'Strategic reward' takes a long-term approach to how an organisation’s reward policies and practices balance and support the needs of both the organisation and its employees. The concept of 'total reward' covers the tangible and intangible aspects of work that people value and may form part of a reward strategy.
This factsheet explores the design and development of a reward strategy, from rationale to implementation and gives guidance on the principles to consider. It introduces the various characteristics of total reward (including the elements they may include), before looking at the approaches available, and the advantages and drawbacks of total reward.
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What are strategic reward and total reward?
Strategic reward is based on the design and implementation of reward policies and practices that support and advance both the organisation’s business and people objectives, and employee aspirations.
Total reward covers all aspects of work that are valued by people, including such aspects as flexible working opportunities, or being rewarded fairly, in addition to the pay and benefits package. Total reward has implications for cultural change as it can focus in part on employee empowerment.
Links between strategic and total reward
Total reward may form part of a strategic approach to reward. For example, an organisation might adopt a total reward approach, providing cutting edge learning programmes together with flexible working options, as well as more traditional aspects of pay and benefits, to better recruit, retain and engage those it needs to secure its business objectives.
The role of strategic reward
Developing a reward strategy
Deploying strategic reward approaches often involves setting out a formal, written reward strategy, although it’s also possible to adopt a strategic approach without the use of such a document.
Content of reward strategies
In his Handbook of reward management practice, Michael Armstrong observed that ‘reward strategies are diverse and so is the structure used by different organisations to define and present them’. However, strategies typically include:
- A statement of proposed reward developments.
- A rationale setting out the case for the reward proposals.
- A definition of guiding principles.
- An implementation plan.
While different approaches exist, the kinds of principles to consider include:
Design pay structures and progression arrangements that ensure the values, behaviours, performances, and attitudes the business needs are rewarded and recognised.
Position variable earnings carefully against basic pay to encourage appropriate employee performances.
Develop a pay policy that’s externally competitive so as to recruit and retain those needed for business success while also taking into account internal market relativities.
Ensure both ‘vertical’ integration of employee reward approaches with corporate goals as well as ‘horizontal’ integration of reward policy with wider people policies.
Ensure reward decisions are fair, that processes and outcomes are transparent, and that actions are reviewed to check they've been correctly implemented.
For more on how reward strategies can be supported, see our factsheets on pay structures and pay progression, pay fairness and pay reporting, performance-related pay, bonuses and incentives and job evaluation and market pricing.
Putting strategic reward into practice
Although strategic reward is often taken for granted as desirable, some commentators have highlighted difficulties in translating theory into practice. One view concludes that attempts to use strategic pay systems are especially problematic for ‘a frustrated and often much maligned pay function and long-suffering line management’ and that employers might be better served taking a risk management, rather than a strategic, reward approach.
However, the adoption of strategic and risk-based approaches to reward aren't necessarily mutually exclusive.
Approaches to total reward
By recognising pay isn’t the only motivator and acknowledging the importance of tangible and intangible rewards within the wider context of the work experience, total reward has wide-reaching workplace implications.
What is included in total reward?
In addition to pay and benefits, the US organisation WorldatWork has identified these six components of the work experience:
- Performance and recognition.
- Work/life balance.
- Organisational culture.
- Employee development and career opportunities.
- Business strategy.
- Human resource strategy.
Although these have always existed in the workplace, they’ve often been taken for granted and managed in isolation. Under a total reward approach, all aspects of the work experience are recognised, and prominence is given not only to remuneration but also to non-financial 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 job.
Total reward may include some, or all, of the following elements as well as traditional elements of pay and benefits packages:
- Flexible benefits.
- Access to professional and personal development.
- Meaningful work.
- Freedom and autonomy.
- Opportunity for promotion.
- Being treated fairly.
- Recognition of achievements.
- Reward transparency.
- Able to raise matters of concern.
- Involvement in decisions that affect the way work is done.
- Flexible working options.
- Supportive line managers.
The term total reward can also be used in a more limited way, simply to refer to the financial value of the pay and benefits package rather than the value of the total package of financial and non-financial rewards.
An analysis of various total reward models by Thompson in Total reward, a 2002 CIPD Executive briefing, found that they can be characterised by an approach that is:
Holistic: it focuses on how employers attract, retain, and motivate those needed to contribute to organisational success using a mix of cash and non-financial rewards.
