Why Total Rewards?

Total Rewards can be defined as “All of the tools available to the employer that may be used to attract, motivate and retain employees. Total rewards include everything the employee perceives to be of value resulting from the employment relationship”.

There are five elements of total rewards, each of which includes programs, practices, elements and dimensions that collectively define an organization’s strategy to attract, motivate and retain employees. These elements are:

• Compensation
• Benefits
• Work-Life
• Performance and Recognition
• Development and Career Opportunities

The elements represent the “tool kit” from which an organization chooses to offer and align a value for both the organization and the employee. The elements are not mutually exclusive. Total rewards strategy involves the art of combining the five key elements into tailored packages designed to achieve optimal engagement. An effective total rewards strategy results in satisfied, engaged and productive employees, who create desired business performance and results.

In a globalize world where local laws and regulations change constantly the impact of C&B becomes more important, so the corporate strategies and remuneration systems need to be adapted to different industries and countries in order to provide the best social and fiscal optimization possible for both the company and the employees.

What do you do in a Total Rewards role?

• Never stop learning.
• Never do exactly the same thing twice (no, not even for your annual processes such as salary reviews or bonus pay-outs).
• Creativity to design and implement solutions that will truly support your company and its employees
• Negotiate with providers to get the best conditions and prices possible for Social Benefits (Health & Life Insurance…) to all employees of the organization.
• Learn and know about Tax & Regulations in each country in order to apply the benefits in the best way for the company and employees.
• Get involved in many aspects of running the business, and through it, get real exposure to the organization, with Finance, Sales and Marketing obviously, but also with the business… and the rest of HR.
• Simulations and multiple scenarios analyses, and the legal, cost and fiscal implications of your decisions.
• At the forefront of the organization, in good times (distributing bonuses and introducing new rewards and recognition practices) and in bad times too (figuring out cost control mechanisms and redundancy plans).
• Interact with people at all levels of the organization, from the junior staff through to line managers, to top Executives and the Board members.

Borja Burguillos

Highest salaries around the globe by country

It’s results always interesting to know where globally speaking we can get “as employees” the highest salaries. I got very interested to know the answer so I decided to start to look for it. We can find an immense biography about this topic with millions of research and statistics and different potin of view about how to measure it.

I got a report from Mercer called “International Geographic Salary Differentials report” which showed what exactly I was looking for. An index with a relative pay levels worldwide. For sure this index can help employers make informed salary decisions to control costs and ensure competitive pay across markets but also to employees to make their own decisions.

All multinational organizations compete diligently for specialized and skilled talent, they can’t afford to misalign salaries with local market standards. In the era of the globalization be equipped with accurate and timely geographic salary differentials is a must. Organizations can guard against under- and over-paying key positions — either of which would have serious ramifications for operations.

See below a very interesting infographic about what are the countries who best pay.

Borja Burguillos

What is an effective Employee Value Proposition?

We can define Employee Value Proposition (EVP) as the balance of the rewards and benefits that are received by employees in return for their performance at the workplace.

Minchington (2005) defines an Employee Value Proposition (EVP) as a set of associations and offerings provided by an organization in return for the skills, capabilities and experiences an employee brings to the organization. The EVP is an employee-centered approach that is aligned to existing, integrated workforce planning strategies because it has been informed by existing employees and the external target audience. An EVP must be unique, relevant and compelling if it is to act as a key driver of talent attraction, engagement and retention

The classic employer-employee deal is becoming extinct:

• It’s unaffordable. Rising costs, especially for health care and taxes, concerns about existing or new legacy obligations, slow growth and continuing economic uncertainty require employers to rethink both the size and structure of their reward investments.
• It’s outmoded. Long-established workplace practices are increasingly inadequate to meet the needs and support the performance of a technologically mobile and digitally savvy workforce
• It’s ineffective — and inefficient. A rewards strategy that’s not aligned with the way a company creates value for its customers — or optimized to channel investment where it will have the most impact — will struggle to deliver desired performance or meet key financial and talent objectives

