Total rewards can mean more HR work than you think

Because it is a holistic and “big picture” approach, a total rewards strategy can sometimes appear dauntingly complex

An organization’s ability to implement total rewards depends upon how people management currently sits. Once you’ve reviewed your compensation strategy you’ll know if HR needs to fundamentally rethink everything from performance reviews and morale to corporate structure.

Traditionally, rewards programs, both monetary and non-monetary, are fragmented into several different categories: pay, benefits, learning and development opportunities, and anything intended to provide work-life balance for employees.

A total rewards strategy approach considers the individual components as part of an integrated whole. The objective of this approach is to determine the best mix of both monetary and non-monetary rewards necessary to create real value for employees, while at the same time driving the highest return on investment.

Because it is a holistic and “big picture” approach, a total rewards strategy can sometimes appear dauntingly complex. But it needn’t be that way.

Creating a total rewards roadmap

The first step towards determining an effective and viable total rewards strategy begins with an analysis of what monetary and non-monetary rewards are being offered. What elements do employee groups value? Are program costs providing the highest return-on-investment in terms of effectiveness and value? Answering these questions is the first step in aligning rewards programs with business goals, and creating true value for employees.

Consider the following example. A major manufacturer of business machines needed to cut costs, while maintaining its ability to attract and retain the best and the brightest in its industry.

To solve this dilemma, the organization embraced a total rewards approach. The program design team began by assembling data from six perspectives: the workforce, the employer, the employee, the competitive market, the financial view, and the business environmental view.

Coupled with a cost analysis, these six views allowed the design team to produce a detailed scorecard of which programs produced the greatest value for employer and employees, and which did not.

The design team made an interesting discovery. Although the organization perceived its rewards programs to be well aligned with its business goals, the reality was very different.

The problem was that some of the organization’s rewards programs were geared towards a traditional way of conducting business (transactional focus supported by commissioned sales), and did not reflect recent market trends that the organization wished to embrace (a “relationship management” approach to sales).

Employees were rewarded for sales, with no attention paid to margins, the profitability of the sale, or the cost of doing business. The company needed to better align rewards programs with the business goals, by considering revenue, profitability, and customer loyalty metrics as factors in the bonus systems.

Finding the “sweet spot”

As the above case suggests, for each individual organization there is an optimal mix of rewards needed to deliver meaningful value to employees while achieving the maximum ROI for employers.

This mix may be defined as a balance between alignment and employee value. Alignment is the extent to which rewards support direct outcomes important to the employer (such as attraction, retention and productivity). Employee value refers to rewards that are meaningful to employees and influence their affiliation with an organization.

Great alignment with inadequate value can lead to recruitment shortfalls, lost productivity and low morale. Great value to employees with poor alignment (as in the case above) will produce happy employees who are not focused on the organization’s success. Or worse, the imbalance will attract the wrong type of employee.

There’s a third factor: cost. Adding cost to the equation produces an integrated model that powerfully illustrates the various tradeoffs between alignment and value, and determines sensitivity to program changes.

Finding the right mix between alignment, value and cost — the “sweet spot” — is crucial to delivering a compelling employment deal and driving ROI.

Yet for many organizations, finding the sweet spot remains elusive. The reasons are many. Rewards programs often evolve in a piecemeal fashion, leaving compensation, benefits and training departments siloed and out of touch with each other. This makes it difficult to get a clear picture of how these different components can work together to achieve the necessary balance.

Furthermore, the tools used to measure programs may be inadequate or outmoded, leaving no way to determine their true value to employees or their contribution to ROI. Finally, the sheer complexity of addressing the priorities of all employees can pose a barrier.

This is the situation a major international natural resources company found itself in. Organization leaders knew something was broken with their reward programs, but they didn’t know how to fix it. High performers weren’t being rewarded fairly, and this led to complaints and a lack of confidence in the rewards system (poor employee value).

The total rewards design team’s analysis revealed that limited interaction between different organizational divisions had resulted in multiple rewards programs for different classes of employees and a host of compensation issues.

The result was confusing, costly and difficult to administer. With the added pressure of an aging workforce, the programs were also having a negative effect on employee morale, and on attraction and retention.

A further complication was that business success required the co-existence of different work cultures: one that was highly entrepreneurial and marketing-focused, and one that could function in a stable and increasingly regulated environment. The company needed to simplify, synchronize and align its rewards programs — to find the “sweet spot.” But where to begin?

To resolve the myriad issues, the redesign team adopted a total rewards approach. They began by meeting with the organization’s HR group and key employees to pinpoint critical HR and reward issues. Next came a comprehensive audit of reward programs and practices. This facilitated a gap analysis of the company’s current programs versus the market’s best practices.

The total rewards design team determined that, to achieve its five-year growth objectives, the organization needed to change its approach to people management. While the current reward programs had supported the company over the past decade, the failure to recognize performance was now acting as a barrier to attracting and retaining top talent. The team’s analysis revealed that both employers and employees felt more emphasis needed to be placed on performance and competency attainment, and that success should no longer be measured simply by upward mobility or changing titles. Instead, advancement needed to be tied to excelling in functional areas, developing long-term potential and broadening job experience.

A total rewards strategy helped the company see the big picture – the forest for the trees, if you will. But it also helped zero in on a series of concrete steps to simplify reward procedures and get reward programs working for the organization.

Liz Wright Toronto practice leader, human capital group, Watson Wyatt Worldwide. She may be contacted at [email protected].

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