Key Components of an Effective Total Compensation Strategy

Key Components of an Effective Total Compensation Strategy

SurveyBy Tom Wilson (adapted from a chapter, authored by Tom Wilson, of an upcoming book and published by McGraw Hill).

When a firm develops its business strategy, there are usually several components. The strategy is viewed first within a context of the market, environment, regulatory factors and other elements that will impact the business. Likewise, a total rewards strategy needs an organizational context that defines essential elements of the plan. It needs to be relevant in the environment in which it operates.

Design of a total rewards strategy starts with a statement. There are three elements to a rewards strategy statement:

1.       The context for the total rewards philosophy — especially if the organization is facing particular challenges or is in the process of implementing fundamental changes — describes what is important to the organization. By nature we mean the firm’s mission, key success factors and strategies, and core values. The description of the context provides a very important framework for understanding why the philosophy and programs are focused in a particular manner.

Here is an example from Google:

“Our employees, who have named themselves Googlers, are everything. Google is organized around the ability to attract and leverage the talent of exceptional technologists and business people. … In line with that philosophy, we have designed our compensation programs to support three main goals:

      • Attract and retain the world’s best talent
      • Support Google’s culture of innovation and performance
      • Align employees and stockholders’ interests

“We pay Googlers competitively compared to other opportunities they might have in the market. We also offer competitive benefits that help Googlers and their families be healthy and happy, and provide unique perks that make life and work more convenient, design compelling job opportunities aligned with our mission, and create a fun and energizing work environment. We have a deeply rooted believe in paying for performance….”

2.       The next task is to develop a unifying statement of philosophy. This statement should connect the core mission, strategy and values of the organization to the rewards programs and practices that influence what people do. While it might be helpful to see the statements of other organizations, these statements should be unique and are best created by the organization itself. This is perhaps the most challenging element of a total rewards philosophy statement. The difficulty is not in expressing what needs to be done, but how to express something succinctly that is meaningful to the organization’s people and serves as the unifying theme for the other elements of the strategy statement. It should define the overall objective desired from all the total rewards programs, with the realization that each program will focus on what it does best.  Here is an example from Whole Foods Market:

“Our compensation and benefit programs reflect our philosophy of egalitarianism. While the programs and individual pay levels will always reflect differences in job responsibilities, geographies and marketplace considerations, the overall structure of compensation and benefit programs should be broadly similar across the organization.

“The primary objective of our compensation programs, including our executive compensation program, is to attract and retain over the long term, qualified and energetic team members who are enthusiastic about our mission and culture, providing them with sufficient income and other benefits to keep them focused on the Company as their employer. A further objective of our compensation programs is to reward each of our team members for their contribution to the Company. Finally, we endeavor to ensure that our compensation programs are perceived as fundamentally fair to all stakeholders.”

3.       The third element of a rewards strategy statement is the definition of the purpose for each primary reward program. These programs include base salaries (both the salary levels and pay increases), variable pay plans (these include bonus plans, sales incentives, project or team incentives, management bonus plans, Gainsharing or Goalsharing plans, company-wide profit sharing plans, etc.), employee benefits programs (e.g., health insurance, life insurance, retirement programs, etc.), and recognition and development processes (e.g. performance and service recognition, promotions, spot awards, targeted training investment, etc.). The purpose statement can be developed by answering these three questions:

      • Why does each program exist?
      • Why is it meaningful to your employees?
      • How does it give the organization a competitive advantage?

These questions should assist in forming the purpose statements for each major category of reward programs.

Intuit provides a very good illustration of these purpose statements for their reward programs. Here are examples of the purpose statements for some of them:

“BE REWARDED”

Our Total Rewards program is more than just a paycheck. It includes compensation and recognition programs designed to reward your performance, tools to help you plan your financial future, and benefits and services for your whole family. Our pay and recognition plans offer cash and other nice rewards.

“BE RECOGNIZED”

Base salary:

We offer competitive salaries to attract, retain and motivate you. We believe in rewarding you for excellent performance. Our merit-based system ties salary increases and promotion opportunities to the results you deliver that help Intuit grow.

Incentive pay:

You deserve rewards for exceptional performance, so we offer bonus and incentive programs at all levels of the organization. They include sales commissions, support and customer service incentives and other programs.

Spotlight recognition:

Everyone appreciates being appreciated. To thank you for a job well done, our peer recognition tool allows us to recognize each other with cash and other awards. And if you stick around a while, we’ll celebrate your milestone employment anniversaries with service awards.

“BE SECURE”

Planning for tomorrow is important. That’s why we offer several tools and programs to help you plan your financial future.

401(k) Investments in Your Future:

Intuit’s 401(k) Plan allows eligible employees to save for their future by contributing on a pre-tax or post-tax (Roth) basis and receive a company match on a portion of the savings. Employees may choose from a broad range of investment funds, including funds designed for anticipated retirement date and self-directed options for their savings.

“BE WELL”

Your family’s health, wellness and security are a top priority. We offer excellent healthcare benefits plans, insurance and more.

Medical, Vision and Dental Care:

There are several plans available so you can choose the option that’s right for you. Choose from three medical plans, a PPO, a consumer directed health plan and a managed network plan.

Life Event Program:

Our life event program provides a free resource and referral service to assist in life’s everyday issues and even the bigger issues that come up. This includes things like parenting, child care, elder care, adoption assistance, educational assistance and work issues.

“BE BALANCED”

You’ve got a busy life outside of work, too. To help you balance it all, we offer several great programs, including time off, fitness incentives and tons of on-site services.

Vacation and time off:

Everyone needs a little time away. We offer paid vacations, personal holidays and sick leave. Temporary, contract, flex-time and seasonal employees are not eligible for time off with pay.

Parental leave:

Having a child changes everything. New mothers and fathers can take up to two weeks of paid parental leave to welcome a newborn or newly adopted child.

A total rewards strategy makes a statement that sets the stage for specific policies and programs, and defines the expectations and actions desired. It provides guidance for the assessment and improvements. Most importantly it outlines why and how a company or organization spends most of its money on people.


[1] 2004 Google’s Founder IPO Letter.

[2] Whole Foods Market, Inc. 2013 Proxy, Compensation Discussion and Analysis Section

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