Calculating a return on investment for total reward can be tricky, so collating data is key, says Debbie Lovewell
With so many organisations now aspiring to the title ’employer of choice’, each is under pressure to differentiate themselves from the competition. Inevitably, this often prompts employers to subscribe to the latest benefits ‘must have’.
Total reward is one phrase that has been flying around the industry in recent years, but its exact definition is still something of a grey area. Regardless of its interpretation, however, the philosophy behind total reward is invariably the same: to enable employers to implement an over-arching strategy for all elements of reward. Where differences arise is usually over just what employers choose to include under this umbrella. Jim Crawley, principal at Towers Perrin, explains: “It is about creating a deal that is not replicable and is unique to the organisation.”
Regardless of what the end design actually looks like, when it comes to devising and implementing a total reward strategy, employers typically follow a fairly similar process. One of the first tasks to consider is what elements of reward employees are most likely to value. This should involve an in-depth process of data collection looking at factors such as the business’s existing reward package, attraction and retention rates for high-calibre employees, and employee feedback on benefits, both in terms of the current package and what staff would like to receive.
Cathy Monaghan, head of HR at PES Consulting, explains: “It’s about looking at the employee base. An organisation wouldn’t make commercial objectives without researching it first, therefore, [it] shouldn’t do the same for its employee proposition.”
Employee focus groups, staff attitude surveys and exit interviews are all good ways of collecting this information, while the benchmarking of the package against competitors can help to identify any areas in which an organisation may be falling behind.
At this stage, employers should also consider the impact of their existing reward strategy on issues such as staff recruitment and retention, engagement, performance, loyalty and motivation. Gathering this base data means it will be much easier to measure the return on a new total reward strategy at a later date, particularly if it includes information on the overall cost of the organisation’s reward strategy, the cost per employee and the profit per head. This will also enable employers to compare the impact of any new approach on benefits to the existing package and determine which is most effective, or best suited to their business needs.
James Taylor, business development director at Ceridian, explains: “[Organisations] have to understand why they are doing [total reward] and what their business reason is for doing it so they can measure against it when it is in place. We [see] a lot of organisations that find staff have a lot of historical and local benefits arrangements.”
Having a clear picture of existing perks helps employers to determine how large a job the move to total reward is likely to be, and whether or not it will simply involve repackaging existing benefits or introducing new contractual perks.
Information on the benefits will inform an organisation’s decision about whether to carry out the move to total reward in-house or use a third-party provider or consultant.
This process of data collection can be as detailed as employers want, says Monaghan. “There are no barriers as to what you can include in this.”
Once employers have completed this process, the next step is to decide how public they wish the terms of the total reward strategy to be among their workforce. One option is to be totally explicit so that staff are kept fully aware of the move to total reward and the estimated value of all elements of the package offered to them, while, the alternative, at the other end of the scale, involves providing all the same perks for staff but managing them on a much more low-key basis.
Both approaches have their pros and cons, so the decision will largely depend on an organisation’s culture. One of the problems with being too implicit, for example, is that employers run the risk of staff overlooking some elements of their package and not understanding the full value of what they receive.
If opting for a more explicit approach, however, employers should ensure that employees’ expectations of what they are due to receive remain at a realistic level. Failing to do so could result in a demotivated and disillusioned workforce. Mark Childs, director of Total Reward Solutions, explains: “[Employers] should do it because they want employees to understand that the value of coming to work is [worth] more than the mechanical pay and benefits.”
Implementing and managing this type of over-arching reward strategy, meanwhile, requires co-ordination between the departments responsible for managing each of the perks. Finance, for example, will often be involved alongside HR, while benefits such as pensions, share schemes and company cars may be managed by separate teams.
“I think HR’s function in life is to understand what reward is and to negotiate all elements. There has to be co-ordination and accountability in one place or it becomes a mire,” says Monaghan.
