Total rewards strategy is a form of compensation and benefits in human resource management that includes different aspects of motivation beyond monetary remuneration. It is used to reward the employees for increased performance, fulfilling a task, a mission, or a long-term goal. It is utilized on a routine basis in many companies that use monetary and non-monetary incentives to motivate their staff (Heneman, 2007). According to Jiang, Xiao, Qi, & Xiao (2009), a total rewards approach is seen as the means to retain employees and enhance their performance. Additionally, many other purposes are pursued through this strategy, such as talent development, promotion of the company’s values, and attracting a new workforce. Total rewards are designed to show employees that they are a valuable part of an organization. Despite some criticism regarding the efficiency of the approach, it remains an absolute necessity in highly competitive markets giving the companies an advantage and allowing them to stand out.
Key Elements of Total Rewards Strategy
Definition and Purpose of Total Rewards Strategy
In democratic countries with market economies, employees have the freedom to choose for what company they want to work considering what they can get back for their time and skills. That is why businesses are involved in the competition for the most talented workers. Human resource managers are trying to answer the question, ‘Why would a certain employer work for us instead of the competitors?’ Monetary compensation is one of the key factors, but the economic opportunities of the company limit its level. When all the players on the market can grant a sufficient base pay, other aspects become decisive. Moreover, the total rewards strategy is not only the means of attracting or retaining the workforce but also an essential tool for empowerment. Motivation strategies are used to enhance performance and build long-term cooperation with the workers. Thus total rewards strategy helps to answer the complex set of questions regarding recruiting, education, promotion, and retention of personnel.
Although the concept of total rewards has become prevalent in HR studies and practice over recent years, the term cannot be defined by explaining what measures it includes. The reason for this is that the strategy implies a significant level of flexibility, allowing its variation and accommodation to different companies and employment types. However, the approach can be best defined through the understanding of its purpose. Wilson (2015) claims that total rewards include such programs, practices, and policies that “provide employees of a company (or organization) with something of value in return for their contributions to the mission and goals of the organization” (p. 22). Total rewards’ primary challenge is retaining and attracting talents to a business (Gross & Peterson, 2015). Bwowe and Marongwe (2018), however, define three objectives of this approach, such as providing a competitive advantage, enhancing performance increase, and introducing fairness at the workplace. Heneman and Coyne (2007) highlight that total rewards go far beyond monetary benefits and consider opportunities for growth, motivating work environment, and development of the feeling of value and self-worth.
The theoretical framework of the total rewards strategy is based on the psychological theory of motivation. Behavioral psychology studies what reactions rewards cause and how they can influence workers’ attitudes and behaviors. Kleinman (2012) explains that positive reinforcement can motivate a recurring positive response. The scholar explains that the desired actions are likely to be repeated when they are supported by a reward “because a positive condition was the result” (Kleinman, 2012, p. 16). Hitt, Black, and Porter (2012) describe positive reinforcement as “a desirable consequence that increases the likelihood of a behavior being repeated in the future” (p. 254). This theory helps to understand the role and value of non-material rewards, such as verbal praise. While the promise of material benefits is often enough to motivate workers, the approval is evaluated afterward. Although it is sometimes underestimated, it can promote future desired behavior.
Key Components of Total Rewards Strategy
Total rewards strategy is a relatively new trend that can be contrasted to a traditional base pay oriented approach. Apart from base and variable salaries, the companies develop a set of benefits and developmental opportunities that make them unique and help to gain a distinctive reputation on the labor market. The central word that explains the essence of this strategy is ‘total’ which means that the rewards account for all the aspects of employees’ well-being, including pay, work/life balance, or training opportunities. Examples of such benefits are 401k, dental insurance, improved work environment, or free corporate foreign language classes. Such measures help to deliver a message that the company cares about its employees.
As the total rewards strategy intends to cover all the aspects of compensation, the key elements are similar among the companies, but the emphasis on each of them varies according to the type of employment and companies’ needs. They are the combinations of base pay and additional pay, plus non-monetary benefits. Jiang et al. (2009) characterize total rewards as “combinations of base pay, variable pay, recognition, and celebration, and benefits are essential to providing a complete total reward package” (p.179). These elements have different proportions in the strategy design varying for each company and even for the separate segments of one company. For example, the sections that require long-term workers would focus on the career development and retention of the staff, and those segments that work with temporary employees would emphasize recruitment and short-term benefits.
