A top-down approach for total rewards that segments the employee population and customises to them will give a better return on investment by pushing performance to the next level and potentially saving dollars at various steps in the process.
Employee total rewards is going down a similar path to the variety now available on the Internet: segmentation and customisation for higher returns on investment. Here's a preview of the future of total rewards.
Losing sleep about rewards
When it comes to total rewards, management often stay up at night concerned about a few key issues:
- What would make our total rewards plan better fit the needs of our employees (i.e. be attractive, help retain top talent, motivate great work) and get a better return on investment?
While many companies are keeping pay competitive, the costs of benefits have been creeping up. Organisations transfer some healthcare costs to employees. Other companies tweak salary, incentive or stock plans. All this has put stress on the attractiveness of the compensation plan. Others have yet to make a move, and watch costs become unmanageable hoping for a way to get a better return.
- How can I use total rewards to get the best talent?
Even well-managed compensation and rewards programs are coming under stress caused by a wide variety of factors. Baby Boomers are retiring. Skills in areas such as sales, engineering, finance and information technology are highly competitive. Global competition for talent is hotter than ever.
- Is there a way to put a fresh face on total rewards with only the usual suspects in the tool kit?
Many top management teams find that total rewards offerings can become stagnant. There are very few new tools or ideas. The basic tools are known and include variations on base pay structures, incentive plans, stocks plans, capital accumulation and health and welfare benefits.
Waking up to a new approach
A: Widening the discussion
Total rewards discussions usually focus on compensation and rewards, yet this limits the tools available to management to achieve the business strategy through people. Companies can expand their toolbox by expanding the discussion to the entire employee value proposition.
The employee value proposition is composed of a few buckets that flow together (see Figure 1). First, there are the direct and indirect financial components that often get a lot of attention. Then there are the offerings around career path. Thirdly, there is the actual job-the activities the employee has to perform. Finally, there is the affiliation, which is the combination of the culture and the status provided by the association with that organisation. Thinking about total rewards in this holistic way offers organisations a portfolio of choices for achieving the desired results.
B: Narrowing the focus in implementation
Like a financial portfolio manager, the total rewards portfolio manager has a range of options and levers to pull in order to attract, retain and motivate employees. But a financial manager cannot have a one-size fits-all approach for clients across cash, fixed income and equity. A financial manager understands the needs and risk appetites of the clients and adjusts the investment vehicles accordingly. Even modest shifts in asset allocation can make a 1% difference in returns. In a big portfolio, that may be worth millions of dollars.
Similarly, the total rewards manager can best leverage the portfolio by understanding the needs of various employee segments and customising them. This goes against the grain of the total rewards philosophy of many companies, which subscribe to the idea that being fair is being equal. But segmentation and customisation have helped many advertisers on the Internet get a higher return on investment and increased sales (and, incidentally, has become the culture of the next generation), and it can help employers get a higher return on the total rewards investment and improve business results. A 1% improvement on the return on payroll dollars is worth millions of dollars.
In a competitive talent market, organisations that traditionally considered themselves employers of choice for top candidates are shifting their approach to incorporate a new paradigm: customising total rewards as an effective way to attract the employee of choice.
Planning the new implementation
How does this new total rewards approach work? Here are ideas for making this new approach operational (Warning: some suggestions may save money):
- Segment employees
Management teams need to step back and ask themselves some questions:
- Strategy - what business results do I need?
- Talent and competency by division - what kind of people can get those results?
- Total rewards - how can total rewards help attract, hire and retain this group of employees? How can it help ensure that business results are achieved?
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Apply total rewards strategy by segment
Pay structure: A motivating pay structure can be decided based on the competencies required for the job and the work activities that need to be encouraged. One division of employees, who need to be directly accountable for results, may be more motivated by a larger bonus potential. On the other hand, another division of employees, who are diligently honing and building skill upon skill, might be more attracted to a 5% raise. The best total rewards portfolio approach would be based on competencies, job activities and results demanded.
Pay level: Most top companies think about whether to pay at or above market rates depending on whether they want to be a top employer in their industries. In most cases, the companies apply this rate as a blanket. Yet, different jobs or divisions may require different pricing based on external (e.g. talent is hard to find) and/or internal pressures (e.g. job is critical to the competitive advantage of the company). Some companies may find that it makes perfect sense to have one set of jobs priced at market and another above. It is a trap to think all pay across an organisation must be the same relative to market.
Give choices: When is comes to total rewards, choice itself can be a benefit. Some companies have offered credits for benefits so employees can participate in the programs that they value most. Employers can also allow employees to decide, for example, whether they want a 50% bonus opportunity or 5% higher salary.
Potential wrinkles to iron out
When implementing total rewards programs where employees may be on different tracks, two concerns arise:
- How transparent will the organisation be about differences across employee segments? Companies may be tempted to keep differences in pay a "little secret". Yet, transparency will be easier than it seems at first glance. If a culture is set around this new philosophy (around giving employees what they need to succeed all around), employees will expect and understand differences.
- What are the administrative challenges? More options will create more administration, no doubt, but the degree will depend on how flexible the program becomes. The decision to take on a more complicated program can be looked at holistically. For example, the time and cost could be offset by a reduced cost of turnover, and potential savings on compensation and benefits (e.g. if some jobs are no longer priced above market, this could be a major saving).
Future forecast: Better returns likely
In summary, total rewards in the future will, first, require employers to use all the tools of the employee value proposition available to attract, retain and motivate. And, second, it will require employers to segment employees according to competencies and job activities to tailor total rewards programs using all the tools to achieve the business goals.