From Total Rewards to Total Value Exchange: A Mandate to Engage Key Stakeholders in the Organization’s Vision, Mission, and Values
Originally published in the September 2014 issue of PSX: The Exchange for People Strategy.
Fewer than one in five companies say that its compensation, benefits, and rewards programs are meeting their objectives, according to research conducted by Grahall LLC. The not-surprising result: instead of motivating employees, the majority of rewards plans are ineffective and often counterproductive. How can you get better results from your firm’s compensation and benefits plan?
In an interview, Michael Graham, of Grahall LLC and Bruce Brownell of Fulcrum Partners LLC discuss how a Total Rewards Strategy ties employees’ success to the company’s success, unleashing a CEO’s most powerful tool: compensation and rewards. They suggest instead of thinking in terms of total rewards strategy, organizations need to consider the new concept of total value exchange strategy.
What is the difference between “Total Rewards” and total value exchange?
Graham: A Total Rewards approach means leveraging all the ways an organization has to reward its executives and employees. You start with the traditional monetary rewards (base salary, short- term incentives, long-term incentives, benefits and perquisites) then factor in nonfinancial rewards, such as culture, training, recognition, casual dress, flexible work schedules, elder care and such, and you get the idea. Total value exchange strategy is a holistic approach that is aligned with the company’s overall business and key stakeholder engagement strategy. Treating reward elements holistically made organizations more efficient in the last decade or two and sent more effective and much stronger messages about what’s expected of employees, but a total value exchange strategy communicates to all key stakeholders how they can exchange (and create mutual value) with an organization.
Brownell: When we implemented Total Rewards Strategies, we answered many employees’ most burning question, which was “What’s in it for me?” by aligning the success of the company with that of the employee. In a total value exchange strategy the organization needs to consider how not just the employee but how all stakeholders can create and exchange mutually beneficial value.
What’s the downside to not taking a holistic approach?
Brownell: The alternative to a holistic total value exchange strategy is to remain at the total rewards strategy level with a restricted, non-holistic, and scattered approach – dealing with one reward program at a time (which happens a lot because often compensation and benefits disciplines are separate areas of the company) and dealing with one key stakeholder (employees, for example) at a time. There are several downsides to this. First, individual programs aren’t integrated into the overall value exchange package and you can end up with elements that are out of balance. Second, costs can spiral out of control when you don’t look at each program in terms of its costs over the program’s life. Third, you run the risk of offering and paying for rewards that employees and other key stakeholders no longer value.
Graham: Historically we saw a tremendous number of organizations with a patchwork quilt of reward programs. These organizations haven’t taken away any reward components, and instead layered new programs on top of existing ones. The result is a confusing set of rewards that aren’t focused on driving desired business results. What we now see is that each major function within the organization treats key stakeholders as if there was now overlap in the sets. In other words customers can’t also be employees and even shareholders for instance.
What drives a company to move from a total rewards approach to a total value exchange approach?
Graham: More often than not, companies realize their stakeholders do in fact overlap and there is untapped value in treating them holistically. With a little bit more effort, compensation and rewards programs can be broadened into value exchange programs to motivate not only employees but all key stakeholders to accomplish the organization’s strategy and even vision. It’s typically a question of impact; they are not looking for a cost saving measure.
Rewards strategy and design has typically been the province of HR. Why should C-suite executives be involved in the increased scope from total rewards programs to total value exchange programs?
Graham: Primarily to unlock all of the return on the investment made across all of the different unconnected programs. For instance a Total Rewards program is the largest and one of the most manageable items on a company’s expense sheet. You can’t control the marketplace or the competitive landscape, but you have virtually 100% control over your rewards program. By asking human resources to work with sales, marketing and customer service on the value exchange between the organization and customers both functions will gain new insights and quite likely new returns on their historically separate endeavors. By asking human resources to work with shareholder relations there could be new and important insights for both functions. These two examples are just the beginning.
CEOs often complain that their new organization strategy doesn’t have any “traction” with employees. But the key is, you get what you pay for. If you value customer satisfaction, for example, then your rewards strategy needs to be designed around rewarding those behaviors that drive customer satisfaction and loyalty. Just as important, CEOs bring a different perspective to rewards decisions than HR executives. CEOs focus on driving business results. HR often has to focus on making things equitable among employees. But if total rewards are stretched to total value exchange and designed to communicate organizational exchanges, being equitable isn’t a main driver.
How important are non-cash value exchanges to today’s key stakeholders?
Graham: Actually take pay, for example, which is No. 8 on the list of employees’ motivators! While it’s true that most people work for a paycheck, base pay isn’t the biggest motivator. And think about it this way: cash is a commodity, so it can’t differentiate one organization from another. It is the intangibles that distinguish. Besides, when it comes to money, someone will always pay more. The opportunity lies in differentiating your organization with additional programs that are of value to all key stakeholders not just employee stakeholders.
Brownell: For example, we had a client that started out as a fast-growth company and was transitioning to an operationally focused company. We worked to change their compensation programs because their messages and corporate objectives changed. For them, the relative value of stock options decreased because executives were less interested in company stock and more interested in building wealth and diversification. So we devised a supplemental retirement plan that acted like a defined benefit plan, but was tied to long-term company performance metrics. We rotated them away from stock options and toward wealth building, which communicated that they were in it for the long haul and offered the diversification that executives wanted.
What metrics show whether or not a total value exchange strategy should be considered in place of a total rewards strategy and whether it is having the desired effect?
