CIPD - Total reward

Pay and reward

Revised April 2008

This factsheet gives introductory guidance. It:

introduces the idea and components of 'total reward'
considers the perceived problems of a total reward scheme
gives the CIPD viewpoint.

By recognising that pay is not the only motivator, and acknowledging the importance of not only tangible but also intangible rewards within the wider context of the work experience, total reward has wide-reaching implications for employers and employees alike. Total reward is potentially very powerful in assisting employers align their HR and business strategies with employee needs, to improve performance. As a concept, total reward is not new. However, the latest of our annual reward management surveys finds that only around three in 10 employers have adopted this approach so far. However, a further 21% claim that they plan to introduce total reward in the next 12 months.

Go to our reward management surveys

A definition

Total reward is the term that has been adopted to describe a reward strategy that brings additional components such as learning and development, together with aspects of the working environment, into the benefits package. It goes beyond standard remuneration by embracing the company culture, and is aimed at giving all employees a voice in the operation, with the employer in return receiving an engaged employee performance.

Components of total reward

Total Reward

Approach

An analysis of various total reward models by Thompson¹ finds that they can be characterised by an approach which is:

Holistic: it focuses on how employers attract, retain and engage employees to contribute to organisational success using an array of financial and non-financial rewards.
Best fit: it adopts a contingency approach - total reward programmes need to be tailored to the organisation's own particular culture, structure, work process and business objectives.
Integrative: it delivers innovative rewards that are integrated with other human resource management policies and practices.
Strategic: it aligns all aspects of reward to business strategy - total reward is driven by business needs and rewards the business activities, employee behaviour and values that support strategic goals and objectives.
People-centred: it recognises that people are a key source of sustainable competitive advantage and begins by focusing on what employees value in the total work environment.
Customised: it identifies a flexible mix of rewards that offers choice and is better designed to meet employees' needs, their lifestyle and stage of life.
Distinctive: it uses a complex and diverse set of rewards to create a powerful and idiosyncratic employer brand that serves to differentiate the organisation from its rivals.
Evolutionary: it is a long-term approach based on incremental rather than on radical change.

Extent of total reward in the UK

In 2008, around half of employers in our reward survey have adopted or are implementing a total reward approach, with a higher proportion among larger private sector firms.

Organisations that have adopted (or are in the process of adopting) a ‘total reward’ approach, by sector and size

	Percentage of organisations
All	50
By sector: manufacturing and production private sector services voluntary services public services	49 55 44 43
By size (no. of employees): 0-49 50-249 250-999 1,000-4,999 5,000	41 41 49 66 60

Source: our survey Reward management survey 2008

Why are employers considering total reward at the present?

Both new and old-economy companies are currently having to rethink their reward strategies. Traditional companies had a paternalistic approach to reward; one benefit for employees was that they could be relatively confident of staying with the same employer for as long as they wished, possibly for their entire working careers. Newer companies (particularly those in the hi-tech sectors) rewarded employees with exciting and challenging surroundings, but with no guarantee of job security. They also offered significant financial rewards, in the form of stock options. Now that the stock options have to be expensed on the profit and loss account, and the traditional companies have stopped providing a job for life, both have to look at new ways of attracting and retaining key personnel. Demographic changes have resulted in a more diverse workforce demanding different returns from work. Total reward is a mindset that enables employers to look at the bigger picture.

Flexible benefits are important but are seen by many as little more than an extension to the existing salary package and something, therefore, that can be matched by rival companies. To obtain maximum effect from these benefits, they have to become part of a bigger business strategy. See our factsheet on Flexible benefits for further information on this topic.

Go to our factsheet on Flexible benefits

At present, pay and benefits may be covered under a single, and controllable, flexible benefit scheme, but the employer is still faced with the prospect of having to meet demands for a wide range of other benefits including better office equipment or more training. In a fully integrated total reward package all the elements of the employee's work become part of a single flexible package. It is only when all the elements of the reward package (that is total rewards) are considered within the context of business and HR strategies that the total cost of each employee's job can provide the most valuable return to the organisation. Thus total reward links cost control with the demand by employees for greater choice and flexibility in the workplace. It also offers employers the opportunity to differentiate and create cultural brand, and thence competitive advantage; it is hard to replicate.

