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How to Develop a Total Rewards Strategy

29 December, 2019

This is the third of a 4-part series on Total Rewards Strategy.

You need a total rewards strategy to avoid blindly following history (what you’ve always done), the herd (what everyone else does) or hearsay (an interesting practice you heard about recently.) You have a good idea of what goes into a reward strategy. So how do you develop a strategy? I do not believe there is a strategy checklist, or that there is only one way to devise a strategy. Like a sculptor, you have finite material (clay; or in our case reward budgets and managerial competence) and we must make something out of it. And we may have to change it down the road, meaning we cannot let the clay harden! So how do we craft reward strategy? Here are my best tips.

Alignment to Business and Talent Objectives

First and foremost, the total reward strategy must align to the needs of the business and key talent objectives. If the business is facing disruptive competition that offers better value for money, your organization absolutely will have no interest in adding fixed cost such as salaries or healthcare. Full stop. Incentives linked strongly to profitability will be essential. Under cost pressure, healthcare strategy will likely focus more on prevention (reducing demand) as well as employee cost-sharing which shifts existing cost (of healthcare supply) as well as reducing demand by prompting employees to think twice about spending money out of pocket to see a doctor.

If an organization is in aggressive growth mode, then attraction and retention will be equally critical. Some rewards are better for attracting, such as salaries and benefits. Others are better at retaining, such as learning and development opportunity, culture, workplace flexibility and everyday good leadership.

A hospital needed to retain operating room nurses who could find easier work schedules at other hospitals. The hospital needed to ensure retention of both experienced and inexperienced nurses to ensure quality patient care and sustained staffing. They implemented premium pay practices based on performance and competency (evidenced through an annual exam) to support higher pay and retention for the best nurses, while allowing less competent nurses to leave voluntarily (for reduced work hours) by not paying them richly. Result? A highly engaged and well-paid group of 18 nurses are now doing the work formerly done by 24 less engaged nurses.

Observe and Rationalize

A rewards strategy–what you will offer, at what level, in what proportions, what you will not do, etc. results from logical, common sense thinking about the business and people priorities, the external business environment, as well as observation, understanding needed behaviors and how rewards can influence behavior. Having a rewards philosophy, relevant benchmark data, and willingness to innovate are highly beneficial.

Let’s begin with observation. Suppose you just joined your organization. Keep your mouth shut and your eyes and ears wide open. Start by observing your reward practices and how they work, and then questioning those practices in your mind only. Say nothing. Yet. Question their existence. This is harder than you think. Why are support staff not on any bonus? Why do we provide 20 days annual leave from year 1? Why do we not have a promotion budget? List your programs and practices and note your observations and questions for each. Say nothing, yet.

It’s hard enough to keep your mouth shut. What’s harder is actually deciding the purpose behind each reward practice. I’m not just talking about the “strange” practices. I mean all practices. Learn to question everything and try to articulate (in real words) what the purpose of salaries is, what the purpose of the sales commission plan is, etc. What are their primary and secondary objectives. If you cannot find a way to state the purpose behind each reward practice, then why are you spending money or time on it? See if you can actually list your reward practices, and write the purpose and objectives for each. Once you have determined whether a reward practice is for attracting talent, retaining talent (or both), aligning efforts with business strategy, etc., you will have a good start toward articulating your reward strategy.

As you are considering each of your reward practices, you are likely to come across one or two that don’t make good logical sense to you. You may be offering gold for long service awards which costs a large amount of money, or your annual corporate incentives may have six performance measures which seems too complex to you. This is where you must discipline yourself to think critically and respectfully. Without self-disciplined thinking, you will jump to intuitive conclusions that certain practices are stupid, unfair, excessive, cheap, etc.

Before doing what is rational, rationalize what you do.

