Implementing Total Rewards Strategies A guide to successfully planning and implementing a total rewards system SHRM Foundation’s Effective Practice Guidelines Series by Robert L. Heneman, Ph.D. with assistance from Erin E. Coyne This publication is designed to provide accurate and authoritative information regarding the subject matter covered. Neither the publisher nor the author is engaged in rendering legal or other professional service. If legal advice or other expert assistance is required, the services of a competent, licensed professional should be sought. Any federal and state laws discussed in this book are subject to frequent revision and interpretation by amendments or judicial revisions that may significantly affect employer or employee rights and obligations. Readers are encouraged to seek legal counsel regarding specific policies and practices in their organizations. This book is published by the SHRM Foundation, an affiliate of the Society for Human Resource Management (SHRM®). The interpretations, conclusions and recommendations in this book are those of the author and do not necessarily represent those of the SHRM Foundation. ©2007 SHRM Foundation. All rights reserved. Printed in the United States of America. This publication may not be reproduced, stored in a retrieval system or transmitted in whole or in part, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior written permission of the SHRM Foundation, 1800 Duke Street, Alexandria, VA 22314. The SHRM Foundation is the 501(c)3 nonprofit affiliate of the Society for Human Resource Management (SHRM). The SHRM Foundation maximizes the impact of the HR profession on organizational decision-making and performance by promoting innovation, education, research and the use of research-based knowledge. The Foundation is governed by a volunteer board of directors comprised of distinguished HR academic and practice leaders. Contributions to the SHRM Foundation are tax deductible. Visit the Foundation online at www.shrm.org/foundation. For more information, contact the SHRM Foundation at (703) 535-6020 or www.shrm.org/foundation. ii Table of Contents V Foreword VII Acknowledgments IX About the Author 1 Implementing Total Rewards Strategies 2 Challenging Questions 3 Total Rewards: A Closer Look 5 Before You Begin: Assembling the Right Project Team 6 Phase One: Assessment 8 Phase Two: Design 15 Phase Three: Execution 20 Phase Four: Evaluation 22 Conclusion 23 Appendix A: Industry Benchmark Phone Survey 25 Sources and Suggested Readings iii Foreword As a busy HR professional, you probably find it difficult to keep up with the latest academic research in the field. Yet knowing which HR practices have been shown by research to be effective can help you in your role as an HR professional. That’s why the SHRM Foundation created the Effective Practice Guidelines series. These reports distill the latest research findings and expert opinion into specific advice on how to conduct effective HR practice. Written in a concise, easy-to-read style, these publications provide practical information to help you do your job better. The Effective Practice Guidelines were created in 2004. The SHRM Foundation publishes new reports annually on different HR topics. Past reports, available online at www.shrm.org/foundation, include Performance Management, Selection Assessment Methods and Employee Engagement and Commitment. You are now reading the fourth report in the series: Implementing Total Rewards Strategies. For each report, a subject-matter expert with both research and practitioner experience is chosen to be the author. After the initial draft is written, the report is reviewed by a panel of academics and practitioners to ensure that the material is comprehensive and meets the needs of HR practitioners. An annotated bibliography is included with each report as a convenient reference tool. This process ensures that the advice you receive in these reports is not only useful, but based on solid academic research. Our goal with this series is to present relevant research-based knowledge in an easy-to-use format. Our vision for the SHRM Foundation is to “maximize the impact of the HR profession on organizational decisionmaking and performance, by promoting innovation, education, research and the use of research-based knowledge.” We are confident that the Effective Practice Guidelines series takes us one step closer to making that vision a reality. Frederick P. Morgeson, Ph.D. Chair, Research Applications Committee Associate Professor of Management Michigan State University Acknowledgments The SHRM Foundation is grateful for the assistance of the following individuals in producing this report: Content Editor Maureen J. Fleming, Ph.D. Professor Emeritus School of Business Administration, University of Montana Reviewers Mr. Rajiv Burman, SPHR Vice President Human Resources, USA & Canada Griffith Laboratories Grace A. Dobson, SPHR Benefits Manager University of Maryland Medical System Ingrid Fulmer, Ph.D. Assistant Professor of Organizational Behavior College of Management, Georgia Institute of Technology Frederick P. Morgeson, Ph.D. Associate Professor of Management Eli Broad College of Business, Michigan State University Project Manager Beth M. McFarland, CAE Manager, Special Projects, SHRM Foundation Major funding for the Effective Practice Guidelines series is provided by the Human Resource Certification Institute (HRCI®) and the Society for Human Resource Management (SHRM®). vii About the Author Robert L. Heneman, Ph.D. Robert Heneman is a recognized expert in the field of total rewards strategy. His work has been reported in The Wall Street Journal, USA Today, Money, Newsweek, and the Washington Post. Dr. Heneman is a professor of management and human resources in the Fisher College of Business at The Ohio State University. He has been a strategic compensation consultant for more than 60 publicand private-sector organizations throughout the world—including IBM, BancOne, Time Warner, Nationwide Insurance, Honda R&D, Whirlpool, Worthington Industries, U.S. Government Office of Personnel Management, and The Limited. He is the author of three compensation books—Merit Pay: Linking Pay Increases to Performance Ratings, Business-Driven Compensation Policies: Integrating Compensation Systems with Corporate Strategies, and Strategic Reward Management: Design, Implementation and Evaluation—and has published more than 80 articles in professional journals. Prior to joining the Ohio State University, he worked as a human resource specialist for Pacific Gas and Electric Company. Dr. Heneman serves on the editorial boards of a number of journals, including Human Resource Management Journal, Human Resource Management Review and Human Resource Planning. He has been selected for the Outstanding Teacher Award in the Masters in Labor and Human Resources Program numerous times by Ohio State students. He was also honored as the first recipient of WorldatWork’s Distinguished Total Rewards Educator Award. Dr. Heneman earned his Ph.D. in labor and industrial relations from Michigan State University, and an M.A. in labor and industrial relations from the University of Illinois at Urbana-Champaign. ix Implementing Total Rewards Strategies The right total rewards system—a blend of monetary and nonmonetary rewards offered to employees— can generate valuable business results. Implementing Total Rewards Strategies Implementing Total Rewards Strategies Rothschild Gourmet Foods is a small, privately owned company based in the American Midwest. It manufactures gourmet food products such as jams, olive oil and sauces, and has been in operation for 13 years. As a result of a company-wide change initiative, Rothschild managed to boost sales, slash controllable costs, increase product quality, and raise employees’ performance-appraisal ratings. How did they do it? The company changed the ingredients in its total rewards system (Heneman, DeSimone, Dooley & Jones, 2002). In addition to offering flexible work schedules and other nonmonetary rewards, Rothschild skillfully implemented an organization-wide incentive plan based on corporate performance. Rothschild isn’t the only company that has discovered firsthand the power of a well-designed and well-executed rewards program. Indeed, as far back as 1996, an article in USA Today (Neuborne, 1996) proclaimed a revolution in the rewards that organizations were offering employees. Instead of awarding employees pay increases and other incentives simply for seniority, the so-called “New Pay” linked rewards to achievement of the organization’s strategic objectives. HR professionals and other managers began experimenting with innovative types of rewards in the workplace, including skillbased pay and goal sharing. And they discovered that the right total rewards system—a blend of monetary and nonmonetary rewards offered to employees—can generate valuable business results. These results range from enhanced individual and organizational performance to improved job satisfaction, employee loyalty, and workforce morale. organizations put such plans into action. And they have made an interesting discovery: The specific practices companies use to implement total rewards programs— that is, to design, deliver, executive, and evaluate them—play a critical role in the programs’ effectiveness. This is true not only for the older, traditional rewards plans (Heneman & Werner, 2005) but also for more recent systems (Beer, Cannon, Baron, & Dailey, 2004). Since the publication of the USA Today article, organizations of all stripes have continued exploring innovative reward plans—particularly with an eye toward aligning workers’ interests with company goals. Today, this revolution manifests itself in two ways. First, organizations have moved beyond merely experimenting with new reward programs and have begun actually using them (Lawler, Mohrman, & Benson, 2001). Second, these plans have shown increasing variety. For example, reward systems now routinely contain both monetary and nonmonetary components—some of which (such as recognition) seldom saw use even as recently as a few years ago. Yet implementing total rewards programs raises daunting challenges. Practitioners who ignore these challenges do so at their—and their organizations’—peril. Drawing on the findings of empirical research, this report provides guidelines for HR professionals and other senior managers seeking to revise their organizations’ total rewards systems or design entirely new plans. As interest in and use of total rewards systems has intensified, researchers have stepped up their examination of the ways in which Implementing Total Rewards Strategy Challenging Questions To implement a total rewards plan, business leaders must tackle a broad range of challenging questions— everything from who will design the plan and what types of rewards it will include to how the plan will be funded and under what business conditions the plan is intended to operate. When executives overlook one or more of these questions, they risk developing a plan that delivers mediocre results once it’s implemented—as the following three stories reveal: • The Profitless Profit-Sharing Plan. A large chemical manufacturer and distributor developed a new profit-sharing system for its employees. The project team took great care to use compensation principles agreed upon by compensation professionals and devoted a year to designing the program. But the team members neglected to ask a crucial question: How will the plan work during an economic downturn? With much fanfare, the company announced the plan—and employees eagerly anticipated their first profit-sharing checks. As it turned out, the organization’s performance (as measured by profit) proved dismal during the plan’s first measurement period. Employees received no bonus checks, and their enthusiasm gave way to resentment and skepticism. The company abandoned the plan. If it had acknowledged the possibility of an economic downturn and better communicated the ramifications of such a downturn for payouts to employees, it might have avoided the backlash. • The Missing Appraisal System. A federal government agency enacted a pay-for-performance plan that pegged individual pay increases to employees’ performance as assessed by a formal appraisal