Totally rewarding
The concept of total reward emerged from the US in the late 1990s. We investigate what it involves and why employers in the UK are increasingly adopting it.
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Total reward takes the "pay-for-performance" concept beyond the monetary benefits of working to encompass all that can be gained from the work experience.
These non-financial elements can include the work environment, learning and development, and recognition.
Total reward provides the flexibility needed by the employer to achieve its business aims, as well as accommodating employees with changing priorities.
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A reward strategy has a dual purpose - it must pay for the performance of the employees and enable the employer to attract, retain and motivate its workforce for the good of the business.
The most basic reward package combines basic pay with a universal benefits package. However, in a bid to boost employee performance, many employers have introduced more individualised reward packages that reflect each employee's contribution.
Performance-related, or merit, pay allows the highest performers to be rewarded accordingly. But such schemes have fallen out of favour in recent years and few organisations are now adopting them, as we have noted before: "The slowdown in the take-up of merit schemes has coincided with a growing body of research evidence that questions the suitability and efficacy of individual performance-related pay" (The truth about merit pay).
Other reward elements once considered useful retention and motivation tools are also facing criticism. The most common long-term incentive, stock options, are subject to a high degree of risk, and, in today's uncertain economic climate, they do not provide much of an incentive at all.
Employers are therefore faced with two key challenges:
Ability to pay. Economic uncertainty has prevailed for almost two years and despite optimistic forecasts during this period, the global economy is yet to fully shake off the effects of September 11. According to the National Institute of Economic and Social Research1: "The scope for passing on higher production costs is likely to be limited until the economy regains its footing . . . and in any case we expect these to be largely shifted to wage earners. The recent slow growth in private sector average earnings shows this process at work. Wage gains may have been foregone in the interest of maintaining employment throughout the economic slowdown;" and
The war for talent. Despite economic uncertainty, and the recent slight rise in unemployment, the labour market remains tight. The outlook for the future remains mixed: "Labour market conditions are uncertain, poised between a continuation of reduced demand for staff and a renewal of skills shortages and hiring activity" (Economic outlook for summer 2003).
So, employers are faced with a conundrum: improve productivity and cut costs, while also attracting, retaining and motivating staff. The solution presented by total reward is to find affordable, yet effective, ways to reward the performance of those employees who are vital to business success.
A solution?
The concept of total reward emerged from the US in the late 1990s when the booming economy and rapid growth in the internet fuelled a "war for talent"2. According to Personneltoday.com: "The trend in the US is moving away from a one-size-fits-all approach, towards an individual contract environment. An environment that includes important 'intangibles' like strong company vision, great management and the chance to work with top- quality teams. Individuals have the bargaining power to demand more of what is personally motivating and valuable to them."3
Today, employers in the UK face a similar problem. According to the CIPD's latest reward management survey4, "trying to solve the conundrum of offering salaries and benefits that are competitive and motivate staff yet are also affordable", is one of the main challenges for employers.
According to Lyons and Ben-Ora, "a key element of successful pay-for-performance design and implementation is to begin with a total reward strategy. This gives the company a structured platform from which future plan decisions can be made consistently even as the environment changes. It also contributes to making sure all human resource programmes are in alignment with the overall business strategy and company direction."5 The CIPD also advocates the importance of linking the reward and business strategies (see box).
What is total reward?
According to Armstrong and Brown6, reward goes beyond basic pay and benefits: "As a means of generating long-term commitment and motivation, pay has to be regarded as only part of a whole. It is the non-financial rewards that will ultimately make the difference," they argue.
This is the key facet of total reward: it combines the traditional pay and benefits elements of a reward package with everything else that an employee gains from employment - skills, experience, opportunity and recognition. It is more than a flexible benefits package or a statement of the combined value of basic pay, benefits and incentives. The key difference is that it takes into account the less tangible benefits of employment, which traditionally have not been measured as a source of competitive advantage.
A framework of total reward from remuneration consultants Towers Perrin suggests that the package offered by organisations needs to combine four key elements7:
pay;
benefits;
learning and development; and
work experience.
