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The Power of Total Rewards
Sixty-five years ago, when a group of visionary professionals formed what was to become WorldatWork, the world of work and the world of pay were much simpler than they are today. Compensation was the primary “reward” and benefits, still in their infancy, were a separate and seemingly low-cost supplement for employees. The concept of combining these things – let alone using them with still other “rewards” to influence employee behavior on the job – was decades away.
Today we are only partially through an evolution from a largely industri-alized business environment to a far more virtual, knowledge- and service-based environment, at least in North America and Europe. Among some major shifts:
• Business increasingly operates as a global village, with work moving to different parts of the world to take advantage of lower-cost labor and address skill gaps.
• Technology continues to revolutionize work, not only in terms of auto-mating more jobs, but also in enabling the virtual workplace as profes-sionals increasingly conduct business in home offices or remote locations.
• Women are equally represented in the overall workforce, if not yet fully in the ranks of senior management.
• Traditional hierarchical distinctions have eroded in the name of faster decision-making and speed to market. Teamwork is one of the most common behaviors rated in performance reviews.
• More businesses and business units in the United States are owned by European or Asian parents, which expect their practices and norms to be followed and respected in the workplace.
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2 The Power of Total Rewards
• Job mobility is taken for granted. According to the Bureau of Labor Statistics, the average worker in 2020 currently holds 10 different jobs before age 40, and this number is projected to grow. Forrester Research predicts that today’s youngest workers will hold 12–15 jobs in their lifetime.
• Gender, race, and religious differences are a common part of most work environments. Diversity has become a respected value, demon-strated through a range of specific programs.
• Business leaders increasingly regard employees as drivers of productiv-ity, rather than as relatively interchangeable cogs in a larger wheel.
Along with these changes have come dramatically different views about the nature of rewards. In the shift toward a more knowledge- and service-based economy, the relationship, or deal, between employer and employee began to evolve as well. Viewing employees as performance drivers meant thinking differently about what it would take to attract, keep, and engage them in giving discretionary effort on the job. And so total rewards entered the lexicon to address these needs.
BROADENING THE DEFINITION OF TOTAL REWARDS
The definition of total rewards always sparks debate. For example, Figure 1.1 includes a comprehensive list of items that have shown up at one time or another in one organization’s definition of total rewards. From this, it is easy to see how people can use the term in conversation only to find that they are referring to very different notions.
Generally speaking, there are two prevailing camps of definitions:
• Narrow definitions. These virtually always comprise compensation and benefits, and sometimes they include other tangible elements (e.g., development). This sometimes is referred to as total compensation or total remuneration.
• Broad definitions. These can expand to encompass everything that is “ rewarding” about working for a particular employer or everything employees get as a result of their employment. Sometimes terms such as value proposition total value are used interchangeably with total rewards.
While the narrower definitions have been around for a long time, it is the broader notion that is generating buzz. Indeed, much of the current activity in total rewards involves organizations moving to a broader definition. There are several reasons for this:
• Erosion of the “core” elements of the package. The traditional elements of rewards – pay, benefits, and stock awards – are no longer differentiating factors for organizations. The competitive position for pay is trending toward median or mean. Benefits costs continue to rise. Stock programs, such as the distribution of options, do not offer the appeal they once did.
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Broadening the Definition of Total Rewards 3
Direct FinancialBase SalaryBonusCash Profit SharingEmployee Referral Pro-
gram (Cash)Stock ProgramsSuggestions Programs
(Cash for Ideas)
Indirect FinancialAdoption AssistanceCollege Savings PlanCollege Tuition and
FeesCommuter Reimburse-
ment (Pretax)Company CafeteriaCompany StoreDependent CareDependent ScholarshipsDiscount TicketsEducational AssistanceFitness F acilities
Dis countsHealth and Welfare
BenefitsIncremental Dependent
Care (Travel)Insurance (Auto/Home)
via Payroll DeductionLong-Term Care
InsuranceMatching GiftsRelocation ProgramRetirement Plan(s)Saving Bonds via Payroll
DeductionsScholarshipsStock Purchase ProgramStudent LoansTuition Reimbursement
WorkAutonomyCasual Dress PolicyChallenging WorkConstructive FeedbackCovered ParkingErgonomics/Comfortable
WorkstationsFlexible Work SchedulesFree ParkingInteresting WorkJob Skills TrainingModern, Well-Maintained
WorkspaceOpen CommunicationPerformance
Manage mentPromotion
OpportunitiesSafe Work EnvironmentSuggestion Program
(No Cash)Telecommuting
OpportunitiesUniforms/Uniform
AllowanceWorkshops
Career360º Skills AssessmentCareer AdvancementCoachingLunch and Learn SeriesManagement
DevelopmentMentoring ProgramOpen Job PostingPreretirement
CounselingService AwardsTraining and
Development
AffiliationAthletic LeaguesCommunityInvolvementDiversity ProgramsEmployee CelebrationsEmployee ClubsProfessional AssociationsSeminarsSpring and HolidayPartiesSupport GroupsVolunteer Connection
Other/Convenience ATMs Onsite Carpooling/Van
Pooling/ShuttlesCar Seat Vouchers
(for Newborns)Child Care ResourcesCredit UnionEmployee Assistance
ProgramEmployee Card and Gift
ShopExpectant Parent
ProgramLegal ServicesMedical CenterMilitary Deployment
SupportOnline ServicesOnsite Dry-Cleaning
PickupOnsite Flu ShotsOnsite Food ServicesOnsite Post OfficePersonal Travel AgencyWellness ProgramWorldwide Travel
Assistance
FIGURE 1.1 Total rewards: different things to different employers.
