HRMN 395-Week 1: The Total Rewards Model

Module 1: The Total Rewards Model

Topics

Topic 1: What is the Total Rewards Model to Compensation Management?
Topic 2: The Change to Total Rewards
Topic 3: The Critical Link of Strategic Objectives and Rewards
Topic 4: Why is the Total Rewards Model Successful?
Topic 5: Conclusions

Topic 1: What is the Total Rewards Model to Compensation Management?

Think about what might attract you to work for a particular organization. Why would you choose one organization over another, if given the opportunity? Which organization offers you the elements surrounding your work experience that you value most? Your answer probably is not salary alone, but many other elements in addition.

The elements you consider of value when you compare different organizations’ offerings are unique to you. They are holistic and comprehensive. It is not merely the pay and a few basic benefits that attract potential employees, but a wide array of rewards known as total rewards.

Take a look at the following list of items that most influence employees’ commitment and motivation. While the study, conducted by Mercer (2007), surfaced some similarities, there were certainly also many differences. For example, the global study found that while workers in Asia valued base pay above anything else, workers in the United States valued other factors, including work-life balance, being treated with respect, and benefits, more highly than money alone. There were also differences among the generations. While employees of at least 60 years of age (known as the Traditionalists) value security and company loyalty most highly, employees between 18 and 29 (the Millennials) tend to value their contributions and learning opportunities, and thus are more willing to change jobs repeatedly, while those between the ages of 30 and 42 (Generation Xers) tend to value the work-life balance most highly (Mercer, 2007, p. 3).

Table 1.1 What Employees Value

• Being treated with respect
• The type of work that you do
• Work-life balance
• Benefits
• Working in an environment in which you can provide good service to others
• Base pay
• The quality of the people you work with
• Long-term career potential
• Having flexible working arrangements
• Learning or training opportunities
• Promotion opportunities
• Variable bonus/incentive bonus

Source: Mercer’s What’s Working Global Employee Survey (2007)

As you reflect on what motivates you to choose one organization over another as your place of employment, which of the items from this list would you rank as the most important? Be prepared to answer this question if your professor asks it.

This discussion of why individuals select one organization over another is at the core of our discussion of the total rewards approach to compensation management. In order for organizations to attract, retain, and motivate employees with the requisite knowledge, skills, and abilities (KSAs) needed for organizational success, a satisfying mix of the monetary, non-monetary, and the overall work experience must be offered. Of course, what we have just shown, as you thought about what satisfies you, is that it is imperative to know which segment of the population desires what mix of rewards. Without this data, there cannot be targeted marketing.

Definitions of the Total Rewards Model

For the purposes of this course, we will use the following model and definition of the total rewards model to compensation management. Imagine the total rewards philosophy for the organization in the middle of a circle, with the following shown as elements around it.

Figure 1.1
Total Rewards Model

The graphic depicts the relationship among the organization’s objectives; the requisite knowledge, skills, and abilities; the pool of potential or current employees; the individual elements that can be offered, including monetary, non-monetary and other work experience elements; and the feedback system of total reward metrics in order to determine the total rewards philosophy for the organization. The total rewards approach to compensation management is strategically planning a targeted reward package to successfully attract, retain, and motivate segmented populations of employees who possess the requisite knowledge, skills, and abilities (KSAs) needed to achieve the organization’s business objectives.

If we look at some of the individual elements of the monetary rewards, the non-monetary rewards, and the work experience of value to employees, we see that there are a large number of them. Take a look at table 1.2:

Table 1.2 Rewards and Experience Employees Value

This chart depicts the many rewards that are included in the total rewards approach to compensation management. Later modules will explain each of these individually and how they align holistically and comprehensively to attract, retain, and motivate employees.

Because total rewards is a fairly new and still emerging perspective, a review of what exactly is meant by total rewards is helpful to the overall understanding of the larger process of strategically planning our total rewards. We also acknowledge that the total rewards concept is also sometimes known by other names, such as the employer/employee value proposition, the psychological contract, the employer brand, total remuneration, and total value. However, the term total rewards seems to be the name most commonly used, according to a survey taken by Mercer (Salopek, 2008).