Total reward in relation to the work experience

The US organisation WorldatWork identifies five separate components of the work experience. These are:

recognition
work/life balance
company culture
employee development
environment, including job design and the physical workspace.

Although these elements have always existed in the workplace, they have often been taken for granted and thus not actively managed. Under a total reward policy, all aspects of the work experience are recognised and prominence is given not only to remuneration but also to less tangible rewards. This is important since experience shows that employees place great emphasis on intangible rewards when deciding where to work and the level of commitment to give to their work.

What might be included in a total reward scheme?

Broadly, total reward encompasses pay and benefits (generally in the form of a flexible benefits scheme), the working environment, and career and personal development. In more detail it may include some, or all, of the following elements:

flexible benefits
access to professional and career development
a challenging role at work
freedom and autonomy at work
opportunity for personal growth
recognition of achievements
preferred office space
being able to raise matters of concern
being involved in decisions that affect the way work is done
preferred office equipment and mobile phone
flexible working hours
home or teleworking
secretarial support.

Clearly some of these rewards are more easily provided than others, and some are more quantifiable than others. One difficulty in a total reward package, beyond the challenge of supplying these less tangible rewards, is attempting to balance them against one another.

What are the perceived advantages of a total reward scheme?

According to Thompson¹, the benefits that flow from a total reward scheme are:

easier recruitment of better-quality staff
reduced wastage from staff turnover
better business performance
enhanced reputation of the organisation as an employer of choice.

What are the perceived problems with a total reward scheme?

Total reward may be regarded as the next logical step after flexible benefits have been implemented. As only relatively few companies in the UK are successfully operating flexible benefits schemes at present (though many are considering such schemes), the number that could even contemplate introducing a total reward scheme is even smaller. As with other reward solutions, no off-the-shelf package is available for companies simply to plug into their operation. To develop an appropriate programme would be enormously complex and would not be without risks in its implementation, so it is an area that would almost certainly benefit from help provided by consultants.

Within the field of total reward, there is currently serious debate over where to draw the line between choices related to personal needs (such as life assurance) and choices that are strictly business-related (such as the choice of computer). Clearly, existing flexible benefits schemes already have grey areas, such as holidays, where the employee's decision is not without an impact on the rest of the organisation. But when it comes to choosing, say, a computer, some employers (and experts) believe that this is not an appropriate area for employee choice but should be a purely business decision.

Similarly, the choice of office accommodation may occasionally lend itself to a trade-off where limited office space is rationed according to who is prepared to sacrifice other benefits in order to obtain it, but (unlike, for example, life assurance) office accommodation is a finite and not particularly flexible resource. In this case, it would often be very difficult to meet everyone's requirements, regardless of how much they were prepared to sacrifice by way of other benefits.

Total reward practice

Our survey Reward management 2005reveals that employers believe that they are better at integrating the financial aspect (pay and benefits) into a total reward approach than the non-financial aspects (learning and development, work-life balance, and other financial rewards). An area of concern revealed by the reserach is line manager behaviour, with employers expressing concern at how well they have integrated the behaviour of these staff within a total reward approach. Yet, if line managers are not going to support the organisations’s commitment to total reward, for example, over flexible working, the approach is likely to fail.

View our 2005 Reward management survey

Summary

The aim of total reward is to encourage more positive employee commitment without incurring open-ended operational costs. The concept is not about transferring the burden of decision-making over items such as office accommodation or technology onto employees but about empowering employees to tailor their work and surroundings to meet their own needs, while allowing the company to keep control of costs.

Although a fundamentally simple concept, total reward is difficult to put into practice. This should not, however, prevent further exploration of the ideas behind this approach, with a view to implementing at least some of its principles when possible.

CIPD viewpoint

CIPD takes the view that total reward is a developing management practice that is fairly simple to understand but very complex in operation because it has wide reaching implications for approaches to reward management and for cultural change in organisations. It is an exciting leading edge concept that focuses on employee empowerment rather than employer command management. Total reward has the possibility of being a very powerful management tool and change catalyst.

Useful contacts

World at Work: the Professional Association for Compensation, Benefits and Total Rewards (formerly the American Compensation Association)

References

THOMPSON, P. (2002) Total reward. Executive briefing. London: Chartered Institute of Personnel and Development. Summary available at: http://www.cipd.co.uk/subjects/pay/general/totrewd.htm

Total reward