system. However, the agency launched the plan before putting an organization-wide appraisal system in place. Managers had to hastily define performance measures by which to assess their employees’ contributions and thereby determine salary increases. This haphazard development of measures led to a highly subjective appraisal system that employees saw as unfair. Just one year after the plan was implemented, the agency eliminated it. • The No-Go Goal-Sharing Plan. In a heavily unionized organization, top management decided to initiate a new goalsharing plan that awarded cash bonuses to employees based on their facility’s business performance. The plan was piloted at one facility, and a research team set out to track the business performance of the plant against that of a similar facility not using the plan. The team found that the performance of the facility using the goalsharing plan exceeded that of the other facility—suggesting that the organization should roll out the new plan at its remaining facilities. But the implementation team had not consulted union leaders at these other plants on the practical implications of the goal-sharing program. And even though goal sharing had proven its mettle during the pilot, the union opposed a company-wide rollout. Implementing Total Rewards Strategies Total Rewards: A Closer Look In recent years, the phrase “compensation and benefits” has given way to “total rewards”—which encompasses not only compensation and benefits but also personal and professional growth opportunities and a motivating work environment (for example, recognition, valued job design, and work/life balance). What explains this broader view of rewards? First, stiffer competition in business has made it difficult for cost-conscious organizations to offer higher wages and more benefits each year. Employers have had to find alternative forms of rewards that cost less to implement but that still motivate employees to excel. Second, organizations have become much more strategic in their management of human resources (Barney & Wright, 1998)—including integrating their various human resource functional areas. For instance, some companies now treat compensation and training as rewards that must be managed together rather than separately by different HR teams. The “Total Rewards Strategies” chart sheds light on the wide range of strategies that can make up a total rewards program. To implement total rewards strategies successfully, organizations must follow a disciplined process (Ledford & Mohrman, 1993), which is depicted in “Implementing Total Rewards Strategies Total Rewards Strategy Definition Compensation Base pay Wages and salaries Merit pay Base-pay increases based on employee performance Incentives Cash bonuses based on employee performance Promotions Base-pay increases based on potential to perform new job Pay increases Base-pay increases based on length of service with the organization Benefits Health and welfare Payment for injuries and illness both on and off the job Paid time off Payment for vacation time or excused days from work Retirement Payment for work no longer performed based on length of employment Personal Growth Training Skill development through on- or off-the-job instruction Career development On-the-job coaching to develop skills Performance management Ongoing goal setting and feedback to develop skills “Total rewards” encompasses not only compensation and benefits but also personal and professional growth opportunities and a motivating work environment. a Total Rewards Program: Four Phases” (see below). The process starts with assessment. In this phase, the project team gathers data to evaluate the effectiveness of the organization’s current total rewards system. The data guides the design phase, during which the team identifies and analyzes potential reward strategies. In the execution phase, total reward strategies are put into operation. Last, the team evaluates the effectiveness of the strategies that have been executed. Clearly, implementing a new total rewards program is akin to carrying out any large-scale transformation initiative. Research on organizational change can provide some guidance. One study examined a 12-plant manufacturing division of a multibillion-dollar food-products firm (Ledford & Mohrman, 1993). The firm used a learning model to guide the change effort. First, it laid the foundation for change by educating stakeholders about the intervention, clarifying the firm’s values, and diagnosing organizational systems relative to the values of the organization. Second, the firm designed, implemented, and evaluated changes to those systems. The cycle was continually repeated, as illustrated in the diagram below. This process led to deeper learning within the organization. To evaluate the results of this learning model, the researchers collected attitudinal data at two points in time. Findings suggested that the change initiative had led to increases in job variety, supervisory participation, influence over planning and scheduling, and other positive outcomes. The following sections take a closer look at how you and other HR professionals in your organization can take a total rewards initiative through each of the four phases in the implementation process. Implementing a Total Rewards Program: Four Phases Assessment Evaluation Design Execution Implementing Total Rewards Strategies Before You Begin: Assembling The Right Project Team The most successful total rewards initiatives are guided by a project team from start to finish. By assembling the right team, you greatly boost your chances of success. The following guidelines can help. Naming the Project Leader As your first step in assembling the team, think about whom you’ll designate as the project leader. The best leaders are senior HR professionals with project management and total rewards experience—they encourage ongoing communication between the project team and top management, and lend credibility to the project. Selecting Additional Members The team might include a consultant from outside the organization. This individual can bring technical knowledge to the project, wisdom gained from experiences with similar organizations, and project management skills. An outsider may also have a more objective view of the implementation process than an insider. In addition, the project team should show employee representation. If your organization has unionized employees, then the team should include a union official. By involving the union in the project, you will stand a much better chance of gaining its support for proposed total rewards strategies. Likewise, be sure the project team includes one or two high-performing and well- liked employees from the nonunion workforce. By representing the interests of nonunion employees who will be affected by the new total rewards plan, these individuals further increase your chances of gaining buy-in from the workforce. If you are concerned that the presence of a nonunion employee on the project team would create conflict between the two parts of the workforce, consider the use of an employee focus group instead. You will need team members who bring expertise in finance, employment law, and HR information and payroll systems, as well as someone to represent the middle and lower layers of management in your organization. Last, the team should include several HR professionals with extensive total rewards experience and the ability to develop policies and procedures. If your organization is small, you can designate one person to handle a number of these roles. You can also consult a legal expert during and after the design phase rather than throughout the entire implementation process. Clarifying Team Members’ Roles Each member of the project team should start off with a clear understanding of his or her role. “Sample Team Structure” shows how one project team organized themselves. As this figure suggests, ultimate authority for the total rewards Implementing Total Rewards Strategies project resides with senior management, while the project task force and consultants coordinate the effort. A separate subcommittee, each headed by a project team member who reports back to the larger task force, takes responsibility for each element of the company’s compensation system. You can further clarify team members’ roles by developing a charter that spells out who will perform which tasks during the implementation process, how the team will work together, and how members will make decisions. Sample Team Structure Phase One: Assessment Once you’ve assembled your project team, it’s time to start the implementation process. During the assessment phase, the project team evaluates the company’s current total rewards system and generates ideas for improving it. To carry out this phase effectively, your project team must take responsibility for a lengthy series of tasks. These tasks include conducting focus groups and industry benchmark surveys, examining current reward strategies and employee attitudes toward them, reviewing rewardsrelated literature, and creating a report documenting the team’s findings and recommendations. Conducting Focus Groups Senior Management Base Pay Subcommittee Pay for Performance Subcommittee Project Task Force Overtime Pay Subcommittee Geographical Differential Pay Subcommittee Bonus Pay Subcommittee Consultants Work/Life Balance Subcommittee The project team can use focus groups to begin gathering data on the effectiveness of the company’s current total rewards system and generating ideas for ways to enhance the system. These groups can raise team members’ awareness of all issues the team must address during the implementation process. To get the most useful information from focus groups, assemble one for management and one for employees. Encourage participants to voice concerns and questions about the current total rewards system. Focus groups can also help to generate survey items and test pilot surveys. Ensure that focus-group participants truly represent the employees who will be impacted by changes in the total rewards plan. Using Industry Benchmark Surveys As another source of data for the assessment phase, the project team can benchmark total rewards practices by successful organizations (to see whether any of these merit adoption). Many employers are willing to share this kind of data because they receive an anonymous copy of the benchmarking results. In collecting benchmark data, ensure that your project team members ask which total rewards practices the survey respondent’s organization uses, as well as how effective these practices are. Appendix A contains a sample benchmark survey. Examining Current Policies Most organizations have an extensive set of policy documents that can provide data for the total rewards project team. These archival records can shed valuable light on an employer’s stance toward total rewards issues. Strategic and operational plans may show how total rewards fit into the enterprise’s larger business goals—such as lowering turnover or attracting workers with specific skills. Manuals may contain the actual policies and procedures for administering current total rewards. Previous associate surveys may show employee attitudes toward total rewards. And HR databases should contain information on employees’ actual pay levels as well as market pay rates. Total rewards systems are often accompanied by various forms (for example, performance-appraisal worksheets). The project team can use these forms to determine the type of information the organization gathers to make rewards decisions. Surveying Employee Attitudes Toward Rewards Surveying employees’ attitudes toward total rewards can generate additional valuable information for the project team during the assessment phase. The team can conduct such surveys using a welldeveloped instrument called the Pay Satisfaction Questionnaire (PSQ), which measures attitudes toward base-pay levels, pay raises, rewards structures and administration, and benefits (PSQ, H. Heneman & Schwab, 1985). A lump-sum bonus satisfaction scale complements the PSQ (Sturman & Short, 2000). The PSQ has long been used by many companies and has excellent reliability (consistency of findings) and validity (it measures what organizations intend it to measure). But because