Rewards Strategies
A guide to successfully planning and implementing a total rewards system
This publication is designed to provide accurate and authoritative information regarding the subject matter covered. Neither the
publisher nor the author is engaged in rendering legal or other professional service. If legal advice or other expert assistance is
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ii
Table of Contents V Foreword
VII Acknowledgments
2 Challenging Questions
22 Conclusion
iii
Foreword As a busy HR professional, you probably find it difficult to keep up
with the latest academic research in the field. Yet knowing which HR
practices have been shown by research to be effective can help you in
your role as an HR professional.
This process ensures that the advice you receive in these reports is not
only useful, but based on solid academic research.
We are confident that the Effective Practice Guidelines series takes us one
step closer to making that vision a reality.
Acknowledgments The SHRM Foundation is grateful for the assistance of the following
individuals in producing this report:
Content Editor
Maureen J. Fleming, Ph.D.
Professor Emeritus
School of Business Administration, University of Montana
Reviewers
Mr. Rajiv Burman, SPHR
Vice President Human Resources, USA & Canada
Griffith Laboratories
Project Manager
Beth M. McFarland, CAE
Manager, Special Projects, SHRM Foundation
vii
About the Author Robert Heneman is a recognized expert in the field of total rewards
strategy. His work has been reported in The Wall Street Journal, USA
ix
Implementing Total Rewards Strategies
Implementing Total Rewards Strategies
Challenging Questions
To implement a total rewards plan, gave way to resentment and on their facility’s business
business leaders must tackle a broad skepticism. The company performance. The plan was
range of challenging questions— abandoned the plan. If it had piloted at one facility, and a
everything from who will design acknowledged the possibility of research team set out to track
the plan and what types of rewards an economic downturn and better the business performance of the
it will include to how the plan will communicated the ramifications plant against that of a similar
be funded and under what business of such a downturn for payouts to facility not using the plan. The
conditions the plan is intended to employees, it might have avoided team found that the performance
operate. When executives overlook the backlash. of the facility using the goal-
one or more of these questions, sharing plan exceeded that of the
• The Missing Appraisal System.
they risk developing a plan that other facility—suggesting that
A federal government agency
delivers mediocre results once it’s the organization should roll out
enacted a pay-for-performance
implemented—as the following three the new plan at its remaining
plan that pegged individual
stories reveal: facilities. But the implementation
pay increases to employees’
team had not consulted union
• The Profitless Profit-Sharing performance as assessed by
leaders at these other plants on
Plan. A large chemical a formal appraisal system.
the practical implications of the
manufacturer and distributor However, the agency launched
goal-sharing program. And even
developed a new profit-sharing the plan before putting an
though goal sharing had proven
system for its employees. The organization-wide appraisal
its mettle during the pilot, the
project team took great care system in place. Managers had
union opposed a company-wide
to use compensation principles to hastily define performance
rollout.
agreed upon by compensation measures by which to assess
professionals and devoted a year their employees’ contributions
to designing the program. But and thereby determine salary
the team members neglected increases. This haphazard
to ask a crucial question: How development of measures led
will the plan work during an to a highly subjective appraisal
economic downturn? With much system that employees saw as
fanfare, the company announced unfair. Just one year after the plan
the plan—and employees was implemented, the agency
eagerly anticipated their first eliminated it.
profit-sharing checks. As it
• The No-Go Goal-Sharing
turned out, the organization’s
Plan. In a heavily unionized
performance (as measured by
organization, top management
profit) proved dismal during the
decided to initiate a new goal-
plan’s first measurement period.
sharing plan that awarded cash
Employees received no bonus
bonuses to employees based
checks, and their enthusiasm
Implementing Total Rewards Strategies
rewards? First, stiffer competition Promotions Base-pay increases based on potential to per-
in business has made it difficult form new job
for cost-conscious organizations Pay increases Base-pay increases based on length of service
to offer higher wages and more with the organization
benefits each year. Employers have
had to find alternative forms of
rewards that cost less to implement Benefits
but that still motivate employees
Health and welfare Payment for injuries and illness both on and
to excel. Second, organizations off the job
have become much more strategic
Paid time off Payment for vacation time or excused days
in their management of human
from work
resources (Barney & Wright,
1998)—including integrating their Retirement Payment for work no longer performed based
on length of employment
various human resource functional
areas. For instance, some companies
now treat compensation and training Personal Growth
as rewards that must be managed
together rather than separately by Training Skill development through on- or off-the-job
instruction
different HR teams. The “Total
Rewards Strategies” chart sheds Career development On-the-job coaching to develop skills
light on the wide range of strategies Performance management Ongoing goal setting and feedback to
that can make up a total rewards develop skills
program.
“Total rewards” a Total Rewards Program: Four firm’s values, and diagnosing
Phases” (see below). The process organizational systems relative to the
Assessment
Evaluation Design
Execution
Implementing Total Rewards Strategies
Using Industry Benchmark The project team can use these Surveying
Surveys forms to determine the type of
information the organization
As another source of data for the
assessment phase, the project gathers to make rewards decisions. employees’ attitudes
team can benchmark total rewards
practices by successful organizations Surveying Employee
toward total rewards
(to see whether any of these merit Attitudes Toward Rewards
adoption). Many employers are Surveying employees’ attitudes
can generate
willing to share this kind of data toward total rewards can generate
because they receive an anonymous additional valuable information additional valuable
copy of the benchmarking results. In for the project team during the
collecting benchmark data, ensure
that your project team members ask
assessment phase. The team can information for the
conduct such surveys using a well-
which total rewards practices the
survey respondent’s organization
developed instrument called the Pay
Satisfaction Questionnaire (PSQ),
project team during
uses, as well as how effective these which measures attitudes toward
practices are. Appendix A contains a base-pay levels, pay raises, rewards the assessment
sample benchmark survey. structures and administration, and
benefits (PSQ, H. Heneman & phase.
Examining Current Policies Schwab, 1985). A lump-sum bonus
Most organizations have an satisfaction scale complements the
extensive set of policy documents PSQ (Sturman & Short, 2000).
that can provide data for the The PSQ has long been used by
total rewards project team. These many companies and has excellent
archival records can shed valuable reliability (consistency of findings)
light on an employer’s stance and validity (it measures what
toward total rewards issues. organizations intend it to measure).
Strategic and operational plans But because this instrument focuses
may show how total rewards fit on base pay, your project team
into the enterprise’s larger business will need to add supplementary
goals—such as lowering turnover questions to gauge attitudes
or attracting workers with specific toward matters such as pay-increase
skills. Manuals may contain the amounts, opportunities, forms and
actual policies and procedures for requirements.
administering current total rewards.
Previous associate surveys may show If your project team adds questions
employee attitudes toward total to the standard PSQ, it will need to
rewards. And HR databases should calculate the reliability and validity
contain information on employees’ of these new dimensions. Care must
actual pay levels as well as market also be taken in the administration of
pay rates. Total rewards systems are the survey. A systematic procedure
often accompanied by various forms should be developed to report back
(for example, performance-appraisal the aggregate survey results to
worksheets). respondents while protecting
may lose valuable The total rewards project team can • Who should be eligible for
rewards?
gain additional insight during the
assessment phase by reviewing the
support for many “how to” articles and case
• What kind of employee behaviors
and values should be rewarded?
studies published on the subject.
the project. Good sources of such literature • What types of rewards would work
include edited books, technical best?
research journals, human resource
• How will the total rewards system
management publications, and
be funded?
business periodicals. Probably
the best way to begin identifying • How much should employees
relevant sources is to visit the Web participate in designing and
sites for WorldatWork (www.waw. implementing our new total
org) and the Society for Human rewards system?
Resource Management (www.shrm.
org). WAW and SHRM provide • What role should the union play
objective reviews of articles and in designing and implementing
books on the subject of total rewards the new system?
practices. They also publish their • What is the estimated time frame
own materials on the subject. for each of the remaining phases
in the implementation of the new
Writing the Assessment system?
Report • What approvals are necessary to
After collecting data from various implement the system and at what
sources, the project team writes points in the implementation
an assessment report. First, team process should those approvals be
members should check the reliability obtained?
of the data they’ve gathered. If
the data are not consistent across
Phase Two: Design
the different sources, further
investigation (such as conducting During the design phase, the project
additional employee interviews) team identifies which employee and
can help resolve discrepancies. organizational attributes to reward
Implementing Total Rewards Strategies
and which types of rewards to offer. establish pay level (R. Heneman, the employer’s competitive strategy
The team should consider the full 2001). This process starts with job and how similar organizations view
range of reward strategies, including analysis—gathering information this same role. The organization
compensation, benefits, personal and about the attributes of specific roles conducts job evaluations to
professional development, and work and the people holding them. The determine the internal value of jobs
environment. end product of this analysis is a job relative to the company’s strategy.
description (a summary of the role’s Salary surveys are conducted to
duties and responsibilities) and a look at average salaries paid and
Compensation
job specification (details explicating to determine the external value of
Compensation comprises three the knowledge, skills, abilities, these same jobs relative to the rates
major components: pay level (base and other attributes of the person paid by similar organizations. The
wage or salary), pay increases, and needed to perform those duties and company then combines the data
incentives (cash bonuses) (Gerhart responsibilities). from the job evaluations and salary
& Rynes, 2003). The sections surveys to define pay grades for
following examine each of these Next, the organization determines
each position. Pay grades specify a
components in turn. the value of the work spelled
range of values assigned to a job.
out in the job descriptions and
Pay Level. Most organizations The uppermost value is called the
specifications. Value depends on
follow an elaborate process to maximum, while the lowermost
how important a particular job is to
A recent narrative review of literature (Colella, Paetzold, Zardkoohi, & Wesson, 2007) shed light on the costs
and benefits of withholding pay information from employees (i.e., pay secrecy).