Although there are minor differences in the views of HR theorists on total rewards strategy components, the majority of them agree on the classification of three main scopes. Jiang et al. (2009) define them as compensation, additional benefits, and work-related experience. The latter includes work/life balance, career development, achievement recognition, and environment (Jiang et al., 2009). A similar classification was developed by Gross and Peterson (2015), including such elements as compensation, benefits, and careers. Payment generally consists of the base pay, performance bonus, recognition awards, and long- and short-term incentives. The structure of the monetary reward is different among businesses, with some focusing on the base pay level and others emphasizing the variable pay. Benefits comprise a broad set of measures that make the job position more attractive for the employees. These incentives often include various types of insurances, such as health or dental insurance or retirement plans. Careers include development and training opportunities as well as career planning. These measures perform a double function, focusing both on the motivation and talent development within the company.
These incentives should be developed with consideration of the different needs of employees. Heneman and Coyne (2007) suggest choosing flexible benefit packages that are desired by different workers instead of standard ones. Moreover, the scholars claim that variable pay should be only in a small proportion to base pay. Instead, HR managers should focus on individual rewards that enhance productivity and influence performance (Heneman & Coyne, 2007). Additionally, the role of a positive work environment that includes work/life balance, job design, and recognition should not be an underestimated component of the total rewards strategy.
Requirements for Successful Total Rewards Strategy Implementation
The state of the labor market and the position of specific jobs on it are the key determinants of what reward strategy should prioritize. The values of modern generations of employees, such as ‘millennials,’ differ from those of ‘baby boomers’ significantly. Gross and Peterson (2015) claim that “median years of tenure with the current employer is 1.7 years less across age groups in 2006 versus 1996” (p. 12). Scholars observe that the youth do not pursue life-long employment and have higher mobility in the job market. That is why reward strategies should also adapt to perform varying roles and meet the different needs of businesses. Gross and Peterson (2015) offer an approach to total rewards strategy development that emphasizes both customizable tools for various tools and holistic planning for the entire company. Thus, the segmentation of the employees according to different work arrangements, will help to customize total rewards and adjust them to the needs of different groups of employees.
Taking into account labor market context is a requirement for the development of an efficient strategy design. This background includes such categories as national and sector level economic indicators, skill supply and demand, employment type, and contract durations. These components should be assessed to set the goals and priorities of total rewards. According to Wilson (2015), integration with the company’s statement of philosophy is another essential requirement to make the reward strategy unique and comprehensive. Additionally, identifying primary drivers is required to set adequate objectives for the approach. Different goals, such as individual or team performance, desired behavior, strategic change, or competition for talent, require different designs of remuneration plans. The next step is to define the key programs that correspond to the objective, including employee benefits, base salaries, development opportunities, or work environment.
After identifying the context and objectives of the strategy, it is necessary to develop a total reward model that corresponds to several criteria that ensure its success. According to Hitt et al. (2012), the strategy should be equitable, efficient, visible, available, and reversible. The size of the assigned rewards should be equally divided with regard to qualitative or quantitative performance characteristics. Efficiency means that the compensation model should affect future performance by setting clear goals for the employees. The visibility of a reward is an essential factor for its implementation, as observation of employees being rewarded will motivate other employees. Additionally, the rewards that can be denied if the performance goals are not met will enhance the consistency of the behavior. Lastly, the availability of the bonuses is an essential factor to consider as incommensurate compensation can undermine the company’s economic well-being. Due to shifting employees’ needs and companies’ opportunities, flexible reward systems should not rely heavily on additional monetary compensations, but instead manifest a holistic vision of the employment.
Advantages of Total Rewards Strategy
The total rewards strategy is assumed to be a mutually beneficial model that brings multiple advantages both to businesses and their employees. There are several reasons why companies desire to spend costs on extra benefits for their workers, including creating competitive advantage, boosting performance, and developing integrity with companies’ values. As Wilson (2015) claims, a long-term competitive advantage on the job market is a key motivation for the companies to develop attractive reward strategies. Such models allow not only competing for the most talented workers but also saving recruitment costs by developing and promoting talent from within the company’s structure. Moreover, positive reinforcement supports the desired types of behavior and motivates staff to increase the quality of their work. Performance-oriented benefits that are regularly evaluated help to create sustained progress. Integrity with the company’s values is another benefit that total rewards give to businesses. Through the system of benefits, the company can deliver the message about who they are and what they value.
Although the total rewards strategy was primarily developed by businesses and intended to fulfill their objectives, it is highly beneficial for the employees. Under the conditions of market competition, qualified workers have the power of choice for what company to work. The companies, trying to attract or retain the best talent, offer many benefits. The combination of base pay and monetary rewards highlight the person’s value and recognize the economic significance of their skills. Moreover, companies’ investments in learning and development in the workplace bring additional advantages for the workers. Jiang et al. (2009) claim that total rewards improve employees’ well-being by creating a comfortable work environment, desirable work-life balance, and psychologically beneficial conditions. That is why creating an atmosphere of appreciation, respect, and individual value of each staff member has a synergetic effect on the company’s business performance and gives a competitive power on the market.
