18 May 2021
Strategic reward and total
reward
Outlines the main characteristics of strategic and total reward, and looks at designing and
implementing a reward strategy across the organisation
Introduction
Strategic reward takes a long-term approach to how an organisation’s reward policies and
practices can balance and support the needs of both the organisation and its employees.
The concept of ‘total’ reward covers all aspects of work that people value, both tangible
and intangible, and may form part of an overall reward strategy.
This factsheet explores the various aspects of designing and developing a reward
strategy, from rationale to implementation and gives guidance on the principles to
consider. It introduces the various characteristics of total reward (including the elements
they may include), before looking at the approaches available, and the advantages and
drawbacks of total reward.
What are strategic reward and total reward?
Strategic reward is based on the design and implementation of reward policies and
practices that support and advance both the organisation’s business and people
objectives and employee aspirations.
Total reward covers all aspects of work that are valued by people, including elements
such as development opportunities, being rewarded fairly and flexible working, in addition
to the pay and benefits package. Total reward has implications for cultural change as it
can focus in part on employee empowerment.
Links between strategic and total reward
Total reward may form part of a strategic approach to reward for many employers. For
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example, an organisation might adopt a total reward approach, providing cutting edge
learning programmes together with flexible working options, as well as more traditional
aspects of pay and benefits, to recruit, retain and engage the staff it needs to secure its
business objectives.
The ability to design and implement a reward strategy and a total reward approach is an
important aspect of a people professional’s role and it forms part of our Profession Map.
Reward strategy in the time of coronavirus
Our 2021 Reward management survey explores the impact that COVID-19 has been having
on pay and benefits. It finds limited change to how pay and benefits are managed, with
most changes that have been made being temporary. There has been more of an impact
on pay increase decisions, with salary rises in 2020 being delayed or frozen, while those in
2021 are being targeted at specific employee groups rather than covering all staff as was
the case in 2020.
There’s more on what employers should be doing in our Responding to the coronavirus
hub.
The role of strategic reward
Developing a reward strategy
Deploying strategic reward approaches often involves setting out a formal, written reward
strategy, although it’s also possible to adopt a strategic approach without the use of such
a document.
Content of reward strategies
In his Handbook of reward management practice, Michael Armstrong observed that
‘reward strategies are diverse and so is the structure used by different organisations to
define and present them’. However, strategies typically include:
A statement of proposed reward developments.
A rationale setting out the case for the reward proposals.
A definition of guiding principles.
An implementation plan.
While different approaches to strategic pay exist, the kinds of principles to consider
include:
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Design pay structures and pay progression arrangements that ensure the values,
behaviours, performances and attitudes the business needs to be successful are
rewarded and recognised (for example, linking individual pay progression with those
types of performance that are valued by the business, such as customer focus).
Position variable earnings carefully against basic pay to encourage appropriate
employee performances (for instance, using cash bonuses to drive higher sales
levels while also taking account of corporate governance standards, risk and
opportunity management and brand trust).
Develop a pay policy that’s competitive with the external labour market to recruit
and retain the key people needed for business success (for instance, paying certain
high-performing staff at the upper quartile level when compared with the external
labour market) while also taking into account internal market relativities.
Ensure both ‘vertical’ integration of employee reward approaches with business
goals (such as developing performance-related pay arrangements to help increase
revenues) as well as ‘horizontal’ integration of reward policy with wider HR policies
(for example, ensuring that pay progression arrangements are aligned with an
organisation’s culture, purpose and mission as well as external factors, such as
regulation).
Ensure reward decisions are fair, that processes and outcomes are transparent, and
that actions are reviewed to check they have been implemented as intended.
For more on how reward strategies can be supported, see our factsheets on pay
structures and pay progression, pay fairness and pay reporting, performance-related pay,
bonuses and incentives and job evaluation and market pricing.
Putting strategic reward into practice
Although strategic reward – at its simplest, using reward policy to support long-term
sustainable business goals – is often taken for granted as desirable, some commentators
have highlighted difficulties in translating the theory into organisational practice. One
view concludes that attempts to use strategic pay systems are especially problematic for
‘a frustrated and often much maligned pay function and long-suffering line management’
and that employers might be better served taking a risk management, rather than a
strategic, approach to reward.
However, the adoption of strategic and risk-based approaches to reward aren’t
necessarily mutually exclusive. There’s more on both approaches to managing reward in
our guide to the pay review process.
For more detailed information on risk management approaches to reward, see our
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Reward risks report.
Approaches to total reward
By recognising that pay isn’t the sole motivator and acknowledging the importance of not
only tangible and intangible rewards within the wider context of the work experience, total
reward has wide-reaching workplace implications.
As a concept, total reward is not new. As with many management trends, the
development originally came from the USA (where the description ‘total rewards’ is
generally used).
What is included in total reward?
The US organisation WorldatWork has identified six separate components of the work
experience in addition to pay and benefits:
Performance and recognition.
Work/life balance.
Organisational culture.
Employee development and career opportunities.
Business strategy.
Human resource strategy.
Although these components have always existed in the workplace, they’ve often been
taken for granted and managed in isolation. Under a total reward approach, all aspects of
the work experience are recognised, and prominence is given not only to remuneration
but also to non-financial rewards. This is important since experience shows that
employees place great emphasis on intangible rewards when deciding where to work and
the level of commitment to give to their job.
Total reward may include some, or all, of the following elements as well as traditional
elements of pay and benefits packages:
Flexible benefits.
Access to professional and career development.
Meaningful work.
Freedom and autonomy.
Opportunity for personal growth.
Being treated fairly.
Recognition of achievements.
Transparency in reward processes and outcomes.
Able to raise matters of concern.
