What is Your Rewards Strategy?

Introduction

Many of my clients are beginning to worry more about employee retention than they have in the past few years. While rewards programs are by no means the only mechanism for improving retention, they certainly can be part of the solution. One of the reasons for the resurrected concern about retention, I believe, is because reward programs in many organizations have not received a lot of attention in the last few years. As organizations struggled in a challenging economic environment, many aspects of the rewards program moved to the back burner. Salary increases were frozen in some firms, or minimal in others. Salary ranges, if they have moved at all, did not move much. Bonus programs did not generate meaningful rewards in many organizations because company performance did not warrant it. Stock option awards were less frequent. And employers asked employees to share more of the ever-increasing cost of health insurance. The world of rewards has not flourished.

But the economy is showing signs of improvement, and many organizations believe that now is the time to "catch up" with the rewards program. We believe they are right: it is a perfect time to step back and think about what you are trying to accomplish with your rewards program. In other words, it's a perfect time to make sure you have the rewards strategy that makes sense for your organization.

Competitiveness

Of course, every organization would love to offer as generous a rewards package as possible, but in the end it becomes a question of what it can afford. So generally the focus is on ensuring the program is "competitive." The program must be competitive in two senses. First, it must not be so expensive as to put the organization at a disadvantage in the marketplace when competing with other organizations that offer similar products or services. And it must be competitive in the sense that employees or prospective employees should not view it as deficient when compared to the reward programs of other organizations.

But rewards programs have many elements: base salary, bonuses, overtime, shift differentials, employee benefits, recognition programs, stock, and others. A question every organization has to ask itself is whether it wants each element of its rewards program to be competitive, or is it willing to allow some tradeoffs among the elements as long as the rewards program is competitive in the aggregate.

For example, some organizations will adopt a philosophy of having low base salaries, high bonus potential and a moderate benefits program. These organizations may be in a highly cost competitive environment. By having a modest salary program, it has a better chance of controlling its fixed costs. By having an aggressive bonus program, it can reward individuals appropriately, but only when company performance warrants it. They try not to spend too much on employee benefits because they have a culture of high performance and they want to emphasize the "high risk" of performance based bonus programs rather than the "comfort" of generous benefit plans.

Other organizations will have a competitive base salary program, no bonus program at all, and a generous employee benefits program. This model is common in non-profits. Many non-profits are not comfortable offering bonuses. Their salaries are often competitive with the non-profit sector, but lower than for-profit organizations. They try to make up for these factors by offering a generous benefits program and/or an attractive and flexible work environment. Some non-profits also attract employees who might be particularly committed to the mission of the organization.

Still other organizations will offer high base salaries, and modest bonus and benefits programs. These organizations may be in a difficult recruiting environment. If they are having a hard time finding the right people, it may force them to offer high salaries. This in turn, from an affordability standpoint, may need to be offset by offering a relatively modest bonus and benefit plan.

Questions to Ask

It is worthwhile for any organization to ask itself a few fundamental questions to ensure it has a rewards strategy that makes sense for the organization. Here are two key questions:

1. When it comes to your goal of having a rewards program that is "competitive," with whom are you trying to be competitive?

What organizations should you compare yourselves to? Do you focus only on those in your geographic area? Do you focus only on those in the same industry? Do you focus only on those that are roughly the same size as your organization in terms of annual revenue or the number of employees? Or do you focus on some combination of these elements?

2. Are there certain elements of your rewards package that should receive greater emphasis than others? To answer this question you need to think about several factors.

• Employee performance: What behaviors do you need from employees in order to achieve business success, and how might the rewards program be structured to encourage those behaviors? For example, an organization may try to encourage the desired behaviors by having a pay for performance salary program that provides wide differentiation in the amount of salary increases based on individual performance.

• Cultural fit: Should certain aspects of the rewards program be emphasized over others because they are more of a "cultural fit?" For example, if the organization has a "paternalistic" culture, it may wish to place more emphasis on employee benefits because they provide "protection for the employee."

• Business environment: Are there aspects of the business environment you operate in that would cause you to emphasize certain aspects of the rewards program over others? For example, do you operate in a highly cost competitive environment? If so, you might decide to have modest salaries combined with an aggressive performance based bonus program.

• Employee preferences: Do employees value certain aspects of the rewards program over others? By emphasizing certain elements of the rewards program over others, would it make it easier for you to attract and retain the types of employees you need? For example, an employee population might value cash over employee benefits. This could cause an organization to put more emphasis on its salary and/or bonus program.

Til next time.