"How do we create compensation and benefits programs that can help us to attract the right talent, retain that talent, and help to engage that talent now and in the future?" - Keith Reynolds PepsiCo
By taking a total rewards approach - a combination of salary, benefits, incentives, rewards, and engagement- the whole shebang, focusing on all aspects of the employee’s wellbeing.
You can call it a strategy like Gartner or philosophy like McKinsey, but the idea is, a total rewards approach, in today’s evolving work system, shifts the focus from the ‘employee’ to the ‘human being'.
It has become an integral part of modern organizations looking to rise above their competitors through the efforts and contributions of their workforce.
“Some organizations have adopted "a culture of taking care of people," assessing the needs of their workforce based on factors such as age, education, demographics, and job level, and then offering segmented benefits to meet these needs.” - Josh Bersin, Bersin by Deloitte
Today, forward-thinking corporate leaders are using employee total rewards as a way to attract, retain and engage talent, ensure high productivity, drive performance, and overall success in a dynamic business environment.
“A ‘new generation of rewards’ emphasizes wellbeing by offering benefits that address financial wellness, fitness, stress relief, mindfulness, and work-life flexibility.” - Josh Bersin, Bersin by Deloitte
Why do we need a total rewards approach?
To begin with, what are total rewards? Employee total rewards are a combination of benefits, compensation, and rewards that employees receive from their organizations, including wages and bonuses, rewards, performance recognition, workplace flexibility, career opportunities, etc.
Next, talking about the strategy and set of principles that make up the total rewards approach, McKinsey calls it the “why” behind the “what” - a complete package (what) that emphasizes the employee’s emotional, physical, social, and spiritual wellbeing (why) while aligning with the company’s ultimate goal of revenue generation.
This table breaks it down for easier understanding:
Components of the total rewards system
So, how do you know you’ve nailed it with your total rewards package?
When your total rewards approach emphasizes all aspects of the employee value proposition (EVP), or in other words, when your employees feel like they’ve hit the jackpot, you get the ‘Best Workplace’ title, and every candidate is falling over themselves to work for you!
The total rewards strategy is a system that combines compensation and benefits with personal growth opportunities to create a highly motivating work environment.
Designing and implementing a successful total rewards strategy requires a deeper understanding of the various components that make up the strategy.
So, let’s look at these components in detail to understand how you can redefine your total rewards strategy:
1. What is compensation?
Compensation is the remuneration offered to an employee in exchange for their talent, time, and services. It includes basic pay – which is agreed upon by the employer and employee, fixed pay – the accrued salary including the fixed monthly allowances offered by the company, and variable pay – the uncertain part of the salary which depends on performance and efforts.
What does compensation include?
- Basic pay – Basic pay is calculated by dividing the annual salary, minus the benefits, by the number of hours worked in a year (based on a 40-hr workweek). It can be hourly, monthly, or annual and does not include any bonus, raises, benefits, or other monetary compensation.
- Fixed pay – This is the accrued salary mentioned in the payslip or the fixed amount an employee gets at the end of the month minus the deductions (taxable). Fixed pay is calculated by combining basic monthly salary with fixed monthly allowances like house rent allowance (HRA), leave travel allowance (LTA), medical allowance, conveyance allowance, etc.
- Variable pay - Also called ‘pay at risk,’ this part of the salary package has to be ‘earned’ by meeting or exceeding certain defined criteria. Only hard work pays off!
- Pay raise – Depending on how well the individual is performing or the company’s business success, any increase in earnings is guaranteed to send an employee straight to cloud 9! The best part, a hike becomes a part of fixed pay.
- Bonus - Who doesn’t like an annual bonus for their hard work or even a joining bonus when starting a new company? But don’t get too used to it because bonuses are not a regular offering.
- Overtime wage – If you’ve worked beyond your contracted hours, you could ask for overtime pay. However, it’s not a legal entitlement and depends entirely on the employer’s goodwill (to avoid disappointment, get some clarity during the initial discussions about salary).
2. What are benefits?
An employee’s benefits package usually includes the base salary and performance-driven wage and non-wage components such as benefits, incentives, workplace flexibility, and career development.
