Pulling Together the Threads of Total Reward Systems
by
Allen D. Engle, Sr, D.B.A.
A presentation to the Bluegrass Compensation Association in Lexington, Kentucky
September 28, 2000
Dr. Allen D. Engle, Sr. is a Professor of Management in the College of Business and Technology at Eastern Kentucky
University. He received his Doctor of Business Administration degree in Human Resource Administration in 1990
from the University of Kentucky. He is a national and regional professional member of World at Work (formerly
the American Compensation Association) and the Society for Human Resource Management. While at Eastern,
Dr. Engle has taught courses in management (undergraduate and graduate), a number of areas within human
resource administration, organizational behavior, organizational theory, and international management
(undergraduate and graduate). His research interests are in the areas of compensation theory and practices,
leadership and organizational change, job analysis, managerial competencies and organizational design,
particularly as they impact on multinational firms. He has presented academic papers on many of these topics in
the U.S., Canada, Germany and the United Kingdom. Dr. Engle has consulted for regional firms and presented
professional seminars in the areas of performance appraisal systems, executive team building,
strategically-responsive compensation systems, intercultural management
issues and organizational change.
Introduction
The moral of the story today is twofold. First, never go to a BCA Executive Committee meeting – they will put you to work. Second, never go to a BCA Executive Committee meeting where both Betsy and Julie are present – they will talk you into hard work. Seriously, I very much appreciate the chance to serve with the BCA professionals. It is one of the most rewarding aspects of my professional career – that shows you what kind of shape my career is in.
Today’s discussion – and I hope very much it will be a discussion and not a lecture – was triggered by a July article in HR Magazine. Doug reads too much.
-- Read the story of a Silicon Valley HR manager who had an underperforming lead engineer who said he didn't have enough of the right kind of light to work his odd-hour position. The firm invested in a cutomized light arrary for his work space and his team's productivity soared. ("Sometimes Employees Just Need a 'Wa' Adjustment" by Bill Leonard. HR Update, page 25, July 2000 issue of HR Magazine)
"Kooky demands" or "Total Rewards"? You decide.
Defining Total Rewards
One of the points that interested me about this topic was just how wide-open the term "Total Rewards" is right now. Let’s poll the audience.
[Ask for definitions and put them on the overhead]
[Talk about pattern review definitions]
According to World at Work, in 1997 the consulting firm Towers-Perrin surveyed 500 North American and European executives asking them to define total rewards. "Simply stated, total rewards embraces everything that employees value in the employment relationship." Sandra O’Neal (1998) (ACA Journal 7(13) 1998 Autumn). This global definition was further broken down into four categories:
The effective blending of these four reward dimensions promises two results:
Beyond the Cafeteria Line
Given the complexity of the topic, a simple image may help. At the heart of the Total Rewards concept is a complex customization of organizational inducements (resources) in order to more completely satisfy and bind the employee to the organization.
In one sense this is the radical extension of the old cafeteria benefits idea – that employees know their preferences – what the economists call utility functions – far more intimately than do HR staff or corporate executives. The problem with the cafeteria was the limited nature of the choices. Visualize yourself standing in line, picking up your tray with standardized indentations to contain the various benefits. You walk down the line and select from among a dozen or so trays containing foodstuffs of various shades of gray and of various textures and consistencies. Not very appetizing.
Now consider a combination personal chef and trainer – (S)He knows your needs, listens, goes to the fruit, vegetable, and meat markets with you to pick out the best. The resulting meal is freshly cooked, just like "mom" used to make, healthy and balanced, and the final presentation is impeccable. Quite a difference in the work dining experiences – who’s hungry?
Strategic Groups and Pay
In a second sense this is an extension of Executive Compensation practices to a wider group of strategically critical employees. Scott Snell of Penn State has coined the term "HR Architecture" to describe four differential approaches to HR practice [see Table1 One]
This critical, irreplaceable group use to be executives in the old command and control days. Today’s right sized, high involvement, participative firms now run on influence and integration – not command or control. Executives may be less critical to strategic success than operational of functional specialists such as IT, R&D workers, sales stars and the culturally connected. These key human resources are worth the customized treatment.
What else has driven the stampede to Total Rewards?
Five Strands
I call these drivers or reasons for the more to Total Rewards the "Strands." We are going to draw together these five strands and see if they relate to your firm’s situation. Nothing gets people’s attention like personal relevance.
