Global Employer Rewards

oÉï~êÇë qê~åëÑçêã~íáçåW
Turning total rewards from a
cost into an investment
péÉÅíêìã
Few business expenditures are more significant than total rewards. The cost of total
rewards can often exceed 40% of a company's revenue. In addition to wages and salaries,
indirect rewards such as health and retirement benefits, training and development programs,
and paid leave can account for about 30% of the total cost.1 Relatively small changes in a
company's total rewards budget can have a disproportionate impact on earnings. The impact
Spanning the realm can be seen through simple arithmetic, but we believe that small changes in total rewards

of business issues can have a major impact upon employee motivation and productivity, which also can have
a major effect on earnings.
and solutions Despite the relationship between rewards, employee motivation, and corporate earnings,
our experience shows that few companies believe they have the tools to determine the
return on their investment in total rewards programs (see Exhibit 1).2 Without effective tools
to understand how total rewards fuel "upside" business results, both direct and indirect
rewards expenditures are typically perceived by management as essentially a cost of doing
business, rather than as an engine of future earnings potential.

Total rewards ROI still an enigma

Exhibit 1. How effective are your current tools and methodologies in helping you
determine the return on investment for your total rewards programs? (N=123)
4%

25%

26%

45%

Very effective – we are able to immediately gauge the impact of changes to our reward programs

Somewhat effective – we can assess the impact, but there are noticeable gaps

Minimally effective – there are significant gaps in our ability to measure our programs’ impact

Ineffective – our programs are more reactive than proactive with regard to the needs of our
company and employees

Source: "2006 Employee Rewards Survey: The Next Generation," Deloitte Development LLC 2006.

As used in this document, the term "Deloitte" includes

Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte
Tax LLP, and Deloitte Financial Advisory Services LLP.
1
How can employers gain confidence that
their total rewards programs are really
contributing to business value? In very broad
terms, we believe this can be accomplished
by viewing one critical driver of rewards as
an employer-employee "total rewards market-
place" − one in which employees "trade"
their time and talent for the total rewards the
employer offers, and in which the employer
designs total rewards "products" that will
elicit the desired results from their employee
"consumers." By understanding the dynamics
of its own total rewards marketplace, an
employer can better assess the impact of total
rewards on business value and focus its total
rewards investment on those programs that
have a higher likelihood of driving the desired
return.
The total rewards marketplace
Placing the emphasis on a company's own
total rewards marketplace rather than on peer
benchmarks and other external reference data
can be a major change to many companies'
current approaches to rewards design. In a
recent survey by Deloitte's Global Employer
Rewards practice, more than half of the HR
professionals surveyed said that their primary
approach for setting pay levels was to provide
rewards at a certain percentile of defined
industry benchmarks, and 89 percent consid-
ered benchmarking one of the three most
important approaches used in setting pay levels.3
But no matter how valuable benchmarks can
be for understanding the types of rewards
Traditional vs. transformed rewards
Traditional Rewards
• Benchmark-driven − focused on
what others do
• Narrowly defined − compensation
and benefits
• Employer paternalism
• Viewed as a cost with uncertain ROI
other organizations are offering, they say
nothing about how to align one's own total
rewards programs with corporate strategy.
A benchmarking study can identify industry
pay ranges, but it can't tell an employer
where in that range it should seek to fall to
effectively support the company's business
goals. Benchmarking studies may suggest
that offering certain programs is a "leading
practice," but they can't tell an employer
how much value its own people place on
such a plan.
What can give an employer this vital informa-
tion, we believe, is an integrated approach
to understanding the company's strategic
goals, the talent needed to achieve them,
and the total rewards elements most likely
to be effective in attracting, retaining, and
engaging that talent. Based on that under-
standing, an employer can tailor its total
Transformed Rewards
• Internally driven − focused on what
you need
• Broadly defined − “total rewards” include
everything about the work experience
that affect an employee’s commitment
and contribution to business value
• Employer-employee partnership
• Treated as an investment with
measurable results
rewards programs to the specific needs of
its unique corporate strategy and employee
population, thereby making a tighter connec-
tion between its total rewards programs and
the company's business goals.
This approach, it should be pointed out,
does not ignore the external marketplace.
Rather, it reflects that marketplace through
the perceptions of the employees themselves.
These perceptions, more than the external
marketplace in itself, are what influence
employees' actions, and tapping into
employees' perceptions can give employers
the primary data needed to inform effective
total rewards designs. As the only justification
for benchmarking is to adjust total rewards
relative to the level that employees believe
they would earn elsewhere, benchmark data
is actually a relatively inefficient proxy for
the real thing.