this instrument focuses on base pay, your project team will need to add supplementary questions to gauge attitudes toward matters such as pay-increase amounts, opportunities, forms and requirements. If your project team adds questions to the standard PSQ, it will need to calculate the reliability and validity of these new dimensions. Care must also be taken in the administration of the survey. A systematic procedure should be developed to report back the aggregate survey results to respondents while protecting Surveying employees’ attitudes toward total rewards can generate additional valuable information for the project team during the assessment phase. Employees need to know that their input was carefully considered, otherwise you may lose valuable support for the project. confidentiality. Employees need to know that their input was carefully considered; otherwise you may lose valuable support for the project. Failure to incorporate employee feedback could jeopardize the entire implementation project as employees may come to resent the new compensation system. Reviewing the Literature The total rewards project team can gain additional insight during the assessment phase by reviewing the many “how to” articles and case studies published on the subject. Good sources of such literature include edited books, technical research journals, human resource management publications, and business periodicals. Probably the best way to begin identifying relevant sources is to visit the Web sites for WorldatWork (www.waw. org) and the Society for Human Resource Management (www.shrm. org). WAW and SHRM provide objective reviews of articles and books on the subject of total rewards practices. They also publish their own materials on the subject. Writing the Assessment Report After collecting data from various sources, the project team writes an assessment report. First, team members should check the reliability of the data they’ve gathered. If the data are not consistent across the different sources, further investigation (such as conducting additional employee interviews) can help resolve discrepancies. Second, with input from senior management, the team should consider how the current total rewards program works versus how the organization would like it to work in the future. Third, team members draft a “compensation philosophy” statement that will guide development of new total rewards strategies. This statement should address questions such as: • Who should be eligible for rewards? • What kind of employee behaviors and values should be rewarded? • What types of rewards would work best? • How will the total rewards system be funded? • How much should employees participate in designing and implementing our new total rewards system? • What role should the union play in designing and implementing the new system? • What is the estimated time frame for each of the remaining phases in the implementation of the new system? • What approvals are necessary to implement the system and at what points in the implementation process should those approvals be obtained? Phase Two: Design During the design phase, the project team identifies which employee and organizational attributes to reward Implementing Total Rewards Strategies and which types of rewards to offer. The team should consider the full range of reward strategies, including compensation, benefits, personal and professional development, and work environment. Compensation Compensation comprises three major components: pay level (base wage or salary), pay increases, and incentives (cash bonuses) (Gerhart & Rynes, 2003). The sections following examine each of these components in turn. Pay Level. Most organizations follow an elaborate process to establish pay level (R. Heneman, 2001). This process starts with job analysis—gathering information about the attributes of specific roles and the people holding them. The end product of this analysis is a job description (a summary of the role’s duties and responsibilities) and a job specification (details explicating the knowledge, skills, abilities, and other attributes of the person needed to perform those duties and responsibilities). Next, the organization determines the value of the work spelled out in the job descriptions and specifications. Value depends on how important a particular job is to the employer’s competitive strategy and how similar organizations view this same role. The organization conducts job evaluations to determine the internal value of jobs relative to the company’s strategy. Salary surveys are conducted to look at average salaries paid and to determine the external value of these same jobs relative to the rates paid by similar organizations. The company then combines the data from the job evaluations and salary surveys to define pay grades for each position. Pay grades specify a range of values assigned to a job. The uppermost value is called the maximum, while the lowermost What Should You Say About Pay? A recent narrative review of literature (Colella, Paetzold, Zardkoohi, & Wesson, 2007) shed light on the costs and benefits of withholding pay information from employees (i.e., pay secrecy). Costs of Secrecy n n Employees question the system’s fairness. n They overestimate pay levels received by colleagues. n Trust in the organization erodes. n Motivation decreases. n Benefits of Secrecy Lack of information creates inefficient labor markets. n Conflicts between employees or between employees and managers regarding pay occur less frequently. Organizations can correct pay inequities without employees’ knowing. n Competition between employees decreases. n Employees have more privacy. n Lack of information about other employees’ pay reduces turnover. The Middle Ground Fortunately, there is a middle ground between complete secrecy and total openness regarding pay. Organizations can reveal some but not all pay information. For example, they can communicate minimums, midpoints, and maximums in pay grades while keeping individual salaries private. (Note that some states, such as Ohio, require state agencies to publish employees’ salaries.) If your organization decides to tread this middle ground, make sure you have a well-developed compensation system. Otherwise, employees may not trust that the system is fair. 10 Implementing Total Rewards Strategies Satisfying Employees with Pay A recent empirical study (Williams, McDaniel, & Nguyen, 2006) found that employees felt more satisfied with their pay level when they had: • Positive perceptions of pay for performance • Positive perceptions of their job design • Larger base pay • Larger pay increases • Perceptions of pay fairness value is the minimum. In general, the more that labor costs can be passed on to the consumer, the higher the maximum. Meanwhile, the minimum is often the lowest level that the organization can pay for the job and still attract enough employees to the organization (Milkovich & Newman, 2006). In conducting market surveys, keep in mind that government regulation stipulates some aspects of how your team will collect and report such data (Shea, 2006). For example, be aware of relevant antitrust laws, which forbid use of salary surveys to “price fix” jobs in a certain geographic region. In addition to defining these traditional pay ranges, an organization can use two more methods to determine pay level: skill-based pay and broadbanding. If an employer uses skill-based pay, it sets pay level solely on the basis of a job’s qualifications rather than the qualifications plus the job description. Skill-based pay enables a company to reward employees for performing multiple tasks in one role rather than just those indicated in a job description. In one welldesigned field study (Murray & Gerhart, 1998), an organization that used skill-based pay in one facility enjoyed 55% higher productivity and 17% lower labor costs than a comparable plant that did not use skill-based pay. If an employer uses broadbanding, it establishes very large pay ranges. The typical pay range usually has a maximum that is roughly 40% above the minimum. With broadbanding, the maximum can be anywhere from 100% to 300% above the minimum. Broadbanding gives organizations maximum flexibility in assigning pay levels to jobs. In one study, about 80% of the HR professionals responding to a survey saw broadbanding as effective for their organization, though the researchers did not measure organizational outcomes such as productivity and labor costs (Abosch & Hand, 1994; 1998). Though broadbanding definitely has its advantages, it can also lead to increased labor costs (Fay, Schulz, Gross, Vande Voort, 2004). To avoid paying higher pay levels than warranted, employers must establish a rigorous performance management system. The right system can help ensure that only those contributing the most value to the organization receive the highest levels in the pay range for their job. In one study of three pilot projects in the U.S. federal government, wages did increase in agencies that paid through broadbanding, as compared with wages for a control agency without broadbanding (Shay, 1997). But this cost was offset by low intention to leave the organization, improved attitudes toward pay, and higher performance overall by the pilot agencies. The question of how to determine pay levels brings up another concern: How Big a Pay Increase? About 11 studies have explored the question of how big a pay increase must be to improve employee attitudes and behaviors. The findings range from 4% to 12% of base salary. Yet most pay increases fall below this range. In addition to providing these figures, one group of researchers (Mitra, Gupta, and Jenkins, 1997) noted several methodological flaws with the studies they reviewed. To minimize these flaws, the authors used an experimental simulation to assess the magnitude of the raise in base pay required to positively influence employee attitudes and behaviors. The results showed that an increase in base pay of at least 7% was needed. This study’s sample consisted of students; however, they were hired and paid as actual employees in the study. Implementing Total Rewards Strategies What Do Employees Want? Some business leaders have argued that employees want new forms of pay (such as team-based pay) more than traditional forms (for example, base salary or merit pay). A study of college students suggested that this is not the case (Cable & Judge, 1994). Another study of the general population of working employees generated similar findings (LeBlanc & Mulvey, 1998). According to these two studies, employees actually prefer: • Flexible benefits rather than a standard benefits package • A small ratio of variable pay to base pay • Individual rewards (such as merit pay) rather than group rewards How much should employees know about one another’s pay? “What Should You Say About Pay?” (p. 9) explores the pros and cons of sharing information about pay levels with the workforce. “Satisfying Employees with Pay” offers additional guidelines. attendance, retention and union vote (H. Heneman & Judge, 2000). But merit pay’s impact on productivity is mixed. Some studies have found a positive correlation; others, a negative one. Clearly, more research is needed to further illuminate this relationship. Pay Increases. Organizations can provide pay increases through two means: merit pay and promotion pay. With merit pay, the employer correlates the pay increase with performance ratings: The higher the performance rating, the higher the pay increase. To minimize the cost of merit pay, companies can link merit raises to the employee’s position in the pay grade: The higher the pay level of the employee in the range, the smaller the merit increase. With promotion pay, a company considers criteria such as an employee’s previous performance, anticipated performance, difficulty of the job, and position in the pay range. Every organization seems to make promotion-pay decisions differently, so it’s difficult to draw lessons from their practices. Moreover, there are no empirical studies in this area showing which factors most employers use to determine the size of a promotion increase, the reasons for the increase, and the outcomes associated with such increases. “How Big a Pay Increase” and “What Do Employees Want?” provide additional insight