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Total Rewards: Everything That Employees Value in the Employment Relationship 1

Fifty 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 benefi ts, 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 infl uence employee behavior on the job—was decades away.

Today we are only partially through an evolution from a largely industrialized business environment to a far more virtual, knowledge- and service-based environ- ment, 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 automating more jobs, but also in enabling the virtual workplace as more professionals conduct business in home offi ces 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 de- cision 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 Euro- pean or Asian parents, which expect their practices and norms to be followed and respected in the workplace.

• Job mobility is taken for granted, with workers averaging six employers over the course of a career.

• Gender, race, and religious differences are a common part of most work en- vironments. Diversity has become a respected value, demonstrated through a range of specifi c programs.

2 Everything That Employees Value in the Employment Relationship

• Business leaders increasingly regard employees as drivers of productivity, rather than as relatively interchangeable cogs in a larger wheel.

Along with these changes have come dramatically different views about the na- ture 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 defi nition of total rewards always sparks debate. For example, Figure 1.1 in- cludes a comprehensive list of items that have shown up at one time or another in one company’s defi nition of total rewards. From this, it is easy to see how people can use the term in conversation only to fi nd that they are referring to very differ- ent notions.

Generally speaking, there are two prevailing camps of defi nitions:

• Narrow defi nitions . These virtually always comprise compensation and benefi ts, and sometimes include other tangible elements (e.g., development). This sometimes is referred to as total compensation or total remuneration.

• Broad defi nitions . These can expand to encompass everything that is “reward- ing” about working for a particular employer or everything employees get as a result of their employment. Sometimes terms such as value proposition or total value are used interchangeably with total rewards .

While the narrower defi nitions have been around for a long time, it is the broader notion that is generating buzz. (See Sidebar 1.1.) Indeed, much of the current activ- ity in total rewards involves companies moving to a broader defi nition. There are several reasons for this:

• Erosion of the “core” elements of the package . The traditional elements of rewards— pay, benefi ts, and stock awards—are no longer differentiating factors for orga- nizations. The competitive position for pay is trending toward median or mean. Benefi ts costs continue to rise. Stock programs, such as the distribution of op- tions, do not offer the appeal they once did. Given all of this, a logical response is to broaden what companies provide for the overall employment package.

• Pressure for operational effi ciency and effectiveness . Total rewards can represent a major cost element. As companies seek to manage costs tightly, there is more emphasis on ensuring that all costs are counted and managed. By redefi ning rewards more broadly and focusing on those elements that achieve the biggest payoff, organizations can drive toward effi ciency.

• Catering to diverse needs . Companies today are managing a much more het- erogeneous population. For the diverse workforce, no single component be- comes a value driver. Employees have choices to make and a need for greater fl exibility. A broad defi nition 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 . Companies are concerned about sending clear business messages to employees. A properly structured total

Broadening the Defi nition of Total Rewards 3

FIGURE 1.1 Total rewards: different things to different employers.

Direct Financial Base Salary Bonus Cash Profi t Sharing Employee Referral Program (Cash) Stock Programs Suggestion Program (Cash for Ideas)

Indirect Financial Adoption Assistance College Savings Plan College Tuition and Fees Commuter Reimburse- ment (Pre-tax) Company Cafeteria Company Store Dependent Care Dependent Scholarships Discount Tickets Educational Assistance Fitness Facilities Dis- counts Health and Welfare Benefi ts Incremental Dependent Care (Travel) Insurance (Auto/Home) via Payroll Deduction Long-Term Care Insur- ance Matching Gifts Relocation Program Retirement Plan(s) Saving Bonds via Payroll Deductions Scholarships Stock Purchase Program Student Loans Tuition Reimbursement

Work Autonomy Casual Dress Policy Challenging Work Constructive Feedback Covered Parking Ergonomics/Comfortable Workstations Flexible Work Schedules Free Parking Interesting Work Job Skills Training Modern, Well-Maintained Workspace Open Communication Performance Manage- ment Promotion Opportunities Safe Work Environment Suggestion Program (No Cash) Telecommuting Opportunities Uniforms/Uniform Allowance Workshops

Career 360º Skills Assessment Career Advancement Coaching Lunch and Learn Series Management Development Mentoring Program Open Job Posting Preretirement Counseling Service Awards Training and Development

