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How to develop a reward strategy

A reward strategy describes how an organisation will use reward policies, practices and processes to support the delivery of its business strategy. Within it, every reward issue or initiative should be viewed through the prism of how it helps the business.

While the reward strategy should support the overall business strategy, it is likely to be explicitly linked to the HR strategy. It is integral to HR strategy because it is mutually supportive of other strands such as talent management, performance management, and learning and organisation development, which themselves support business strategy.

This XpertHR “how to” guide looks at the steps that an employer should follow to develop a reward strategy.

The guide covers: What is a reward strategy? The purpose of the reward strategy Total reward Global reward strategy Developing the reward strategy Using reward to achieve business objectives Key stakeholders How to address reward priorities Formulating and implementing the strategy Planning implementation Communication plan Ongoing review

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How to develop a reward strategy

What is a reward strategy?A reward strategy describes how an organisation will use reward policies, practices and processes to support the delivery of its business strategy. Within it, every reward issue or initiative should be viewed through the prism of how it helps the business. The reward strategy should include: some guiding principles, what needs to be done in reward to reflect how the organisation is developing, details of the mix of financial and non-financial rewards to be offered, and a plan for implementation.

The purpose of the reward strategyThe aim of the reward strategy is to support the business strategy. It does this by:

n being integrated with HR strategy;n enabling and incentivising achievement of corporate business objectives;n rewarding the behaviours associated with business success;n supporting and making real the values of the organisation; andn helping to attract the skills the organisation requires to meet current and future business

needs.The reward strategy should support the overall business strategy, but is likely to be explicitly linked to the HR strategy. It is integral to HR strategy because it is mutually supportive of other strands of HR strategy such as talent management, performance management, and learning and organisation development, which themselves support business strategy.

Total rewardSuccessful reward strategies include a compelling offer to come and work for the organisation and stay with it. That offer is not necessarily just about pay and benefits but also about alignment of aspirations and values. Total reward is about the whole package comprising both tangible reward, such as pay and benefits, and intangible items such as opportunity and development. It is important to balance two key drivers - value and employee engagement. Value is about managing costs but also about ensuring value to the business and a return on investment in reward. Employee engagement is key to attracting and retaining motivated employees.

Total reward strategy supports HR strategy by:

n combining the tangible aspects of the employment package, such as pay and benefits, with the intangible ones, such as career and development opportunities and being associated with excellence, to articulate the employer value proposition; and

n supporting the engagement, resourcing and talent and organisational development strategies by providing a platform for structuring and sizing roles, recognising relative positions, motivating employees and recognising development.

For more information on total reward see How to follow a total reward approach.

Global reward strategyIn global or multinational organisations it is important to establish what elements of the reward strategy will be globally determined and what will be determined locally. For example, it would be typical to establish globally determined principles such as paying for performance and guidelines for bonus or long-term incentives because they support corporate business objectives; whereas salary ranges, benefits programmes and specific merit awards would be locally determined because of the need to be competitive in the local market.

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Developing the reward strategyIn determining reward strategy the organisation will need to consider internal influences such as:

n current reward practice and how it should change to align with business strategy;n the views of key stakeholders (leaders, managers and employees); andn organisation structure (for example the relative importance of the group and/or autonomy

of individual business units).The organisation will also need to take into account external influences such as:

n market practice and trends; andn the global/regional/sectoral context as appropriate (legislative, fiscal, economic, regulatory

and tax environments).It is critical for the employer to keep checking with the business to ensure that the reward strategy is still relevant, up to date and effective.

Using reward to achieve business objectivesThe first step in developing a reward strategy will be to review the business strategy (if this is not clearly articulated in a discrete document it may be derived from materials such as annual reviews or CEO’s statements). The employer should identify the key factors that can be influenced by people in the organisation and the reward actions that could make a difference.

The table below shows some example goals for organisations and how they are supported by reward solutions and the business rationale.

Strategy/objective Reward solutions Rationale

Recognise and reward excellent performance

Use incentive and bonus schemes; merit-related salary reviews; and/or non-financial recognition (for example awards or professional recognition, depending on the organisation context).

Promotes, encourages and/or incentivises the delivery of business objectives and desired behaviours.

Market related

Conduct a benchmarking exercise against similar jobs, and use to determine a market position that fits with the business strategy - individuals’ reward may be related to contribution, job size and/or market.

Employee perception is that they are paid competitively compared with the external market considering the role and their level of performance.

