Total Rewards: Federal
Author: Warren N. Rothman, Blue Prairie Group LLC
- A comprehensive total rewards strategy incorporates an integrated set of initiatives that are tied to the employer's business objectives, culture and core values. HR should lead the development and implementation of this strategy. See Total Rewards Strategy Overview.
- The performance management process provides necessary and valuable input to total rewards strategic initiatives. See Performance Management.
- Using total rewards initiatives, such as succession planning, internal or external training, job rotations, or mentoring, HR can develop a talent pool to fill employers' job vacancies and reduce costs. See Employee Development.
- A total rewards strategy should incorporate initiatives that help employees balance their work and personal lives. See Work-Life Programs and Initiatives.
- Often, employees do not understand the significant investment employers put into a total rewards strategy. HR can use various techniques to address that information void. See Communicating Total Rewards to Employees.
- A total rewards strategy can yield significant financial and nonfinancial returns to the employer. HR plays an important role in developing and monitoring these key business metrics. See Assessing the Impact of Total Rewards Strategy.
Total Rewards Strategy Overview
Attracting, motivating and retaining talent is critical to an employer's short and long term success. See HR Strategy, Management and the Law > Workforce Planning. A comprehensive, integrated total rewards strategy can help achieve those important objectives. Implementing a total rewards strategy starts with senior management's willingness to invest time and financial resources in the employer's human capital. Therefore, HR should be prepared to make a business case for total rewards by explaining the returns on those investments to senior managers.
Returns on those investments may be objective and readily quantifiable, such as:
- Reduced turnover or improved retention; or
- Measurable contributions to the employer's growth, including increased revenue or profits.
Or, returns may be subjective and less readily quantified, such as improved employee:
- Satisfaction; and
A total rewards approach should link to and integrate with the employer's business and HR strategies, while reinforcing the employer's overall culture and core values. Total rewards components can have a significant impact on prospective and current employees with respect to recruiting, onboarding, organizational integration as well as training, development and career progression. See Employee Management > Employee Retention.
Led by HR (in close collaboration with senior leadership and other functional heads), an integrated total rewards strategy typically includes the following components:
- Performance management;
- Employee development; and
- Work-life programs and initiatives.
When effectively implemented, a comprehensive, integrated total rewards strategy can give employers a competitive advantage by creating a productive, engaged and committed workforce. See Employee Management > Employee Retention.
Elements of Total Rewards Strategy
Compensation is the most visible component of a comprehensive total rewards strategy. If an employer wants to develop an engaged, motivated and productive workforce, its employees must feel they are being fairly and competitively compensated. In addition, if an employer wants to remain competitive, it must have a compensation plan that attracts top talent. Often, an employee's decision to work for a particular employer is based purely on the size of the paycheck. A total rewards strategy, however, is focused on getting both employers and employees to think beyond just a paycheck.
HR should help employers develop a compensation plan that is consistent with the employer's culture and values. An employer's compensation plan will be based upon the following considerations:
- Market positioning. HR should determine whether the employer's objective is to be a market leader (for example, pay at the 75th percentile), in the middle of the pack (50th percentile) or below market (25th percentile).
- Compensation mix. HR should determine if the employer wants to focus on base salaries or on both base salaries and variable incentives, such as annual bonuses, spot bonuses, stock options, etc. If the employer's compensation strategy will include variable incentives, HR should determine how variable compensation will be allocated in the short- and long-term. The employer should also decide whether equity-based variable incentives, i.e., stock options, are appropriate and, if so, how they will fit into the employer's compensation plan.
Employers with a strong commitment to total rewards will typically position themselves at the 50th percentile of the market or higher. Those employers will also invoke a compensation strategy that combines base salaries and variable incentives. Base salaries should be a significant compensation component for lower ranking employees, and variable compensation should be given greater weight for executives and higher ranking employees.
HR should also consider the following:
- Base salary. Assuming the employer has a salary structure with levels and ranges, new hires will typically be paid at the lower end of the range and below the range's midpoint. Employees' base salaries are increased within the range at varying speeds. How fast or slow an employee's base salary is increased will depend upon the individual employee's performance, potential and commitment.