Affi liation Athletic Leagues Community Involvement Diversity Programs Employee Celebrations Employee Clubs Professional Associations Seminars Spring and Holiday Parties Support Groups Volunteer Connection

Other/Convenience ATMs Onsite Carpooling/Van Pooling/Shuttles Car Seat Vouchers (for Newborns) Child Care Resources Credit Union Employee Assistance Program Employee Card and Gift Shop Expectant Parent Pro gram Legal Services Medical Center Military Deployment Support Online Services Onsite Dry Cleaning Pickup Onsite Flu Shots Onsite Food Services Onsite Post Offi ce Personal Travel Agency Wellness Program Worldwide Travel Assistance

4 Everything That Employees Value in the Employment Relationship

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 defi nition is gaining favor in the marketplace. Companies still need to decide how broadly they want to defi ne total rewards, based on what they can adequately measure and manage.

Sidebar 1.1: How We Defi ne It

For the purposes of this book, the term total rewards refers to everything that employees value in the employment relationship (i.e., everything an employee gets as a result of working for the company).

WorldatWork defi nes total rewards as the monetary and nonmonetary re- turn provided to employees in exchange for their time, talents, efforts, and results. It involves the deliberate integration of fi ve key elements that effec- tively attract, motivate, and retain the talent required to achieve desired busi- ness results. The fi ve key rewards elements are:

• Compensation. • Benefi ts . • Work-Life. • Performance and Recognition. • Development and Career Opportunities.

Total rewards strategy is the art of combining these fi ve elements into tailored packages designed to achieve optimal motivation. (See Figure 1.2: Components of total rewards.)

For a total rewards strategy to be successful, employees must perceive mon- etary and nonmonetary rewards as valuable.

FIGURE 1.2 Components of total rewards.

Evolution of the WorldatWork Total Rewards Model 5

EVOLUTION OF THE WORLDATWORK TOTAL REWARDS MODEL

In 2000, when the American Compensation Association changed its name to WorldatWork, the association affi rmed its commitment to the concept of total re- wards as a more comprehensive model refl ecting the value employees receive from their employment.

In the same year, after facilitating discussion with leading thinkers in the fi eld, WorldatWork introduced a total rewards framework intended to advance the con- cept and help practitioners think and execute in new ways. The model focused on three elements:

• Compensation (e.g., pay, incentives). • Benefi ts (e.g., health care, retirement funding). • The Work Experience .

• Acknowledgment . • Balance (of work and life). • Culture . • Development (career/professional). • Environment (workplace).

Up to this point, the association had focused solely on compensation and benefi ts. Yet, specialists and generalists alike agreed that compensation and benefi ts—while foundational and representing the lion’s share of human capital costs—cannot be fully effective unless they are part of an integrated strategy of other programs and practices to attract, motivate, and retain top talent.

Thus, “the work experience” aspect of the fi rst WorldatWork total rewards model included aspects of employment that may be programmatic or just part of the over- all experience of working. For instance, acknowledgment may be part of a formal rewards program or may be as simple as a “thank you” from the boss or a coworker. Workplace fl exibility (part of work-life) may manifest itself as a formal telework pro- gram or as having a culture or practice that embraces work-life fl exibility.

From 2000 to 2005, the bodies of knowledge associated with total rewards became more robust as practitioners experienced the power of integrated strategies. Orga- nizational and departmental structure changes allowed for better integration, and professional understanding improved, as well. Advanced literature, research, and case studies accelerated visibility for total rewards beyond the Human Resources (HR) profession, garnering notice from line managers, and, indeed, the C-suite.

Given this advanced thinking and the increased importance of total rewards as a core business strategy, WorldatWork convened teams of leading professionals in the fi eld to create an enhanced view of total rewards. The result: a comprehensive model that demonstrates the context, components, and contributions of total re- wards as part of an integrated business strategy. (See Figure 1.3.)

There are fi ve elements of total rewards, each of which includes programs, prac- tices, elements, and dimensions that collectively defi ne an organization’s strategy to attract, motivate, and retain employees. These elements are:

• Compensation. • Benefi ts . • Work-Life. • Performance and Recognition. • Development and Career Opportunities.

6 Everything That Employees Value in the Employment Relationship

The elements represent the toolkit from which an organization chooses to offer and align a value proposition that creates value for both the organization and the employee. An effective total rewards strategy results in satisfi ed, engaged, and pro- ductive employees who, in turn, create desired business performance and results.

