What Are Strategic Reward and Total Reward

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What are strategic reward and total reward?

Strategic reward

Strategic reward is based on the design and implementation of long-term reward

policies and practices to closely support and advance business or organisational

objectives as well as employee aspirations.

Total reward

The concept of total reward encompasses all aspects of work that are valued by

employees, including elements such as learning and development opportunities

and/or an attractive working environment, in addition to the wider pay andbenefits package.

Links between strategic and total reward

The use of total reward may form part of a strategic approach to reward for

many employers. For example, an organisation might adopt a total reward

approach, encompassing the provision of both cutting edge training

programmes together with flexible working options, as well as more traditional

aspects of the pay and benefits package, in order to recruit, retain and motivate

the high quality staff that are best placed to help it secure its business

objectives.

The role of strategic reward

Developing a reward strategy

The deployment of strategic reward approaches is often based on the setting outof a formal, written reward strategy, although it is also possible to adopt a

strategic approach to reward without the use of such a document.

According to our annual reward managment surveys, around one third of

employers overall have a reward strategy in place.

See more in our annual reward survey reportsContent of reward strategies
http://www.cipd.co.uk/research/_reward-managementhttp://www.cipd.co.uk/research/_reward-managementhttp://www.cipd.co.uk/research/_reward-management


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Reward strategies are diverse and so is the structure used by different

organisations to define and present them, as observed by Armstrong1.

However, he identifies four elements typically included in strategies:

a declaration of intent, or statement of proposed reward developments a rationale setting out the business case for the reward proposals a definition of guiding principles an implementation plan.

While varying approaches to strategic pay exist, examples of the type of

principles that need to be considered include the following:

designing pay structures and pay progression arrangements that ensurethat the business is able to recruit, retain and engage the staff it needs toachieve its goals (for example, linking individual pay progression with

those types of performance that are valued by the business such as

customer focus)

positioning variable earnings carefully against basic pay to encourageappropriate employee behaviours (for instance, using cash bonuses or

commission to drive desired business outcomes such as higher sales

levels while also taking account of corporate governance standards and

risk management)

developing a pay policy that is competitive with the external labourmarket in order to recruit and retain key personnel needed to achieve

business success (for instance, paying certain high-performing staff at the

upper quartile level when compared with the external labour market)

ensuring both vertical integration of employee reward approaches withbusiness goals (such as developing performance-related pay arrangements

to help increase revenues) as well as horizontal integration of reward

policy with wider HR policies (for example, ensuring that pay

progression arrangements are aligned with company culture or succession

planning arrangements).

For more information on how reward strategies can be supported by pay

structures, pay progression, performance-related pay, market pricing and

bonuses, see our factsheets covering these topics

Go to our factsheet on Pay structures Go to our factsheet on Pay progression Go to our factsheet on Performance-related pay Go to our factsheet on Market pricing and job evaluation Go to our factsheet on Bonuses and incentives
http://www.cipd.co.uk/hr-resources/factsheets/pay-structures.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/pay-structures.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/pay-progression.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/pay-progression.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/performance-related-pay.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/performance-related-pay.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/market-pricing-job-evaluation.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/market-pricing-job-evaluation.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/bonuses-incentives.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/bonuses-incentives.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/bonuses-incentives.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/market-pricing-job-evaluation.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/performance-related-pay.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/pay-progression.aspxhttp://www.cipd.co.uk/hr-resources/factsheets/pay-structures.aspx


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Putting strategic reward into practice

Although the basic concept of strategic rewardat its simplest, using reward

policy to support long-term business goalsis often taken for granted as adesirable concept, some commentators have highlighted difficulties in

translating the theory into reality in organisational practice. One recent paper by

Trevor concludes that attempts to use strategic pay systems are especially

problematic for a frustrated and often much maligned pay function and long-suffering line management2. According to this paper, employers might bebetter-served taking a risk management, rather than a strategic, approach to

reward.

However, the adoption of strategic and risk-based approaches to reward are not

necessarily mutually exclusive. CIPD members can find further information onboth approaches to managing reward in our guide to the pay review process.

Go to our guide to the pay review processFor more detailed information on risk management approaches to reward, see

our report on risk and reward.

Go to our reward risks reportApproaches to total reward

By recognising that pay is not the only motivator, and acknowledging the

importance of not only tangible but also intangible rewards within the wider

context of the work experience, total reward has wide-reaching implications for

employers and employees alike.

As a concept, total reward is not new. As with many trends in reward

management, the development of formal concepts and theoretical models of

total reward originally came from the USA (where the description totalrewards is generally used rather than the singular version of the term often

favoured in the UK).

What is included in total reward?

The US organisation WorldatWork (formerly the American Compensation

Association) has identified five separate components of the work experience in

addition to pay and benefits. These are:
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recognition work/life balance company culture employee development environment, including job design and the physical workspace.