- Variable cash compensation. These incentives will vary and should be performance-based. The key principle for HR to keep in mind is that employees should have a clear line of sight between their performance and any variable pay received. An unclear relationship can significantly diminish the incentive's impact. Variable cash incentives can take a number of forms, including:
- Short-term incentives are typically paid annually (but may be paid more frequently) and are based on individual, team or organizational performance, or on all three. Payouts may also vary based on the individual employee's potential and commitment.
- Long-term incentives are designed to incent and reward longer term performance. Cash plans will typically cover performance periods of up to three years. Payouts are typically larger than for short-term incentives, and the impact on the retention of key employees can be significant.
- Equity awards. Generally, equity awards are targeted to senior level employees (although some employers provide them to lower level, high potential employees). These awards are designed to provide employees with a sense of ownership in the organization. Stock options, restricted stock, performance shares or performance units are a few examples of equity awards. A three to five year vesting period is normal for most equity awards.
- Unexpected cash awards. Unexpected cash awards, e.g., spot bonuses, may be an important part of a total rewards strategy. Those "out of cycle" awards are timely, specific and immediately tied to the individual's (or team's) contributions. Since they are not constrained by the typical annual incentive structure, unexpected cash awards are a significant form of recognition.
A fair and competitive compensation plan is critical. It will not guarantee a motivated and committed workforce, but it will help. Most importantly, it will assist the employer in obtaining the maximum return on investment (ROI) from its other total rewards initiatives. For example, employees who believe they are fairly compensated are more likely to view their position as a career rather than a job and, therefore, may be more willing to participant in the employer's training, development and community involvement initiatives.
Benefits complement an employer's compensation plan. Benefits are a significant employer expense, often 30 percent or more of employee compensation. See Employee Benefits > Benefit Planning and Design. Some benefits are legally required and others are at the employer's discretion. Some are fully employer paid, some fully employee paid and others have shared cost.
Employees have come to expect a balanced benefits package. Employees' perceptions of compensation and of employer provided benefits packages have a similar impact on employee motivation, commitment and engagement. If an employer's basic benefits and compensation programs are positively perceived, then other components of the total rewards strategy are more likely to yield a positive ROI, including a positive retention rate.
Designing a benefits package provides significant opportunity for HR discretion and creativity. HR should design a benefits package that employees and candidates for employment will perceive as fair, competitive and affordable. As with compensation, however, the overall benefits package should align with the employer's and HR's business objectives, while reinforcing the employer's culture and values.
Benefits costs (particularly for health plans) have become a significant issue for employers. Therefore, as HR designs an overall benefits package, it should consider how costs will impact the employer's bottom line. See Employee Benefits > Managing Health Care Costs. Those costs, of course, must be weighed against the ROI for higher retention rates, ability to attract top talent from the labor market, etc.
An employer's total rewards strategy may include several benefits categories:
- Legally required, such as Social Security, Medicare, unemployment and workers' compensation insurance, certain types of leave (e.g., under the Family and Medical Leave Act), etc.;
- Health and welfare, such as medical, dental, vision, life insurance, disability protection, along with alternative funding mechanisms, such as flexible spending accounts (FSA) or health savings accounts (HSA);
- Retirement, such as defined contribution (401(k)) and defined benefit (traditional pension) plans;
- Paid time off, such as vacation, holiday, sick, bereavement, along with various leaves of absence (Note that the trend is for employers to combine vacation, personal and sick days into a pool of available days off. Combining paid time off gives employees greater personal control over how paid time off is used.); and
- Perquisites, such as noncash items available to all employees (e.g., discounts in retail employers) or to a select group of senior employees (e.g., car services, first class travel or financial counseling).
Employers focusing on total rewards will set performance standards that drive accountability and reward outstanding contributions. That is established by creating a "culture of accountability" that helps develop motivated, committed and engaged employees who achieve needed results. See Employee Management > Performance Appraisals. Developing and implementing a performance management strategy is a critical part of that process.