As defi ned here, the elements are neither mutually exclusive nor intended to rep- resent the ways that companies organize or deploy programs and elements within them. For instance, performance management may be a compensation-function– driven activity, or decentralized in line organizations; it can be managed formally or informally. Likewise, recognition could be considered an element of compensation, benefi ts, and work-life.

The WorldatWork model recognizes that total rewards operates in the context of overall business strategy, organizational culture, and HR strategy. Indeed, a compa- ny’s exceptional culture or external brand value may be considered a critical com- ponent of the total employment value proposition. The backdrop of the model is a globe, representing the external infl uences on business, such as legal/regulatory issues, cultural infl uences and practices, and competition.

Finally, an important dimension of the model is the “exchange relationship” be- tween the employer and employee. Successful companies realize that productive employees create value for their organizations in return for tangible and intangible value that enriches their lives.

EXPLORING THE KEY AREAS

Following is a brief description of the fi ve elements of the WorldatWork total re- wards model. (See Figure 1.4 and Figure 1.5.)

FIGURE 1.3 WorldatWork total rewards model.

Exploring the Key Areas 7

Total Rewards Component Defi nition

Compensation Pay provided by an employer to an employee for services rendered (i.e., time, effort, and skill). Includes both fi xed and variable pay tied to levels of performance.

Benefi ts Programs an employer uses to supplement the cash compensation that employees receive. These health, income protection, savings, and retirement programs provide security for employees and their families.

Work-Life A specifi c set of organizational practices, policies, and programs plus a philosophy that actively supports efforts to help employees achieve success at both work and home.

Performance and Recognition Performance: The alignment of organizational, team, and individual efforts toward the achievement of business goals and organizational success. It includes establishing expectations, skill demonstration, assessment, feedback, and continuous improvement. Recognition: Acknowledges or gives special attention to employee actions, efforts, behavior, or performance. It meets an intrinsic psychological need for appreciation for one’s efforts and can support business strategy by reinforcing certain behaviors (e.g., extraordinary accomplishments) that contribute to organizational success. Whether formal or informal, recogni- tion programs acknowledge employee contributions immediately after the fact, usually without predetermined goals or performance levels that the employee is expected to achieve. Awards can be cash or noncash (e.g., verbal recognition, trophies, certifi - cates, plaques, dinners, tickets, etc.).

FIGURE 1.4 Total rewards defi nitions.

(continued)

8 Everything That Employees Value in the Employment Relationship

Development and Career Opportunities

Development: A set of learning experi- ences designed to enhance employees’ applied skills and competencies. Devel- opment engages employees to perform better and engages leaders to advance their organizations’ people strategies. Career opportunities: A plan for employ- ees to advance their career goals. May include advancement into a more re- sponsible position in an organization. The organization supports career op- portunities internally so that talented employees are deployed in positions that enable them to deliver their great- est value to their organization.

FIGURE 1.4 (Continued)

FIGURE 1.5 Model defi nitions.

Total Rewards Total rewards is the monetary and nonmonetary return provided to employees in exchange for their time, talents, efforts, and results. It involves the deliberate inte- gration of fi ve key elements that effectively attract, motivate, and retain the talent required to achieve desired business results. The fi ve key rewards elements are:

• Compensation. • Benefi ts. • Work-Life. • Performance and Recognition. • Development and Career Opportunities.

Total rewards strategy is the art of combining these fi ve elements into tailored packages designed to achieve optimal motivation. For a total rewards strategy to be successful, employees must perceive monetary and nonmonetary rewards as valuable.

Compensation Pay provided by an employer to an employee for services rendered (i.e., time, ef- fort, and skill). Compensation comprises four core elements:

• Fixed pay: Also known as “base pay,” fi xed pay is nondiscretionary compensa- tion that does not vary according to performance or results achieved. It usu- ally is determined by the organization’s pay philosophy and structure.

• Variable pay: Also known as “pay at risk,” variable pay changes directly with the level of performance or results achieved. It is a one-time payment that must be re-established and re-earned each performance period.

Exploring the Key Areas 9

• Short-term incentive pay: A form of variable pay, short-term incentive pay is designed to focus and reward performance over a period of one year or less.