American compensation association WorldatWork believes that the key difference between total reward and a standard pay and benefits approach to remuneration is the work experience, comprising aspects such as acknowledgement, appreciation and recognition, work-life balance, culture, development and environment (see document extract)8.
Benefits
Ultimately, an organisation will design a reward package to improve its ability to recruit, retain and motivate staff. Total reward is no different in this respect. A well-designed total reward package must be attractive to employees for it to achieve its aims.
As we have noted, in the current economic climate, employers need to cap their salary bill. Total reward enables employers to gain a competitive advantage in a cost-effective manner. For example, while flexible working is unlikely to cost the organisation anything, it may be highly valued by staff. But a note of caution should be issued here: without a competitive base salary and benefits package, none of the other elements of a total reward package will provide the lure needed to attract the high-performers.
Total reward is also widely deployed as a retention tool. In a market where the best performers are highly sought-after, employees are able to demand a reward package that goes beyond meeting their financial needs. Two recent features on the subject (Effective retention strategies and A coherent approach to tackling staff turnover ) demonstrate how several organisations have boosted employee retention through focusing on aspects such as flexible working, recognition programmes, employee involvement and communication, and career and training opportunities. These are the typical non-financial incentives that form an integral part of a total reward programme.
Finally, the different reward aspects combine to provide a motivational tool for employees. Total reward offers employers the potential to engage employees in determining what motivates them, and then adjust the package to provide them. A focused workforce will be more productive than an ever-changing poorly rewarded one.
Whatever package an employer offers, it is likely to be different to that offered by any other employer. While salaries can always be matched, the combination of other rewards can act as the key differentiator between employers.
Tailored approach
Employees are unique. According to Mike Huggins, "recognising good work, giving praise and thanks are far more likely to leave an employee with a stronger, longer lasting 'good feeling' than a slightly larger number on a bank statement can ever produce."9 But this may not be the case for everyone.
Total reward is not a one-size-fits-all approach. The mix offered may not only vary between organisations; it may also be tailored to specific employee groups, or employees, within a business unit. The key to making it work is in ensuring that it provides the required incentive to each individual. And this is also where its strengths lie. It is a flexible offering that can, for example, combine a competitive base salary and development opportunities for recent graduates, and pension benefits and flexible working for employees close to retirement.
With the ultimate aim of developing an approach that helps deliver on the business aims, WorldatWork suggests a six-stage approach to devising a total reward strategy:
First, identify the unique external and internal influences in your organisation. For example, internal influences may include finances, the business strategy and culture, while external influences include the economy, the business environment and the state of the labour market.
Second, inventory all the possible individual elements of compensation, benefits and the work experience and weight the importance of each relative to the internal and external influences.
Third, assess the total rewards mix of your current organisation, both in terms of dollars and people dedicated to these today.
Fourth, listen to your employees and employment candidates regarding the relative importance of various rewards elements.
Fifth, map the interrelationships of the components as you consider individual programmes in each area and the total rewards "package" that will be the unique competitive advantage to your organisation. What is your inspirational strategy compared to where you are today?
Finally, create the "mix" of the components that most effectively ensures the behaviours and culture to achieve your ultimate business strategy.
As this list demonstrates, total reward requires time and effort to be effective, and should not be seen as a quick solution to recruitment and retention problems.
The role of HR
According to Zingheim and Schuster10: "Guaranteeing jobs, supporting an attractive work-life balance, adding pay and incentives, encouraging personal development and making the workplace appealing all make poor business sense without an understanding of the need for high performance." Total reward provides the structure for high performance by providing a multi-faceted incentive for employees.
The challenge for the HR department is to ensure that the total reward strategy delivers on its aims. A straightforward variable reward component such as a flexible benefits programme can be administered electronically with little input from HR; a tailored total reward offering, however, can prove more time-consuming. Just how far employers go in individualising the total reward offering to each employee is the challenge for the HR department.