into this subject. Merit-pay plans have generated mixed results. Empirical research has consistently shown a connection between these plans and employee attitudes (R. Heneman & Werner, 2006). In particular, there is a positive correlation between merit pay and pay satisfaction. In turn, pay satisfaction leads to better Incentives. Incentives take the form of a cash bonus or stock. To award incentives, organizations use more 11 objective measures of performance, such as an employee’s productivity, rather than performance ratings (R. Heneman & Werner, 2006). Because incentives are not linked to base salary, they do not compound over time. Therefore, they are less costly for employers than merit pay and promotion pay. Companies can award incentives based on individual, group, or organizational performance. “An Overview of Incentives” compares the advantages and disadvantages of these criteria. Individual incentives provide a cash or stock payment for performance measured at the level of the individual employee. Classic examples of individual incentive plans would be sales commissions and piece-rate pay systems. With this approach, the greater the person’s job performance, the greater the cash bonus he or she receives. Individual incentives exert the most powerful impact on productivity of all total rewards practices, usually increasing productivity by about 30% (Jenkins, Mitra, Gupta, Shaw, 1998; Gupta & Mitra, 1998). However, they do not ensure a commensurate increase in product quality. Also, they don’t promote teamwork, because they emphasize individual rather than team performance. Lastly, many jobs do not have readily available metrics for assessing individual performance. Thus an employee’s contribution may be difficult to measure. Group incentives provide a cash or stock payout for performance measured at the group or work-team level. Classic examples of group incentives would be gain sharing 12 Implementing Total Rewards Strategies An Overview of Incentives Criteria Incentives Advantages Disadvantages Individual performance Sales commissions Piece-rate pay Exert most powerful impact on productivity (30% increase) Do not promote teamwork or ensure a commensurate increase in product quality May be difficult to measure Group performance Gain-sharing, goal-sharing, and team-based incentive plans Encourage teamwork Yield a moderate impact (13%) on productivity Organizational performance Profit sharing and stock sharing, including broad-based stock options, stock-purchase programs, and employee stock- ownership plans Increase shareholder returns and company profits Generate a small increase (6%) in productivity (incentives provided to reduce costs, popular in the health care industry); goal sharing; and team-based incentive plans. Group incentives have a more moderate impact on productivity than individual incentives do, yielding increases of about 13% (Welbourne & GomezMejia, 1995). But they reinforce the importance of teamwork. Organizational incentives provide cash or stock to employees based on the overall performance of the organization or business unit (sector, division, department, or plant). Classic examples of these incentive plans are profit sharing and stock sharing, which may include broadbased stock options, stock-purchase programs, and employee stockownership plans. A review of the available research reveals that profitsharing plans generate a relatively small increase in productivity: about 6% (Blinder, 1990). Why the meager impact? Most employees probably see organizational performance as outside their control, so they are less motivated to perform. On the other hand, some research indicates that stock sharing results in positive shareholder returns (Gerhart & Rynes, 2003). Indeed, one study found that organizations with stockownership plans were about 5% more profitable than organizations without these plans (Blasi, Conti, & Kruse, 1996). “Introducing Incentive Pay at SimCom International” reveals the kinds of results organizations can generate through savvy implementation of incentive pay. Benefits Owing to their hefty price tag, benefits such as health care and insurance constitute an increasingly large proportion of total rewards costs. As a result, employers want to ensure an acceptable return on their investment in the form of employee performance. In designing a benefits package, organizations must consider two important issues: how they will communicate the details of the package to employees, and how much choice employees will have in selecting benefits that interest them. Communication. Research has clearly shown that employees in many organizations are unaware of or do not understand the benefits offered by their employer (Dreher, Ash, & Bretz, 1988). When employees lack this understanding, they tend to be dissatisfied with the benefits. And dissatisfied employees are less likely to attend work, more likely to leave the company, and more likely to vote for a union (H. Heneman & Judge, 2000). Acknowledging this problem, organizations have begun providing employees with individual benefit statements so they can periodically see the cash value of their benefits. Choice. Studies also suggest that flexible benefits plans can increase employees’ satisfaction with the system. With these types of benefits, employees can select from a menu Implementing Total Rewards Strategies Introducing Incentive Pay at SimCom International A small, privately held company with locations in Orlando and Phoenix, SimCom International builds flight simulators for training pilots on twin-engine propeller planes as well as small jets. The company has about 80 employees organized into teams based on functions: production, marketing, sales, training, computer services, and clerical. SimCom has enjoyed rapid growth. In 1990, it trained 54 pilots. In 1997, that number had risen to about 2,650, and SimCom was recognized with a “Best of the Best” award from Flying magazine. In 1992, during its start-up days, SimCom’s senior management considered introducing an incentive-pay plan. At that time, its current pay system was based on market rates, with pay increases linked to seniority. The company’s new president expected associates to act like owners and to focus on providing excellent customer service. The president and owner thought that incentive pay might help boost performance on these criteria. The company defined a three-phase project for introducing incentive pay. In Phase One, the project team developed a survey to assess possible desirable outcomes that might come from basing individual incentive pay on the company’s profitability and individual performance ratings. In Phase Two, the team designed and implemented the new pay system. In Phase Three, management assessed the effectiveness of the new system by comparing business outcomes before the system was in place with outcomes after implementation. The surveys gauged employees’ attitudes toward: • Job satisfaction • Pay satisfaction • Performance ratings • Pay for performance According to the findings, job satisfaction, pay satisfaction, and pay for performance perceptions significantly increased after the new system was put in place, but performance ratings declined. However, executives attributed this decline to managers’ increased commitment to an accurate rating process—which caused them to be less lenient in their ratings than before. Source: Heneman, Eskew & Fox (1998) 13 the benefits they receive based on what they value most at different life stages. For example, retirement benefits and health care are less important to workers in their 20s, but become increasingly important as employees age. One study at a financial services firm showed that employee satisfaction with benefits significantly increased following the implementation of a flexible plan (Barber, Dunham, & Formisano, 1992). This increase, the authors note, may have stemmed in part from the extensive communication and training that accompanied the introduction of the flexible plan. Personal and Professional Development Personal and professional development opportunities—such as training, career development, and performance management—can constitute valuable rewards for employees. But the value of these rewards for an organization is less clear. From the employer’s perspective, personal and professional development is good only if it enables workers to acquire specific skills that add value to the enterprise. Valuable skills are those that give an organization unique capabilities that rivals can’t copy—and thus afford the employer a sharp competitive edge (Barney & Wright, 1998). Clearly, development opportunities that give workers general skills that can be easily transported to other organizations do not provide strategic value. For these reasons, companies must walk a fine line in including 14 Provide development experiences valued by employees that also serve the organization’s strategic needs. personal and professional growth opportunities in their total rewards systems. The goal? Provide development experiences valued by employees that also serve the organization’s strategic needs. Work Environment A positive work environment can be an important component in an organization’s total rewards strategy. Work environment includes job design, recognition, and work/life balance. The sections below consider each of these in turn. Job Design. Most people think of job design in terms of the physical characteristics of a work setting, such as office size. But job design also includes psychological characteristics—in the form of employees’ perceptions of their work. These characteristics include perceptions of whether the work is meaningful or challenging, whether the job affords autonomy, and whether the person identifies with the role. According to the job characteristics model (Hackman & Lawler, 1971), positive perceptions of work lead to higher employee motivation and, in turn, better onthe-job performance. A review of all the studies conducted to test this theory showed a modest correlation between perceptions of psychological characteristics of a job and employee motivation, and a weak correlation between these perceptions and employee performance (Fried & Ferris, 1987). Research also suggests that job design is most effective when other total rewards strategies are poorly developed. If other total reward strategies are operating effectively, then job design simply becomes redundant (Morgeson, Johnson, Campion, Medsker & Mumford, 2006). Recognition. Most employee recognition systems provide rewards that are relatively inexpensive compared to compensation, benefits, and personal and professional growth. Given heightened world competition and the need to minimize labor costs, employers today are placing as much emphasis on recognition as financial incentives—sometimes even more (Nelson, 1994; Barton, 2006). Interestingly, according to some studies, many employees prefer nonfinancial rewards over financial ones (Amabile, Hill, Hennessey, & Tighe, 1994). Note, however, that these studies ask individuals to selfreport their preferences. Though people say that nonfinancial rewards are more important to them, evidence about what people actually do shows that pay is equally if not more important to most employees (Rynes, Gerhart, & Minette, 2004). Still, studies also show that recognition can exert a powerful impact on employee performance (Stajkovic & Luthans, 1997; 2001) and that it may influence organizational effectiveness as much as financial incentives do. Indeed, one study of fast-food franchises found that, over time, nonfinancial incentives had just as large an impact on profitability and customer service as financial incentives (Peterson & Luthans, 2006). In addition, financial and nonfinancial rewards apparently become more effective when used together rather than separately (Stajkovic & Luthans, 2003). Implementing Total Rewards Strategies Work/Life Balance. Although work/life balance programs take a number of different forms, most of the research to date has focused on flexible work schedules and compressed work weeks. One extensive review of empirical studies on these forms (Baltes, Briggs, Huff, Wright, and Newman, 1999) showed that such rewards had a mixed impact on certain organizational priorities. For example, the largest