An Introduction to Total Reward - Hay Group

Total Reward and Total Remuneration

DAVID PYPER | PETER BOREHAM 24 SEPTEMBER 2010

2© 2010 Hay Group. All rights reserved

Total Reward

Definition: The sum total of what an employee receives from the organisation

Broad definition of reward is becoming more commonplace in the market Constraints on financial elements of reward More strategic use of HR function

Different depictions or models in use. Most make use of: Financial rewards Work environment Development opportunities

Dimensions include: Directness of rewards (direct and indirect) Nature of rewards (transactional and relational)


Total Reward (continued)

RR

EE

WW

AA

RR

DD

RREEMMUUNNEERRAATTIIOONN

Annual incentive Bonus/spot awards

Base salary Hourly wage

Common Examples

Intangibles (typically

intrinsically valued)

Benefits

Reward Elements

Base Cash

Definition

T O T A LT O T A L

T O T A LT O T A L

TOTALDIRECT

TOTAL

CASH

Intangible

Rewards where we we can assign

an objective value

Tangible COMP E S A T I O N

Internal value or motivation

LTI

Perks

Share options Performance shares

Pension schemes Health and welfare Holidays Child care vouchers Life insurance

Cars Clubs Health checks

Quality of work Work/life balance Inspiration/values Enabling environment Future/growth opportunity

Short Term Variable


Total Reward model emphasising intangible rewards

Tangible rewards

Inspiration/values

Quality of work

Future growth/

opportunity

Work/life balance

Enabling environment


Related benefits

Training anddevelopment

Health promotionWork/life balanceJob satisfaction

Recognition awards

Work/Life programsEmployee assistance plans

Insurance benefitsRetirement plans

Pay

Self actualisation

Ego needs

Social needs

Safety needs

Physiological needs

Maslow’s hierarchy of human

needs

Total Rewards model as related to human needs


Intangible rewards

Intangible rewards is a ‘catch all’ concept that includes all rewards other than tangible rewards

It is all of the reasons an employee comes to work at a particular organisation, other than compensation and benefits that can be translated into dollars

By HR standards, intangible rewards are not soft: They can be key to a company’s actual recruiting and retention strategy At a minimum, they should be taken into account as the company formulates

its competitive direct reward strategy

Employer value proposition: Total reward strategies can and should have a direct link to the employer

‘brand’ Supports the internal and external marketing of the company to employees Focuses as much or more on intangible rewards


What does changing pay mean for total reward and the psychological contract?

The majority of staff in any organisation do not fall into the star or poor performer category. They are good, solid competent performers

If the public sector is to reduce people costs and improve productivity whilst delivering high quality public services, then those will be the people who must deliver

Performance

Freq

uenc

y

The performance curve


Total reward and employee effectiveness

The McLeod Report draws links between employee engagement and productivity

Lots of evidence that engaged employees are: more productive deliver a better financial outcome more likely to stay more likely to inspire customer loyalty more likely to innovatethan those who are less engaged

There are two core routes to employee engagement: things that organisations do to inspire engagement things that they do to enable engagement


Total reward and employee effectiveness

Clear and promising direction Confidence in leaders Quality and customer focus Respect and recognition Development opportunities Pay and benefits

Performance management Authority and empowerment Resources Training Collaboration Work, structure, and process

Employee engagement Commitment Discretionary effort

Employee enablement Optimised roles Supportive environment

Drivers EMPLOYEEEFFECTIVENESS

EMPLOYEEEFFECTIVENESS

Productivity

Financial performance

Customer loyalty

Innovation

Enhanced organisation reputation

Attraction and retention of talent


Engagement and enablement: implications for action

Engagement and enablement are both important determinants of employee performance

Organisations are unlikely to sustain one without the other

Frustrated employees will breakthrough barriers, disengage, or leave the organisation

Our research shows that about 20 per cent of employees are frustrated

HIGH

DETACHED EFFECTIVE

INEFFECTIVE FRUSTRATED

LOW HIGHEngagement

Enab

lem

ent


Demonstrating the business impact

Increase in employees above performance expectations

Reduction in turnover rates

Customer satisfaction rates

Revenue growth

Employee retention

Employee performance

Customer satisfaction

Financial success

10% -40% 71% x2.5High engagement only

50% -54% 89% x4.5High engagement plushigh enablement

Based on linkage case studies using Hay Group’s global normative database


A new map for public sector reward

Engagement

Better salary management

New pensions

Pay for performance


Better salary management

Current approach is inflexible, expensive and pays the wrong people more

Move away from fixed increments Shorter incremental scales Variable increments to ensure pay is within an overall budget Performance/capability-based progression

Focus on total cost, not ‘pay inflation’

Aim to get people to market and then stop, not above market

Acknowledge local market

Doing something is probably better than doing nothing


Reasons for dissatisfaction about pay increase

Source: CIPD, 2009


Different pay cultures

Source: CIPD, 2010

How employees would like to be rewarded, by sector (%)


Pay for performance in the public sector 1

How should this work? Be clear about

What salary is for

What variable pay is for

For example

Salary is focused on role and the individual’s medium-term value

Variable pay should focus on organisation (particularly for execs)

There is a danger with sub-optimal variable pay

But even sub-optimal variable pay is helpful providing it doesn’t encourage perverse activities



Dispelling the variable pay myths “Variable pay doesn’t motivate”

But does communicate what’s important And links staff costs to value delivered

“We don’t want variable pay” Rational people tend to prefer fixed, guaranteed, pensionable pay to

something variable! “Now is not the time for variable pay”

City bonuses are extreme by private sector standards Deficit reduction will increase focus on value for money

“Variable pay is divisive” Depends on the design!



Dispelling the variable pay myths - more “Variable pay doesn’t work”

True. But only if it’s badly designed! “There’s not enough money available”

May need to start small Even modest payments can send a positive message

“People shouldn’t get extra money just for doing their job” But at the moment they get a salary even if they fail to do their job! And delivering variable pay just for achieving the expected is OK if

salaries are set lower – see graph below


Truly variable pay


Pensions – context

A new settlement is needed

The old deal (compared to private sector) Lower salaries Better job security Higher pensions

The new deal (compared to private sector) Similar salaries Historically better job security (about to change?) Much higher pensions

And pension costs keep going up Increased longevity Salary growth (in some areas)


Pensions – suggested points of principle

Uncapped final salary difficult to justify High earners don’t need a guaranteed high % of their full final pay

Average salary is more appropriate than final salary Reduces cost volatility Avoids weighting expenditure towards best paid Avoids huge pension cost on promotion

Penalty-free retirement at age 60 is unacceptable given today’s life expectancy and the extra cost of this compared to age 65

Pension is not an untouchable, God-given right! Private sector workers have accepted reforms Private sector unions have accepted major cutbacks where some degree of

defined benefit guarantee remained

Beware sudden and massive transfer of risk from employer to employee


Some practical tips around total remuneration

Don’t obsess about valuation! Cannot practically allow for all the differences in people’s circumstances

which will influence the economic and perceived value of benefits Perceived value will differ to economic value even after employee education

Don’t obsess about the market Market is an assessment tool, not a design tool The Civil Service has always attracted talented people and will continue to

do so Total Rem variations to market of less that 10% are unlikely to have a

significant impact on recruitment and retention if everything else works well

Balance choice and complexity Current package is very inflexible and cannot be personalised unlike private

sector practice But too much choice in (for example) pensions can be intimidating

Documents

An Introduction to Total Reward - Hay Group