brexit will bring, executives will need to make astute decisions around how talent, rewards and performance are managed. Labor supplies and the ability to recruit employees will be significantly altered in both the UK and for EU countries. As uncertainty grows, leaders will need to ensure their employees stay engaged, informed, and secure in their future. Finally, the financial ramifications are perhaps the most complex for organizations to predict. Making sound decisions around pay, benefits, and rewards will differentiate the organizations that survive and thrive through this volatility and those that perish.

Summary

ContactsLex VerweijPartner and Head of Europe Talent, Rewards & Performance +442070865008 lverweij@aon.com

About Aon Aon plc (NYSE:AON) is a leading global provider of risk management, insurance brokerage and reinsurance brokerage, and human resources solutions and outsourcing services. Through its more than 72,000 colleagues worldwide, Aon unites to empower results for clients in over 120 countries via innovative risk and people solutions. For further information on our capabilities and to learn how we empower results for clients, please visit: http://aon.mediaroom.com.

© Aon plc 2016. All rights reserved.The information contained herein and the statements expressed are of a general nature and are not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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