In addition to defining these several methodological flaws with the studies they reviewed. To minimize these
traditional pay ranges, an flaws, the authors used an experimental simulation to assess the magnitude of the
organization can use two more raise in base pay required to positively influence employee attitudes and behaviors.
methods to determine pay level: The results showed that an increase in base pay of at least 7% was needed. This
skill-based pay and broadbanding. study’s sample consisted of students; however, they were hired and paid as actual
If an employer uses skill-based employees in the study.
pay, it sets pay level solely on the
Implementing Total Rewards Strategies 11
Introducing Incentive Pay at SimCom International the benefits they receive based on
what they value most at different
A small, privately held company with locations in Orlando and Phoenix, SimCom life stages. For example, retirement
International builds flight simulators for training pilots on twin-engine propeller benefits and health care are less
planes as well as small jets. The company has about 80 employees organized important to workers in their 20s,
into teams based on functions: production, marketing, sales, training, computer but become increasingly important
services, and clerical. SimCom has enjoyed rapid growth. In 1990, it trained as employees age. One study at a
54 pilots. In 1997, that number had risen to about 2,650, and SimCom was financial services firm showed that
recognized with a “Best of the Best” award from Flying magazine. employee satisfaction with benefits
significantly increased following the
implementation of a flexible plan
In 1992, during its start-up days, SimCom’s senior management considered (Barber, Dunham, & Formisano,
introducing an incentive-pay plan. At that time, its current pay system was 1992). This increase, the authors
based on market rates, with pay increases linked to seniority. The company’s note, may have stemmed in part
new president expected associates to act like owners and to focus on providing from the extensive communication
excellent customer service. The president and owner thought that incentive pay and training that accompanied the
might help boost performance on these criteria. introduction of the flexible plan.
The company defined a three-phase project for introducing incentive pay. In Personal and Professional
Phase One, the project team developed a survey to assess possible desirable Development
outcomes that might come from basing individual incentive pay on the company’s Personal and professional
profitability and individual performance ratings. In Phase Two, the team designed development opportunities—such
and implemented the new pay system. In Phase Three, management assessed as training, career development, and
the effectiveness of the new system by comparing business outcomes before the performance management—can
system was in place with outcomes after implementation. constitute valuable rewards for
employees. But the value of these
The surveys gauged employees’ attitudes toward:
rewards for an organization is
• Job satisfaction less clear. From the employer’s
perspective, personal and
• Pay satisfaction
professional development is good
• Performance ratings only if it enables workers to acquire
specific skills that add value to
• Pay for performance the enterprise. Valuable skills are
those that give an organization
unique capabilities that rivals can’t
According to the findings, job satisfaction, pay satisfaction, and pay for copy—and thus afford the employer
performance perceptions significantly increased after the new system was put a sharp competitive edge (Barney &
in place, but performance ratings declined. However, executives attributed this Wright, 1998). Clearly, development
decline to managers’ increased commitment to an accurate rating process—which opportunities that give workers
caused them to be less lenient in their ratings than before. general skills that can be easily
transported to other organizations
do not provide strategic value.
Source: Heneman, Eskew & Fox (1998)
For these reasons, companies
must walk a fine line in including
14
Provide personal and professional growth effectively, then job design simply
opportunities in their total rewards becomes redundant (Morgeson,
development systems. The goal? Provide
development experiences valued
Johnson, Campion, Medsker &
Mumford, 2006).
by employees that also serve the
experiences valued organization’s strategic needs.
Recognition. Most employee
recognition systems provide rewards
that are relatively inexpensive
by employees Work Environment compared to compensation, benefits,
A positive work environment can and personal and professional
that also serve be an important component in an growth. Given heightened world
organization’s total rewards strategy. competition and the need to
the organization’s Work environment includes job minimize labor costs, employers
design, recognition, and work/life today are placing as much emphasis
strategic needs. balance. The sections below consider
each of these in turn.
on recognition as financial
incentives—sometimes even more
(Nelson, 1994; Barton, 2006).
Job Design. Most people think Interestingly, according to some
of job design in terms of the studies, many employees prefer
physical characteristics of a work nonfinancial rewards over financial
setting, such as office size. But job ones (Amabile, Hill, Hennessey, &
design also includes psychological Tighe, 1994). Note, however, that
characteristics—in the form of these studies ask individuals to self-
employees’ perceptions of their report their preferences. Though
work. These characteristics include people say that nonfinancial rewards
perceptions of whether the work are more important to them,
is meaningful or challenging, evidence about what people actually
whether the job affords autonomy, do shows that pay is equally if not
and whether the person identifies more important to most employees
with the role. According to the job (Rynes, Gerhart, & Minette, 2004).
characteristics model (Hackman &
Lawler, 1971), positive perceptions Still, studies also show that
of work lead to higher employee recognition can exert a powerful
motivation and, in turn, better on- impact on employee performance
the-job performance. A review of (Stajkovic & Luthans, 1997;
all the studies conducted to test this 2001) and that it may influence
theory showed a modest correlation organizational effectiveness as much
between perceptions of psychological as financial incentives do. Indeed,
characteristics of a job and employee one study of fast-food franchises
motivation, and a weak correlation found that, over time, nonfinancial
between these perceptions and incentives had just as large an impact
employee performance (Fried & on profitability and customer service
Ferris, 1987). Research also suggests as financial incentives (Peterson
that job design is most effective & Luthans, 2006). In addition,
when other total rewards strategies financial and nonfinancial rewards
are poorly developed. If other total apparently become more effective
reward strategies are operating when used together rather than
separately (Stajkovic & Luthans, 2003).
Implementing Total Rewards Strategies 15
excluding these employees may customer service, and group or R. Heneman, 2000; R. Heneman,
put your company at risk for a company profitability. To determine DeSimone, Dooley, & Jones, 2002).
discrimination law suit. whether employees have met these If you view total rewards as a lead
criteria—and therefore deserve a system—that is, you believe that
particular reward—employers must putting the right rewards in place
Top Management Support
measure (gather data on) these will encourage your workforce to
As noted earlier, implementing aspects of performance. accomplish key strategic goals—you
total rewards is a large-scale would make the plan operational
organizational intervention. To But measurement is useful only
before launching a new business
ensure buy-in, top managers if the resulting data are reliable
strategy. That way, you would show
must show visible support for and valid. Reliability refers to the
that the organization is committed
the intervention. And in showing consistency of interpretations of
to change and is willing to invest
support, action speaks louder than data. In other words, the results
up front to secure employees’
words. Executives must not only should be consistent over repeated
commitment to the new strategic
verbally advocate the plan, they measurements. To accurately link
plan. This approach can help attract
must also be covered by it. Consider rewards- such as pay increases- to
and retain workers. However, it is
the well-known apparel retailer employees’ on-the-job contributions,
also costly, because the company
Limited Brands (R. Heneman & the organization must confirm that
must allocate money for total
Thomas, 1997), which established the data gathered is reliable.
rewards before achieving its
an HR management system that business goals.
Validity refers to whether the
linked its total rewards system
project team has really measured
to competencies. To that end, If you view total rewards as a
what it intended to measure. For
the top 200 managers identified lag system, you would make
example, in appraising an employee’s
competencies for themselves, the new plan operational after
productivity, the team must be
which the company then used to employees had helped carry out
certain that it is evaluating actual
determine these managers’ merit your company’s new business
productivity rather than some other
pay and stock. Only then was the strategy. With this approach,
closely related criterion, such as
total rewards system extended to rewards reinforce the successful
engagement.
lower levels in the organization. A execution of a business plan rather
review of 30 studies of performance than lay the groundwork for that
appraisal interventions showed that Project Management execution. This approach may be
productivity from interventions that Successfully executing a total less costly than a lead approach,
received management support was rewards plan requires strong project because the investment is linked to
51 percentage points higher than management skills. As with any the successful accomplishment of
those which did not (Rodgers & complex project, your project team business goals. However, it does
Hunter, 1992). will need to consider a wide range of not demonstrate a commitment by
issues. The sections below examine the organization to invest in human
each of these challenges. capital before the workforce can
Measurement
generate measurable results.