Why transform rewards?

Many employers' reward structures were established in an economy very different from today's. Deloitte has found that old approaches
to rewards are leaving new challenges unaddressed and potential new opportunities on the table. For instance:

• In 2008, the first members of the Baby Boom generation will turn 62 (the average retirement age in North America, Europe, and
Asia), marking the start of a potentially severe, demographically driven drain of essential skills from the workforce.

• The global economy applies new competitive stresses on employers. Especially in the U.S., employers take on social responsibilities
that are handled in other countries by governments or family structures − or, in the case of some global competitors, simply not
handled at all. In this global context, how can employers make total rewards something other than a competitive burden?

• As the growing cost of benefits changes the proportion of total compensation allocated to benefits, employees' interests in how
their rewards are structured − that is, how much of their compensation they receive in the form of cash versus health, retirement,
and other benefits − start to diverge along economic, social, and demographic lines. The increasing divergence in employee interests
makes it more difficult for employers to address the needs of its total workforce with one-size-fits-all rewards designs.

• Security for employees now comes not from a sustained employer-employee relationship, but in the form of portable value: transfer-
able skills, retirement accounts, health spending accounts, and so on. How can employers make this work for them?

• Modern HR administrative models and systems are increasingly able to handle complex benefits arrangements (e.g., retirement choice
programs), opening new possibilities for managing complex total rewards programs in a cost-effective manner. How can employers
take advantage of these technologies to improve, not just HR efficiency, but the effectiveness of their total rewards programs?

As used in this document, the term "Deloitte" includes

Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte
Tax LLP, and Deloitte Financial Advisory Services LLP.
2
Of course, it's important to make sure
that total rewards decisions are based on
actual perceptions rather than "wish lists."
The effectiveness of the approach will
depend upon sound analysis facilitated by
some of today's leading interactive technolo-
gy. Such results can be validated by bench-
mark data, but not restricted by it, especially
if the employer has reason to believe that
deviating from so-called leading practices
would yield a better ROI.
Understanding the total
rewards consumer
To understand its employees’ views on total
rewards, employers can use the same tech-
niques that a retail business may use to
understand its targeted customers’ buying
habits. Before introducing a new product,
Exhibit 8. Which procedures do you use to gather information from your employees
Exhibit 2. Which procedures do you use to gather information from your employees on
on their views and preferences about their rewards? Check all that apply. (N=117)
their views and preferences about their rewards? Check all that apply. (N=117)
2%
1%
13%
21%
10%
22%
0% 10% 20%
Survey, once a year or less often
Think business, not benchmarks
Changes in the business environment can make last year's benchmarks irrelevant to
this year's rewards concerns. At one company that had just completed its first year
of compliance activities under the Sarbanes-Oxley Act, the executive team wanted to
establish behavior-based incentives for the internal audit staff to encourage them to
support the company's Sarbanes-Oxley compliance efforts in future years. The head
of HR, however, was reluctant to implement these incentives because a benchmarking
study had shown that very few companies used behavior-based incentives for their
internal audit employees. It was only after the head of HR realized that the benchmark
results reflected pre-Sarbanes-Oxley reward practices that the internal audit incentive
structure was adopted.
a retailer is likely to conduct extensive be among both existing and potential
market research to study its prospective new customers, what changes might
customers' preferences. Through repeated make it more appealing, and how to price
surveys and focus groups, the company it appropriately.
can learn how popular the product might
Now consider the potential advantages
an employer could gain by making a
comparable effort to understand its
employees' "buying habits" with respect
to total rewards. Our experience suggests
56% that different total rewards elements − base
pay, bonuses, health and welfare benefits,
and "intangibles" such as training programs
and career opportunities − all influence
employees' choices of where to work and
49%
how much discretionary effort to expend.
The more fully an employer can understand
how its employees are likely to react to
various aspects of total rewards, the more
effectively it can design programs that help
motivate the right performance. And the
same tools that companies use to measure
their external consumers − surveys, focus
30% 40% 50% 60% groups, etc. − can help an employer make
On-boarding interviews
better total rewards decisions.