The key to avoiding kneejerk reactions is this: before doing what is rational, try to rationalize (identify the reason for) what you do. Each reward practice—salary, car allowance, incentive pay, medical insurance—exists for a reason. Not only is there a reason for its existence, but there must be a reason for the quantum of salary, incentive, allowance, leave days, etc. Do your best to determine that reason. Go beyond “it’s always been provided” or “salaries have always been low”. The words “always been” are an observation, not a reason.

For every observation, there are alternatives. For example, just looking at cash compensation:

  • Instead of salary only, an alternative is slightly lower salary plus an annual incentive.
  • Instead of salary and bonus only, we could offer lower salaries plus fixed cash allowances which are excluded from bonus calculations and may be tax-free as well
  • Bonuses could link to individual performance ratings, or maybe we could adopt a profit sharing incentive with no individual consideration, but use a spot bonus for individual recognition.
  • Instead of setting salary ranges at market 50th percentile salary, let’s use 75th %ile for strategic functions, key contributors and high potentials, 40%th for those in roles that will be automated, using the additional money to provide them with job skills training, and 50th for everyone else.

The list goes on and on. There are choices galore in total rewards.

Prevalence Benchmarking

I am shocked at how many organisations do not benchmark compensation and benefits effectively. In the U.S. and Europe, it is assumed you will acquire good quality benchmark information from the big “data product” firms. In developing markets, and even some Asian developed markets such as Singapore, the use of benchmark data is insufficient and immature.

Benchmark data from the big firms is expensive because the databases are huge, the result of collecting far more information from participants than any one participant will ever need, in order to enable the firms to generate more products to sell you. This serves a good purpose for those who need a car report or severance pay report. But these mammoth surveys carry a heavy price for participants, not just in dollars but in staff resources and stress. There are cheaper benchmark data alternatives emerging, many of which use artificial intelligence or machine learning, along with non-traditional information sharing arrangements that extend outside the C&B “world.” Be informed and be careful where you get your data.

Benchmarking is important if you are in a competitive industry, care about cost, or care about attracting or retaining talent. (That covers just about everyone, but to illustrate my point, what if your organization is a monopoly with no competitors and you can raise your prices–or taxes if you are a government–without limit? In that case, comp and benefits costs wouldn’t matter, and you can just pay everyone richly. When you pay everyone richly, you will attract everyone (the good talent and the others as well,) so you’d better select very carefully! Paying richly also retains effectively, because no one wants to take a pay cut to change employers, so paying richly means you will have to deliberately manage out poor performers, using a performance improvement plan and progressive discipline practices within a legal environment that generally protects workers job security. But for the rest of us, costs matter. And we prefer to be selective about who gets paid richly and who should not. So benchmarking is important so we know how of a reward would lead, lag or match the market.

Isn’t benchmarking about strategy implementation only? We agree that benchmarking is essential to implementing strategy–for example, a strategy that you will pay top performers at market 75th percentile total cash compensation will require you to benchmark your total cash against market 75th percentile–it is also important in developing strategy..

How does benchmarking help develop strategy? By paying attention to emerging trends, especially which practices are helping other employers attract or retain or motivate employees. If you read that workers of all ages are seeking workplace flexibility and certain employers are introducing flexible work arrangements, such information does not require your organization to adopt workplace flexibility (that would be following hearsay), but it is a very useful “data point” for strategy discussions. It should cause you to ask yourself (and your leaders, HRBPs, etc.) whether it would be effective in supporting business and talent objectives.

Benchmarking is helpful in identifying potential new rewards, and potential sources of funding for new rewards. For example, if a survey shows the prevalence of eldercare benefits has risen, you may want to consider it. But to pay for it, you may discover that your expensive company cars are no longer prevalent in the market, so you could reduce the company car policy, and use that money to support eldercare.

