With the unexpected alterations that have occurred in the North American
economy over the past year, managing costs has become a critical concern in many
industries. Yet, the need to attract and retain the right people has never been
greater. As a result, the allocation of compensation dollars must not only
support the organization’s business direction, it must be perceived as
valuable by employees. To satisfy both objectives, it is important to consider
costs and cost-control potential with respect to both the intrinsic and extrinsic
components of total rewards programs (see Figure 1 below).
Unfortunately, due to the myopic belief that money will solve all attraction,
retention and motivation problems, many organizations tend to focus exclusively
on the extrinsic side. This was particularly true during the dynamic employee
markets of the late 1990s. However, the effective management of the intrinsic
aspects of compensation in the total reward scheme determines whether employees
feel they are undergoing a positive or negative work experience. As a result,
financial rewards may not have to be as generous if intrinsic rewards are
appropriately managed. Intrinsic rewards can also enhance the stature of a
company as an employer of choice.
Within the total rewards framework, specific activities for controlling extrinsic
- ensuring that total compensation reflects the marketplace from which the
talent base is sourced,
- reducing or eliminating non-essential or valued perks and benefits but
clearly communicating the impact,
- shifting base pay to variable pay opportunities and extending variable pay
further into the organization,
- eliminating merit-based adjustments for under-performers and reducing
merit-pay budgets overall while increasing budgets for variable components
that are contingent on performance,
- providing lump-sum payments in lieu of salary increases to those who are
already at market and are performing at a competent level,
- developing low cost/high impact recognition initiatives as a way of
maintaining employee satisfaction, and
- enhancing low-cost rewards that have high perceived value by tailoring the
rewards to specific segments of the employee population.
Some suggested ways of managing intrinsic costs are:
- supplying relevant, job-related training to as broad a segment of the
employee population as possible,1
- ensuring that any development activity undertaken by employees is used
back on the job,
- implementing a dynamic communication strategy aligned with the overall
business objectives that supplies frequent, consistent and honest messages
from senior management through personal connections, such as electronic
town-hall meetings or web-casts,
- fostering active communication channels that seek employee feedback, such
as opinion surveys, and tell what actions have been undertaken to address
- adopting performance management goals that align with the organization’s
business strategy, 2
- creating a performance management system that involves employees in their
- promoting a flexible and collegial working environment based on mutual
Current Watson Wyatt research also reinforces the notion that different
groups respond differently to different compensation provisions. 4
Figure 2 below taken from the 2001 Strategic Rewards survey demonstrates
that various groups in the employee population are looking for and motivated by
diverse total rewards elements. For example, the top issue for men is
above-average total cash closely followed by the opportunity for above-average
base pay. Conversely, flexible work schedules and skill developments are the top
two concerns of women.
Employees under the age of 30 years are looking for advancement opportunities
and skill development, while those over the age of 50 years want above-average
total cash and above-average base pay.
Although still in its infancy, adopting targeted compensation practices as
part of the total rewards plan is gaining acceptance. Of course, moving from a
generic compensation system to a total rewards approach that considers what
employees value requires greater flexibility than traditional systems have
allowed. This could add administrative complexity and may give rise to questions
about fairness for those used to standardized procedures.
In many cases staff has been reduced as much as possible, but compensation
costs remain too high. Focusing on both the extrinsic and intrinsic components
of total rewards can help organizations contain compensation costs while
optimizing their return on investment.
1 Watson Wyatt’s 2001 Human Capital
Index® research shows that improperly applied training programs can have a
negative impact on shareholder value [return to text].
2 Watson Wyatt’s 2001 Human Capital
Index® and 2000 WorkCanada® research indicate that poorly constructed
performance management systems can have a detrimental affect on shareholder
value and employee commitment [return to text].
3 Watson Wyatt’s 2001 Human Capital
Index® research found that a flexible and collegial workplace could have a
positive outcome on shareholder value [return to text].
4 Strategic Rewards®: Managing Through
Uncertain Times, 2001 Survey Report
[return to text].