Reward management

is concerned with
the formulation and implementation of strategies and policies that aim to
reward people fairly, equitably and consistently in accordance with their
value to the organization.
Reward management consists of analyzing and controlling
employee remuneration, compensation and all of the other benefits for the
employees. Reward management aims to create and efficiently operate a
reward structure for an organization. Reward structure usually consists of pay
policy and practices, salary and payroll administration, total reward,
minimum wage, executive pay and team reward.

PSYCHOLOGICAL PERSPECTIVE ON REWARDS MANAGEMENT

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FORMS OF PAY
With the family, housing, and commuting allowances that are still used in
many Japanese
companies.10
These contrasting perspectives of compensationsocietal, stockholder,
managerial, employee,
and even globaladd richness to the topic. But these perspectives can also
cause confusion
unless everyone is talking about the same thing. So lets define what we
mean by compensation.
Compensation, or pay (the words are used interchangeably in this book),
refers to all forms of
Financial returns and tangible services and benefits employees receive as
part of an employment
Relationship.
FORMS OF PAY
Exhibit 1.2 shows the variety of returns people may receive from work.
They are categorized as
total compensation and relational returns. The relational returns
(development opportunities, status, opportunity to belong, challenging work,
and so on) are the psychological returns people
Believe they receive in the workplace.11 Total compensation includes pay
received directly as cash (e.g., base, merit, incentives, cost-of-living
adjustments) and indirectly as benefits (e.g., pensions, medical insurance,
programs to help balance work and life demands, and so on). Programs to
deliver compensation to people can be designed in a wide variety of ways,
and a single employer typically uses more than one way. Both relational
returns and total compensation can be designed to help the organization be
successful. However, this book focuses on total compensation, which
includes cash compensation and benefits.
Cash Compensation: Base
Base wage is the cash compensation that an employer pays for the work
performed. Base wage
tends to reflect the value of the work or skills and generally ignores
differences attributable to
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individual employees. For example, the base wage for machine operators
may be $12 an hour.
However, some individual operators may receive more because of their
experience and/or performance.
compensation
all forms of financial returns and tangible services and benefits employees
receive as part of an employment relationship
relational returns
psychological returns employees believe they receive in the workplace

T 1.2 Total Returns for Work

Some pay systems set base wage as a function of the skill or education an
employee possesses; this
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is common for engineers and schoolteachers. A distinction is often made

between a wage and a
salary, with salary referring to pay that is calculated at an annual or monthly
rate rather than
hourly. Periodic adjustments to base wages may be made on the basis of
changes in the overall cost of living, changes in what other employers are
paying for the same work, or changes in experience or skill.
Cash Compensation: Merit Increases and Cost-of-Living Adjustments
Almost all Canadian firms use merit pay increases.12 Merit increases are
given as increments to
the base pay in recognition of past work behavior. Some assessment of past
performance is made, with or without a formal performance evaluation
program, and the size of the increase is varied with performance. Thus,
outstanding performers could receive an 8 to 10 percent merit increase 8
months after their last increase, whereas an average performer may receive,
say, a 4 to 5 percent increase after 12 or 15 months. In contrast, a cost-ofliving adjustment gives the same percentage increase across the board to
everyone, regardless of performance, in order to maintain pay levels relative
to increases in the cost of living.
Cash Compensation: Incentives
Incentives tie pay increases directly to performance. However, incentives
differ from merit adjustments.
First, incentives do not increase the base wage, and so must be re-earned
each pay period.
Second, the potential size of the incentive payment generally will be known
beforehand. Whereas merit pay programs evaluate the past performance of
an individual and then decide on the size of the increase, the performance
objective for incentive payments is specified ahead of time. For example, an
auto sales agent knows the commission on a BMW versus the commission on
a Honda prior to making the sale. Thus, although both merit pay and
incentives can influence performance, incentives do so by offering pay to
influence future behavior. Merit, on the other
Hand, recognizes and rewards past behaviors. The distinction is a matter of
timing.
Incentives can be tied to the performance of an individual employee, a team
of employees, a
total business unit, or some combination of individual, team, and unit. The
performance objective
may be expense reduction, volume increases, customer satisfaction, revenue
growth, return
on investments, or increases in total shareholder valuethe possibilities are
endless.13
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Because incentives are one-time payments, they do not have a permanent