We begin with a definition by Stacey Kaplan (2007), who states that “total rewards encompass everything that an employee values in their employment relationship: compensation, benefits, development, and the work environment” (p. 4). Kaplan finds that while effective total reward systems offer both current and potential employees the holistic intrinsic and extrinsic rewards they want, those rewards must also be aligned with the objectives of the organization in order to justify the offerings. This means that human resources staffs that are designing the total rewards package must be familiar with the strategies of the organization and the requisite KSAs to fulfill those objectives. Furthermore, they must identify and understand the unique wants, needs, and desires of the people they are trying to recruit. They need to know in detail what rewards would attract, retain, and motivate those who possess the needed KSAs.

Other contemporary authors continue this review of the general view of total rewards. For example, Richard Kantor and Tina Kao, in an article titled Total Rewards: Clarity from the Confusion and Chaos (2004, p. 9) share the broad definition of total rewards as rewards that “encompass everything that is rewarding about working for a particular employer or everything employees get as a result of their employment.” In an article titled Retention Buzz, Jennifer J. Salopek recognizes that employees are viewing employment from a “what’s in it for me?” perspective. It is no longer merely, “show me the money!” as was the case in the popular Jerry Maguire movie, but show me everything and anything that is going to satisfy ME!

Manas and Graham (2003) also touch on the plethora of offerings approach when they state that total rewards are analogous to offering 31 flavors in order to satisfy all tastes! They explain that “the more broadly rewards are defined, the more likely you are to touch upon what motivates the broad constituencies represented by your employees” (p. 1). In this course, however, you will see how we take the view that we cannot offer the “31 flavors,” but will rather determine what flavors are desired by the individuals with the requisite KSAs, and will offer those flavors. Manas and Graham (2003) go on to define total rewards as beginning with total remuneration, which includes all the elements of rewards that can be valued in dollar terms; non-cash rewards that are part of the employment compact that they define as “an agreement or covenant … that reflects the unwritten contract that exists between an employer and an employee for the exchange of value” (p. 3). The non-cash rewards that make up the compact include affiliation, quality of work and life, training, and development.

Ann Black (2007) touches on the value relationship of the rewards offered when she shares that “the concept of total rewards goes beyond the traditional view of benefits to include everything the employee perceives to be of value that results from the employment relationship. These total rewards packages include not only compensation and benefits but also work/life programs, employee recognition programs, and developmental and career opportunities” (p. 33).

Mercer sums up the current thinking about total rewards and its significance for the future well. The quote is from a white paper shared on Mercer’s web site (October, 2007, www.mercer.com). Mercer states that “the companies that succeed in the future will be the ones that are able to attract, engage, and retain the people they need in a way that is sustainable from a cost perspective.” They assert that organizations must develop “a total rewards strategy that acknowledges a broader interpretation of rewards with differing appeal to employees,” including compensation (base pay, short- and long-term incentives, and recognition awards); benefits (health and other group benefits, retirement plans, work-life programs, and perquisites); and careers (performance management, career pathing, training and development, talent review, and succession planning).

Before the focus of this module changes to how we evolved to the holistic and comprehensive offering of total rewards, it is enlightening to look at what as early as the 1970s, Ed Lawler, III, found to “suit the needs of a model for the importance of pay” (1971. p. 25). Lawler stated that it was not pay that satisfied the needs, but rather what the pay manifested; for example, variable pay might allow an employee to be recognized before others (leading to positive self esteem) or team incentives to allow a person more identification with a group. The list of needs published by Abraham Maslow (1954) as a hierarchy of needs was what Lawler used as his context and is still a model used today by many organizations to help them identify rewards that satisfy all the needs of the employees they seek.