Survey, every six months Focus groups Many companies do, of course, collect
(approximately)
Other some of this information from their
Survey, monthly
Not applicable – we do not gather employees, as illustrated in Exhibit 2.3
Exit interviews information from our employees Yet recent evidence suggests that many
on their views and preferences
about their rewards employers do not necessarily come to
Source: "2006 Employee Rewards Survey: The Next Generation," Deloitte Development LLC 2006. the same conclusions as their employees.
For example, according to the 2005 Job
Satisfaction Survey by the Society for
Exhibit 3. Top Five Job-Satisfaction Factors Human Resource Management (SHRM),
Rank According to Employees According to HR Professionals HR professionals and employees disagreed
about the relative importance of all of the
1 Benefits Relationship with supervisor top five factors important to job satisfaction
2 Compensation Recognition of performance (Exhibit 3).4
3 Work/life balance Communication
4 Job security Compensation
5 Feeling safe in the work environment Benefits

Source: "2005 Job Satisfaction Survey," Society for Human Resource Management (SHRM), cited in Margaret M. Clark,
"Employees, HR Differ on Satisfaction Factors," HR Magazine, August 2005.

As used in this document, the term "Deloitte" includes

Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte
Tax LLP, and Deloitte Financial Advisory Services LLP.
3
 of the many existing touch points between
Ask the right questions employer and employee − open enrollment,
performance reviews, benefits inquiries,
A Rewards Dialogue survey, like a market research tool, would ask focused questions even brief pauses at work − as well as more
about employees' total rewards preferences. The answers could then be used to guide formal survey efforts to maintain an ongoing
particular aspects of a company's total rewards policy and programs. Deloitte’s Rewards flow of information. Employers would close
Dialogue approach explores subjects such as: the loop regularly with communications to
manage employees' expectations and keep
• How do you see your future career with us? them informed of changes to their rewards,
along with the reasons for those changes
• Which items do you value as "rewards" from employment?
insofar as they can be disclosed.
• Among those items, which is most important to your decision to stay here?
• What are your preferences among various benefits and cash? By keeping employers in continuous touch
with employees' views on total rewards,
• Is your satisfaction with rewards greater or less than last time we asked? By how much?
Rewards Dialogue can help an employer
• How do you expect your rewards to progress through your career? understand its workforce's changing prefer-
ences and develop programs that are both
tailored to employees' current needs and
flexible enough to respond to employee
We believe that closing the gap between We advocate a more extensive "Rewards
feedback without major redesigns. Building
employers' perceptions of employees' views Dialogue" between employers and employ-
in such flexibility is key to striking a work-
and the actual state of the internal total ees, a kind of continuous feedback loop in
able balance between responsiveness and
rewards marketplace requires a much more which an employer would regularly reach
stability. It may not be practical for an
rigorous, scientific, and intensive approach out to its employees for their views about
employer to make the changes to its total
than the traditional annual survey. Many total rewards while responding to them
rewards programs to keep current with the
times, employee surveys tend to contain to demonstrate that it is listening in a
latest employee feedback. But with Rewards
biases, make unconscious assumptions, and meaningful way. This outreach would take
Dialogue, an employer can keep an eye on
miss the integrated picture. Also, a relatively place often enough for the employer to
emerging trends and plan ahead to meet
infrequent survey does not permit manage- spot trends in employees' responses over
anticipated needs, as well as create a total
ment enough ongoing contact to improve the time. Instead of conducting surveys once a
rewards structure with the inherent flexibility
survey's questioning in the light of responses year or less often, as many employers now
to respond to a fluid environment.
previously received. do, Rewards Dialogue might take advantage

How dialogue can drive more effective total rewards investments

One employer, a mid-sized U.S. hospital, saw the need to align its total rewards programs to support a challenging new business strategy
in an effort to help improve the hospital's competitiveness and support its plans for future growth. HR and executive leaders understood
the value of securing employee feedback and opinions, and they used a combination of interviews, focus groups, and surveys to explore
their employees' attitudes toward their total rewards and the organization. Among their findings and subsequent actions:

• The hospital's spending on certain health and welfare benefits measurably exceeded the subjective value to employees without
generating a corresponding return to the hospital in employee commitment. Management scaled back these benefits and reinvested
the money saved to enhance their training and career development programs, which more directly supported the hospital's strategic
plan. Ultimately, they believe these investments will benefit both the employees and the hospital.