Every company creates its own benefits package, and the amount varies from month to month and is calculated based on individual, team, or the organization’s performance.
What does benefits include?
- Benefits –Benefits are legally mandated compensation offered to employees above their base salary package. You can usually gauge how employee-centric an organization is by looking at its benefits package.
- Supplementary Pay – Usually left to the company’s discretion, supplementary pay includes stock options, 401 (k) plans, bonuses, tips, etc. – a kind of accompaniment to the salary aimed at improving the employee’s general emotional wellbeing.
- Workplace flexibility and work-life balance – In recent years, the importance of workplace flexibility and work-life balance has skyrocketed due to its direct impact on productivity. With remote and hybrid working becoming a norm rather than an exception, more and more companies are using it as a tool to boost their employees’ morale, reduce work stress, improve work-life balance and boost performance.
- Paid leaves – From maternity to sick leaves, compensatory time off, and even paid vacations, paid leaves are usually calculated by dividing an employee’s annual leave balance by the number of pay periods in the year. Some paid leaves like maternity leave are governed by laws (ranging from 6 months to 1 year), while sick leave or paid vacations differ from company to company.
- Health Insurance – Most companies are mandated by law to provide a comprehensive health insurance plan covering dental and regular checkups. However, the insurance premium is left to the discretion of the company.
- Retirement benefits – Social security and pension plans are an excellent way to secure the employee's future and thereby their present loyalty and dedication. While these are supposed to provide an employee with a steady income after retirement, many companies offer their workforce a one-time payment.
- Legal benefits – Anything defined by state and federal laws comes under the purview of legal benefits. While it differs from region to region, it usually includes worker’s compensation, disability benefits, federal and state unemployment insurance, Medicare, tax assistance, and group legal plans.
- Incentives for long-term wealth creation – Most organizations offer their employees different kinds of motivation to achieve performance goals. This may or may not be in cash, but more often than not, they have a financial element and are usually linked to the KPIs that drive business success.
- Financial wellness – When a company is generous with its offers of incentive bonuses, extra vacation days (over and above the paid leave policy), stock appreciation rights and options, paid sabbaticals, or education support, its employees will go above and beyond in their work knowing their future is secure.
- Perks – Another ‘extra’ that goes beyond an employee’s wage and benefits package, perks vary across the industry and are dependent on the organization’s budget and goodwill. However, most purpose-led organizations today design their perks package to attract and nurture talent (with an eye on that ‘Best Workplace’ award!).
- Employee discounts and meal plans – This could range from membership discounts at various food and retail stores, gyms, spas, clubs, employee cashback, season passes to food vouchers like Sodexo, or even free food at the office (not every company can afford 5-star chefs though).
- Relocation allowance – Got a dream job but live in a different city? No problem! Some companies are happy to provide a reasonable relocation allowance that covers initial rent, travel insurance, travel reimbursement, or moving costs (including packing service, insurance coverage. Most companies also include 15-30 days of temporary housing at a hotel or guesthouse.
- Educational stipend – Though this is less common, some companies provide an educational stipend – a fixed sum of money - as compensation for job training. This is different from the salary paid to an employee.
- Child-care and tuition assistance – To provide a better work-life balance, reduce absenteeism and stabilize the workforce, some companies like Accenture, Dell, Microsoft, etc., sponsor child-care programs (onsite daycare or corporate tie-ups) and/or provide tuition reimbursement. This is a sure way to win brownie points with parents (especially women) who often struggle to balance their work and child-care duties.
- Wellbeing – When you think of employee engagement, wellness automatically comes to mind. This is even more evident in APA’s annual stress in America survey, drawing a distinct connection between work stress and psychological conditions like anxiety, depression, etc. Since the employee is the most valuable asset for a company, protecting them and optimizing their physical, mental, and emotional wellbeing makes sense. Most companies today live by the phrase – healthy, wealthy, and wise – a healthy employee makes for a wealthy (& wise) company.
