A ‘total reward’ approach to benefits is outdated, argues Kathi Enderes, explaining why we need a more dynamic approach to how we compensate employees in a fast-changing world of work.
We’re experiencing a period of economic uncertainty, and while it is uncertain whether we will enter a technical recession, there is no denying that times are more challenging than anticipated post-pandemic.
Companies face a myriad of HR challenges: difficulties in sourcing skilled professionals and, in many cases, even finding suitable candidates to do the basics. Additionally, they are grappling with employees working in diverse locations with varying costs of living, inflation, and a continuing war for talent.
Attracting the recruits we need and keeping the people we already have engaged often comes down to the rewards we offer – which is either accepted or rejected by hires but influences the loyalty of our current team members.
Pay structures
So what are you using to manage this? A set of outdated concepts like “salary bands” and “job levels”, established many decades ago, simply aren’t relevant for the complexities of today’s employment landscape.
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The reality is that corporate pay practices simply have not caught up with the new world of work. This realisation has become even more apparent through recent research by ADP, which highlights the truly broken state of pay and benefits.
The findings show that pay and rewards are now the top drivers of employee experience, with 44% of employees believing they are underpaid, while a mere 5% of organisations have a defined clear strategy for implementing skills-based pay.
What’s really important about that last stat is that the organisations that do have a defined strategy for skills-based pay are twice as likely to innovate effectively.
This highlights the undeniable need to rethink corporate compensation and focus on fairness, transparency, inflation-adjustments, and pivot to a truly systemic look at performance-based pay.
Is ‘total reward’ outdated?
It is crucial to replace the outmoded concept of “total reward” too, as many line managers think this is the only way to work out promotions and pay grades. This was perfect for its day, but it no longer aligns with the dynamic nature of today’s workforce.
In the traditional total reward framework, every job has a “level” (usually kept confidential) and within that level, there is a salary band. Employees progress within that band through the performance management process, gradually advancing until they reach the top of the band. At that point, their manager typically says: “We can’t increase your pay any further until you are promoted, so let’s work on a way to advance your career”.
Tied to compensation are the benefits offered. In larger companies, there is often a wide array of benefit options available, sometimes numbering up to 100, ranging from free transport, holiday insurance, health benefits, fertility benefits, free food, onsite pools, and so on.
These benefits can account for approximately 30% of the total employee cost, so they really add up. We could argue that total reward has been around since the industrial age, but while we continue to rely on this archaic linear process, around us the world of work is going crazy.
Not fit for purpose
We are witnessing a massive demand for enhanced employee wellbeing, extended benefits and flexible work arrangements. Simultaneously, there are enormous skills gaps as new technologies and new domains are invented.
One example is that businesses feel they have to pay premium compensation to attract individuals who have rare skills. This poses a problem for resourcing and can create wage inflation and a candidates’ market, but can also leave existing employees feeling dissatisfied and undervalued.
Add in the factor of pay equity, plus the fact that we have part-time workers, gig workers, and the presence of six generations in the workforce – it’s created a landscape riddled with inequities and inconsistencies in pay. The total reward system is practically at the point of collapse.
Only this week, two unions have written to cabinet office minister Jeremy Quin urging the government to reform the civil service’s ‘broken’ pay structure and create a system that would help recruitment and retention.
The breakdown of the traditional total reward system can be attributed to the changing expectations of today’s workforce. Instead of static job descriptions defined by pay levels and salary bands, rigid structures and ranges, and one-size-fits-all benefits plans, today’s workforce wants a holistic and more transparent approach to pay and benefits.
Reward in context
New compensation and benefits ideas need to be as agile as the work the 2023 employee actually performs – recognising the ongoing value individuals bring to the organisation. It’s time for reward to move into the 21st century.
Fortunately, there is a very rational and data-driven successor to the total reward model waiting in the wings: systemic rewards. This concept better reflects evolving workforce requirements and balances pay equity and pay for performance with personalisation options.
And our research indicates that because this approach allocates more of the budget towards flexibility, career development, and recognition, it can effectively address the evolving demands of the modern workforce.
Our research has revealed that organisations embracing the new systemic rewards approach are 3.1 times more likely to excel in innovation and 2.4 times more likely to be acknowledged as a great place to work, compared to organisations that adhere to more traditional models.
As mentioned, pay for performance plays a vital role in achieving pay equity and fairness, and as many as 91% of companies struggle to get it right.
Our research indicates that because this approach allocates more of the budget towards flexibility, career development, and recognition, it can effectively address the evolving demands of the modern workforce.
But under a systemic rewards approach that emphasises proper implementation of pay for performance, organisations are 2.7 times more likely to effectively engage and retain their workforce. It is notable that the 9% of organisations that excel in this area also enjoy Glassdoor ratings of almost 15% above average. Trailblazing companies doing this include Salesforce, Schneider Electric, American Airlines and Unilever.
Starting the journey
Although the current estimation suggests that just 9% of companies have achieved the highest level of rewards maturity, the experiences of these and other organisations clearly signpost that thinking systematically about pay and benefits yields far greater benefits than a traditional total reward mindset.
To embark on the journey towards implementing a systemic rewards approach, it requires concerted effort and collaboration across departments within the organisation. This goes beyond the reward function alone and involves close collaboration with colleagues from learning and development, talent acquisition, diversity and inclusion, employee experience and talent management.
Furthermore, implementing a systemic rewards approach that truly aligns with your company’s goals and values requires a strong philosophical foundation starting from the C-suite.
It is essential to address non-trivial questions such as: How do we define and measure performance? How are we going to communicate performance metrics and goals clearly across the organisation so people feel that it’s fair? This requires a comprehensive understanding and discussion about what performance truly entails within your organisation.
This delves into the fundamental question of what aspects of performance will be rewarded. And that’s a conversation that isn’t just about performance management. It’s about what we are going to reward: Metrics? Collaboration? Innovation? Are we going to reward profitability, and so on?
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While the transition to systemic rewards may present challenges, it is essential for modern organisations to sit down and initiate these conversations. The outdated pay and benefits structures from the 1970s are ill-suited to meet the needs of today’s workforce and the complexities of the modern business landscape.
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