Companies face serious challenges when it comes to attraction, retention and engagement of talent. Following the research “Towers Watson 2012 Talent Management and Rewards Study – Global” reveals what it takes to get it right

Companies that have adopted an increasingly integrated approach to Total Rewards strategy, design and delivery decisions — supported by an overarching Employee Value Proposition — are:

• 5x more likely to report their employees are highly engaged
• 2x more likely to report achieving financial performance significantly above their peers

 What is an effective Employee Value Proposition?The evolution of an effective EVP and Total Rewards strategy

A Total Rewards framework provides the roadmap to update rewards strategy and align it with business needs.

Borja Burguillos

Compensation philosophy

1. What is a compensation philosophy?

• Articulates what the company believes about how its employees should be treated financially
• Provides guiding principles for designing cohesive compensation programs
• Lays out what is important to the company
• Communicates a consistent and clear message
• Should be backed up by the company’s actions

Your stated philosophy should reflect the company’s intentions and set expectations for employees. Example statements:

• Efforts will be recognized, but results will be rewarded.
• Employees with the greatest level of sustained performance receive the greatest rewards in pay.
• Solid performers will be targeted at 50th percentile. Top performers will be targeted at 75th percentile.
• By linking pay opportunities to clearly outlined individual performance objectives, we offer every employee an equal chance to succeed.
• All employees should share in the financial success of the company.
• Our compensation programs are globally focused, locally competitive.
• We want all employees to think like owners, which is why we award stock options to every employee.

2. Why do you need an explicit compensation philosophy?

• Managers might be making compensation decisions that are not in the best interests of the company as a whole
• There may be an implicit philosophy that isn’t consistent across the company
  • Look at employee communications over the years
  • Informally survey top managers of the company
  • What do the current compensation programs look like and what do they “say” about the company’s beliefs?
  • Does the corporate culture offer any clues?

3. How do we develop a compensation philosophy?

• Interview senior management and Board of Directors
  • Business objectives, current and future
  • Desired employee behaviors to accomplish those objectives
  • Competitive environment and desired positioning
  • Recruiting or retention issues
  • Pay elements and desired mix

• Outline current rewards programs
  • Where are we now?
  • Where do we want to be?
  • How do we get there?

4. When might your compensation philosophy change?

• Leaving start-up phase
• Major change in your business model
• Business and headcount growth that outpaces expectations
• Following a merger or major acquisition

5. What is a successful compensation system?

• Supports the company’s compensation philosophy
• Enables the company to compete for the talent it needs to be successful
• Provides sustainable compensation programs
• Allows the company to meet its financial goals
• Flexible enough to accommodate changes in the company or marketplace
• Motivates and rewards complementary objectives over the short and long term

Borja Burguillos

Executive Compensation Principles

Determining and structuring long-term compensation plans is a complex, multi-year process for boards that is constantly evolving. Compensation plans have many objectives measured over a multi-year time horizon, including:

• Ensuring that compensation decisions are highly correlated to long-term performance.
• Enhancing the alignment of interests between executives and shareholders.
• Mitigating the risk of unintended outcomes or the creation of inappropriate incentives.
• Attracting, motivating and retaining top talent.

The focus of the following principles is on “pay for performance” and the integration of risk management functions into the executive compensation philosophy and structure.

While proxy disclosure is limited to the top five executives, boards are expected to ensure these principles are used in determining compensation practices throughout the company. The compensation programs for senior executives set the tone and should reflect a company’s overall compensation philosophy and risk profile.

The board and the compensation committee of every public company are responsible for, and accordingly must be actively involved in, establishing and independently verifying compensation philosophy, setting performance measures and assessing performance.

The Canadian Coalition for Good Governance (CCGG) recognizes next 6 principles as the Key of the Executive Compensation. Totally agree with them.