effect on labor
costs. When performance declines, incentive pay automatically declines, too.
Consequently,
incentives are frequently referred to as variable pay.
Long-Term Incentives
Incentives may be short or long term. Long-term incentives are intended to
focus employee
efforts on multi-year results. Although they could take the form of a cash
bonus, more typically
these returns are in the form of stock ownership or options to buy stock at
specified, advantageous prices. Thus, they straddle the categories of cash
compensation and benefits. Some argue that stock options are not
compensation at all, that they are more accurately described as an equity
incentive granted by owners to employees.14 We will treat options as part
of the financial returns employees receive from employers in exchange for
their work and ideas.
The idea behind stock options is that giving employees a financial stake in
how well the organization is doing will focus them on such long-term financial
objectives as return on investment, market share, return on net assets, and
the like. Magna grants shares of stock to selected key contributors who make
outstanding contributions to the firms success. Some companies have
extended stock ownership beyond the ranks of managers and professionals.
Sun Microsystems, Yahoo, Pepsi, Wal-Mart, and Starbucks offer stock options
to all their employees. These companies believe that having a stake in the
company supports a culture of ownership. They hope that employees will
behave like owners.15
Salary
Pay calculated at an annual or monthly rate
Merit increase
Increment to base pay in recognition of past work behavior
Cost-of-living adjustment
Percentage increment to base pay provided to all employees regardless of
performance
Incentives/variable pay
One-time payments for meeting previously established performance
objectives.
Benefits: Income Protection
Exhibit 1.2 shows that employee benefits, including income protection, worklife programs, and
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allowances, are also part of total compensation. Exhibit 1.2 shows that
employee benefits, including income protection, work-life programs, and
allowances, are also part of total compensation. Some income protection
programs are legally required. For example, employers make contributions to
the Canada/Quebec Pension Plan, Employment Insurance, and Workers
Compensation. Different countries have different lists of mandatory benefits.
Health insurance, dental insurance, pensions, and life insurance, are
common benefits. They
help protect employees from the financial risks inherent in daily life. Often,
companies can provide these protections to employees more cheaply than
employees can obtain them for themselves. Because the cost of providing
benefits has been rising, they are an increasingly important form of pay.16
Benefits: Work-Life Programs
Programs that help employees better integrate their work and life
responsibilities include time
away from work (vacations, jury duty), access to services to meet specific
needs (drug counseling,
financial planning, referrals for child and elder care), and flexible work
arrangements (telecommuting, nontraditional schedules, nonpaid time off ).
Responding to the tight labour market for highly skilled employees and the
changing demographics of the work force (two-income families who demand
employer flexibility so that family obligations can be met), many Canadian
employers
are giving a higher priority to these benefits forms. Husky Injection Molding
in Bolton,
Ontario offers a healthy workplace program with three main componentsa
wellness center, a
fitness center, and a nutrition program.17
Benefits: Allowances
Allowances often grow out of whatever is in short supply. In Korea and
Japan, housing (dormitories
and apartments) and transportation allowances are frequently part of the
pay package.
Some Japanese companies continue to offer a rice allowance based on
number of dependents,
a practice that grew out of postWorld War II food shortages. Almost all
companies starting
operations in China discover that housing, transportation, and other
allowances are expected.
Companies that resist these allowances must come up with other ways to
attract and retain talented employees. In many European countries,
managers expect a car to be provided. The issue then becomes what make
and model.
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allowances
compensation to provide for items that are in short supply
Total Earnings Opportunities: Present Value of a Stream of Earnings
Up to this point we have treated compensation as something paid or
received at a moment in
time. But compensation decisions have a temporal effect. Say you have a job
offer of $30,000. If
you stay with the firm five years and receive an annual increase of seven
percent every five years,
you will be earning $39,324 in five years. The expected cost commitment of
the decision to hire
you turns out to be $224,279 ($30,000 base compounded by seven percent
for five years, plus
benefits equal to 30 percent of base). So the decision to hire you implies a
commitment of at
least a quarter of a million dollars from your employer.
A present value perspective shifts the choice from comparing todays initial
offers to
Consideration of future bonuses, merit increases, and promotions. Andersen
Consulting, for
example, says that their relatively low starting offers will be overcome by
larger future pay
increases. In effect, Andersen is selling the present value of the future
stream of earnings.
But few students apply that same analysis in calculating the future increases
required to offset
the lower initial offers. Hopefully, all students who get through Chapter One
will now do so.
Relational Returns from Work
Why does Bill Gates still show up for work every morning? Why do all the
Microsoft millionaires relatively young employees made wealthy by the
astounding performance of Microsoft stockcontinue to write code? There is
no doubt that nonfinancial returns from work create intrinsic motivation that
has a substantial effect on employees behaviour. Exhibit 1.2 includes
recognition and status, employment security, challenging work, and
opportunities to learn. Other relational forms might include personal
satisfaction from successfully facing new challenges, teaming with great coworkers, and the like. Such factors are part of the total rewards, which is a
broader umbrella than total compensation. So, although this book is about
total compensation, lets not forget that compensation is only one of many
factors affecting peoples decisions about work. The .Net Worth box provides
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an example of a Canadian company using both total compensation and

relational returns to attract new employees.
What Attracts Employees to a Job?
The findings from a 2002 study of 765 Canadian companies by compensation
consultants
Towers Perrin illustrate the importance of both total compensation and
relational
returns. Although competitive base pay is the top attraction to a job, the
second most
important is opportunities for advancement. In third place is competitive
health care
benefits. The fourth and fifth most important factors that make a job
attractive to
Canadians are work/life balance and recognition for work, respectively. Other
important
factors include challenging work, learning and development opportunities,
and a
competitive retirement package.1
One Canadian company that promotes both total compensation and
relational returns
is IMS Health, a medical information and consulting company with offices in
Montreal
and Toronto. Their Web site highlights total compensation, including pay,
benefits,
incentives, recognition, social events, work/life balance arrangements, career
growth,
and more.
Total Rewards System - A Total Rewards System (TRS) is an integrated
reward system encompassing three key elements that employees value from
their employment: compensation, benefits and work experience.
A successfully implemented total rewards system helps organizations build a
powerful benefit structure. This benefit structure will not only motivate the
workforce but also regenerate a balance between corporate dollars spent
and employee appreciation and engagement. The TRS chart below
illustrates what can make up a total rewards program.

