This is the second of a 4-part series on Total Rewards Strategy.
2. What’s in a total rewards strategy? (this blog)
3. How do you develop a total rewards strategy?
4. How do you apply a total rewards strategy?
What’s in a total rewards strategy?
A total rewards strategy is the pattern for the design of your base pay structure, use of allowances, design of incentives, benefits, or other rewards. It defines the intended linkages to performance or other criteria, and a few other decision points. The strategy differentiates the mix of rewards, both externally and internally, assuming you do not intend to blindly follow the market, nor do you intend to treat everyone equally within your organization. (We treat everyone fairly, but not equally, unless all “talent” is the same.)
No Strategy = Stragedy
To be clear, in the absence of a rewards strategy, you are doomed to one of the following:
- you will do what you’ve always done (“time tested”, or Einstein’s insanity definition)
- you’ll follow the herd (“P50 mentality”, or in Chinese 中庸)
- you’ll copy someone else (an admired company in your industry)
- you’ll follow “best practice” you recently read about or heard at a conference
Without a guiding strategy, or in the presence of mixed practices, managers will feel anything is fair, as long as you can sell it to your boss and get away with it. Certain jobs or people get overgraded and over paid, and the ripple effect drives up costs. People hear that other departments allow work at home for similar jobs when their own boss does not allow it. Engagement drops, people start to leave. If there is no guiding reward philosophy and strategy, the rule is there are no rules. A strategy tragedy.
If your organization rejects the above defaults, then it should attempt to articulate an actual strategy that reflects the intent of the business. Here are some of the common components:
- Purpose of the rewards strategy — sets out the reason behind the rewards strategy, why it exists and why it should be followed. for example “the purpose of company ABC’s total rewards strategy is to guide the development and implementation of the company’s total rewards practices, to ensure rewards practices support business needs and talent strategies.” Or “to ensure the company’s ability to attract and retain talent at affordable cost” or “to support fulfilment of the company’s vision, mission and values in all reward practices.” State the purpose for having a rewards strategy.
- Scope — state whether this rewards strategy is applicable to the entire company, group, subsidiary, business unit, global v regional, acquisitions, job levels, workforce segments, etc. You will likely have different strategies for different locations, businesses or employee groups, so here is where you define the groups that are within the scope of your rewards strategy.
Rewards Objectives — a list of specific total rewards objectives, which
is more specific than the purpose statement. The objectives should cover the
most important goals or objectives related to rewards. Most typically,
- Support business needs which vary over time or between locations and business units
- Support the company’s vision, mission and values, especially values that relate to people: does your company want to empower employees? If so, that suggests a shared-responsibility philosophy. If all the decisions are made at the top, this suggests a paternalistic approach to rewards (leading you to offer defined benefit pensions, inflation-based raises, full-cover health insurance, full expat packages, etc.) If your values include “diversity and inclusion” that suggests your definition of dependent for benefits eligibility would be broader.
- Attract and retain talent needed by the business at any point in time. This is the classical purpose of rewards and belongs in every total rewards strategy. The key here is “at any point in time” since the specific talent needs change with time. In startup and growth phase, field sales talent may be more critical than during maturity or decline where account management and ecommerce may be more critical.
- Reward high performance or “motivate” employees. This is a common objective, though many organizations will be more specific, defining performance in terms of team versus individual performance. Some employers will use “contributions” or “impact” instead of the word “performance.” Some reward excellence or other specific language used in the organization. It’s good to link what you reward to the company’s values and business mission, vision and overall strategy.
- Ensure rewards are externally/market competitive. This is an essential objective of rewards. Normally this statement includes reference to the employers you compete with for talent, i.e. orgnaizations you “hire from, lose to.” The relevant labor market can vary by job group. This statement can be generalized to avoid signalling that certain functions or roles will be paid more competitively than others. The reality is that some functions, groups or individuals will be paid above market norms, though this may not be documented, as it can change very fast.
- Ensure rewards are internally fair, equitable and legally compliant
- Ensure reward decisions are made with sufficient control and consistency while giving the business the flexibility it needs
- Control costs associated with rewards
Culture, Philosophy and Business Strategy
Culture impacts reward strategy. Culture is what is ok, what is not ok, what is expected, what is tolerated. Culture is the holistic interrelationship between beliefs, traditions, rules, values and norms that guide behaviour.
Rewards Philosophy refers to deeply held beliefs and attitudes towards work and rewards. A CEO of a semiconductor company believes a VP who is paid at market median is paid enough, and is therefore not eligible for an annual salary review. Many companies in the Philippines believe that it is HR’s duty to “pass the hat” every time an employee’s family suffers a death or serious illness. Many companies believe same-sex partners should be covered as dependents on medical insurance.
Business Strategy is the fundamental way a company makes money. Some companies compete by their operational excellence (e.g. Toyota). Others focus on product leadership and speed to market (e.g. Apple or Netflix). Others compete on customer-centricity/intimacy, such as facebook. Operational excellence companies value cost-efficiency, and so will seek to control fixed compensation costs and leverage incentives and maximise automation opportunities. Product leadership companies will pay market-leading salaries to attract and the retain the world’s best talent for key roles.