• The hospital's spending and approach to disability coverage was also mismatched to employee and employer needs. Through a
combination of illness banks and voluntary disability insurance, long-tenured employees had more protection than they could use,
creating a perception of "phantom value." Newer employees, on the other hand, either faced burdensome costs or lacked protection
in the event of disability. By restructuring the program, the hospital was able to provide universal disability protection, which improved
their attractiveness to experienced new hires while saving money for both the hospital and employees.

• Management and nurses agreed that it was important for top-performing nurses to provide direct patient care. However, the lack of
a career path for bedside nurses worked against this objective. In response, the hospital deployed a task force, including several nurses,
to design a career ladder program to provide an opportunity for nurses to earn recognition and advance their careers without having
to leave patient care and move into management positions.

As used in this document, the term "Deloitte" includes

Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte
Tax LLP, and Deloitte Financial Advisory Services LLP.
4
Focusing the total rewards
investment Exhibit 4. Has your company defined its critical workforce segments (e.g., segments that
have the greatest impact on the value chain, possess the skills that are most difficult to
replace, and/or are currently in the shortest supply)? (N=123)
A key challenge in designing total rewards
programs is managing the trade-off between
satisfying employees' rewards preferences 18%
20%
on the one hand, and working with limited
resources on the other. Few employers are
likely to have the resources to create pro-
grams that suit the preferences of all of its
employees. Given these resource constraints,
we suggest that employers can further
boost the total returns by focusing on
incorporating total rewards elements that 22%
increase commitment among "critical work-
force segments" − employee groups whose
retention and motivation are highly important
to a company's efforts to achieve its financial 41%

objectives. These are the people a company

can least afford to lose, whether outright to
a competitor or indirectly through a lack of Yes, we have explicitly defined them

commitment, effort, and productivity. Because Yes, but the definitions are somewhat implicit and not widely understood
of their relatively greater leverage, it is their No, but we’re considering doing so
views that will most influence an employer No
focused on greater ROI.
Note: percentages do not total 100% due to rounding.
There are obvious sensitivities around desig-
nating certain employee groups as more
"critical" than others. However, the term
If you answered "yes" to the above, have you identified specific needs/desires of these
"critical workforce segment" should be
critical workforce segments in terms of rewards programs? (n=74)
understood in its specific context of impact
on corporate earnings, not as a broad value
judgment. A workforce segment is critical 5%
to the extent that its work directly affects
business value creation, its people are 22%

difficult and/or expensive to replace, and

its skills are in high internal or external
demand. Different workforce segments,
therefore, may become more or less critical
as the business strategy and the external 38%
environment change over time. Which areas
are in need of immediate or long-term
growth? Where would turnover or attrition
be most harmful to the business plan?
Where do talent, experience, and/or training
35%
have the greatest impact on business results?
These and other strategic considerations will
influence which workforce segments are
considered critical at any given time. No

Many employers already segment their work-
force to some degree, managing whatever
sensitivities may arise in order to take advan-
tage of this talent management tool. In our
Not really, we are more likely to view our workforce as a whole or segmented
differently (e.g., by level, region, etc.)
Yes, they receive significant consideration in program design
Yes, we proactively design rewards programs to meet their needs

