Reimagining Total Rewards for a Changing World

Published: December 2020

 

As employees reexamine what they want from their rewards, HR leaders need to consider whether their programs meet the needs of an ever-changing world. We look at ways organizations can design total rewards that support an agile and resilient workforce.


A new era of workforce transformation, accelerated by the COVID-19 pandemic, is here. As companies face acute challenges and very difficult choices, business leaders also possess a rare opportunity to fully reimagine their total rewards strategies.

Consider how quickly the business world has changed in 2020:
  • The unemployment rate in the United States (U.S.) shot up from 3.8% in February to 14.4% in April.[1] 
  • Only 5.4% of the European workforce routinely worked from home in 2019. A year later, that figure rose to 40%.[2] 
  • The scope of essential workers expanded, and hazard pay became much more widespread when governments across the globe ordered non-essential businesses to shutdown.
  • As schools moved to online learning, employees began asking more questions about their childcare benefits and looking for more flexibility in their work schedules.
In each of these cases, employees are beginning to rethink their total rewards, and employers need to consider whether their programs are agile enough to meet the needs of an ever-changing world.

How the Workforce Is Changing

Long before the emergence of COVID-19, the workplace was already undergoing significant change. The digitalization of the workplace has been occurring for several years. Technology has influenced the types of jobs and skillsets required in the marketplace in addition to how people do their jobs.
Meanwhile, average retirement ages have been increasing, leading to more generations in the workforce and greater diversity than ever before. An increasing focus on work-life balance has also driven interest in flexible work environments and leave benefits.

Virtual work environments, which had gradually been increasing for several years, have become the dominant way of working across a variety of industries, with many employees continuing to work virtually for the foreseeable future. While the full impact of these changes has yet to be understood, most businesses will not return to a pre-COVID-19 environment and significant change will only continue.

The face of the workforce has been changing as well. As workers have sought greater flexibility and organizations look to better manage costs, an increasing portion of work is being done by gig workers (e.g., contractors, short-term contingent workers). In the U.S., for example, the percentage of contingent workers in the workforce has increased from approximately 4% in in 2005 to more than 40% in 2020.[3] These gig workers often receive limited or no benefits from the organizations they work for. The battle over how to classify gig workers has played out in California when the state passed legislation in September 2019 that required companies with gig workers to reclassify them as eligible for certain benefits. However, the impact of the new legislation took a hit when voters approved a proposition on November 3, 2020, that allows companies like Uber and Lyft to continue to treat their drivers as gig workers.

The Impact of a Changing World on Stakeholders

With all the change taking place in the world, it would be naïve to think that the expectations of employees and investors are not somehow being impacted by all this change.

COVID-19 has created profound health care concerns for employees and their families. They are closely looking at the support they receive from their employers when it comes to sick and family leave benefits and health insurance. Employers can use these benefits as a differentiator for their employee value proposition. Meanwhile, workers who provide essential services or are required to come into the workplace, are expressing safety concerns, leading to hazard pay and/or additional workplace protections. These concerns have spanned from critical healthcare providers to meatpackers to food delivery workers.

Employees allowed to work from home are receiving new types of benefits — in some cases, trading their transportation or on-site gym perks for home office stipends for home office equipment and technology support — in addition to childcare and sick leave benefits (see Figure 1 for more details).

Greater awareness of equity and social justice issues has also created increased scrutiny on organizations’ rewards practices. Proxy advisory firms like Institutional Shareholder Services and Glass Lewis are seeking additional information on expectations around proportional compensation program changes that reflect portfolio value impact to shareholders and recommend consistency in metrics for awards with multi-year measurement periods. Spurred by concerns of gender and racial inequities, a number of countries have adopted pay equity legislation with regulators auditing compliance.

While a number of these changes have been quick and severe, we do expect many of these changes to have lasting workforce impacts to necessitate a new approach to total rewards.

The Impact of a Changing World on Rewards

As organizations begin to better understand how these changes impact their employees and how work gets done, they have been forced to respond in the way they think about their rewards. Historically, most organizations developed rewards programs through rigid structures of fixed rewards elements. While incentive structures are naturally aligned with performance, most other elements are somewhat fixed relative either to performance or changing employee needs. Benefit designs and employee benefit elections typically operate on an annual basis. As a result, organizations have been forced to respond to unexpected changes in a rather reactive manner.

Beyond the immediate health concerns of COVID-19, the pandemic has accelerated focus on mental health benefits. Organizations are recognizing that historic support for employees’ mental health, whether prevention or treatment, may be inadequate. In recent months, many organizations have sought to enhance their employee assistance programs or provide stress management programs to help augment their existing mental health benefits.

Economic volatility has also required many organizations to seek immediate opportunities to defer or reduce costs. These changes included broad reductions in base salaries, suspension of incentive programs or the suspension or delay of retirement plan contributions (to the extent permitted by applicable laws). Many countries have passed legislation to allow master trust or pooled employer arrangements that provide a more efficient way to deliver defined contribution benefits while improving governance for plan fiduciaries.

With all these changes taking place, organizations are looking to foster a more agile and resilient workforce that can survive and thrive in an increasingly volatile world. This type of workforce needs a rewards program that is adaptable and flexible to meet the differing and evolving needsof a diverse talent base. The question then becomes: How can organizations execute this undertaking in a way that’s sustainable and cost efficient? Where do they start?