• PRINCIPLE 1 

A significant component of executive compensation should be “at risk” and based on performance.

• PRINCIPLE 2

“Performance” should be based on key business metrics that are aligned with corporate strategy and the period during which risks are being assume.

• PRINCIPLE 3

Executives should build equity in the company to align their interests with those of shareholders.

• PRINCIPLE 4

A company may choose to offer pensions, benefits and severance and change-of-control entitlements. When such perquisites are offered, the company should ensure that the benefit entitlements are not excessive.

• PRINCIPLE 5

Compensation structure should be simple and easily understood by management, the board and shareholders.

• PRINCIPLE 6

Boards and shareholders should actively engage with each other and consider each other’s perspective on executive compensation matters.

Borja Burguillos

Compensation’s Role in Human Resource Strategy

Reading the book “Solving the Compensation Puzzle” I realized that even being obvious I had never wrote about the important of Compensation’s Role in Human Resource Strategy so I decides to put this post based on the book and my views.

Compensation is one of many human resource (HR) tools that organizations use to manage their employees. For an organization to receive its money’s worth and motivate and retain skilled employees, it needs to ensure that its compensation system is not an island by itself. Not only is it important for an organization to link compensation to its overall goals and strategies, it is important that its compensation system aligns with its HR strategy.

Too many organizations plan and administer their pay systems by default; or worse, fall back on “the squeaky wheel gets the grease” practices. More than any other area in HR, ignoring pay and performance systems can be devastating. It is a very expensive and laborious process to hire new employees, buy back trust of current employees and renew the organization’s energy and motivation level. By ignoring this issue, it does not go away or get better with time. It will take extra money and valuable resources to fix the system.
Smart, successful organizations do regular planning and evaluating of their compensation and performance appraisal systems. Because compensation is visible and important to employees, it is critical to consistently communicate a clear message regarding how pay decisions are made. In short, a solid pay-for-performance strategy requires that employee pay matches the organization’s message.

Engaging Key Stakeholders to Support the Compensation Strategy

There are three levels of compensation strategy that exist within an HR department:

• The first level is a strategy that is only understood and supported by the HR department.
• The second is a strategy that is supported by the HR department and translated into practical solutions, policies and decisions Compensation’s Role in Human Resource Strategy that guide compensation decisions.
• The third level, which should be an organization’s ultimate goal, is the most difficult to achieve. It is a compensation strategy that supports a pay-for-performance system that transforms and permeates all levels of the organization.

Important Considerations in Designing a Compensation Strategy

Does the compensation system match the organization’s overall objectives? In other words, how does the compensation strategy complement other HR initiatives? For example, if quality, experience and a sophisticated skill set are an organization’s strategic advantages, then it will not be successful hiring employees significantly below the market rate for that position. To answer this question, it is important to review the organization’s strategic plan (at least annually) and discuss whether the current HR and compensation systems are supporting these initiatives.

Where does the organization want to be in terms of market competitiveness? In this competitive job market, it is important to be aware of the organization’s competing firms. An organization can lead, meet or lag the market.

What are the strengths and weaknesses of the organization’s current compensation system? An important component of market competitiveness is to find answers to the following questions:

• Is the organization able to attract the appropriate skill sets and types ofemployees when needed?
• Where is the organization hiring its best employees?
• How long do most employees stay at the organization?
• Where do employees go when they leave the organization?
• What are the organization’s promotion policies?
• Are employees frequently asked to take on new tasks without being rewarded for their efforts?
• Do employees value the company’s benefit, incentive, work environment?
• What of these items should be changed or updated?
• What is the employee morale? This information can be gathered from managers, exit interviews, employee surveys and other communication tools. Employee survey feedback, in particular, provides valuable information for moving forward.
• What mix of base pay, incentive pay, work environment and benefit levels make the most sense for the organization when considering the competition, types of jobs, niche and labor market available?