In deciding which rewards to offer When will the new plan be
to which employees, organizations operational? There are two schools Properly designed and implemented,
must determine whether employees of thought on the subject of when a total rewards system can serve both
have met the criteria defined for you might make your new total lead and lag purposes. For example,
receiving each reward. Those criteria rewards system fully operational. in one case study
may include aspects of performance You can think of these two schools (R. Heneman, DeSimone, Dooley,
such as individual productivity, as “lead” versus “lag” (Ledford & & Jones, 2000), empirical data
Implementing Total Rewards Strategies 17
showed how a new total rewards Educating and Involving Employees at Rothschild Gourmet Foods
plan comprised of group and
individual incentives walked this
Rothschild Gourmet Foods is a small, privately owned manufacturer of gourmet
middle road. Involving employees
food products. The company consists of a kitchen, assembly line, and warehouse
in the design and implementation
for distribution. A small corporate support staff and internal and external sales
of the plan increased their
staff complete the labor force. The business is very seasonal, registering the bulk
awareness and understanding of
of its sales from September through January.
the organization’s strategy (a lead
effect). And payouts from the
incentive plan after key business The company prides itself on quality and financial success. It uses only premium
goals were met encouraged ingredients and high-quality containers, such as glass imported from Italy.
employees to accomplish additional Employees are viewed as an important asset since the company depends on a
objectives related to the firm’s skilled workforce to maintain high quality standards and generate new product
strategy (a lag effect). ideas. Rothschild uses a market-based pay system and offers a combination of
How will you explain the new incentives to reward its workforce. It sets pay at the fiftieth percentile for small
total rewards program to your employers and compensates for the differential by emphasizing variable pay and
workforce? A recent survey explored offering a generous benefits package. It also boasts a friendly workplace, flexible
this question with an eye toward work schedules, and other nonmonetary rewards.
determining how communication
affects employees’ attitudes toward
Rothschild decided to augment its existing total rewards program with an
total rewards (R. Heneman, Mulvey,
organization-wide plan linking incentives to corporate performance as measured
& LeBlanc, 2002). The researchers
by changes in return on assets. The amount made available for cash bonuses
conducted the survey in 13
from the funding pool was determined by the company’s performance on the
organizations, gathering input from following criteria: product and service quality, “controllable” cost savings, and
more than 13,000 employees. The sales. Actual payouts from each of these three sources were determined by
findings? individual performance and tenure at the organization.
The more employees knew about
their company’s rewards system, the
The project team took several steps to win employees’ buy-in. First, it measured
more satisfied they were with it. And
only those elements of performance that lay within employees’ control. For
with greater satisfaction came greater
example, large capital expenditures made by senior managers were not counted
commitment and engagement at
as “controllable” costs. Second, the team established a participative governance
work. Unfortunately, the study
system whereby employees suggested and implemented ideas for improving
also showed that most employees
performance on the organizational measures. Third, employees received training
had very little knowledge of how
on what these measures meant and how they would be evaluated.
their organization’s rewards system
worked. To improve employee
knowledge of pay and other rewards, The team collected several rounds of data on the measures before introducing the
the researchers recommended the new incentive plan and several rounds afterward. The results proved impressive:
following communication practices: Sales increased, controllable costs decreased, quality improved, and performance
appraisal ratings increased after the incentive plan was put in place.
• Make more information about How will you handle employees’ committee of senior managers and
the total rewards system available concerns about the system? A employees who can listen to and
to employees, especially details large body of research shows that address such concerns.
about how the system operates. employee attitudes and behavior are
Will your new system adhere to
influenced both by how much they
• Personalize total rewards by employment laws? At least three
are paid and also how their pay is
creating a statement for each areas of laws and regulations govern
determined (Folger & Konovsky,
employee detailing the rewards total rewards decisions: employment
1989). This research suggests that
he or she has received. laws (such as the Civil Rights Act
employees need a safe way to express
of 1991); compensation laws (for
• Minimize the use of traditional any concerns about their rewards.
example, the Fair Labor Standards
communication vehicles, such as To that end, consider establishing a
policy statements, to announce or
explain rewards. EXECUTION CHECKLIST
• Encourage one-on-one
conversations between As you prepare to implement your new total rewards system, use
supervisors and employees about the following checklist to ensure that you are addressing all the
total rewards. major issues:
• Provide more interactive
Determine who will be eligible for each type of reward.
communication through your
company Web site or intranet. Ensure that the new system has the support of top management.
How will you train people in the Establish the reliability and the validity of the performance data you will gather
new system? By training members to determine reward levels.
of the project team and approval
parties (such as senior management)
on the basics of the new total Develop a solid plan for managing the project—including:
rewards system, you give them
the knowledge they need to make When will the new system be Under what conditions would the plan
informed decisions throughout the operational? need to be put on hold?
execution phase. Also train managers
How will you communicate the new If unionized, how will you involve union
on how best to use elements of the system to the workforce? leaders?
total rewards system (including
job evaluation, performance How will you train people to use the How will you handle cross-border
measures, and pay-survey data) to system? cultural differences?
accomplish business goals. Finally, How will you handle employee Which technology is the best match to
educate employees on how the concerns? design and run the new system?
new system operates, including
Does the system adhere to all How will you handle the unique
showing them how their rewards
employment laws? execution challenges that arise for
will grow as they contribute more
small- and medium-size organizations?
to the organization. “Educating and How will you fund the new system?
Involving Employees at Rothschild Will you outsource execution to a third-
When will you evaluate the system’s
Gourmet Foods” (p. 17) shows how party vendor?
effectiveness?
one company used training (among
other practices) to win employees’
buy-in for a new incentive program.
Implementing Total Rewards Strategies 19
Act); and labor laws (including the In addition, the team should explain How will you handle cross-border
National Labor Relations Act). to employees early on that the cultural differences? Many leading
During the execution phase, your plan may be temporarily stopped U.S. companies use similar total
project team will need to ensure under certain conditions outside rewards strategies in the different
that the revised or new total rewards the organization’s control such as countries in which they operate (R.
system adheres to all employment a drastic economic downturn or a Heneman, Fay, & Wang, 2001).
laws. As a valuable step, the team spike in fuel prices. Clearly, it is easier to implement
could periodically audit or review and administer one total rewards
How will you involve the union?
compensation decisions’ impact on plan than to offer different plans
In the United States, the National
employees in various categories such for different locations. However,
Labor Relations Act requires
as age, race, sex, color, religion, a one-size-fits-all approach carries
that organizations with unions
and national origin. If this review some risks. First, owing to cultural
negotiate wages, hours and working
reveals differences within each differences, employees in one
conditions with union workers. Total
category that cannot be explained by country might view a particular
rewards strategies come under this
job-related decisions (for example, reward as fair while those in
banner as well. But negotiating total
job evaluation), the team should another country may consider
rewards with union leaders can be
investigate immediately and rectify the same practice unfair. Second,
difficult, as unions historically have
the situation. rewards already in use in a country
favored rewards based on seniority
may be embedded in the culture
How will you fund the new system? rather than performance. To
and therefore may be difficult to
One of the biggest issues to be implement total rewards strategies in
overcome. For example, Chinese
resolved during the execution a unionized environment, employers
and U.S. reward practices differ
phase is how the total rewards plan must involve the union in the
markedly (R. Heneman, Wang,
will be funded. The direct costs execution phase at a minimum (R.
Tansky, & Wang, 2002). Third, laws
associated with a new or revised Heneman, von Hippel, & Eskew,
and regulations vary dramatically
total rewards system can reach 1997), and in the assessment and
across countries. To illustrate, a form
immense proportions. Increasingly, design phases if possible. Involving
of gain sharing is heavily governed
organizations are trying to ensure the union means soliciting, listening
by law in many French organizations
that the new system costs no more to, and acting on union leaders’
(Roussel & R. Heneman, 1997).
than the old one. To generate the opinions on proposed rewards
savings needed to fund the plan, without having to resort to the To ensure that your organization’s
a company can take steps such as formal collective bargaining process. total rewards system works as
reducing overtime, seniority, and The more your project team can intended at an international level,
merit pay, as well as decreasing involve the union, the greater the the project team must take cross-
headcount through attrition. likelihood that union leaders will cultural differences into account (R.
see that they and management share Heneman, Fay, & Wang, 2001).
What will the system’s duration be?
similar goals when it comes to using
To give the new total rewards plan Will you use technology? Modern
total rewards. Unions that have had
the best chances of succeeding, the technology is both a blessing and
input into the design and execution
project team should stipulate when a curse to the implementation
of rewards are also more likely to
the program will be reevaluated of total rewards systems. On the
vote in favor of new total rewards
and modified if necessary. Members positive side, technology enables
strategies during the collective
should also ensure that the organizations to automate complex
bargaining process. Why? People
organization sets aside enough decisions about rewards strategies.
who have been consulted about
money to continue funding the plan Consider the digital expert system
an impending change tend to feel
even if the enterprise experiences that can help employers implement
committed to that change.
financial problems. compensation plans (R. Heneman
19
20 Implementing Total Rewards Strategies
& Dixon, 2001). Decision makers finance technological and capital strategies and human resource
simply input the strategy, structure improvements in order to grow. As management.
and culture of their organization a result, their budgets are relatively
into the expert system. Based on this small on a per-capita basis. With less Phase Four: Evaluation
input, the system provides a detailed funding available, you may want Probably the most often
summary of the most appropriate to de-emphasize cash in your total overlooked phase of total rewards
compensation system based on the rewards programs and lean more implementation is evaluation. In this
available research (R. Heneman, toward recognition. As discussed phase, the project team compares
Ledford, & Gresham, 2000). earlier in this report, recognition the actual results of the executed
systems can be just as effective as total rewards strategies against the
On the negative side, modern
financial incentives. desired results. The hope is that
technology may be too easy to use.