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Involvement in decisions that affect the way work is done.
Flexible working options, including homeworking.
Supportive line managers.
The term total reward can also be used in a more limited way simply to refer to the
financial value of the pay and benefits package rather than the value of the total package
of financial and non-financial rewards.
Characteristics
An analysis of various total reward models by Thompson in Total reward, a 2002 CIPD
Executive briefing, found that they can be characterised by an approach that is:
Holistic: it focuses on how employers attract, retain and engage people to
contribute to organisational success using a mix of cash and non-financial rewards.
Best fit: it adopts a contingency approach – total reward programmes need to be
tailored to the organisation’s own culture, structure, work process and business
objectives.
Integrative: it delivers innovative rewards that are integrated with other people
management policies and practices, such as performance management.
Strategic: it aligns all aspects of reward to business strategy – total reward is driven
by business needs and rewards the business activities, employee behaviour and
values that support strategic goals and objectives.
People-centred: it recognises that people are a key source of sustainable
competitive advantage and begins by focusing on what they value in the total work
environment.
Customised: it identifies a flexible mix of rewards that offers choice and is better
designed to meet employees’ needs, their lifestyle and career stage.
Distinctive: it uses a complex and diverse set of rewards to create a powerful and
unique employer brand that serves to differentiate the organisation from its rivals.
Evolutionary: it’s a long-term approach based on incremental rather than on
radical change.
Coverage
While private sector employers have tended to be at the forefront of the formal
development and adoption of total reward policies, there has been interest in the
approach among public sector organisations.
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To take one example of heightened interest in total reward in the public sector, there has
in recent years been a focus on the non-basic pay advantages of working in the sector,
such as high-quality pensions and work-life balance provisions, among the public sector
pay review bodies (which recommend pay rises for several groups of public sector
workers such as medical staff, teachers and defence staff).
Advantages and drawbacks of total reward
Advantages
These can include:
Helping to attract, retain and motivate employees.
Meeting both employee needs and organisation priorities.
Enhancing the reputation of an organisation as an employer of choice through its
capacity to place a value on the wider non-financial benefits of working for an
organisation.
Helping the employer better communicate its employee value proposition. Many
employees are unaware of the costs to the employer of benefits, such as pensions,
which can be very substantial. To overcome this, employers frequently provide
individual employees with total reward statements that emphasise the value not
only of basic pay but also the wider benefits package and potentially other congenial
aspects of employment
Drawbacks
Research from our Reward management surveys indicates that employers believe they’re
better at integrating financial aspects (pay and benefits) into a total reward approach
than the non-financial aspects. An area of concern revealed by the research is line
manager behaviour, with employers expressing concern at how well they’ve integrated
the behaviour of these staff within a total reward approach. Yet, if line managers don’t
support the organisation’s commitment to total reward (for example, over family-friendly
working patterns) the approach is likely to fail.
Other potential challenges include:
Some rewards are easier to provide than others. For example, most employees
might prefer a desk located by a window, but office accommodation is a finite and
not particularly flexible resource. In such cases, it would often be very difficult to
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meet everyone’s needs.
Attempting to measure or weigh the value of certain reward against one another –
particularly if the aim is to include a numerical or tangible value in total reward
statements distributed to employees. Employees can be confused by too much
reward information and choice.
The need to educate staff by communicating the value of the reward package and
what the strategy aims to achieve.
The danger that the organisation defines the total reward offering with no regard to
the needs and wants of its staff.
The temptation for employers to shift the reward mix from pay to lower-cost
benefits and non-financial rewards.
Cynicism among some employees that total reward is no more than camouflage for
a cost-cutting strategy.
Furthermore, our book Reward management: alternatives, consequences and contexts
notes that there’s been a lack of evidence to suggest that this approach improves
employee engagement, productivity or wellbeing. The authors flag that this may be about
to change though, citing research looking at the positive impact it can have in
recruitment.
Useful contacts and further reading
Contacts
Reward & Employee Benefits Association
IBEA: The International European Benefits Association
Books and reports
ARMSTRONG, M. (2019) Armstrong’s handbook of reward management practice:
improving performance through reward. 6th ed. London: Kogan Page.
PERKINS, S.J. and WHITE, G. (2020) Reward management: alternatives, consequences and
contexts. 4th ed. London: Chartered Institute of Personnel and Development.
ROSE, M. (2018) Reward management: a practical introduction. 2nd ed. HR Fundamentals.
London: CIPD and Kogan Page.
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Visit the CIPD and Kogan Page Bookshop to see all our priced publications currently in
print.
Journal articles
BROWN, D. (2014) The future of reward management: from total reward strategies to
smart rewards. Compensation and Benefits Review. Vol 46, No 3, May/June. pp147-151.
CHURCHILL, F. (2020) More than half of reward strategies not fit for remote workforces,
survey suggests. People Management (online). 19 November.
DAY, N. (2019) How well do pay and nonfinancial rewards attract applicants to jobs? World
at Work Journal. Vol 28, 1st quarter. Reviewed in In a Nutshell, issue 85.
FARRAND, L. (2016) Put the scores up on the board: a total reward strategy will enable
employees to see the full value of their package. Employee Benefits. May. pp18-19.
KUCZMARSKI, S. and KUCZMARSKI, T. (2019) How rewards fuel or fail innovation. Strategic
HR Review. Vol 18, No 1. pp8-12.
WHITEHOUSE, E. (2020) How will reward strategies change after Covid? People
Management (online). 4 June.
CIPD members can use our online journals to find articles from over 300 journal titles
relevant to HR.
Members and People Management subscribers can see articles on the People
Management website.
This factsheet was last updated by Charles Cotton.
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