• Long-term incentive pay: A form of variable pay, long-term incentive pay is de- signed to focus and reward performance over a period longer than one year. Typical forms include stock options, restricted stock, performance shares, performance units, and cash.

Benefi ts Programs an employer uses to supplement the cash compensation that employees receive. These programs are designed to protect the employee and his or her fam- ily from fi nancial risks and can be categorized into the following three elements:

• Social Insurance • Unemployment. • Workers’ compensation. • Social Security. • Disability (occupational).

• Group Insurance • Medical. • Dental. • Vision. • Prescription drug. • Mental health. • Life insurance. • AD&D insurance. • Disability. • Retirement. • Savings.

• Pay for Time Not Worked: These programs are designed to protect the employee’s income fl ow when not actively engaged at work. • At work (breaks, clean-up time, uniform changing time). • Away from work (vacation, company holidays, personal days).

Work-Life A specifi c set of organizational practices, policies, programs, plus a philosophy, which actively supports efforts to help employees achieve success at both work and home. There are seven major categories of organizational support for work-life ef- fectiveness in the workplace. These categories encompass compensation, benefi ts, and other HR programs. In combination, they address the key intersections of the worker, his or her family, the community, and the workplace. The seven major cat- egories are:

• Workplace fl exibility. • Paid and unpaid time off. • Health and well-being. • Caring for dependents. • Financial support. • Community involvement. • Management involvement/culture change interventions.

(continued)

10 Everything That Employees Value in the Employment Relationship

Performance and Recognition

Performance A key component of organizational success, performance is assessed in order to understand what was accomplished, and how it was accomplished. Performance involves the alignment of organizational, team, and individual effort toward the achievement of business goals and organizational success.

• Performance planning is a process whereby expectations are established link- ing individual with team and organizational goals. Care is taken to ensure goals at all levels are aligned and there is a clear line of sight from perfor- mance expectations of individual employees all the way up to organizational objectives and strategies set at the highest levels of the organization.

• Performance is the manner of demonstrating a skill or capacity. • Performance feedback communicates how well people do a job or task com-

pared to expectations, performance standards, and goals. Performance feed- back can motivate employees to improve performance.

Recognition Acknowledges or gives special attention to employee actions, efforts, behavior, or per- formance. It meets an intrinsic psychological need for appreciation for one’s efforts and can support business strategy by reinforcing certain behaviors (e.g., extraordi- nary accomplishments) that contribute to organizational success. Whether formal or informal, recognition programs acknowledge employee contributions immediately after the fact, usually without predetermined goals or performance levels that the employee is expected to achieve. Awards can be cash or noncash (e.g., verbal recogni- tion, trophies, certifi cates, plaques, dinners, tickets, etc.). The value of recognition plans is that they:

• Reinforce the value of performance improvement. • Foster continued improvement, although it is not guaranteed. • Formalize the process of showing appreciation. • Provide positive and immediate feedback. • Foster communication of valued behavior and activities.

Development and Career Opportunities

Development A set of learning experiences designed to enhance employees’ applied skills and competencies; development engages employees to perform better and leaders to advance their organizations’ people strategies.

Career Opportunities A plan for employees to advance their own career goals and may include advance- ment into a more responsible position in an organization. The organization sup- ports career opportunities internally so that talented employees are deployed in positions that enable them to deliver their greatest value to their organization. Development and career opportunities include the following:

• Learning Opportunities • Tuition assistance. • Corporate universities.

FIGURE 1.5 (Continued)

Exploring the Key Areas 11

• New technology training. • Attendance at outside seminars, conferences, virtual education, etc. • Self-development tools and techniques. • On-the-job learning; rotational assignments at a progressively higher level. • Sabbaticals with the express purpose of acquiring specifi c skills, knowledge,

or experience.

• Coaching/Mentoring • Leadership training. • Access to experts/information networks—association memberships, atten-

dance and/or presentation at conferences outside of one’s area of expertise. • Exposure to resident experts. • Formal or informal mentoring programs; in or outside one’s own

organization.

• Advancement Opportunities • Internships. • Apprenticeships with experts. • Overseas assignments. • Internal job postings. • Job advancement/promotion. • Career ladders and pathways. • Succession planning. • Providing defi ned and respectable “on and off ramps” throughout the ca-

reer life cycle.

