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No longer just a bonus and bottle of Christmas booze

Reward strategies used to focus on setting a budget for bunging target-meeting executives and salesmen a bonus, some M&S vouchers and a bottle of Christmas booze. Nowadays they are a way to develop a high-performing workforce that helps drive business objectives.

Employee benefits have never been more pertinent, given that small pay rises and freezes have left many worse off during four years of low or no growth. Since November 2009, staff pay rises have tended to lag behind inflation, Alastair Hatchett, head of pay and HR services at Income Data Services, points out.

This is where a well thought-out reward strategy and policy comes in. They can be complex. According to Iain McMath, managing director at reward and benefits specialist Sodexo, a total rewards concept is about creating a plan that spans a spectrum from benefits to rewards, and which enables employers to tie these to business, individual and organisational objectives.

“Every employee’s role can impact on revenue, client retention and efficiency so you can link every employee’s activities to one or more of these areas,” he says.

David Wreford is a principal at business consultancy Mercer and advises clients on reward strategies. He says Mercer’s definition of a total reward strategy is based on four “quadrants”: cash; benefits; careers; and the work/life environment. Cash covers basic pay, bonuses and the like, while benefits include pensions, healthcare, income protection and other perks.

Employers need to ask questions such as why they incentivise people and what behaviours they want to drive

The careers element focuses on what employers offer in terms of development, while the work/life environment stresses the importance of the atmosphere and relationships in the workplace, and the employer’s cultural values, expressed, for example, in corporate social responsibility programmes. Beyond these cornerstones, says Mr Wreford, employers need to ask questions such as why they incentivise people and what behaviours they want to drive.

Reward policy objectives that employers must consider include retaining key people, rewarding high performers and attracting appropriately talented recruits, while other issues include transparency, communication, where benefits fit in, long-term incentives, such as share plans and how reward meshes with personal development and performance plans.

Charles Cotton, performance and reward adviser at the Chartered Institute of Personnel and Development (CIPD), says: “For a total reward approach to work, it should be aligned with the organisation’s contexts – technological, economic, demographic – as well as its aims and objectives, business drivers, such as cost, quality, innovation and culture, and the assumptions, beliefs and values that guide and shape employee, manager and leader perceptions, and the employer brand. This can be challenging.”

For reward specialist Northgate Arinso’s director of consultancy Dan Wilson, the most challenging element of a reward policy is “a clear talent management strategy that is embedded within the reward strategy”. This is “not easy to retain and requires commitment from the leaders, while HR needs to demonstrate the benefits to the business”.

Mr Cotton says total reward can be a huge challenge for HR departments because it requires those in such roles as learning and development, talent, payroll and pensions, as well as reward, to work together “to ensure that a seamless offering is provided to workers in a way that meets the needs and aspirations of the employer, and of current and future employees”. “This can be a stretch if colleagues are not used to collaborating and are still rewarded and recognised for functional, rather than cross-functional, contribution,” he adds.

In practice many employers appear to take a more simplistic approach to reward with the focus on cash-based goodies. The CIPD’s 2012 Reward Management Survey found employers used various financial carrots to reward good performance and encourage staff engagement.

Two-thirds of the 455 private and public-sector employers surveyed offered performance-related rewards and the most popular – cited by 66.8 per cent of respondents – were individual bonuses, followed by “merit rises”, combinations of the two, sales commission and financial awards for completing projects successfully.

The report highlights the John Lewis Partnership as an example of where this can work effectively, structuring its performance-related reward in such a way that partners can, over time, “achieve earnings rates substantially ahead of their starting pay”. It also pays “above the national minimum wage regardless of local conditions that may allow them to pay minimum rates”.

“What we want is to be distinctive in rewarding excellent performers and to allow earning potential without having to be promoted,” according to John Lewis’ head of reward Andrew Clark. “If we’ve got an excellent furniture saleswoman, who is of real value to the business, why shouldn’t we be paying her a really great rate?”

Cathy Aldwinckle, director of strategy at online employee benefits provider Benefex, says rewards and benefits policy should also acknowledge where the employee is in terms of their employment lifecycle.

“For example, when joining a company, employees will put more emphasis on the pay and benefits being offered, since these are by far the most tangible element,” she says. “However, for many employees, once employed, other components become more important, such as learning and development opportunities, and the work environment.”

This may mean taking an age-related view of benefits and rewards, something which Mercer’s Mr Wreford says some of his clients are starting to do. “Employers should think about reward as an investment,” he says. “Think about what would appeal to young people, such as helping them pay off student debt. Higher up an organisation, benefits come to the fore, but for young people they’re not compelling. You have to be flexible.”