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Employee pay and benefits make up to 70% of overall company expenses.
Real wages have not kept up with inflation, so issues of pay and rewards keep employees up at night, and pay is now the most important topic they are looking for when considering a job, trumping everything else.
How can HR and compensation leaders respond to this?
Attracting the talent we need but also keeping the people we already have often comes down to the compensation we’re prepared to offer them
Catching up to current concepts
Attracting the talent we need but also keeping the people we already have often comes down to the compensation we’re prepared to offer them.
In many organisations, the answer almost certainly centres on outdated concepts like ‘salary bands’ and ‘job levels’ – ideas established decades ago that simply aren’t a good fit for the complexities of today’s employment landscape.
To address these issues, we embarked on a year-long, broad-based study of pay and benefits with around 450 companies and 94 organisational rewards practices.
The study, The Definitive Guide to Pay and Benefits: The Road to Systemic Rewards, highlights how broken the pay and benefits model is, and demonstrates how to move the function into the 21st Century.
For example, we found pay and rewards are now the top drivers of employee experience, with 44% of employees believing they are underpaid, but a mere 5% of organisations have a defined clear strategy for implementing a skills-based pay strategy.
Firms that do have a defined strategy in place for skills-based pay are twice as likely to innovate effectively as a business.
Compensation is a complex problem, confusing to HR, leaders and employees alike.
Based on our Global HR Capability Project (with participation from more than 9,000 HR leaders), designing the right rewards approaches is critical, yet three out of four HR practitioners are mere beginners in this area, and it’s the third-lowest performing capability across the board, with just 8% of HR professionals highly proficient.
Most compensation departments are stuck in the 20th Century, with rigid salary ranges, rewarding slow, linear career progression, lacking personalisation or technology enablement. We have to totally rethink compensation.
The way we’re going to achieve this is to replace the ‘total rewards’ concept line managers think is the only way to execute promotions and pay grades.
In a total rewards model, every job has a secret ‘level’. Within that level, there is a salary band that employees advance through via a performance management process until they reach the top.
Total rewards – the tools and strategies that organisations use to attract, retain and motivate their employees – stems from the early 20th Century.
Employers saw that pay and wages alone were insufficient to engage employees. Therefore, the concept of total rewards has evolved to include a range of benefits and perks.
Non-cash benefits costs have increased significantly over the last 10 years, and now account for around a third of total workforce expense.
As employers pile on benefits, some offer over 100 options, ranging from discounted movie theatre tickets to lavish gym memberships, and from pet insurance plans to the highest life insurance benefits.
The problem? As one total rewards leader told us: “Nobody can keep track of all of these benefits – not even I can remember all of them”.
We found pay and rewards are now the top drivers of employee experience, with 44% of employees believing they are underpaid, but a mere 5% of organisations have a defined clear strategy for implementing a skills-based pay strategy
Benefits are not working
Our research revealed that companies fall into four distinct levels of rewards maturity, with level 1 the least impactful, and level 4 the most.
These levels are found across industries, geographies, and organisational sizes. Only 9% of surveyed companies are at the highest maturity level – systemic rewards.
They balance pay equity, pay for performance, and skills-based pay to create rewards systems that are fair and inspire trust, while also differentiating performance levels with pay and encouraging skills development for the future.
Systemic rewards that work focus on pay equity as the key priority, rethinking pay for performance, prioritising the benefits offering towards flexibility, career and recognition and developing a strategy and transparent communication around rewards.
Companies that use these strategies have much better business, people and innovation outcomes.
Five myths of rewards
As we evaluated all the practices, programmes and approaches of pay and rewards, we came across various myths and revealed the truth.
Myth 1: Total rewards is the most advanced way of thinking about pay and benefits.
Truth: Total rewards – throwing benefits and perks to the compensation mix – is merely a stepping stone to systemic rewards that are business-driven, employee-focused and equitable at the core.
Myth 2: Pay equity and pay for performance are at odds with each other.
Truth: Pay for performance is at its core not a motivator but a requirement for equity, so people understand why they are paid what they are paid.
Myth 3: High compensation levels are key to engagement and attraction of talent.
Truth: Yes, companies need to pay fair wages. But pay equity is 13 times more impactful than lavish pay and benefits, and employees value career opportunities, flexibility and recognition more than a benefits maze.
Myth 4: Merit increases are effective in differentiating performance levels.
Truth: Rather than ‘splitting spare change’ of annual pay increases into tiny pieces that are disengaging for everybody, give non-performance related base pay increases (based on market ranges, cost of living, and rarity of skills) and use variable pay for performance incentives.
Myth 5: Benchmarking is the best way to determine what to offer employees.
Truth: Rather than focusing on benchmarking various competitors’ offerings, listening to employees, personalising the offering and communicating transparently is key.
That way, your workforce gets what’s most important for their unique needs, in the context of your company strategy.
Systemic rewards sets your company up for success: recognising all your people for doing their best work, contributing to team success, and building the right skills for the future
The road to systemic rewards
Clearly, moving beyond total rewards needs a comprehensive discussion about what performance truly entails within your environment.
That conversation needs to extend beyond performance management and delve into the question of what aspects of performance you need to be rewarding: Collaboration? Innovation? Profitability? Some other facet of contribution?
It’s an immense responsibility, and the rewards function can’t go it alone.
It requires collaboration and insights from across the company, working together with business leaders, talent acquisition, L&D, performance management, organisational design and development, DEI, people analytics, and employee experience to create an irresistible ‘employee deal’ that’s equitable and fair.
Systemic rewards sets your company up for success: recognising all your people for doing their best work, contributing to team success, and building the right skills for the future.
If you enjoyed this, read: Weathering a recession with reward and recognition