Organizations are able to link their rewards to each level of Maslow’s hierarchy of needs described below. In an article written for WorldatWork, Kanter and Kao (2004, p. 12) explain how each need can be satisfied by a reward offering. Starting at the top of the hierarchy, for example, advancement/growth/ affirmation links to self-actualization, interesting and challenging work to aesthetic needs, learning and development to cognitive needs, recognition to esteem needs, and affiliation and coworkers to belonging and love. Financial security and health and welfare benefits are related to safety and security needs. At the bottom of Maslow’s hierarchy, hourly wage or base salary relates to psychological needs.

Figure 1.2
Maslow’s Hierarchy of Needs

Topic 2: The Change to Total Rewards

According to Henderson, “in 1936, a steelworker received $4.32 per day” for a hard day of work (2008, p. 30). This base rate of pay was with no time-and-a-half for overtime, no hospitalization insurance, no paid leave time, and no pension. The philosophy at the time was to offer the least amount of money for the skills needed and if the employees did not produce, there were plenty more where they came from.

Today, organizations carefully craft their rewards philosophy to be competitive, to stand out, and to hire the employees that possess the needed knowledge, skills, and abilities to make their organization competitive and to achieve its objectives. It is commonly recognized that “the outdated reward system that recognizes basic pay and common benefits is not enough in today’s approach for attracting, retaining, and motivating the requisite talent needed for organizations to succeed” (Kaplan, 2007). We know we are in a new era of compensation management, but what has caused this dramatic change in rewards philosophy? Like so many changes in business in general, and the human resources practice specifically, four trends are leading factors for the move.

Factors Influencing the Evolution to Total Rewards

Now that we have taken a brief look back at how rewards were once regarded, we will look at the trends that moved the United States toward a total rewards model. While we will not discuss all of the factors that influenced the change, we are including some of the major ones that moved employers to move from mere pay to attract, retain, and motivate employees. These factors influencing the evolution to total rewards include demographic shifts, globalization, technology, and competitive factors. Of course, there are other factors we are not mentioning here, including increased governmental regulation, policies, and programs, as well as the increase of union influence in employment practices.

1. Demographic shifts include “declining workforce growth, increasing age of the workforce, changing gender balance, increasing ethic diversity, and deteriorating family economic health” (Ulrich & Brockbank, 2005, p. 36). These changes result in a diverse population, and where there is diversity there are different needs, desires, and wants. What an organization offers will attract some segments of the diverse population, but not others. For example, older workers will likely prefer health care insurance and retirement benefits, whereas younger workers will likely prefer alternative work arrangements, training, and upward mobility. The need for organizations to think strategically about population segments and how to attract the segments with the needed KSAs is clear.
2. Globalization is another important factor driving the need for the shift to a total rewards model. Not only is competition global today, but the labor market is as well. When human resources professionals design their reward offerings, it is no longer enough to offer rewards and practices traditional to employees in the United States; they must consider the cultural differences that will drive what is attractive and competitive to employees in other countries as well.
3. Technology is “the application of knowledge to the transformation of things into other things (and it) drives almost every aspect of the changing business environment” (Ulrich & Brockbank, 2005, p. 22). Technology has made information and production move faster, improving efficiency, increasing connectivity, and making customization possible. For our discussion of total rewards, technology allows employees to be much more informed not only about their own organization’s offerings, but also the offerings of global competitors. Technology makes it easy for someone to apply for positions. Technology supports an organization’s communication plan about its rewards to both current and potential employees. Technology has made it possible for organizations to give what many want, such as alternative work arrangements. Technology is not only one of leading factors driving the need for a total rewards model to compensation management, but is also a key factor that allows the total rewards model to be successful since the labor market is now global.
4. Competitive forces are present today and economic pressures see no likelihood of diminishing, so costs are always examined closely. As competition increases in the United States, companies realize that it is easy to move production into other countries. Whether it is products they are producing or services they are providing, there are workers in other countries ready and able to take on the activities. One impact of the increased competitive forces is that organizations must be prudent in their total rewards budget; there is not room for offering rewards with no value in recruiting, hiring, or motivating employees. There is no reason to waste money on offerings that do not help the organization attract, retain, and motivate the talent needed to achieve the organization’s objectives.