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4 The Power of Total Rewards
Given all of this, a logical response is to broaden what organizations provide for the overall employment package.
• Pressure for operational efficiency and effectiveness. Total rewards can rep-resent a major cost element. As organizations seek to manage costs tightly, there is more emphasis on ensuring that all costs are counted and managed. By redefining rewards more broadly and focusing on those elements that achieve the biggest payoff, organizations can drive toward efficiency.
• Catering to diverse needs. Organizations today are managing a much more heterogeneous population. For the diverse workforce, no single com-ponent becomes a value driver. Employees have choices to make and a need for greater flexibility. A broad definition of total rewards helps employers show how their slate of rewards responds to the broad needs of today’s global workforce.
• Need to more strongly reinforce business strategy. Organizations are concerned about sending clear business messages to employees. A properly struc-tured total rewards package sends a key message. By aligning all the components of total rewards with the overall business vision, a company ensures its workforce is on the same page.
Given these factors, it is not surprising that a broader definition is gaining favor in the marketplace. Organizations still need to decide how broadly they want to define total rewards, based on what they can adequately meas-ure and manage.
What Is Total Rewards?
Total rewards encompasses the elements – compensation, well-being, benefits, development, and recognition – that, in concert, lead to optimal organiza-tional performance. When designed strategically and executed in alignment with business goals, total rewards programs fuel motivated and productive workforces that feel appreciated and rewarded for their contributions, driving the organization to ever greater success.
The Total Rewards Model
Initially introduced in 2000, the WorldatWork Total Rewards Model continually evolves to reflect changes in organizations’ needs, workforce expectations, workforce demographics, and the total rewards profession.
The practice of total rewards requires in-depth knowledge, specialized skills, and up-to-the-minute insight into the most critical issues facing today’s workforce. The model captures the broad influence that total rewards practices and its practitioners have on organizational strategy and work-force outcomes.
The 2020 Total Rewards Model encompasses five components, each of which includes programs, practices, and nuanced dimensions that collectively
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Broadening the Definition of Total Rewards 5
define an organization’s strategy to build a productive, inspired, and committed workforce.
Compensation
Pay provided by an employer to workers in exchange for services such as time, effort, and talent. This includes both fixed and variable pay tied to overall contributions.
Well-Being
The state of a workforce that is productive, comfortable, happy, and healthy, considering physical, emotional/mental, financial, and environmental factors. Total rewards professionals influence this state through organizational strategic influence and building programs that support workforce success inside and outside of work.
Benefits
Programs focused on health and welfare, income protection, financial preparedness, retirement and time off, including leaves of absence, aimed to provide holistic well-being and security for the workforce and their families.
Development
Encompasses the rewards and opportunities that employers offer their workers to advance their skills, competencies, responsibilities, and contributions – in both their short- and long-term careers.
Recognition
Formal or informal programs that thank, validate, recognize, and celebrate workforce contributions while aligning and strengthening organiza-tional culture.
Internal Influences
A TR program must also align with overall business strategy, be championed by leaders and fit within the organizational culture. Other workforce elements, such as the business implications of inclusiveness, are crucial for program success.
In these challenging and hyper-accelerated times, diversity and inclusion (D&I) is a strategy area that requires TR practitioner competency. No longer in a support function alone, TR pros are now expected to be the strongest advocates of cultural intelligence and behavioral change. Organizations are relying on them to understand, influence, and reflect D&I principles in the design and delivery of their TR programs.
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6 The Power of Total Rewards
The internal influences that inform the design and implementation of total rewards initiatives and programs include business strategy, culture, workforce, inclusion, and leadership.
Strategy
Total rewards strategies are a mechanism to make a strong business strategy come to life. Whether the goal is operational excellence, product/service leadership, or customer engagement – rewards programs help communicate expectations, align efforts, and motivate the behaviors required to deliver results.
Culture
Simply stated, organizational culture refers to a set of shared values and beliefs that form over time as people interact and work together. It encompasses an organization’s vision, values, norms, and ultimately influences workforce experiences and outcomes. Total rewards offerings can help transform and re-enforce desired cultural norms, and significantly influence how work is performed and recognized in the organization.
The Workforce
Rewards must be tailored to meet the needs of an increasingly diverse pool of employees that is defined by geopolitical trends, tech advances, and talent demographics, including today’s up-to-five-generation workforce. Savvy total rewards pros see this as an opportunity to attract the highest performers and “best” the competition.
Inclusion
In these hyper-accelerated times, diversity and inclusion strategies provide organizations with a competitive advantage in talent attraction and work-force productivity. Total rewards leaders can help organizations achieve greater diversity while building an inclusive culture by developing clear approaches for pay equity and transparency, career development, inclusive benefits, and more.
Leadership
Total rewards programs are only effective when leaders play an active role to promote understanding and appreciation of the rewards programs. Total rewards practitioners must work with organizational leaders to ensure that total rewards initiatives align with business goals and that they are well-understood, used, and appreciated by workers for maxi-mum impact.
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Why the Total Rewards Approach Works 7
External Influences
The fundamentals of designing an optimal TR design strategy have remained relatively steady for 20 years. Organizations must be cognizant of several external factors, such as the competitive (product and labor) markets, the regulatory environment and the social and cultural norms affecting each area. A deep understanding of these factors will provide TR pros the context needed to build effective TR programs that drive performance outcomes.