Best fit: it adopts a contingency approach – total reward programmes are tailored to the organisation's own culture, structure, work processes and business objectives.
Integrative: it delivers innovative rewards that are integrated with other people 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 they 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 career stage.
Distinctive: it uses a complex and diverse set of rewards to create a powerful and unique employer brand.
Evolutionary: it's a long-term approach based on incremental rather than on radical change.
While private sector employers have tended to be at the forefront of the formal development and adoption of total reward policies, there has been interest in the approach among public and voluntary sector organisations.
For example, among the public sector pay review bodies (which recommend pay rises for several groups of public sector workers, such as medical staff) in recent years there has been a focus on the non-basic pay advantages of working in the public sector, such as high-quality pensions and work-life balance provisions.
Advantages and drawbacks of total reward
These can include:
- Helping to attract, retain and motivate employees.
- Meeting both employee needs and organisation priorities.
- Enhancing the reputation of an organisation as an employer of choice through its capacity to place a value on the wider non-financial benefits of working for the organisation.
- Helping the employer better communicate its employee value proposition. Many employees are unaware of the substantial costs to the employer of benefits, such as pensions. To overcome this, employees can be provided with total reward statements, which emphasise the value not only of pay but also the wider benefits package and potentially other congenial aspects of employment.
Past CIPD research indicated employers believe they’re better at integrating financial aspects into a total reward approach than the non-financial aspects. An area of concern revealed by the research is line manager behaviour, with employers expressing concern at how well they’ve integrated the behaviour of these individuals within a total reward approach. Yet, if line managers don’t support the organisation’s commitment to total reward the approach is likely to fail.
Other potential challenges include:
Some rewards are easier to provide than others. For example, most employees might prefer a desk located by a window, but office accommodation is a finite and not particularly flexible resource.
Attempting to weigh the value of certain rewards against one another – particularly if the aim is to include a numerical or tangible value in employee total reward statements. distributed to employees. Staff can be confused by too much detail and choice.
The need to educate people by communicating the value of the reward package and why it's being offered.
The danger that the organisation defines the total reward offering with no regard to staff needs and wants.
The temptation for employers to shift the reward mix from pay to lower-cost benefits and non-financial rewards.
Cynicism among some workers that total reward is just a camouflage for a cost-cutting strategy.
Furthermore, our book Reward management: alternatives, consequences and contexts notes there's been a lack of evidence to suggest that this approach improves employee engagement, productivity or wellbeing. The authors flag that this may be about to change though, citing research looking at the positive impact it can have in recruitment.
Useful contacts and further reading
Books and reports
ARMSTRONG, M. (2019) Armstrong's handbook of reward management practice: improving performance through reward. 6th ed. London: Kogan Page.
PERKINS, S.J. and WHITE, G. (2020) Reward management: alternatives, consequences and contexts. 4th ed. London: Chartered Institute of Personnel and Development.
ROSE, M. (2018) Reward management: a practical introduction. 2nd ed. HR Fundamentals. London: CIPD and Kogan Page.
Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in print.
BROWN, D. (2014) The future of reward management: from total reward strategies to smart rewards. Compensation and Benefits Review. Vol 46, No 3, May/June. pp147-151.
CHURCHILL, F. (2020) More than half of reward strategies not fit for remote workforces, survey suggests. People Management (online). 19 November.
DAY, N. (2019) How well do pay and nonfinancial rewards attract applicants to jobs? World at Work Journal. Vol 28, 1st quarter. Reviewed in In a Nutshell, issue 85.
FARRAND, L. (2016) Put the scores up on the board: a total reward strategy will enable employees to see the full value of their package. Employee Benefits. May. pp18-19.
KUCZMARSKI, S. and KUCZMARSKI, T. (2019) How rewards fuel or fail innovation. Strategic HR Review. Vol 18, No 1. pp8-12.
WHITEHOUSE, E. (2020) How will reward strategies change after Covid? People Management (online). 4 June.
CIPD members can use our online journals to find articles from over 300 journal titles relevant to HR.
Members and People Management subscribers can see articles on the People Management website.
This factsheet was last updated by Charles Cotton: Senior Performance and Reward Adviser, CIPD
Charles directs CIPD’s research agenda and public policy on performance and reward. He speaks for CIPD at government consultations on topics such as, pensions, retirement, CEO remuneration, low pay and employee tax.
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