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How to develop a reward strategy
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XpertHR How to develop a reward strategy 2
How to develop a reward strategy
Author: Tony Hatton-Gore
Summary
Consider how the reward strategy will link to the business and HR strategies.
Understand what total reward is and why it is important for the reward strategy.
Review the business strategy, and understand how objectives can be met through reward.
Review the current reward offering, considering how each element supports the business
strategy.
Formulate the new strategy, taking into account that each element included in the strategy
should have a purpose.
Involve key stakeholders to ensure buy-in across the whole organisation.
Plan the implementation of the new strategy, ensuring it is well communicated.
Regularly check that the reward strategy is still relevant, current and effective.
What is a reward strategy?
A reward strategy describes how an organisation will use reward policies, practices and
processes to support the delivery of its business strategy. Within it, every reward issue or
initiative should be viewed through the prism of how it helps the business. The reward strategy
should include: some guiding principles, what needs to be done in reward to reflect how the
organisation is developing, details of the mix of financial and non-financial rewards to be
offered, and a plan for implementation.
The purpose of the reward strategy
The aim of the reward strategy is to support the business strategy. It does this by:
being integrated with HR strategy;
enabling and incentivising achievement of corporate business objectives;
rewarding the behaviours associated with business success;
supporting and making real the values of the organisation; and
helping to attract the skills the organisation requires to meet current and future business
needs.
The reward strategy should support the overall business strategy, but is likely to be explicitly
linked to the HR strategy. It is integral to HR strategy because it is mutually supportive of other
strands of HR strategy such as talent management, performance management, and learning
and organisation development, which themselves support business strategy.
XpertHR How to develop a reward strategy 3
Total reward
Successful reward strategies include a compelling offer to come and work for the organisation
and stay with it. That offer is not necessarily just about pay and benefits but also about
alignment of aspirations and values. Total reward is about the whole package comprising both
tangible reward, such as pay and benefits, and intangible items such as opportunity and
development. It is important to balance two key drivers - value and employee engagement.
Value is about managing costs but also about ensuring value to the business and a return on
investment in reward. Employee engagement is key to attracting and retaining motivated
employees.
Total reward strategy supports HR strategy by:
combining the tangible aspects of the employment package, such as pay and benefits, with
the intangible ones, such as career and development opportunities and being associated
with excellence, to articulate the employer value proposition; and
supporting the engagement, resourcing and talent and organisational development
strategies by providing a platform for structuring and sizing roles, recognising relative posit
ions, motivating employees and recognising development.
Global reward strategy
In global or multinational organisations it is important to establish what elements of the reward
strategy will be globally determined and what will be determined locally. For example, it would
be typical to establish globally determined principles such as paying for performance and
guidelines for bonus or long-term incentives because they support corporate business
objectives; whereas salary ranges, benefits programmes and specific merit awards would be
locally determined because of the need to be competitive in the local market.
Developing the reward strategy
In determining reward strategy the organisation will need to consider internal influences such
as:
current reward practice and how it should change to align with business strategy;
the views of key stakeholders (leaders, managers and employees); and
organisation structure (for example the relative importance of the group and/or autonomy
of individual business units).
The organisation will also need to take into account external influences such as:
market practice and trends; and
the global/regional/sectoral context as appropriate (legislative, fiscal, economic, regulatory
and tax environments).
It is critical for the employer to keep checking with the business to ensure that the reward
strategy is still relevant, up to date and effective.
XpertHR How to develop a reward strategy 4
Using reward to achieve business objectives
The first step in developing a reward strategy will be to review the business strategy (if this is
not clearly articulated in a discrete document it may be derived from materials such as annual
reviews or CEO's statements). The employer should identify the key factors that can be
influenced by people in the organisation and the reward actions that could make a difference.
The table below shows some example goals for organisations and how they are supported by
reward solutions and the business rationale.
Strategy/objective Reward solutions Rationale
Recognise and reward
excellent performance
Use incentive and bonus schemes;
merit-related salary reviews;
and/or non-financial recognition
(for example awards or
professional recognition, depending
on the organisation context).
Promotes, encourages and/or
incentivises the delivery of
business objectives and
desired behaviours.
Market related
Conduct a benchmarking exercise
against similar jobs, and use to
determine a market position that
fits with the business strategy -
individuals' reward may be related
to contribution, job size and/or
market.
Employee perception is that
they are paid competitively
compared with the external
market considering the role
and their level of performance.
Equitable
Use reward structures that ensure
similar treatment to internal
comparators and appropriate
relativities between roles and
different levels of performance.
