‘Total reward’ may be a mis-used term but HR commentator Michael Armstrong believes the less obvious non-financial or intrinsic rewards, such as opportunities for growth, are of vital consideration, says Amanda Wilkinson
Total reward may be flavour of the month, but although the term first emerged in the US around ten years ago, many employers are still confused as to its true meaning.
HR consultant and co-author of such tomes as Reward management and Strategic reward, Michael Armstrong, however, is adamant that there is only one true meaning. For him, total reward is best encapsulated in a definition used by consumer goods company Unilever which states that it “encompasses all the elements of what it means to come to work”.
This extends beyond total remuneration, which is confined to pay and benefits. “There are lots of models about, but essentially total reward is about all the ways in which people are rewarded when they come to work – pay, benefits and the other non-financial rewards – put together to make a coherent and integrated whole,” says Armstrong.
Non-financial or intrinsic rewards include factors such as scope for achievement, recognition and opportunities for growth.
Armstrong believes the concept of total reward is simple. If people are rewarded both extrinsically and intrinsically then that helps foster engagement with a job, commitment to an organisation and positive discretionary behaviour, for example, by staff undertaking more work than is expected of them or tasks outside of their job description.
“There is nothing new in total reward. It’s a name that has been coined to cover what many people have been saying for years, back to Frederick Herzberg who was writing 40 years ago, that the intrinsic rewards are just as important [as pay and benefits] and probably longer lasting in terms of motivating people,” says Armstrong.
Management green light
While he accepts that pay and benefits motivate people, the effect, he says, is short-lived. “[The positive effect of] having a pay increase or a bigger car, will pass, always. What really counts in terms of long-term engagement and commitment to the organisation are the other things which are about the environment and the intrinsic rewards that derive from the work itself.”
Total reward may sound simple enough, but difficulties can arise in first convincing management to give such a strategy the green light and then actually implementing the concept. “The problem is you can’t demonstrate [to management] that you will get a return on investment. This is what you want to cost, but it’s difficult because you will have to make all sorts of assumptions,” says Armstrong.
While the cost of pay and some benefits can be determined, accurate figures are difficult to calculate for the more intrinsic aspects of reward. Furthermore, there is no way of estimating the return on that expenditure, and the time and effort spent in implementing total reward, although improvements in staff productivity, commitment and recruitment, would be expected along with reduced turnover. The HR team will need to be persuasive if it is to convince management that total reward is worth implementing. The task though is helped by the increasing acceptance and use of the term total reward.
“Many organisations now say they have total reward because it’s the thing to have, if you like flavour of the month, but there is a lot of rhetoric about it. I think it’s quite a difficult thing to do in reality,” says Armstrong.
The quadrant definition
If employers want to adopt total reward they should start by reviewing the existing package against one of the various total reward models. Armstrong believes the most well-known is that used by Towers Perrin which has quadrants on pay and reward, benefits, learning and development and the work environment. “That’s the first thing, to get total remuneration right. In one sense, that is the easiest because it’s clear cut,” says Armstrong. However, it is not necessarily quick as it can take years for example to get the pension scheme right or to introduce a flexible benefits plan.
According to Armstrong, the learning and development quadrant includes factors such as workplace learning, career development, training and performance management, while the work environment, includes core values, leadership, job design and employee voice.
“You are really looking much more broadly at your HR policies and saying ‘what are we doing to create an effective brand new proposition here – the employment proposition’ and you say ‘we want to make this organisation a place to which people want to come to work and want to stay to work’,” explains Armstrong.
This process can take a long time. “It’s really a question of carrying out a review of what is happening now and establishing the gaps, and then progressively doing something about it. You may have to tackle some things one at a time and do it incrementally. What you are trying to do is reinforce the total reward package and trying to reinforce the total value proposition.
“If one can do that, then one is beginning to be in a position to be able to tell people, which is what you want to be able to do when you are recruiting them and while they are with you, ‘look, this is what you are getting, not just pay and benefits, you are getting this tremendous learning and development, career planning opportunity programme, we are dealing with flexibility and looking at your work-life balance, we are making sure managers are developed as leaders and so on’. It then becomes a package that can be presented to people.”
Involving existing staff in the process of developing the total reward proposition so that they can understand it and help communicate it to a wider audience will pay dividends. This should include discussions with trade union representatives at a local, regional and national level. “The unions could well be suspicious. This is why you start off by saying ‘let’s get the pay and benefits right’, if you can. It’s a question of trying to get them on board.”
Other ways of involving employees include staff associations, focus groups, workshops and discussions with line managers who, at the end of the day, play a key role in implementing and communicating total reward effectively.
Communication can be executed in a number of other ways including through total reward statements, which Armstrong distinguishes from total remuneration statements that just include pay and benefits. “It’s really telling people the value they get from working for this type of organisation. It’s not just a handbook-type approach – it’s a continuous programme using every media you have got, the internet, briefing groups, training sessions, workshops, induction programmes, staff handbook, all those things,” he says.
Ultimately, the message that needs to be conveyed is that “there is more to working here than just drawing a pay cheque at the end of the month”, says Armstrong.
However, there are many organisations that claim to offer total reward when they don’t in fact do so, while some even confuse it with offering flexible benefits.
“Some people in organisations I have been involved with say they have introduced flex, and therefore have introduced total reward, well they haven’t. Total reward is, in fact, much broader and a much more difficult concept to apply,” says Armstrong.
He does, however, believe that flexible benefits are an important part of total reward as they help improve the employee experience by giving more choice when it comes to perks.
If organisations are to do more than merely pay lip service to total reward and to implement a strategy effectively then, as Armstrong says, they must accept “it’s a hard road to follow, but one worth following”
How widespread is total reward?
According to the Chartered Institute of Personnel and Development’s Reward management survey 2007, four-in-10 employers have adopted or are implementing a total reward approach.
What is total reward?
Various approaches have been taken to total reward, but many experts take a broad view of the total reward package extending it beyond pay and benefits to include intrinsic aspects of work such as the work environment and learning and development. The aim is to use total reward to foster employee engagement with their work, commitment to the organisation and positive discretionary behaviour.
What are the benefits of adopting a total reward strategy?
While it is hard to calculate the return on investment from a total reward strategy, it arguably improves productivity, reduces staff turnover, helps in recruiting key talent and enhances the reputation of the employer both internally and externally.
What can be included in a total reward package?
Pay, pension, flexible benefits, working environment, career opportunities, learning and development, work-life balance, company culture, flexible working, and the recognition of achievements, among other factors.
Career history – Michael Armstrong
A prolific author of reward and HR books, Michael Armstrong began his career in HR at the coalface as a practitioner.
After 25 years working in this role, including a 12-year stint as the HR director of a large publishing firm, Armstrong became a practice leader for HR at Coopers & Lybrand where he spent ten years. He is now an independent consultant and managing partner of e-reward.
His publications include A handbook of employee reward management and practice, Reward management, co-authored with Helen Murlis, Strategic reward, co-authored with Duncan Brown, A handbook of human resources management practice and Performance management.
“If people are thinking about their HR strategy, part of this must be total reward. It is becoming an accepted term. There’s a better understanding of it now than say five years ago in spite of a lot of people paying lip service to it,” says Armstrong.