Total Reward and Total

Remuneration
DAVID PYPER | PETER BOREHAM
24 SEPTEMBER 2010
2
2010 Hay Group. All rights reserved
Total Reward
Definition: The sum total of what an employee receives from the
organisation
Broad definition of reward is becoming more commonplace in the market
Constraints on financial elements of reward
More strategic use of HR function
Different depictions or models in use. Most make use of:
Financial rewards
Work environment
Development opportunities
Dimensions include:
Directness of rewards (direct and indirect)
Nature of rewards (transactional and relational)
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2010 Hay Group. All rights reserved
Total Reward (continued)
R R
E E
W W
A A
R R
D D
R R
E E
M M
U U
N N
E E
R R
A A
T T
I I
O O
N N
Annual incentive
Bonus/spot awards
Base salary
Hourly wage
Common Examples
Intangibles
(typically
intrinsically
valued)
Benefits
Reward Elements
Base Cash
Definition
T O T A L T O T A L
T O T A L T O T A L
TOTAL
D
I
R
E
C
T
T
O
T
A
L
C
A
S
H
Intangible
Rewards where
we we can assign
an objective
value
Tangible C
O
M
P
E
S
A
T
I
O
N
Internal value or
motivation
LTI
Perks
Share options
Performance shares
Pension schemes
Health and welfare
Holidays
Child care vouchers
Life insurance
Cars
Clubs
Health checks
Quality of work
Work/life balance
Inspiration/values
Enabling environment
Future/growth opportunity
Short Term
Variable
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2010 Hay Group. All rights reserved
Total Reward model emphasising
intangible rewards
Tangible
rewards
Inspiration/
values
Quality of work
Future
growth/
opportunity
Work/life
balance
Enabling
environment
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2010 Hay Group. All rights reserved
Related
benefits
Training and
development
Health promotion
Work/life balance
Job satisfaction
Recognition awards
Work/Life programs
Employee assistance plans
Insurance benefits
Retirement plans
Pay
Self
actualisation
Ego needs
Social needs
Safety needs
Physiological needs
Maslows
hierarchy
of human
needs
Total Rewards model as related to
human needs
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2010 Hay Group. All rights reserved
Intangible rewards
Intangible rewards is a catch all concept that includes all rewards other
than tangible rewards
It is all of the reasons an employee comes to work at a particular organisation,
other than compensation and benefits that can be translated into dollars
By HR standards, intangible rewards are not soft:
They can be key to a companys actual recruiting and retention strategy
At a minimum, they should be taken into account as the company formulates
its competitive direct reward strategy
Employer value proposition:
Total reward strategies can and should have a direct link to the employer
brand
Supports the internal and external marketing of the company to employees
Focuses as much or more on intangible rewards
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2010 Hay Group. All rights reserved
What does changing pay mean for total
reward and the psychological contract?
The majority of staff in any organisation do not fall into the star or poor
performer category. They are good, solid competent performers
If the public sector is to reduce people costs and improve productivity whilst
delivering high quality public services, then those will be the people who must
deliver
Performance
F
r
e
q
u
e
n
c
y
The performance curve
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2010 Hay Group. All rights reserved
Total reward and employee
effectiveness
The McLeod Report draws links between employee engagement and
productivity
Lots of evidence that engaged employees are:
more productive
deliver a better financial outcome
more likely to stay
more likely to inspire customer loyalty
more likely to innovate
than those who are less engaged
There are two core routes to employee engagement:
things that organisations do to inspire engagement
things that they do to enable engagement
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2010 Hay Group. All rights reserved
Total reward and employee effectiveness

Clear and promising direction

Confidence in leaders
Quality and customer focus
Respect and recognition
Development opportunities
Pay and benefits
Performance management
Authority and empowerment
Resources
Training
Collaboration
Work, structure, and process
Employee engagement
Commitment
Discretionary effort
Employee enablement
Optimised roles
Supportive environment
Drivers
EMPLOYEE
EFFECTIVENESS
EMPLOYEE
EFFECTIVENESS

