Strategic reward

Strategic reward is based on the design and implementation of long-term reward policies and practices to support closely 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 and benefits 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, and more traditional aspects of the pay and benefits package, to recruit, retain and engage the high-quality staff that are best placed to help it secure its business objectives.
 

By recognising that pay isn’t the sole motivator, and acknowledging the importance of not only tangible and 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 management, the development of formal concepts and theoretical models of total reward originally came from the USA (where the description ‘total rewards’ is generally used).

What is included in total reward?

The US organisation WorldatWork has identified six separate components of the work experience in addition to pay and benefits:

• performance and recognition
• work/life balance
• organisational culture
• employee development and career opportunities
• business strategy
• human resource strategy

Although these components have always existed in the workplace, they’ve often been taken for granted and managed in isolation rather than as a whole. Under a total reward policy, all aspects of the work experience are recognised and prominence is given not only to remuneration but also to non-financial 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 job.
 
Total reward may include some, or all, of the following elements as well as traditional elements of pay and benefits packages:

• flexible benefits
• access to professional and career development
• a challenging role
• freedom and autonomy
• 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 home working
• administrative support

The term total reward can also be used in a more limited way simply to refer to the financial value of the pay and benefits package rather than the value of the total package of financial and non-financial rewards.
 
Characteristics

An analysis of various total reward models by Thompson3 finds that they can be characterised by an approach that is:

• Holistic: it focuses on how employers attract, retain and engage employees to contribute to organisational success using a mix of cash and non-financial rewards.
• Best fit: it adopts a contingency approach – total reward programmes need to be tailored to the organisation’s own culture, structure, work process and business objectives.
• Integrative: it delivers innovative rewards that are integrated with other human resource management policies and practices.
• Strategic: it aligns all aspects of reward to business strategy – total reward 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 sustainable competitive 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 and is better designed to meet employees’ needs, their lifestyle and stage of life.
• Distinctive: it uses a complex and diverse set of rewards to create a powerful and unique employer brand that serves to differentiate the organisation from its rivals.
• Evolutionary: it’s 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 has been growing interest in the approach among public sector organisations.

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 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 sector.
 

By recognising that pay isn’t the sole motivator, and acknowledging the importance of not only tangible and 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 management, the development of formal concepts and theoretical models of total reward originally came from the USA (where the description ‘total rewards’ is generally used).

What is included in total reward?

The US organisation WorldatWork has identified six separate components of the work experience in addition to pay and benefits:

• performance and recognition
• work/life balance
• organisational culture
• employee development and career opportunities
• business strategy
• human resource strategy

Although these components have always existed in the workplace, they’ve often been taken for granted and managed in isolation rather than as a whole. Under a total reward policy, all aspects of the work experience are recognised and prominence is given not only to remuneration but also to non-financial 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 job.

Total reward may include some, or all, of the following elements as well as traditional elements of pay and benefits packages:

• flexible benefits
• access to professional and career development
• a challenging role
• freedom and autonomy
• 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 home working
• administrative support

The term total reward can also be used in a more limited way simply to refer to the financial value of the pay and benefits package rather than the value of the total package of financial and non-financial rewards.

Characteristics

An analysis of various total reward models by Thompson3 finds that they can be characterised by an approach that is:

• Holistic: it focuses on how employers attract, retain and engage employees to contribute to organisational success using a mix of cash and non-financial rewards.
• Best fit: it adopts a contingency approach – total reward programmes need to be tailored to the organisation’s own culture, structure, work process and business objectives.
• Integrative: it delivers innovative rewards that are integrated with other human resource management policies and practices.
• Strategic: it aligns all aspects of reward to business strategy – total reward 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 sustainable competitive 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 and is better designed to meet employees’ needs, their lifestyle and stage of life.
• Distinctive: it uses a complex and diverse set of rewards to create a powerful and unique employer brand that serves to differentiate the organisation from its rivals.
• Evolutionary: it’s 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 has been growing interest in the approach among public sector organisations.

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 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 sector.
 

The term ‘reward’ generally covers all financial provisions made to employees, including cash pay and the wider benefits package (pensions, paid leave and so on). It can also include wider provisions for employees, with the term ‘total reward’ encompassing non-pay benefits.
 