recent survey of HR executives, see Exhibit 4,

61 percent said that their organizations
defined their critical workforce segments Source: "2006 Employee Rewards Survey: The Next Generation," Deloitte Development LLC 2006.
either explicitly or implicitly. Moreover, 22
percent of these said that they proactively
design rewards programs to meet critical
workforce segments' needs, and a further
35 percent said that critical workforce
segments receive significant consideration
in program design.5
As used in this document, the term "Deloitte" includes
Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte
Tax LLP, and Deloitte Financial Advisory Services LLP.
5
Importantly, designing total rewards with The case for Rewards Contacts
an eye to critical workforce segments'
needs does not mean that this comes at
Transformation
the expense of a company's other, "core" With critical workforce segments defined Tim Phoenix
employees. The Rewards Transformation and Rewards Dialogue in place, an employer Principal, Deloitte Consulting LLP
approach to differentiation applies only to can better monitor the value generated by 512-226-4272
rewards design, not to rewards magnitude. its investment in total rewards programs tphoenix@deloitte.com
Critical workforce segments may not neces- and the specific impact of those programs
sarily receive more total rewards than others, on its employees. The workings of the Joseph Rosalie
but they should have relatively more influence internal total rewards marketplace can Principal, Deloitte Consulting LLP
over the nature and design of the company's become more clear, and the employer 212-618-4734
incentive programs, the configuration of its can better fine-tune its investment in that jrosalie@deloitte.com
benefits programs, and other aspects of the marketplace to support its business goals
company's total rewards designs. as they may evolve. Instead of a cost to
be controlled, total rewards can become
We're also not suggesting that employers
an investment to be managed for greater
should unquestioningly offer a "rising tide"
business value − a true "transformation"
of rewards that lifts all employees to the
that recognizes the consumer-driven nature
level of the segments with the most leverage.
of total rewards.
Rather, an employer's "baseline" total
rewards programs should treat critical and
References
core workforce preferences as one of many
important factors, including the company's 1 "Employer costs for employee compensa-
cost and risk constraints, to consider in tion − September 2005," U.S. Department
program design. It's also possible that many of Labor, December 2005.
of the total rewards factors valued by critical 2 "2006 Employee Rewards Survey: The
workforce segments will include "intangibles" Next Generation," Deloitte Development
such as mentoring, career planning, and LLC 2006.
flexibility, which can be offered to the wider 3 Supra, fn. 2.
employee population without necessarily
4 "2005 Job Satisfaction Survey," Society
incurring prohibitive costs.
for Human Resource Management (SHRM),
cited in Margaret M. Clark, "Employees,
HR Differ on Satisfaction Factors," HR
Magazine, August 2005.
5 Supra, fn. 2.

About This Publication

This publication contains general information only and Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial
Advisory Services LLP are not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or other profession-
al advice or services. This publication is not a substitute for such professional advice or services, nor should it be used as a basis for any decision
or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a
qualified professional advisor.

Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, Deloitte Financial Advisory Services LLP, their affiliates and related entities shall
not be responsible for any loss sustained by any person who relies on this publication.

About Deloitte

Deloitte refers to one or more of Deloitte Touche Tohmatsu, a Swiss Verein, its member firms and their respective subsidiaries and affiliates.
Deloitte Touche Tohmatsu is an organization of member firms around the world devoted to excellence in providing professional services and
advice, focused on client service through a global strategy executed locally in nearly 150 countries. With access to the deep intellectual capital
of 120,000 people worldwide, Deloitte delivers services in four professional areas, audit, tax, consulting and financial advisory services, and
serves more than one-half of the world's largest companies, as well as large national enterprises, public institutions, locally important clients,
and successful, fast-growing global growth companies. Services are not provided by the Deloitte Touche Tohmatsu Verein and, for regulatory
and other reasons, certain member firms do not provide services in all four professional areas.

As a Swiss Verein (association), neither Deloitte Touche Tohmatsu nor any of its member firms has any liability for each other's acts or omissions.
Each of the member firms is a separate and independent legal entity operating under the names "Deloitte", "Deloitte & Touche", "Deloitte
Touche Tohmatsu" or other related names.

In the US, Deloitte & Touche USA LLP is the US member firm of Deloitte Touche Tohmatsu and services are provided by the subsidiaries of
Deloitte & Touche USA LLP (Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Financial Advisory Services LLP, Deloitte Tax LLP and their
subsidiaries), and not by Deloitte & Touche USA LLP. The subsidiaries of the US member firm are among the nation's leading professional
services firms, providing audit, tax, consulting and financial advisory services through nearly 30,000 people in more than 80 cities. Known
as employers of choice for innovative human resources programs, they are dedicated to helping their clients and their people excel. For more
information, please visit the US member firm's web site at www.deloitte.com/us.

As used in this document, the term "Deloitte" includes Deloitte & Touche LLP, Deloitte Consulting LLP, Deloitte Tax LLP, and Deloitte Financial
Advisory Services LLP.
Member of
Copyright © 2006 Deloitte Development LLC. All rights reserved. Deloitte Touche Tohmatsu