A New Target for Global Total Rewards

There is a growing movement to consider compensation, benefits, equity and other perquisites in aggregate as part of the overall employee total-rewards package. In conjunction with this, companies are looking to align these newly defined total-rewards philosophies with the broader employee value proposition and overall business objectives.

Wednesday, May 29, 2013
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Today, many organizations are battling a strong global economic headwind, where the war for talent remains fierce. HR is under more pressure than ever to maintain competitiveness by doing more with less, or improve competitive position to stimulate growth, without materially increasing overall spends. With this in mind, it is becoming more and more difficult for companies to differentiate themselves on the traditional premise of better pay or better benefits due to the cost implications on the overall business model, and this is impacting organizations' ability to recruit the best talent.

Companies are forced to rethink their employee value proposition and consider alternative -- sometimes creative -- approaches to rewards in order to attract and retain top talent while adhering to their restricted constraints. In particular, for multinational companies, seeking an optimal balance between global consistency, regional similarities and local appropriateness makes the optimization challenge more complex.

For many years it has been the expected norm to provide a robust rewards package focusing on "foundational rewards" such as base pay, bonus, pension, core insurance benefits and locally applicable leaves and allowances.

The concept of putting both benefits and compensation under the banner of Total Rewards -- where these elements are considered in conjunction with each other -- is not a new one. It has, in fact, been around in one guise or another for more than 30 years, however there is renewed vigor around its application. This new energy is manifesting itself in a multitude of ways.

In recent years, companies find themselves in leaner times, facing an economic shift that brings with it increased pressure to maintain, or even reduce, overall HR spend, while remaining competitive. They have also been asked to expand operations in new territories where growth is the primary driver. This presents a complex challenge to a global HR function; especially given they are operating in a world in which the actual cost of providing benefits in particular is increasing. This shift has been responsible in part for the drive from defined benefit plans to 401(k) retirement plans as well as consumer driven healthcare plans in the US. Similar shifts from defined benefit to defined contribution have been seen in Europe and in many cases, the rest of the world.

Cost increases aside, the challenge is that the global war for talent remains hot and the key talent scarce in most markets. In China and India in particular, we are seeing that key talent is both hard to find and even harder to keep. It is not just emerging markets that have this challenge. For many skilled positions, such as engineers, companies are competing for this talent all over the world.

This poses a real challenge for companies, as they must first compete for this talent and, once recruited; retain employees for the long term, all with a lower overall rewards spend. The result of this change has been a gradual shift in companies' focus on the provision of rewards to their employees in several key aspects:

Understanding what drives your population: It is more important than ever to fully understand what drives your employees, what they value and what is important to them. Companies are beginning to analyze this from a quantitative perspective, to understand the specific effects on employee engagement and perceived value for every extra dollar spent in a specific area.

Armed with this information, companies can make strategic decisions on where to focus their rewards spend to maximize the value realized by employees, and yet remain in line with the overall corporate business strategy. They can reduce overall spend in areas that will hurt employees the least, while increasing spend in areas they will value the most. They can also selectively provide access to certain reward elements only to groups of people for which they will get maximum appreciation for minimum cost.

As they look at this concept more closely, employers are also finding that they either have access to some of this information already or, by virtue of engagement studies, have a ready-made vehicle to collect this data quickly and easily. With the right questions asked in the right way, it is possible to build survey content that can assist in gathering preliminary reward preference information across the broad suite of rewards offered.

Increased focus on appreciation: It isn't just about offering the right benefits to the right employees, the right benefits may indeed be being provided but, if not fully appreciated, much of the value is diluted. Many recent surveys around employee appreciation for example, demonstrate that companies are not receiving full appreciation value for the rewards they offer, because employees either don't understand the value of the benefit, or in many cases, aren't even aware they have it.

In a recent survey conducted of Chinese companies, more than half of companies surveyed spend more than 20 percent of total payroll on benefits, but of the employees surveyed, more than half were not aware these benefits existed. These statistics are fairly representative of Asia-Pacific as a whole, and although awareness is better in the US and Europe, there is opportunity to improve across the world.

Whether achieved through stronger and targeted communication, participation in selection of rewards or cost sharing with employees on some level, increasing employee "buy-in" on their rewards is an important focal point for increasing appreciation for employers and employees.

A targeted flexible approach: In some countries, there is an increased focus on allowing a degree of "choice" in specific benefits elements. So-called flexible benefits are a regularly occurring phenomenon in parts of the Western world; however, it is a concept very much in its infancy in parts of Asia. It represents an opportunity for companies to tailor offerings to employees and, consequently, get better appreciation, while all the time potentially reducing or maintaining overall spend. This opportunity does, however, need to be balanced with the possible additional administration complexities involved.

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By offering increased choice, rather than focusing too much on benefit levels, there is an opportunity to differentiate simply by changing the benefits themselves, or just the way they are offered, rather than potentially needing to inflate the spend on these benefits.

Supplementing foundation rewards with lifestyle benefits and other perquisites: There are many other elements of the employee experience that individual's value, but may not typically appear in the Rewards discussion. These may include things like flexible work hours, home office, on-site facilities (such as daycare, gym, restaurants or dog-sitting) or wellness programs. Some of these have a cost, but some do not. These lifestyle benefits provide a new and interesting array of areas in which companies can seek to differentiate themselves in the total rewards space.

We are seeing upticks in both the provision and communication of these "lifestyle" benefits, benefits also frequently cited by employees at companies deemed to be "Best Places to Work." In Silicon Valley, for example, many employers provide extensive on-site "campus benefits", designed to keep employees on-site longer, targeted at maximizing productivity by creating a complete and engaging work environment that employees don't want to leave.

In considering these benefits, companies can manage costs effectively by spending their rewards dollars more innovatively and gaining differentiation from others in that manner.

Aggregation: However these elements of rewards are considered, the overall focus is clear: there is renewed energy on considering all of these as part of the overall employee value proposition and in particular, in a total rewards context.

Companies are realizing that, just because they are where they want to be versus the rest of the market on both benefits and compensation, it does not mean the same is true when the two elements are aggregated. Given the pressure to reduce costs and remain competitive, or continue to grow without increasing costs, there is new determination to consider compensation, benefits, equity and other perquisites in aggregate as part of the overall employee total-rewards package. In conjunction with this, companies are looking to align the provision of these to newly defined total rewards philosophies with the broader employee value proposition and overall business objectives.

Whether it be to cut costs and retain perceived value, or increase value to promote growth, many companies are reconsidering their employee value proposition and total rewards philosophies globally to incorporate these opportunities.  Off the back of regular engagement surveys, or through more robust conjoint analyses, new data is being collected to better understand what employees truly value and prefer. From this, an aggregated approach to total rewards, aligning to overall business strategy and optimizing reward spend is the end goal. This is coupled with seeking an appropriate balance between gaining the right levels of global consistency, while maintaining local appropriateness within countries and specific groups of employees in those countries so as to optimize total-rewards spend.

Alex Young-Wootton is a San Francisco-based director in Towers Watson's international consulting group.

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