Pay may be divided into two categories:

base (or fixed) pay – guaranteed cash wage or salary paid to employees for doing their work for a contracted period

total earnings – base pay plus additional variable earnings such as bonus payments or overtime earnings

Pay definitions vary. For example, certain location allowances might be seen as part of base pay by some employers, while others may see it as variable pay and exclude it from base pay.

Other terminology may also be used. ‘Compensation’, for example, is usually taken to refer just to financial rewards (base pay and earnings) while ‘remuneration’ might be used interchangeably with ‘reward’ to mean the wider benefits package.
 

Pay structures

Pay structures provide a framework for valuing jobs and understanding how they relate to one another within the organisation and to the external labour market.

Surveys illustrate that a wide range of different types of pay structures exist, linked to varying organisational needs and objectives, including:

• individual pay rates, ranges or ‘spot’ salaries
• narrow graded pay structures
• broadbands

Pay structures may also need to allow for certain additional elements other than basic pay rates, for example the inclusion of location allowances.

Pay levels

There are various approaches to setting pay levels or ranges. For example, job evaluation is an important tool for setting pay rates among public sector employers, whereas market pricing tends to be more influential in the private sector. By employer size, the views of the owner or managing director can be more influential in smaller firms.

Where market rates are used, employers need to determine where to pitch in-house rates (for example, at the median or upper quartile).

Pay awards

When setting the size of the overall pay review budget for annual pay increases – which often includes performance-based pay rises as well as general pay structure movement (commonly known as the annual pay award or cost of living uplift) – the key considerations include:

• ability to pay
• inflation
• market rate changes

There are variations by sector. For instance, in the public sector the key factor is the government’s pay policy together sometimes with union pressure, whereas the latter factor is rarely an issue for many private sector companies.

Pay progression

Individual performance, market rates and competency are commonly used factors for moving individuals along salary bands or ranges. A hybrid approach which bases progression on more than one factor is typical. It might involve an assessment of what is achieved by individual employees against the backdrop of what is happening in the wider labour market.

Many organisations expect ‘satisfactory’ performers to progress to a target point in their pay range. Among private sector service employers, the target point is often the mid-point in the range, while in the public sector it tends to be close to the top of the salary scale. In the voluntary and manufacturing and production sectors, employers tend to be more evenly split whether the target is at the mid-point or towards the top end.

Variable pay: cash bonuses and incentives

Surveys show the widespread use of bonus and incentive awards, either to encourage future performance (incentives) or to recognise past performance (bonuses). However, there are again variations by sector, with such schemes more widespread in the private sector. Many employers have more than one bonus or incentive scheme, typically around three.

Bonus and incentive schemes are commonly linked to an individual’s performance, followed by approaches based on organisational performance of which the most popular are those driven by business results (such as profit or revenue targets). Combination schemes use both measures of organisational and individual performance.

The advantage of variable pay schemes is that they can link earnings closely to desired performance and, in theory, only pay out when there is a reason to do so. Variable elements of pay do not generally feed through into other elements, such as overtime or pension contributions, and so create no additional on-costs.
 

Encouraging high performance levels by linking performance to pay

While money can influence employee behaviour, it isn’t always in the ways that the organisation intended. Where PRP appears to have worked, critics claim it’s often the underlying improvements in performance management and development that have the greatest impact on bringing about positive changes, rather than the increased pay. And in an era of tight pay budgets, it can be difficult to give those judged as high performers significantly more than those whose performance is seen as being good. CIPD research highlights other issues with the operation of PRP for instance, there is the danger it can: ‘crowd out’ intrinsic motivation, undermine teamwork, and encourage individuals to focus on certain measures at the expense of others.

Embedding an entrepreneurial or high-performance culture across an organisation

PRP can send a message to employees about what achievements the organisation wants and is prepared to reward, although there are other (non-monetary) ways of communicating the need for high performance. Communication can also suffer as employees feel constrained about having open conversations with their line managers in case this influences the size of their pay rise.