demonstrated impact was on absenteeism followed by productivity. Flextime had a bigger impact on employees than on managers. The more flexible a company’s work schedules, the greater the positive impact on organizational priorities. Turning to compressed workweeks, the researchers again saw a moderately positive impact. Compressed workweeks had the largest positive effect on job satisfaction and the next-largest effect on supervisory performance ratings. However, they had almost no impact on absenteeism or productivity. In short, it seems that flexible work schedules exert a more positive impact on performance than on employee attitudes, while compressed work schedules improve attitudes more than performance. Synergies Through Total Rewards Design How do you decide which of the many available reward strategies to incorporate in your total rewards system design? Start by weighing each component’s strengths and weaknesses. Also consider whether you can generate any synergies by mixing and matching certain strategies. One empirical study (Stajkovic and Luthans, 2003) found that combinations of different total rewards strategies led to higher employee performance than did any single strategy. In thinking about ways to generate synergies, consider the interactive Synergistic Design at Dale Carnegie The Ohio and Indiana Tyson/Eppley franchise of Dale Carnegie carefully blends total rewards strategies to support a key strategic objective: developing junior talent in the organization. To meet this objective, the organization brings in entry-level professional employees just out of college and has them work at a call center to learn the business from the bottom up. Though it pays below-market salaries, the firm offers extensive training in the skills needed for these new hires to advance to higher levels in the organization. Additional nonmonetary incentives are provided, including well-defined career paths and a friendly work environment featuring pool tables, video games, comfortable furniture, and refreshments. The results of this strategy are still being evaluated; however, evidence suggests that the approach is helping to attract junior talent to the firm. Source: Robert Heneman’s consulting work. 15 effects of various strategies as well as the interactive effects of strategies and other HR practices. A recent study showed that aligning compensation with training, selection, flexible work arrangements and employee involvement practices had a larger positive impact on employee performance than did compensation alone (Combs, Liu, Hall, & Ketchen, 2006). “Synergistic Design at Dale Carnegie” illustrates the power of combining strategies in your total rewards design. Phase Three: Execution Once the project team has designed a total rewards system, it moves to the execution phase of the implementation process—putting the new system in place in the organization. During this phase, the team must consider numerous issues, each examined below. Eligibility In the past, only executives and sales personnel were eligible for incentives. Today, thanks to research showing the connection between rewards and productivity, all employees—from the highest to the lowest level, and from the front line to the support functions—are eligible for most total rewards strategies. With support staff, organizational leaders recognize that these employees enable line personnel to perform. Employers who do not include support staff in their total rewards programs risk eroding these workers’ motivation. Moreover, because many women and minorities fill support jobs, 16 Implementing Total Rewards Strategies excluding these employees may put your company at risk for a discrimination law suit. Top Management Support As noted earlier, implementing total rewards is a large-scale organizational intervention. To ensure buy-in, top managers must show visible support for the intervention. And in showing support, action speaks louder than words. Executives must not only verbally advocate the plan, they must also be covered by it. Consider the well-known apparel retailer Limited Brands (R. Heneman & Thomas, 1997), which established an HR management system that linked its total rewards system to competencies. To that end, the top 200 managers identified competencies for themselves, which the company then used to determine these managers’ merit pay and stock. Only then was the total rewards system extended to lower levels in the organization. A review of 30 studies of performance appraisal interventions showed that productivity from interventions that received management support was 51 percentage points higher than those which did not (Rodgers & Hunter, 1992). customer service, and group or company profitability. To determine whether employees have met these criteria—and therefore deserve a particular reward—employers must measure (gather data on) these aspects of performance. But measurement is useful only if the resulting data are reliable and valid. Reliability refers to the consistency of interpretations of data. In other words, the results should be consistent over repeated measurements. To accurately link rewards- such as pay increases- to employees’ on-the-job contributions, the organization must confirm that the data gathered is reliable. Validity refers to whether the project team has really measured what it intended to measure. For example, in appraising an employee’s productivity, the team must be certain that it is evaluating actual productivity rather than some other closely related criterion, such as engagement. Project Management Measurement Successfully executing a total rewards plan requires strong project management skills. As with any complex project, your project team will need to consider a wide range of issues. The sections below examine each of these challenges. In deciding which rewards to offer to which employees, organizations must determine whether employees have met the criteria defined for receiving each reward. Those criteria may include aspects of performance such as individual productivity, When will the new plan be operational? There are two schools of thought on the subject of when you might make your new total rewards system fully operational. You can think of these two schools as “lead” versus “lag” (Ledford & R. Heneman, 2000; R. Heneman, DeSimone, Dooley, & Jones, 2002). If you view total rewards as a lead system—that is, you believe that putting the right rewards in place will encourage your workforce to accomplish key strategic goals—you would make the plan operational before launching a new business strategy. That way, you would show that the organization is committed to change and is willing to invest up front to secure employees’ commitment to the new strategic plan. This approach can help attract and retain workers. However, it is also costly, because the company must allocate money for total rewards before achieving its business goals. If you view total rewards as a lag system, you would make the new plan operational after employees had helped carry out your company’s new business strategy. With this approach, rewards reinforce the successful execution of a business plan rather than lay the groundwork for that execution. This approach may be less costly than a lead approach, because the investment is linked to the successful accomplishment of business goals. However, it does not demonstrate a commitment by the organization to invest in human capital before the workforce can generate measurable results. Properly designed and implemented, a total rewards system can serve both lead and lag purposes. For example, in one case study (R. Heneman, DeSimone, Dooley, & Jones, 2000), empirical data Implementing Total Rewards Strategies showed how a new total rewards plan comprised of group and individual incentives walked this middle road. Involving employees in the design and implementation of the plan increased their awareness and understanding of the organization’s strategy (a lead effect). And payouts from the incentive plan after key business goals were met encouraged employees to accomplish additional objectives related to the firm’s strategy (a lag effect). How will you explain the new total rewards program to your workforce? A recent survey explored this question with an eye toward determining how communication affects employees’ attitudes toward total rewards (R. Heneman, Mulvey, & LeBlanc, 2002). The researchers conducted the survey in 13 organizations, gathering input from more than 13,000 employees. The findings? The more employees knew about their company’s rewards system, the more satisfied they were with it. And with greater satisfaction came greater commitment and engagement at work. Unfortunately, the study also showed that most employees had very little knowledge of how their organization’s rewards system worked. To improve employee knowledge of pay and other rewards, the researchers recommended the following communication practices: Educating and Involving Employees at Rothschild Gourmet Foods Rothschild Gourmet Foods is a small, privately owned manufacturer of gourmet food products. The company consists of a kitchen, assembly line, and warehouse for distribution. A small corporate support staff and internal and external sales staff complete the labor force. The business is very seasonal, registering the bulk of its sales from September through January. The company prides itself on quality and financial success. It uses only premium ingredients and high-quality containers, such as glass imported from Italy. Employees are viewed as an important asset since the company depends on a skilled workforce to maintain high quality standards and generate new product ideas. Rothschild uses a market-based pay system and offers a combination of incentives to reward its workforce. It sets pay at the fiftieth percentile for small employers and compensates for the differential by emphasizing variable pay and offering a generous benefits package. It also boasts a friendly workplace, flexible work schedules, and other nonmonetary rewards. Rothschild decided to augment its existing total rewards program with an organization-wide plan linking incentives to corporate performance as measured by changes in return on assets. The amount made available for cash bonuses from the funding pool was determined by the company’s performance on the following criteria: product and service quality, “controllable” cost savings, and sales. Actual payouts from each of these three sources were determined by individual performance and tenure at the organization. The project team took several steps to win employees’ buy-in. First, it measured only those elements of performance that lay within employees’ control. For example, large capital expenditures made by senior managers were not counted as “controllable” costs. Second, the team established a participative governance system whereby employees suggested and implemented ideas for improving performance on the organizational measures. Third, employees received training on what these measures meant and how they would be evaluated. The team collected several rounds of data on the measures before introducing the new incentive plan and several rounds afterward. The results proved impressive: Sales increased, controllable costs decreased, quality improved, and performance appraisal ratings increased after the incentive plan was put in place. Source: Heneman, DeSimone, Dooley & Jones (2002) 17 18 Implementing Total Rewards Strategies • Make more information about the total rewards system available to employees, especially details about how the system operates. • Personalize total rewards by creating a statement for each employee detailing the rewards he or she has received. • Minimize the use of traditional communication vehicles, such as policy statements, to announce or explain rewards. • Encourage one-on-one conversations between supervisors and employees about total rewards. • Provide more interactive communication through your company Web site or intranet. How will you train people in the new system? By training members of the project team and approval parties (such as senior management) on the basics of the new total rewards system, you give them the knowledge they need to make informed decisions throughout the execution phase. Also train