Walking the line

Getting the rewards balancing act right

Eric McMurray

January 1, 2007

Every organization must attract, retain and motivate employees. To accomplish this most effectively, an organization needs a Total Rewards Strategy: a plan to develop, implement and manage rewards programs that balance program costs with value to employees, motivate employees to deliver high performance and engage them in managing their financial and personal needs.

Reward costs are by far the largest single operating expense for many employers. Consequently, getting reward design, delivery and communication right is one of the most high-impact, high-return investments that an organization can make. The challenge of doing this is compounded by the constant changes impacting the rewards environment, which include the following:

•  Health care costs continue to rise, as employees are being asked to shoulder more of the cost burden themselves;

•  Employers are reconsidering their future commitment to defined benefit plans and are exploring alternative plan designs;

•  Some companies are modifying their stock option and equity compensation programs, thereby curtailing employees’ abilities to benefit from their organizations’ stock performance;

•  HR managers indicate that retaining and rewarding top performers is their highest priority, but still struggle with culture shifts needed to execute on this priority.

The key is to invest employee reward dollars across the workforce in a way that best balances employee and organization interests and generates the highest possible perceived value for employees at the most economical level for the enterprise.

While most employers want to achieve this balance, the challenge is prioritizing the solutions to create the best overall result. Depending on whether a company focuses on attracting, retaining or engaging employees, the relative importance of various reward elements can vary considerably. The Towers Perrin Global Workforce Study confirms that employees look for very different things at each of these stages of their employment life cycle.

Companies must start by getting the basics right – wealth creation, balance and opportunity. Companies often don’t have clear insight – and little or no data to help decide –where a reduction in costs would have the least harmful effect on employees’ views, dedication and work ethic. Neither are they confident about how to redirect their current level of investments to deliver the best results to those employees most critical to meeting business goals.

Recent Towers Perrin surveys of employers and employees provide answers to some of these questions, as well as insight into where companies are moving forward and others are stumbling. Although focused more on benefits, our 2006 Benefit Strategy Survey is indicative of the evolving attitudes of Total Rewards. Our survey found:

•  Most employers have already taken significant steps toward sharing more responsibility and risk for programs with their employees — and more changes are on the way.

•  Despite two years of change to benefit programs, employers say they’ve been less effective than they would like in achieving their cost management objectives and in driving the changes they seek in organization culture and employee behavior.

•  Employees say they recognize the reasons for changes in programs and accept shared responsibility for their cost, but this understanding is not reflected in the actions they’ve taken in the wake of changes to such programs.

•  Continuing changes in programs have created a significant disconnect between employers and employees and, in many organizations, eroded employees’ trust in management, as well as their commitment to their jobs and employers. With more change on the way, employers who don’t take steps to improve employee perceptions risk further alienating their workforces.

The change management equation

Companies maintaining a solid balance between cost and cultural objectives have focused as much on change management as on the specific changes to programs. At these companies, effective leadership and organizational communication – in combination with the right tools and information – are proving effective in eliminating disconnects and in strengthening employee engagement.

A winning Total Rewards strategy must bring together all of the following reward program elements:

Connect with the business strategy to create a high-performing culture – An organization becomes what it rewards – and many companies fail to connect poor performance and a misaligned reward strategy. Business strategy changes every three to five years, and with change, companies need to review their Total Reward strategies to ensure that they align with the business strategy.

Support the “ employment brand ” – The power of the brand comes alive if the implementation of communication afterward translates “ the deal ” into consistent and observable actions.

Generate maximum return on the reward program investment – Often, these significant investment decisions are made with little information about the potential return in terms of the employee behaviors that companies want to drive — retention, engagement, etc.

For employers, the good news is our research shows that employees understand the financial pressures on companies and the need to share responsibility for the growing cost of total reward programs. That somewhat unexpected finding suggests that management does have the employees’ attention and, with it, the potential to influence the program decisions they make and the perceptions they form about the company in response to program changes.

THE KEY IS TO INVEST EMPLOYEE REWARD DOLLARS ACROSS THE WORKFORCE IN A WAY THAT BEST BALANCES EMPLOYEE AND ORGANIZATION INTERESTS AND GENERATES THE HIGHEST POSSIBLE PERCEIVED VALUE FOR EMPLOYEES AT THE MOST ECONOMICAL LEVEL FOR THE ENTERPRISE.

Companies must capitalize on this opportunity – and quickly. Our survey findings clearly show that employees don’t understand the additional risks they’re taking on with current benefit strategies and, as a result, are not making the program-related decisions that are in the best interests of their companies or themselves. If employers expect them to move beyond superficial acceptance of such changes, assume responsibilities beyond cost contributions and take meaningful action, then leaders must focus more on how the company manages the change process and then support employee decision-making.

Making change work

Our study findings bring into sharp relief a number of imperatives that employers should be embracing to drive the kind of employee engagement that will make program change work, such as:

Understand your workforce in all of its diversity – Employers need to segment their workforces and address individual employee characteristics in the change process. For example, lower-income employees will have far different capacities for saving for retirement, and it's important that the decision-making tools and other support programs offered to them actually address their individual needs. Fully understanding every employee's ability to manage change is a critical success factor.

Invest in and develop a communication strategy – Changes to programs must include a strong educational component this is supported by appropriate tools. Effective communication will explain the need for the change, the business context for that change and the leadership view of the change. The organization should couple this communication with decision support tools and programs that actually help employees take on the responsibilities the employer expects of them.

Take steps to understand and address disconnects in perception – Nothing discourages employee engagement as quickly and thoroughly as a lack of trust in management. The good news is our survey shows there is some common ground from which employers can begin to affect the communications and actions that will align respective views more fully and effectively. Employees have expressed a willingness to take on more responsibility, which gives employers a tremendous opportunity to partner with them and drive alignment. Our study suggests three dimensions of change influence the ultimate success of a new reward strategy.

For more information on the 2006 Benefit Strategy Report, visit www.towersperrin.com or call 404-365-1728

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