To Create a Win-Win Total Rewards Strategy, Start by Understanding Employee Preferences

Published: June 2020

 

Where should business and HR leaders start when they see an opportunity to rethink their total rewards strategy? Survey your employees to determine what they value most.

The humanitarian and economic toll of the COVID-19 pandemic is vast, leaving many businesses struggling to respond. This is especially true when it comes to managing your workforce while maintaining cost controls. In recent months, many business and HR leaders were forced to answer difficult questions, such as: Do we need to decrease our headcount? Are pay reductions necessary? Is our healthcare coverage sufficient, or does it need to be increased? Do we need to rescale our operating model? And we know companies will continue to face these questions for some time.
 
With all of these issues in motion, firms are left with a clear takeaway — we have an opportunity to create a new, and hopefully better, normal if businesses can successfully reimagine the way they work to adapt to changing times. How your firm manages people-related costs, while also retaining the talent needed for the future, will help navigate through extreme uncertainty in the near term and be better positioned for longer-term growth.
 
To help determine an optimal solution, leaders should stop guessing what their employees value and make fact-based decisions by surveying their workforce. It’s crucial to actively think through your firm’s total rewards program and determine the best approach to reshape existing practices. For example, how can we differentiate by segment, job family and other demographics? After all, providing employees with what they truly want and perhaps saving money at the same time, is a win-win for everyone involved.
 
Some HR professionals may question whether the current challenging economic environment is really the time to take a deep dive into evaluating total rewards, but we believe the investment in such an assessment will pay dividends. A well-structured rewards optimization review will demonstrate how to save the most money without negatively impacting a large portion of the workforce and can ultimately result in meaningful cost savings.
 
In an ideal scenario, employees help shape change within their organization by becoming an essential part of the process. Figure 1 shows the inputs required to design the new normal for a total rewards strategy in which an employee’s preference towards different types of rewards plays a pivotal role. 

Gathering Insights on Employee Preferences and Cost of Change

In order to effectively gather and analyze employee preferences towards rewards, we developed a Total Rewards Optimization (TRO) tool that is designed to generate fact-based, predictive insights to help you make informed decisions. This tool has the power to:
 
  • Identify employee groups where your current total rewards offering is suboptimal (e.g., life insurance for millennials).
  • Unearth preferences of your employees as they relate to total rewards. It is important to note that in a post-COVID-19 working environment, some programs will have more value than others. For example, flexible hours, working from home and the requirement to travel may all hold more currency in the future.
  • Find cost savings while minimizing employee disruption and perceive value of their total rewards package. This ideally results in less money for a more appreciated deal.

The TRO tool is deployed in the form of a survey through which we understand the employee’s perception of the total rewards framework, along with their preferences by asking trade-off questions (e.g., Do you prefer more health insurance coverage vs. two additional days of paid leave?). Having this information at hand will provide employers with the platform for finding ways to positively influence engagement and retention. Survey results are analyzed by demographic cuts including generations, critical work segment, career level, work location, performance and business unit. When using a tool like this to review your total rewards strategy, employers can:
 
  • Quantify your return on investment of your total rewards offering.
  • Quantify the perceived value and impact of an alternative design on engagement and retention at equal or lower cost.
  • Identify opportunities to deliver a more appealing package to various employee groups (e.g., different generations, different job families or focusing in on high performers).
  • Link spending levels to predicted engagement, satisfaction or retention levels in a predictive way, allowing employers to make informed decisions prior to implementation.

The Advantage of Scenario Planning

By conducting a total rewards analysis like this, firms will gain access to a fully functional optimization model that can help identify the value and cost impact of changes on various demographics — an edge that is especially important in today’s volatile economic environment. There are various scenarios and risk zones that can play out, and it’s beneficial for employers to be prepared.
 
Let’s take, for example, Risk Zone 1 (see Figure 2). This indicates that the spend on total rewards is high but is not proportionately valued by employees. This is a severe problem — the employer feels that it is spending sufficient funds on its workforce, but the workforce is not experiencing the same level of value. An example of this could be an employer with an aggressive target variable pay that has not been paid out at target levels in the last few years.
 
Risk Zone 2 indicates that the spend on total rewards is less, but employees still don’t perceive value in them. By identifying the effective opportunities to spend on total rewards, employers can improve engagement. For example, despite having a workforce that is more than 30% female, a firm’s maternity benefits are minimal. This presents an improvement opportunity to help fill the gap. During global pandemics such as COVID-19, some employers are aiming to be in this zone. With the proper communication, employees will understand that reduced value of rewards is due to business challenges.
 
Then there’s the Win-Win Zone, which indicates that the spend on total rewards is optimal and aligned with employees’ perceived value of the rewards offered. This should be the target zone for all employers. From our experience, we have seen organizations making 5% to 10% of cost savings on their existing total rewards spend, while still sustaining perceived value and engagement levels.
 
Finally, we have identified an ROI Zone, which leads to improved value engagement levels upon increased spend on total rewards. However, the value of additional investment will start to flatten out, producing diminishing returns on incremental investments. From our experience, we have seen organizations improving employee engagement by 3% in the first six to 12 months. 

Next Steps and Additional Resources

Growth in all major global markets is expected to slow considerably in 2020 due to the COVID-19 pandemic. The economic environment will likely get worse before it gets better. Therefore, companies should adapt now to manage costs and maximize their rewards spend. CEOs and CFOs will be looking at people-related costs as the first line of defense when trying to balance the books, leaving human capital leaders with this question to answer: How can we save money by realigning total rewards? Analyzing your total rewards is a useful way to test multiple options, such as lower pay, unpaid leave, early retirement, benefit reduction, lowering bonus target, etc.
 
Potential cost savings and improved employee engagement levels are the tangible benefits of taking on this analysis. However, the often overlooked, but very important intangible benefits include gaining valuable insight into employees’ perceived value of different rewards. Having such insights is essential for sustaining the future well-being of both your business and people.
 
If you are interested in a demo of the TRO tool or have any questions about optimizing total rewards, please reach out to the authors or write to rewards-solutions@aon.com
 
To read more articles on how rewards professionals can respond to the COVID-19 pandemic, please click here.

To download complimentary results of our latest pulse survey on Setting the Stage for a Return to Work and the New Normal, please click here.


COVID-19 Disclaimer: This document has been provided as an informational resource for Aon clients and business partners. It is intended to provide general guidance on potential exposures, and is not intended to provide medical advice or address medical concerns or specific risk circumstances. Due to the dynamic nature of infectious diseases, Aon cannot be held liable for the guidance provided. We strongly encourage visitors to seek additional safety, medical and epidemiologic information from credible sources such as the Centers for Disease Control and Prevention and World Health Organization. As regards insurance coverage questions, whether coverage applies or a policy will respond to any risk or circumstance is subject to the specific terms and conditions of the insurance policies and contracts at issue and underwriter determinations.

General Disclaimer: The information contained in this article and the statements expressed herein are of a general nature and not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information and use sources we consider reliable, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without the appropriate professional advice after a thorough examination of the particular situation.

 

 


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