- Work flexibility and work-life balance – The most common cause of work-related stress is attributed to not having work flexibility and a proper work-life balance. An increasing number of companies are exploring a hybrid work model divided equally between the office and remote location. When you have an urgent doctor’s appointment and a client meeting scheduled within 30 mins of each other, it helps to have the flexibility to take that meeting on the go without missing your appointment. Similarly, when you can spend a productive day at work without being burned out and still have an evening of fun with your family or friends, then you can boast about having a good work-life balance. Working 16-18 hours a day x 6 days a week at a stretch is an example of poor work-life balance – hello, burnout!
- Positive workplace for physical and mental wellbeing – A positive workplace culture aims to reduce work stress and promote physical and mental wellness in employees. Offering meditation courses, prayer rooms, onsite yoga classes, relaxing spa treatments or massage chairs and even free psychological counselling/psychiatric consultations are some of the initiatives that empower employees to focus on mental well-being. Whereas, onsite physicians, sick rooms, ergonomics training, and first aid centers ensure the employees’ physical wellbeing. When your employees have nothing to worry about on their physical and mental health, they will only have praises for your company, you can then pat your back!
- Teamwork, team outings, fun day at work – Another way to boost emotional wellbeing is by providing fun collaborative and employee-centric experiences like retreats, team building activities, annual days, fun at work initiatives, team lunches, and outings, etc. The list is endless. When your employees are having fun, they come back to work with a fresh mind and the zeal to excel.
- CSR initiatives – Companies like Deloitte, have shown us how their CSR and community initiatives (Impact Day) have had a direct impact on employee engagement. The feeling of being able to give back to the community is linked to the psychological wellbeing of the employee by engendering a sense of purpose and satisfaction.
- Meals, onsite wellness centers – Who doesn’t like a fully stocked cafeteria with subsidized items or free meals every day? Employees at global companies like Google and Facebook are spoiled for choice with free, five-star meals, a fully stocked pantry, free food, and beverages from vending machines in addition to onsite sports, wellness, and medical facilities and even a breakroom for that 10-minute power nap!
- Career development – Apart from a good pay package, this is the one thing that employees look for in their companies. When a person joins a company, they do so with the expectation that they will hone their skills and advance along their chosen career path. A promotion or new role-based learning opportunity is as important as a pay hike or a bonus to most employees. Companies that focus on their employees’ career goals and development plans usually see a spike in performance and productivity, which translates to profits for the company.
- Growth opportunity– The best way to help an employee’s career growth or professional development is by providing new responsibilities and experiences that can improve their skills and overall knowledge.
- Learning and development – Learning and development hold the key to employee engagement and productivity. Give your skilled employees a chance to advance their skills through learning and development initiatives, sponsoring certifications and courses, and they will thank you by applying those skills to their job.
- Training & Coaching – Most companies offer regular training and mentoring sessions aimed at skill development and enhancement. Some companies even have a designated L&D department to guide and advise their employees to build a productive workplace with an engaged workforce.
- Career breaks – Are you looking for a sabbatical or want to dial down to accommodate a change in personal circumstances? Some global companies like Deloitte offer their employees the flexibility to take career breaks or work reduced hours. This could be one of the reasons why Deloitte has long-serving, loyal employees with tenures ranging from 20-40 years.
3. What are rewards?
Unlike total rewards compensation and benefits, which are tangible, measurable, and mostly monetary, this one is a little more intangible – more like collective experiences that the company offers to its employees in return for their passion, dedication, commitment, hard work, and contributions to the organization’s continued growth.
At the most fundamental level, rewards are all about building an engaged, motivated workforce by boosting emotional wellbeing, offering career development, and frequent rewards and recognition.
What do rewards include?
- Rewards – What used to be the occasional performance bonus or an annual day out in most companies has now evolved into structured, well-defined programs with measurable KPIs for success. Both monetary and otherwise, rewards are a company’s way of offering positive outcomes for performant behavior. Multiple studies and reports show that the new, multi-generation workforce looks to their organizations for tailored incentives and rewards that fit the broader business success goal.
- Performance or annual bonus – Unlike regular wages, a performance bonus is the standard way to reward your employees for a productive year. Preceded by a performance appraisal, the actual bonus is usually calculated around 1-5% of the annual wage or salary, but it can differ from organization to organization. Annual bonus’ on the other hand, depends on how well the company has been doing. A good year when the company exceeds its revenue targets usually calls for a cash bonus for the employees who contributed to the success.
