Low Rates of Return

Total-rewards programs are designed to attract and motivate employees. But it appears many companies -- thanks to poor execution and lack of communication -- aren't seeing much of a return on their investments.

Monday, October 1, 2012
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Engineers at a large aerospace firm were expressing concerns about something, and it wasn't their pay or their working conditions -- they were worried about the "half-life" of their skills and knowledge.

Given the rapid pace of technological change, these engineers were worried that half of what they'd learned would be "useless" within five years, says Richard Kantor, senior vice president in Aon Hewitt's human capital consulting division.

Mindful of the need to retain these highly skilled employees, the company looked at the best practices of its industry competitors and found that its own career-development programs stacked up well against them. But when it pulled back and compared itself to companies ranked "world class" in learning, its own offerings didn't fare nearly so well, he says.

The company responded not only by strengthening its career-development programs, but ensuring that the engineers were fully aware of the opportunities available to them, says Kantor.

"They helped the engineers understand that, by staying with the company, they'd have plenty of opportunities to replenish their learning and stay at the forefront of technological change," he says. "They realized what a great retention tool this could be."

Companies spend lots of money on their total rewards programs -- the combination of pay, benefits and development opportunities that keep employees sticking around. Yet a recent survey from Aon Hewitt finds that, despite those investments, few companies seem to be getting much out of their programs so far.

Aon Hewitt's Total Rewards Survey of approximately 750 organizations revealed more than half (58 percent) use total-reward programs to foster employee engagement, while 48 percent want the programs to strengthen their ability to retain and attract top talent. However, 60 percent described their employee-engagement levels as low and two-thirds said it's either holding steady or trending downward.

Other research also points to a disconnect.

"Our studies suggest there's a significant divide between what employers think employees want and what the employees actually want," says Peter Gundy, a managing director at Towers Watson in Stamford, Conn.

Companies tend to rank base pay, organizational mission and being rated as a "best place to work," respectively, as the things valued most by employees in terms of what drives them to join and stay with an organization, he says. Conversely, employees typically value job security, base pay and healthcare benefits as the most important factors.

"As the concept of total rewards has evolved, the challenge has been for employers to clearly articulate what they expect from employees, and what they're prepared to give in return," says Gundy.

Getting Down to Basics

What to do? Aon Hewitt analyzed the total-rewards programs of companies it identifies as "high performers" -- those with the highest levels of innovation, engagement and revenue -- and compared them with the rest of the surveyed companies.

According to the results, top performers distinguish themselves by articulating clear strategies and goals in their total-rewards programs, using data and input to drive decision-making, connecting the program to the business and employees, and defining the effectiveness of their programs differently.

One of the most important things these companies do, says Kantor, is "disaggregation."

"The data suggests leading companies understand that attraction, retention and motivation -- which are, first and foremost, what companies say they're trying to do via their total rewards -- should be disaggregated," he says. "We know from our research that the elements that attract candidates to a company are different from the elements that retain and the ones that motivate."

A company focused on retaining skilled employees -- like the aforementioned aerospace firm -- should use its total-rewards strategy to emphasize things such as career development, which tend to be moderately strong attractors but very strong retainers, he says.

The importance of communication simply can't be overlooked, says Brian Kropp, managing director at Arlington, Va.-based consultancy CEB (formerly Corporate Executive Board).

"When you look at what people actually value in terms of total rewards, the most important driver is whether or not they understand it," says Kropp. "Almost half of the perceived value of a total-rewards package derives from how effectively it's communicated, not the actual components of the package itself."

However, too many companies take a scattershot approach to communication.

"Often, you'll get a message from the head of HR about vacation days, then another from the head of compensation about merit increases, then another message from the CEO about summer Fridays," says Kropp. "It becomes this hodgepodge of messages that's hard for employees to put together, as opposed to one common thread about the total rewards that are available."

A best practice is to quantify the value of intrinsic awards, he says.

"It's very easy for workers to understand what their actual compensation looks like, but much harder to get a full appreciation of the broader total-rewards package," says Kropp. "If they get a 5 percent raise, it's easy to understand that's more dollars in their pocket. But a reduction in medical co-pays -- you have to quantify that, in a dollar sense, so employees understand what it means to them."

An obvious and potentially effective remedy is to provide employees with regular total-reward statements. However, some TR statements are better than others, he says.

Some HR leaders are fans of highly detailed statements, in which the company's total rewards are broken down into segmentations based on employees' ages and/or job levels -- on the assumption that different groups will value certain benefits over others. However, CEB's studies reveal that this approach has limited value.

"There isn't a tremendous amount of variability in what matters most to employees in terms of total rewards -- it's not as if a 35-year-old cares about dramatically different things than a 55-year-old," he says. "So, if you're doing a segmentation strategy but people aren't reading it, does it matter?"

A better approach, says Kropp, is to segment by "life stage" -- such as younger employees, new parents or employees about to retire.

The savviest companies, he says, have been able to figure out how to keep things simple.

Rather than sending out detailed messages about the rules and regulations pertaining to taking time off, these companies understand that most employees simply want to know whether they'll be able to leave early in the afternoon to see their kids' play, or how much paid time off they can roll over year to year, he says.

Employees, Kropp says, care about the basics,so HR leaders would be well served by not making things too complicated.

The Brand's the Thing

The most effective TR-related communications are interwoven with a branding strategy, says Ania Krasniewska, CEB's senior director of compensation and benefits programs.