Outcomes
While total rewards plays a leading role in the employee experience, it does not exist in a vacuum. Initiatives must be completely woven into the enterprise’s HR strategy, considering the human capital and societal influ-ences that affect program design and strategy. Upskilling, the gig economy, regulatory changes, AI’s impact, data analytics, pay equity, and other HR factors all influence the total rewards strategy.
Alignment of strategy, culture, and TR elements result in a differentiated value proposition for workers and the organization: an inclusive environ-ment where engagement is enhanced and performance (individual/team/business) is elevated. Key performance indicators in this area may include pay equity, perception of fairness, strength of employment brand, financial performance, overall productivity, employee engagement, and satisfaction.
WHY THE TOTAL REWARDS APPROACH WORKS
Throughout the decades, there has been compelling evidence showing that the best way to attract, engage, and retain employees is to focus on total rewards, not just pay and benefits.
In the 1950s, Frederick Hertzberg conducted his famous study of factors affecting job attitudes. He identified 16 factors and categorized them into 10 “hygiene factors” and 6 motivators (growth, advancement, responsibility, work itself, recognition, and achievement). Note that the motivators do not include pay and benefits – these are hygiene factors. To motivate, a total rewards approach must be taken.
Since the 1960s, psychologists (including Abraham Maslow) have stressed how fewer tangible needs, such as growth and self-actualization, were equally important to individuals’ sense of worth. Figure 1.2 illustrates how total rewards maps to Maslow’s famous hierarchy. This message has been rein-forced over the years by other leading thinkers and management gurus, including Maslow, Ed Lawler, Peter Drucker, and Edward Demming.
Most data show that work and career opportunities, leadership, and recognition are leading drivers in employee engagement and retention – not pay.
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8 The Power of Total Rewards
What do you do when you get a job offer? Take a sheet of paper, draw a vertical line down the middle, label one column “stay” and the other “take the offer.” Then fill in the columns with a list of the total rewards associated with each opportunity. If a total rewards mindset is used to make this individual decision, shouldn’t the same mindset be applied when thinking about how to attract, retain, and motivate the broader workforce?
In today’s environment, the case for a total rewards approach is stronger than ever:
• Total rewards addresses today’s business needs for managing costs and growth. Research suggests that a more limited view of rewards can be more costly because organizations tend to respond to every situation with cash. Total rewards supports moving away from ineffective programs toward those that help drive the business forward.
• Total rewards meets the evolving needs of today’s employees. As the workforce continues to diversify, employees’ expectations change. For example, there is stronger emphasis on job enrichment, flexible work schedules, and the overall work environment. A total rewards approach better addresses many of these varying employee needs.
Transactional Rewards
Self-Actualization(Reaching Full Potential)
Advancement/Growth/Affiliation
Interesting,Challenging Work
Learning andDevelopment
Recognition, Promotion,Performance Feedback
Affiliation andCoworkers
Financial Security,Health and Welfare
Hourly Wage,Base Salary
Aesthetic Needs(Order and Beauty)
Cognitive Needs(Knowledge and Understanding)
Esteem Needs(Positive Self-Image)
Belonging and Love(Affection, Identification with a Group)
Safety and Security Needs(Long-Term Survival)
Physiological Needs(Short-Term Survival)
FIGURE 1.2 Transactional rewards and Maslow’s hierarchy.
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The Top Five Advantages of a Total Rewards Approach 9
• Total rewards fits with a movement away from cash and stock. As the role of stock becomes deemphasized in most companies, the hunt is on for other items that help redefine a compelling and differentiated offer in the market for talent. Total rewards can help do this.
THE TOP FIVE ADVANTAGES OF A TOTAL REWARDS APPROACH
1. Increased Flexibility
With the one-size-fits-all approach essentially gone, the twenty-first century is well on its way to becoming the “rewards your way” era. Just as companies create niche products and services to cater to small consumer segments (micromarketing), employers need to start creating different blends of rewards packages for different workforce segments. This is particularly true in a global labor market where workforce diversity is the rule, not the excep-tion, and when specific skills are in short supply.
A total rewards approach – which combines transactional and relational awards – offers tremendous flexibility because it allows awards to be mixed and remixed to meet the different emotional and motivational needs of employees. Indeed, flexibility is a two-way street. Both employers and employees want more of it.
As the importance of flexibility has become more understood, more com-panies are allowing employees to determine when they work, where they work, and how they work. Total rewards recognizes that employees want, and in many instances demand, the ability to integrate their lifestyle and their work.
2. Improved Recruitment and Retention
Organizations are facing key shortages of best-in-class workers (top perform-ers), information technology (IT) workers with hot skills, and workers for entry-level, unskilled jobs. The classic initial solution to a recruitment and retention dilemma is to throw money at the problem. But because this solu-tion is so overused, it does not offer a competitive advantage. Furthermore, it immediately raises costs.
A total rewards strategy is critical to addressing the issues created by recruitment and retention. It can help create a work experience that meets the needs of employees and encourages them to contribute extra effort – developing a deal that addresses a broad range of issues and spend-ing rewards dollars where they will be most effective in addressing workers’ shifting values.
Indeed, today’s workers are looking beyond the “big picture” in deciding where they want to work. Work and personal life should be seen as
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10 The Power of Total Rewards
complementary priorities, not competing ones. When a company helps its employees effectively run both their personal and work lives, the employees feel a stronger commitment to the organization. In addition, numerous studies show that employees look at the total rewards package when decid-ing whether to join or stay with an organization.
An actual summary statement can be prepared for potential employees, enabling them to see the whole value of being employed by a company. As such, as highly desirable job candidates explore their options with various companies, companies with total rewards have a competitive advantage because they are able to show the “total value” of their employment packages.