Employee perception is that
pay decisions are made fairly
and that the organisation lives
by its values.
Be as good at
everything as core
business
Develop the reward policy and
process to define or match the best
practice in each of the
organisation's markets/sectors.
Positions the employer as best
in class, promotes pride in
employees and reinforces
satisfaction with reward.
Be innovative
Encourage/reward innovation and
achievement through recognition
schemes, appraisal criteria and
competency frameworks.
Encouraging innovation and
original thinking enables the
organisation to gain maximum
leverage from the intellectual
capital of its people, to
differentiate itself from
competitors and to establish a
distinctive brand or identity
that will help attract high-
performing individuals in the
labour market.
XpertHR How to develop a reward strategy 5
Strategy/objective Reward solutions Rationale
Focus on the
customer
Incentivise delivery, quality and
service through reward and
recognition programmes that
promote customer service
practices. For example, total
reward promotes pride and
affiliation in the company so
employees offer a consistent
message to clients.
Ensuring a high level of
customer service increases the
likelihood of repeat business,
develops and maintains a
reputation for excellence,
supports the value chain by
ensuring employees are
satisfied and engaged and
gives a positive image to
customers.
Reduce the cost base
Define the measures of the return
on investment in reward and
monitor the impact of reward
initiatives. Build reward capability
of HR and the line managers by
knowledge and communication
training to obtain the best impact
from reward programmes.
Leverage benefits purchase by
commercial procurement strategies
to gain advantages of economies of
scale.
Such actions enable effective
short-term budgetary control
and safeguard the longer-term
financial wellbeing of the
organisation. They also
promote a sustainable future
business for all stakeholders
including shareholders and
employees, and ensure that
decision-making in reward is
consistent with business
strategy and generates value.
Be a good corporate
citizen
Adopt a total reward approach
which includes social responsibility
to promote pride and affiliation in
the employer.
Building an attractive
corporate reputation and
brand will aid the business
strategy by promoting positive
perceptions of the organisation
in its markets and as an
employer.
Key stakeholders
When developing the reward strategy, it is important to engage in consultation and obtain buy-
in across the whole organisation. The reward strategy will be more relevant to the business and
offer a much better chance of buy-in and successful implementation if what people think is
taken into account. It may be necessary to invest in building understanding to facilitate debate
at the right level: senior executives should be consulted on key objectives and relevance to the
business; and management on the skills and support they need to make reward decisions and
communicate reward effectively.
Employee consultation may be effected by reference to specific reward questions in employee
attitude surveys but organisations may also consider feedback from sources such as exit
interviews and annual performance and pay reviews, together with any existing employee
consultative structure.
XpertHR How to develop a reward strategy 6
How to address reward priorities
The organisation will need to review the whole current reward offering, looking at each element
such as salary, bonus, benefits and intangibles to identify how each element supports the
business strategy by delivering value in terms of employee outcomes such as attraction,
retention and motivation.
The idea is to cover all the relevant aspects of business and people strategies, so that there are
no gaps and no overlaps. An organisation should not be paying for the same thing twice, for
example by confusing the roles of salary and bonus.
The organisation should review everything in its reward offering, considering the following:
What is its purpose?
How does it support the business?
How does it support the broader HR strategy?
How do we measure its effectiveness; and what can we do to make it more effective?
By conducting this type of gap analysis the organisation can start to establish the direction of
travel that the reward strategy should take and establish some pointers for priorities. These can
be refined further through consultation.
The reward structure should comprise elements that each have a purpose. For example:
basic salary reflects ongoing contribution, performance and size of job;
bonus rewards individual achievement and enables employees to share in success;
executive reward recognises the roles of executives in achieving business targets; and
benefits are market competitive, may support the organisation's values (for example caring
for the environment or being family-oriented), and may offer choice and flexibility to
employees.
In devising the strategy, organisations should consider the relative cost of reward items and
their perceived value by employees and where possible focus spend on items that give best
return in terms of perceived value. They should bear in mind that the more expensive benefits
might be less widely appreciated. Organisations may also think about targeting different groups
of employee within the workforce and offering flexibility or choice within the reward programme.
XpertHR How to develop a reward strategy 7
Formulating and implementing the strategy
The table below summarises the key steps that organisations need to follow when developing a
reward strategy.