There are hundreds of “plug and Also consider stock. If your by conducting this evaluation, you
play” total rewards systems that enterprise is not publicly traded, this can show top management that the
companies can easily install and type of stock will not be available company’s investment in its total
begin using. Unfortunately, many of as a reward. However, your SME rewards system has paid off. Of
these systems do not meet different can still distribute what’s called course, conducting an evaluation
employers’ specific needs. Instead, phantom stock—which is based on can be unnerving if you fear that
these products’ manufacturers the enterprise’s book value rather the selected reward strategies are
have made them as homogeneous than its market value (R. Heneman, in fact not delivering as anticipated
as possible to sell to a wide range DeSimone, Dooley, & Jones, 2002). (Corby, White, & Stanworth, 2005).
of customers. Thus these generic Phantom stock helps to motivate To get the most from the evaluation
systems cannot provide users with employee performance because the phase, encourage your project team
competitive advantage (Combs, employee has a monetary stake in to measure the outcomes of the
Liu, Hall, & Ketchen, 2006). This the effectiveness of the organization. executed total rewards system and to
situation suggests that organizations Employees receive cash bonuses if interpret the findings correctly.
can get the most from their total the organization performs well.
rewards technology by building a Measuring the Outcomes
Will you outsource some aspects of
customized system. One downside
execution? Organizations can now To decide which outcomes of your
of such systems is that they are
outsource execution of their total total rewards system to measure,
difficult to upgrade.
rewards systems to vendors, which revisit the system’s objectives and
The implications for your can save time and hassle. However, then consider which data sources will
organization? Carefully weigh the resulting rewards systems may provide the information you need
the pros and cons of the various not be customized enough to to evaluate those outcomes. For
technology options before deciding meet your enterprise’s needs. Also, example, if the new rewards program
which may be best for your total you have no guarantee that the was intended to improve employee
rewards plan. consultants who perform the work satisfaction, the project team can
are well trained in total rewards or measure this outcome through
What if you work in a small- or workforce surveys. “Outcomes and
human resource practices. To ensure
medium-size organization? If you Data Sources” shows examples of
that your total rewards program
are in a smaller organization, you the kinds of outcomes you may want
gives your company a strategic
may encounter unique challenges to measure and the sources that
advantage, use great care in selecting
when implementing a total rewards might generate the data you need.
a vendor. In particular, look for
system. Perhaps the largest challenge
vendors who can offer solutions
is funding. Many small and medium
tailored to your needs and who have
enterprises (or “SMEs”) must
staff well trained in total rewards
Implementing Total Rewards Strategies 21
Interpreting Your Findings How might your project team • Measure outcomes over time—
In an ideal world, your project team conduct the most effective in the months or years before
would pilot-test each reward strategy evaluation possible, given the execution of the new rewards
in the proposed total rewards constraints at hand? The following and in several time periods after
system (and each combination of practices can help: execution. This helps you see
strategies within the system) before whether any outside forces have
• Compare measurements of
implementing it. Moreover, the affected those outcomes. For
important criteria taken before
team would randomly assign some example, if employee productivity
execution of the new rewards
employees to groups receiving changed dramatically in the
system against measurements of
changes in total rewards and other months leading up to execution of
the same criteria after execution.
employees to a control group that the new rewards system, whatever
is not receiving any changes. Of • Consider whether any other caused that change may have also
course, this kind of testing raises variables not studied may have influenced productivity during and
several challenges. First, senior influenced the outcomes you’re after execution. Your team will
managers will want more immediate seeing. need to identify such influences
results than those most teams in order to accurately evaluate the
• Search the management impact of the new rewards.
can produce with pilot studies. literature to see how effective
Moreover, randomly assigning the total rewards strategies you
employees to different groups may selected have proved in other
not be practical in your organization. organizations operating under
Finally, few employees will take similar circumstances.
kindly to being assigned to a group
that receives no rewards for the
purpose of experimentation. Outcomes and Data Sources
For these reasons, your project team To measure this outcome: Use this data source:
may need to evaluate the results of
total rewards changes “in the field” Productivity Operational reports
rather than in an organizational
“laboratory.” And field evaluation Job satisfaction Workforce surveys
is as much art as it is science. Team
members will need to use judgment
Revenue Income statements
in estimating the effectiveness of
particular total rewards strategies.
Costs Income statements
And they will never know for certain
whether an observed result is due
Profits Income statements
to the new plan or to some other
variable that they did not study. Fit with the organization’s strategic
For example, a rise in productivity Senior management
plan
may stem more from the fact that
Human resource information system
employees had input into job design Customer or employee complaints
(HRIS)
than from the actual job designs
themselves or the types of rewards Human resource information system
offered. Recruitment and retention
(HRIS)
22 Implementing Total Rewards Strategies
Conclusion Successfully implementing a revised or entirely new total rewards program will always
be challenging. To boost your chances of success, you and your pilot team must
carefully shepherd the project through the four phases of implementation: assessment,
design, execution, and evaluation. Each of these phases requires careful thought,
patience, and a willingness to solicit input from a wide range of individuals in your
organization.
Appendix A:
Industry Benchmark Phone Survey
Base Pay
Do you have job descriptions? Y_____ N_____
Do you conduct job evaluation? Y_____ N_____
Do you offer skill-based pay? Y_____ N_____
Do you offer competency pay? Y_____ N_____
Do you have an overtime pay policy? Y_____ N_____
How many pay grades are in your current structure? __________ Grades
What is the average width of pay grades? __________% (minimum to maximum)
Promotion Pay Criteria (check all that apply):
_____ Formula
_____ Internal equity
_____ Performance
_____ Potential
_____ Seniority
_____ Other (please list) __________
Incentives
Types of incentive plans (including merit pay):
24
Implementing Total Rewards Strategies 25
and other tangible incentives. Data impact these results. Specifically, human resources in helping an
was collected from both college positive effects were not found organization gain (and maintain) a
students and working adults over for managers/professionals and strategic and competitive advantage.
an eight year time span. The for organizations with too much The authors present the value,
analysis of the WPI scale indicated flexibility. Compressed workweeks rareness, imitability and organization
that the instrument did assess also had positive effects on all work- (VRIO) framework in describing
stable motivational orientations in related criteria except absenteeism. how the human resource (HR)
individuals, and has adequate fact function can be a source of sustained
structures, internal consistency, and competitive advantage due to its
reliability. The WPI measure also Barber, A.E., Dunham, R.B., & impacts on important resources
related to personality characteristics, Formisano, R.A. (1992). The such as human capital skills,
attitudes and behaviors that are impact of employee benefits on employee commitment, culture
important in an organizational employee satisfaction: A field and teamwork. The framework
setting. study. Personnel Psychology, 45, suggests that HR activities that
55-75. are valuable, rare, difficult to
imitate, and supported by the
Employee satisfaction with benefits organization (such as firm-specific
Baltes, B.B., Briggs, T.E., Huff,
was found to significantly increase skill training, for example) will help
J.W., Wright, J.A., & Neuman,
following the implementation of lead to a sustained competitive
G.A. (1999). Flexible and
a flexible benefits plan. Overall advantage and above-normal
compressed workweek schedules:
satisfaction was also found to performance for the firm. Other
A meta-analysis of the effects on
be somewhat higher. Empirical HR activities such as selection,
work-related criteria. Journal of
support was demonstrated through general training, and compensation
Applied Psychology, 84:4, 496-513.
a study of 110 employee attitudes must still be performed efficiently
The effects of flexible and before and after a flexible benefits to maintain competitive parity or a
compressed workweek schedules plan was introduced at a financial temporary competitive advantage.
on work-related criteria such as services company. Demographic Without these HR activities in an
productivity, job satisfaction, profiles and satisfaction with benefits organization, a firm could be at
absenteeism and work schedule were not found to be related. The a competitive disadvantage. This
satisfaction are explored in this authors suggest that the high level article provides support for the role
study. The work adjustment model of satisfaction with the flexible of the HR executive as a strategic
(Dawis, England, & Lofquist, benefit plan may have been related partner in an organization.
1968) and the job characteristics to the extensive communication and
theory (Hackman & Oldham, training that went along with the
1976) are used as theoretical implementation of the new plan.
Beer, M., Cannon, M.D., Baron,
frameworks suggesting the impact
J.N., & Dailey, P.R. (2004).
alternative work schedules can
Promise and peril in implementing
have on psychological states that Barney, J.B., & Wright, P.M. pay-for-performance. Human
influence attitudes and behavior. A (1998). On becoming a strategic Resource Management, 43, 3-20.
meta-analysis was conducted using partner: The role of human
29 published studies on alternative resources in gaining competitive This article explores the decision-
work arrangements. Flexible work advantage. Human Resource making process that managers at
schedules were found to have Management, 37(1), 31. Hewlett-Packard went through
generally positive effects on all when deciding to abandon the
work-related criteria. However, This ground-breaking article pay-for-performance programs they
some moderators were found to establishes the significance of previously used. These managers
Implementing Total Rewards Strategies 27
found that the costs of these profitability, productivity and with work participation may be
programs seemed to be greater compensation. Results indicated the ultimate solution to boosting
than the benefits. Employees in this that companies with employee productivity.
high-commitment culture felt pay- stock ownership of more than 5%
for-performance was like a bribe, were more profitable than those
and often caused bitter feelings with less than 5%, particularly for Cable, D.M., & Judge, T.A.
and hurt relationships. Other corporations smaller in size. No (1994). Pay preference and
managerial practices were found significant differences were found job search decisions: A person-
to be more beneficial, including for productivity and compensation organization fit perspective.
effective leadership, clear objectives, levels among companies that had Personnel Psychology, 47, 317-348.
coaching and training. When more than or less than 5% employee
implementing a pay-for-performance stock ownership. Therefore, This article provides empirical
program, managers must clearly employee stock ownership will likely support for the theory that job
state expectations and communicate increase or not change company seekers find organizations perceived
the purpose of the program—while performance, but it will not to offer high pay levels, flexible
giving employees a chance to ask negatively impact performance in an benefits, individual-based pay, and
questions. organization. fixed-pay policies more attractive.