HR plays a key role in structuring and overseeing the employer's performance management process. Performance management is the integrated process of establishing and evaluating individual and team goals and accountabilities, and then providing appropriate rewards. When goals are achieved or exceeded, employees or teams may be rewarded with base salary adjustments, bonuses or other forms of recognition. Performance management must be an ongoing process with extensive management-employee interaction. To be effective, performance management cannot be reduced to an annual performance review.
Specific components of an effective performance management process are:
- Setting performance objectives. HR should work with managers to help them establish and communicate performance objectives to employees. There should be a clear association between an employee's performance and the rewards. There are several types of performance objectives, such as:
- Employee's ongoing performance objectives. For example, Bob is a junior accountant in Acme Banking Corp.'s financial department. Bob has an ongoing responsibility to generate month end financial reports.
- Employee's special or onetime performance objectives. For example, Bob is asked to develop and implement a new receivables aging report.
- Employee's personal development objectives. For example, Bob needs to obtain his CPA certification during the review period.
- Agreement on behavioral expectations. An employer's core values describe what it stands for and its expectations for employee conduct. While performance objectives define what is expected to be accomplished, behavioral objectives define how an employee should meet his or her performance objectives. For example, if an employee has a performance objective to "develop core job related competencies," supervisors should include a behavioral objective, such as "attend three or more external training programs." Total rewards oriented employers incorporate both what and how into the performance management process.
- Feedback. Employees grow and develop as a result of constructive, performance related feedback. For feedback to help change behavior, it should be both timely and specific. Feedback should be provided at several points in the overall performance management process:
- Ongoing. as expected results are achieved (or not) or as expected behaviors are demonstrated (or not);
- Midyear updates. a structured approach to documenting progress against performance objectives and making needed changes for the balance of the performance period; and
- Annual performance review. involves documenting full year performance, along with an in-depth discussion regarding whether the employee failed to meet, met or exceeded performance objectives. The annual performance review bridges the current performance period and the next performance period by identifying what was done well during the prior performance period and what should be improved for the next performance period.
Total rewards focused employers should incorporate an employee development and career planning component into the annual review.
Employers that are focused on total rewards should demonstrate a commitment to growing their own talent by providing developmental opportunities for employees. Developmental opportunities help employees mature professionally and grow within the employer's organization. An employer's willingness to invest in its employees' development may also attract new hires and help the employer retain current employees.
Stan Joseph is a highly sought after software developer. Acme Software LLC wants to bring Stan on board, but, as a start-up company, Acme cannot match the base salaries offered by its larger competitors. Acme does, however, have something its competitors do not - a comprehensive total rewards strategy.
When Acme offers Stan a position as head software developer, Stan tells Acme about three other job offers and immediately asks about the starting salary. Acme's hiring manager gives Stan a chart showing what Acme has to offer in terms of not only base salary, but also bonuses, variable incentives, equity awards, benefits, developmental opportunities, discounts with local vendors, etc. Stan looks it over.
Stan calls Acme a week later and accepts Acme's employment offer. Stan explains that he wanted to take some courses to develop his skills, but did not want to pay for them. So, he decided to join Acme because of its tuition reimbursement program.
While individual employees are responsible for taking advantage of developmental opportunities, HR needs to notify the work force that the opportunities exist. See Employee Management > Employee Communication.
While total rewards employers should be concerned about developing their entire employee population, targeted and selective investments in top performers may yield the most significant ROI for employers. To determine the best way to focus its efforts, HR should categorize employees by performance levels. For example:
- A - top performers whom the employer absolutely does not want to lose (typically only 15%-20% of the workforce);
- B - solid performers, the employer's core employee population, some of whom may be promotable (typically 65%-75% of the workforce); and
- C - below expectations performers, some of whom may improve while others will likely need to exit the organization (the remaining 5%-10% of the work force).