- Gift cards/vouchers/points/discounts – The latest trend in the industry is giving employees near-cash gifts (tax-free up to $50) like gift cards/vouchers/point-based rewards or employee discounts and cashback to show appreciation for their efforts and achievements. This form of rewarding is based on the theory of extrinsic motivation and is the key to unlocking both creativity and achievement.
- Paid time off – This is different from paid leaves, classified as one of the five categories of benefits by the National Compensation Survey (NCS). Since most employees rate time off worth more than money, companies are using this to their advantage and as a way to show their commitment to their employee’s wellbeing.
- Employee experiences - While gifts and discounts are used as tools for extrinsic motivation, they alone cannot guarantee an employee’s passion and dedication. Therefore, companies are looking to provide personalized and positive experiences that appeal to the need for intrinsic motivation- tailored experiences that give employees a sense of satisfaction from fulfilling their roles. The idea is, if the employee feels motivated and enthusiastic about their work, they will bring their A-game and provide similar experiences to the company’s customers.
- Awards and recognition – Most companies today have realized the true potential of awards and recognition in boosting employee performance and productivity. A woke and purpose-driven workforce wants to be acknowledged, valued, and recognized. The recognition may be tangible – in the form of awards or intangible – in the form of appreciation/recognition. Once you reach that sweet spot where your employees feel appreciated and motivated, it will reflect on your profits chart. This is why companies that promote a recognition-rich environment outperform their competitors.
- Performance, service, leadership awards – The best way to show your commitment to your employees and reinforce performant behavior, awards are what distinguishes you on Glassdoor as a ‘great place to work!’ Your employees and executives need to feel a sense of accomplishment if you want them to be productive, and one way to achieve this is by giving spots and long-term awards.
- Service anniversary – The traditional form of shout-outs and a memento to mark long-term tenure has evolved into real-time awards for service anniversaries. If your employee has dedicated five or more years of hard work to make your company successful, they are worth more than a commemorative plaque or a $10 Starbucks voucher!
- Appreciation/acknowledgment – Want your employees to perform at their highest level? Acknowledge their efforts and appreciate their achievements. It can be something as small as a thank-you note, a pat on the back, or as big as a rockstar award. Real-time appreciation is the key to improving morale, lowering attrition, and preventing general disengagement. Oh, and don’t underestimate the power of personal feedback from the CEO!
- Social shout-outs – These days, a quick shout-out on LinkedIn is worth more than a private email. In an age of social media, companies that see their business accelerate usually fuel their employees with regular doses of appreciation and social shout-outs.
- Peer-to-peer recognition – Peer recognition is one of the most powerful tools to boost individual and team morale. Recognition from the people around us drives us to be a better version of ourselves. The same applies in the workplace. Recognition from colleagues empowers employees to champion the company culture while strengthening trust, collaboration, and teamwork – the hallmarks of a successful company.
- Corporate branded merchandise – Imagine the happiness on your employees' faces when they receive company branded merchandise! That is the power of brand loyalty.
Reimagining the total rewards experience
Using the Rorschach test of compensation, enhancement, and employee engagement, you could redefine your total rewards strategy to address your diverse, multi-generational employees’ preferences and needs.
When creating a total rewards package, your aim should be to stimulate the chemical Dopamine (a neurotransmitter) in the part of your employee’s brain that ‘processes rewards and creates positive emotions like satisfaction and enjoyment.’
According to Gallup, high levels of dopamine can stimulate feelings of accomplishment and pleasure; the lack of it leads to ‘ feelings of frustration, anxiety,’ while the need for it ‘can cause people to make career-altering decisions.’
But a note of caution here – When creating and implementing a total rewards package, you must also assess the potential risks and impact on employee morale and measure the success and fallouts if the package is not well-received.
The whole concept of total rewards centers around improving the psychological contract between the employee and the company. So, how do you enhance this contract, nurture talent, and realize the collective ambitions of your workforce and the organization.