Greater fit between personality of
the job seeker and characteristics of
the compensation system resulted
Blasi, J., Conti, M., & Kruse, Blinder, A.S. (Ed.) (1990).
in even greater attractiveness. One
D. (1996). Employee stock Paying for productivity: A look at
hundred and seventy-one college
ownership and corporate the evidence. Washington, D.C.:
students from a large northeastern
performance among public Brookings Institution.
university participated in the study.
companies. Industrial and Labor
One potential mechanism for A policy-capturing approach was
Relations Review, 50, 60-79.
increasing productivity growth used in which participants reviewed
The association between employee in the future is tying worker positions based on compensation
stock ownership and economic compensation to performance. The system attributes and then
performance has been a source major finding of this book is that indicated their attractiveness to
of debate for several years. Some meaningful worker participation those positions. Survey data was
believe the group compensation enhances productivity no matter collected on job-pursuit intentions,
schemes result in employee free- what compensation plan is used. materialism, individualism, self-
rider problems, while others think This book reviews alternative pay efficacy, locus of control, risk
employee stock ownership can systems and takes a closer look at aversion, and other demographic
result in increased information compensation issues such as profit characteristics. The findings suggest
sharing, identification with the sharing, employee ownership that job attractiveness is influenced
company, and monitoring of plans, employee participation, by not only high pay level, but also
co-workers, which can lead to and the employment system in flexible benefits, individual-based
improved company performance. Japan. The answer to the question pay, fixed pay, and job-based pay.
The corporate performance of two regarding whether productivity can
groups of companies (one group be increased by changing the way
had more than 5% of company employees are paid seems to be that
stocked owned by employees while changing the way employees work
the others had less than 5%) was is more beneficial than changing
compared to determine the impact the way they are paid. However,
of employee stock ownership on combining alternative pay systems
28 Implementing Total Rewards Strategies
Colella, A., Paetzold, R.L, compensation, training, employee Dreher, G.F., Ash, R.A., & Bretz,
Zardkoohi, A., & Wesson, M.J. participation, selectivity, and flexible R.D. (1988). Benefit coverage
(2007). Exposing pay secrecy. work arrangements. Ninety-two and employee cost: Critical factors
Academy of Management Review, studies were used in this analysis. in explaining compensation
32, 55-71. Results indicated that organizations satisfaction. Personnel Psychology,
can increase their performance by 41, 237-254.
Pay secrecy can be thought of
.20 of a standardized unit for each
as a restriction of the amount of Employers invest in employee
unit increase in HPWP. The effect
information employees are provided benefits under the assumption
sizes demonstrated greater effects
about what others are paid. It can that providing these benefits will
for HPWP systems over individual
become complex in organizations increase employee satisfaction,
practices and for manufacturing
when considering who and what pay commitment, and loyalty to the
organizations over service
information is restricted. The costs of organization. This article empirically
organizations. Future research could
pay secrecy can include sacrifices in explored this assumption by
explore why HPWPs didn’t work as
employee judgments about fairness looking at the relationship between
well in service organizations.
and trust, decreases in employee benefit program characteristics
motivation, and (potentially) a less and compensation satisfaction. An
efficient labor market. In addition, extensive compensation survey
Corby, S., White, G., &
pay secrecy can have benefits such as was administered to employees in
Stanworth, C. (2005). No news
organizational control, protection of eight state agency organizations.
is good news? Evaluating new
privacy, and decreased labor mobility. Results indicated that increased
pay systems. Human Resource
Several contextual factors are related benefit coverage and decreased
Management Journal, 15: 4-24.
to when costs and benefits can employee costs were related to
occur. These factors include—but The focus of this article is on HR greater satisfaction with benefits and
are not limited to—the nature of managers who have introduced new compensation. Changes in the cost
human capital, the criteria for pay systems in their organizations in of health insurance were particularly
pay allocation, and the gauging England between 2000 and 2002. influential in altering employee
of relative pay status. Several The evaluations HR managers satisfaction levels. The study also
questions remain related to pay make to assess the effectiveness demonstrated that employees who
privacy and its implications in of changes in pay and grading possessed more accurate information
organizations and society. systems is explored through about actual benefit costs and
interviews and case studies with 15 coverage were more satisfied
organizations. Results suggest that with compensation and benefits
Combs, J., Liu, Y., Hall, A., & new pay systems can impact labor programs.
Ketchen, D. (2006). How much turnover, recruitment, retention,
do high-performance work staff attitudes, and working
practices matter? A meta-analysis practices. However, even given these Fay, C., Schulz, E., Gross, S.E.,
of their effects on organizational impacts, the study indicates that & van de Voort, D.V. (2004).
performance. Personnel Psychology, HR managers usually only conduct Broadbanding, pay ranges, and
59, 501-528. limited evaluations that are based labor costs. WorldatWork Journal,
on employee self-report. Given 13:2, 8-24.
A meta-analysis was performed to
the complexities of evaluation and
find the relations between high- This study investigated whether base
the limited time of managers, the
performance work practices (HPWP) salaries and total cash compensation
authors suggest that practitioners
and organizational performance. would be higher in firms using
focus on evaluating the costs of the
HPWPs are performance-enhancing broadband pay administration
system and report their findings to
practices such as incentive policies than in firms using
all employees.
Implementing Total Rewards Strategies 29
traditional pay ranges. Broadbands Fried, Y., & Ferris, G.R. in an attempt to explain why some
collapse multiple pay ranges into (1987). The validity of the job companies pay more than others,
a large band with a minimum and characteristics model: A review and why pay levels for particular jobs
a maximum. It may consist of and meta-analysis. Personnel differ. Next, the effects of pay level
several jobs and does not contain a Psychology, 40:2, 287-322. for employers are studied to find
midpoint. Survey data from 5,593 the importance of pay to individuals
Approximately 200 relevant
IT job incumbents in 2000 and and what employers get in return
studies on Hackman and Oldham’s
10,906 IT job incumbents in 2001 for higher pay. Pay structure is also
Job Characteristics Model were
was collected to test the hypotheses. discussed to provide information
reviewed in this meta-analysis.
Results indicated that both base about job evaluations and work-
The results of the meta-analysis
salaries and total cash compensation life incentives. Psychological versus
supported parts of the model such
were higher in firms using economic perspectives of motivation
as the multidimensionality of job
broadbanding when controlling and compensation are offered as
characteristics, but the exact number
for organizational, occupational, well. Then the book summarizes
and definition of dimensions was
and individual characteristics research on pay-for-performance
more debatable. Relationships
known to be associated with salary programs and pay strategies. Finally,
between job characteristics and
differentials. future research and methodological
psychological and behavioral
recommendations are made to guide
outcomes were also demonstrated
research on compensation.
in the results. Job complexity
Folger, R., & Konovsky, M.A.
indices like the MPS seem to be less
(1989). Effects of procedural and
predictive of work outcomes than a
distributive justice on reactions to Gupta, N., & Mitra, A. (1998).
simple additive index. Therefore, the
pay raise decisions. The Academy of The value of financial incentives:
main findings of this article indicate
Management Journal, 32, 115-130. Myths and empirical realities.
that although the Job Characteristics
ACA Journal, Autumn, 58-66.
The impact of distributive and Model has some usefulness in
procedural justices on reactions to predicting work outcomes, several Years of research on the relationship
pay raise decisions was examined modifications and improvements between financial incentives and
in this study. Two hundred and need to be made to enhance the employee performance is reviewed in
seventeen first-line employees of a validity and accuracy of the model. this article on the myths and realities
privately owned manufacturing plant related to the value of financial
completed a survey on the practices incentives. The myths (found as a
supervisors used to determine Gerhart, B., & Rynes, S.L. (2003). result of this study) are that financial
their most recent salary increase. Compensation: Theory, Evidence, incentives do not motivate, people
Procedural justice was found and Strategic Implications. do not value money, financial
to influence levels of employee Thousand Oaks, CA: Sage. incentives are punishing, financial
commitment to an organization and incentives undermine intrinsic
Pay level, pay structures and pay
trust in management. Distributive motivation, and financial incentives
delivery systems are the three
justice, however, was related to erode performance quality. The
main compensation decisions
higher levels in satisfaction with empirical realities of the value of
explored in this book. It reviews
pay. These results suggest that financial incentives are that financial
the determinants and effects
the manner in which pay raises incentives consistently improve
of compensation. Theory and
are distributed, as well as the performance quantity, money makes
empirical evidence are integrated to
distribution itself, are important to a difference in people’s behavior,
demonstrate practical significance
the satisfaction levels of employees financial incentives are rewarding,
of compensation research. First,
with pay raise decisions. financial incentives complement
differences in pay level are examined
30 Implementing Total Rewards Strategies
intrinsic motivation, and financial receive and pay delivery systems. satisfaction. Future research to
incentives are, at worst, unrelated Antecedents of pay satisfaction may confirm these results and test other
to performance quality. The main include pay program characteristics dimensions would be beneficial.
conclusion from this article is that such as pay- for-performance, merit,
although money is not the only incentive, bonus, stock and benefits.
thing that matters, it does matter, Outcomes of pay satisfaction or Heneman, R.L. (2001). Business-
and the challenge is to design lack thereof could include changes Driven Compensation Policies:
effective incentive systems. in input such as performance, Integrating Compensation Systems
commitment and trust, or steps with Corporate Business Strategies.
toward change: job interviewing, New York: AMACOM.
