Employee Benefits Future Strategy 2006 – Sponsor’s comment: The advantage of total reward

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Total reward management is becoming AN increasingly popular buzzword at the moment, meaning many different things to different people. Essentially, the term describes the policies adopted by organisations that seek to integrate the four elements of total reward (pay, benefits, learning and development and work environment).

This broad definition of total reward management, which incorporates policies such as flexible benefits and total reward statements, has two main drivers: one from an employee and one from an employer perspective. Human resources professionals increasingly recognise that effective total rewards strategies have the symbiotic relationship of aligning the employer’s perspective (usually increasing shareholder value) with the employee’s perspective (creating meaningful, rewarding work, which is compensated fairly).

By combining the design, delivery and communication of an employee’s reward package, the employer can derive better appreciation of its investment in its people programmes – thereby increasing the effectiveness and efficiency of the budgetary spend.

By making the investment in its people programmes transparent to employees, organisations can increase the “employee engagement” levels of its workforce. Towers Perrin research (for example, the Global workforce study) and independent client experience, provides evidence that improving employee engagement levels can have a direct impact on a company’s financial performance. This statement is particularly true of organisations that compete on customer service or product and service innovation – the employee-centric areas of competitive advantage.

In the UK, one financial services company has developed a direct correlation between the level of employee engagement and the level of customer satisfaction and the financial performance of the branch. Within the organisation there is now acceptance that employee engagement leads to better financial performance. Not only does this organisation understand the direct impact that improving engagement has, it is also utilised as a leading (rather than lagging) indicator of financial performance – enabling management to have confidence that an increase in employee engagement will have a future impact on business results.

However, while this basic, and broad, approach to total reward management can be a valuable tool in itself, organisations have built on the concept to create tools that can analyse the interplay of the total reward elements and accurately model the impact on the business of various strategies. This has been one of the main aims in Towers Perrin creating the Total Rewards Optimisation tool.

Total rewards optimisation ensures that organisations invest the available reward budget across a workforce in a way that will produce the greatest return to the company. This process is achieved within the organisation’s overall budget constraints and allows the package to be delivered and communicated in a thoughtful way so that employees perceive it to be fair as well as meeting their needs.

Total rewards optimisation allows a company to determine the rewards that have the biggest impact on employee attitudes and behaviours and then create reward portfolios that deliver the highest return on investment to the organisation.

Carrying out conjoint analysis of employee total reward preferences (asking samples to make trade-off decisions between different elements of reward) and portfolio optimisation (determining the cost benefit of the suggested changes to package elements) allows the company to answer the following questions. What is the best level of total investment in employees? What is the best allocation of that investment in reward to maximise the employee behaviour we want to drive? And, how do the answers to these two questions vary within our targeted employee segments?

While this discussion of total reward optimisation has been necessarily brief, the validity of this approach is proven in detailed, client-specific cases. As the number of the organisations introducing total reward optimisation techniques increases, it is highly likely to become accepted best practice, if not standard market practice, in the future. And with all market developments, those companies that move to embrace total reward optimisation and total reward management techniques in general will enjoy the short- and mid-term competitive advantage it brings to their organisation.