The notion of equity or fairness

There is more widespread acceptance of the effectiveness of PRP in this respect, that people consider it right that higher performing employees should get more money, but there are some notable differences by sector. CIPD survey finds private sector workers are more likely than their public sector counterparts to want their rewards to reflect performance. However, if pay for some individuals is not perceived as reflecting their performance, other employees may see this as unfair.
 

PRP typically uses a system based on consolidated pay progression within pay brackets attached to each grade, level or zone.

However, for performance to be rewarded, it’s necessary to have an effective means of measuring that performance. Historically, this has been via performance appraisal, though more recently some employers have used less formal approaches to appraise performance, such as using rating-less approaches.

In traditional performance appraisal, each employee’s performance is typically ranked on a scale, incorporating three to six categories, ranging, for example, from ‘unsatisfactory’ to ‘superior’ (sometimes using ‘forced’ distributions, as detailed below). Some systems allow for management discretion in translating these scores into levels of pay rise, while others determine increases through a formula or a matrix system linking each grade, level or zone to each of the performance categories. This method may involve the use of a comparison ratio, or ‘compa ratio’, the term given to the relationship between each employee’s current salary and the mid-point of their grade. Thus, for a worker at the mid-point of their pay range, the compa ratio is 100%.

It’s often felt appropriate for the pay rises associated with each performance category to be higher for employees at lower points within the pay brackets, given the presumed existence of a learning curve for new entrants to a grade. However, more senior employees who’re performing very highly may resent the award of comparatively low percentage pay rises.
 

Performance-related pay or PRP to be effective, employees need to perceive a clear and prompt link between the effort expended and the reward that will be obtained, and to feel that the level of reward on offer is worth the effort.

The key issues for employers implementing PRP include the following:

Objectivity/consistency of line managers

The role of the line manager is key to the effective implementation of PRP, and this group should be involved at an early stage in designing systems to ensure consistency and transparency when assessing performance. Some schemes try to eliminate marking differences between ‘hard’ and ‘soft’ managers using ‘forced distribution’ arrangements, that is insisting that all managers band a certain proportion of staff in each performance pay grouping (for example, 10% ‘poor’ and 10% ‘superior’).

Ensuring objectivity is also important to avoid rewarding favourites. Particularly serious is the potential for unlawful discrimination. It’s important for appraising managers to be aware of the impact that unconscious bias can have through training/awareness and for monitoring of merit pay awards to take place (for example by gender, ethnicity, age and so on).

Distribution of pay awards

As some HR commentators have noted, pay is not the only motivating factor, or even the most important one, for some employees. And the performance element of pay is often relatively small, particularly for those relatively middling performers who will form the bulk of the workforce. The problem is accentuated during times of low inflation when the pay bill increase is usually limited to relatively small percentage figures. Even where PRP may have a motivational impact for high performers, the corollary can be the demotivation of the lower or middle level performers. Therefore, it’s important to consider the issue of pay award distribution.

Identification of development needs

A major concern is that linking pay awards to the performance review process may inhibit an open and honest discussion of an individual’s training and development needs. One solution is to separate the pay review aspect of performance measurement from the broader performance/development review, for instance, by holding separate meetings some weeks or months apart.

Time-consuming nature

The processes associated with PRP, such as performance appraisal, can be administratively very time-consuming. In general, it’s important to allow sufficient time away from day-to-day duties for managers and employees to be able to engage in the PRP process effectively.

Undesired impacts on employee behaviour

Behavioural science finds that whilst financial incentives can increase worker performance, they may also drive out intrinsic motivations, such as the desire to do a good job. Or they may incentivise people to focus on some targets (such as customer service) at the expense of others (such as sales). Research indicates that linking pay to both individual and team performance may be better than just focusing on one or the other.
 

The payment of bonuses and cash incentives is generally linked either to the quality and/or quantity of work, on an individual or collective basis, or to some measure of company performance such as profit levels (or both).

Schemes may be broadly divided into the following categories although definitions vary, may overlap or be linked.

