Benefits and Compensation

Total Rewards vs. Total Compensation: Are You Muddling the Two?

A total rewards framework is a comprehensive way of looking at how employers pay their employees. It is now finding its way into the thinking of compensation and human resources professionals at more and more companies.

Some of the business drivers for this shift in compensation philosophy are:

  • The need to unify distinct cultures (such as different cultures that come together in a merger or acquisition, or people from different societal cultures around the world working together as companies become more global);
  • The urgency to attract the best people in a tight labor market;
  • The need to deliver exceptional value to customers (which may require having employees more keenly focused on business success); and
  • The need to manage costs to sustain business momentum.

Don’t Confuse “Total Rewards” with “Total Compensation”

Susan Deller, a principal with Eckler Ltd. who specializes in benefits communications consulting, notes that there is often confusion between the concepts of “total rewards” and “total compensation.” Writing recently on, she says:

A total compensation approach focuses on the financial rewards of the employment deal. These are the tangibles—they can be measured and added together to give a dollar value …. On the other hand, total rewards present a more inclusive perspective [to encompass] the intangibles that are often the most critical factor in driving performance.

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The intangibles, as Deller notes—such as your workplace culture, quality of life, and work-life flexibility—can be key to attracting and retaining the best talent (and, ironically, at a fraction of the cost of more traditional compensation increases).

Building Commitment

Employee commitment may be more effectively nurtured through great jobs that encourage high performance and pay that rewards performance rather than through “golden handcuffs” such as retention bonuses or stock options.

Towers Watson research indicates that “top performing companies build loyalty to an employee the same way a consumer brand builds loyalty to a product.”

In other words, you need to consider your Employee Value Proposition (EVP), which “includes the entire employee ‘experience’ from their rewards and benefits, to the opportunity for career development and also the more intrinsic elements of management style, work environment, and culture.”

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The Question of Benefits

How to best structure benefits is also an important—and hotly contested—issue within the total rewards framework.

In the past, many organizations tried to use benefits to distinguish their company as an “employer of choice” in what clearly has become a race to attract the best employees.

Nowadays, however, there is evidence of a growing trend toward placing less emphasis on benefits packages in recruitment. If a median level of certain benefits (such as health care and retirement) will do just as well as above average benefits in attracting the right workforce, then resources can be used in another part of the total rewards package.

No matter where you fall within the debate on benefits, you may want to consider looking at benefits in the broader context of total rewards. (You would, by necessity, have to know whether healthcare or retirement benefits were important to the population you were trying to attract, and whether having better-than-average benefits would be a significant issue to this population.)

Tomorrow, we’ll give you a nontraditional reward assessment checklist, so you can benchmark how your organization is doing in this area.