Developing a Total Compensation Strategy

From Compensation to Total Reward

What is Compensation?

What is Reward?

From Compensation to Total Reward

The definition of Reward has changed signifiantly over the last 5 years and today covers a wide scope of both financial and intrinsic (non financial) elements: Financial: Base Pay, Fixed Benefits, Short Term Incentives, Long Term Incentives Intrinsic: Career Development and Promotion opportunities, Work/Life balance, Flexible working environments, Pay for Performance Culture The challenge for organizations is to understand that it is their ability to holistically manage all aspects of Reward that will ultimately have the desired impact on the financial success of the organization.

Elements of Reward
Career Development

Long Term Incentives

Short Term Incentives Base Salary & Benefits

Organizational Level

Promotion Opportunities

Work / Life Balance

Flexible Work Environment

The Link between Reward and Financial Performance

Reward Design & Delivery

Improved Company Performance

Improved Employee Behaviours

Improved Business Performance Indicators

Reward Design & Delivery

Reward Design & Delivery

Historically, traditional financial elements of Reward such as salary, short term bonus and benefits were managed independently, without looking at ways to optimize the overall value of the package being provided, for both the employee and the Company. All of the research indicates that there is a clear trend towards taking a more holistic approach to Reward. Why? With increasing focus on cost control, Companies need their Reward package to achieve the highest impact for their employees in order to generate the greatest return on their investment.

Reward Design & Delivery

Reward Design & Delivery

Employees expect greater flexibility in their total package to meet their individual needs and Companies are realizing that those elements which have the strongest influence on employee behaviours are intrinsic rather than financial. However, they only successfully support employee commitment levels, job satisfaction and reduce turnover if they are underpinned by a competitive financial package. While recognizing the need to be able to provide more flexible and holistic solutions for employees, the increasing proportion of pay at risk and the continuing focus on building a performance culture remain priority themes for most large organizations irrespective of geography or industry.
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Reward Design & Delivery

Reward Design & Delivery

Holistic Management of Total Reward

Increasing focus on intrinsic rewards

Increasing levels of pay at risk Greater levels of performance focus Increasing levels of communication and transparency.

Siloed Management of purely financial elements of Reward package The value of providing above market levels of fixed cost rewards is decreasing

Improved Employee Behaviours

The Impact on Employee Behaviour

The degree of employee satisfaction in a Reward program can be measured in terms of levels of employee motivation, commitment, satisfaction, retention and ultimately in the levels of turnover. It can often be that pay comparisions are the drivers of comparing jobs once an employee has decided to leave or join an organization, but once in a job it is intrinsic aspects (esp. Career development and promotion prospects) which determine whether an employee is committed and remains.

The continuing prevalence of putting pay at risk and the increasing focus on performance drives the question: How can a Company use incentive compensation to truly motivate employees?
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Improved Employee Behaviours

The Impact on Employee Behaviour

From the employee's perspective, the degree of motivation felt as a direct result of an incentive scheme is not driven by whether or not the incentive scheme in it's entirety make sense but the perceived level of fairness and appropriateness of the current arrangement: Drivers of motivation include:
The level of individual opportunity which the scheme provides. The degree to which the drivers of performance (both at the Corporate and individual level) are clearly defined, communicated and understood. The extent to which actual levels of incentive received truly differentiate on the basis of individual performance and contribution. The perception of the level of fairness of the individual performance review as supported through the performance management process.

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Improved Business Performance Indicators

Business Performance Indicators

A key success factor of an Incentive scheme is to recognize the important middle link between employee behaviours and overall Company performance the Business Performance Indicators. These indicators are the ones which employees can most directly influence on a day to day basis and typically focus on elements such as Customer Service, Productivity and Cost Management. These indicators represent the translation of Company performance top down, and the contribution of individuals and teams bottom up, and is central to a solid performance management process.

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Improved Business Performance Indicators

Business Performance Indicators

A successful performance management and incentive scheme will recognize and support these links by reinforcing the "red thread" bewteen behaviors, indicators and overall Company performance. The choice of performance measures to be used in an incentive scheme is a critical design element for Companies who need to think about this aspect on multiple levels:
Determine the performance aims of the organization Identify the indicators available to measure progress Specify the individual contributions required to influence these indicators Set the necessary standards of achievement which are required

Incentive scheme drivers and indicators are explore further later in this presentation.
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Improved Company Performance

Improved Company Performance

The ultimate link in the chain is the ability to increase the level of Company performance, the definition of which is dependent upon the performance aims of the Company:
More profit? Sales Growth? Reduced Costs? etc.

Whatever the performance aims may be, affordability of an incentive scheme is a must and therefore plan funding is a key design consideration both in terms of financial mesaures which could be applied as well as basic plan architecture.

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Building a Compensation Philosophy

What is the objective of the organization's compensation system? to attracting and retaining qualified employees, to reward employees for good performance, to motivate good performance, to create or reinforce a particular type of organizational climate? What is the communication policy? How is the organization going to communicate the compensation plan to employees once it has been developed? Is the organization prepared to evaluate the effectiveness of any such communication? If so, how?

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Building a Compensation Philosophy

How will decisions regarding pay be made? Who will be involved in these decisions? What decision guidelines will need to be developed? What is the organization's desired market position relative to pay? Will the organization choose to pay market rates, above market or below market? How does the desired market position fit with other strategic goals? What is the desired mix between benefits and cash? Since benefits are an important form of compensation, how does an organization use them to maximize the effectiveness of the compensation plan?
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Building a Compensation Philosophy

What role does performance have in the compensation philosophy? Does it pay for performance or seniority or some combination? What is the role of performance appraisal in the organization? How will the organization manage change to the compensation plan once it has been developed? What systems need to be in place to implement any changes including deciding when change is necessary and who decides this? How does the compensation philosophy and plan fit with the rest of the organization? How can the compensation practices reinforce other overall management philosophies and objectives?
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Compensation Philosophy Checklist

What is the objective of the organization's compensation system? What is the communication policy? How will decisions regarding pay be made? What is the organization's desired market position relative to pay? What is the desired mix between benefits and cash? What role does performance have in the compensation philosophy? How will the organization manage change to the compensation plan once it has been developed? How does the compensation philosophy and plan fit with the rest of the organization? What is the impact of Geography? Industry? Size and Maturity of Organization? Reporting Requirements?

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What is the Compensation Strategy of...?

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