Total rewards – an idea whose time has come

The past year has been financially difficult for many organisations, with talent considerations taking a back seat to cost management. As the economy continues to recover, effectively managing Total Rewards (TR) will help companies to grow. Total Rewards is a term commonly used to summarize an array of factors – not just pay and benefits, but also career and work-life issues, for example – that combine to attract, motivate and retain employees and, thereby, enhance the organisation’s financial performance. (See box)  

Components of Total Reward   Compensation: base pay, cash incentives, stock awards, etc Benefits: retirement, medical, life insurance, etc Careers: talent and career development, training Work-life: non-financial and status recognition, flexibility, leave practices and intrinsic work factors, such as culture, leadership, values, work content, etc

  A recent survey of 741 organisations by Mercer and WorldatWork, conducted primarily among US businesses, found that just one-quarter of respondents believe their approach to TR is truly integrated.   Part of this may reflect the current stage of the economic cycle. In survival mode, as many organisations were last year, cutting costs is often the primary driver of rewards decisions. But as growth returns, so too will demand from businesses for the best talent, so they will need to balance a still keen focus on costs with reward programmes designed not only to differentiate themselves from the competition but also to engage employees and drive productivity.   Indeed, with economic volatility, growing globalisation and mobility, increasing government oversight, falling levels of employee engagement, and continued downward pressure on costs, companies need to take into account four different perspectives when designing their TR policies: employer, employee, cost and external. [See box]    

The four perspectives Employer: What does the workforce need in terms of structure, behaviour, capabilities and performance, and how should the rewards programmes be designed and delivered in order to secure these workforce outcomes? Employee: What creates a compelling place to work in the eyes of employees, what does or should differentiate it from competing employment opportunities, and how do employees place value on the current rewards package? Cost: Can the rewards programmes designed to support the desired strategy be provided at an affordable and sustainable cost? External: What are the labour and related awards environments in which the company competes, and how do they influence or constrain rewards practices that the company may wish to adopt?

  The way companies can reconcile the often competing priorities implicit in these four perspectives is to identify and segment their mission-critical jobs, skills and core competencies and allocate their TR budget accordingly. In so doing, they also have to recognise that different groups of employees are motivated by different things.   Employees constantly trade off the value of ‘money’ (pay and benefits), career opportunities and work-life style, and a 24-year-old will accord a very different value to these different aspects than a 54-year-old. Many of the elements of TR cost very little and are simple to provide – recognition and values being obvious examples – yet they have a disproportionate effect on employee engagement.   Yet most companies will have a universal reward programme that neither acknowledges these different weightings nor pays any account to important demographic differences. If they segmented their workforce more carefully, and targeted different elements of reward more judiciously, organisations should find that they have happier, more motivated employees, contributing more productively to the business, in a way that costs them less, than they had before.   But these different ‘value propositions’ have to support considered people and talent strategies which, in turn, need to be rooted in the business strategy. What outcomes are you looking for? Retention? Engagement? Productivity? Results? Each of these requires a different reward approach.   What, ultimately, you are trying to achieve is the greatest return on your reward dollar, and that comes down to understanding the business’s aims, and encouraging the behaviour that will help it get there, through the appropriate reward strategy.   However, even the most sophisticated TR strategy won’t be effective unless it is communicated. Some 96 per cent of respondents to the Mercer/WorldatWork survey cited ‘communication’ as the most significant factor in making their TR programme more successful. And communications have to be personal, proactive and hit their mark – not general or left to employees to stumble upon.   The administration of TR is also highly important – yet execution is often overlooked by employers. If an employee rings the call centre with a question about his or her benefits and receives poor service or an unsatisfactory answer, this can significantly diminish their perception of the value of the benefits they receive – again, undermining all the hard work and thought that has gone into designing the package.   The Mercer/WorldatWork findings suggest that companies that adopt a holistic TR approach not only get a better return on their investment in rewards, but also weather economic turbulence better than those that don’t.  

• Firms that cut their TR investment last year were more likely to see a decline in revenue over the next 12 months than those that maintained or increased their investment.
• Organisations that experienced a decline in revenue were more likely to indicate that their employees do not recognise the ‘brand’ of their TR programme, and that leadership generally views spending on TR as a cost rather than an investment.

Investment in TR is a significant part of the cost of doing business, but many companies have paid insufficient attention to the return on that investment. The depth and scale of new business challenges means that limiting decision-making to anecdotal or dated trends exposes them to an unacceptable level of risk. By contrast, those that grasp the nettle may find that their TR approach proves a major source of competitive advantage.

Tags: human resources consulting