Thinking Strategically About Total Rewards

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1 ISSUE ANALYSIS Thinking Strategically About Total Rewards By: Mary Aprahamian, SPHR, CCP Deborah Schultz, GPHR, SPHR MRA The Management Association Setting the Stage Delivering powerful results that is what it s all about, right? Every organization has strategic goals to reach and competitors to beat. Strong performance is an expectation. Organizations are under tremendous pressure to deliver on business commitments despite outside external influences such as economic challenges, global competitive pressures, changing regulatory requirements, an active war for talent in volatile labor markets, escalating energy and health care benefits costs, and more. Directly connecting business and people strategies to drive measurable results, many organizations are focusing on total rewards strategies to reward and recognize employee contributions. The primary goal of most manufacturers, and most every type of employer, is to attract the right hires, motivate, grow and engage employees, and secure employee retention. Achieving that goal is 46

2 both vital and required when there is modest room to increase salary budgets and when pay differentiation is even more critical. Some organizations are far ahead of the curve, distinguishing their organizations with a complete focus on total rewards strategy. Some are experimenting with tactics and possibilities or beginning conversations about paths and options. Yet, for others, a total rewards strategy, or the perceived need for one, has yet to hit the radar screen. Our aim is to offer insight, perspective, and experience to prompt thoughts for consideration, or reconsideration, on your total rewards journey. Increasing Focus on Total Rewards While there are variations of the term total rewards, one of the more consistently applied definitions is that it represents the broad array of financial and nonfinancial ways an organization invests in its workforce to attract, engage, and retain the people it needs to achieve business success. Essentially, an integrated total rewards strategy offers advantages for both employers and employees. Employers recognize the need to take a more inclusive, or complete, look at their rewards and develop an approach that s sustainable through varying economic conditions. The volatility of the last several years, as well as continued economic uncertainties, point out the necessity to weather changing business conditions that are often unpredictable. An integrated total rewards strategy can: Benefit the key elements of talent management attracting, engaging, and retaining talent. Help inform employees about choices they must make regarding benefits, work/life flexibility, alignment with an employer of choice, and methods to prepare for the future. Guide investment decisions for the employer. Refine the employer-employee relationship. Enhance the employer brand. Increase the return on rewards. Along the journey to implement total rewards, organizations should ask questions about how it can: Ensure rewards are affordable now and sustainable in the future. Be perceptive to what employees value in the employment relationship. Use competitive reward strategies to rev up business growth. Reallocate rewards to maximize return on investment and enhance employee perception. 47

3 Recognize and reward high performers and capture, recognize, and reward high potentials. Differentiate high and low performance results. Ensure the rewards deliver the intended outcomes without unexpected results. MRA s research and experience offer this practical view of the components generally considered part of a total rewards strategy: Compensation Base salary Incentive pay Bonuses Recognition Pay premium Pay process Individual Growth Advancement Compelling future Professional development Performance support Succession planning Lateral career movement Training and development Participation in the decision-making process; information access Benefits Health care Other group benefits Retirement Work/life programs Paid time off Wellness Work Environment The work itself Organizational image Leadership Organizational policies Work/life balance and flexibility Culture Affiliation Manager capability Just as each manufacturer has its own unique process, every organization has a different way of looking at these and other key components. Regardless of the approach, it is critical to identify, evaluate, and effectively tie together the essential elements, creating the right balance across the quadrants. In exploring and developing a framework, organizations find that they can more readily adapt to changing needs whether across industries, economies, or geographies. Like most people-related strategies, there is more art than science to combining the elements important for your organization into a 48

4 tailored package designed to engage employees who create desired business performance and results. As you work toward a total rewards strategy, it is important to think like best practice companies think consider ideas outside the box. Then, think about design, strategy, and communication inside the box of your organization. Focus on what your organization needs and do what s best for your organization and your employees. After all, you know your organization, your employees, and the future employees who best fit your culture! Aligning Total Rewards with Business Strategy For some organizations, people strategies and business strategies are still not fully entwined. But rewards issues are business issues! One simply can t function without the other. An aligned strategy is fundamental to making business work and to driving business results. To create an aligned total rewards strategy, critical messages that your organization sends to current and prospective employees should include, but not be limited to: How jobs/roles are valued in the organization. What behaviors and contributions are rewarded. What responsibility rests with the employees for retirement planning. How the organization helps employees manage health and welfare concerns. How employees can align their goals and objectives with the organization s priorities. What career paths, options, or opportunities for advancement employees can pursue. How employees can develop new skills or competencies the business needs to succeed. What flexibility exists in total compensation focus areas as employees move along the employment maturity curve. Examine the following MRA illustration of the various HR systems sustaining organization strategy. While spokes are interchangeable among the wheels, each component plays a role in driving both employee connectivity to the organization and business success. Consequently, each has an opportunity to influence the alignment of total rewards with business strategy. After defining your organization s key principles related to aligning total rewards with business strategy, you can flesh out specific reward strategy elements and conduct a gap analysis, 49