"The easiest way to do this is to be consistent, whether it's a logo, consistent color scheme or something more elaborate," she says.

A consistent branding strategy signals to employees that a communication piece is about their total rewards. It's also wise to plan multiple announcements about TR, as people typically have to hear something several times before it sinks in, she says. "HR gets very excited about a big total-rewards strategy that ends up being 100 pages long, but the chances of employees getting past the second page are very low."

At Chicago-based MillerCoors, the company -- created in 2008 as a joint U.S. venture between global brewery giants SABMiller and Molson Coors -- is using its total-rewards communications strategy to motivate its employees while strengthening its brand.

"We have a diverse set of employees, multiple locations and we intend to become America's best beer company, so we're taking a fresh approach to everything we do, including HR," says Ami Patel, senior director for compensation and people operations.

The approach being taken at MillerCoors is to take into account the fact that employees at its corporate location may share a perspective that differs from the workers at its breweries, she says.

"Many companies fall back to differences in ages, but we found things vary by location," says Patel. "The headquarters staff values an open-office environment, while employees at some of our breweries care more about day care. We've also made a point of having -- at all our locations -- a gathering place, not necessarily a full bar, but one where employees can meet and socialize with beer."

Indeed, the company's headquarters features an elaborate bar on its 60th floor. The goal is to ensure that employees understand that the company wants to provide them with a positive working environment regardless of their location, and that such perks are among the benefits of working for MillerCoors, says Patel. 

The company's TR statements are supplemented by individual conversations managers have with employees to ensure they understand it. Employees are also directed to the company's intranet, called The Taproom, to get more information about pay and benefits, she says. The Taproom has more detailed information about benefits and short-and long-term incentives, as well as modeling tools that allow employees to, for example, calculate their potential end-of-year bonuses.

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"The point is not to give people a 20-page book but to remind them of the total environment in terms of how we, as a company, want to work," says Patel. 

In support of this effort, the company created "mKits," which are one-page summaries of MillerCoors' total-rewards strategy that also offer guidance on using the company's online compensation tool and pointers on how to talk to employees about their compensation. The mKits -- along with regular briefs from senior leaders -- are part of the company's effort to ensure managers fully understand MillerCoors' total-reward strategy so they can confidently explain it to employees and answer their questions.

"It's one thing to hear something about pay and benefits from the head of compensation, but quite another to hear it from your manager," says Patel. "We're now able to say to employees, 'If you have any further questions, talk to your manager.' "

Even the most thoughtfully designed TR strategy will be undermined should HR fail to ensure managers understand and support it, says David Turetsky, senior director for talent management strategy at Roseland, N.J.-based ADP.

"Managers and employees have a very difficult time having these conversations without proper training or guidance from HR," he says. "That's why it's important that HR provide managers with good, concrete examples of, 'Here's what to say when you're conveying a pay increase' and 'Here's what to say when there's no pay increase' to an employee."

Managers should also understand the importance of context, says Turetsky.

"It's fine to talk about merit increases, but don't forget to remind employees about all the other things available to them: paid time-off, 401(k) matches, etc.," he says. "It's important that employees keep sight of the fact that compensation and rewards are so much more than that annual raise."

Although MillerCoors doesn't yet have numbers to fully ascertain the effectiveness of its new TR approach, Patel says, informal feedback has been positive. And, the most recent employee-engagement survey reveals that 90 percent "agree" or "strongly agree" that they believe in the company's compensation philosophy.

"The number for high-performing, highly engaged employees was even greater," she says.

What Do They Want?

As certain aspects of total rewards -- especially pay-for-performance programs -- have grown more complicated, so has the employee-communication piece.

"It can get pretty complex," says Chris Caldon, senior vice president for marketing at Peoplefluent, a Raleigh, N.C.-based talent-management vendor. "Some financial-services companies may have 10 or 20 different incentive programs."

Some companies are turning to compensation-planning tools designed to show managers and employees what drove the financial benefits they got and what they can do to help ensure they get the same or greater payout during the next cycle, he says. 

"Lots of managers don't like to deliver bad news, with the result that we typically see even mediocre performers getting raises," says Caldon. "Now, managers have the data available to say, 'Look, here's the justification for why Sally gets a 7-percent raise and Joe gets 1 percent, or no percent.' It almost de-personalizes the conversation and makes it about the data."

Another best practice? Listening to employees, says Kantor.

"It's ironic that the overarching goal of total-rewards programs is to attract and motivate, yet more than half of organizations don't seek out employees to find out what they find compelling and motivating," he says.

At this year's WorldatWork annual conference in Orlando, Cindy Jorgensen and Ron Steele Jr., two compensation specialists from the Boeing Co., presented a case study on how the company reached out to its employees at its South Carolina facility to determine why they had such a low opinion of the aircraft maker's pay practices.

After a survey revealed that the South Carolina employees gave the company's pay policies a low rating, Jorgensen and Steele dug deeper into the data and held a series of employee focus groups to get a better understanding of why they were dissatisfied.

The results revealed that much of the frustration arose from a lack of understanding of Boeing's pay practices rather than the actual pay levels. As a result, the company invested in managerial training and employee education.

"Many companies have fallen into the trap of thinking that they just need to provide what the competition is offering," says Kantor. "But if you look at what's going on in the world today, with one out of every two employees disengaged, I think it suggests we could be doing a better job of trying to understand what it is that employees want."

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