Borja Burguillos

Global pension: analysis and next challenge for labour world

The Melbourne Mercer Global Pension Index compares retirement income systems in 20 countries representing more than 55% of the world’s population. The Index rates these systems based on their adequacy (accounts for 40% of the overall score), sustainability (35%), and integrity (25%). This comes at a time when pension systems worldwide are under increasing pressure due to rising life expectancy, increased governmental debt, uncertain economic conditions, and a global shift to defined contribution plans.

David Knox, a Mercer Senior Partner and author of the study says “Worldwide, many of the challenges relating to aging populations are similar, irrespective of each country’s social, political, historical, or economic influences,” he notes. “Many of the desirable policy reforms are also similar and relate to pension ages, retirement level funding, work longevity, and benefit design issues to reduce benefits leakage before retirement.”

In addition you can find a study done by Towers Watson Global-Pensions-Asset-Study-2013-Towers-Watson where you will fin a deeper analysis for 13 major pension markets around the world, which total USD 29,754 bn in pension assets and account for 78,3% of the GDF of these economies.

Thinking about… Why not a Global Pension?

In a globalized and hyper-connected world it doesn´t make sense to speak about local pension markets. The workforce is moving now more than ever in the history crossing borders without any problem.

Then, When will start to talk about a Global Pension? This is not the future, this is the present.

Pension Plans in Europe 2013: looking for the stability

There remain powerful incentives for pension plans to reduce equity-related volatility, in particular the regulatory environment and a desire on the part of corporate sponsors to mitigate the impact of pension plan volatility on their balance sheets. In addition, rising equity markets over the course of 2012 and early 2013 will have generally lifted funding levels, providing some of those plans on a path to a lower risk position with an opportunity to reduce equity allocations.

As Nick Sykes says -European Director of Consulting in Mercer’s Investments business- the Pension schemes across Europe, but particularly in the UK, remain on a path towards a lower-risk investment strategy.

This approach in reducing risk will not simply mean increases to government bond allocations and simple swap strategies. Instead, there would be increasing interest in assets that offer a relatively stable and inflation-sensitive income stream, such as ground lease property and infrastructure. Sophisticated LDI strategies are also proving essential for providing a greater degree of flexibility and responsiveness to changing market conditions

What is LDI strategy?

Liability-driven investment policies and asset management decisions are those largely determined by the sum of current and future liabilities attached to the investor, be it a household or an institution. As it purports to associate constantly both sides of the balance sheet in the investment process, it has been called a “holistic” investment methodology.

In essence, the liability-driven investment strategy (LDI) is an investment strategy of a company or individual based on the cash flows needed to fund future liabilities. It is sometimes referred to as a “dedicated portfolio” strategy. It differs from a “benchmark-driven” strategy, which is based on achieving better returns than an external index such as the S&P 500 or a combination of indices that invest in the same types of asset classes. LDI is designed for situations where future liabilities can be predicted with some degree of accuracy. For individuals, the classic example would be the stream of withdrawals from a retirement portfolio that a retiree will make to pay living expenses from the date of retirement to the date of death. For companies, the classic example would be a pension fund that must make future payouts to pensioners over their expected lifetimes (see below).

Below you can find a nice infographic elaborated by Mercer about how is the current situation of Pension Plans in Europe and what are the expectations.

Borja Burguillos

How to develop a Global Total Compensation Model

Throughout the history, employers have been challenged with attracting, motivating and retaining employees.

During the past decade, the Compensation topic has continued mature. Increasingly, it has become clear that the battle for talent involves much more than highly effective, strategically designed compensation and benefits programs.

The most successful companies have realized that they must take a total rewards approach, emphasizing attraction, motivation and retention.

In this article we want to show the variables to taking into account to design develop and implement a Global Total Compensation plan successfully. We consider this as the previous step before to develop the whole Total Rewards Model, including concepts as “Performance & Recognition” and “Development & Career Opportunities”.