Graham: There is not a single measure, but in general, companies that use a total value exchange strategy for all key stakeholders in place of a total reward strategy for just employees typically have a higher return on investment. They get continual improvement in their stated objectives. It’s not because of the additional layer of strategy in a total value exchange strategy nor is it the inclusion of all key stakeholders (rather than just employees), but improvements result from the focus on essential organizational strategies and reinforcing behaviors that support these strategies. You can also see results in everything from employee attitude surveys (where employees view their leadership team as being well-organized and well-deployed) to customer and supplier satisfaction levels. Without a good total value exchange strategy, leaders tend to be more focused on just the contribution their own function can make to organizational performance.
How important is communication to a strong total value exchange strategy?
Brownell: Communication is key. You can’t stop delivering the message until the last key stakeholder is engaged. And as companies strive to be recognized as employers and organizations of choice, they need their employees and key stakeholders to really understand the value of all the value exchanges they offer.
Graham: Communication of the value exchange concept goes above and beyond the compensation and benefits programs. The communication has to demonstrate how the value exchange supports the accomplishment of organizational visions and organizational strategies which in turn helps to sustain the organization and enhance the value all key stakeholders can receive. Communications fall on deaf ears when they only contain the facts about the plan or organization strategy, that it’s good or that it’s competitive and not about the organization’s vision, mission, values and beliefs. Those aren’t “impact” messages.
If you don’t design all the value exchanges for all key stakeholders together to support the organization strategy, and you don’t communicate them all together in the context of the organization strategy, there’s no sizzle in the steak, no icing on the cake!
How critical is process to the overall success of a total value exchange strategy?
Graham: It’s not about the end of the journey; it’s about the journey itself. Process is extremely critical because the management team has to be in consensus about the value exchange program and it has to build consensus among all the critical stakeholders. These can include the board, key customers, partners, rank-and-file employees. The process should involve their input. If it reflects only the input from an outside consultant, it’s probably doomed to failure.
Should value exchange be tailored with different key stakeholders?
Brownell: Absolutely. What motivates a 30-year-old is different than what motivates a 50- or 60-year old. Also, value exchange plans for highly sought after employees should be very different than those for the general population. Employees that are customers, stakeholders and even champions or ambassadors need to be specific to the relationship.
Graham: This is really the heart of the issue. No two organizations deliver value in the exactly same way – some may be focused on the back end of the value chain, others may be more “customer focused”. They are each striving to accomplish different things. That’s why you need a surgical approach versus a “one size-fits-all” approach when you design a value exchange strategy.
How does a total value exchange approach differ from a one-off decision about total rewards or even compensation?
Brownell: Say a company needs to change its deferred compensation plan to comply with 409A regulations. You can make fixes to the program to solve that issue. A total rewards approach would look at what the deferred compensation plan is designed to provide in terms of the business strategy, how it is part of the overall compensation strategy and if it would be better to look at how you’re paying your executives overall. A total value exchange strategy might look at how these executives were also shareholders and customers of the organization. Most executives are also champions for the organization’s products and services.
What’s the typical shelf life for a total value exchange program?
Graham: There’s a rule of thumb that says if you go more than three to five years without looking at your organization’s strategies, results, environment, along with how well your rewards are working, you’re probably on the edge of insanity. If you don’t have or aren’t considering moving from a total rewards program for employees to a total value exchange program for all key stakeholders you are already losing ground to the competition.
Brownell: The greater the pace of change, the greater the need to update and enhance your reward plan to a total value exchange plan. And change takes many forms: What legislation is being enacted? Is the company going to move from growth to value? Has the organization recently become profitable, or will they have losses to carry forward for some time? Are they acquisitive or divesting unproductive business units? The bottom line is that you change from a rewards program to a value exchange program when the company’s goals, strategy and financial positions change or when you want to take advantage of the opportunity to manage the entire value exchange with the entire key stakeholders on a coordinated and therefore a higher return on the organization’s investments in this area.
Are there any latest trends in total value exchange programs?
Graham: Focusing on “trends” can be misleading because the vast majority of organizations aren’t doing what the elite, high-performing organizations are doing. How many Apples are there? That being said, I believe the important trends to interpret are the ones starting outside the areas of HR and compensation and benefits.
Take a trend like mass customization, which focuses on delivering personalization and customized solutions to a broad population at a mass production price. We’re realizing that one set of compensation and benefits resources are not effective to meet the needs for an entire employee population. What’s important for someone who’s single is different than what’s important for someone with a family, so you need to have programs that people can easily customize for their needs. Branding is another example. That’s a trend that started in the marketing world, but has huge implications for HR, because branding your rewards strategy is an effective way to communicate what your company stands for and its position in the marketplace.
Why should our readers consider implementing a total value exchange strategy?
Brownell: If organizations build their reward plans in silos, they’ll do a great job on individual programs, but to maximize all the tools they have to play with, they need an integrated approach. Think of a sailboat race. As the skipper, you can trim only one sail, and still make headway, but by trimming all the sails together, you are maximizing your speed. All organizations are in a race against their competitors, market trends, the business cycle, and so on. It should stand to reason that there needs to be a comprehensive and coordinated review in order to ensure they are not only the most cost effective and tax efficient suite of compensation and benefit plans but also that they facilitate the best overall value exchange between all key stakeholders and the organization.
Graham: I believe that total value exchange strategies are going to be the differentiator of great organizations versus good ones. It’s the most powerful way to motivate not only key employees to accomplish organizational results but to fully engage all key stakeholders in accomplishing the organization’s mission, vision, values and beliefs.
Bruce Brownell, of Fulcrum Partners, LLC can be reached at Bruce.Brownell@FulcrumPartnersLLC.com; Michael Dennis Graham of Grahall, LLC can be reached at Michael.Graham@Grahall.com.
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