• Individual-based – payment of the bonus/incentive is calculated by some measure of individual performance, hence there should be a considerable incentivisation effect. Sales commission could be included within this category (although this may be regarded as a distinct form of remuneration in its own right).
• Schemes driven by business results often use company profit levels as a measure to help determine bonuses.
• Team-based – link the bonus with some measure of team performance, often with the aim of fostering effective team working.
• Ad hoc/project based – might be used when a particular deadline is important, for example, to reward construction workers for completing a building project on time, although such schemes may be open to manipulation.
• Department/site-based – payments which could be used to reward, for instance, factory workers who attain productivity improvements in one particular plant of a firm.
• Gainsharing – based on the idea that employees should be able to share in financial gains achieved through improved performance (particularly enhanced productivity).
• Combination – based on a combination of two or more of the above programmes.

There’re also specialised bonuses for example, holiday season (such as Chinese New Year, Christmas), attendance and retention bonuses.

According to CIPD’s Reward management surveys, many employers operate some form of cash-based bonus or incentive plans. However, such schemes are far more common in the private sector than in the public or voluntary sectors. The most popular arrangements include individually based plans (for example, personal performance or commission), plans driven by business results (such as profit) and combination schemes.
 

Many employers offer a wide range of benefits from traditional items such as paid leave and occupational pensions to newer elements such as concierge services.

There are various reasons why benefits are offered, including to: match market practice, provide workers with some measure of health or disability security, or retain employees. Some benefits can be tax-efficient methods of remuneration via salary sacrifice provisions. Share schemes are one specific option for attracting, retaining or motivating senior managers as well as employees.

Flexible and voluntary benefits schemes

Flexible benefits schemes allow employees to vary their pay and benefits package to satisfy their personal requirements.

Voluntary benefits (where employers arrange for the purchase of goods and services, often at a discount, by employees) are more widespread than flexible benefits, partly as they have no cost to employers beyond set-up and administrative costs.
 

While pay and benefits are important, and getting them wrong can have adverse consequences, they are not the only rewards that employers should consider. Research shows that non-financial rewards can be just as important. These include:

• good performance management and appraisals
• opportunities for personal and career development
• flexible working (such as working from home)
• being involved in decisions that affect how and when employees do their work
• recognition, such as through an ‘employee of the month’ award or team-based events

Reward strategies that mix non-financial provisions with pay and benefits are often known as total reward approaches
 

It’s sometimes argued that cash may not be the most effective means of motivating employees as it doesn’t necessarily motivate them to ‘go the extra mile’ in their current role. Non-cash incentive schemes, based on the receipt of a gift or prize, are arguably more memorable and exciting, and therefore have greater impact.

Typically found in customer-facing industries, non-cash incentive schemes may be based on the use of a single prize to be won by the highest-performing individual employee or encompass a range of awards recognising different levels of achievement.
 
The benefits of using non-cash incentives include:

• Affordability – such programmes may be more affordable than alternatives such as cash bonuses.
• Simplicity – it is easy for a sales employee to understand that, say, selling so many phones will result in them receiving whatever the latest gadget is.
• Psychological impact – it’s acceptable for employees to speak openly with pride about the winning of gifts in a way that would be considered by many to be socially unacceptable it they were seen to be ‘bragging’ about their cash bonuses.

On the downside, drawbacks may include:

• Lack of credibility – such prizes may not be taken as seriously as cash.
• Lack of employee awareness – employees may be less conscious of the value of non-cash incentives over ‘hard cash’ especially when living standards have fallen significantly.

 
Types of non-cash incentives

The main types of non-cash incentives may be broadly divided into:

• merchandise such as tablets, mobile phones or watches
• activities/special events such as meals out, hotel spa accommodation/treatments or a trip to a sporting event.
• travel for example an all-expenses paid trip
• retail vouchers which are often obtainable at a discount to ‘face value’
• awarding points that may be converted into a range of awards.

It’s worth noting that the last two of these categories might not be strictly regarded as ‘non-cash’ items.

Selecting a supplier

Numerous suppliers of non-cash incentives exist. Such organisations often provide a wide-ranging service encompassing not only employee non-cash incentives but also other employee schemes such as recognition and team-building activities.

Tax implications

Employers need to consider the tax implications of implementing a non-cash incentive scheme as they can be subject to income tax over a certain level.