To develop or maintain its existing "culture of accountability," the employer should consider ways to nurture and grow the As, help the Bs develop, and, after providing adequate time for improvement, manage the Cs out of the organization. A, B and C employees will be identified based upon performance management results and supervisor feedback.
Employers should consider providing or sponsoring the following developmental opportunities:
- Internal training, including corporate universities;
- External training in specialized skills or subject matter;
- Offering tuition reimbursement and/or discounts for job-specific college courses;
- Access to virtual learning through podcasts and webinars;
- Special assignments, such as participation on a cross-functional task force;
- Job rotations and lateral moves (including overseas assignments) to gain exposure to new areas;
- Exposure to senior management;
- Ongoing performance feedback, including finding ways to provide public recognition;
- Participation in industry associations, including committee memberships; and
- Mentoring, either as the mentor for a new or developing employee (e.g., an A employee is the mentor) or as the mentee to receive feedback, coaching and exposure (e.g., the CEO meets periodically with groups of high potential employees).
A well-developed talent pool allows employers to fill key openings internally. See HR Strategy, Management and the Law > Workforce Planning. The first step in internal promotions is succession planning, i.e., determining who goes where. Typically, HR leads this effort with input from senior managers. Performance management is valuable to the succession planning process because it helps employers determine who is available and qualified to fill an open position.
Posting job vacancies provides a structure that allows others in the organization to express interest in, be interviewed for and, at times, be placed in openings. The more vacancies employers fill with internal candidates, the greater the ROI from their staff development initiatives. Also, employees will look beyond their paycheck and view developmental opportunities as a benefit of their continued employment with the employer.
Acme Department Stores has a reputation as a great training ground for employees. Acme earned that reputation because many employees leave to join a competitor after Acme trains them. Sue Abrams, Acme's CEO, wants to change this reputation by improving Acme's retention rate. To do so, Sue sets the following business objective - at least 80 percent of Acme's open management level positions will be filled with internal candidates.
Sue communicates this business objective to Tom Scott, Acme's senior vice president and director of HR. Tom initiates a succession planning process that starts six weeks after Acme's annual performance review cycle. The process involves developing a succession planning team that meets periodically. The team consists of Tom, Sue and senior managers from each of Acme's divisions. During the meetings, the team identifies its current and upcoming job openings and discusses the performance, potential, readiness and development needs of each internal candidate.
Tom consolidates the decisions from the succession planning meetings and develops a slate of candidates for each key position. The first year, 68 percent of openings are internally filled; by the second year, that rises to 82 percent.
Over the next several years, Acme's retention rates also increase. Three years later, Acme administers a job satisfaction survey. Survey results link increased retention to growth opportunities with Acme.
Work-Life Programs and Initiatives
Employees have obligations outside of work, and sometimes balancing those obligations with work can be challenging. Often, employees take a lower paying job or leave a higher paying job in search of the opportunity to balance work and life. Total rewards oriented employers should, therefore, make an effort to help employees succeed at work, home and in their communities. HR may draw from various work-life initiatives, including:
- Flexible workplace. Where appropriate, flexible scheduling, job sharing and telecommuting (or virtual arrangements) can give employees more control of their schedules and work, without impacting the employer's need for quality. See Employee Management > Managing Employees in Special Situations.
- Paid and unpaid time off. Employers can also tailor personal leave and other time off policies and practices to provide adequate time away from work for employees to spend with family and friends and/or to engage in community obligations. An employer's internal leave policies must, however, comply with the Family and Medical Leave Act (FMLA) and other similar laws. See Employee Leaves > FMLA.
- Health and wellness. Health and wellness initiatives (such as health risk assessments, blood pressure screening and discounted or on-site workout facilities) help reduce absenteeism and improve productivity, while helping control the employer's medical benefits costs. See Employee Benefits > Health Care Benefits.
- Dependent care. Employers may provide support for parenting (such as maternity or paternity leave) and dependent care (e.g., on-site or discounted external childcare).
- Community involvement. Employers should consider charitable giving, matching gift, volunteer programs and partnerships (for example, with charitable organizations) to support community programs that may be important to its employees. However, employers should avoid religious, political or other similar programs. See HR Strategy, Management and the Law > Employer-Sponsored Charitable and Social Events.