Phase Actions
Collect and review
information
Collect and review corporate information such as mission statement,
values and business strategy; and basic reward data such as headcount,
reward structures (for examples grades and job evaluation), pay review
frequency and processes, reward cost and existing reward elements
(such as salary, bonus, incentives and benefits), linkage between reward
and performance management and trade unions, different types of pay
for different categories of employee and how executive reward relates to
the rest of the organisation.
Analyse the data
and formulate an
initial strategy
Review what this information tells the organisation about the relationship
of reward to business and HR strategies and whether or not reward
supports the direction of the organisation. Consider any apparent issues
such as:
under/overpayment comparative to market or internal comparators;
inconsistencies by employee group, business unit or location;
fairness, equal pay and discrimination;
feedback from employee surveys and exit interviews;
where leavers go and where joiners come from and if reward is a factor
in these decisions; and
what the skills of today and tomorrow are and whether or not pipeline is
sufficient.
Use this analysis to develop an initial strategy and identify associated
reward interventions.
Develop and refine
Consult and discuss initial findings with stakeholders such as senior
executives, HR, line managers and possibly employees. Discuss and
explore the practical implications:
Test potential actions against emerging principles.
Model costs and the impact of change.
Identify the cost and the benefits of a new strategy.
Determine what success would look like and how to measure return on
investment in reward.
When you have a robust proposition, develop an associated
implementation plan and communication strategy in order to cover
questions on detail and implementation as well as on strategy.
XpertHR How to develop a reward strategy 8
Phase Actions
Consultation
Identify key people from the organisation to contribute or be consulted
such as senior executives and subject-matter experts. Think about their
expectations and how to meet them, as well as how to keep them
informed and involved. Talking with stakeholders will make the strategy
better and develop a broader sense of ownership.
Approval
The reward strategy should be agreed at the highest level in the
organisation because it is about how to support the strategic direction
and is likely to involve a programme of action over an extended period. It
is therefore essential to obtain senior buy-in to give impetus and
credibility to planning implementation.
Planning implementation
As part of the process of developing a reward strategy, employers should develop an action plan
to turn the reward strategy into reality by identifying actions associated with each reward
element such as salary, bonus, benefits and intangibles.
The employer should develop a project plan that includes resources, outputs and timescales. It
should define deliverables, contingencies and individuals' roles including responsibility for
approval and implementation. Oversight for the reward strategy should be at the top level of
the organisation and an individual should be appointed to report to this level on progress.
Organisations should define the roles of stakeholders such as HR and reward professionals, and
regional and national HR, as well as other specialist areas such as communications, systems
and finance, as appropriate. The organisation will need to consider potential risks and issues
and how to manage them. Finally, the organisation will need to agree who has final sign-off for
the reward strategy and is responsible for implementation.
XpertHR How to develop a reward strategy 9
Communication plan
The project team should develop a communication plan to support roll-out throughout the
organisation. Employers need to remember that the principles are global but how they are
applied locally is determined by local factors so there may be a need for local communication in
addition to corporate messages, but the two must be consistent.
Reward communication should be:
simple, to promote understanding among employees and managers and facilitate better
management of reward decisions;
consistent with the reward strategy to ensure continuing credibility;
aligned with business and HR strategy to support policies on engagement and individual
performance and be directly relevant to organisation success; and
clear about objectives and transparent about process so that people feel fairly treated.
Methods of communication may include online, paper or in person (depending on the culture
and type of workforce) but communication will be most effective when integrated with other
corporate messages and targeted to specific employee groups.
The role of line managers should not be underestimated. The most effective reward
communication comes from line managers so it is essential to ensure that they understand the
strategy and have the skills and knowledge to communicate about reward.
Communication can also play a key role in ensuring return on investment, as effective
communication of the reward offering promotes better employee understanding of the overall
package, its components and its value. It can also improve employees' perception of their pay
because of the sense of fair treatment with respect to others in the organisation, competiveness
with the external market and integration of reward with business strategy.
Ongoing review
Persistent effort will be required to embed the changes with HR, managers and employees until
they become familiar with the strategy. This should include regular reporting on progress and
monitoring of the impact of interventions to assess if adjustments are needed or respond to any
unexpected effects. Organisations should define the responsibility for implementation up to the
point when strategy becomes part of business as usual.
There is no given lifespan of a reward strategy - it is a case of a continuous feedback loop.
Organisations should build in a regular way to check with the business that the reward strategy
is still relevant, current and effective. It should be possible to integrate this with reviewing HR
strategy and its relationship to business strategy. In this way reward maintains its position as
an integrated part of the HR strategy, linking with resourcing, learning, talent and engagement
to contribute to business success.
© Reed Business Information
