This is the first of a 4-part series on Total Rewards Strategy. Follow this site if you want to make sure you receive all the remaining installments.
Why does an organization need a total rewards strategy? What is it and how do you develop a strategy? What are its components? How is it applied?
This blog series attempts to set out the core elements of total rewards strategy. I will break the subject down addressing various elements in a logical sequence:
- Why do employers need a total rewards strategy?
- What’s in a total rewards strategy?
- How do you develop a total rewards strategy?
- How do you implement a total rewards strategy?
Why do employers need a total rewards strategy?
Consider these scenarios:
- A large mature manufacturing company is failing, losing market share fast, watching their prices fall and customers walk away as disrupters enter with alternative products and services. Yet fixed costs–mainly salaries–are still rising as the company has traditionally rewarded “loyalty” keeping people whole with inflation and paying bonuses in both good years and bad. Margins are dropping fast.
- A startup company has grown to 250 employees, adding staff almost daily, and feels they can no longer negotiate each pay package from a blank sheet of paper. People are talking and there is a buzz about inconsistency. There are rumors about discrimination on the basis of gender, religion and politics.
- A growing company with 2,000 employees has adopted “industry best practices” and finding that their culture has lost its spark, people do what’s in their job description and little more. The company pays “market median” through benchmarking and HR follows the “correct” methods in everything it does, so as not to be questioned. Sales, margins and other indicators are merely acceptable. Despite acceptable staff turnover, CEO does not feel the company is attracting or retaining the best talent.
What do these scenarios have in common?
Their reward practices do not align to business needs. Pay practices are inefficient, ineffective or killing margins. The pain and risk caused by these results are enormous:
- In the first case, the large mature company has followed paternalistic pay practices within a competitive industry. (This is more common than you might think.) As a result, layoffs are almost certain. There is little money available for R&D. The company is headed for decline. The “good people” are leaving to join the new disruptors. Those who stay claim loyalty, when in fact no one out there can match their current pay and most of the “loyal” employees have not invested in their own development. Many feel they are no longer marketable and most are correct. In fact, the company has assumed their customers were loyal. Until they weren’t. They assumed their distributors were loyal, but the end customers now buy online, not in stores. Disruption is leading to extinction for this company.
- In the second case, the startup has no system. A manager in software engineering has hired a guy he used to manage at a previous company, at a salary 40% higher than the average salaries offered to females in the same year. Not only are people concluding there is gender pay discrimination, but they talking about favoritism. Lack of any sort of pay structures, policies, philosophy or process is resulting in a patchwork of pay decisions explainable only as favoritism and bias. As a result, HR is swamped with emails and meetings about pay issues, salary proposals, justifications, accusations and so on. They are so busy driving a broken car they have no time to fix it.
- In the third case, the growing company decided a few years ago they needed a pay system to ensure fairness and consistency. Tired of negotiation, they had progressed beyond startup stage to growth stage where processes and systems are put in place. That year, HR was given a KPI to “implement a compensation system including grading and salary ranges by end of the year.” HR embarked on a benchmarking study to determine industry best practice, and attended a course to learn the “correct” way to develop salary ranges (like using +/- 20% range width..) The completed their KPI, addressed all the outliers, froze people over the max, calculated compa-ratios, linked annual raises to performance ratings, and implemented a salary proposal worksheet to set starting salary offers more fairly and consistently. Managers received an email with all the pay policies they had to obey. Pay decisions are now made much faster, with little room for bias. The problem now is that managers feel their hands are tied when they need to make a mid-year off-cycle pay adjustment to retain their top innovators who are making an exodus to their competitor. In fact, the forced ratings curve has resulted in a key player on a strong team getting a low rating (someone has to get a low rating..) and has just tendered her resignation. What’s left are the mediocre talent. And no surprise.. business results are mediocre.
If these three organizations had deliberate, written reward strategies, they would be able to develop their pay practices accordingly, rather than leaving pay decisions to well-meaning managers who fall back on their own instincts from previous experiences, or just keep the status quo. With a written rewards strategy, HR would have a blueprint against which to evaluate current practices and to guide new ones. With a written reward strategy, the organization could target certain talent and effectively get and keep the best, while deliberately enabling low contributors to leave voluntarily by NOT putting golden handcuffs on them through guaranteed minimum raises.
- We have marketing strategies because you just can’t make and sell everything to every type of customer through every channel. You have to make choices. We will do this; therefore we will NOT do that.
- We have finance strategies because you just can’t spend whatever you want and borrow money to do it. You have to make choices. We will spend money on this, not on that. Like value investing, money goes where better returns are expected.
Employers need reward strategies to guide overall rewards program design and to guide specific reward decisions, to achieve business objectives and support the talent strategy. You have limited dollars, so you have to make choices. Some types of workers get more and some get less. Within a group, some individuals get more, some get less. There are more than 100 types of specific pay and benefit practices and no organization offers them all; you much select those practices that will have strong appeal to those having the talent you need.
“Now hold it! Marketing and Finance are more important than HR in this company. We are viewed as an administrative function.” For many of you, that’s a fair point. Let me ask you, why is HR viewed as an administrative function? Is it because HR is not allowed to be strategic? Or is it because HR has not brought any strategic ideas to the table? Just asking. Break the mold, shatter the stereotype of the HR profession. Have a talent strategy, and to enable it, have a rewards strategy.
There is a strong case to be made for controlling cost, maximizing efficiency and effectiveness, aligning rewards to business needs, supporting high performance and so on. If others aren’t being strategic about rewards, and you are, you have a chance to outdo them and win the talent you need more successfully than they do.