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"The concept of total reward emerged in the US in the late 90s, but while the terminology is fairly new, the components date back a long time," says Charles Cotton, CIPD adviser. "The concept of total reward goes beyond tangible aspects such as pay and benefits, to include elements such as opportunities for learning and development, the nature of work itself, how highly the role is regarded and the culture of the organisation. Another way of viewing it is to see it as 'the unified grand theory' of reward, bringing together all those aspects that make coming to work an enjoyable experience. "Companies tend to adopt total reward either due to a push or pull factor. Those pushed towards it find they no longer have the financial resources to increase salaries and therefore need to look at other ways of rewarding staff. "On the other hand, some organisations are drawn towards total reward because they see it as delivering competitive advantage in the marketplace. Such an approach can see employers winning the best talent, and this then feeds through in to winning sales and contracts. "The challenge for HR is bringing together all the elements of reward into a coherent package that meets the needs of an increasingly diverse labour force. Organisations need to look at what they need to achieve, and use total reward to attract and retain the people who are going to deliver on these aims. The key is being able to meet the needs of a diverse workforce, for example providing opportunities to increase take-home pay for those at the beginning of their working life, to flexible working for those nearing the end of their full-time employment. However, an important challenge for HR is to ensure that line managers, who have the role of bringing total reward to life, have both the skills and the commitment to do this. "We would encourage employers to use total reward as the
strategic framework for reviewing HR practices and policies. The concept is
here to stay: it gets people thinking about what the organisation wants to
achieve and how the reward strategy feeds into this." |
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Total reward is simple in concept and at best complex in its execution. Yet, organisations that understand the concept as it affects their industry and competitive environment - and deploy critical factors to their strategic advantage - will be the clear winners in the battle for talent. Total reward has three main components: compensation;
benefits; and
the work experience.
Compensation and benefits are the two core components of total reward. In every organisation, there is some overlap of these components; the degree of overlap depends on organisation culture and programme design for the intended impact. Individually and jointly, these components can offer tremendous strategic advantage and impact. The third and overlapping component of total reward is the work experience. Whereas compensation and benefits have clearly defined bodies of knowledge that are maintained by well-established professions, the work experience includes the many elements of reward that are important to employees and employers today but many times are less tangible. They overlap, relate to and sometimes integrate with compensation and benefits. And while they always have existed in organisations, these elements traditionally have not received attention as important components of the entire attract-retain-motivate proposition. Yet, recent research consistently demonstrates that employees place a high value on matters related to the total experience of working. The components are not exclusive. They overlap, put pressures on one another, work synergistically with one another, and sometimes integrate. Collectively, they help drive organisational performance. And that's the key; their collective impact can vary dramatically, especially in today's competitive and quick-changing environment. Overlaying factors Overlaying the total reward model are two key factors: internal influences: your core ideology, funds available, internal organisational culture and its desired behaviours, business strategies, and competitive environment - what makes you organisation "tick" in the way it does; and
external influences: the economy, business environment in general, government, labour pool and other forces largely beyond your organisation's control.
While there are common influences for all businesses and within certain sectors of the economy, each organisation has unique circumstances that will influence its total reward decisions. This is your organisation's focal point of strategic advantage. Source:
www.worldatwork.com. |
1. National
Institute Economic Review, No.184 April 2003, National Institute of Economic and
Social Research, available from Sage Publications, tel: 020 7374 0645, price £51
(single issue).
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3. Personneltoday.com, 1 May 2002.
4. Reward management
2003, CIPD, available at www.cipd.co.uk/surveys, free.
5. "Total rewards strategy: the best foundation of pay for
performance", Compensation and Benefits Review, March/April 2002, available from
Sage Publications, tel: 020 7374 0645, price $289 per year.
6. New dimensions in pay
management, M Armstrong and D Brown, Chartered Institute of Personnel and
Development, available from www.cipdpublishing.co.uk, price £23.99.
7. Further information
available at www.towers.com.
8. Further information
available from www.worldatwork.com.
9.
Birmingham Post, 8 March 2003.
10. "Pay it forward" People Management, 7 February 2002.
