'Total rewards magic'
By Simon Ferry
Total rewards is the concept of considering all aspects of the rewards provided by an employer to their employees, or in other words, “everything an employee gets from the employer that they find rewarding.” This means not only considering pay, but also considering factors such as employee benefits, training and development opportunities, the working environment and more.
This is illustrated in more detail in the diagram below (Figure 1), where rewards are divided between:
Financial (which have a direct monetary value, such as salary and retirement benefits) vs. experiential (which relate to the general experience of working for your employer, such as learning opportunities and company culture); and
Personal (where rewards are individually applied, such as bonuses and promotion prospects) vs. company (which are normally provided in a similar way to all employees, such as vacation leave or the working environment).
In practice there are a range of different ideas and approaches when it comes to total rewards, but the framework in Figure 1 allows us to categorize any reward program readily and consider what it potentially means in for employees.
The concept of Total Rewards is certainly nothing new as it has been around many years, even if the term has only been used in more recently.
Why is it important?
Considering from a total rewards perspective gives a much more holistic view of what a company provides to attract, retain and motivate employees.
This can help employers develop their rewards policies to better align with business needs and objectives ― creating a total rewards strategy which will motivate employees to follow desired business behaviours and to feel engaged in their work.
By comparing total rewards against those provided by other companies, it gives employers the opportunity to make strategic decisions on where it may be more advantageous to provide rewards, which differentiate them from competitors. At the same time, it is possible to compare the value of the total rewards package to align with market competiveness objectives.
From an employee perspective, it can also help in terms of understanding what rewards and opportunities their employer provides and highlight the importance and value of these programs which might otherwise not be easy to fully appreciate.
Psychologists and leading thinkers have theorised as to what factors can help motivate and drive people to succeed in the workplace. There are various different ideas, but an interesting feature is illustrated by engagement surveys results. For example, these results can include identifying the typical factors which attract, retain and engage people. The results of Aon Hewitt engagement surveys in the United States suggest that, in the U.S. at least, the top attraction factors include competitive base pay; competitive retirement and health benefits; and financial stability of the company. Whereas, the top drivers for engagement include clear career path; career development; and teamwork.
Although there may be significant differences by country and company, these results demonstrate how different rewards programs can have differing impact in terms of attracting people to work for a company, encouraging them to stay and engaging them ― thus driving performance.
By taking a total rewards approach, companies can consider what rewards programs and mix will best align with their objectives and most motivate employees to perform.
How can company develop total rewards strategy?
The first step in developing a total rewards strategy is to consider set out the objectives which need to be met. The table below (Figure 2) is an extract from the 2012 Aon Hewitt total rewards survey. It shows the top five priorities for total rewards and in particular, that engagement, business alignment, attraction and retention are among the top drivers for total rewards strategies currently.
Having a more holistic view of total rewards can also help in terms of managing and mitigating certain associated risks, this might include:
• Alignment risk ― how total rewards align to the market and help meet attraction, retention and engagement objectives
• Financial risk ― management of the cost and volatility of rewards provided
• Execution risk ― reviewing rewards to make sure they deliver on objectives in practice
• Regulatory ― ensuring that compliance needs are met and relevant regulations are followed
• Human capital risk ― rewards can also play a significant part in managing broader human capital risks i.e. risks associated with the workforce. This includes, not only those associated with having the right people to deliver, but also risks associated with peoples’ behaviour.
Rewards can motivate people to take certain actions or follow certain behaviours, for example, increase motivation to sell more if they receive a sales commission. However, without careful design and taking a more holistic view ― this might encourage some employees to sell in ways which could create legal risks for the company later. A total rewards approach can help manage this type of risk, by not only considering alignment of compensation components with business needs, but also in the values created through company culture, training and development.
Can value of rewards be measured?
Experiential aspects of total rewards cannot be turned into a monetary value as easily as financial rewards. However, it is possible to understand their impact through measuring employee engagement and by conducting specialized employee surveys to identify the utility value of experiential rewards to employees.
Likewise, whilst it is easy to measure the cost of employee benefit programs, this cost does not necessarily relate to the value represented to employees. For example, a large company may have enough purchasing power to provide a benefit to employees at a lower cost than a small company. However, the value to employees may be the same. A better approach for considering competitiveness is to measure in a way which looks at the value the benefit program is expected to provide to employees, rather than cost. This is the approach has been used to generate the chart in Figure 3, which shows the typical split in the total value of employee benefits programs provided by employers in Korea.
The chart above is taken from Aon Hewitt’s 2011 Korean benefit index study. This demonstrates how retirement, paid leave (e.g. annual leave and long term sick-leave) and allowances and subsidies (e.g. meal subsidies and education support) are the most valuable benefits typically offered by companies. The actual distribution of benefit value can also vary significantly between industries and from company to company.
Based on this survey, the typical employee benefits package Korea has a value equivalent to around 30percent of base pay, before considering social insurance programs.
Given that this represents such significant potential value plus the range and complexity of benefits offered by many companies, measuring benefit value as a component of total rewards is critical. It is also important to regularly monitor total rewards to ensure objectives are met and to manage risks associated with rewards programs.
Communicating total rewards
Developing and monitoring a total rewards strategy can provide major benefits to both employers and employees, but unless the programs are well executed and communicated, then the full potential of a total rewards approach cannot be realised.
For example, let’s consider employee benefit programs. The range of employee benefits provided by many companies in Korea can be large and there are big differences in programs and the level of benefits offered by different companies. This can mean that, as an employee, it may not as easy to understand as salary components and the value may be very different depending on the circumstances of an individual. For example, children’s education support could be very valuable to someone who currently has children in education, but not appreciated by an employee with no children.
Communicating the value of benefit programs can be achieved measuring benefit value and sharing this with employees either generally through group meetings, or individually. Individual communication can be achieved by providing each employee with a summary of the value of the compensation and benefits they have received during the year. This is often referred to as a total rewards statement.
Best vs. the rest
A total rewards approach can be a clear differentiator between the “best” employers and the “rest.”
Aon Hewitt conducts a regular survey to find the “best employers” in Korea. This study identifies organisations where employees are engaged and the human resources functions provide a strong contribution to the success of the business. One area that differentiates the “best” from the “rest” is how a company designs and delivers the foundations for their continuous growth. These factors include clear vision and compelling employee promises; performance driven culture; efficient and effective people practices; strong organizational alignment; and pervasive accountability and trust.
A total rewards strategy which is well designed and implemented can clearly contribute to all the factors mentioned above. By understanding how rewards compare to other employers and aligning with business objectives, companies can inspire the best form their employees to deliver business success.
Simon Ferry is a UK qualified pension’s actuary based in Seoul. He has over 10 years experience in pensions and benefits consulting with Aon Hewitt.