What is total compensation
In the earliest years that the fields of compensation and benefits were recognized as professions, practice was based largely on formulas that served the entire employee population in an organization. Salary structures were just that -- rigid and highly controlled -- and benefits programs were designed as a one-size-fits-all answer to a homogenous work force.
In the 1970s and 1980s, organizations recognized that strategically designed compensation and benefits programs could give them the edge in a rapidly changing environment. Organizations were responding to:
- Global economic development and the emergence of multinational firms
- A much more competitive business environment
- Diversification of the work force to include workers who didn't fit the sole breadwinner, head-of-household model of the '50s and '60s
- New government mandates related to employee benefits
- Rapidly rising benefits costs that prompted flexibility in programs to reduce costs.
Suddenly, the relatively simple compensation and benefits programs of the past were requiring consideration of their strategic impact and relationship to one another. Integration became a key, and compensation and benefits professionals emerged as critical strategic partners in their organizations' leadership -- a position still occupied by leaders in the field today.
During the 1990s, companies experienced unprecedented challenges including:
- Dramatic changes in the workplace, including increased awareness of conflicts caused by family, home and work demands.
- Workforce demographic changes that challenged the traditional working-father, stay-at-home-mother model of previous decades.
- Fewer resources available for pay increases.
- Astronomical increases in health-care costs in some countries.
- Rapid decline of defined-benefit pension plans as a financially viable retirement model.
- Tremendous advances in technology and the emergence of new business opportunities.
- Geographic movement of many manufacturing and service roles.
- Advancement of pay-for-performance practices.
- Unprecedented mergers, acquisitions and global competition.
Collectively, these forces and others caused business leaders to scramble for ways to improve efficiency, effectiveness and marketplace viability. HR professionals -- particularly those specializing in compensation and benefits -- were challenged to contain costs and contribute to improved business results. These professionals were at the forefront of designing and implementing programmatic changes that have shaped the next generation of compensation and benefits. The results have included improved alignment of pay and performance, tighter controls on benefits costs, and more relevant and valued employee rewards programs.
Forward-thinking professionals realized that programmatic advances would not be enough. While program efficiencies and cost controls have been pivotal for survival, many organizations have recognized that an integrated and enriched "value exchange" between an employer and its employees can accelerate velocity and success.
The concept of total rewards emerged in the 1990s as a new way of thinking about the deployment of compensation and benefits, combined with the other tangible and intangible ways that companies seek to attract, motivate and retain employees. Flexible companies and start-ups were able to deploy these concepts rapidly, while other organizations have struggled with entrenched organizational structures, practices and culture that have slowed or prevented progress.
During the past decade, various total rewards models have been published. While each approach presents a unique point of view, all of the models recognize the importance of leveraging multiple programs, practices and cultural dynamics to satisfy and engage the best employees, contributing to improved business performance and results.
Increasingly, it has become clear that the battle for talent involves much more than highly effective, strategically designed compensation and benefits programs. While these programs remain critical, the most successful companies have realized that they must take a much broader look at the factors involved in attraction, motivation and retention. And they must deploy all of the factors -- including compensation, benefits, work-life, performance and recognition and development and career opportunities -- to their strategic advantage.
WorldatWork Total Rewards Model
As the association representing the professions comprising total rewards, WorldatWork has served as a focal point for intellectual-capital development and dialogue about this topic. In 2000, after facilitating discussion with leading thinkers in the field, WorldatWork introduced a total rewards framework intended to advance the concept and help practitioners think and execute in new ways. The model focused on three elements:
- The Work Experience
- Balance (of work and life)
- Environment (workplace)
Up to this point, the association had focused solely on compensation and benefits. Yet, specialists and generalists alike agreed that compensation and benefits -- while foundational and representing the lion's share of human-capital costs -- cannot be fully effective unless they are part of an integrated strategy of other programs and practices to attract, motivate and retain top talent. Thus "the work experience" aspect of the first WorldatWork total rewards model included aspects of employment that may be programmatic or just part of the overall experience of working. For instance, recognition (acknowledgement) may be part of a formal rewards program or may be as simple as a thank-you from the boss or a co-worker. Workplace flexibility (part of work-life) may manifest itself as a formal telework program or as having a culture and practices that embrace work-life flexibility.
As companies were exposed to total rewards, understanding of the concept advanced rapidly. In fact, the concept has become the practice in many companies. While the term didn't even exist a decade ago, today departments and jobs include the term. A September 2005 survey of WorldatWork members revealed that more than 90% of respondents use the terms "total rewards," "total compensation" or "compensation and benefits" to describe the collective strategies deployed by their companies to attract, motivate and retain the talent needed to be successful.
During the past several years, the concept of total rewards has advanced considerably. Practitioners have experienced the power of leveraging multiple factors to attract, motivate and retain talent; high-performing companies realize that their proprietary total rewards programs allow them to excel in new ways. At the same time, human resource professionals, consulting firms, service providers and academic institutions have made significant contributions to our understanding of total rewards.
Total Rewards Today
From 2000 to 2005, the bodies of knowledge associated with total rewards became more robust as practitioners experienced the power of integrated strategies. Organizational and departmental structure changes allowed for better integration, and professional understanding improved as well. Advanced literature, research and case studies accelerated visibility for total rewards beyond the HR profession, garnering notice from line managers and, indeed, the C-suite.
Given this advanced thinking and the increased importance of total rewards as a core business strategy, WorldatWork convened teams of volunteers -- leading professionals in the field -- to create an enhanced view of total rewards. The result: a comprehensive model that demonstrates the context, components and contributions of total rewards as part of an integrated business strategy.
Elements of Total Rewards
There are five elements of total rewards, each of which includes programs, practices, elements and dimensions that collectively define an organization's strategy to attract, motivate and retain employees. These elements are:
- Performance and Recognition
- Development and Career Opportunities
The elements represent the "tool kit" from which an organization chooses to offer and align a value proposition that creates value for both the organization and the employee. An effective total rewards strategy results in satisfied, engaged and productive employees, who in turn create desired business performance and results.
The elements, as WorldatWork has defined them, are not mutually exclusive and are not intended to represent the ways that companies organize or deploy programs and elements within them. For instance, performance management may be a compensation-function- driven activity or may be decentralized in line organizations; it can be managed formally or informally. Likewise, recognition could be considered an element of compensation, benefits and work-life.
Context for Total Rewards
The WorldatWork model recognizes that total rewards operates in the context of overall business strategy, organizational culture and HR strategy. Indeed, a company's exceptional culture or external brand value may be considered a critical component of the total employment value proposition. The backdrop of the WorldatWork model is a globe, representing the external influences on a business, such as:
- Legal/regulatory issues
- Cultural influences and practices
The Exchange Relationship
An important dimension of the model is the "exchange relationship" between the employer and employee. Successful companies realize that productive employees create value for their organizations in return for tangible and intangible value that enriches their lives.Source: www.awlp.org