Total Rewards Framework and Model

Total Rewards Framework and Model

New pay is to align & optimize performance

Posted 27 January 2019 | Revised 01 May 2021

Total Reward

In an extremely competitive market place for talent, most companies are focusing on incentives and intrinsic elements to motivate and improve retention. Any arrangement must be looked at within the context of the company philosophy on ‘Total Reward’.

Exhibit 1: Reward Elements

Why is reward a strategic issue?

Represents an investment in the most valuable asset in the organization: Human Resources
Is often the biggest recurring annual cost
Provides an excellent mechanism for aligning organizational goals with employee goals
Provides major communication to employees about what the organizational values are and their progress in the organization
Major leverage on employee behavior

How is pay changing?

Business oriented “New Pay” is a way of aligning & optimizing performance.
Administration oriented “Traditional Pay” is a way of controlling employment costs.

Exhibit 2: Traditional Pay vs. New Pay

Objectives of a Reward Strategy

A reward strategy addresses the “why”, “how”, and “how much” questions surrounding pay and incentives.

The objectives of a reward strategy is to address the following:

Set out principles to guide the design, development and implementation of a reward program
Support the attraction, retention and engagement of the talent required to deliver the business strategy
Reinforce the desired organization culture and desired behaviors amongst employees
Provide the basis for sound reward governance
Provide the basis for communication with staff

A clear articulated Reward Strategy will help the organization align employee behaviors and actions to the business strategy, attract and retain key talent.

Key guiding principles of a reward strategy:

Competitive but affordable

Reward policy not to be driven by competitive market trends and movements, but it should be informed by them.
Reward to be pitched at a level that enables each part of the business to attract, engage and retain the required talent.
Systematic benchmarking of total reward against the right market comparators.

Pay for Performance

Reward arrangements to recognize high performance - it should differentiate between high performance, average and substandard performance.
Reward to be linked to agreed measures of business and individual performance.
A meaningful proportion of reward at Senior level should be ‘at risk’.

Simple and Transparent

Develop a simple and transparent systems with a significant amount of clarity on how they work and minimize ‘discretion’.
Invest significant time in the communication of reward ensuring it is clear, user friendly and in plain language.
Managers should be able to manage the day-to-day aspects of reward, including questions from their employees.

Fair & Trustworthy

Reward arrangements should ensure fairness of treatment within and between employee groups.
Employees will trust the way they are rewarded and that outcomes for variable pay are linked to the actual performance delivered.

Consistent & Sustainable

New reward arrangements should stand the test of time and not be required to be subject to regular re-designs (only evolutionary revisions).
Reward arrangements should be flexible to the changing business needs, including the mobility of talent to meet project requirements.

Clear levels of governance

Reward recommendations should be made by managers and senior executives who have the right oversight on business requirements and performance.
Sign-off for reward outcomes should be delegated but taken by sufficiently independent individuals to promote good governance.

Common Reward Life-Cycle Stages:

Stage 1 - Start-Up

Pay is managed by the Finance Director
Pay is perceived as an overhead cost to be controlled
No Pay Scales; There are simply ‘spot’ pay levels for everyone
No formal job evaluation
Performance rewards are discretionary
Links between skill and competency acquisition and reward are unexplored

Stage 2 - Maturity

Remuneration levels are set based on systematic monitoring of market data
Competitive benefits of which the core is harmonized among employees
Job evaluation are managed by use of formal approach
Performance rewards are underpinned by formal approach
Flexible approaches to Reward Management to support organization’s strategic objectives
Good communication on reward issues with the employees
A sensible balance is struck between central and devolved control over pay decisions; emphasizing line management involvement in and ownership of remuneration policy

Stage 3 - Old Age

Rigid pay structures are typically based on length of service
Rigidity and over emphasis on status and hierarchy in benefits and entitlement
Long-established, bureaucratic and often outdated approaches to job evaluation reflect old organizational values in design, application and hierarchies requiring an army of specialists to maintain
Performance Management are regarded as dishonest annual rituals
Market monitoring is over-systematized and often very costly
Policy development is over centralized

Stage 4 - Renewal

Policy is decentralized and devoted down to individual business units
Old pay structures, incentive schemes and progression systems are abandoned as too costly and too complex to administer
Broad banded pay structure is introduced to match a delayered organization
Benefit policy is revised, eliminating all superfluous items and allowances in favor of ‘clean cash’ and move towards flexible benefits
Competence-based or Team-based pay is introduced, and performance awards are paid only for demonstrable added value

Reward strategy can be achieved through:

Strong internal equity based on effective job evaluation;
Proper market alignment through effective comparison and positioning against reliable external market data on pay and benefits;
Structuring the “package” to get the right balance between, basic salary, bonus, allowances and benefits; AND
Developing an effective link between remuneration and job performance.