managers on how best to use elements of the total rewards system (including job evaluation, performance measures, and pay-survey data) to accomplish business goals. Finally, educate employees on how the new system operates, including showing them how their rewards will grow as they contribute more to the organization. “Educating and Involving Employees at Rothschild Gourmet Foods” (p. 17) shows how one company used training (among other practices) to win employees’ buy-in for a new incentive program. How will you handle employees’ concerns about the system? A large body of research shows that employee attitudes and behavior are influenced both by how much they are paid and also how their pay is determined (Folger & Konovsky, 1989). This research suggests that employees need a safe way to express any concerns about their rewards. To that end, consider establishing a committee of senior managers and employees who can listen to and address such concerns. Will your new system adhere to employment laws? At least three areas of laws and regulations govern total rewards decisions: employment laws (such as the Civil Rights Act of 1991); compensation laws (for example, the Fair Labor Standards EXECUTION CHECKLIST As you prepare to implement your new total rewards system, use the following checklist to ensure that you are addressing all the major issues: Determine who will be eligible for each type of reward. Ensure that the new system has the support of top management. Establish the reliability and the validity of the performance data you will gather to determine reward levels. Develop a solid plan for managing the project—including: When will the new system be operational? Under what conditions would the plan need to be put on hold? How will you communicate the new system to the workforce? If unionized, how will you involve union leaders? How will you train people to use the system? How will you handle cross-border cultural differences? How will you handle employee concerns? Which technology is the best match to design and run the new system? Does the system adhere to all employment laws? How will you handle the unique execution challenges that arise for small- and medium-size organizations? How will you fund the new system? When will you evaluate the system’s effectiveness? Will you outsource execution to a thirdparty vendor? 19 Implementing Total Rewards Strategies Act); and labor laws (including the National Labor Relations Act). During the execution phase, your project team will need to ensure that the revised or new total rewards system adheres to all employment laws. As a valuable step, the team could periodically audit or review compensation decisions’ impact on employees in various categories such as age, race, sex, color, religion, and national origin. If this review reveals differences within each category that cannot be explained by job-related decisions (for example, job evaluation), the team should investigate immediately and rectify the situation. How will you fund the new system? One of the biggest issues to be resolved during the execution phase is how the total rewards plan will be funded. The direct costs associated with a new or revised total rewards system can reach immense proportions. Increasingly, organizations are trying to ensure that the new system costs no more than the old one. To generate the savings needed to fund the plan, a company can take steps such as reducing overtime, seniority, and merit pay, as well as decreasing headcount through attrition. What will the system’s duration be? To give the new total rewards plan the best chances of succeeding, the project team should stipulate when the program will be reevaluated and modified if necessary. Members should also ensure that the organization sets aside enough money to continue funding the plan even if the enterprise experiences financial problems. In addition, the team should explain to employees early on that the plan may be temporarily stopped under certain conditions outside the organization’s control such as a drastic economic downturn or a spike in fuel prices. How will you involve the union? In the United States, the National Labor Relations Act requires that organizations with unions negotiate wages, hours and working conditions with union workers. Total rewards strategies come under this banner as well. But negotiating total rewards with union leaders can be difficult, as unions historically have favored rewards based on seniority rather than performance. To implement total rewards strategies in a unionized environment, employers must involve the union in the execution phase at a minimum (R. Heneman, von Hippel, & Eskew, 1997), and in the assessment and design phases if possible. Involving the union means soliciting, listening to, and acting on union leaders’ opinions on proposed rewards without having to resort to the formal collective bargaining process. The more your project team can involve the union, the greater the likelihood that union leaders will see that they and management share similar goals when it comes to using total rewards. Unions that have had input into the design and execution of rewards are also more likely to vote in favor of new total rewards strategies during the collective bargaining process. Why? People who have been consulted about an impending change tend to feel committed to that change. How will you handle cross-border cultural differences? Many leading U.S. companies use similar total rewards strategies in the different countries in which they operate (R. Heneman, Fay, & Wang, 2001). Clearly, it is easier to implement and administer one total rewards plan than to offer different plans for different locations. However, a one-size-fits-all approach carries some risks. First, owing to cultural differences, employees in one country might view a particular reward as fair while those in another country may consider the same practice unfair. Second, rewards already in use in a country may be embedded in the culture and therefore may be difficult to overcome. For example, Chinese and U.S. reward practices differ markedly (R. Heneman, Wang, Tansky, & Wang, 2002). Third, laws and regulations vary dramatically across countries. To illustrate, a form of gain sharing is heavily governed by law in many French organizations (Roussel & R. Heneman, 1997). To ensure that your organization’s total rewards system works as intended at an international level, the project team must take crosscultural differences into account (R. Heneman, Fay, & Wang, 2001). Will you use technology? Modern technology is both a blessing and a curse to the implementation of total rewards systems. On the positive side, technology enables organizations to automate complex decisions about rewards strategies. Consider the digital expert system that can help employers implement compensation plans (R. Heneman 19 20 Implementing Total Rewards Strategies & Dixon, 2001). Decision makers simply input the strategy, structure and culture of their organization into the expert system. Based on this input, the system provides a detailed summary of the most appropriate compensation system based on the available research (R. Heneman, Ledford, & Gresham, 2000). On the negative side, modern technology may be too easy to use. There are hundreds of “plug and play” total rewards systems that companies can easily install and begin using. Unfortunately, many of these systems do not meet different employers’ specific needs. Instead, these products’ manufacturers have made them as homogeneous as possible to sell to a wide range of customers. Thus these generic systems cannot provide users with competitive advantage (Combs, Liu, Hall, & Ketchen, 2006). This situation suggests that organizations can get the most from their total rewards technology by building a customized system. One downside of such systems is that they are difficult to upgrade. The implications for your organization? Carefully weigh the pros and cons of the various technology options before deciding which may be best for your total rewards plan. What if you work in a small- or medium-size organization? If you are in a smaller organization, you may encounter unique challenges when implementing a total rewards system. Perhaps the largest challenge is funding. Many small and medium enterprises (or “SMEs”) must finance technological and capital improvements in order to grow. As a result, their budgets are relatively small on a per-capita basis. With less funding available, you may want to de-emphasize cash in your total rewards programs and lean more toward recognition. As discussed earlier in this report, recognition systems can be just as effective as financial incentives. Also consider stock. If your enterprise is not publicly traded, this type of stock will not be available as a reward. However, your SME can still distribute what’s called phantom stock—which is based on the enterprise’s book value rather than its market value (R. Heneman, DeSimone, Dooley, & Jones, 2002). Phantom stock helps to motivate employee performance because the employee has a monetary stake in the effectiveness of the organization. Employees receive cash bonuses if the organization performs well. Will you outsource some aspects of execution? Organizations can now outsource execution of their total rewards systems to vendors, which can save time and hassle. However, the resulting rewards systems may not be customized enough to meet your enterprise’s needs. Also, you have no guarantee that the consultants who perform the work are well trained in total rewards or human resource practices. To ensure that your total rewards program gives your company a strategic advantage, use great care in selecting a vendor. In particular, look for vendors who can offer solutions tailored to your needs and who have staff well trained in total rewards strategies and human resource management. Phase Four: Evaluation Probably the most often overlooked phase of total rewards implementation is evaluation. In this phase, the project team compares the actual results of the executed total rewards strategies against the desired results. The hope is that by conducting this evaluation, you can show top management that the company’s investment in its total rewards system has paid off. Of course, conducting an evaluation can be unnerving if you fear that the selected reward strategies are in fact not delivering as anticipated (Corby, White, & Stanworth, 2005). To get the most from the evaluation phase, encourage your project team to measure the outcomes of the executed total rewards system and to interpret the findings correctly. Measuring the Outcomes To decide which outcomes of your total rewards system to measure, revisit the system’s objectives and then consider which data sources will provide the information you need to evaluate those outcomes. For example, if the new rewards program was intended to improve employee satisfaction, the project team can measure this outcome through workforce surveys. “Outcomes and Data Sources” shows examples of the kinds of outcomes you may want to measure and the sources that might generate the data you need. Implementing Total Rewards Strategies Interpreting Your Findings In an ideal world, your project team would pilot-test each reward strategy in the proposed total rewards system (and each combination of strategies within the system) before implementing it. Moreover, the team would randomly assign some employees to groups receiving changes in total rewards and other employees to a control group that is not receiving any changes. Of course, this kind of testing raises several challenges. First, senior managers will want more immediate results than those most teams can produce with pilot studies. Moreover, randomly assigning employees to different groups may not be practical in your organization. Finally, few employees will take kindly to being assigned to a group that receives no rewards for the purpose of experimentation. For these reasons, your project team may need to evaluate the results of total rewards changes “in the field” rather than in an organizational “laboratory.” And field evaluation is as much art as it is science. Team members will need to use judgment in estimating the effectiveness of particular total rewards strategies. And they will never know for certain whether an observed result is due to the new plan or to some other variable that they did not study. For example, a rise in productivity may stem more from the fact that employees had input into job design than from the actual job designs themselves or the types of rewards offered. How might your project team conduct the most effective evaluation possible, given the constraints at hand? The following practices can help: • Compare measurements of important criteria taken before execution of the new rewards system against measurements of the same criteria after execution. • Consider whether any other variables not studied may have influenced the outcomes you’re seeing. • Search the management literature to see how effective the total rewards strategies you selected have proved in other organizations operating under similar circumstances. 