 Total Rewards
Tough Times
Demand Focus—
Total Rewards Strategy
by Andy Hiles
A total rewards strategy is a focused game plan that allocates resources and
tailors activities to achieve a target performance level within a prescribed timetable. It must be unique to the organization that develops it and, when done effectively, will help drive sustainable, competitive advantage in the ever-tightening
market for key talent by carefully considering the full list of potential sources of
value to employees. This article resolves common areas of confusion over total
rewards strategies and provides some potential value drivers for consideration.
A total rewards strategy can drive differentiation from the competition and allow
for cost-reduction steps that save needed dollars but do not have a commensurate negative impact on employee appreciation and engagement.
A
colleague of mine recently said,
“The plan is the plan until we
get a new plan.” I like her statement very much in that it gets
to an essential element of strategy—a plan of action around
which everything will be
aligned. What she did not say
(but would have if asked) is
that, when done correctly, a
strategy is a template for allocating resources to drive
competitive advantage. Unfortunately, in the world
of employee rewards programs, some confusion exists about exactly what a robust total rewards strategy is (and is not).
Even more troubling is the sometimes lack of appreciation for the full scope of reward plan value drivers. Understanding these value drivers can help differentiate an organization from the competition and/or
allow for cost-reduction steps that save needed dollars
but do not have a commensurate negative impact on
employee appreciation and engagement.
44 BENEFITS QUARTERLY, Fourth Quarter 2009
Does An Organization Need a Comprehensive Total Rewards Strategy?
While covered extensively in other articles,1 it is worth
restating that over the last several years we have seen seismic changes in the landscape for talent and the people
programs that organizations develop to attract and retain
employees. Compensation programs are increasingly under stress to differentiate base salaries—rewarding high
performers—in the context of dwindling merit budgets.
Emphasis continues to shift from internal equity to market data comparisons. Short-term incentive plans are
moving away from subjective measures, and more recently long-term incentive plans are packed with underwater options that no longer hold any retention power.
At the same time, benefit plan costs are a large
and growing portion of reward programs, and employers are responding to the recession with cutbacks
in all nonessential areas. Sharpening the pencil
around employee benefit plan costs is, for most organizations, a logical and necessary step.
In addition to the added cost pressure brought
about by the recession, market volatility can make it
nearly impossible for the chief financial officer to
predict next year’s benefit plan costs. Employers,
aided by recent legislative changes and emboldened
by the clear mandate to reduce costs, are pushing
greater responsibility for making good decisions to
employees—who show signs of being unprepared
(and possibly uninterested) to meet the challenge.
And to complicate matters, the workforce is diversifying rapidly while employer-sponsored benefit plans
show disparities in savings and health results across
workforce segments. Organizations that do not have
an explicit plan to address these new benefit plan realities run the risk of overspending for benefits, cutting costs in the wrong areas or simply failing to garner sufficient employee appreciation for the dollars
invested.
What is a Total Rewards Strategy?
A total rewards strategy is a focused game plan
that allocates resources and tailors activities to
achieve a target performance level within a prescribed timetable. Strategy is future focused and is
typically a response to a new development in the
market (economists call this a nonlinear or discontinuous change). In employee reward programs, examples of nonlinear/discontinuous change include
the recession-induced free fall of stock values. In
benefits, nonlinear changes include the transformation in the consumer (the diversifying workforce), the
shift in risk/decision-making responsibility from employers to employees, and the growth in importance
of benefit plan costs (level and volatility) in achieving
overall organizational goals.
Noted strategy consultant Vijay Govindarajan of
the Tuck School of Business at Dartmouth says that
managers spend most of their time managing the
present—doing a better job at the same activities.
While this is important, he stresses that in times of
discontinuous change, managers must do two things
well at the same time: manage the present (operational efficiency) while creating the future (strategy).
According to the excellent Harvard Business Review article entitled “Can You Say What Your Strategy Is?” by David J. Collis and Michael G. Rukstad
(April 2008), strategy has three core elements:
1. Objective
2. Scope
3. Advantage
Let’s consider how these apply to employee reward plans.
The total rewards objective is the very specific
“what” an organization is trying to achieve. It should
be highly measurable as well as time bound. The organization should stick to reward plan goals that can
be measured, like differentiation in base pay, cost per
employee, plan participant behaviors (savings rates,
condition management compliance, etc.) and/or employee satisfaction with reward plan offerings, etc.
The scope aspect of the strategy statement adds
clarity to who and what is included. Often, total rewards strategy projects include on the compensation
side job evaluation, base salary, salary increase, recognition, short- and long-term incentives and, sometimes, performance management. The benefit program includes health and welfare, financial security,
paid time off and work/life programs.
Finally, the most important part of the strategy
statement—the advantage—outlines the means an
organization will employ to achieve its objective. This
is all about differentiation, finding the aspects of the
total rewards program that will be emphasized to
drive better results for the same or less cost. Organizations can drive differentiation using any of the
value drivers in the supply chain of total reward activities: plan design, communication, administration/
enrollment and decision support.
How is a Total Rewards Strategy Different than a Mission, Vision or Philosophy?
The total rewards strategy will specifically define
next steps for the organization while providing a consistent template for future decision making. It must
be unique to the organization that develops it and
(when done effectively) will help drive sustainable,
competitive advantage in the ever-tightening market
for key talent.
Sometimes organizations confuse strategy with a
 THE AUTHOR
Andy Hiles is a thought leader and national To-
tal Rewards, benefits and health care strategist at
Hewitt. He has led strategy development projects
at some of the largest public and private employers in America. Hiles is a fellow of the Society of
Actuaries.