Hackman, J. R. (1971). Employee searching, and union voting. Pay
satisfaction outcomes could also This book provides practitioners
reactions to job characteristics.
result in withdraw, with employees with step-by-step information on
Journal of Applied Psychology,
that have turnover intentions, how to make strategic decisions
55(3), 259-276.
lateness, or job transfers. Pay on compensation. Corporate
This article suggests that jobs high preferences have been found that business strategies should be used
on variety, autonomy, task identity suggest employees prefer individual to guide compensation strategies
and feedback tend to result in higher rather than group pay, performance that impact base pay systems,
motivation, higher job satisfaction, rather than seniority based pay, fixed rewards systems, and ultimately pay
fewer absences from work, and high salaries, and a choice of benefits. system administration. Part one
quality work as rated by supervisors. presents a model of strategic pay
Data was collected from employees systems and part two explores work
in 13 different jobs in plant and analysis, work evaluation, market
Heneman, H. G., & Schwab, D.
traffic departments of an eastern surveys, and pay structures of base
P. (1985). Pay satisfaction: It’s
telephone company. Employees were pay systems. Individual, team, and
multidimensional nature and
surveyed, observed and interviewed organizational rewards are examined
measurement. International Journal
about the characteristics of their The author also looks at pay system
of Psychology, 20(2), 129-141.
job. The results suggest that the administration and offers suggestions
motivational potential of jobs can This study suggests the on strategic pay design, pay
only be reached when the personal multidimensional nature of pay implementation, and pay evaluation.
goals and needs of employees match and proposes the Pay Satisfaction Part five recommends general do’s
up with the psychological demands Questionnaire (PSQ) as a tool for and don’ts for compensation-related
and aspects of their jobs. measuring the multiple dimensions decisions.
of satisfaction with pay. The
proposed dimensions include
Heneman, H., & Judge, T. A. satisfaction with levels, benefits, Heneman, R.L., DeSimone,
(2000). Compensation attitudes. raises, structure and administration. B., Dooley, A.E., & Jones, D.
Compensation in organizations: The research was conducted by first (2002). Taking a middle stance:
Current research and practice. San constructing the questionnaire, then Goalsharing as a lead and lag
Francisco: Jossey-Bass, 61-103. testing it on a sample of white-collar system for business performance
employees. A modified version then improvement. WorldatWork
The attitudinal issues of pay emerged, and was tested using a new Journal, 11:2, 65-70.
satisfaction, pay justice and pay sample of employees. Reliability and
preferences are explored in this consistency were found for all of the Some researchers argue that goal-
chapter on employees’ affective scales. The results provide support sharing should be used as a lead
reactions to the amount of pay they for the multidimensionality of pay system to improve organizational
Implementing Total Rewards Strategies 31
performance while others believe with a narrow span or control; or a large amount of turnover among
goal-sharing should be used after the organic, with low formalization, employees over the five year period.
strategic plan has been formulated. centralization and standardization.
This article uses longitudinal data Cultures investigated included
from a privately held manufacturing traditional-style with a clear division Heneman, R.L., Fay, C.H.,
company to support a combination of labor and vertical communications & Wang, Z.M. (2001).
of these positions, arguing that or involvement-style with shared Compensation systems in the
goal-sharing can play a role in both decision making and risk taking. global context. In D. Ones
the formulation and implementation Reward form, unit of analysis, value & C. Viswesvaran Global
of business strategy. Employee comparisons, reward measures and handbook of Industrial, Work and
awareness, understanding and levels, administrative processes, Organizational Psychology, (pp.
commitment to strategic business timing and communications were 77-92). London, England: Sage.
plans can be increased by used as components of the reward
involving them in the design and system. The eight expert systems This chapter provides a summary
implementation of a gain-sharing described offer ideal combinations of global research on compensation
pay plan and clearly communicating that can be used to align reward and including base pay, variable pay,
any changes that may take place. organization systems. individual incentives, ownership
and benefits. The chapter begins
by exploring the history of
compensation, continues with
Heneman, R.L, & Dixon, K. Heneman, R.L., Eskew, D., &
the current state of compensation
(2001). Reward and organization Fox, J. (1998). Using employee
affairs, and ends with a discussion
systems alignment: An expert attitudes to evaluate a new
of future research and practice.
system. Compensation and Benefits incentive program. Compensation
Global compensation issues such
Review, November/December, and Benefits Review, 28:1, 40-44.
as the impact of culture, legal
17-28.
This study suggests that employee systems, and other local conditions
Aligning the design and attitudes towards pay can be used on compensation strategies are
implementation of a reward system to determine the effectiveness of a also considered. The impact of
with the business strategy, structure pay system. Employees at a small pay systems on organizational
and culture is essential to creating flight-simulator company in Orlando effectiveness has been shown to be
a unique system that will steer and Phoenix were surveyed to assess positive, yet one must recognize that
company performance in the right the need for incentive pay. Then, an some pay plans are more effective
direction. Eight reward systems incentive pay system was developed than others, and the implementation
are recommended to help align and implemented, and employees of pay strategies is just as important
and integrate a company’s strategy, once again completed the survey. as the plan itself.
structure and culture with the The survey measured employee
reward system. Strategies explored attitudes on job satisfaction, pay
include defender strategies in stable satisfaction, performance ratings, Heneman, R.L., Mulvey, P.M., &
markets with a narrow range of and pay-for-performance. Results LeBlanc, P.V. (2002). Improving
products versus prospector strategies suggest that employees had greater base pay ROI with employee base
in changing markets with a wide job satisfaction, extrinsic satisfaction, pay knowledge. WorldatWork
variety of products that compete intrinsic satisfaction, pay satisfaction, Journal, 11:4, 21-27.
using innovations. Organizational benefits, structure, and pay-for-
structures looked at were performance after incentive pay was This study suggests that return
mechanistic, or highly formalized, implemented. Performance declined, on investment for base pay is
centralized and standardized however, but this was explained by likely to be improved by simply
32 Implementing Total Rewards Strategies
competencies, test the new tool, Heneman, R.L. & Werner, J.M. higher retention, morale and
and finally implement and train (2006). Merit Pay: Linking Pay to productivity. One of the biggest
the new process for performance Performance in a Changing World. challenges of these programs is
management. This system gave Greenwich, CT: Information Age inconsistency in implementation
managers a new appreciation Publishing. at various levels or in different
for how things are done. It also departments of an organization.
This book answers several questions
helped direct managers through Advice for implementing these
related to merit pay, including why
the changing nature of managerial programs in an organization
it is based on performance; how
work by providing a tool with includes communication, planning
salary increases are impacted by
competencies and standards they and support. Involve employees in
organization, job and situation; what
could use to guide their work. work/life practice decisions, and
constitutes performance under merit
make policies clear about when and
pay; why certain amounts are given;
how flextime can be used.
what kind of policies are related in
Heneman, R.L., von Hippel,
merit pay; and what can be expected
C., Eskew, D., & Greenberger,
after receiving an increase in merit
D. (1997). Alternative rewards Jenkins, G.D., Jr., Ledford,
pay. In addition to answering these
in unionized environments. G.E., Gupta, N., & Doty, D.H.
questions, the authors of this book
American Compensation (1992). Skill-Based Pay: Practices,
offer a comprehensive overview
Association Journal, Summer, Payoffs, Pitfalls, and Prescriptions.
of the history of merit pay, a
42-55. Scottsdale, AZ: American
description of pay-for-performance,
Compensation Association.
Alternative reward plans can include administering merit pay, and
lump sum merit pay, piece-rate pay, evaluating merit pay outcomes. This study examines 97 different
skill-based pay, gainsharing, goal- The differences among merit pay skill-based pay plans. Typically,
sharing, profit sharing, and stock plans are also explored according skill-based pay plans have 10 skill
sharing. Deciding which of these to to the performance criteria that are units that can be acquired in three
use in a unionized environment can evaluated, the form that merit pay years. These plans can help promote
be difficult, and so this article offers takes, the method used to calculate flexibility, productivity and employee
some suggestions on a framework the increase, and the permanence of growth. Some of the difficulties
under which various alternative the increase. associated with skill-based pay plans
reward strategies are likely to are that they are not implemented
succeed in unionized environments. correctly, are poorly communicated,
Data provided by 150 unionized HR Focus. (2006). Retention, and involve inadequate training.
firms and 350 nonunionized morale, and productivity result Skill-based pay plans are most often
firms indicated that unionized from work/life programs. 83:10, used in manufacturing organizations,
organizations are more likely to S1-S3. flat structures with few layers, and
use skill-based pay, gainsharing, companies using continuous process
Work/life practices such as flexible
goal-sharing, and stock sharing technologies. This study found
scheduling, telecommuting and
than non-unionized environments. skill-based pay to be beneficial in
job sharing are used by many
Unionized organizations are also unionized organizations as well,
organizations in today’s society.
more likely to use objective, group- and it did not make companies
However, the ‘best practices’ and
based performance measures, base susceptible to litigation. The success
the costs and benefits of these
performance standards on historical of skill-based pay plans is enhanced
programs are still being developed.
standards, and provide payouts to with employee and manager
This article suggests the main
employees in equal pay amounts. involvement, participation and
benefits from these practices include
commitment.
34 Implementing Total Rewards Strategies
Jenkins, G.D., Jr., Mitra, A., management practices in Fortune and performance into account.