An Integrated Total Rewards Strategy

Culture Culture consists of the collective attitudes and behaviors that infl uence how indi- viduals behave. Culture determines how and why a company operates in the way it does. Typically, it comprises a set of often unspoken expectations, behavioral norms, and performance standards to which the organization has become accus- tomed. Culture change is diffi cult to achieve because it involves changing attitudes and behaviors by altering their fundamental beliefs and values. Organizational culture is subject to internal and external infl uences; thus, culture is depicted as a contextual element of the total rewards model, overlapping within and outside the organization. Source: Schein, E. “Organizational Culture.” American Psychologist 43, no. 2 (Febru- ary 1990): 109–19.

Environment Environment is the total cluster of observable physical, psychological, and behav- ioral elements in the workplace. It is the tangible manifestation of organizational culture. Environment sets the tone, as everyone who enters the workplace reacts to it, either consciously or unconsciously. Because they are directly observable and often measurable, specifi c elements of the environment can be deliberately manipulated or changed. The external environment in which an organization op- erates can infl uence the internal environment; thus, environment is depicted as a contextual element of the total rewards model, overlapping within and outside the organization.

(continued)

12 Everything That Employees Value in the Employment Relationship

Attraction The ability an organization has to draw the right kind of talent necessary to achieve organizational success. Attraction of an adequate (and perpetual) supply of qualifi ed talent is essential for the organization’s survival. One way an organi- zation can address this issue is to determine which “attractors” within the total rewards programs bring the kind of talent that will drive organizational success. A deliberate strategy to attract the quantity and quality of employees needed to drive organizational success is one of the key planks of business strategy.

Retention An organization’s ability to keep employees who are valued contributors to orga- nizational success for as long as is mutually benefi cial. Desired talent can be kept on-staff by using a dynamic blend of elements from the total rewards package as employees move through their career life cycles. However, not all retention is de- sirable, which is why a formal retention strategy with appropriate steps is essential.

Motivation The ability to cause employees to behave in a way that achieves the highest perfor- mance levels. Motivation comprises two types:

• Intrinsic Motivation: Linked to factors that include an employee’s sense of achievement, respect for the whole person, trust, appropriate advancement opportunities, and others, intrinsic motivation consistently results in higher performance levels.

• Extrinsic Motivation: Extrinsic motivation is most frequently associated with rewards that are tangible such as pay.

There also are defi ned levels of intensity with regard to motivation:

• Satisfaction: How much I like things here. • Commitment: How much I want to be here. • Engagement: How much I will actually do to improve business results.

Another key plank of the business strategy, motivation can drive organizational success.

FIGURE 1.5 (Continued)

Compensation

This includes fi xed pay (base pay) and variable pay (pay at risk). It also includes several forms of variable pay including short-term incentive pay and long-term in- centive pay. While one of the most traditional elements of total rewards, it remains a necessity for business success.

Benefi ts

While this area seems to be continuously challenged during this time of shrinking health care benefi ts and expanding health care premiums, businesses are trying to redefi ne the traditional benefi ts program. In basic form, benefi ts programs pro- tect employees and their families from fi nancial risks. This area includes traditional

Exploring the Key Areas 13

programs such as Social Security, medical and dental insurance, but also nontradi- tional programs such as identity theft insurance and pet insurance.

Work-Life

This area refers to any programs that help employees do their jobs effectively, such as fl exible scheduling, telecommuting, child-care programs, etc. One of the most talked about areas of late, work-life has become the “secret sauce” in many organiza- tions’ recipes for business success.

In 2003, Alliance for Work-Life Progress (AWLP) joined the WorldatWork family of organizations, refl ecting work-life as an integral component of total rewards.

Performance and Recognition

Perhaps one of the anchors in talent management, performance involves the align- ment of organizational and individual goals toward business success.

Recognition is a way for employers to pay special attention to workers for their accomplishments, behaviors, and successes. Recognition is a necessity in order to re- inforce the value of performance improvement and foster positive communication and feedback. It can be programmatic or simply cultural in execution.

Development and Career Opportunities

This key area focuses on the concept that motivating and engaging the workforce entails planning for the advancement and/or change in responsibilities to best suit individual skills, talents, and desires. In this way, both the business and the employee benefi t from this symbiotic relationship. Tuition assistance, professional develop- ment, sabbaticals, coaching and mentoring opportunities, succession planning, and apprenticeships are all examples of career enhancement programs.