Total Rewards

During the current economic crisis which was created by the worldwide pandemic, companies have been looking at their total rewards strategies. When faced with a limited budget, how do you provide total rewards for your employees? The solution is to be very focused on how you spend your budgeted dollars. This will cause you to step back and look at your total rewards strategy and compensation philosophy going forward. Before we get started, I believe we should first define total rewards. Total rewards are all the direct and indirect pay or other financial compensation provided in exchange for an employee’s services. Direct compensation would be the pay systems involved in cash-based rewards, while indirect compensation is basically the benefits, perks and recognition programs which are typically noncash.

A compensation philosophy will define the “why” behind employee compensation. The compensation philosophy is a short statement defining the companies guiding principles and core values about employee compensation. In essence, the compensation philosophy serves as a mission statement for the company’s compensation strategies.

Compensation philosophies are usually designed by a talented Human Resources group or a talented Human Resources consultant. Philosophies will vary from company to company based on many factors which would include: industry, size of company, profitability, current benchmarking compensation data, and the ability of the company to attract and retain talent. In conclusion, a well-designed compensation philosophy supports the companies strategic plan and vision for growth.
A compensation philosophy could be as simple as: “Our company will be the employer of choice who drives profitability and creates positive change.” To accomplish this compensation philosophy, we will do the following:
  • Provide competitive pay.
  • Pay for performance.
  • Attract and retain top talent (A Players).
  • Provide innovative compensation programs to motivate employees to higher levels of performance.
  • Create an ownership thought process with our employees.
Now that we have a compensation philosophy, we need to look at putting in the actual compensation strategy.
Starting with the basics in this process we need to ask ourselves what are the goals or inputs? Is the goal to improve recruitment, employee engagement, or simply keeping your valuable employees?
The next step is the process of alignment with the existing company strategy, the type of culture you want to create, the realities of the current labor market, and legal compliance.
The output will be a total rewards strategy where the company uses it compensation tools to create and sustain a highly-engaged and productive workforce to further the growth of the company.

You will know when you have the framework to determine if your current total rewards system is aligned with your compensation strategies. For example, let’s look at a reward system that provides a year-end bonus based on how many years of service you worked for the company. Let’s say you pay someone $100 per year of service. If someone worked for 30 years with the company, they would receive a $3,000 year-end bonus. How does that align with the companies pay for performance strategy? Obviously, providing employees a bonus for their number of years of service and paying them even if they are a poor or excellent performer makes no sense. This compensation strategy communicates to your employees that we value employees who stay with the company a long time, and we don’t care if they are poor or excellent performers.

Consequently, if you pay a year-end bonus based on a combination of the profitability of the company and the actual performance review rating of the employee, this will be more aligned with the compensation strategy we used as an example above. In addition, basing the bonus on the profitability also directly aligns when you’re faced with a major economic downturn like the world is facing currently with COVID-19.
As a final comment on compensation strategies, you need to clearly communicate, provide transparency and consistently administer them. Consistency will also keep you legally compliant with both current employees and future candidates. A strategy applied inconsistently can erode employee morale and, in some cases, result in legal challenges. Communicating a sound compensation strategy and consistently applying it creates fairness in the company.