Policy setting and costing ‘Best Practice’ approach:

Determine the relevant markets for comparison
Establish the desired ‘market position’
Compare your data to the market
Calculate and test alternatives
Select the ‘best’ alternative

Positioning against the market depends on:

Competitive practice
Affordability
Business economics
Culture

Reward Audit

Answer and score the questions for your organization.

Score: A=12 B=8 C=4 D=0

Exhibit 3: Organization Reward Audit

Emotional Reward is more than ‘Just Pay’

We need to remember that reward has an ‘emotional dimension’

Tangibles
• physical environment • sustainability of work • work facilities • security

Quality of Work
• perception of the value of work • achievement • challenge • recognition • work interest

Lifestyle
• social environment • life-style balance • caring environment

Work Style
• working relationships • risk sharing • freedom & autonomy • pace of work

Building for the Future
• career advancement • learning & development • performance improvement & feedback

The 6 Guiding Principles

1. Think strategically about reward

Consider how to best position your organization relative to the competition
Be clear that ‘internal equity’ and ‘external competitiveness’ are key drivers
Communicate, communicate and then communicate some more

2. Invest heavily in a ‘Pay for Performance’ culture

Ensure performance management works - clear targets, well planned, continuous management, fair review, no surprises
Be aggressive on incentive payments and ensure you are ‘sharing in success’

3. Check the market and be transparent on findings

Rumors always ‘run wide’ of the market

4. Policies, Procedures and Guidelines should eliminate unfair practices

Be clear on how to position and move through the grade structure
Are there times when the job grade could be different from the personal grade?
Is the criteria for the annual review transparent?

5. Never under-estimate the power of recognition

Payment is never enough, ensure that staff know their contribution is being measured and when appropriate is appreciated (Awards; Presentations; Articles; Certificates; - they all help)

6. Accept that your best performing staff will always want more pay

It is their way of telling you that the value they deliver exceeds the compensation they receive

How to design a compensation structure in 5 steps?

1. Reward Strategy

A clear linkage with the overall business strategy to describe how an organization will use reward policies and practices to deliver its business strategy which may include manpower plans, recruiting & retaining the right talent levels, motivating high performers, incentive based schemes, etc.

Examples of Reward Strategy linkage:

Demands of the Business Strategy, including cost constraints & manpower plans
Underpins Organizational Change relative to jobs, career paths, etc.
Should recruit and retain the right staff
Should ensure that the organization motivates it’s high performers
Develops performance based incentives schemes to drive the business performance goals
Fitting reward processes to individual needs & expectations of employees

2. Internal Equity

The purpose of internal equity analysis is to determine and assess the relationship between similar jobs as evaluated and corresponding pay levels. This is only possible if there is a proper linkage between job analysis and job evaluation. Job size must be equitably in relation to other similar jobs within the organization.

3. External Competitiveness

Proper external market alignment through an effective benchmark and positioning against reliable external market pay & benefits data.

Why Use Pay Surveys?

To acquire accurate and reliable information about the external market place
To view company practice/position within that market
Track movements & changes in relevant pay markets
Provide informed advice to senior management on changes required to the compensation structure
As a guide to implementing internal salary administration and creating a salary policy
To assure employees that organisation is sensitive to market changes when reviewing pay levels

What are you benchmarking against?

Which market?

Local (e.g. States, Region)
Functional (e.g. IT, Accounting)
Industry Specific (e.g. FMCG, Banking)
International (e.g. US, Europe)

What element?

Base salary
Total Cash
Benefits
Total Compensation

Probably the most critical aspect of any pay survey is how jobs are measured.

Job Evaluation

Uses established methodology
Covers all jobs
Consistent across functions

Job Matching / Mapping

Uses generic job descriptions
May be underpinned by job evaluation
Unsuitable for unusual jobs

Job Title Matching

Very inconsistent between organizations
Unreliable results

4. Developing Compensation Structure

Structuring and assigning a compensation range/band against each relative job grade/job size. This is established by the desired “market position” and is tabulated using a percentage (%). Structuring an effective “right package” link between remuneration and job performance is very critical.

Country specific legislation will establish minimum wages, overtime pay, record keeping requirements, and equal pay affecting full-time and part-time workers in the private sector.

What is the basis for the pay range?