Equitable

Use reward structures that ensure similar treatment to internal comparators and appropriate relativities between roles and different levels of performance.

Employee perception is that pay decisions are made fairly and that the organisation lives by its values.

Be as good at everything as core business

Develop the reward policy and process to define or match the best practice in each of the organisation’s markets/sectors.

Positions the employer as best in class, promotes pride in employees and reinforces satisfaction with reward.

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Strategy/objective Reward solutions Rationale

Be innovative

Encourage/reward innovation and achievement through recognition schemes, appraisal criteria and competency frameworks.

Encouraging innovation and original thinking enables the organisation to gain maximum leverage from the intellectual capital of its people, to differentiate itself from competitors and to establish a distinctive brand or identity that will help attract high-performing individuals in the labour market.

Focus on the customer

Incentivise delivery, quality and service through reward and recognition programmes that promote customer service practices. For example, total reward promotes pride and affiliation in the company so employees offer a consistent message to clients.

Ensuring a high level of customer service increases the likelihood of repeat business, develops and maintains a reputation for excellence, supports the value chain by ensuring employees are satisfied and engaged and gives a positive image to customers.

Reduce the cost base

Define the measures of the return on investment in reward and monitor the impact of reward initiatives. Build reward capability of HR and the line managers by knowledge and communication training to obtain the best impact from reward programmes. Leverage benefits purchase by commercial procurement strategies to gain advantages of economies of scale.

Such actions enable effective short-term budgetary control and safeguard the longer-term financial wellbeing of the organisation. They also promote a sustainable future business for all stakeholders including shareholders and employees, and ensure that decision-making in reward is consistent with business strategy and generates value.

Be a good corporate citizen

Adopt a total reward approach which includes social responsibility to promote pride and affiliation in the employer.

Building an attractive corporate reputation and brand will aid the business strategy by promoting positive perceptions of the organisation in its markets and as an employer.

Key stakeholdersWhen developing the reward strategy, it is important to engage in consultation and obtain buy-in across the whole organisation. The reward strategy will be more relevant to the business and offer a much better chance of buy-in and successful implementation if what people think is taken into account. It may be necessary to invest in building understanding to facilitate debate at the right level: senior executives should be consulted on key objectives and relevance to the business; and management on the skills and support they need to make reward decisions and communicate reward effectively.

Employee consultation may be effected by reference to specific reward questions in employee attitude surveys but organisations may also consider feedback from sources such as exit interviews and annual performance and pay reviews, together with any existing employee consultative structure.

How to address reward prioritiesThe organisation will need to review the whole current reward offering, looking at each element such as salary, bonus, benefits and intangibles to identify how each element supports the business strategy by delivering value in terms of employee outcomes such as attraction, retention and motivation.

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The idea is to cover all the relevant aspects of business and people strategies, so that there are no gaps and no overlaps. An organisation should not be paying for the same thing twice, for example by confusing the roles of salary and bonus.

The organisation should review everything in its reward offering, considering the following:

n What is its purpose?n How does it support the business?n How does it support the broader HR strategy?n How do we measure its effectiveness; and what can we do to make it more effective?By conducting this type of gap analysis the organisation can start to establish the direction of travel that the reward strategy should take and establish some pointers for priorities. These can be refined further through consultation.

The reward structure should comprise elements that each have a purpose. For example:

n basic salary reflects ongoing contribution, performance and size of job;n bonus rewards individual achievement and enables employees to share in success;n executive reward recognises the roles of executives in achieving business targets; andn benefits are market competitive, may support the organisation’s values (for example caring

for the environment or being family-oriented), and may offer choice and flexibility to employees.

In devising the strategy, organisations should consider the relative cost of reward items and their perceived value by employees and where possible focus spend on items that give best return in terms of perceived value. They should bear in mind that the more expensive benefits might be less widely appreciated. Organisations may also think about targeting different groups of employee within the workforce and offering flexibility or choice within the reward programme.

Formulating and implementing the strategyThe table below summarises the key steps that organisations need to follow when developing a reward strategy.

Phase Actions

Collect and review information

Collect and review corporate information such as mission statement, values and business strategy; and basic reward data such as headcount, reward structures (for examples grades and job evaluation), pay review frequency and processes, reward cost and existing reward elements (such as salary, bonus, incentives and benefits), linkage between reward and performance management and trade unions, different types of pay for different categories of employee and how executive reward relates to the rest of the organisation.