Some organizations—even listed companies—seek to be like a family, or retain family values. Some family businesses seek to be more like private companies. What does this mean for rewards?
- A paternalistic company values loyalty and hard work, and in return employees can expect job security and annual raises (rarely put into writing, but this is a very common philosophy, especially with family-run businesses.) A paternalistic company is likely to pay bonuses in good times and bad, keep people whole with inflation, keep all their expats whole economically, regardless of the type of contract or duration. Paternalistic companies believe in defined benefit pensions and full-cover medical insurance. They generally feel that employees are entitled to many things as long as they remain loyal to the company. It is very much like a family.
- A shared-responsibility philosophy thinks of itself as a business, or like a sports team. Reward practices are based on business needs and the laws of supply and demand. Success is shared, but individuals who don’t “pull their own weight” or contribute will not survive long, compared to those working within a family culture. The company will pay what’s competitive with no particular promises. Rewards depend mainly on performance of the job and achievement of objectives. Employees are more likely to share in the cost of healthcare through deductibles and co-pays. Retirement contributions are defined contribution with no promises of what you will have at retirement age. These companies make few promises to expatriates, putting most of them on local or local-plus packages: if they want to live in a palace, they must actually use some of their salary instead of the company paying for it.
- Companies that believe in high performance will never pay bonuses for perfect attendance or give spot awards for working an extra 30 minutes.
Sadly, many if not most companies have a mix of reward philosophies, not a single coherent set of tenets regarding work and rewards. These are companies without a compass, benchmarking and doing whatever is prevalent, giving DB pensions in one location and DC in another. Full-cover insurance in one place and using co-pays in another, covering employees-only on medical in one country and broadly-defined dependents in another. This is done in the name of following market practice, or worse, because it has always been that way.
Considerations for your Rewards Strategy
- Segmentation of the workforce – it is possible you will have a different rewards strategy for senior executives than for other white collar workers, or for blue collar workers. So before writing your strategy, think about how you will break down the workforce into broad groups, usually no more than 2-5 groups. Sales, unions, senior executives, white/blue collar, direct labor versus indirect…these are the typical groups who are identified and given a unique rewards strategy. Other possible groups with their own rewards strategy could be globally mobile employees (expatriates), project-based employees (whose salaries must be covered by project revenues) or contract employees who may not get normal benefits or bonuses.
- Market positioning — this is where the company states that rewards should align to “market competitive” levels or align to industry norms. It may state that “superior performers will receive superior pay”, etc. This statement is often intentionally vague because a company may use market 50th percentile in general, but use a higher or lower percentile for certain positions or groups of employees. Many companies state only that total compensation should align to the market, providing some flexibility on the mix of rewards. One location could have lower salaries combined with more generous allowances or incentives, for example.
- Organizational levels and grading – this sets out the essential framework for job grading, job evaluation, number of structures, number of grades, job evaluation governance, emphasis on market versus internal factors affecting grading, and may provide guidance on job titles/designations as well. A $40 billion government linked mortgage company in the U.S. has a policy that no more than 2% of its white collar workforce can be a Vice President or above. This is a permanent part of their reward strategy, which also includes criteria or being an officer of the company, including both traditional job evaluation factors as well as some individual competency criteria. A German manufacturer of insulation products has a rewards strategy that states the Hay system is their official and exclusive job evaluation methodology. Many companies actually list their job grades in their reward strategy and title guidelines by grade, so it is 100% clear that you must use Manager–>Senior Manager–>Director–>Senior Director, etc., following the corresponding grade levels. You may not realize this, but without clarity around grading and titles, these practices easily get out of control in a large complex, multinational organization, resulting in excessive costs, dropping engagement, and potentially litigation relating to discrimination. Do not assume grading is bureaucracy.
- Pay for Performance–this section is enormously important, and should address several questions:
- What is performance–is it organizational performance that counts, and individuals make a “contribution” to it, or demonstrate “impact” on organization performance? Or is performance only about an individual employee completing all their tasks and KPIs, doing only what is on their job description? It is important to lay out all the dimensions of performance in a clear statement, including individual, team/unit and global/overall performance, etc.
- How base pay is linked to performance–is it a link to ratings? KPIs only? Importance of performance versus compa-ratio, market trend or other factors in determining pay adjustments
- How incentives are linked to performance; short-term versus long-term incentives
- Use of recognition to reward performance
- How salary budgets are linked to performance–yes, some companies provide bigger salary increase budgets to better performing business units. (Hmm, do you think weaker unit performance will improve by dragging down salaries? But if the business is open to letting weaker units die, then this is a rational approach.)
The total rewards strategy may also include additional sections on benefits (with specific guidance on health, wellness, eligibility, flexibility, retirement, time off), work-life practices such as flexible work arrangements, compliance, administration, governance and communication. Some of these sections should acknowledge the role of local (country) HR leaders in providing specific oversight and guidance in program design and implementation.
It is possible to create a lengthy rewards strategy if you find yourself listing all the various rewards principles and methods you have ever learned. If you’re not careful you may end up with a book no one has time or interest to read. Your strategy will change with time so make sure the contents are actually relevant to your company at this point in time, and don’t necessarily state all the “how to” details.