The five strands are:
True Diversity
Standard assumptions about what employees value are not merely out of date, they are dangerous. A review of recent article in ACANews/Workspan, ACA Journal/W&W Journal and HR Magazine/still HR Magazine - picks up issues related diversity in:
A second factor underlying the increased willingness to expand the time and resources to customize work exchanges is the brutal reality of competing for fewer and fewer capable workers. We all know the high tech IT horror stories, but these are significant labor shortages in professional production and semiskilled or even non-skilled occupational categories. Applying pay and benefit solutions (dimensions 1 and 2) simply results in overpayment and/or turnover costs. A recent article by Mulvey, Ledford & LeBlanc (World at Work Journal, Volume 9, No. 3, pp. 6-18) contains survey data that allows the authors to conclude that even if employees are satisfied with their total reward package there is a 16% chance they may be a strong candidate for voluntary turnover. Competition is just that disruptive in a best-case scenario – what is it if you don’t try to bind employees with customized rewards?
Mergers and acquisitions add to the swirling mix of changing psychological contracts by at once breaking up old loyalties and traditional compensation practices while exposing employees to new and sometimes radically different approaches to pay. With an entire pay history gone with the winds of change it is no wonder that stunned survivors of mergers and acquisitions will never look at pay in the same manner again.
Sublime Service
Transition to a service – information economy combines with the competitive pressure described previously to change the very definition of work and hence performance. Work is now much more psychological and social – your state of mind (satisfaction, commitment, seniority, mental harmony – "wa" if you will) is much more aligned to job performance if you are doing knowledge work, creative innovative R&D or listening to whining clients than if you are assembling widgets or digging postholes. Satisfied customers start with satisfied employees. The new economy is about "emotional work" as much as it is about mental or social aspects of work. If we are going to press the right buttons to get out employees to provide world-class service we need to know where those buttons are. Again, a recent (9/00) Workspan article by Gaughan, Kasparek, Hagens & Young describes using marketing research techniques to design employee compensation and benefits at NCR. I used conjoint analysis, a proposed product valuation device, in my 1990 dissertation to assess the value of strategic pay dimensions by various employee groups. These marketing techniques have the potential to listen to employee preferences and set up "win-win" rewards, providing employees with pay components they value very much personally (win one) that do not cost the firm nearly what the employees value (win two).
Global Grasp
Don’t get me started on the forces of globalization or we’ll never get out of here. Suffice it to say that globalization opens up the firm to at least three ideas.
First, people value different components of rewards (the diversity idea) and reward differently. Second, pay secrecy is impossible globally – transparency is as much a consequence of physical and cultural distance as it is of technical capability. Third, expatriate HR management has driven home the effectiveness of seamlessness (combining R&S, T&D, C&B in new expanded forms) to cover world–hopping families in a complete corporate cocoon (education, housing, medical services, holiday travel, shopping, etc. etc). The effectiveness of this expanded and integrated HR role has driven much of the "domestic" Total Rewards discussion (Davis, 2000; Ekstrom, 1999; Packen, 1999)
Finally, a two-edge sword –
Two-edged Technology
There is good news and bad news. The bad news is that technology opens up the inducements/contributions discussion creating much more of a sellers market. Just yesterday I received unsolicited and via the Internet, an invitation to join "expertfind" - a web based professional directory. I also get unsolicited position announcements everyday and can, with little effort, use the web to track position openings and associated pay and conditions of employment without leaving my office.
Additionally, technology’s capabilities create more responsibility for the HR managers as the "state of the art" becomes more and more advanced. HR information systems running off increasingly integrated Oracle based systems "allow us" (for that read "makes us accountable") to deal with larger volumes of personal and job based information. I don’t want to get into a workflow versus job analysis discussion – but suffice it to say that information technologies allow us to efficiently deal with work-based relationships at the position (person) level of analysis as well as the job-family, and occupation levels of analysis.
To conclude on a positive note, technology opens up the capabilities
of traditional HR systems thought and arms us for the first time with the
resources to respond with creativity and sophistication to a complex, customized
employment relationship. Total Rewards require Total Professionalism –
creativity, sophistication and a flexibility of thought that can move us
from reactive transactional pay processes and procedures to more strategic,
proactive, transformational pay systems.
Table 1
Organizational Architecture and Strategic groups
Strategic Criticality of Grp
Replacability of Not Critical Critical
|
2 Low Maintenance |
1 High Maintenance |
|
Outsource |
Standard System |