- Financial support. Employers can provide resources and referrals to help employees manage their finances (for example, sponsoring financial education programming delivered by the employer's 401(k) administrator).
Communicating Total Rewards to Employees
An employer should receive credit from its employees for making a significant investment in a comprehensive, integrated total rewards strategy. Employees are often not aware of the time, effort and dollars invested by HR and senior management on their behalf. This could lead to complacency and a reduced appreciation for the employer's commitment to its workforce. Worse yet, employees will focus on their paycheck without acknowledging the total rewards received from their employment.
On the front end, HR can get employees involved in the planning stage to build a sense of ownership and identification with the total rewards strategy. That can be accomplished through employee surveys (for example, asking about benefits preferences and trade-offs), focus groups (where more in-depth feedback can be obtained), as well as involving employees in some of the design decisions and vendor selections. Those involved in the front end processes can then become peer ambassadors for the employer, helping build employee acceptance and buy-in.
Following implementation, an annual total rewards statement can be generated for all employees. These statements show the actual dollars spent by the employer (and the employee) for each quantifiable component of the total rewards strategy. For example:
- Compensation would be 100% employer funded;
- Benefits (including legally required benefits, such as Social Security and Medicare) would be shared funding (assuming that the employer passes on some of the premium expense to its work force); and
- Employee development may be shared (partial tuition reimbursement) or 100% employer funded (for outside training, internal training delivered by vendors or attendance at professional association meetings).
Assessing the Impact of Total Rewards Strategy
If properly developed and implemented, a total rewards strategy will help the employer attract top talent in the labor market, keep its current employees engaged and reduce employee turnover. HR should have metrics in place to make sure the employer's total rewards strategy is working and should be sufficiently flexible to make necessary adjustments where needed.
HR should track such indicators as:
- Job acceptance rates. if candidates reject offers of employment, determine whether the employer's compensation and benefits packages are competitive;
- Employee retention. determine if the employer is reducing turnover of its top performers;
- Attendance. engaged employees find a way to get to work regardless of the circumstances, are often the first ones in and last ones out, and have few unexcused absences;
- Productivity. engaged employees get their work done efficiently and effectively;
- Talent acquisition. the extent to which the employer is able to fill open positions internally vs. the time and direct cost of going to the outside (If necessary to go to the outside, HR can put in place a meaningful employee referral program that will incent the current staff to recommend individuals to the employer.);
- Customer or client satisfaction. an engaged work force is customer focused, resulting in positive customer feedback along with high customer retention rates; and
- Financials. the employer needs to track both its top-line and bottom-line growth as the ultimate measures of the ROI from its total rewards strategic investment.
Acme Movie Theaters' CEO asks Jim Sheridan, Acme's chief HR officer to improve employee performance and productivity in Acme's various theater locations. In response, Jim takes steps to ensure that Acme's pay and benefits programs are market leaders, and initiates extensive employee training and development efforts designed to yield more internal promotions. Acme also creates more flexible schedules, initiates paid time off and begins employee volunteer programs in its theaters' local communities.
Acme has extensive metrics of theater performance, including concession revenues, cost controls and customer feedback. Upon launching the total rewards initiatives, Jim implements an employee engagement survey to generate baseline data and also sets up a special bonus pool to reward improved performance. When the survey is re-administered after 18 months, Jim finds that the theaters with the most improved employee engagement scores also have the most improved business metrics. Noteworthy is that 65 percent of the higher scoring locations have managers who had been promoted from inside Acme, while 75 percent of the lowest scoring theaters are led by outside recruits.
This provides further validation of the business impact of Acme's total rewards strategy, and provides data that Jim and Acme's VP of operations use to develop location specific action plans focused on strengthening total rewards acceptance and implementation. While the best performing theaters receive their share of the bonus pool that Jim had created, corrective action plans become part of the lower performing theater managers' goals and accountabilities for the next performance review cycle.
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