The value of investing in rewards
In a tight labour market with skill shortages due to demographic shifts and changes in employee preferences, employers need to be strategic about how, and why, they choose to reward their staff.
A 2023 “Future of Jobs” survey by McKinsey1 found that 60 percent of organisations around the world face skill gaps and struggle to attract talent as a result of the labour market disruptions caused by the pandemic. Fewer employees over the age of 55 returned to the workforce after the lockdowns and younger employees have a greater focus on work-life balance. This adds a key challenge for organisations, along with economic uncertainty and increasing costs.
A couple of examples: Bob is 55, his kids have left home, his wife is enjoying her professional career and he is thinking ahead to retirement and would like to put more towards his KiwiSaver account rather than pick up the additional study allowance offered to all employees. He would also like to work a 9-day fortnight so he can spend less time on the commute to work and a day on the golf course.
On the other hand, Fow is 25, would rather be able to re-direct the additional employer contribution to KiwiSaver towards her student debt and wants to undertake some additional study directly related to work. She is also asking about taking parental leave because her partner is pregnant.
Bob and Fow illustrate some of the differences in what employees are looking for from employers. Some would like to see the employer offer a menu of benefits from which they can select what best suits them, given their current life priorities. Some are interested in slightly unusual benefits or opportunities.
As workplaces become more diverse, employee needs and expectations become more diverse as well. Employers who recognise and respect those differences and needs in their approach to how they reward their staff will be at an advantage in terms of attracting and keeping the people they need.
Some employers are taking a broader approach to how they reward their people for working for them. Many realise that a total rewards package includes not only the salary or benefits provided but also the development opportunities and the work-life balance offered. This is not new, but to make the rewards really work in a diverse environment, understanding employee needs and flexibility are key.
Benefit flexibility
A few years ago, several of our client organisations were considering offering a menu of benefits, enabling their staff to pick and choose which particular benefits they were most interested in within a total package value. We followed up with them a year or so later to ask whether they had progressed with this innovative approach to managing their benefits offering. A number said they considered it too time-consuming and costly to develop1. One decided to make all benefits options available to all staff but had realised that many staff weren’t aware that this was the case.
We also explored with our clients, whether they were considering any benefits outside the box. Along with a range of initiatives such as pet leave and regular whānau events paid for by the organisation, one private sector organisation, whose strategy required them to improve collaboration amongst the creatives in the organisation to improve the bottom line, decided to provide a regular company paid lunch. Was this really a “benefit”? The idea of a group lunch was intended to improve communication and collaboration in order to improve the bottom line for the company. While the lunch had an ulterior motive, the organisation found that it also improved morale and overall engagement. The value to the employees (and ultimately the employer) was greater than the cost of the lunches.
These responses raise several questions around understanding the cost versus the value of what an employer is offering as part of the employment reward package. It also raises the issue that, to be effective, the benefit must not only be of value to employees, but they need to know about it.
We know that people are motivated by more than money and that the intrinsic reward we get from undertaking an activity (work or otherwise) is often more valuable to us as individuals than any direct or monetary return we might get.
The return on investment that organisations should therefore consider when considering whether a benefit or benefit programme is worth undertaking is more than just the monetary cost or even value.
There are some fundamental underlying concepts that organisations need to consider when assessing whether it is worthwhile investing money in something beyond employees’ pay packets. These could be presented in the format of a formula for assessing the return on investment (ROI) of the expenditure.
Cost is a critical consideration of the value of any rewards programme, so the obvious place to start is the cost to the employer. This could be denoted as $er
But what if we considered the intrinsic value of these rewards – the value to the employee? This could be denoted as Perceived Value to the Employee or: Vee
This raises the question: What do employees value?
Our discussions with employers provided some interesting conundrums. At the end of a financial year one organisation gave all its employees a $50 voucher to spend at a particular retailer. Unfortunately, as most of the products were well over $50 and many of the employees were paid close to the minimum wage, they had no discretionary income to top up to the value required to purchase anything from that retailer. Some employees felt unhappier about the organisation than they were before receiving the voucher.
This doesn’t mean that employers should stop recognition programmes, rather that it should be done with careful thought and an understanding of the employees needs and what they value.
Effect of communication
The final and key component is the power of communication on the perceptions of reward fairness.
A WorldatWorkii article on “Pay Fairness” looked at the factors that enhance perceptions of rewards fairness. “Communication” was listed in third place, after “external benchmarking”, and “rewards strategy and design”. However, “communication” tops the list of factors that erode the perception of the fairness of rewards. Rewards policies and practices perceived as unfair undermine employers’ ability to attract and retain staff and motivate performance. The increasing employee expectations in the current environment where pay information is readily available on social media, and with potential legislative requirements for pay transparency, mean that effectively communicating the value employees gain from working for the organisation is increasingly important.
The WorldatWork article noted that: “even if employers are using job evaluation, pay surveys and other methods to help ensure fairness in pay levels, employees may not be aware of this effort unless they are told”, thus losing the value of the benefit. On the other hand, however, the research also indicated that poor communication could undo any perception of fairness.
The research concluded that the extent to which employees considered the rewards package fair was both positively and negatively affected by communication. Effective communication greatly enhances the perceived value of the benefits provided while poor communication quickly erodes the value of the benefit itself.
The power of effective communication could be represented by ec2 in our formula, to capture this potential for both negative and positive impact on employee perceptions of fairness.
Putting these components together can be summarised in a formula that could be used, at a conceptual level at least, to consider the value of investing in rewards by capturing the impact of perceptions of fairness and value as well as the costs involved:
ROI =
The WorldAtWork research also noted that challenging economic times can adversely affect employee perceptions of reward fairness and equity. This increases the need for taking this aspect into account now. The study also identified that “female employees may develop perceptions of rewards fairness based on different criteria”. Given the persistent gender pay gap, the authors strongly suggest that: “perceptions as to what constitutes fairness with employees and between genders in particular should be examined”.
The authors of the McKinsey research on the future of jobs propose that a focus on productivity, rather than cost saving, will benefit organisations, employees and the economy, suggesting that the more value-add organisations create investing in talent and technology and sharing that with employees and customers, the better it is for the economy.
Taking a purely numerical approach to costing the benefits and rewards programmes overlooks the real value inherent in a total rewards approach to developing and valuing benefits. We know that having fully engaged employees is a key driver of organisational performance.
In a tight labour market, constrained economic conditions and changing employee expectations, organisations now more than ever need to consider the value as well as the cost of the total employee value proposition, and communicate this effectively. These studies indicate that organisations can enhance their rewards programme to become a real “total value employee proposition” by:
- taking a “total rewards” approach to their employee rewards package
- understanding the value rather than just the cost of benefits
- paying greater attention to the varied needs of employees when designing systems and programmes; by
- involving employees in the design of systems; and
- paying greater attention to communicating with employees the full value of rewards package.
Total Rewards is a strategic investment in your organisation’s most valuable asset – your people. Contact Strategic Pay today to discover how they can help you create a total reward framework that will enhance your workplace, enabling every individual to feel valued, recognised, and empowered to contribute fully and effectively.