21 • Measure outcomes over time— in the months or years before execution of the new rewards and in several time periods after execution. This helps you see whether any outside forces have affected those outcomes. For example, if employee productivity changed dramatically in the months leading up to execution of the new rewards system, whatever caused that change may have also influenced productivity during and after execution. Your team will need to identify such influences in order to accurately evaluate the impact of the new rewards. Outcomes and Data Sources To measure this outcome: Use this data source: Productivity Operational reports Job satisfaction Workforce surveys Revenue Income statements Costs Income statements Profits Income statements Fit with the organization’s strategic plan Senior management Customer or employee complaints Human resource information system (HRIS) Recruitment and retention Human resource information system (HRIS) 22 Implementing Total Rewards Strategies Conclusion Successfully implementing a revised or entirely new total rewards program will always be challenging. To boost your chances of success, you and your pilot team must carefully shepherd the project through the four phases of implementation: assessment, design, execution, and evaluation. Each of these phases requires careful thought, patience, and a willingness to solicit input from a wide range of individuals in your organization. But the effort is worthwhile. A well-thought-out and skillfully implemented rewards program can give your organization a competitive edge. In particular, it can help you generate the business outcomes that matter most to your strategy—whether those outcomes take the form of employee retention, productivity, job satisfaction, or service quality. In an age of stiffening competition and increasing pressure to do more with less, no organization can afford to ignore the strategic value that a well-designed total rewards system can provide. Implementing Total Rewards Strategies Appendix A: Industry Benchmark Phone Survey Base Pay Do you have job descriptions? Y_____ N_____ Do you conduct job evaluation? Y_____ N_____ Do you offer skill-based pay? Y_____ N_____ Do you offer competency pay? Y_____ N_____ Do you have an overtime pay policy? Y_____ N_____ How many pay grades are in your current structure? __________ Grades What is the average width of pay grades? __________% (minimum to maximum) Promotion Pay Criteria (check all that apply): _____ Formula _____ Internal equity _____ Performance _____ Potential _____ Seniority _____ Other (please list) __________ Incentives Types of incentive plans (including merit pay): For each plan, find out the following: Plan objectives (list): Type of employees covered by plan (list): Type of performance measures (check all that apply): _____ Financial _____ Productivity _____ Quality _____ Safety _____ Output/Volume Overall Effectiveness of Incentive Pay Plan (circle one number only): 1 2 3 4 5 N/A 1 = Not effective 2 = Neutral 3 = Somewhat effective _____ Cost Reduction Benefits _____ Attendance List Work/Life Programs: _____ Project Milestones _____ Other (list) ____________________ 4 = Very effective 5 = Highly effective N/A Not known 23 24 Implementing Total Rewards Strategies A well-thought-out and skillfully implemented rewards program can give your organization a competitive edge. In particular, it can help you generate the business outcomes that matter most to your strategy. 24 Implementing Total Rewards Strategies 25 Sources and Suggested Readings Abosch, K.S., & Hand, J.S. (1994). Broadbanding design, approaches, and practices. Scottsdale, AZ: American Compensation Association. The objectives of this study were to provide organizations with information on broadbanding, to identify the processes and practices that will help make broadbanding a success, and to evaluate the effectiveness of broadbanding. Four hundred and twenty four HR professionals, top executives, employees, and organizations that did not implement broadbanding were surveyed and interviewed to gain information about broadbanding. Results suggested that the primary reasons for implementing broadbanding include creating more organizational flexibility, supporting new culture and climate, de-emphasizing traditional structures, fostering a flatter organization, and emphasizing career development. Methods used to place positions into bands include transitioning jobs from current grades, job slotting using band descriptions, market value slotting, pre-existing job evaluations, and skill requirements. Broadbanding significantly consolidated job titles for 42% of people that participated in this study. Seventy-eight percent of the companies surveyed found broadbanding to be effective. Abosch, K.S., & Hand, J.S. (1998). Life with broadbands. Scottsdale, AZ: American Compensation Association. This study looks at 73 companies using broadbanding for at least one year, and analyzes longitudinal data from 33 organizations to evaluate the effectiveness of broadbanding over time. First, a review of research on broadbanding is presented to explain what is known about broadbanding now and what is still left to learn. Next, the research methodology for this particular study is shared. After that, the design and implementation of broadbanding over the years is explored. Finally, the impact of broadbanding on organizations is discussed. Reasons for implementing broadbanding include career development, skill acquisition, and organizational issues. Overall, results from the study indicated that 87% of respondents think broadbanding is quite effective, and is received positively by management, human resources, and employees. Amabile, T.M., Hill, K.G., Hennessey, B.A., & Tighe, E.M. (1994). The work preference inventory: Assessing intrinsic and extrinsic motivational orientations. Journal of Personality and Social Psychology, 66:5, 950967. Individual differences in intrinsic and extrinsic motivational orientations are assessed in this study of a common scale used to measure these characteristics. This scale is called the Work Preference Inventory (WPI) and is used to capture elements of intrinsic motivation such as evaluation, recognition, money, 26 Implementing Total Rewards Strategies and other tangible incentives. Data was collected from both college students and working adults over an eight year time span. The analysis of the WPI scale indicated that the instrument did assess stable motivational orientations in individuals, and has adequate fact structures, internal consistency, and reliability. The WPI measure also related to personality characteristics, attitudes and behaviors that are important in an organizational setting. Baltes, B.B., Briggs, T.E., Huff, J.W., Wright, J.A., & Neuman, G.A. (1999). Flexible and compressed workweek schedules: A meta-analysis of the effects on work-related criteria. Journal of Applied Psychology, 84:4, 496-513. The effects of flexible and compressed workweek schedules on work-related criteria such as productivity, job satisfaction, absenteeism and work schedule satisfaction are explored in this study. The work adjustment model (Dawis, England, & Lofquist, 1968) and the job characteristics theory (Hackman & Oldham, 1976) are used as theoretical frameworks suggesting the impact alternative work schedules can have on psychological states that influence attitudes and behavior. A meta-analysis was conducted using 29 published studies on alternative work arrangements. Flexible work schedules were found to have generally positive effects on all work-related criteria. However, some moderators were found to impact these results. Specifically, positive effects were not found for managers/professionals and for organizations with too much flexibility. Compressed workweeks also had positive effects on all workrelated criteria except absenteeism. Barber, A.E., Dunham, R.B., & Formisano, R.A. (1992). The impact of employee benefits on employee satisfaction: A field study. Personnel Psychology, 45, 55-75. Employee satisfaction with benefits was found to significantly increase following the implementation of a flexible benefits plan. Overall satisfaction was also found to be somewhat higher. Empirical support was demonstrated through a study of 110 employee attitudes before and after a flexible benefits plan was introduced at a financial services company. Demographic profiles and satisfaction with benefits were not found to be related. The authors suggest that the high level of satisfaction with the flexible benefit plan may have been related to the extensive communication and training that went along with the implementation of the new plan. Barney, J.B., & Wright, P.M. (1998). On becoming a strategic partner: The role of human resources in gaining competitive advantage. Human Resource Management, 37(1), 31. This ground-breaking article establishes the significance of human resources in helping an organization gain (and maintain) a strategic and competitive advantage. The authors present the value, rareness, imitability and organization (VRIO) framework in describing how the human resource (HR) function can be a source of sustained competitive advantage due to its impacts on important resources such as human capital skills, employee commitment, culture and teamwork. The framework suggests that HR activities that are valuable, rare, difficult to imitate, and supported by the organization (such as firm-specific skill training, for example) will help lead to a sustained competitive advantage and above-normal performance for the firm. Other HR activities such as selection, general training, and compensation must still be performed efficiently to maintain competitive parity or a temporary competitive advantage. Without these HR activities in an organization, a firm could be at a competitive disadvantage. This article provides support for the role of the HR executive as a strategic partner in an organization. Beer, M., Cannon, M.D., Baron, J.N., & Dailey, P.R. (2004). Promise and peril in implementing pay-for-performance. Human Resource Management, 43, 3-20. This article explores the decisionmaking process that managers at Hewlett-Packard went through when deciding to abandon the pay-for-performance programs they previously used. These managers Implementing Total Rewards Strategies found that the costs of these programs seemed to be greater than the benefits. Employees in this high-commitment culture felt payfor-performance was like a bribe, and often caused bitter feelings and hurt relationships. Other managerial practices were found to be more beneficial, including effective leadership, clear objectives, coaching and training. When implementing a pay-for-performance program, managers must clearly state expectations and communicate the purpose of the program—while giving employees a chance to ask questions. profitability, productivity and compensation. Results indicated that companies with employee stock ownership of more than 5% were more profitable than those with less than 5%, particularly for corporations smaller in size. No significant differences were found for productivity and compensation levels among companies that had more than or less than 5% employee stock ownership. Therefore, employee stock ownership will likely increase or not change company performance, but it will not negatively impact performance in an organization. Blasi, J., Conti, M., & Kruse, D. (1996). Employee