3. Reduced Labor Costs/Cost of Turnover
The cost of turnover – often the driver of recruitment and retention – is sometimes invisible and far from cheap. According to Work Institute, the estimated costs of employee turnover ranges from 33 percent to 200 percent of the departing employee’s salary. Willis Towers Watson research shows that the cost of salesforce labor, for example, during the notice, vacancy, and transition periods is significant. To replace a direct channel industrial sales-person, soft-dollar costs can range from 25 percent to 100 percent of the actual out-of-pocket costs.
In addition, the cost of turnover includes indirect costs such as losses from customers and sales, as well as decreased efficiencies as productive employees leave, and the remaining workers are distracted.
4. Heightened Visibility in a Tight Labor Market
Talent shortages have become a chronic condition of business life, and experts agree that the tight labor market is going to get tighter. As a result, employers can no longer afford to simply view their employees as inter-changeable parts. Organizations quickly are realizing that every employee matters even more when there are not enough employees to fill the available jobs.
In addition, demographic shifts (e.g., the increasing number of women in the workforce) coupled with new economic forces (e.g., global competi-tion) have changed the employment landscape, creating an unprecedented need for committed employees at a time when loyalty is low. If people can find an environment that’s more in sync with their needs, they will make changes for that. Likewise, they will stay put when they feel their needs are being met.
By gaining a clear understanding of what employees value, and mixing and matching rewards within a comprehensive framework, companies can reallocate their investment dollars to match what employees say they value most, and can communicate the total package versus a patchwork of indi-vidual components.
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Developing a Total Rewards Strategy 11
5. Enhanced Profitability
Aside from the high costs of technology, HR professionals also are saddled with escalating benefits costs and changes in health care coverage and medical protocols. Employees want a “new deal” at the same time that companies – struggling to deliver their financial targets – are readily cutting programs to trim costs. How to balance these two realities? Change the mix.
A big misconception about total rewards packages is that they are more expensive. That’s because a number of companies equate the notion of rewards with “more” – more pay, more benefits, and more combinations of rewards. What companies need to realize is that by remixing their rewards in a more cost-effective way, they can strengthen their programs and improve employees’ perception of value without necessarily increasing their overall investment. It’s largely a matter of reallocating dollars rather than finding more dollars.
Indeed, as companies discover the power of targeted reallocation of rewards and begin promoting the total value of their programs, they are abandoning the practice of setting pay, benefits, and other budgets in isola-tion, without reference to broad strategic and cost objectives. As they begin understanding their true aggregate costs – often for the first time – they are positioned to measure the extent to which their expenditures are in line with, over, or under competitive practice. And they can then measure whether they’re getting a reasonable return on their overall investment.
In addition, today’s workforce includes several distinct generations, each with a different perspective of the employer–employee relationship. Most employee research indicates that younger employees place a far higher priority on work environment and learning and development than on the traditional rewards components. In contrast, older workers put more emphasis on pay and benefits. All employees are concerned with health care, wealth accumulation, career development, and time off. It simply is no longer possible to create a set of rewards that is universally appealing to all employees or to address a series of complex business issues through a single set of solutions.
The challenge is to develop and implement a flexible program that capitalizes on this diverse workforce (Figure 1.3). Valuing each employee includes understanding that everyone does not want to work the same way or be rewarded the same way. To achieve excellence, employers need a portfolio of total rewards plans.
DEVELOPING A TOTAL REWARDS STRATEGY
While many organizations agree with the idea of total rewards, they often don’t actually put a total rewards strategy into practice. The compensation department may design a sales compensation program separately from the benefits department that revises the 401(k) program. This piecemeal approach is common, but it’s akin to building a state-of-the-art skyscraper on
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12 The Power of Total Rewards
top of the foundation of a 30-year-old, mid-rise office building. That skyscraper isn’t going to be structurally sound using a base that wasn’t designed to sup-port it. The same thing can happen when new or revised benefits are built without regard to the overall compensation and benefits structure.
The Total Rewards Blueprint
Starting a total rewards program on the right foot is a matter of taking a complete inventory of the programs already in place, ranking each program’s effectiveness, and finding the linkages between the rewards and the business strategy.
• Inventory. Find out what’s already in the mix – every program, plan, and perk, even those not currently in use.
• Rank. Determine the effectiveness of each program and how close it is to being a best practice in the industry. Effectiveness can be defined several ways. For instance, low participation can mean low interest, or possibly low understanding of a particular program. Ask line managers to list the top five and bottom five programs in the current package.
• Link. This is a difficult but important step. Look at the company business strategy and map where rewards complement or help to drive the specifics of the strategy.
For example, consider an organization that developed a business strat-egy that focused on providing an integrated customer service experience to its clients. If the company tried to blend 10 separate products and 3 different sales groups into one seamless offering, the structure of the company’s sales force and the compensation programs likely would not support this collaborative approach. In fact, the pay structure for the sales force, customer service reps, and sales support team could be inconsistent and actually motivate people not to work together. Good compensation programs are important, but linking total rewards to business strategy is essential.
StrategyCulture
WorkforceInclusion
Leadership
Social NormsINFLUENCES………. HR STRATEGY
RegulatoryAI & TechnologyProduct Market
Labor Market
Compensation
Well-Being
Benefits
Development
Recognition
WORKFORCEEXPERIENCES
ORGANIZATIONPERFORMANCE
PR
OD
UC
TIV
E
T
OTAL
REWARDS STRATEG
Y IN
SP
IRE
D
COMMITTED
FIGURE 1.3 Total rewards strategy.