Although these elements have always existed in the workplace, they have often

been taken for granted and thus not actively managed. Under a total reward

policy, all aspects of the work experience are recognised and prominence is

given not only to remuneration but also to less tangible rewards. This is

important since experience shows that employees place great emphasis on

intangible rewards when deciding where to work and the level of commitment

to give to their work.

In more detail, total reward may include some, or all, of the following elementsas well as traditional elements of pay and benefits packages:

flexible benefits access to professional and career development a challenging role at work freedom and autonomy at work opportunity for personal growth recognition of achievements preferred office space or equipment capacity to raise matters of concern involvement in decisions that affect the way work is done flexible working hours opportunities for working from home secretarial support.

It is worth noting, though, that the term total reward is also occasionally used in

a more limited way simply to refer to the benefits package beyond basic pay.

For instance, some commentators use the term primarily to ensure a focus the

value of pensions (in addition to basic pay) as part of the overall remuneration

package.

Characteristics

An analysis of various total reward models by Thompson3

finds that they can be

characterised by an approach that is:


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Holistic: it focuses on how employers attract, retain and engageemployees to contribute to organisational success using an array of

financial and non-financial rewards.

Best fit: it adopts a contingency approachtotal reward programmesneed to be tailored to the organisation's own particular culture, structure,work process and business objectives.

Integrative: it delivers innovative rewards that are integrated with otherhuman resource management policies and practices.

Strategic: it aligns all aspects of reward to business strategytotalreward is driven by business needs and rewards the business activities,

employee behaviour and values that support strategic goals and

objectives.

People-centred: it recognises that people are a key source of sustainablecompetitive advantage and begins by focusing on what employees value

in the total work environment.

Customised: it identifies a flexible mix of rewards that offers choice andis better designed to meet employees' needs, their lifestyle and stage of

life.

Distinctive: it uses a complex and diverse set of rewards to create apowerful and idiosyncratic employer brand that serves to differentiate the

organisation from its rivals.

o See our report Employer branding and total reward Evolutionary: it is a long-term approach based on incremental rather

than on radical change.

Coverage

While private sector employers have tended to be at the forefront of the formal

development and adoption of total reward policies, there is growing interest in

the approach among public sector organisations, with relatively little variation

currently recorded in the coverage of total reward approaches between private

and public employers.

To take one example of heightened interest in total reward in the public sector,

there has in recent years been a particular focus on the non-basic pay

advantages of working in the sector, such as high-quality pensions and work-life

balance provisions, among the public sector pay review bodies (which

recommend pay rises for several groups such as medical staff, teachers and

defence workers).

'While pensions and total reward [are] not specifically mentioned in review

body remits, they [have] a direct relevance to recruitment, retention and
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motivation', in the view of one commentator from the Office of Manpower

Economics, as well as being important in the considerations of broad pay

comparability with the private sector4.

Advantages and drawbacks of total reward

Advantages

In common with many reward policies, the aims of total reward include the

desire to enhance recruitment, retention and performance levels.

Total reward has a particularly strong potential to enhance the reputation of an

organisation as an employer of choice through its capacity to place a value on

the non-basic pay or wider non-financial benefits of working for anorganisation.

Many employees have traditionally been unaware of the costs to the employer

of benefits such as pensions, which can be very substantial for an employer.

Hence the use of total reward is often closely associated with the desire to

communicate to employees the value of their employment package. Employers

frequently provide individual employees with total reward statements (either

print versions or online) that emphasise the value not only of basic pay but also

the wider benefits package and potentially other congenial aspects ofemployment in a particular company.

Drawbacks

Research from our reward management surveys indicates that employers

believe they are better at integrating financial aspects (pay and benefits) into a

total reward approach than the non-financial aspects. An area of concern

revealed by the research is line manager behaviour, with employers expressing

concern at how well they have integrated the behaviour of these staff within atotal reward approach. Yet, if line managers do not support the organisations

commitment to total reward (for example, over flexible working) the approach

is likely to fail.

Clearly, moreover, some rewards that might be included in a total reward

package are more easily provided than others. In respect of the working

environment, for example, many employees might prefer a desk located by a

windowbut office accommodation is a finite and not particularly flexible

resource. In such cases, it would often be very difficult to meet everyonesrequirements.


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One other difficulty in developing a total reward package, beyond the challenge

of supplying certain rewards, is attempting to measure or weigh their value

against one anotherparticularly if the aim is to include a numerical or tangiblevalue in total reward statements distributed to employees.

CIPD viewpoint

Strategic reward is potentially very powerful in helping employers align their

reward approach with HR and business strategies as well as employee needs in

order to improve organisational performance. Total reward has wide-reaching

implications for cultural change in organisations as it can focus in part on

employee empowerment rather than employer command management. While

both strategic and total reward are fundamentally simple concepts, it can be

difficult to translate the approaches into practice or to quantify their impact on

individual or organisational performance. This should not, however, preventfurther exploration of the ideas behind such approaches, with a view to

implementing at least some of their principles when possible. Both strategic and

total reward approaches have the potential to be very powerful management

tools and change catalysts.

Documents

What Are Strategic Reward and Total Reward