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The Top Five Advanta ges of a Tota l

Rewar ds Approach

1. Increased Flexibility

With the one-size-fits-all approach essentially gone, the twenty-first century may well

become the “rewards your way” era. Just as companies create niche products and

services to cater to small consumer segments (micromarketing), employers need

to start creating different blends of rewards packages for different workforce segments.

This is particularly true in a global labor market where workforce diversity is

the rule, not the exception, and when specific skills are in short supply.

A total rewards approach—which combines transactional and relational awards—

offers tremendous flexibility because it allows awards to be mixed and remixed

to meet the different emotional and motivational needs of employees. Indeed,

flexibility

is a two-way street. Both employers and employees want more of it.

As the importance of flexibility has become more understood, more companies

are allowing employees to determine when they work, where they work, and how

they work. Total rewards recognizes that employees want, and in many instances

demand, the ability to integrate their lifestyle and their work.

2. Improved Recruitment and Retention

Organizations are facing key shortages of best-in-class workers (top performers),

Information Technology (IT) workers with hot skills, and workers for entry-level,

unskilled jobs. The classic initial solution to a recruitment and retention dilemma is

to throw money at the problem. But because this solution is so overused, it does not

offer a competitive advantage. Furthermore, it immediately raises costs.

A total rewards strategy is critical to addressing the issues created by recruitment

and retention. It can help create a work experience that meets the needs of employees

and encourages them to contribute extra effort—developing a deal that

addresses a broad range of issues and spending rewards dollars where they will be

most effective in addressing workers’ shifting values.

Indeed, today’s workers are looking beyond the “big picture” in deciding where

they want to work. Work and personal life should be seen as complementary priorities,

not competing ones. When a company helps its employees effectively run both

their personal and work lives, the employees feel a stronger commitment to the

organization. In addition, numerous studies show that employees look at the total

rewards package when deciding whether to join or stay with an organization.

An actual summary statement can be prepared for potential employees, enabling

them to see the whole value of being employed by a company. As such, as highly

desirable job candidates explore their options with various companies, companies

with total rewards have a competitive advantage because they are able to show the

“total value” of their employment packages.

3. Reduced Labor Costs/Cost of Turnover

The cost of turnover—often the driver of recruitment and retention—is sometimes

invisible. In reality, it’s far from cheap. Estimates of the total cost of losing a single

position to turnover range from 30 percent of the yearly salary of the position for

hourly employees (Cornell University) to 150 percent, as estimated by the Saratoga

Institute, and independently by Hewitt Associates (Lermusiaux 2003). In addition,

the cost of turnover includes indirect costs such as losses from customers and sales,

as well as decreased efficiencies as productive employees leave and the remaining

workers are distracted.

4. Heightened Visibility in a Tight Labor Market

Talent shortages have become a chronic condition of business life, and experts

agree that the tight labor market is going to get tighter. As a result, employers can

no longer afford to simply view their employees as interchangeable parts. Organizations

quickly are realizing that every employee matters even more when there are

not enough employees to fill the available jobs.

In addition, demographic shifts (e.g., the increasing number of women in the

workforce) coupled with new economic forces (e.g., global competition) have

changed the employment landscape, creating an unprecedented need for committed

employees at a time when loyalty is low. If people can find an environment that’s

more in sync with their needs, they will make changes for that. Likewise, they will

stay put when they feel their needs are being met.

By gaining a clear understanding of what employees value, and mixing and

matching rewards within a comprehensive framework, companies can reallocate

their investment dollars to match what employees say they value most, and can communicate

the total package versus a patchwork of individual components.

5. Enhanced Profitability

Aside from the high costs of technology, HR professionals also are saddled with

escalating benefits costs and changes in health care coverage and medical protocols.

Employees want a “new deal” at the same time that companies—struggling to

deliver their financial targets—are readily cutting programs to trim costs. How to

balance these two realities? Change the mix.

A big misconception about total rewards packages is that they are more expensive.

That’s because a number of companies equate the notion of rewards with

“more”—more pay, more benefits, and more combinations of rewards. What companies

need to realize is that by remixing their rewards in a more cost-effective way,

they can strengthen their programs and improve employees’ perception of value

without necessarily increasing their overall investment. It’s largely a matter of reallocating

dollars rather than finding more dollars.

Indeed, as companies discover the power of targeted reallocation of rewards and

begin promoting the total value of their programs, they are abandoning the practice

of setting pay, benefits, and other budgets in isolation, without reference to broad

strategic and cost objectives. As they begin understanding their true aggregate costs—

often for the first time—they are in a position to measure the extent to which their

expenditures are in line with, over, or under competitive practice. And they can then

measure whether they’re getting a reasonable return on their overall investment.

In addition, today’s workforce includes several distinct generations, each with a different

perspective of the employer-employee relationship. Most employee research indicates

that younger employees place a far higher priority on work environment and

learning and development than on the traditional rewards components. In contrast,

older workers put more emphasis on pay and benefits. All employees are concerned

with health care, wealth accumulation, career development, and time off. It simply is

no longer possible to create a set of rewards that is universally appealing to all employees

or to address a series of complex business issues through a single set of solutions.

The challenge is to develop and implement a flexible program that capitalizes on

this diverse workforce. Valuing each employee includes understanding that everyone

does not want to work the same way or be rewarded the same way. To achieve

excellence, employers need a portfolio of total rewards plans.