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Crystallizing the Spirit of Your Total Rewards Plan 13
Five Common Ways a Total Rewards Strategy Can Go Astray
1. Trying to reengineer programs in pieces. When moving to a total rewards approach, review and reengineer the entire program. Don’t reengineer the short-term variable pay programs this year and take on base salary pro-grams next year. This defeats the purpose of making sure all the programs are working together to deliver the business results necessary for success.
2. Trying to implement changes all at once. Yes, reengineering the entire pro-gram is essential; however, implementing the changes all at once can have a detrimental effect. It’s much better to phase in new rules and new programs over time. There’s only so much change that employees can absorb and adapt to at once. In addition, it is necessary to build in time for managers and employees alike to move through the learning curve. When planning to implement radical changes to a total rewards program, it’s advisable to allow a two- to five-year timeline.
3. Limiting the number of people involved. A broad coalition of people should be involved in a total rewards effort. All stakeholders need a place at the table – human resources, executives, finance, employees, board of directors, customers. While it may be easier to exclude some groups for the sake of simplicity, it’s far too easy to overlook key elements without input of every group that will be impacted by the programs.
4. Not doing a thorough impact analysis. Before implementing any piece of the total rewards program, do a thorough analysis of the financial, organizational, employee, and customer impact of the plans. View these impacts both today and into the future. Don’t forget to look at the full range of outcomes. What happens to the total rewards program if company profits drop by 50 percent, or sales and revenues increase threefold? It’s a huge disservice not to know how the program elements will behave at different points in the company’s life cycle.
5. Not communicating effectively. Many times when companies make these kinds of large-scale changes to their compensation and benefits pro-grams, they communicate too much, too early, to employees, creating a workforce that gets full on hype and expectations. The flipside, com-municating too little, too late, also is a problem because employees don’t understand the business reasons for the changes or how these changes will impact their individual situations. Proper communication of total rewards changes is essential to success. Determine the right amount of information, the right time to deliver it, and the right for-mat to use for delivery.
CRYSTALLIZING THE SPIRIT OF YOUR TOTAL REWARDS PLAN
When carefully evaluated, developed, and woven into a comprehensive total rewards strategy, the elements of the total rewards puzzle work together to produce an impact on employee attraction and retention that is greater
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14 The Power of Total Rewards
than any of the elements considered individually. It is truly a strategy whose whole is greater than the sum of its parts.
In addition, a total rewards strategy maximizes the organization’s return on compensation, benefits, and other rewards dollars invested; provides managers with multiple tools for encouraging employee development and rewarding performance; and creates a rewards package that meets or exceeds the value of a competitor’s total rewards offerings. As with any effec-tive, competitive HR program or initiative, a total rewards strategy should not be created in a vacuum. It should provide specific, motivating direction when choosing what to focus on (and choosing what not to focus on). Rewards strategies should follow two primary aims:
1. Articulate a distinctive value proposition for current and prospective employees that attracts and retains employees who have the capabili-ties and values the employer needs.
2. Provide a framework from which the employer designs, administers, and communicates rewards programs with the maximum motivational impact to drive desired behaviors.
The total rewards strategy should ensure that the rewards framework matches the strategic needs of the business, and that the mechanics of the total rewards structure reinforce the desired corporate culture and manage-ment style. Also, it should help structure the components of the rewards system to influence and motivate employee behavior in the right direction.
Issues That a Total Rewards Strategy Should Address
A well-conceived TR strategy should address several elements:
• Strategic perspective. A total rewards strategy begins with an articulation of the company’s values and business strategies. The link to business needs and aims should be spelled out right up front. The total rewards strategy is the place to be clear about where, when, and how the links between business goals and rewards should and should not be made.
• Statement of overall objectives. The strategy should include statements that describe how the rewards system will support the needs of the business and the company’s customers, employees, shareholders, and other key stakeholders. This typically includes a delineation of the role of each reward element. If you cannot clearly define a role for any given element of total rewards, then you should question why it is being offered at all.
• Prominence. The strategy should describe the overall importance of rewards relative to other tools that can focus and affect actions and decisions (e.g., shared values, cool products, inspiring leadership, etc.). One way to think about prominence is to imagine an employee talking to a friend about working for the company. As the employee relates what is great about the company, prominence involves two key questions:
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Crystallizing the Spirit of Your Total Rewards Plan 15
1. At what stage in the conversation would you like the employee to mention the rewards package (as opposed to things such as the cul-ture, quality of leadership, focus on customers, etc.)? This helps define the importance of total rewards in the context of the total employee experience. Do you lead with total rewards, or is it a sup-porting component?
2. Which elements of the package would you like to hear mentioned first, and which should be mentioned last – or not at all? What does your company want to be famous for? What is the signature pro-gram? These questions are aimed at culling the handful of reward elements that deserve 80 percent or 90 percent of your attention in design, administration, and communication.
• Performance measures. The strategy should clearly identify the performance criteria to be rewarded, the appropriate level of measurement for each (e.g., corporate, business unit, region, work group, individual, etc.) and which reward elements will be linked to which measures. Also, the strat-egy should describe the degree to which rewards are expected to drive employee actions and decisions through variability, influence over out-comes (controllability), and the explicitness of the pay-performance link.
• Competitive market reference points. The total rewards strategy should describe the types of companies, industries, or other reference points that will be used as the basis for determining the competitiveness of the rewards package. What are the comparators? Do they differ among business units? Why?
