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Developing a Total Rewards Strategy 3

While many companies agree with the idea of total rewards, they often don’t actually put a total rewards strategy into practice. The compensation department may de- sign a sales force compensation program separately from the benefi ts 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 top of the foundation of a 30-year-old, mid-rise offi ce building. That skyscraper isn’t going to be structurally sound using a base that wasn’t designed to support it. The same thing can happen when new or revised benefi ts are built without regard to the overall compensation and benefi ts structure.

THE TOTAL REWARDS BLUEPRINT

Starting a total rewards program off on the right foot is a matter of taking a com- plete inventory of the programs already in place, ranking each program’s effective- ness and fi nding 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 defi ned several ways. For instance, low participation can mean low interest, or possibly low understand- ing of a particular program. Ask line managers to list the top fi ve and bottom fi ve programs in the current package.

• Link. This is a diffi cult step, but an important one. Take a look at the company business strategy and map where rewards complement or help to drive the specifi cs of the strategy.

Five Common Ways a Total Rewards Strategy Can Go Astray 19

For example, consider an organization that developed a business strategy that focused on providing an integrated customer service experience to its clients. If the company tried to blend 10 separate products and three different sales groups into one seamless offering, the structure of the company’s sales force and the compensa- tion programs likely would not support this collaborative approach. In fact, the pay structure for the sales force, customer service personnel, and sales support team could be inconsistent and actually motivate people not to work together. Good com- pensation programs are important, but linking total rewards to business strategy is essential.

FIVE COMMON WAYS A TOTAL REWARDS STRATEGY CAN GO ASTRAY

1. Trying to re-engineer programs in pieces. When moving to a total rewards ap- proach, review and re-engineer the entire program. Don’t re-engineer the short-term variable pay programs this year and take on base salary programs 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, re-engineering the entire program is essential; however, implementing the changes all at once can have a det- rimental 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 fi ve-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, fi nance, 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 fi nancial, organiza- tional, 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 profi ts 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 benefi ts programs, they communicate too much, too early, to employees, creating a workforce that gets full on hype and expectations. The fl ipside, communicating 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. (See Chapter 5.) Determine the right amount of information, the right time to deliver it, and the right format to use for delivery.

20 Developing a Total Rewards Strategy

CRYSTALLIZING THE SPIRIT OF YOUR TOTAL REWARDS PLAN

When carefully evaluated, developed, and woven into a comprehensive total re- wards strategy, the elements of the total rewards puzzle work together to produce an impact on employee attraction and retention that is greater than any of the ele- ments 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 com- pensation, benefi ts, 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 effective, competitive HR program or initiative, a total rewards strategy should not be created in a vacuum. (See Figure 3.1.)

FIGURE 3.1 Embracing total rewards: 10 rules of the road.

Consider these 10 essential rules of the road that came out of the Hewitt Total Rewards Research Forum (April 2003). The forum was attended by senior HR leaders from 27 of the world’s largest organizations, representing more than $1 trillion in revenues, more than $200 billion in total annual spending on people programs, and more than 10 million employees and their dependents.

1. Focus on the broad concept of total rewards, however you defi ne it, what- ever you call it. Push yourself to defi ne total rewards broadly rather than narrowly. Conveying the total value of work experience is always more compelling to your employees.

2. Clarify the business direction fi rst. A total rewards program and strategy needs to support a clearly defi ned business strategy. It is impossible to motivate and reward the right behaviors and results unless you know what they are.

3. Articulate a clear, compelling, and specifi c strategy. Generic reward strategies are a waste of time. They do not help leaders see how reward programs can help drive the business forward. They do not help HR professionals to focus the design or administration of reward programs. They do not help employees see what is expected of them and what they can expect in return. Well-conceived strategies force organizations to make choices. You can be broad in your defi nition of what total rewards is, and specifi c in your posi- tions on what the strategy is and what each reward element represents.

4. Communicate with quality, not quantity. Employees who understand the true value of their total rewards package are more likely to appreciate the invest- ment their employer is making in them, to stay with the company, and to deliver business results. Focus on delivering targeted rewards information to employees that is accessible, up-to-date, and meaningful.

5. Seek to manage the whole value. As pay becomes more competitive at the same time that we have fewer dollars to spend, and as equity becomes less of an option while the choices become more narrow, it is important to leverage the whole as opposed to one segment. The more you work the whole package, the more the perceived value of each element rises.