5 MRA s Strategic Workforce Management Model comparing current programs to the new reward strategy and identifying priorities for change. At this stage, it may be extremely important to circle back (or initiate connections if you have not already done so), in order to understand employees perceptions and preferences. Challenges may arise if the revised approach to rewards is significantly different from the previous system, or if employees don t understand the multitude of issues impacting or surrounding your total rewards strategy. Management must address questions critical to achieving alignment: Will the reward cost structure require adjustment? Are people costs aligned to deliver required financial performance? Does the current cost and risk-sharing model raise issues or challenges? If so, what are the implications? Has there been appropriate scenario planning and modeling? Have you considered everything from variable pay to benefits to workplace flexibility to convenience 50

6 benefits all intended to engage employees and drive behaviors to produce business results? Remember that your organization s journey to implement a total rewards program is a work in progress, not a project with an end state set permanently for the future. Ongoing attention will ensure that your organization remains current and nimble enough to address necessary change or to overcome construction bumps along the way. Specific Considerations How Does It Work? High performing organizations clearly articulate their compensation philosophy. A typical example might be to attract and retain high quality employees by targeting the average or median rate of pay. Staying on top of market pay rates helps ensure an effective compensation strategy. Many organizations participate in salary surveys in order to obtain competitive pay information. But beware of free salary data available online and from other sources because this data typically lacks the key information that you need to confirm that the data is relevant to your organization. Some of the key components to look for in a salary survey include a list of the participating organizations, geographic scope of data, how the size of the organization is determined (either by employee headcount, annual revenue/sales and/or asset size), and industry data. Similar to previous years, base pay increase budgets are projected to be a meager three percent for It s difficult to effectively reward employees with such a small pool of dollars available for base pay increases. Consequently, looking at the overall total rewards package can help incent and reward employees above and beyond this year s three percent pay increase budgets. When you meet with employees to discuss their performance and annual pay increase, consider weaving those details into a larger conversation that starts with total rewards. Highlighting all the benefits, special programs, work culture, and professional development opportunities along with the base pay increase helps employees see the total package. Some organizations refer to this as the Employee Value Proposition (EVP). For example, a typical meeting might point out: Employee s Current Base Pay = $60,000 Performance Rating = Average Merit Increase = 3% of base or $1,800 Merit increase equates to $69.23 per bi-weekly payroll Instead of focusing on just the increase, consider expanding the 51

7 conversation to include total rewards. Ideas for Total Rewards Components There are many examples of total rewards components beyond pay and standard benefits. For example, over the last few years, workplace stress is on the rise, and a lack of work/life balance is a primary concern for many employees. Offering flexible work schedules such as compressed workweeks, job sharing, flextime, and working from a virtual office can help alleviate stress. Compressed workweeks typically allow an employee to work a full-time job in less than five working days. Some examples include four-day workweeks or a schedule with one day off every two weeks. While job sharing presents unique challenges, it allows for a more flexible schedule and a part-time schedule if desired. Telecommuting or working from a virtual office is yet another way to attract and retain employees while reducing stress. Allowing employees to work from home for part or all of their workweek helps them avoid high stress situations like a long commute. To identify what drives employee attraction and retention for your organization, it may be necessary to conduct an employee survey. Every organization has its own culture, unique jobs, and competitive environment. Particularly for some high tech and professional level jobs (e.g., engineers and specialized IT jobs), competitive wages alone are not enough to attract and retain the best talent. Rewards strategies that resonate with these groups include enhanced professional development and career growth opportunities as well as sabbatical opportunities that allow employees time off to take a deeper dive into their area of expertise. MRA s interaction with a wide variety of organizations allows a unique vantage point that reveals novel and creative rewards programs in today s workplaces. Some organizations are spending time and money to update and improve employee break rooms, offering gourmet snacks and beverages (sometimes free to employees) and installing televisions, computers, and comfortable furniture. Others are more liberally dispensing personal cell phones, and/or boosting reimbursement for personal phones. To allow employees a more comfortable business travel experience, some companies are expanding travel budgets. With increased focus on healthy employees, organizations often implement preventive health initiatives and wellness programs that go above and beyond standard biometric screening. Smoking cessation classes have seen an increase in popularity as well. 52