A common response to the question about comparators is that they should be composed of companies against which we compete for talent. It’s a sound approach, usually resulting in a list dominated by companies in the same industry or geography. Another angle to consider is what you want the com-pany to be famous for. Perhaps benchmark the company’s signature pro-gram against companies that already are famous in that area, even if it means looking beyond the industry or geography.
• Competitive positioning. The strategy should clearly describe the desired competitive position relative to the competitive reference points in the labor market. Ideally, it should define how the competitive positioning is expected to vary with performance or other criteria.
It is worth noting that many companies define the median as the desired competitive benchmark for all components of rewards with increasing fre-quency. This raises a question: If you position all elements at the median, how will you differentiate? Defining a “signature” program is one way to avoid the creation of a plain set of rewards that looks like what every other company offers:
• Degree of internal equity and consistency. The statement should address the extent to which the total rewards strategy will be applied uniformly throughout the company, both horizontally and vertically. To take the
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16 The Power of Total Rewards
view that both internal and external relativities are important is fine, but defining a strategy is about making choices. A good strategy clearly defines which is more important when the two are in conflict.
• Communication and involvement. The strategy should define how much information about the rewards programs will be disclosed and explained to employees. It also should outline the degree of participa-tion that employees will have in the design and ongoing administration of the rewards programs. This includes a clear delineation of where HR’s responsibility for designing and managing rewards ends and man-agement’s accountability begins. It also should include the company’s policy toward employee unions, works councils, and other representa-tive or collective bargaining units.
• Governance. While core principles governing the rewards program should remain fairly constant, the underlying programs need to be revised and refreshed periodically to ensure that they are competitive and compelling. The rewards strategy should delineate how frequently such reviews will occur, and who plays which roles in carrying out the review and redesign.
• Data and information management. The rewards strategy should specify guidelines for data management, information sources, collection and reporting methodologies, and processes for using data for decision sup-port. The strategy also should include an overall process for measuring the efficacy of the total rewards program, and the supporting data.
The Bottom Line
Effectively executing an appropriate total rewards strategy can increase a company’s market premium. Unfortunately, weak execution means many companies are leaving at least some of this money on the table.
Problems with execution are understandable. Many rewards and benefits programs evolved in a fragmented way, without consideration for how the parts fit together or whether they reinforce business goals. Even in organizations with truly integrated designs, effective delivery depends on successful implementation of performance management, change management, com-munication, and the use of technology.
Every organization can develop and execute a superior total rewards solu-tion. By taking a step back and analyzing the design and delivery of each component of their total rewards strategy, companies can identify the steps they need to take to maximize its effectiveness (see Sidebar 1.1).
WFA: REEVALUATING THE TOTAL REWARDS EQUATION
Total rewards has typically focused on compensation, well-being, benefits and, more recently, career development and recognition. With the recent demonstrated success of remote work, organizations are realizing that work
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WFA: Reevaluating the Total Rewards Equation 17
location is also an important consideration, possibly on par with these other elements of the total rewards matrix. Work from Anywhere (WFA) is an important evolution, as it means companies have another powerful new lever to use in driving their talent strategy. Companies that recognize this and thoughtfully invoke work location in their employee value proposition could significantly benefit by:
• Attracting talent. Many times, the available talent we need/want cannot be sourced in the location in which we operate. Consequently, we either settle for candidates in our current market or we employ mobility to move talent to the job location. Both are costly solutions. As organiza-tions are able to facilitate effective remote work, they will be able to attract new types of talent that prefer their current location or prefer a remote work environment. In other words, that key software developer who didn’t want to leave Austin, Texas, is now in reach.
• Retaining talent. Every organization has lost talent due to personal needs. Maybe a key employee’s spouse gets a new job across the country or needs to move to take care of an aging relative. The amount of institutional knowledge these employees take with them is staggering, and companies spend significant time and monies replacing that staff
Sidebar 1.1: Reevaluating Total Rewards Strategies for the Growing Remote Workforce
By Steve Brink
Before the 2020 global pandemic, a 2018 study by Global Work-placeAnalytics.com highlighted that just 3.6 percent of the United States labor force worked remotely 50 percent or more of the time.
The same report tells us that 56 percent of employees have jobs that could be accomplished remotely. As quarantine/social distancing was implemented, most of the workforce performed their tasks from home, with the exception of certain sectors (e.g., service, manufacturing, etc.).
The remote work experiment forced by COVID-19 has been viewed by most as a success. But this has raised HR policy questions about WFH (Work from Home) and, taking a step further, working where you want to live versus living close to the work office. The value of on-premise/co-location working has come into question, and this experience brought those questions to the forefront.
If proximity and ease of commute are no longer issues, what factors drive our preferred work/live location? Is it being close to family members, or a location that aligns with your hobbies and passions? Whatever the answer, what we’re really discussing here is the role of location in the total rewards matrix.
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18 The Power of Total Rewards
and training new workers. By investing in distributed work, companies may save that talent and organizational knowledge, thus minimizing disruptions and saving on costs and time. One would also think that if employees are able to live where they want, they will be happier and want to stay with an organization that facilitates that lifestyle.
• Enhancing talent. By now, we all know the benefit of diverse and inclusive teams. Diversity means a lot of things, and one definition could include work location. People who live in San Antonio see the world quite dif-ferently than people in San Francisco – and that’s a good thing. Diversi-ty provides a unique blend of ideas and different perspectives that fuel creativity and performance in our business. By no means does location replace other diversity – and inclusion-related efforts, but it can play a role in enhancing an organization’s D&I strategy.