Crystallizing the Spirit of Your Total Rewards Plan 21

Factors to consider when developing the strategy include:

• The desired level of external competitiveness (i.e., market leading, market competitive, or market following).

• The programs that will be offered to various employee groups to achieve orga- nizational objectives while also maintaining appropriate internal equity.

• How the total rewards strategy will support the achievement of key organiza- tional objectives.

• Ensuring that all elements developed or enhanced comply with state and fed- eral regulations.

Also, effective communication is imperative for a total rewards strategy to be suc- cessful. Given that the message is more complex than the traditional focus on base pay only, a strong communication campaign that clearly identifi es the value of the additional components of the total rewards package is essential.

Creating a total rewards program that is unique to an organization and based in competitive practices is not a simple task, but one that requires signifi cant thought, analysis, and refi nement. (See Figure 3.2.)

6. Balance between fl exibility and adherence to the core. As you think about making choices in defi ning a total rewards strategy, recognize the need for core values and principles that are unifying and distinguishing. How is it that IBM is still IBM and GE is still GE, even as these organizations provide fl exibility in their total rewards approaches across the globe? The answer lies in each company’s ability to balance the two sides—offering enough fl exibility so the needs of differing populations are met and defi ning common principles that anchor the company.

7. Manage what you can measure. The breadth of a total rewards strategy is its value to organizations. Yet companies need to make sure they are equipped to manage such an inclusive approach. This means an ability to mea- sure and track the inputs into and results from a total rewards program. Including every reward element possible in a plan may sound appeal- ing, but is ultimately useless if the value of such an approach cannot be demonstrated to the business.

8. Recognize that the recipient defi nes value. The value of any reward element will vary by population segment whether by geography, business unit, gender, age, or tenure. Only recipients can defi ne the value of the rewards they receive. Think about individuals fi rst, and then see if they can be clustered into groups.

9. Beware of simple solutions. We tend to put in place things that are easy to execute and the hard stuff is left for another day. Most of us focus on things that are important but somewhat incremental. In time, the harder, transformational things need to be tackled.

10. Copy how great companies think, not what they do. Think about how great companies become great and what are the things that make sense for them and why they do the things they do. Don’t copy the practices that they put in place. Try to emulate their thinking.

22 Developing a Total Rewards Strategy

FIGURE 3.2 10 steps to a more effective total rewards program.

Following are 10 steps that employers can take to better design and implement their total rewards programs and maximize their effectiveness (conclusions drawn from 2005 Strategic Rewards Study, Watson Wyatt and WorldatWork):

1. Focus on Alignment. High-performing companies are more successful at aligning employee behavior with company goals than low-performing companies are.

2. Ask Employees What They Want. Rewards only work if they are meaningful to employees and infl uence their affi liation with the organization. Study data show more companies need to ask employees about their rewards prefer- ences and use their input to shape program offerings. Too many companies are missing the opportunity to understand whether their investments in dif- ferent rewards plans are valued by employees and support the company’s at- traction, motivation, and retention goals.

3. Measure and Manage Costs and Risks. Successful rewards plans strike a balance between effectiveness and cost. However, too small a percentage of employ- ers formally measure the cost-effectiveness of their total rewards program to a moderate or great extent. The lack of information means companies are missing opportunities to make changes to boost program performance.

Companies also need to identify and manage total rewards–related risks. They should, for example, have a plan to manage fi nancing risks related to defi ned benefi t or stock plans. They need to understand time-based risks such as costs escalating over time for skill-based pay. And they have to be pre- pared if rewards don’t infl uence employees’ behaviors in intended ways.

4. Strengthen Performance Management Systems. While many companies have adopted designs that feature best practices, their managers are not faithfully or effectively carrying them out.

Just as important are the perception gaps related to pay for performance and performance improvement. Most employers say they link pay decisions to the results of the review process, but not enough employees see the link- age for themselves. Even more troubling, most employers say they help poor performers improve, but few poor performers would agree.

One way to strengthen the connection between performance management and rewards is by investing in formal training for managers. Managers are the linchpins of the system—if they don’t understand and aren’t comfortable with their organizations’ total rewards strategies, they won’t send the right message to employees. Organizations that formally train managers to manage em- ployee performance rate more favorably on key performance management measures than organizations that do not formally train their supervisors.