Co-ordinating the strategy centrally can also help employers to build a single brand for their reward package. “One person, or a group of people, needs to provide central leadership. You need a brand ambassador to marshal owners of the elements. And it’s tough. If you can get your resourcing, development and reward people all joined up, you’re much more likely to [create] a brand identity,” explains Childs.
But opinions continue to differ over what precisely a total reward strategy should include. Broadly speaking, total reward can consist of anything that employees are offered by their employer, including pay, tangible benefits such as pensions, training and development, and intangible elements such as organisational culture, the working environment and management style. Flexible benefits scheme are also often included.
Martha How, head of reward at Hewitt Associates, says: “[Flex] will certainly enhance the total reward offer as it gives employees the chance to say ‘I’d like more of this or more of that’.”
The intangible components are likely to be just as valued by staff as some of the more traditional benefits. Malcolm Higgs, director of the school of leadership, change and human resource management at Henley Management College, says: “Increasingly, the climate they are working in, [means that], by and large, traditional elements of reward don’t necessarily recruit and retain people in the long term, but intangible elements do.”
Operating a total reward strategy may help to alter the way employees think about their reward package, which, in turn, may boost their perceived value of what they receive. Where, for example, an organisation is unable to offer staff a pay rise because it has heavily invested in other perks, such as its pension scheme, then this fact, under a total reward strategy will not be lost on staff.
Adrian Houlihan, flexible benefits manager at Origen, explains: “It can help an organisation in helping staff to understand where it is spending money. It helps employees to see that if there are trials and tribulations, then they are sharing in those but are still getting [things such as] pay rises.”
Understanding what is on offer can boost employees’ engagement and loyalty to their employer. In turn, this will help to build an organisation’s reputation, which will have an impact on staff recruitment and retention. Ultimately, all such factors, if measured correctly, will produce a return on the company’s investment in total reward. “If you get employees through [word of mouth] recommendations, that saves you money [on recruitment costs],” explains Higgs.
But employers should also be aware that not all employees will respond positively to total reward. Highlighting the exact value of their package, for example, may flag up to some staff that they are not receiving as much as they may have previously thought, all of which will need to be taken into account when producing cold hard figures.
Calculating an exact return on investment (ROI) for total reward, however, can be a tricky process, although it is not impossible. “The ROI will be unique to the organisation. But it is key to understand how you are going to measure that,” says Taylor.
A key starting point for employers will be analysing the difference in figures for staff turnover, engagement, performance and productivity before and after the introduction of total reward.
“You can then link these attitudinal outcomes to business outcomes, [such as] sales growth and customer service,” says Crawley.
Employers must therefore take into account various factors in trying to obtain the best possible results from a total reward strategy. The good news is that there is not one standard format that has to be followed in order for a scheme to succeed.
“It’s about making sure each part is delivering in line with what you are trying to do. You need changes to be communicated consistently. If you know what you are trying to do, it can be delivered in different ways as long as you’ve still got an over-arching strategy and the messages going out are consistent,” concludes Higgs.
Case study -†DHL repackages perks
DHL Express is gradually implementing a total reward strategy.Although the delivery company began to develop its scheme in 2004, various factors such as its unionised environment meant that it only began to put this into practice last year. The first step was its introduction of a voluntary benefits scheme last September, which was followed by total reward statements in January. The last phase of the programme is a flexible benefits scheme, for which employees’ choice of perks are due to come into effect in April.
Craig Truter, reward and recognition manager, says: “We are still at the beginning of this. It could take a couple of years [to fully develop] and move in different directions.”
The total reward scheme, which is branded ‘You Drive’, is divided into four main areas covering: money, health, career, and lifestyle perks.
Truter explains that, while it can be difficult to place an exact value on some factors, a number of tangible and intangible measures are used to help calculate the strategy’s return on investment (ROI). These include: employee take up, the organisation’s savings from salary sacrifice benefits, turnover and recruitment costs, and the scheme’s impact on staff retention.
Return on investment
- Factors that employers can use to calculate total reward’s return on investment include:
- Employer’s national insurance savings on salary sacrifice benefits
- Employee engagement
- Motivation and morale