Topic 3: The Critical Link of Strategic Objectives and Rewards

Loree Griffith, a principal at Mercer, is quoted in Salopek (2008) saying alignment (of rewards to business objectives) is “making sure what you are doing on the people side (of your business) is important to satisfying your business goals, motivating and driving your employee population to do certain things.” We know that competition for employees is increasing because of the shifts in demographics and competition is increasing due to global economic concerns, therefore the money spent on rewards must lead toward the success of the organization or it is monies ill spent.” Mercer (2006, p. 1) shares that “it’s a matter of focus. With finite resources to spend on compensation, organizations need to invest these resources in a way that makes sense for the business and drives future success.”

Two organizations that use the total rewards approach to compensation management successfully are depicted in the Company Spotlights below. We feature Exxon Mobil and Google, both of which are on the 2007 Fortune 100 Best Places to Work, with Google being ranked first. Both companies demonstrate how they have made the critical link of their organization’s business objectives and the rewards they offer in order to attract, retain, and motivate the employees they need.

Company Spotlight: Google

In her article, Business Strategy, People Strategy and Total Rewards – Connecting the Dots, Stacey Kaplan (2007) shares how Google takes a total rewards approach and achieved Fortune magazine’s top ranking on their list of the best companies to work for in 2007. She describes the offerings to Google’s employees as an “incredible mix of quirky and traditional employee perquisites … to drive productivity by attracting high achievers who are willing to spend most of their time at work.” The partial list includes company-paid gourmet meals, a 24-hour gym, an in-house doctor, and concierge services such as dry cleaning and on-site massages. Kaplan goes on to state that Google’s strategy makes the employees feel valued, which helps with attracting and retaining the talent needed to achieve Google’s business strategy.

Company Spotlight: Exxon Mobil

In his book, Employee Benefits: A Primer for Human Resource Professionals, Joseph Martocchio (2008) shares how Exxon Mobil aligns its business strategy, its human resource strategy, and its strategic benefits plans. See if you can find the link in the following descriptions:

Business Strategy: The Exxon Mobil Corporation is committed to being the world’s premier petroleum and petrochemical company. To that end, we must continuously achieve superior financial and operating results while adhering to the highest standards of business conduct. These unwavering expectations provide the foundation for our commitments to those with whom we interact.

Human Resource Strategy: Exxon Mobil is a dynamic, exciting place to work. We hire exceptional people, and every one of them is empowered to think independently, to take initiative, and be innovative. Our employees thrive on change, new technology, and synergistic partnerships both inside and outside our company. And while the work is exciting and ever-changing, we know there’s a time when work ends and life kicks in.

Strategic Benefits Plans: In return for your intelligence, ingenuity, and passion, here are the rewards that await you at Exxon Mobil: outstanding compensation, benefits, and employee programs, as well as a satisfying balance between career pursuits and personal interests outside of work. We also offer resources and support for ongoing development, growth, and success.

The strategic imperative of the total rewards model is the focus on the business objectives and linking rewards that target the population possessing the requisite KSAs. How to design total rewards through this strategic process is the subject of a later module.

Topic 4: Why is the Total Rewards Model Successful?

Most of the employers on Fortune magazine’s annual list of the best companies to work for in the United States have designed total rewards strategies rich in non-monetary rewards, such as flexible working arrangements, developmental opportunities, and fun office perks. By being included in the well-publicized list and by offering the total rewards they do, the organizations are afforded a heightened visibility as a preferred employer, which assists them in recruiting, retaining, and motivating the talented people they want. Kaplan (2007) states that research shows that higher- rated employers tend to receive more employment applications, thus making recruitment easier. Kaplan also states that these higher ratings often translate into improved retention and enhanced profitability, because engaging employees typically provide the best customer service.

