Finding the ROI in total rewards (On total rewards)

Total rewards in danger of becoming just another euphemism for HR overhead

In recent years, the concept of total rewards has come to the forefront in the HR community. It makes good sense. In order to better define the employment relationship and provide a focus for the value of programs that organizations offer, employers need to have a structure and framework. Total rewards provides that framework.

However, one of the benefits — or dilemmas — of being around human resources for so many years is that one gets to see the different “wrappers” that get put around much of one’s work. Total rewards for some is a means of presenting and professionalizing what they do. For others it assists in communicating the package they offer employees. And for others still (older HR types who have trouble remembering details and who find concepts easier), it helps to categorize many of the things HR specialists now do for the organization.

While this might sound a little disrespectful, my point is that there is a real issue the profession must address. Unless the return-on-investment an organization achieves from total rewards can truly be measured and communicated, “total rewards” will become another euphemism for HR overhead until the nomenclature is once again changed to reinvigorate the concepts.

As a profession, HR prides itself on the fact it is now at the business table, partnering with the top levels of the organization. HR is finally being taken seriously and recognized for its input rather than being seen as an administrative resource. To maintain this stature with senior management, and continue to earn the right to participate in strategic decision-making, HR professionals need to ensure they are accurately and consistently measuring the return from human resource concepts such as total rewards.

I have had the opportunity to conduct many interviews with senior executives in organizations where the total rewards concept is established. When I asked these executives to describe what total rewards is in their organization, with the exception of a few, they either respond with a blank stare and sheepishly but honestly admit they are not sure, or they try to appear knowledgeable about it and describe the compensation and incentive practices they can remember.

People who work with the many aspects of total rewards on a regular basis in their role, clearly see how the alignment of the elements and the quality with which organizations manage their programs contribute to the bottom line of the company. The people at the top still, for the most part, don’t get it.

Organizations have always offered some form of monetary compensation in return for the work done by employees. In the past century, a variety of benefits were added to the employment equation that provided a means of attracting and maintaining a relationship with employees. In the last few decades, HR has incorporated these things into communications to employees of what they get for their efforts (remember benefit statements?). HR has been looking for employees to recognize and appreciate the costs and contribution the organization has made to protect and support them, and many do.

However, as organizations have been forced to “right size” and reduce costs, the value of these rewards fell in many organizations with increased co-payment, termination of some coverage and increased thresholds or caps. At the same time, other programs such as career development, wellness and organizational culture have been brought into the equation among other work experience elements to justify why, despite the fact the organization pays at the 50th percentile, it’s still a great place to work.

Employers invest a lot of money in their people to ensure they are productive. But HR is just not very good at quantifying it and making sure decision-makers recognize the value it provides to the bottom line. HR practitioners pride themselves on the fact they’re considered business associates because they can read a financial statement or do a cost-benefit analysis. We have not, however, forced our senior managers to also be accountable for measuring and documenting the ROI that has been achieved through total rewards.

There needs to be more research and measurement into the value of total rewards. One way to do this would be to fund research by academics or by industry associations to demonstrate the value total rewards brings to organizations. More importantly, HR professionals need to push for better measurement of the ROI within their organizations in the language senior management understands.

This includes measuring contributions to earning before interest and tax and improved gross margin through commercial productivity improvements. Another key requirement going forward will be increased customer value and longer term commitment and profitability that can result from better tactical execution and achievement of agreed-upon service levels.

These activities need to be measured and communicated to executives to demonstrate the value of the reward investments connected with performance and achievement. Working with many sales organizations globally has taught me a lesson that is now part of my mantra to clients: It’s only through measuring and demonstrating the link between improved organizational competence and the total rewards programs will you be able to adequately justify the costs and support further investment.

David Johnston is president of Sales Resource Group, a Toronto-based sales force effectiveness consulting firm that specializes in sales and incentive compensation plan design. He is on the faculty of WorldatWork, teaching the Total Rewards and Sales Compensation certification courses. He can be reached at (905) 845-0192 or [email protected].

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