After publication, Andy Hiles joined Aon Consulting as senior vice president and Large Market
Growth and Innovation Leader for the U.S.
Health & Benefits Practice.
BENEFITS QUARTERLY, Fourth Quarter 2009 45
mission statement, guiding principles or a vision
statement. Although all can be important, they are
quite different.
A total rewards mission or philosophy statement
explains why the organization offers employee reward programs. These statements are often broad.
Given the high-level nature of these statements, it
would not be surprising for two competing organizations to share similar statements. For example,
something like, “We provide pay and benefits to reward our employees for value-added service, and to
help them maintain good health while saving for
their future” would be akin to a mission or philosophy statement.
If employees assign a high value
to this product (reward plans), the
employer commands a higher
“price” and greater return on investment,
measured as attraction and retention
impact for a lower cost. 
A total rewards vision succinctly summarizes the
desired future state where the program is more effectively supporting organizational goals. So, if today
is point A, the total rewards vision describes point B.
The total rewards strategy connects these points.
Total rewards guiding principles or values statements articulate what the organization believes in
and/or the basic rules of behavior. These, too, are
general enough that they can be applied over broad
groupings of employees.
Reward Plan Value Drivers
Employees, as consumers of reward programs,
sometimes define the value they receive in ways different than we as “experts” might suspect. Designers
of reward plans have typically calculated value as
program cost or as an actuarially determined number
that can be compared to those of other organizations.
46 BENEFITS QUARTERLY, Fourth Quarter 2009
Employees have no insight into these calculations.
As the consumers of the product (reward programs),
employees and their families assign value in many
different ways. And this is important: If employees
assign a high value to this product (reward plans), the
employer commands a higher “price” and greater return on investment, measured as attraction and retention impact for a lower cost.
Of course, employee reward programs are not exactly like other consumer products. First, employees
dissatisfied with reward plan offerings cannot easily
go elsewhere for pay or to buy their health care, time
off or retirement benefits. The stress of job change,
benefit tax laws and availability of individual coverages are such that employees will “buy” these products from their employer almost regardless of how
they feel about them (with the return on investment
to the organization being the variable).
The second critical difference between reward programs and other consumer products is that it is very
important to the maker of the product (the organization) that the products work well. This is true for compensation plans (retaining employees and having
them focus on the right activities) and benefit plans
like retirement savings, as employers want their employees to be able to afford to retire. Recently, focus
has shifted to health care. In years past, health care
was just an expense to be managed. However, employers now realize that a well-designed health plan
will do more than just manage cost and trend—it can
help employees stay on the job and be productive.
In developing a total rewards strategy, we recommend that the employer go beyond just economic or
actuarial value and carefully consider the full list of
potential sources of value to their employees. Note
that employee preferences can be difficult to determine without quantitative research into the covered
population. However, some potential value drivers to
consider in addition to pay level relative to benchmarks and richness of benefit plan design include
• Ease of understanding—“I know what is most
important and how I will be rewarded for doing
it well.”
• Knowledge of the value of the total rewards
package—“I can now see all of the sources of my
rewards, and they add up to more than I
thought.”
• Well-designed defaults—“I didn’t have to do a
thing and I am saving and investing for retirement in a way that really fits my situation.”
• Timely information about programs and access
to services—“It really helps to know these services are available to me and that my employer
has prescreened them . . . so I know I am getting
a service I can trust, even if I have to pay for it
myself.”
• Ease of use and compliance—“It’s easy to get
what I need and do the things my employer
wants me to do.”
• Low cost (at enrollment or at point of use)—“I
can afford to enroll and use the plan that is offered to me.”
• Simplified choice—“I have choices that make me
think about what’s right for me . . . but not so
many that it is just confusing.”
• Consistency with employee perceptions of a positive employer brand—“I am proud of my company. Before I was hired they claimed that they
treat employees fairly and reward performance,
and that has certainly been my experience. Also,
even though I don’t take advantage of all of the
benefits, it tells me a lot about the kind of company I work for that we provide these programs.”
Remember that all of these sources of value are
relative—to the programs of other employers (to the
extent these are known by employees) and, to some
degree, the standards set by other products and services employees and their families purchase.
Also keep in mind that just like the customers for a
company’s services, employee groups differ significantly in what matters most. Age groups, concentration in certain roles and pay levels, turnover, opportunity for promotion, career development opportunities,
culture, competitiveness of local labor markets, geography (critical mass in some places versus wide dispersion) and racial/ethnic diversity all vary by organization. The total rewards strategy a company
develops should consider all these differences and be
unique to that organization. Having the total reward
programs be the same, or even a little better than
other organizations is acceptable—but it is intense
focus on what’s unique to the organization and workforce that will drive optimal efficiency and real competitive advantage.
b
Endnote
1. For example, see “Building a Culture of Personal Benefits
Responsibility” (Benefits Quarterly, Second Quarter 2007); “It’s
Time to Rethink Employee Benefits” (Benefits Quarterly, Fourth
Quarter 2006); and “Release Hidden Value: Maximize Your ROI
in People” in Executive Excellence Magazine.
International Society of Certified Employee Benefit Specialists
Reproduced from the Fourth Quarter 2009 issue of BENEFITS QUARTERLY, published by the International Society of
Certified Employee Benefit Specialists. With the exception of official Society announcements, the opinions given in articles
are those of the authors. The International Society of Certified Employee Benefit Specialists disclaims responsibility for
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©2009 International Society of Certified Employee Benefit Specialists
BENEFITS QUARTERLY, Fourth Quarter 2009 47