The impact can be seen through simple arithmetic, but we believe that small changes
in total rewards can have a major impact upon employee motivation and productivity, which also can have a major effect on earnings. Despite the relationship between rewards, employee motivation, and corporate earnings, our experience shows that few companies believe they have the tools to determine the return on their investment in total rewards programs. Without effective tools to understand how total rewards fuel "upside" business results, both direct and indirect rewards expenditures are typically perceived by management as essentially a cost of doing business, rather than as an engine of future earnings potential.

How can employers gain confidence that their total rewards programs are really contributing to business value? In very broad terms, we believe this can be accomplished by viewing one critical driver of rewards as an employer-employee "total rewards marketplace" - one in which employees "trade" their time and talent for the total rewards the employer offers, and in which the employer designs total rewards "products" that will elicit the desired results from their employee "consumers." By understanding the dynamics of its own total rewards marketplace, an employer can better assess the impact of total rewards on business value and focus its total rewards investment on those programs that have a higher likelihood of driving the desired return.

The total rewards marketplace

Placing the emphasis on a company's own total rewards marketplace rather than on peer benchmarks and other external reference data can be a major change to many companies' current approaches to rewards design. In a recent survey by Deloitte's Global Employer Rewards practice, more than half of the HR professionals surveyed said that their primary approach for setting pay levels was to provide rewards at a certain percentile of defined industry benchmarks, and 89 percent considered benchmarking one of the three most important approaches used in setting pay levels. But no matter how valuable benchmarks can be for understanding the types of rewards other organizations are offering, they say nothing about how to align one's own total rewards programs with corporate strategy.

A benchmarking study can identify industry pay ranges, but it can't tell an employer where in that range it should seek to fall to effectively support the company's business goals. Benchmarking studies may suggest that offering certain programs is a "leading practice," but they can't tell an employer how much value its own people place on such a plan. What can give an employer this vital information?

We believe, is an integrated approach to understanding the company's strategic goals, the talent needed to achieve them, and the total rewards elements most likely to be effective in attracting, retaining, and engaging that talent. Based on that understanding, an employer can tailor its total rewards programs to the specific needs of its unique corporate strategy and employee population, thereby making a tighter connection between its total rewards programs and the company's business goals.

This approach, it should be pointed out, does not ignore the external marketplace. Rather, it reflects that marketplace through the perceptions of the employees themselves. These perceptions, more than the external marketplace in itself, are what influence employees' actions, and tapping into employees' perceptions can give employers the primary data needed to inform effective total rewards designs. As the only justification for benchmarking is to adjust total rewards relative to the level that employees believe they would earn elsewhere, benchmark data is actually a relatively inefficient proxy for the real thing.

Traditional vs. Transformed rewards

• Benchmark-driven - focused on what others do
• Narrowly defined - compensation and benefits
• Employer paternalism
• Viewed as a cost with uncertain ROI

• Internally driven - focused on what you need
• Broadly defined - "total rewards" include everything about the work experience that affect an employee's commitment and contribution to business value
• Employer-employee partnership
• Treated as an investment with measurable results

Why transform rewards?

Many employers' reward structures were established in an economy very different from todays. Deloitte has found that old approaches to rewards are leaving new challenges unaddressed and potential new opportunities on the table. For instance:

• In 2008, the first members of the Baby Boom generation will turn 62 (the average retirement age in North America, Europe, and Asia), marking the start of a potentially severe, demographically driven drain of essential skills from the workforce.
• The global economy applies new competitive stresses on employers. Especially in the U.S., employers take on social
• responsibilities that are handled in other countries by governments or family structures -or, in the case of some global competitors, simply not handled at all. In this global context, how can employers make total rewards something other than a competitive burden?
• As the growing cost of benefits changes the proportion of total compensation allocated to benefits, employees' interests in how their rewards are structured -that is, how much of their compensation they receive in the form of cash versus health, retirement, and other benefits -start to diverge along economic, social, and demographic lines. The increasing divergence in employee interests makes it more difficult for employers to address the needs of its total workforce with one-size-fits-all rewards designs.
• Security for employees now comes not from a sustained employer-employee relationship, but in the form of portable value: transferable skills, retirement accounts, health spending accounts, and so on. How can employers make this work for them?
• Modern HR administrative models and systems are increasingly able to handle complex benefits arrangements (e.g., retirement choice programs), opening new possibilities for managing complex total rewards programs in a cost-effective manner. How can employers take advantage of these technologies to improve, not just HR efficiency, but the effectiveness of their total rewards programs?

Of course, it's important to make sure that total rewards decisions are based on actual perceptions rather than "wish lists."

Understanding the total rewards consumer

To understand its employees' views on total rewards, employers can use the same techniques that a retail business may use to understand its targeted customers' buying habits. Before introducing a new product, a retailer is likely to conduct extensive market research to study its prospective customers' preferences. Through repeated surveys and focus groups, the company can learn how popular the product might be among both existing and potential new customers, what changes might make it more appealing, and how to price it appropriately.

Now consider the potential advantages an employer could gain by making a comparable effort to understand its employees' "buying habits" with respect to total rewards. Our experience suggests that different total rewards elements - base pay, bonuses, health and welfare benefits, and "intangibles" such as training programs and career opportunities - all influence employees' choices of where to work and how much discretionary effort to expend. The more fully an employer can understand how its employees are likely to react to various aspects of total rewards, the more effectively it can design programs that help motivate the right performance. And the same tools that companies use to measure their external consumers -surveys, focus groups, etc. -can help an employer make better total rewards decisions.