Gupta, N., & Shaw, J.D. (1998). 1000 companies are changing. Employees in the United States want
Are financial incentives related The adoption and effectiveness of individual, not team or company
to performance? A meta-analysis employee involvement practices, rewards, and fixed increases in pay
review of empirical research. total quality management, such as bonuses and incentives in the
Journal of Applied Psychology, 83, reengineering, and knowledge form of one-time payments. Most
777-787. management practices are workers were satisfied with benefits,
explored. The book also focuses on job security and opportunities for
This meta-analysis explores the
organizational changes occurring, personal growth and development.
relationship between financial
such as the type of employment
incentives and the quality and
relationships, new performance-
quantity of performance. Thirty-
improvement approaches, and Ledford, G.E., & Heneman,
nine studies were analyzed which
change-management strategies. R.L. (2000). Compensation:
contained 47 relationships between
Finally, the last portion of the A troublesome lead system in
these variables. Results of the
book looks at predictors of organizational change. In M.
study conclude that financial
practice adoption including Beer & N. Noria (Eds.) Breaking
incentives are significantly related
organizational size, downsizing, the Code of Change (pp. 307-
to performance quantity, but not
competitive environments, de- 322). Cambridge, MA: Harvard
performance quality. The effect
layering, and working towards high Business School Press.
size of the incentive-quantity
performance. Data is presented
relationship is estimated to be .34. Some people argue that
about organizational practices and
Theoretical framework moderated compensation is ineffective in
management activities that support
the strength of the relationship, as changing employee behavior and
corporate change initiatives and
did the setting (laboratory, field, therefore should not be used as
suggest approaches to improvement
experimental simulation), but task a system to lead organizational
efforts in large corporations.
type did not affect the relationships change. These authors contend
investigated in this study. Future that empirical research supports
research suggested included looking the effectiveness of compensation
LeBlanc, P.V., & Mulvey,
at the impact of interdependencies systems, but they may be
P.W. (1998). How American
among employees on performance, better as a lag rather than a
workers see the rewards of work.
as well as the relationship between lead in organizational change.
Compensation and Benefits Review,
financial incentives and perceptions Compensation is a highly emotional
30, 24-28.
of organizational justice. topic that may initiate resistance
A survey conducted on the rewards to change and emotional turmoil.
of work addressed pay system Also, using compensation as a lag
Lawler, E.E. III, Mohrman, S.A., preferences regarding benefits, in organizational change allows
Benson, G. (2006). Organizing work content, affiliation, career, it to better match the business
for High Performance: Employee and pay itself. Results demonstrated strategy, structure and culture of
Involvement, TQM, Reengineering, that employees are concerned not the organization after the change.
and Knowledge Management in the only with how much money they Therefore, compensation can be
Fortune 1000. San Francisco, CA: make, but also how they are paid. influential in changing employee
Jossey-Bass. It’s important that the system for behavior, but compensation systems
administering pay to employees should be designed as a lag rather
This book presents the results
is effective, fair and inclusive. Pay than a lead when organizational
of a fifth study in a continuous
systems should take employee change takes place.
research program that looks at how
preferences, concerns, commitment
Implementing Total Rewards Strategies 35
Ledford Jr., G. E. & Mohrman, performance-reward plan works and performance appraisals. Finally,
S.A. (1993). Self-design for best. The four areas of objectives the compensation of special groups,
high involvement: A large-scale for this study include business the role of the union in wage and
organizational change. Human performance, improving teamwork, salary administration, international
Relations, 46(2), 143-173. improving the performance- pay systems, and legal issues in
reward link, and improving compensation are also discussed.
This case study examines a five-
the quality of the workforce.
year action research project in a
Organizational information such
12-place manufacturing division of
as communications, employee Mitra, A., Gupta, N., & Jenkins,
a food-products firm that is trying
involvement, business performance, G.D. (1997). A drop in the
to change its culture. The change
and plan development are also bucket: When is a pay raise a pay
efforts consider high-involvement
provided. The report lays out raise? Journal of Organizational
management practices, large-scale
design features for performance- Behavior, 18, 117-137.
organizational change, and self-
reward plans such as types of
design for managers and employees. In this study, 192 student employees
payout measures, output, cost
Surveys were completed by 2,152 participated in a data-transferring
reduction, gains, and management
employees and assessed high task to determine how large a pay
involvement. Financial, satisfaction,
involvement practices, organization raise had to be before employees
and non-financial results are
functioning, employee quality of actually considered it a pay raise.
reported, and suggestions are made
work life, and employee perception Results indicated that minuscule
for plan administration, reassessment
of team and plant effectiveness. pay raises were not viewed as raises
and termination.
The data suggests high involvement and were often disappointing. The
systems have particularly positive threshold at which an employee
effects for start-up divisions. seems to consider a pay raise an
Milkovich, G. T., & Newman, J.
Survey, interview and performance actual raise appears to occur at
M. (2005). Compensation. Irwin
results indicate change occurred about 7% of base pay. Anything
Homewood, IL.
and improved satisfaction and less than that may not elicit any
performance for both employees and This textbook examines the positive cognitive or behavioral
the company as a whole. strategic choices in managing reactions, and may not be effective
total compensation. A model of in motivating employees. Future
total compensation is introduced research on the cognitive reactions
McAdams, J.L., & Hawk, in the first chapter and serves as to pay decisions should be
E.J. (1995). Organizational a framework for the remainder considered.
performance and rewards. of the book. The authors discuss
Scottsdale, AZ: American how to determine the structure,
Compensation Association. pay levels, individual pay and Morgeson, F., & Humphrey,
benefits in an organization. Internal S. (2006). The Work Design
This report is about performance-
alignment with strategic goals is Questionnaire (WDQ): developing
reward plans that can be successful
reviewed through job analysis, and validating a comprehensive
for both the employee and the
job evaluation and person-based measure for assessing job design
organization. The study identifies
structures. External competitiveness and the nature of work. Journal of
663 variable pay plans from 372
is explored by examining pay Applied Psychology, 91(6), 1321-39.
companies in the manufacturing
levels and mixes in comparison
and service industries to explore This study was used to develop
with market values. Employee
strengths and weaknesses and the Work Design Questionnaire
contributions are also identified
offer suggestions at what type of (WDQ) as a new tool to measure
through pay-for-performance plans
36 Implementing Total Rewards Strategies
satisfaction and learn more about those that have participative cultures, Neuborne, E. (1996, October
work and job design. First, 107 and those that offered other 15). Meeting goals just got more
work-characteristic terms were incentive programs to complement rewarding. USA Today, Retrieved
identified and sorted into three skill-based pay. Although skill-based Jan. 12, 2007, from www.
major categories: motivational, social pay is related to positive outcomes, usatoday.com.
and contextual. The motivational it’s important to remember that
In this newspaper article, Eileen
work characteristics included successful use of skill-based pay
Neuborne explores the revolution
autonomy, task significance, task includes challenges such as increased
happening at work in the 1990s in
identity, feedback, job complexity, training, designing certification
relation to a management theory
information processing, and problem tests, recordkeeping, keeping track
called New Pay. New Pay links
solving. Social characteristics of employees, and many more
compensation to achieving the
identified included social support, administrative tasks.
company strategy, and thus changes
interdependence, interaction outside
rewards at work. In the past, pay
the organization, and feedback
systems were based on seniority and
from others. Ergonomics, physical Nelson, B. (1994). 1,000 ways
cost of living increases, but New
demands, work conditions, and to reward employees. New York:
Pay compensation programs are
equipment use were identified Workman Publishing.
offering profit sharing and bonus
as contextual characteristics.
Rewards and recognition are some plans as incentives. Innovation and
The sample consisted of 540 job
of the most motivating factors experimentation with new types of
incumbents who held 243 distinct
to improving performance in a rewards are being investigated to
jobs. Results demonstrated excellent
company. This book offers a number improve pay plans at organizations
reliability as well as convergent and
of ways to reward employees in a across the country. Employees
divergent validity.
variety of situations. The first part are being given a greater role in
discusses informal rewards such determining their own compensation
as communications, time off, gift by working hard and meeting
Murray, B., & Gerhart, B. (1998).
certificates, and celebrations. Next, strategic goals.
An empirical analysis of a skill-
awards for specific achievements
based pay program and plant
were reviewed: employee suggestion
performance outcomes. Academy of
awards, productivity awards, Peterson, S.J., & Luthans, F.
Management Journal, 41, 68-78.
customer service awards, sales goal (2006). The impact of financial
Outcomes related to productivity awards, attendance awards, and team and nonfinancial incentives on
and labor costs were examined in awards, among others The final part business-unit outcomes over time.
this study to determine how they are of the book offers suggestions for Journal of Applied Psychology, 91:1,
impacted by the use of skill-based formal rewards such as contests, 156-165.
pay programs in organizations. Skill- educational rewards, special events,
This study demonstrated that
based pay was found to have positive travel, stock ownership, benefits,
both financial and non-financial
effects on organizational outcomes. and anniversaries. The book also
incentives significantly improved
Specifically, organizations using features where to get reward items,
business unit outcomes such as
skill- based pay reported greater companies with unusual rewards,
profitability, customer service, and
productivity (58%), lower labor cost and motivational companies and
employee turnover. In addition,
per part (16%), and favorable quality associations.
this improvement in performance
outcomes. Researchers suggest that
was found to continue over time.
skill-based pay fits best in high-
A quasi-experimental design used
involvement environments such as
21 fast food franchises split into
those in a start-up or growth phase,
Implementing Total Rewards Strategies 37
a financial group, a non-financial Roussel, P. & Heneman, R.L. HR practitioners take complaints
group, and a control group. Results (July-August, 1997). The about pay seriously, don’t fall very
show that the financial incentive had emergence of far below market pay levels, realize
greater initial impact initially, but individual reward systems in that most of the best employees
the discrepancy between this and France. American Compensation want strong pay-performance
non-financial incentives disappeared Association News, 18-20. relationships, and examine whether
for profitability and customer service executive pay is moving in the
Individual reward systems are
over time. Manager training and same direction and at roughly
beginning to replace general pay
the use of a behavioral performance proportionate rates to employee
increases based on the cost of living
management incentive system were increases. These tips will help a pay
and seniority in the French labor
critical components to increasing system remain effective and will
force. Higher costs of living, a
employees’ key performance maintain the premise of pay as a
decline in general funds for increases,
behaviors. motivator to employees.
and moves towards more efficiently
designed organizations are some of
the factors that led to this change.
