Mark Lerner

Total Rewards seems to be one of the brightest stars in today’s compensation heaven, but it also triggers a kind of schizophrenia in the minds of many human resources people.

On the one hand, we take great comfort in the idea of a holistic approach to compensation planning. We recognize that compensation objectives cannot be achieved without appropriate planning and communication of all elements in the compensation package.

On the other hand, we have a residual distrust for the phrase itself. Total Rewards oozes marketing come on. It sound like the name a drug store might attach to its customer loyalty program, or what some airline might give to its frequent flyer plan.

In fact, the marketing hype associated with some Total Rewards approaches can be very distracting. From time to time, we find ourselves seduced into the belief that the important and challenging issues associated with measuring total rewards and designing effective total rewards solutions have either long since been solved, or can comfortably be ignored. When this happens, even carefully nurtured compensation programs will break down.

Unfortunately, too often there is too little total in Total Rewards. Employees come to feel cheated. And in an employment world where employees really have a choice about where they will work, nothing induces people to vote with their feet more than the sense of being cheated.

The reality is that different companies and different people often mean too many very different things when they talk about Total Rewards.

One popular approach to Total Rewards is almost purely one of communications. The idea is to ensure that staff have the most complete understanding possible of the full gamut of pay, benefits and other rewards that flow to them as a result of their employment with a company. The corporate objective is very simple: to raise the perceived value of the total rewards package by making sure that every nuance of rewards is known and understood by staff. The message is equally simple: Total Rewards means more than just cash money.

A second communications-based definition of Total Rewards emphasizes the cost of non-cash programs, rather than just their availability and characteristics. The corporate objective is to overcome the long-standing lament of many a compensation planner that employees just don’t have a clue that benefits costs are a lot more than they are asked to pay for them, and that employer benefits costs are a large part of running a business.

While the costing of non-cash programs is far from a straightforward process, and while there are important differences between the cost of a benefit to a company and the value of the benefit to an individual, the message behind this approach is still very simple: benefits are not free, they cost a lot more than employees usually think they do, and they certainly cost a lot more than employees are usually asked to contribute.

For some companies, these communications approaches to Total Rewards are very new, for others they are very much old hat.

One of the newest uses of the Total Rewards concept is very different from these communications perspectives. Its proponents tout Total Rewards as a conceptual approach to the overall integration of the human resources function. In their view, HR has always and continues to organize itself into a number of independent problem solving units that function more-or-less in a vacuum. Compensation versus benefits versus training and development versus employee relations each operates with blinkers on, and tackles problems without due regard for what other HR areas are doing, and for what staff perceive is truly valuable in their relationship with the company.

In the distant past when the business world was a simpler place, they say, the human resources function could get away with these failings. In recent years, the environment has changed, but HR has not changed to keep pace with the needs of modern business realities. The tragic flaw in the human resources function and the evil to be eradicated is what proponents refer to as the single-silo solution. The truth and the light to be followed is an integrated Total Rewards approach that encompasses – in their phrase - everything that staff value in the employment relationship.

Supporters of this integrated approach package Total Rewards in four components:

1. The first is PAY. This encompasses salary, bonuses, commissions, profit sharing, cash recognition awards, and share-based awards.
2. The second is BENEFITS. This includes health and dental care, retirement and disability income replacement, paid time off and survivors’ benefits.
3. The third is termed LEARNING AND DEVELOPMENT. This is comprised of career development opportunities, training and skills development, and other learning experiences of every sort, including performance management.
4. The fourth is called WORK ENVIRONMENT. In Work Environment are included such things as organizational climate, leadership style, work/life balance programs and performance support.

Pay and Benefits are termed transactional rewards, because they have the character of a financial transaction. Learning and Development and Work Environment are termed relational rewards, because they are designed to bind staff more closely to the organization.

The dogma of this approach to Total Rewards holds that transactional rewards offer little competitive advantage because the underlying compensation programs can easily be copied by a competitor. Relational rewards, on the other hand, bind the individual and the organization in a way that financial rewards just cannot do. As a result, they create "the mindset required to open an employee to contributing the discretionary insights and skills necessary to create competitive advantage."

The strategy of Total Rewards, therefore, is to divert dollars from transactional rewards to relational rewards to get more true reward bang for the buck.

Maintaining Strategic Focus

In a way, it is all kind of nice. There is just one problem – and that is that is difficult not to feel that this kind of an approach takes one hurtling back to the land of marketing hype. Show me the money? Don’t be silly. Everybody knows that the money problems have all been solved, and even if they’re not, what really counts are the relational rewards that bind staff intimately to the organization.

Most compensation people recognize that this kind of dogma suffers from two severe weaknesses. First, it marginalizes or trivializes the core elements of the pay package – base salary, annual bonuses and long-term incentives. There is a difference between membership on the company bowling team and base salary. There is a difference between frog decals on the desks of good performers and annual bonuses. And as important as tuition and book reimbursements may be to some employees, they are not the same things as stock options.

Very few employees feel cheated when so-called relational rewards are not in place. The same cannot be said about the core elements of pay.

Unfortunately, employees can feel cheated very easily. This highlights the second major concern to which very broad definitions of Total Rewards give rise. They tremendously overestimate the extent to which planning and communication of the core elements in the pay package have been and are now effective in ensuring that employees do not feel cheated.

Single-silo solutions? In many organizations, the people who are responsible for salary planning are very different from those who are responsible for incentive planning. And when it comes to stock-based long-term incentives, a third group may be responsible for planning, those planners may reside in another country, and cash compensation planners may not even know in detail how the programs work or what is being offered to individual staff.

Even where the same compensation planners are responsible for all aspects of core total rewards, the integrated communication of the various pieces of the core pay package is often highly problematic. In particular, the value of the share component of core total rewards is infrequently communicated effectively, and often not communicated at all. This rarely-recognized waste of valuable compensation resources desperately needs to be corrected in many companies.

Total Rewards approaches that direct our attention to the identification and resolution of problems like these should be welcomed and adopted by all companies. Approaches that divert our attention from what is really important in compensation, and mistakenly equate compensation with the full spectrum of employee relations should be recognized as marketing hype, and universally shunned.