Strategic reward and total reward

Strategic reward

Strategic reward is based on the design and implementation of long-term reward policies and practices to closely support and advance business or organisational objectives as well as employee aspirations.

Total reward

The concept of total reward encompasses all aspects of work that are valued by employees, including elements such as learning and development opportunities and/or an attractive working environment, in addition to the wider pay and benefits package.

Links between strategic and total reward

The use of total reward may form part of a strategic approach to reward for many employers. For example, an organisation might adopt a total reward approach,  encompassing the provision of both cutting edge training programmes together with flexible working options, as well as more traditional aspects of the pay and benefits package, in order to recruit, retain and motivate the high quality staff that are best placed to help it secure its business objectives.

By recognising that pay is not the only motivator, and acknowledging the importance of not only tangible but also intangible rewards within the wider context of the work experience, total reward has wide-reaching implications for employers and employees alike.

As a concept, total reward is not new. As with many trends in reward management, the development of formal concepts and theoretical models of total reward originally came from the USA (where the description ‘total rewards’ is generally used rather than the singular version of the term often favoured in the UK).

What is included in total reward?

The US organisation WorldatWork (formerly the American Compensation Association) has identified five separate components of the work experience in addition to pay and benefits. These are:

• recognition
• work/life balance
• company culture
• employee development
• environment, including job design and the physical workspace.

Although these elements have always existed in the workplace, they have often been taken for granted and thus not actively managed. Under a total reward policy, all aspects of the work experience are recognised and prominence is given not only to remuneration but also to less tangible rewards. This is important since experience shows that employees place great emphasis on intangible rewards when deciding where to work and the level of commitment to give to their work.

In more detail, total reward may include some, or all, of the following elements as well as traditional elements of pay and benefits packages:

• flexible benefits
• access to professional and career development
• a challenging role at work
• freedom and autonomy at work
• opportunity for personal growth
• recognition of achievements
• preferred office space or equipment
• capacity to raise matters of concern
• involvement in decisions that affect the way work is done
• flexible working hours
• opportunities for working from home
• secretarial support.

It is worth noting, though, that the term total reward is also occasionally used in a more limited way simply to refer to the benefits package beyond basic pay. For instance, some commentators use the term primarily to ensure a focus the value of pensions (in addition to basic pay) as part of the overall remuneration package.

Characteristics

An analysis of various total reward models by Thompson³ finds that they can be characterised by an approach that is:

• Holistic: it focuses on how employers attract, retain and engage employees to contribute to organisational success using an array of financial and non-financial rewards.
• Best fit: it adopts a contingency approach – total reward programmes need to be tailored to the organisation's own particular culture, structure, work process and business objectives.
• Integrative: it delivers innovative rewards that are integrated with other human resource management policies and practices.
• Strategic: it aligns all aspects of reward to business strategy – total reward is driven by business needs and rewards the business activities, employee behaviour and values that support strategic goals and objectives.
• People-centred: it recognises that people are a key source of sustainable competitive advantage and begins by focusing on what employees value in the total work environment.
• Customised: it identifies a flexible mix of rewards that offers choice and is better designed to meet employees' needs, their lifestyle and stage of life. 
• Distinctive: it uses a complex and diverse set of rewards to create a powerful and idiosyncratic employer brand that serves to differentiate the organisation from its rivals.
  • See our report Employer branding and total reward
• Evolutionary: it is a long-term approach based on incremental rather than on radical change.

Coverage

Our Reward management surveys find that around one third of employers overall have adopted a total reward approach to date, with significant interest additionally recorded in introducing such approaches in the future among employers.

While private sector employers initially tended to be at the forefront of the formal development and adoption of total reward policies, there is growing interest in the approach among public sector organisations – with relatively little variation currently recorded in the coverage of total reward approaches between private and public employers.

• Go to our annual reward management surveys

To take one example of heightened interest in total reward in the public sector, there has in recent years been a particular focus on the non-basic pay advantages of working in the sector, such as high-quality pensions and work-life balance provisions, among the public sector pay review bodies (which recommend pay rises for several groups such as medical staff, teachers and defence workers).

'While pensions and total reward [are] not specifically mentioned in review body remits, they [have] a direct relevance to recruitment, retention and motivation', in the view of one commentator from the Office of Manpower Economics, as well as being important in the considerations of broad pay comparability with the private sector⁴.

Advantages

In common with many reward policies, the aims of total reward include the desire to enhance recruitment, retention and performance levels.

Total reward has a particularly strong potential to enhance the reputation of an organisation as an employer of choice through its capacity to place a value on the non-basic pay or wider non-financial benefits of working for an organisation.

Many employees have traditionally been unaware of the costs to the employer of benefits such as pensions, which can be very substantial for an employer. Hence the use of total reward is often closely associated with the desire to communicate to employees the value of their employment package. Employers frequently provide individual employees with total reward statements (either print versions or online) that emphasise the value not only of basic pay but also the wider benefits package and potentially other congenial aspects of employment in a particular company.

Drawbacks

Research from our reward management surveys indicates that employers believe they are better at integrating financial aspects (pay and benefits) into a total reward approach than the non-financial aspects. An area of concern revealed by the research is line manager behaviour, with employers expressing concern at how well they have integrated the behaviour of these staff within a total reward approach. Yet, if line managers do not support the organisation’s commitment to total reward (for example, over flexible working) the approach is likely to fail.

Clearly, moreover, some rewards that might be included in a total reward package are more easily provided than others. In respect of the working environment, for example, many employees might prefer a desk located by a window – but office accommodation is a finite and not particularly flexible resource. In such cases, it would often be very difficult to meet everyone’s requirements.

One other difficulty in developing a total reward package, beyond the challenge of supplying certain rewards, is attempting to measure or weigh their value against one another – particularly if the aim is to include a numerical or tangible value in total reward statements distributed to employees.

This factsheet has been updated by Janet Egan, researcher and writer on reward and employment issues.