Rodgers, R. and Hunter, J. E. Schay, B.W. (1997). Paying
French employers feel that individual
(1991). Impact of management for performance: Lessons
reward systems will allow employees
by objectives on organizational learned in fifteen years of
to be held accountable for results-
productivity. [Monograph]. federal demonstration projects.
based performance objectives, and
Joumal of Applied Psychology, In New Strategies for Public
will not be based on the assessment
76, 322-336. Pay: Rethinking government
of personality traits. Profit sharing
compensation programs. San
Management by objectives (MBO) and gainsharing are regulated by
Francisco, CA: Jossey-Bass
includes participating in decision law in France, and team-based pay is
Publishers.
making, goal setting, and objective only used by a few firms.
feedback. This study uses a meta- This book chapter is a review of
analytic technique to explore federal demonstration project
the effectiveness of MBO in the Rynes, S.L., Gerhart, B., experiences in the area of pay for
public and private sectors. Seventy & Minette, S. (2004). The performance and their results.
studies that look at management importance of pay in employee Conditions suggested for successful
by objectives were used in the motivation: Discrepancies between pay-for-performance systems include
meta-analysis. MBO programs what people say and what they do. communication to employees about
were found to result in large gains Human Resource Management, 43: how rewards are given, supervisors
in productivity when commitment 381-394. explaining and supporting reward
from top management is high. systems in discussion with their
Several practitioners underestimate
MBO was not as successful in the subordinates, varying rewards based
the importance of pay in motivating
government sector, usually due to a on performance, objective and
employees. In many company
lack of management commitment. inclusive measures of performance,
surveys, employees respond that pay
However, MBO was demonstrated and high levels of trust between
is not that important to them since
to be successful in all public-sector supervisors and subordinates.
they do not want to appear greedy
agencies studied. Several lessons were learned from
or materialistic. In reality, however,
these three projects. The first lesson
academic research demonstrates
suggested that mistrust of merit pay
that pay is a necessary but not
can be overcome by experiencing
sufficient condition in motivating
a system that works. Next was
employees. The authors suggest that
that money does not have to drive
38 Implementing Total Rewards Strategies
performance ratings. Furthermore, a questionnaire regarding design implications of this study are that
labeling employees with adjectival features and preferences related to the O.B. Mod. approach produces
performance ratings should be skill-based pay. The success and stronger effects in manufacturing
avoided. Finally, supervisor training survival of skill-based pay programs than in service organizations; that
in managing pay for performance is based mostly on contextual factors in service organizations, financial
is essential for successful like supervisor and co-worker reinforcers result in stronger effects
implementation. support in addition to environmental than non-financial interventions;
characteristics such as the facility. and that the natures of different
Skill-based pay systems are less likely behavioral interventions should be
Shea, M.B. (2006). Anti-Trust to survive in organizations following examined to help increase employee
implications in the Salary Survey a technically innovative strategy. effectiveness.
Process. In The Survey Handbook Design characteristics such as a focus
and Directory: A Guide to Pay and on skill breadth, the total number
Benefits Solutions. Scottsdale, AZ: of skills in the pan, and topped Stajkovic, A.D., & Luthans, F.
WorldatWork. out percentages were less likely to (2001). The differential effects
predict the success of a skill-based of incentive motivators on
Benchmarking through informal pay system in an organization. work performance. Academy of
and formal surveys can potentially
Management Journal, 44, 580-
be violating antitrust regulations.
590.
In order to avoid these regulations,
Stajkovic, A.D., & Luthans, F.
benchmark surveys should be The nature, impact and mechanisms
(1997). A meta-analysis of the
managed by independent third underlying the relationship
effects of organizational behavior
parties, the information provided by between incentive motivators and
modification on task performance,
survey respondents should be based performance are explored in this
1975-1995. Academy of
on data more than three months old, study. One hundred and eighty-
Management Journal, 40, 1122-
reluctant participants should not two employees in the operations
1149.
be pressured into responding, and division of a large company were
there should be significant number The O.B. Mod approach was split into four groups representing
of participants that no one can be established in the 1950s and is various financial incentives. These
identified. When reporting results, based on reinforcement theory. intervention groups included
the article suggests not identifying The model developed from the one that received routine pay for
individual company data, displaying behavior-modification approach is a performance, one that received
aggregate and historic data, and five-step framework for measuring monetary incentives, one that
being cautious if the industry only and evaluating employees’ task- received social recognition, and one
has a few companies or high-profile related behaviors intended to impact that received performance feedback.
companies. performance improvement. This Financial incentives (money) were
study offers a meta-analysis of the found to have high instrumental
research findings related to the value that translated into increased
Shaw, J.D., Gupta, N., Mitra, O.B. Mod approach. It looks at performance. Social recognition
A., & Ledford, G.E. Jr. (2005). the effect on task performance and was seen as a sign of future benefits
Success and Survival of Skill- characteristics that may moderate the and therefore also improved work
Based Pay Plans. Journal of relationship between the O.B. Mod performance. The feedback slightly
Management, 31:1, 28-49. approach and task performance. improved performance as well,
Results indicated a significant main since employees felt they were
Human Resource managers at 97 effect for the O.B. Mod. approach communicated to in a positive
facilities of 73 companies answered on task performance of .51. Practical manner.
Implementing Total Rewards Strategies 39
Stajkovic, A.D., & Luthans, F. employees’ base wages. The study responses to gainsharing; and using
(2003). Behavioral management demonstrates the need to measure multidimensional reward criteria.
and task performance in lump-sum bonus satisfaction,
organizations: Conceptual how the construct fits into the
background, meta-analysis, nomological network of the pay Williams, M.L., McDaniel, M.A.,
and test of alternative models. satisfaction questionnaire, and & Nguyen, N.T. (2006). A
Personnel Psychology, 56, 155-194. reliability and convergent validity meta-analysis of the antecedents
of the instrument used to measure and consequences of pay level
A meta-analysis of behavioral
lump-sum bonus satisfaction. Results satisfaction. Journal of Applied
management studies in
indicate that lump-sum bonuses are Psychology, 91:2, 392-413.
organizational settings was
a separate and distinct component
performed to examine reinforcement This meta-analysis summarizes
of pay. Future research should
effects on task performance. The the past 40 years of pay level
explore behavioral outcomes and the
types of reinforcement effects looked satisfaction research by looking
determinants of lump-sum bonus
at included additive, which are the at the relationships between
satisfaction.
sum of individual effects; redundant, determinants, antecedents, correlates
which are when combined effects and consequences. Two hundred
are less than additive effects; and forty samples from 203 studies
Welbourne, T., & Gomez-Mejia,
and synergistic, which are when were analyzed to test a current
L.R. (1995). Gainsharing: A
combined effects are greater than model of pay level satisfaction.
critical review and a future
the sum of the individual effects. Results suggest that antecedents
research agenda. Journal of
The overall effect size was 0.47, with of pay level satisfaction include
Management, 21, 559-609.
16% improvement in performance perceptions of pay policies, perceived
and 63% probability of success Gainsharing is growing rapidly in job characteristics, perceived inputs
when using behavioral management organizations for many reasons. and outputs of relevant others,
in an organization. The use of all The authors include the fact that and actual pay and pay raises
three reinforcement effects together many firms moved toward team- received. Consequences include
produced the strongest effect on task based work designs; many people turnover intentions and population
performance. are dissatisfied with other pay-for- performance. Correlates such as
performance systems; gainsharing perceived distributive justice were
is a relatively simple program to also important. Future research
Sturman, M.C., & Short, J.C. sell to top management, has a long is recommended, such as testing
(2000). Lump-sum bonus history, and offers considerable the impact of personality and pay
satisfaction: Testing the construct flexibility to determine payoffs and satisfaction, and further examination
validity of a new pay satisfaction the distribution of gains. This article of other correlates such as
dimension. Personnel Psychology, offers a theoretical framework for performance reward contingency.
53: 673-700. studying gainsharing, as well as a
conceptual review of past research
This article focuses on satisfaction
and recommendations for future
with lump-sum bonuses and finds a
research. Some of these future
relationship with attitudinal variables
research ideas include linking
beyond those provided by typical
aggregate, team, and individual
pay level variables and the pay
rewards; using gainsharing as a
satisfaction questionnaire. Lump-
control mechanism, an instrument
sum bonuses are cash payments to
of change, and a strategic tool;
employees that are not added to
understanding failures, risks and
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