stock ownership and corporate performance among public companies. Industrial and Labor Relations Review, 50, 60-79. Blinder, A.S. (Ed.) (1990). Paying for productivity: A look at the evidence. Washington, D.C.: Brookings Institution. The association between employee stock ownership and economic performance has been a source of debate for several years. Some believe the group compensation schemes result in employee freerider problems, while others think employee stock ownership can result in increased information sharing, identification with the company, and monitoring of co-workers, which can lead to improved company performance. The corporate performance of two groups of companies (one group had more than 5% of company stocked owned by employees while the others had less than 5%) was compared to determine the impact of employee stock ownership on One potential mechanism for increasing productivity growth in the future is tying worker compensation to performance. The major finding of this book is that meaningful worker participation enhances productivity no matter what compensation plan is used. This book reviews alternative pay systems and takes a closer look at compensation issues such as profit sharing, employee ownership plans, employee participation, and the employment system in Japan. The answer to the question regarding whether productivity can be increased by changing the way employees are paid seems to be that changing the way employees work is more beneficial than changing the way they are paid. However, combining alternative pay systems 27 with work participation may be the ultimate solution to boosting productivity. Cable, D.M., & Judge, T.A. (1994). Pay preference and job search decisions: A personorganization fit perspective. Personnel Psychology, 47, 317-348. This article provides empirical support for the theory that job seekers find organizations perceived to offer high pay levels, flexible benefits, individual-based pay, and fixed-pay policies more attractive. Greater fit between personality of the job seeker and characteristics of the compensation system resulted in even greater attractiveness. One hundred and seventy-one college students from a large northeastern university participated in the study. A policy-capturing approach was used in which participants reviewed positions based on compensation system attributes and then indicated their attractiveness to those positions. Survey data was collected on job-pursuit intentions, materialism, individualism, selfefficacy, locus of control, risk aversion, and other demographic characteristics. The findings suggest that job attractiveness is influenced by not only high pay level, but also flexible benefits, individual-based pay, fixed pay, and job-based pay. 28 Implementing Total Rewards Strategies Colella, A., Paetzold, R.L, Zardkoohi, A., & Wesson, M.J. (2007). Exposing pay secrecy. Academy of Management Review, 32, 55-71. Pay secrecy can be thought of as a restriction of the amount of information employees are provided about what others are paid. It can become complex in organizations when considering who and what pay information is restricted. The costs of pay secrecy can include sacrifices in employee judgments about fairness and trust, decreases in employee motivation, and (potentially) a less efficient labor market. In addition, pay secrecy can have benefits such as organizational control, protection of privacy, and decreased labor mobility. Several contextual factors are related to when costs and benefits can occur. These factors include—but are not limited to—the nature of human capital, the criteria for pay allocation, and the gauging of relative pay status. Several questions remain related to pay privacy and its implications in organizations and society. Combs, J., Liu, Y., Hall, A., & Ketchen, D. (2006). How much do high-performance work practices matter? A meta-analysis of their effects on organizational performance. Personnel Psychology, 59, 501-528. A meta-analysis was performed to find the relations between highperformance work practices (HPWP) and organizational performance. HPWPs are performance-enhancing practices such as incentive compensation, training, employee participation, selectivity, and flexible work arrangements. Ninety-two studies were used in this analysis. Results indicated that organizations can increase their performance by .20 of a standardized unit for each unit increase in HPWP. The effect sizes demonstrated greater effects for HPWP systems over individual practices and for manufacturing organizations over service organizations. Future research could explore why HPWPs didn’t work as well in service organizations. Corby, S., White, G., & Stanworth, C. (2005). No news is good news? Evaluating new pay systems. Human Resource Management Journal, 15: 4-24. The focus of this article is on HR managers who have introduced new pay systems in their organizations in England between 2000 and 2002. The evaluations HR managers make to assess the effectiveness of changes in pay and grading systems is explored through interviews and case studies with 15 organizations. Results suggest that new pay systems can impact labor turnover, recruitment, retention, staff attitudes, and working practices. However, even given these impacts, the study indicates that HR managers usually only conduct limited evaluations that are based on employee self-report. Given the complexities of evaluation and the limited time of managers, the authors suggest that practitioners focus on evaluating the costs of the system and report their findings to all employees. Dreher, G.F., Ash, R.A., & Bretz, R.D. (1988). Benefit coverage and employee cost: Critical factors in explaining compensation satisfaction. Personnel Psychology, 41, 237-254. Employers invest in employee benefits under the assumption that providing these benefits will increase employee satisfaction, commitment, and loyalty to the organization. This article empirically explored this assumption by looking at the relationship between benefit program characteristics and compensation satisfaction. An extensive compensation survey was administered to employees in eight state agency organizations. Results indicated that increased benefit coverage and decreased employee costs were related to greater satisfaction with benefits and compensation. Changes in the cost of health insurance were particularly influential in altering employee satisfaction levels. The study also demonstrated that employees who possessed more accurate information about actual benefit costs and coverage were more satisfied with compensation and benefits programs. Fay, C., Schulz, E., Gross, S.E., & van de Voort, D.V. (2004). Broadbanding, pay ranges, and labor costs. WorldatWork Journal, 13:2, 8-24. This study investigated whether base salaries and total cash compensation would be higher in firms using broadband pay administration policies than in firms using Implementing Total Rewards Strategies traditional pay ranges. Broadbands collapse multiple pay ranges into a large band with a minimum and a maximum. It may consist of several jobs and does not contain a midpoint. Survey data from 5,593 IT job incumbents in 2000 and 10,906 IT job incumbents in 2001 was collected to test the hypotheses. Results indicated that both base salaries and total cash compensation were higher in firms using broadbanding when controlling for organizational, occupational, and individual characteristics known to be associated with salary differentials. Folger, R., & Konovsky, M.A. (1989). Effects of procedural and distributive justice on reactions to pay raise decisions. The Academy of Management Journal, 32, 115-130. The impact of distributive and procedural justices on reactions to pay raise decisions was examined in this study. Two hundred and seventeen first-line employees of a privately owned manufacturing plant completed a survey on the practices supervisors used to determine their most recent salary increase. Procedural justice was found to influence levels of employee commitment to an organization and trust in management. Distributive justice, however, was related to higher levels in satisfaction with pay. These results suggest that the manner in which pay raises are distributed, as well as the distribution itself, are important to the satisfaction levels of employees with pay raise decisions. Fried, Y., & Ferris, G.R. (1987). The validity of the job characteristics model: A review and meta-analysis. Personnel Psychology, 40:2, 287-322. Approximately 200 relevant studies on Hackman and Oldham’s Job Characteristics Model were reviewed in this meta-analysis. The results of the meta-analysis supported parts of the model such as the multidimensionality of job characteristics, but the exact number and definition of dimensions was more debatable. Relationships between job characteristics and psychological and behavioral outcomes were also demonstrated in the results. Job complexity indices like the MPS seem to be less predictive of work outcomes than a simple additive index. Therefore, the main findings of this article indicate that although the Job Characteristics Model has some usefulness in predicting work outcomes, several modifications and improvements need to be made to enhance the validity and accuracy of the model. Gerhart, B., & Rynes, S.L. (2003). Compensation: Theory, Evidence, and Strategic Implications. Thousand Oaks, CA: Sage. Pay level, pay structures and pay delivery systems are the three main compensation decisions explored in this book. It reviews the determinants and effects of compensation. Theory and empirical evidence are integrated to demonstrate practical significance of compensation research. First, differences in pay level are examined 29 in an attempt to explain why some companies pay more than others, and why pay levels for particular jobs differ. Next, the effects of pay level for employers are studied to find the importance of pay to individuals and what employers get in return for higher pay. Pay structure is also discussed to provide information about job evaluations and worklife incentives. Psychological versus economic perspectives of motivation and compensation are offered as well. Then the book summarizes research on pay-for-performance programs and pay strategies. Finally, future research and methodological recommendations are made to guide research on compensation. Gupta, N., & Mitra, A. (1998). The value of financial incentives: Myths and empirical realities. ACA Journal, Autumn, 58-66. Years of research on the relationship between financial incentives and employee performance is reviewed in this article on the myths and realities related to the value of financial incentives. The myths (found as a result of this study) are that financial incentives do not motivate, people do not value money, financial incentives are punishing, financial incentives undermine intrinsic motivation, and financial incentives erode performance quality. The empirical realities of the value of financial incentives are that financial incentives consistently improve performance quantity, money makes a difference in people’s behavior, financial incentives are rewarding, financial incentives complement 30 Implementing Total Rewards Strategies intrinsic motivation, and financial incentives are, at worst, unrelated to performance quality. The main conclusion from this article is that although money is not the only thing that matters, it does matter, and the challenge is to design effective incentive systems. Hackman, J. R. (1971). Employee reactions to job characteristics. Journal of Applied Psychology, 55(3), 259-276. This article suggests that jobs high on variety, autonomy, task identity and feedback tend to result in higher motivation, higher job satisfaction, fewer absences from work, and high quality work as rated by supervisors. Data was collected from employees in 13 different jobs in plant and traffic departments of an eastern telephone company. Employees were surveyed, observed and interviewed about the characteristics of their job. The results suggest that the motivational potential of jobs can only be reached when the personal goals and needs of employees match up with the psychological demands and aspects of their job…
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