What is Total Reward?

Total reward has been around for decades, but there is a large degree of conjecture. Laverne Hadaway discovers it’s about emphasising the full benefits of an organisation and tracks its growing influence.</b>

Case Studies: BT, Royal Bank of Scotland 

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Every so often, a buzzword crops up that seems deliberately designed to confuse. Total reward is one such phrase which, despite its frequent use, many would struggle to define. So is it a genuinely useful idea that can transform businesses, or merely consultant speak designed to squeeze more money out of employers?

No one seems to know where the concept has come from, but many people seem to think that it originated in the US. Although most organisations claim to have used the term for at least five or 10 years, Aon claims to have used it for at least 20 years.

Eddie Hodgart, a consultant at Watson Wyatt, says: "Total reward is a philosophy; it’s not something you implement. It’s more about the steps you put in place out of a total reward feasibility study and project. You never implement it, you simply highlight the changes that need to be made as a result of the study."

Hodgart has conducted in-depth surveys on the subject as well as having been hands-on in various clients’ total reward projects. Nevertheless, the concept can seem a bit like a marketing gimmick, rather than a serious way of measuring a company’s performance and ultimately adding to its bottom line.

From definitions gathered from the big five consultancies it can be seen that total reward encompasses all the benefits that employees gain from their labour, ranging from basic financial rewards, such as pay, bonuses and overtime payments, to traditional employee benefits, such as private medical insurance, holiday entitlement and pensions, and even more nebulous concepts such as the working environment and job satisfaction. Finally, it encompasses the communication of the value of these different aspects to employees together with their perception of this value.

The basic salary aspect is probably the easiest to quantify. But while hard financial rewards are important to employees, consultants acknowledge that there is more to work than money. Chris Charman, a consultant at Towers Perrin, says: "Employees come to work at a company for the pay and benefits but once they are working, they have to be engaged to deliver more."

Employee engagement is another concept associated with total reward. Charman cites the example of one high street retail firm which found that for every £100 it spent on base pay and bonuses, it was only getting back around half the value. The best return on investment, in terms of employee engagement, lay in some of the less easily measured aspects of reward.

While employee benefits really came to the fore in the 80s and 90s, many firms have begun to think about total reward as they assess the benefits they offer to employees. It may be that firms are looking to revamp their benefits package and perhaps introduce flexible benefits, which are often associated with total reward. Mergers and acquisitions can also set an organisation off down the total reward route. The need to bring together different terms and conditions will require an assessment of which benefits do and which don’t work.

Lynda Hatcher, a consultant at Ceridian Centrefile, says: "Employers are under pressure to look differently at the reward packages with which they attract and retain people." She cites the problems and expenses of traditional benefits packages, such as the pensions crisis, as factors in the move towards total reward.

However, it can be much harder to measure the less tangible environmental elements of working in a particular place. "The working environment is about how it feels to work in a company or an organisation. There’s the employment brand. How does it feel if you’re at a barbecue and you tell people where you work? People in the charity sector are happy with the values of their organisation and the fact that they are making a difference," explains Towers Perrin’s Charman.

Other aspects of this element of total reward can include learning and development opportunities as well as the chance to become involved in interesting work. When the Treasury looks at total reward for its employees, for example, it considers pay and people practices. Typically, pay in the public sector is not high, but the work-life balance, family-friendly policies, pensions and holiday entitlement can be highly rated. Charman also points to those who work for the Financial Services Authority as another example. The organisation cannot offer the kind of salary commensurate with an investment bank, but it does offer unique work. "That’s a major issue in total reward. You can only do this kind of work at this place," explains Charman.

Another important aspect of the working environment is the quality of leadership or management. Research shows that in the best organisations managers understand the people they manage. They do not simply regard them as units of production.

The role of leadership is vital in the fourth aspect of total reward, the delivery of the message. "It’s important that staff understand the value of the package they have. The value of total reward comes from trying to encourage greater use, take-up and appreciation of reward so [it] can be used effectively," says Ceridian Centrefile’s Hatcher.

Judith Inglis, a consultant at Aon, agrees: "It does matter what you provide and the value will only be as good as the perception of it. You will only get a return if the package is recognised by employees." She admits that the term total reward may be alien to the man in the street, "but he knows what benefits he gets".

Darren Smith, a consultant at Hewitt Associates, describes the communication of total reward as "vitally important to cement the deal between employees and employers". The advantage is that it provides a picture of the value of the whole package. "Normally, pension statements are in one place, share options in another, but with total reward, for the first time [staff] can see everything together in one place and recognise [its] overall value."

Total reward statements, therefore, effectively personalise employees’ pay, benefits and rewards and can be delivered to their homes. Smith explains that it usually has a positive impact and is one of the few times that the HR department receives positive feedback. "It promotes greater employee engagement which can lead to more productive employees, which can add to the bottom line."

But the value of the package is not something only to be communicated to staff, but also offers valuable information to be used by employers. Savvy organisations are measuring and quantifying the pay and rewards that they provide to employees, storing the information and using it to analyse the effect on employee engagement and ultimately how well the company itself performs. Charman describes HR as being "in an exciting phase" because it is easier to measure what effect different aspects of pay and reward have on employee behaviour.

"HR directors’ roles are evolving. In the biggest and best companies, they are asked to take a partnership role, to provide a return on the investment in employees and look at the link between retention and reward," says Aon’s Inglis. Effectively, the role of HR is to measure individual employee reward and aggregate the costs as part of the total reward project so that it can quantify the cost and value to the business. "It’s exceptionally powerful information for a business to be able to compare with its competitors. Not all organisations can measure those things easily as there may be different suppliers for different benefits," adds Inglis.