Keep in mind these important tips when reading surveys:

  • Pay attention to the entire range of practices. Don’t focus only on the most prevalent practice! It’s useful to know that 71% of British companies provide a leased car to managers, but it’s also useful to know that 15% of companies provide a taxable cash car allowance in lieu of a vehicle, to simplify administration and avoid fleet maintenance tasks. (These numbers are fictitious, by the way.)
  • Pay attention to trends. A “P50 thinker” reading the above car survey will immediately recommend offering leased cars, since it is the industry norm, or “best practice” they may believe. But what if older workers are happy to take the train, or you’ve introduced a work-at-home policy and therefore many prefer the cash option. What if the previous year survey showed 75% of companies offering leased cars and only 10% offering a cash option, indicating a trend away from leased cars, towards cash car allowances. In this instance, a strategic thinker will see an opportunity to differentiate his company in the market place by offering a cash option before it becomes standard practice, if current and future employees would prefer the cash.

Consider Business Life Cycle Stages

Business life cycle stage is essential to understand. If you are in start-up phase, you are investing in product development and distribution. The company most likely lacks cash (or investors are looking for profitability quick) so reliance on rich salary offers is not a good idea. Instead you will offer ESOP shares and excitement, in lieu of cash. This drives talent strategy as well, as you will be hiring a lot of healthy singles and only selectively hiring mid-career types needing good health benefits or supplemental retirement contributions.

If you are in growth phase, you have established a customer base, but you are hiring fast and need a productive, entrepreneurial workforce, perhaps even agile with the ability to make decisions below management levels, on the fly, with few formal meetings or email chains. In terms of rewards, this means job descriptions will be burdensome but necessary to give job candidates a sense of role focus and role clarity. Yet bureaucracy kills agility, so keep the JD’s light and emphasize “other duties as assigned”. Use gig workers to maximize flexibility and to focus on deliverables, not pay for “butts in seats” from 9 to 6. In growth stage, incentives will focus on top line growth, specifically profitable growth, as discounting (as a means of growth) will kill margins. Consider incentivizing sales people on gross margin dollars, not the top line. Maximize contests and recognition and variable pay–as long as it is self-funding, make payments exciting.

Final thoughts

Beware the trap of P50 mentality. Sure, no one ever got in trouble for doing what everyone else does. At least to this point. But if you are now involved in steering reward strategy, you must abandon P50* mentality, and dump the consultants who conduct benchmarking, find a market gap, then give you their $10,000 advice to simply close the market gap to bring you closer to market practice. No one ever won an Olympic event by coming in at P50, and your organization will not win any talent wars either, by paying P50 across the board. Investors don’t invest equal amounts of money to all stocks, but they pick their bets and weight their positions carefully. We must do the same with scarce reward budgets.

Investors don’t invest equal amounts of money to all stocks, but they pick their bets and weight their positions carefully.

Reward strategy is not permanent, just as business conditions, talent market conditions and the regulatory environment are not static. Strategy is dynamic in rewards just as with anything in life involving decisions. Don’t seek perfect; aligned is the goal. Align your rewards practices, that’s all. A little more of this, a little less of that. Like a chef, you will develop with experience a sense of the right total reward recipe for a given situation.

Don’t worry if it’s not perfect. If it works well for your organization, I will be the first to call it best practice!

*P50 refers to 50th percentile, i.e. market median or “middle of the pack”

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2 Comments
  1. Ian Speirs permalink

    Excellent introductory chapter, Tom. Clearly articulated and thought provoking.
    I really like the concept of observation before rushing to judgment with packaged solutions. Also the pitfalls of the ‘herd’ mentality without regard to the the business cycle status.
    Thanks for this initiative.
    Regards

    Ian

  2. Dear Thomas,

    This article is an absolute intellectual pleasure.I could relate to your insights and tips as I was planning to write something similar. In fact, I learned few more important tips from this piece. You are absolutely right about keeping mouth shut is the hardest thing as I went through the same experience. I loved the fact that you pointed out the 50th percentile mentality syndrome and over reliance on consultants which makes the job of C&B specialists so mundane, uninteresting and boring. The term best practice is also another mind block so kudos to you for writing this beautiful piece. Its refreshing to see someone actually sharing the knowledge rather than just writing stuff with very little substance and little take away.

    Thank you,
    Muhammad

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