Developing a Total Rewards Strategy for the Future

With the change that is certain to continue, an effective total rewards strategy will need to meet the following objectives:
  • Align to organizational performance but also provide a threshold level of benefits protection;
  • Afford greater flexibility in the range and level of rewards to meet the needs of a diverse talent base;
  • Support a more agile workforce (e.g., full-time, part-time and short-term workers);
  • Grounded in compliant and equitable standards; and
  • Differentiate and afford the organization a competitive advantage.
With these objectives in mind, we recommend organizations ensure their rewards programs have the following features:

Align to Organizational Performance
Alignment to organizational performance serves two critical objectives: ensuring that the organization can afford the rewards it provides and providing an incentive to drive performance. Incentive compensation is typically aligned to organizational performance by its very nature. Other rewards elements may be aligned to organizational performance depending on design and statutory considerations. For example, some organizations tie a portion of their retirement contributions to profit or other measures. Conversely, statutory provisions may allow or limit the amount or timing of retirement contributions.

Greater Flexibility in Range and Level
Flexibility in total rewards can mean many things, including the breadth of rewards elements offered to employees. With limited budgets, we see many organizations broadening the offering of employee-paid voluntary benefits. This approach helps facilitate a broader range of readily available resources without increasing costs.  Flexibility might also refer to the level of coverages or benefits available — as is often seen in health care coverage or life insurance benefits. Flexibility may also be seen in benefits that support different life stage situations (e.g., childcare assistance) or work environment needs (e.g., work-from-home support).

Flexibility can also refer to how rewards elements are made available to employees. Flexible benefit arrangements have been available for several years and provide employees with the ability to personalize their benefits to meet individual needs within a fixed cost structure. With recent advancements in supporting technology, as well as an increased range of available benefits, more adaptive rewards frameworks are emerging as an opportunity to help employees truly personalize their own rewards.

Support for a More Agile Workforce
With the growth of the gig economy and a greater emphasis on an agile and resilient workforce, organizations’ rewards strategies need to be more agile. For example, to attract short-term workers, many organizations are considering providing earlier access to earned but unpaid wages.
Older, more experienced workers are another important potential resource. While these workers may no longer want to work full-time hours, there are creative rewards solutions employers can offer, such as phased retirement programs, which allow employees to scale back their hours as they head into retirement.

Ground in Compliant and Equitable Standards
Another area that is seeing increased attention is compliant and equitable rewards practices. While countries such as Canada have had pay equity requirements for many years, pay equity legislation has proliferated in other parts of the world in recent years. While these requirements may vary at a provincial or state level, it’s important that compensation and benefit programs provide for consistent monitoring and reporting of equitable pay practices.

Beyond ensuring simple pay equity, there is increased awareness of other inequitable human capital and rewards practices. Both regulators, institutional shareholders and their advisors have been seeking additional data on environmental, social and governance (ESG) practices, leading some companies to establish board-level ESG committees or add oversight into an existing committee charter. This increased scrutiny means some rewards programs should include industry relevant ESG metrics. An effective total rewards strategy will need to reflect equitable and inclusive designs (e.g., ESG funds in retirement investment options) as well as identifying those metrics upon which this will be established.

Differentiate and Afford a Competitive Advantage
The most common shortfall in most total rewards strategies is that they fail to provide a competitive advantage. Differentiation doesn’t necessarily mean providing above-market rewards. In some instances, differentiation means a degree of flexibility in providing rewards. In other instances, differentiation is found in a truly effective communication program showing the value of the rewards provided.

We recently partnered with Lam Research to help them take a more flexible approach to their total rewards. Facing a competitive talent market, Lam was looking for ways to differentiate its offerings. In 2020, the company introduced a $500 taxable reimbursement account (sometimes referred to as a “lifestyle account”) for its 6,000 workers in the U.S. Employees can use the account to satisfy specific fitness, financial and educational goals. Eligible expenses include student loans, financial planning, fitness reimbursement and tutoring expenses. Additional services may be added in future years.
In the end, a total rewards strategy needs to align to your unique strategic objectives and your broader employee value proposition (EVP). Just as companies evaluate their rewards considering the changes taking place in the world, they also need to rethink their EVP. Organizations with unique on-site perks and benefits may now find those less relevant or desirable to employees. Business leaders need to start with the question: “How have we differentiated our rewards and is it compelling to our employees?”

Developing an Agile Total Rewards Strategy

While each organization’s objectives and their respective rewards strategies will look different, there are some elements that should be consistent to developing an agile total rewards strategy. Begin with a data-driven approach that allows for measurement. Whether the focus is on driving performance or ensuring an equitable and compliant approach, businesses need a way to quantify the value of their rewards programs. Unfortunately, this is one area where many organizations’ rewards strategies have fallen short.

Another critical element is the inclusion of a more consumer-centric perspective. Few organizations regularly seek in-depth, thoughtful feedback from their workforce on their rewards programs. To gain a competitive advantage with your key talent, getting their perspectives is an essential step that needs to be considered on a regular basis. Too many organizations assume or guess what is important to their workers without a thoughtful approach to gathering their perspectives.

A final element is flexible program design. Rewards programs need to be adaptable to appeal to a diverse talent base and varying organizational and individual worker needs. Rewards programs should have a flexible framework that provides a breadth of compensation and benefits elements and price points to choose from. They must also better align to changing organizational performance and to allow individuals greater flexibility to change the form of their rewards.

Today’s rewards strategies need to be forward looking with employee choice and organizational flexibility incorporated into the design to support the needs of a changing world. Create an agile total rewards program will be critical in companies’ mission to foster an agile and resilient workforce.
For more information about how we help organizations with their total rewards strategy, please contact us at rewards-solutions@aon.com
[1] Bureau of Labor Statistics, United States Department of Labor
[2] Telework in the EU before and after the COVID-19: Where We Were, Where We Head To, Science Policy Briefs, European Commission.
[3] United States Bureau of Labor Statistics; Intuit 2020 Report: 20 Trends That Will Shape the Next Decade.
 

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