Today, there is a range of diagnostic tools available to employers looking to quantify and value their reward packages. These include questionnaires, face-to-face interviews and databases of information stored around the business. It is possible to create an engagement index of employees of similar organisations to compare how they perform in relation to industry peers. Anecdotally, research shows that organisations which perform well against their peers have highly-engaged employees. But, employee motivation is not the only factor in how well an organisation does and there is a correlation between business success and employee engagement rather than a causality.

Business performance is also about pricing strategy and selling the right products. However, Charman believes that organisations with highly-engaged employees tend to have better operating margins and a lower cost of goods sold, while their people costs also tend to be lower. The more effectively a company retains its employees, the lower its people costs. In turn, that can have a knock-on effect on the cost of producing goods and services because the employees are likely to be working more efficiently and effectively.

Taking a total reward approach, therefore, has the potential to motivate employees and empower employers. It means that organisations will be able to identify which are the most effective aspects of their reward programme in terms of motivating employees and ultimately enhancing the company’s financial performance.

By all accounts, the total reward approach is growing in influence and increasingly being applied both in the UK and internationally. The main reasons, in the UK at least, are demographic. There is expected to be a fall off in the population of working age and low unemployment means that employers are having to fight harder to attract the most suitable candidates for the job.

Smith believes that firms most interested in taking a total reward approach are those with a high staff turnover where people move around a lot. The financial services industry is one example, but there are projects in many other industries too from pharmaceuticals, to building and construction. Although it is less prevalent among firms with predominantly manual workers, companies such as Transco, for example have also adopted a total reward approach. With demographic patterns as they are, we can expect to see more companies taking the same route.

Vox pop: What is total reward?

Paul O’Malley, European head of total reward at Mercer HR Consulting:

"Total reward is compensation benefits and careers, encompassing training and development. Some people join companies because of the career opportunities and some leave because of the lack of them. Employers should look at balancing compensation benefits with career movement and development."

Judith Inglis, a consultant at Aon:

"Total reward has two parts; in its purest form it’s the entire package of benefits, such as finance, pay, bonuses, cars; employee recognition, opportunities, quality of working life and other non-financial elements. But it’s also about communication. It doesn’t matter what you provide, the value will only be as good as the perception of it. A return relies on recognition by employees."

Chris Charman, a consultant at Towers Perrin:

"Total reward has four quadrants: basic pay and bonuses, long-term incentives; benefits such as pensions and cars, the working environment – physical and cultural – and leadership. It’s a useful way for an organisation to think about delivering employees the things that they value. It’s about taking a holistic perspective of the whole benefit/reward package offering."

Eddie Hodgart, a consultant at Watson Wyatt:

"By total reward, we mean total compensation – base pay plus variable pay, plus additional benefits and the cost of benefit provision, such as pensions, cars and holidays. [It is also] the benefits that are hard to value, such as culture, environment, working time, maternity and paternity benefits, plus the way it is communicated and delivered."

Darren Smith, a consultant at Hewitt Associates:

"Broadly speaking, total reward refers to managing most or all of a company’s reward elements in an integrated way. In other words, proactively integrated design and delivery of each individual reward element is working in concert with other elements in a manner that best supports an organisation’s business strategy and workforce needs. In short, focusing on the whole package and not just the individual parts."

Case study: Royal Bank of Scotland

Bank sees reward approach as safe bet The Royal Bank of Scotland Group (RBS) decided to introduce total reward in the mid-1990s during a period of significant restructuring. This began with the assessment of the financial elements of the package and was completed with the introduction of a flexible benefits programme, known as RBSelect, in 1998.

The group wanted a reward approach that would help drive its people strategy, assist with the development of a new culture and ensure a better understanding of the value of the package at both employee and management levels. In addition, RBS sought to ensure that it had better control and sight of the overall reward cost, which was difficult to achieve [with separate] components.

Jim Cowan, senior consultant within the Remuneration and Benefits practice, says: "We needed to recognise that our people are all individuals and by allowing them choice over how to take delivery of their reward we could ensure they took the best value out of the corporate spend.

"When developing the benefits choice programme, we involved a broad cross section of our people to ensure we had an understanding of what was and was not valued in our previous programmes."

To date, over 90% of employees offered the chance to move to total reward have accepted. Cowan explains that one of the biggest challenges was communicating the changes and how these impacted on individual staff and managers.

Since implementation, the company has successfully identified a proven link between benefit take-up under RBSelect and engagement with the organisation and productivity. "Our annual survey shows that staff respond more favourably to specific questions on reward than they did previously," he says.

Case Study: BT

BT has had a total reward strategy for three years. Its project covers its 27,000 management and professional grade employees and was designed to make the rewards clearer while being more flexible and motivating.

The reward system was restructured as a precursor to introducing flexible benefits in September 2005.

The company began by introducing job families whereby employees with similar roles were assigned a standard benefits package, bonus level and salary range based on the external market. Eighteen job families were introduced, comprising around 300 roles and replacing six or seven job grades and a range of job titles. Also, pay and rewards were based on performance rather than tenure.

As a result, employee attitude scores are much higher. Colin Evans, group reward manager, says: "It has given people clarity and made them feel that we understand what they do. They can also see more clearly how their efforts are reflected in the rewards they get."

He explains that the main challenges were to keep the messages simple, so that everyone understood why the changes were being made; to manage the programme so that it was cost neutral overall and to help managers understand how to use the new structure. The response was positive. There was a lot of interest from employees and more than 500,000 hits on the website. It has resulted in high levels of use of the online total reward statements and a 4% improvement in employee attitudes to rewards.