5. Sharply Differentiate between Top Performers and Everyone Else. Employers need to identify their critical skills groups and their best-performing employees, let these employees know they are considered top performers, and reward them with signifi cantly better salary increases, recognition and incentive awards, and opportunities for learning and development.

6. Make Greater Use of Incentive-Based Pay. One of the best ways to reward top performers and spur them to greater achievement is to make incentive-based pay a key element of the total rewards strategy. Companies that use incentive- based pay to motivate performance benefi t fi nancially.

Crystallizing the Spirit of Your Total Rewards Plan 23

7. Review Incentive Funding Metrics and Targets. Funding metrics for short-term incentives are important. Higher-performing fi rms fund short-term incen- tive plans at higher rates than low-performing fi rms. They also are slightly more focused on revenue growth, while low-performing fi rms focus more on operating income growth and cash fl ow. In addition, high-performing fi rms are slightly more likely to include nonfi nancial measures that drive fi nancial performance, such as customer satisfaction and quality outcomes.

Finally, incentive targets should be updated regularly to refl ect new com- pany priorities and goals.

8. Make Communication and Education a Priority. Total rewards strategies only work if employees understand and support them. Unfortunately, employers and employees alike agree that such understanding is missing.

Poor communication has real consequences. Most employees, for exam- ple, continue to value small annual pay increases over other compensation structures that could result in larger rewards.

9. Use Long-Term Incentives throughout the Organization. Long-term incentives continue to be important rewards vehicles for executives and nonexecutives alike. In fact, organizations with broad eligibility for stock-based programs signifi cantly outperform organizations with limited eligibility. In light of decreased eligibility of other stock-based programs, companies should con- sider maintaining Employee Stock Purchase Plans (ESPP), despite the unfa- vorable accounting treatment.

10. Manage Rewards in a Truly Integrated Way. Many companies are not making a connection between compensation, benefi ts, fi nance, and other functions. This absence of integration means many companies are missing the op- portunities true total rewards approaches offer, such as effi ciencies in plan design and administration and a detailed understanding of current and projected costs and risk profi les across all components of their total rewards programs.

A total rewards strategy statement helps crystallize the spirit of a total rewards plan. It should provide specifi c, motivating direction when choosing what to focus on (and choosing what not to focus on). Rewards strategies should follow two primary aims:

• To articulate a distinctive value proposition for current and prospective em- ployees that attracts and retains employees who have the capabilities and val- ues the employer needs.

• To 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 struc- ture reinforce the desired corporate culture and management style. Also, it should help structure the components of the rewards system to infl uence and motivate employee behavior in the right direction.

24 Developing a Total Rewards Strategy

ISSUES THAT A TOTAL REWARDS STRATEGY SHOULD ADDRESS

A well-conceived 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 de- scribe 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 defi ne 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 work- ing for the company. As the employee relates what is great about the company, prominence involves two key questions: • At what stage in the conversation would you like the employee to mention

the rewards package (as opposed to things such as the culture, quality of leadership, focus on customers, etc.)? This helps defi ne the importance of total rewards in the context of the total employee experience. Do you lead with total rewards, or is it a supporting component?

• Which elements of the package would you like to hear mentioned fi rst, and which should be mentioned last—or not at all? What does your com- pany want to be famous for? What is the signature program? These ques- tions 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 cri- teria to be rewarded, the appropriate level of measurement for each (e.g., cor- porate, business unit, region, work group, individual, etc.) and which reward elements will be linked to which measures. Also, the strategy should describe the degree to which rewards are expected to drive employee actions and deci- sions through variability, infl uence over outcomes (controllability), and the explicitness of the pay-performance link.

• Competitive Market Reference Points. The total rewards strategy should de- scribe 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 ap- proach, usually resulting in a list dominated by companies in the same industry or geography. Another angle to consider is what you want the company to be famous

Issues That a Total Rewards Strategy Should Address 25

for. Perhaps benchmark the company’s signature program 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 com- petitive position relative to the competitive reference points in the labor mar- ket. Ideally, it should defi ne how the competitive positioning is expected to vary with performance or other criteria.

It is worth noting that many companies defi ne the median as the desired com- petitive benchmark for all components of rewards with increasing frequency. This raises a question: If you position all elements at the median, how will you differenti- ate? Defi ning 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 view that both internal and external relativities are important is fi ne, but defi ning a strategy is about making choices. A good strategy clearly defi nes which is more important when the two are in confl ict.