Many companies do, of course, collect some of this information from their employees. Yet recent evidence suggests that many employers do not necessarily come to the same conclusions as their employees. For example, according to the 2005 Job Satisfaction Survey by the Society for Human Resource Management (SHRM), HR professionals and employees disagreed about the relative importance of all of the top five factors important to job satisfaction.

Top five factors important to job satisfaction

Source: "2005 Job Satisfaction Survey," Society for Human Resource Management (SHRM), cited in Margaret M. Clark, "Employees, HR Differ on Satisfaction Factors," HR Magazine, August 2005.

Ask the right questions

A Rewards Dialogue survey, like a market research tool, would ask focused questions about employees' total rewards preferences. The answers could then be used to guide particular aspects of a company's total rewards policy and programs. Deloitte's Rewards Dialogue approach explores subjects such as:

• How do you see your future career with us?
• Which items do you value as "rewards" from employment?
• Among those items, which is most important to your decision to stay here?
• What are your preferences among various benefits and cash?
• Is your satisfaction with rewards greater or less than last time we asked? By how much?
• How do you expect your rewards to progress through your career?

We believe that closing the gap between employers' perceptions of employees' views and the actual state of the internal total rewards marketplace requires a much more rigorous, scientific, and intensive approach than the traditional annual survey. Many times, employee surveys tend to contain biases, make unconscious assumptions, and miss the integrated picture. Also, a relatively infrequent survey does not permit management enough ongoing contact to improve the survey's questioning in the light of responses previously received.

We advocate a more extensive "Rewards Dialogue" between employers and employees, a kind of continuous feedback loop in which an employer would regularly reach out to its employees for their views about total rewards while responding to them to demonstrate that it is listening in a meaningful way. This outreach would take place often enough for the employer to spot trends in employees' responses over time. Instead of conducting surveys once a year or less often, as many employers now do, Rewards Dialogue might take advantage of the many existing touch points between employer and employee -open enrollment, performance reviews, benefits inquiries, even brief pauses at work -as well as more formal survey efforts to maintain an ongoing flow of information. Employers would close the loop regularly with communications to manage employees' expectations and keep them informed of changes to their rewards, along with the reasons for those changes insofar as they can be disclosed.

By keeping employers in continuous touch with employees' views on total rewards, Rewards Dialogue can help an employer understand its workforce's changing preferences and develop programs that are both tailored to employees' current needs and flexible enough to respond to employee feedback without major redesigns. Building in such flexibility is key to striking a workable balance between responsiveness and stability. It may not be practical for an employer to make the changes to its total rewards programs to
keep current with the latest employee feedback. But with Rewards Dialogue, an employer can keep an eye on emerging trends and plan ahead to meet anticipated needs, as well as create a total rewards structure with the inherent flexibility to respond to a fluid environment.

Focusing the total rewards investment

A key challenge in designing total rewards programs is managing the trade-off between satisfying employees' rewards preferences on the one hand, and working with limited resources on the other. Few employers are likely to have the resources to create programs that suit the preferences of all of its employees. Given these resource constraints, we suggest that employers can further boost the total
returns by focusing on incorporating total rewards elements that increase commitment among "critical workforce segments" - employee groups whose retention and motivation are highly important to a company's efforts to achieve its financial objectives. These are the people a company can least afford to lose, whether outright to a competitor or indirectly through a lack of commitment, effort, and productivity. Because of their relatively greater leverage, it is their views that will most influence an employer focused on greater ROI.

There are obvious sensitivities around designating certain employee groups as more "critical" than others. However, the term "critical workforce segment" should be understood in its specific context of impact on corporate earnings, not as a broad value judgment. A workforce segment is critical to the extent that its work directly affects business value creation, its people are difficult and/or expensive to replace, and its skills are in high internal or external demand. Different workforce segments, therefore, may become more or less critical as the business strategy and the external environment change over time.

Which areas are in need of immediate or long-term growth? Where would turnover or attrition be most harmful to the business plan? Where do talent, experience, and/or training have the greatest impact on business results? These and other strategic considerations will influence which workforce segments are considered critical at any given time. Many employers already segment their workforce to some degree, managing whatever sensitivities may arise in order to take advantage of this talent management tool. In our recent survey of HR executives, 61 percent said that their organizations defined their critical workforce segments either explicitly or implicitly. Moreover, 22 percent of these said that they proactively design rewards programs to meet critical workforce segments' needs, and a further 35 percent said that critical workforce segments receive significant consideration in program design.

Importantly, designing total rewards with an eye to critical workforce segments' needs does not mean that this comes at the expense of a company's other, "core" employees. The Rewards Transformation approach to differentiation applies only to rewards design, not to rewards magnitude. Critical workforce segments may not necessarily receive more total rewards than others, but they should have relatively more influence over the nature and design of the company's incentive programs, the configuration of its benefits programs, and other aspects of the company's total rewards designs. We're also not suggesting that employers should unquestioningly offer a "rising tide" of rewards that lifts all employees to the level of the segments with the most leverage. Rather, an employer's "baseline" total rewards programs should treat critical and core workforce preferences as one of many important factors, including the company's cost and risk constraints, to consider in program design. It's also possible that many of the total rewards factors valued by critical workforce segments will include "intangibles" such as mentoring, career planning, and flexibility, which can be offered to the wider employee population without necessarily incurring prohibitive costs.

The case for Rewards Transformation