8 Other unique total rewards ideas include: English as a second language classes on-site Additional personal leave time Supporting employee charitable interests and volunteer work Onsite health clinics Rewarding High Performers As you consider your total rewards package, give special attention to top performing employees that are highly sought after by your competitors. Top performers should see significantly higher merit pay rewards than colleagues who demonstrate only average performance. Spot bonuses are an effective way to reward high performing employees. If you use a spot bonus, it s important that the bonus is large enough to be considered a meaningful reward and that, as budget allows, it is available to all employees. One of the challenges of spot bonus programs is insufficient communication throughout the organization. Ensure that you implement a clear communication plan so that managers are aware of the program details. High performing employees may value more intrinsic rewards like support from senior leadership as well as their managers. Consider options like increased support for technology, physical office space requirements, and other core needs. Working in partnership with its member organizations, MRA has observed substantial opportunity for organizations to improve communication related to employees pay. Helping employees understand your organization s philosophy and how their pay compares to peer organizations can improve employees perception of their overall pay. As you weigh the cost/benefit of every total rewards option, invest in features suitable for your organization s budget as well as those valued by your employees. Case Anecdotes Lessons Learned Many members of our employers association, including a strong manufacturer presence, have stated to MRA that their employees do not understand the total value of the compensation and benefits the member provides, or do not appreciate the considerable company contribution made to the cost of their benefits. While employers generally equate compensation with the full package of wages and benefits they provide to employees, many employees identify compensation solely with their salary or hourly wage rather than the scope of the total compensation package. 53

9 This gap in understanding provides employers with the opportunity to change the conversation from compensation to total rewards. In this approach employers communicate to employees the components of the total rewards offered: compensation; employee benefits, including vacation/personal time; individual growth; and work environment (culture, affiliation, citizenship) of the organization. This approach also is helpful when considering changes to any individual component of total rewards. By communicating all components of the total rewards offered in a holistic manner, the employer is able to more effectively explain any changes made. For example, an enhancement in compensation may result in a decrease in another benefit. Or, a change to one benefit may impact another component. An MRA member had learned through focus groups that its employees did not value or appreciate the company s annual holiday party. The member eliminated the annual party and used the amount typically paid for the event to provide a slight increase in the employer-paid portion of its employees health care premiums. Another MRA member communicates the total rewards it offers via a total compensation statement prepared by MRA. This member was able to use the information during collective bargaining discussions to illustrate and explain the benefits provided to employees. To outline the value of the training and development benefit that it offers to employees, an MRA member listed the total value of the training benefit available on each employee s total compensation statement as well as the amount the employee had used during the year. Carefully measuring behaviors, productivity, and people cost are all especially important, and ensuring that goals are clearly stated and aligned with business objectives is absolutely essential. Offering moderate to high rewards with low or unclear expectations leads only to a culture of entitlement, which ultimately causes low performance and retains the wrong people. Conversely, offering low rewards with high expectations deters talent. The bottom line? There is value in adopting a more strategic, comprehensive, and integrated approach to total rewards that includes both financial and nonfinancial rewards. Work to prioritize your organization s investment in the rewards program according to the needs and preferences of the key talent segments in your organization with a design tailored just for you. 54

10 Where Do We Go From Here? To think strategically about total rewards, address questions candidly and deeply: How does your organization define total rewards? Do you know? Have you held clarifying discussions? How does your organization gather employee feedback? How do you know your employees perceptions about what they value? Does your organization truly align, in words and actions, that the leadership of people is a vital business function? Are you creating a total rewards strategy that reflects what it will take to engage the current as well as the emerging workforce? Identifying the essential elements of an effective total rewards strategy for your organization and implementing that strategy requires dynamism, experimentation, and flexibility, but it can pay off handsomely. Linking people and business strategies furthers organizational success. End Note Sources include research, surveys, and consulting conducted by MRA as well as a review of studies completed by large national research organizations such as: Towers Watson, Hay, Aon Consulting, Hewitt Consulting, Melcrum Research, McKinsey, Deloitte, MetLife, WorldatWork, and others. With contributions from MRA s Kathryn Helmke, SPHR, HR Government Affairs Director. 55