• Communication and Involvement. The strategy should defi ne how much infor- mation about the rewards programs will be disclosed and explained to em- ployees. It also should outline the degree of participation 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 management’s accountability begins. It also should include the company’s policy toward employee unions, works councils, and other representative or collective bargaining units.

• Governance. While core principles governing the rewards program should remain fairly constant, the underlying programs need to be revised and re- freshed 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 guide- lines for data management, information sources, collection and reporting methodologies, and processes for using data for decision support. The strat- egy also should include an overall process for measuring the effi cacy of the total rewards program, and the supporting data.

What do the results of such an exercise normally look like? Typically, results are refl ected in a written report that is anywhere from 8 to 20 pages in length. Though involving a lot of work, it’s worth the effort for three reasons.

1. Clear, Compelling Strategies Help People Make Good Decisions Faster

Clear and compelling strategies defi ne what is in bounds and what is out of bounds. They help employees and prospective employees make their own choices with re- gard to whether the company is the right place for them. Finally, clear strategies help the people who design and administer programs to operate with clarity and

26 Developing a Total Rewards Strategy

confi dence. Consider these statements from companies that have developed clear and compelling strategies:

• “We will be market driven. Market competitiveness will be given priority over internal equity.”

• “We will avoid reinforcing status distinctions via the provision of perquisites and other visible status symbols that are not based on business needs.”

• “We do not seek to use benefi ts as a strong differentiator in our rewards package.”

• “We aim to differentiate ourselves in recruiting and retaining talent by focus- ing on the opportunities we provide, particularly in the form of variable pay and developmental and career growth. We provide competitive pay and ben- efi ts, but we do not seek to differentiate ourselves through these elements of the total rewards package.”

• “We actively develop our reputation as a desirable place to grow profession- ally. We provide employees with opportunities for personal growth, capability improvements, organizational advancement and employment security. Em- ployees are responsible for driving their own professional growth with sup- port from managers. They are encouraged to take a proactive approach to developing and planning their careers. Managers who develop people well are recognized and rewarded. Managers who do not develop people well are coached and, if needed, replaced.”

• “To help employees manage the demands of their work and personal lives, we create an environment in which we are open to fl exible work arrangements, exhibit leadership behaviors that support our employees in times of high de- mand on them, and continue to examine work content and job design to ensure appropriate work-life balance.”

2. Clear, Compelling Strategies Help Identify Potential Friction Points

One company worked with a consulting fi rm to develop a global total rewards strat- egy that included roughly 130 statements similar to the preceding statements. The statements were placed in a matrix alongside the client’s major geographic regions.

Representatives from the company’s global HR function took 20 minutes to an- swer “yes” or “no” for each of the 130 strategy statements and how they relate to their particular region. By doing this, the consulting fi rm was able to determine the degree of alignment between current state and desired state. The exercise un- covered a potential friction point relating to the section of strategy dealing with recognition: Most Anglo-Saxon cultures answered “yes,” while most of the rest of the world answered, “no.” This forced a re-examination of the relevance and ap- plicability of some of the statements, and whether the articulated strategy was “too Anglo-Saxon.”

3. Clear, Compelling Strategies Help Provide Supporting Architecture

Some companies create a supporting framework or architecture to help audit and im- plement the strategy worldwide. Such architectures can provide enough clarity to be

The Bottom Line 27

used to evaluate whether the current approach is in line with the articulated strategy, and, if not, where the work needs to be done to bring the rewards program in line.

The use of an architecture model goes beyond evaluation of total rewards. It provides broad specifi cations that can be used to design programs. In this sense, the rewards strategy provides the broad description of the type of house we are build- ing, and the architecture provides a blueprint that the craftsmen can follow.

With the strategy clearly defi ned, attention can be turned to the other challenges: execution and communication.

THE BOTTOM LINE

Effectively executing an appropriate total rewards strategy can increase a company’s market premium. Unfortunately, weak execution means many companies are leav- ing at least some of this money on the table.

Problems with execution are understandable. Many rewards and benefi ts pro- grams evolved in a fragmented way, without consideration for how the parts fi t to- gether or whether they reinforce business goals. Even in organizations with truly integrated designs, effective delivery depends on successful implementation of performance management, change management, communication, and the use of technology.

Every organization has the ability to develop and execute a superior total rewards solution. By taking a step back and analyzing the design and delivery of each com- ponent of their total rewards strategy, companies can identify the steps they need to take to maximize its effectiveness.