Total Rewards and Business Strategy - Linking Total Rewards and Business Strategy

ABSTRACT

This research paper explores total rewards for organizations, business strategy and creating alignment between the two. An analysis of the research data indicates an overall shift for human resources professionals in the benefits arena. Historically, benefits have been pieced together by human resources professionals based on budgeted dollar amounts handed to them by top management, with little or no thought as to how these rewards impact talent acquisition, retention or employee engagement and productivity. However, recently a new paradigm has emerged where human resources professionals and benefits specialists are partnering with top management to develop compensation and benefit programs that encompass the total rewards program for employees. These new programs are designed to strategically align with overall business strategy and therefore accomplishing the objective of enhancing employee engagement, attraction and retention of talent, and employee productivity. Additionally, the research conducted indicates that these programs can save millions of wasted dollars on unwanted, unneeded and duplicated benefits. Clearly, human resources professionals must continue to aggressively survey their employee bases, strategize with top managers and strongly negotiate with vendors to implement a total rewards program that meets the needs of their respective organizations.

Linking Total Rewards and Business Strategy

For most organizations, investment in human capital is a significant portion of the company's total expenditures. "While health care costs in the U.S. are projected to increase at a lower rate in 2012 vs. 2011, the average cost per employee will surpass the $10,000 mark for the first time" (Miller, 2011). However, many give little thought to how this investment is linked to the overall strategy of the business, and how costs can be minimized by strategic planning. I believe this outdated trend is changing and more organizations are beginning to utilize talented human resources professionals to enable them to make wiser human capital investment decisions. "Company after company has set about transforming its HR function - setting up new centers of excellence, redefining the role of the HR business partner, establishing shared-service centers and outsourcing basic functions" (Srivastava, MacKenzie, & Chowdhury, 2006).

Employee benefits in the United States now constitute as much as 35% or more of an employee's total compensation. No longer are they considered fringe benefits. Candidates and incumbent employees alike now have an expectation that certain benefits will exist within their employing organizations. Certainly the passage of the Patient Protection and Affordable Care Act has increased the need for businesses and other employing organizations to be more vigilant in their pursuit of effective total rewards plans that include a strategic alignment of benefit offerings (Rosenbloom, 2011).

When companies formulate their business strategy, they decide what their marketing goals will be. They decide if they will compete in the marketplace in terms of price, value, quality or distinction, and how they will accomplish that strategic mission. Many times, though, the organization's strategy to acquire, motivate and retain talent is left out of these discussions (Kaplan, 2007). Often, the current state of benefits and compensation in many organizations is a jumble of overlapping, inadequate, expensive and undervalued plans that may or may not meet employees' needs (Adamik, 2007). In order for companies to fully utilize their investment in their human capital, they must be part of the strategy discussions including long and short term goal planning (Kaplan, 2007).

A well designed total rewards strategy that links to business strategy can yield tremendous results in terms of greater organizational alignment, better execution against the organization's key capability requirements, improved yields in recruiting, higher levels of talent retention and greater employee engagement and productivity (Srivastava, MacKenzie, & Chowdhury, 2006).

Total Rewards

Total rewards is the term used to describe the myriad of benefits and compensation offered to employees of organizations in return for their employment. World at Work, a membership organization devoted to total rewards, defines total rewards as "all of the tools available to the employer that may be used to attract, motivate and retain employees. Total rewards include everything the employee perceives to be of value resulting from the employment relationship." "Throughout history, employers have been challenged with attracting, motivating and retaining employees. From the simplest barter systems of centuries past to the current complex incentive formulas of today, the organizational premise has been the same: Provide productivity and results to our enterprise and we will provide you with something of value" (World at Work Total Rewards Association, 2006).

Total rewards include both tangible and intangible items. These items include compensation, benefits, work life balance options, recognition, and development opportunities (World at Work Total Rewards Association, 2006).

Compensation refers to any payment made to an employee for services rendered. It has four main elements, fixed pay, also known as base pay; variable pay, short term incentive pay and long term incentive pay. Fixed pay is defined as non-discretionary payments that do not vary based on performance or results. Variable pay is a payment made once and must be earned again for each specified performance period. Short term incentive plans are designed to reward performance over a short period of time, typically one year or less. Finally, long term incentives are designed to reward performance over a longer period of time, usually longer than one year. Long term incentives usually include items such as stock options and cash (World at Work Total Rewards Association, 2006).

Executive compensation is a unique form of compensation that is typically developed individually outside other compensation strategies for hourly and other managerial employees. Executive compensation plans are typically designed to link performance with compensation, and drive desired results. Often it is designed to promote longevity of tenure and contains specific metric measures of success over specific periods of time. The plan for executive compensation usually includes a short term and long term strategy to meet organizational goals (The Right Connections Peer Network, 2011), and can include luxury items such as a company car, club memberships and lower