The case for organizations to design and implement a total rewards model is evident. The total rewards model provides the strategies needed to address diversity shifts, globalization, increased competition, and technological advances. Total rewards provides for the needed change from the limited view of rewards to the expanded view.

Total rewards help to manage costs and to ensure that money spent is used effectively on the right offerings. Previously organizations would often respond to retention issues with cash rather than including some of the non-monetary rewards that are less costly but valued by employees (such as flexible schedules). Total rewards supports identifying and moving away from ineffective programs to those that help drive the business forward.

The total rewards model assists organizations in addressing the diversity of the population by first understanding the needs and then offering elements in the work experience that fit the needs. For example, there is stronger emphasis on job enrichment, flexible work schedules, and the overall work environment. A total rewards approach better addresses many of these varying employee needs.

The most compelling reason the model works, however, is because the monetary and non-monetary offerings, which were once perhaps randomly decided, are strategically determined to help the organization achieve its business goals in the total rewards model. Also beneficial to success is the marketing approach that identifies what customers want. It is several elements together that make the model the success that it is. As Kaplan (2007, p. 1) states in her article titled “Business Strategy, People Strategy, and Total Rewards: Connecting the Dots,” many executives are quick to introduce a new type of compensation or benefit program because they’ve heard about it in the news or through a colleague. However, this program may just be the latest plan du jour, not fitting within their organization’s strategic direction. It is important to identify and implement programs that bring an organization further along its strategic plan.

There is no surprise in that the top employers on Fortune’s Top 100 Best Places to Work list use a total rewards model. They use it because it works to attract, retain, and motivate the talent needed to allow them to hold a competitive advantage. The two spotlight companies we looked at (Exxon Mobil and Google) demonstrate this.

Topic 5: Conclusions

For purposes of this course, the definition of the total rewards model to compensation management is: strategically planning a targeted reward package to successfully attract, retain, and motivate segmented populations of employees who possess the right knowledge, skills, and abilities (KSAs) needed for accomplishing the organization’s business objectives. The total reward package is one that is not only monetary rewards, but also includes non-monetary rewards and other important elements of the work experience. Together they make up the holistic experience of working in a given organization. The trends of increased diversity, globalization, technology, and competition requiring a more sophisticated planning process for employment will continue to drive the need for human resource professionals to apply the marketing approach to their offerings. The application of the total rewards model to compensation management will continue to benefit those organizations that use it effectively.

References

Black, A. (2007). Total rewards, Benefits & Compensation Digest, November, pp. 32-36.

Henderson, R.I. (2008). Compensation management in a knowledge-based world. New Jersey: Pearson Prentice Hall.

Kantor, R., and Kao, T. (2004). Total rewards: Clarity from the confusion and chaos, WorldatWork Journal. Third quarter, http://www.worldatwork.org

Kaplan, S. (2007). “Business strategy, people strategy and total rewards: Connecting the dots,” Benefits & Compensation Digest. Brookfield: Vol. 44, Issue 9, p1, 13.

Lawler, E. E. III (1971). Pay and Organizational Effectiveness: A Psychological View. U.S.: McGraw-Hill.

Manas, Todd M., and Graham, M.D. (2003). Creating a total rewards strategy: A toolkit for designing business-based plans. New York: AMACOM.

Martocchio, J. J. (2008). Employee Benefits: A Primer for Human Resource Professionals. McGraw-Hill Irwin.

Maslow, A. H. (1954). Motivation and personality. New York: Harper.

Mercer. (2007). “Compensation trends of the future: Designing a sustainable global total rewards strategy.” White paper. Retrieved March 1, 2008, from http://www.mercer.com

Salopek, J. (2008). Retention buzz, Training and Development. Alexandria: January, Vol 62, Issue 1, pp. 23-25.

The WorldatWork (2007). The WorldatWork handbook of compensation, benefits & total rewards: A comprehensive guide for HR professionals. New Jersey: John Wiley and Sons.

Ulrich, D., and Brockbank, W. (2005). The HR value proposition. Boston, MA: Harvard Business School Press.