Companies that hit the mark here will provide additional benefits to their employees, including:
• Less time spent commuting• Reduced transportation expenses• Lower day-to-day costs (such as wardrobe costs and restaurant meals)• Increased productivity• Improved quality of life• Ease of family care arrangements• Enhanced flexibility to work in their preferred style/hours/etc.
Work from Anywhere
There are many, many resources discussing the tools and technology needed to facilitate remote work, but thus far, there has been little conversation around the compensation-related aspects of this WFA strategy.
COVID-19 skyrocketed WFA to a top-of-mind priority for leaders in the mobility industry. Facebook made a big announcement in May 2020 that it expected 50 percent of its workforce of 48,000 to work remotely in 5–10 years. Facebook saw remote working as a way to retain talent that wanted to leave the Bay Area and to attract talent that might already be remote and prefer not to move. This was a major shift of philosophy for Facebook, which once provided a $10,000 bonus if you lived within 10 miles of the office. While not as public, many other companies (both within and outside of the tech industry) announced similar plans on increasing their remote worker mix.
There’s an important caveat to this strategy. Facebook agreed to this WFA approach but indicated that salaries would be adjusted based on the cost of living in the location in which the employee resides. There are myriad ways to accomplish this salary localization, and this section will provide a view on different strategies to employ to set pay for those working from anywhere.
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WFA: Reevaluating the Total Rewards Equation 19
Understanding Cost of Living and Cost of Labor
First, as a reminder, there is a difference between cost of labor and cost of living.
Cost of living is the cost to live in a specific location and is based on the price of goods and services, housing, and tax rates. Cost of labor is typically the predominant pay for a particular role in a specific location given criteria such as industry, years of experience, and/or seniority/responsibility. It’s a supply/demand-based approach, which has been used to set pay for years.
FIGURE 1.4 Work where you live.
Source: “Reevaluating Total Rewards Strategies for the Growing Remote Workforce” by Steve Brink, President & CEO of AIRINC. AIRSHARE, Aug 4, 2020. © 2020, AIRINC U.S.A., https://www.air-inc.com/ Reprinted with permission from AIRINC.
With the choice of working from home on the rise, what is the value of salaryin different cities across the world? This inforgraphic helps understand the
equivalent value of USD 100,000 salary across major city centers, desirabletowns, and countries. Salaries have been adjusted for cost of living and
income tax differences.
$100,000Equivalent Salary in 26 Cities Across the World
ABOVE $100K
BERLIN, GERMANY
LONDON, U.K.
LIBSON, PORTUGAL
BRIDGETOWN, BARBADOS
ATLANTA, GA, U.S.A.SAN FRANCISCO, CA, U.S.A.
HOUSTON, TX, U.S.A.
MEXICO CITY, MEXICO
PANAMA CITY, PANAMA
CANCUN, MEXICO
SAO PAULO, BRAZIL
CAPE TOWN, S.A.GABORONE, BOTSWANA
PORT LOUIS, MAURITIUS
DENPASAR, INDONESIA
PENANG, MALAYSIA
BANGKOK, THAILAND
MONROVIA, LIBERIA
RIYADH, SAUDI ARABIA
BUDAPEST, HUNGARY DUBAI, U.A.E.
SYDNEY, AUSTRALIA
PARIS, FRANCE
AIX-EN-PROVENCE, FRANCE
TOKYO, JAPAN
HONG KONG, HONG KONG
BELOW $100K
$102,975
$185,428
$130,546
$123,984
$123,981
$118,971
$104,602
$100,000
$93,989
$70,674
$77,457
$57,149
$64,514
$62,430
$76,961
$91,973 $87,945
$81,159
$59,871$54,567
$64,114
$74,083
$66,509
$133,881
$124,515
$114,391
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20 The Power of Total Rewards
But with the rise of WFA, that supply-demand equation is being turned on its head. From a cost-of-labor perspective, the supply and demand of labor has been historically contained within a particular market. But now that we are able to acquire and employ talent across the world, our labor market is now global, which makes for a very different supply–demand equation.
In a perfect world, we would create a new mechanism to determine cost of labor (i.e., international pay scales based on global supply/demand or skills-based pay). But those capabilities do not exist (yet).
In the mid-term, some companies are looking to cost of living as a way to take their current compensation approach and weave it into this WFA world.
In the cost-of-living example, we consider a position in Atlanta that earns $100,000. The graphic illustrates an equivalent salary for a sample of locations across the United States, given differences in cost of goods and services, housing, and tax rates. At these pay levels, a person would have similar purchasing power to that which they enjoyed in Atlanta. You can see that variations in the cost of living may warrant a significant difference in the required salary to maintain this purchasing power.
Setting the Pay Level
Your total rewards philosophy will determine the best way to pay remote work-ers. As mentioned, in the past, salaries were typically based on office location. As employees increasingly WFA, there is no office location by which to set salaries.
In this new environment, work follows the employee, not the other way around. Therefore, a strategically aligned rewards philosophy is important so that your pay methodology is clear for in-office and WFA workers. It is imperative to establish a process for setting pay, as it will assist in ensuring pay equity and fairness relative to others.
Below are the four major ways to set compensation levels for WFA workers. Again, the appropriate approach should be dictated by your total rewards philosophy and organizational approach to WFA.
1. Align All Compensation with Company HQ
In this approach, pay, no matter if in-office or distributed, is based on the HQ location and each employee’s role.
A remote worker in a low-cost-of-living location might receive a “windfall,” or an increased purchasing power, due to the difference in cost of labor at the HQ location and cost of living in the worker’s location. Conversely, a remote employee who lives in a high cost-of-living location might experi-ence lower purchasing power.
The fundamental philosophy is that a given role has a certain value to the organization, and it does not matter where the role is located.