Productivity
Financial performance
Customer loyalty
Innovation
Enhanced organisation
reputation
Attraction and retention
of talent
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2010 Hay Group. All rights reserved
Engagement and enablement:
implications for action
Engagement and enablement
are both important
determinants of employee
performance
Organisations are unlikely to
sustain one without the other
Frustrated employees will
breakthrough barriers,
disengage, or leave the
organisation
Our research shows that about
20 per cent of employees are
frustrated
HIGH
DETACHED EFFECTIVE
INEFFECTIVE FRUSTRATED
LOW HIGH
Engagement
E
n
a
b
l
e
m
e
n
t
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2010 Hay Group. All rights reserved
Demonstrating the business impact
Increase in
employees above
performance
expectations
Reduction in
turnover rates
Customer
satisfaction rates
Revenue growth
Employee
retention
Employee
performance
Customer
satisfaction
Financial
success
10% -40% 71% x2.5
High
engagement
only
50% -54% 89% x4.5
High
engagement plus
high enablement
Based on linkage case studies using
Hay Groups global normative database
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2010 Hay Group. All rights reserved
A new map for public sector reward
Engagement
Better salary
management
New
pensions
Pay for
performance
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2010 Hay Group. All rights reserved
Better salary management
Current approach is inflexible, expensive and pays the wrong people
more
Move away from fixed increments
Shorter incremental scales
Variable increments to ensure pay is within an overall budget
Performance/capability-based progression
Focus on total cost, not pay inflation
Aim to get people to market and then stop, not above market
Acknowledge local market
Doing something is probably better than doing nothing
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2010 Hay Group. All rights reserved
Reasons for dissatisfaction about pay
increase
Source: CIPD, 2009
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2010 Hay Group. All rights reserved
Different pay cultures
Source: CIPD, 2010
How employees would like to be rewarded, by sector (%)
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2010 Hay Group. All rights reserved
Pay for performance in the public sector 1
How should this work?
Be clear about
What salary is for
What variable pay is for
For example
Salary is focused on role and the individuals medium-term value
Variable pay should focus on organisation (particularly for execs)
There is a danger with sub-optimal variable pay
But even sub-optimal variable pay is helpful providing it doesnt encourage
perverse activities
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2010 Hay Group. All rights reserved
Pay for performance in the public sector 2
Dispelling the variable pay myths
Variable pay doesnt motivate
But does communicate whats important
And links staff costs to value delivered
We dont want variable pay
Rational people tend to prefer fixed, guaranteed, pensionable pay to
something variable!
Now is not the time for variable pay
City bonuses are extreme by private sector standards
Deficit reduction will increase focus on value for money
Variable pay is divisive
Depends on the design!
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2010 Hay Group. All rights reserved
Pay for performance in the public sector 3
Dispelling the variable pay myths - more
Variable pay doesnt work
True. But only if its badly designed!
Theres not enough money available
May need to start small
Even modest payments can send a positive message
People shouldnt get extra money just for doing their job
But at the moment they get a salary even if they fail to do their job!
And delivering variable pay just for achieving the expected is OK if
salaries are set lower see graph below
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2010 Hay Group. All rights reserved
Truly variable pay
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2010 Hay Group. All rights reserved
Pensions context
A new settlement is needed
The old deal (compared to private sector)
Lower salaries
Better job security
Higher pensions
The new deal (compared to private sector)
Similar salaries
Historically better job security (about to change?)
Much higher pensions
And pension costs keep going up
Increased longevity
Salary growth (in some areas)
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2010 Hay Group. All rights reserved
Pensions suggested points of principle
Uncapped final salary difficult to justify
High earners dont need a guaranteed high % of their full final pay
Average salary is more appropriate than final salary
Reduces cost volatility
Avoids weighting expenditure towards best paid
Avoids huge pension cost on promotion
Penalty-free retirement at age 60 is unacceptable given todays life
expectancy and the extra cost of this compared to age 65
Pension is not an untouchable, God-given right!
Private sector workers have accepted reforms
Private sector unions have accepted major cutbacks where some degree of
defined benefit guarantee remained
Beware sudden and massive transfer of risk from employer to employee
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2010 Hay Group. All rights reserved
Some practical tips around total remuneration
Dont obsess about valuation!
Cannot practically allow for all the differences in peoples circumstances
which will influence the economic and perceived value of benefits
Perceived value will differ to economic value even after employee education
Dont obsess about the market
Market is an assessment tool, not a design tool
The Civil Service has always attracted talented people and will continue to
do so
Total Remvariations to market of less that 10% are unlikely to have a
significant impact on recruitment and retention if everything else works well
Balance choice and complexity
Current package is very inflexible and cannot be personalised unlike private
sector practice
But too much choice in (for example) pensions can be intimidating