Disadvantages of Total Rewards Strategy
The common assumptions about the disadvantages of total rewards concern the strategy’s costs and inefficiency in achieving the desired results. From the psychological point of view, positive reinforcement can sometimes strengthen undesired behaviors. Hitt et al. (2012) suggest that the employees tend to prioritize individual benefits over the company’s profit and so they take shortcuts to achieve necessary performance levels. Moreover, the benefits that are oriented to individual performance can have an adverse effect on teamwork (Heneman & Coyne, 2007). However, the mentioned above disadvantages can be explained by the cases of poor reward management, not the strategy’s flaws. The HR team must understand whether it is necessary to prioritize cooperation or individualism and set clear quality-oriented performance goals that exclude possible shortcuts.
High economic costs of total rewards are another concern about the efficiency of the strategy. When monetary rewards can be easily measured and compensated due to the increase in performance, education, and career-based benefits usually require significant investment that may not be covered. The fear that the costs involved in the process will not bring the desired benefit prevents the companies from pursuing total rewards. However, in highly competitive markets, such an approach harms the employers’ reputation and results in lower competitive ability. That is why the total rewards strategy is a must for modern employers, as its absence is highly disadvantageous. Proper management, goal orientation, and prioritizing can minimize the model’s disadvantages and maximize benefits.
Organizations with Reward Strategies
In the era of rapid technological development and the spread of innovation, companies find it hard to develop unique strategies that would make them stand out and give a significant advantage over the competitors. While the technologies, financial management, and marketing models can be easily copied, many companies have realized that the approach to their service is something that makes them unique and is difficult to replicate. That is why some businesses have come up with unique models to attract, train, and reward the staff that makes them distinctive on the market. Moreover, they actively promote their compensation systems to be attractive to potential employees.
As a global brand, Nike has always attracted tremendous attention to the way they treat their employees. Today, their compensation and benefits plans have developed to cover the different needs of their workers with an individual approach. The key characteristic feature of the companies reward plan is the refusal of a traditional one-size-for-all approach. The retirement plans that the company offers to their workers paid time off and medical plans are flexible to cover different needs of the employees. If some employees need support in moving to a new city, Nike has developed the programs to support them (Nike, 2020). Interestingly, Nike offers fitness club discounts, which, along with product discounts, promote the company’s identity.
Nordstrom is the American store chain that is recognized for the excellence of customer service. Hitt et al. (2012) claim that “the success of the company lies much more in its service reputation than in tangible aspects of the company” (p. 168). The company’s managers have realized that their workers may become an outstanding detail of their identity and give them a competitive advantage. The primary focus of the reward strategy is based on performance, which is measured in sales per hour. Such an approach boosts the efficiency of the sales as the company’s clerks compete among themselves. They understand that the most effective way to increase sales is to have more repeat customers. That is why their behavior is focused on creating a pleasant impression and making customers come back, which is also beneficial for the company.
Southwest Airlines are pioneers in their approach to human resource management as the company have been providing their unique service for thirty years successfully competing with the giants of the industry. The success of Southwest Airlines goes from an understanding of the uniqueness that people can bring and their customer-service mentality. For being able to provide high-quality performance, Southwest employees get an extensive total rewards package that includes competitive base pay, medical coverage with dental and visual insurance, child and eldercare support, and flexible low-tax spending accounts (Southwest, 2020). Such conditions allow the company to compete for both customers and employees and contribute to the reputation and philosophy.
Chipotle Mexican Grill
Many people consider working in a fast-food chain is regarded as an unprivileged position with moderate compensation and increased health risks. Chipotle Mexican Grill has designed a total reward strategy to undermine this stereotype. Last year, the company announced the implementation of its benefits program that includes access to mental health care and several other programs that work for the employees and their families. Chipotle aims to compensate for work-related risk factors and create a corporate culture that emphasizes care for each person. Chipotle’s Chief People Officer Marissa Andrada claims that “this is just the beginning of how we’re strategically investing in the well-being of our employees and their families” (Chipotle, 2019). Other elements of the strategy include medical compensation, financial well-being plans, and fitness discounts.
Total rewards strategy is a complex set of measures chosen by a company that motivates its employees to increase performance. It is founded on the theoretical framework of positive reinforcement, which argues that reward for the desired behavior increases the likelihood of repetitive activity. Although it is a single term, the total rewards model should differ in every company to meet the changing needs of the workers. The examples of businesses that pursue total rewards show that the strategy allows them to create a unique service. Moreover, they can attract the best talent by giving them comfortable work conditions.
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