Companies that employ this strategy might pay a national rate for a posi-tion, as opposed to a location-specific market rate. This could be helpful if you have multiple offices or no major office.
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WFA: Reevaluating the Total Rewards Equation 21
2. Current Market-Level Pay for Their Location
This approach assesses the market-pay rate for the position in the location of the remote worker. This means organizations would pay for the position based upon how other organizations in the remote worker’s location pay for a similar position (i.e., market competitive pay for that role at that location).
It takes significant time and survey vendor fees to understand what the market pay rate is in a particular location. Companies will need to subscribe to a compensation survey database so they can get the best market informa-tion possible. Unfortunately, there may be some locations where market pay data does not exist or is insufficient.
Discussions around pay (including a reduction in pay for WFA employees because a role might have a lower cost of labor in one location versus another) can be challenging. This approach is not always transparent, and there may be questions about the criteria used when evaluating market pay.
The philosophy here is that you are maintaining a competitive pay offering in a location for every remote worker. This focus on each labor market makes sense if your philosophy is to pay the going rate in each geographic location.
As stated previously, it should be noted that market pay is misaligned with WFA. The idea of market pay is a supply/demand argument specific to a location (because in the past, the supply could only come from that loca-tion). Since WFA supply/demand is nationwide/global, it doesn’t really “fit” to base pay on a particular market because that doesn’t match the true “sup-ply” for the remote position. For this reason, companies should think care-fully about the application of this approach in a WFA compensation strategy.
3. Develop Geographic Differentials Structure
The prior two approaches provide two extremes; the first is a one-size-fits-all approach while the second applies differentiated, individualized salaries for each remote worker. This third option is a middle approach to provide some differences in pay but not by every individual/location. For larger compa-nies with diverse work locations, this is already a popular approach.
In this approach, organizations define a salary structure that is for HQ or a specified base location. Based on estimated competitive pay, you establish a geographically differentiated salary structure. You can have as many as you want. In the above example, we have as many geographic differences as there are remote workers, but usually a company will have 3–10 different structures, depending on how many work locations there are.
For example, you might have five different structures (A through E). Structure A is for high wage locations, while Structure E is for low wage ones. Structure C could be the structure that is the base level (100 percent). Structure A and B would be set higher (110 percent and 105 percent, respec-tively). Levels D and E would have their structures at 95 percent and 90 percent. These figures are for illustrative purposes only.
Each remote worker location would be slotted into one of these five sam-ple salary structures. The philosophy in this approach is market-based but simplifies to a few salary structures versus each remote worker having their
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22 The Power of Total Rewards
own salary structure. This third approach is easier than approach No. 2, as it is more manageable over time and recognizes that there are pay differences across locations versus approach No. 1.
A corollary to this approach is to use cost of living information to set geo-graphical differences instead of assessing competitive pay based on each marketplace. The geographic differentiated salary structures would be set in a similar way but using cost of living data to create the various salary struc-tures (A through E in our example).
The cost-of-living data are usually easy to find. Having access to this infor-mation significantly reduces the complexity of the pay approach (i.e., we don’t need to consider role, experience, or other market pay criteria). Transparency to workers is also improved, because remote workers “feel” the difference in paying for goods and services, housing, etc. When basing salaries on market pay, transparency is diminished because there are a vari-ety of factors considered that aren’t typically communicated to employees, such as peer group, selected roles, or sample size.
Many companies use this cost-based approach, as it is defensible, easy to communicate, and easily understood by employees.
4. Pay Based on Cost of Living
This next approach is a newer concept and might be best aligned with an increasingly distributed workforce. In this approach, companies set com-petitive pay based on the HQ location, and then use a cost of living approach to adjust the compensation up or down based on where the employee lives/works.
This approach is similar to the cost-of-living option in approach No. 3, but more specific to an individual situation (as we see in approach No. 2). However, unlike approach No. 2, cost-of-living data is much easier to obtain than competitive pay data in each location, and it’s simpler and more straightforward for employees to understand. Consequently, this is much easier to maintain, and also optimizes the compensation for each person based on the location that they have chosen to live. By assessing competitive compensation at HQ and translating it to remote workers using cost of liv-ing, companies ensure that everyone across the organization – no matter where you work – enjoys similar purchasing power. This is an excellent way to preserve internal equity across an organization.
There is a variation of this approach, which might be beneficial to both the employee and the company, as some organizations explore a type of gainsharing. In this scenario, companies split any gains between the differ-ence in HQ salary and the cost of living-based salary in the remote worker’s location. For example, if the HQ salary is set at $100,000 and the remote worker’s cost of living adjusted salary is $90,000, the gainsharing salary would be $95,000 (splitting the difference of $100,000 and $90,000). The company receives an ongoing savings on pay given the $5,000 reduction, and the remote worker benefits by having more purchasing power than they would under a different approach. Win–win.
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WFA: Reevaluating the Total Rewards Equation 23
Personalizing Rewards
In closing, there is a continued trend toward WFA/remote work. Distributed work and location as a total rewards component continues the well- established HR trend of personalization of rewards. Personalization grows through cafeteria-style benefit plans and multiple career paths. WFA is just another step in aligning individual personal preference and perceived value to create happier, more productive employees.
Work location has always been a key element of the compensation pillar. Now, WFA will allow employees to choose their own work location, which will further drive perceived value and allow for trade-offs in other areas of the total rewards matrix.
Companies should recognize this trend and develop a clear rewards phi-losophy and an approach to setting pay for remote workers that is consistent with their talent strategy and goals.
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