Analyse the data and formulate an initial strategy

Review what this information tells the organisation about the relationship of reward to business and HR strategies and whether or not reward supports the direction of the organisation. Consider any apparent issues such as:

n under/overpayment comparative to market or internal comparators;

n inconsistencies by employee group, business unit or location;

n fairness, equal pay and discrimination;

n feedback from employee surveys and exit interviews;

n where leavers go and where joiners come from and if reward is a factor in these decisions; and

n what the skills of today and tomorrow are and whether or not pipeline is sufficient.

Use this analysis to develop an initial strategy and identify associated reward interventions.

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Phase Actions

Develop and refine

Consult and discuss initial findings with stakeholders such as senior executives, HR, line managers and possibly employees. Discuss and explore the practical implications:

n Test potential actions against emerging principles.

n Model costs and the impact of change.

n Identify the cost and the benefits of a new strategy.

n Determine what success would look like and how to measure return on investment in reward.

When you have a robust proposition, develop an associated implementation plan and communication strategy in order to cover questions on detail and implementation as well as on strategy.

Consultation

Identify key people from the organisation to contribute or be consulted such as senior executives and subject-matter experts. Think about their expectations and how to meet them, as well as how to keep them informed and involved. Talking with stakeholders will make the strategy better and develop a broader sense of ownership.

Approval

The reward strategy should be agreed at the highest level in the organisation because it is about how to support the strategic direction and is likely to involve a programme of action over an extended period. It is therefore essential to obtain senior buy-in to give impetus and credibility to planning implementation.

Planning implementationAs part of the process of developing a reward strategy, employers should develop an action plan to turn the reward strategy into reality by identifying actions associated with each reward element such as salary, bonus, benefits and intangibles.

The employer should develop a project plan that includes resources, outputs and timescales. It should define deliverables, contingencies and individuals’ roles including responsibility for approval and implementation. Oversight for the reward strategy should be at the top level of the organisation and an individual should be appointed to report to this level on progress.

Organisations should define the roles of stakeholders such as HR and reward professionals, and regional and national HR, as well as other specialist areas such as communications, systems and finance, as appropriate. The organisation will need to consider potential risks and issues and how to manage them. Finally, the organisation will need to agree who has final sign-off for the reward strategy and is responsible for implementation.

Communication planThe project team should develop a communication plan to support roll-out throughout the organisation. Employers need to remember that the principles are global but how they are applied locally is determined by local factors so there may be a need for local communication in addition to corporate messages, but the two must be consistent.

Reward communication should be:

n simple, to promote understanding among employees and managers and facilitate better management of reward decisions;

n consistent with the reward strategy to ensure continuing credibility;n aligned with business and HR strategy to support policies on engagement and individual

performance and be directly relevant to organisation success; andn clear about objectives and transparent about process so that people feel fairly treated.Methods of communication may include online, paper or in person (depending on the culture and type of workforce) but communication will be most effective when integrated with other corporate messages and targeted to specific employee groups.

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The role of line managers should not be underestimated. The most effective reward communication comes from line managers so it is essential to ensure that they understand the strategy and have the skills and knowledge to communicate about reward.

Communication can also play a key role in ensuring return on investment, as effective communication of the reward offering promotes better employee understanding of the overall package, its components and its value. It can also improve employees’ perception of their pay because of the sense of fair treatment with respect to others in the organisation, competiveness with the external market and integration of reward with business strategy.

Ongoing reviewPersistent effort will be required to embed the changes with HR, managers and employees until they become familiar with the strategy. This should include regular reporting on progress and monitoring of the impact of interventions to assess if adjustments are needed or respond to any unexpected effects. Organisations should define the responsibility for implementation up to the point when strategy becomes part of business as usual.

There is no given lifespan of a reward strategy - it is a case of a continuous feedback loop. Organisations should build in a regular way to check with the business that the reward strategy is still relevant, current and effective. It should be possible to integrate this with reviewing HR strategy and its relationship to business strategy. In this way reward maintains its position as an integrated part of the HR strategy, linking with resourcing, learning, talent and engagement to contribute to business success.

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More guidance from XpertHR

“How to” guides on:

n benchmarking your pay and benefits against those of other employers

n deciding the pay and benefits for a new position

n choosing a salary survey

n using a salary survey

Good practice guides on:

n performance management

n retaining staff

Salary Surveys to benchmark the pay and benefits of your staff against market rates

XpertHR is the most cost-effective online information source for good practice, compliance and benchmarking for HR professionals.

Let us show you how XpertHR can immediately benefit your organisation by requesting a demonstration today.

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