Aligning Rewards with Business Strategy

Given increased globalization, stiffer competition and the shrinking labor pool, companies no longer can afford to view traditional rewards programs as a cost to manage. HR departments need to research what their employees truly want and develop total rewards systems that match the value they bring to the organization and align to corporate ROI.
We're living in an era marked by tipping points on many fronts, from dealing with global climate change to feeding the world's hungry. The business world also has had its moments of delicate balance and shifting paradigms in recent years, surviving executive scandals, corporate failures and increased regulatory scrutiny.

We seem to be in a cycle. When it comes to the need for significant change in important matters, tweaking simply is not good enough, and substantive progress is most effectively achieved through real transformation.

This also holds true for addressing many workforce and people challenges. In a recent survey conducted by Deloitte Consulting LLP in collaboration with the Economist Intelligence Unit, 85 percent of more than 500 senior business and HR executives from 468 companies said the people they employ are vital to all aspects of their company's performance, especially their top strategic challenges.

This shouldn't come as a surprise — increased globalization, innovation-driven competitiveness and the continuing push for both greater efficiency and productivity are all issues that come back to people at the core.

Yet, on the HR front, we do not see a great deal of transformative activity in regard to establishing the type of feedback mechanisms and rewards systems that would support improved efforts to attract, motivate and retain the best people. And although this might be true of the general employee population, it is a particularly troubling observation to make with respect to the critical workforce segments.

Failures of Conventional Wisdom

The war for talent has been waged somewhat officially for nearly 10 years, but most companies still have not achieved the balance they seek between meeting recruitment and retention needs and offering the programs that keep employees engaged, productive and aligned with business objectives.

To some extent, current practices have failed to recognize that people are in a near-constant state of flux in regard to many key business-related concerns, including specifics about what inspires, motivates and rewards them. In the absence of identifying a better way, most companies fall back on benchmarking surveys, which long have been among the primary tools used for setting both the level and content of employee rewards packages.

If you think your organization has distinction and a unique character and culture, using peer benchmarks and other external reference data will tell you nothing about how to effectively align your own rewards programs with your particular business strategy and employee population.

This is where the tweaking comes in. Many companies rely on benchmarks and perceived best practices to design their reward programs, but then they do little to create better benefits portals on their intranet sites, introduce onboarding and exit interviews, explore methodologies for measuring ways to implement nonfinancial reward programs or consider the possibility of managing rewards elements in an integrated fashion.

So, although the C-suite, heads of operating units and HR executives face increasing talent shortages, we continue to see corporate reward systems that are based on economic and social requirements of a bygone era — pay levels that provide rewards at a certain percentile of defined industry standards, for example.

These tweaks are not good enough, so top talent either remains disengaged (at best) or just walks out the door (at worst). This leads to missed production schedules, customer service misfires, competitors getting your best engineer or salesperson and a top-notch labor pool that continues to shrink.

This approach is simply inadequate in a time when HR leaders need to be focused on linking rewards strategy to people strategy and people strategy to business strategy. It is time to deal with this highly dynamic set of circumstances — urgent requirements for talent and increasingly complex people issues — by taking a rigorous approach to finding out what your employees truly want, what really gets their juices flowing and enhances their loyalty and then developing a total rewards system (base pay, bonuses, health and welfare benefits and intangibles such as culture, training and career opportunities) that rewards them for the value they bring.

Deloitte Consulting research supports the fact that the cost of total rewards (a combination of both financial and nonfinancial elements of a rewards program) represents the most significant business expenditure for most companies, often exceeding 40 percent of total revenue.

In addition, rewards traditionally have been applied uniformly across the entire employee population, with special consideration given only to top performers and senior executives. And if there happened to be one more dollar to spend on rewards in a particular year, it likely would be spent on a broad-based employee benefit plan, such as a 401(k) plan, rather than a targeted approach to maximize ROI.

This approach simply doesn't work anymore. The sheer level of diversity in today's typical workforce prevents the kind of "peanut butter" tactics that have been used for decades. As with most changes in today's business world, the movement is toward segmented, targeted approaches. In fact, building stronger employee relations is not all that different from building stronger customer relations — develop an understanding of what customers/employees want or need, assess the value differential that certain customers/workforce segments bring and provide accordingly.

In the customer relations department of a retail store, it might be known as the value of the "shopping experience." When implemented in the employee relations division of an HR department, we call it the value of the work experience. Thinking in terms of the value of the work experience could actually change the dynamic of rewarding employees — instead of focusing on the cost of managing compensation and benefit programs, the emphasis would shift to creating greater corporate ROI for employees who create the greatest value.

This change is much more than a tweak.

Three Steps to a Positive Way Forward

A few relatively small and simple changes in a total rewards program can have a major impact on employee motivation and productivity, which ultimately can affect earnings. Every year, most companies spend a tremendous amount of time and energy determining their business plans, setting the financial targets and agreeing how they will get to these targets. With a strong commitment to innovation and with no more effort than the planning process demands of most business units, HR leaders can begin the process of transforming their organization's approach to people at its most fundamental level.

1. Open the dialogue. Start the conversation in the HR department, reinforcing the idea that everyone — from benefits specialists to training to administration — is part of the same team with the same goals.

2. Open the dialogue with the C-suite and business unit leaders. Discuss workforce segmentation and brainstorm how to get inside the heads of the respective groups to develop a better understanding about what motivates and engages them. Develop a direct and real-time dialogue with the various employee segments using a rigorous approach to surveys and focus groups to explore their motivation levers regarding a variety of reward options — from cash and pension benefits to vacation time and training and career opportunities, as well as some more contemporary possibilities such as corporate social responsibility, day care or community involvement.

3. Reassess your company's total rewards programs and expenditures. Optimize the effect on your workforce, with particular emphasis on critical workforce segments and be sure to spend your money on those programs that can help generate the highest ROI. It is likely you are already closely aligned to people's importance to your organization's performance and the belief you must invest in people management to build sustainable performance.

Once you've identified your critical workforce segments and established a targeted and differentiated rewards system, your company will be better positioned to track the value its people generate and check that against the investment made in the rewards.

Create Your Own HR Tipping Point

How can you then measure the potential ROI and gain confidence that your total rewards program is actually contributing to business value? In broad terms, this is accomplished by viewing rewards as an employer-employee total rewards marketplace in which employees exchange their time and talent for the total rewards offered, and employers develop total rewards products that will elicit the desired results from their employees.

By understanding the dynamics of their own marketplace and consumers, employers can better assess the impact of total rewards on business value and focus their total rewards investment on those programs that have a higher likelihood of driving the desired return. If concern about costs of implementation is an issue, consider that many contemporary HR administrative systems are now capable of handling complex benefits arrangements very cost-effectively.

At the end of the day, you stand a very solid chance of having tipped your company's winning people strategy in ways that will add value at all levels. And instead of standing by a compensation and benefits plan that is viewed as a cost to be controlled, your new total rewards plan can become an investment to be managed for greater business value, representing a transformation that recognizes total rewards' consumer-driven nature.