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How does Total Rewards System work? A total rewards approach helps
both employer and employee to look beyond monetary rewards and
strategically evaluate the value of non-monetary rewards. All elements of the
rewards program are then integrated into one system. CIE
Why adopt a total rewards approach now? In todays ever competitive
business environment, its becoming more and more difficult to offer higher
wages and more benefits. Benefit costs are sky rocketing and threatening to
go up even more in the years to come. Companies are being even more
careful as to how they spend every dollar. As a result, employers are looking
for alternative rewards that cost less but still motivate employees to excel.
How can you successfully and cost-effectively implement a total
rewards system? Every time the word benefit is mentioned, the phrase
daunting costs always jumps to mind. An effective total rewards system
may help break this connection. A disciplined implementation strategy will
allow the organization to regain control of each dollar spent. The process
identifies inefficiencies and finds the missing links between the rewards and
business strategy. N

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Secrets to a Successful Total Rewards System

1. Assemble the right team the chance of success depends on inputs
from all parties that will be impacted by the program. All stakeholders need a
place at the table.
2. Take inventories of everything thats in the mix every program,
plans, benefits, and perks, including those that are not in use but may be
considered in the future.
3. Assess and rank each program
A.Start with surveys & benchmarking - use industry benchmark surveys
and internal employee surveys to assess how effective each program is.
Effectiveness should be measured in different ways. For example, low
participation rate could mean low interest; however, it could also mean low
understanding of a particular program.
b. Review each policies and link to business strategies this is one of
the most critical steps. This is where the policies are mapped to each
business strategy. For example, is the purpose of your policy to motivate a
sales force, to increase customer satisfaction, or to retain personnel in a
nonprofit organization?
c. Conduct impact analysis Before implementing each program, ask this
question: whats the financial, organizational, employee, customer impact of
the plans? What if the company profit drops by 30%? What if revenue
doubles? Look at both issues today and into the future.
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4. Implement changes in stages set a timeline to phase in the

programs. It is important to give managers enough time to absorb the
initiatives and build new performance measures before the roll-out. Where
multiple divisions or facilities are involved, a pilot plan can be used.
5. Communicate, communicate, and communicate a plan that is not
communicated is no better than no plan at all. Proper communication is the
ultimate key to the success of a total rewards system. A communication
strategy needs the right amount of information, being delivered at the right
time and through the right media. Effective communication does not need to
be expensive. Well-written, creative communication material combined
with face-to-face discussions can sometimes be more effective than fourcolor, glossy booklets or sophisticated videos.
Total reward includes all types of reward non-financial as well as
financial, indirect as well as direct, intrinsic as well as extrinsic. These
embrace everything that people value in the employment relationship and
are developed and implemented as an integrated and coherent whole.
TOTAL REWARDS STRATEGY
Benefits make up an important component of the employment relationship,
providing employees with financial protection, access to health care and
programs to support work/life balance. Its no surprise then that employers
carefully manage their benefits programs. What is surprising is that they
often do so independently of other programs and, as a result, may not get
the highest return on overall benefits spending. Thinking about employee
benefits within a total rewards framework and approaching total rewards as a
differentiator for your organization will have a more positive impact on
attraction, retention and engagement while helping to manage cost and
volatility.
When properly designed, delivered and communicated, a companys
total rewards program can provide an incentive for talented people to join a
company, to perform at levels that produce desired business results and to
remain with the company as long as they continue to produce. In short,
companies can achieve a higher return on their investment in benefits and
other programs by operating within a total rewards framework.
Financial or experientialFinancial elements have a clearly defined value
or cost, while experiential elements are those the employee experiences
through interaction with the company, leadership, management, employees
and customers.
Personal or companySome rewards are tailored to the individual (e.g.,
salary, bonus, personal goals, development plan, etc.), while others are
provided in more or less the same way to all employees (e.g., benefits,
culture, work environment). Everything an employee receives from an
employer can and shouldbe positioned within this framework.
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A Bold New Total Rewards Framework

With a Focus on Benefits
Thinking about benefits within this total rewards framework provides focus to
how you design, deliver and communicate. With this framework, the
emphasis shifts from providing access to rewards as well as basic rewards to
using rewards to drive behavior (contingent rewards) and those rewards that
are going to set you apart (differentiators). In the end, these are the rewards
that will create the greatest return on your investment.

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