GLOBAL TOTAL COMPENSATION MODEL

4 phases and steps to consider

FIXED PAY

Fixed or base pay, also known as base pay, is nondiscretionary compensation that does not vary according to performance or results achieved.

It’s usually determined by the organization’s philosophy and pay structure.

• Base pay

Fixed or base pay is the compensation paid to an employee for performing specific job responsibilities:

• The definition of base pay can vary by country.
• Base pay levels need to take into account variations in equivalent monthly salaries vary by country.
• The bottom line to fixed pay practices need to be based on a competitive strategy for each country.

• Types of Base pay

Once pay structures are built, the organization must determine how employees will be paid:

• Salary: paid on a weekly, biweekly or monthly basis rather than by the hour, generally to higher level positions.
• Nonexempt / hourly rates: paid by the hour for a job being performed. An individual’s annual pay is dependent on the number of hours worked during the course of the year.
• Piece rate: payment is based on an individual’s rates production. A payment is received for each piece or unit work produced.

VARIABLE PAY

Incentive or Variable pay, also known as pay at risk, is compensation that is contingent on discretion, performance or results achieved.

Much of the innovation in compensation is occurring in the variable pay element. Companies are making greater use of variable pay programs by expanding them to a significantly broader portion of the workforce that they have in the past.

These schemes are adopted by many corporations in order to improve the employee morale and increase the motivation to work for the employees. Based on performance measures and metrics defined by the human resources of the specific organization incentive plans are devised and the specific mode of incentive is decided.

• Bonus or Incentives

Bonuses or Incentives are delivered through plans that predetermine a performance and reward schedule. The incentive can be paid in an accounting period (month, quarter, year, multi-year) or upon an event (reaching an objective, completing a project, etc)

Organizations that seek to create a closer link between employee compensation and the risks of doing business have increased the prevalence of group/team incentives.

• Commissions

Commission is a sum of money that is paid to an employee upon completion of a task, usually selling a certain amount of goods or services. Commission may be paid as percentage of the sale or as a flat dollar amount based on sales volume.

Employers often use sales commissions as incentives to increase worker productivity. A commission may be paid in addition to a salary or instead of a salary.

Commissions are cash payments, based on predetermined performance and reward schedule. They are typically based on sales or profit margin on those sales. Commissions are usually for sales employees.

Sales incentive plans matched to type of responsibilities: Customer identification, customer service or customer persuasion.

• Profit-Sharing Plans

Profit- Sharing is a form of variable pay provided to all employees based on the profits of the company. Companies usually have predetermined goals and formulas for determining the amount that will be allocated to employees.

Profit- Sharing are typically implemented to achieve employee participation and identification with the organization’s success.

• Performance-Sharing Plans

A variable pay plan that bases rewards on the performance of a combination of quantitative and /or qualitative measures. The objective increase employee identification with the organization’s success and increase employee understanding of what is important to the organization and communicate the basis upon which success is measure.

BENEFITS

Benefits are a core element of the Total Rewards Model. Benefits include Health and Welfare plans, Retirement plans and programs providing pay for time not worked. Over time, employee benefits have evolved from basic fringe benefits of insurance coverage and a few perquisites to wide a range of benefits designed to strike a balance between an employee’s personal and professional life.

• Healthcare

Healthcare systems are influenced by the beliefs, values, culture and perceptions in different regions regarding the role of government in providing health care to its citizens.

The employers commonly supplement the government health programs with health care plans influenced by corporate objectives, competitive practices and the limitations of government programs. Limitations government-sponsored programs may include restricted access, limits on services/facilities, payments, reimbursement and gaps in coverage.

We can find as components of Medical Plans:

• Medical coverage for dependants.
• Dental plan.
• Optical plan.
• Hearing plan

• Welfare

The factors that influence health and retirement benefits may also affect other benefits such as life insurance, disability and time off.

Depending on the type of benefit, statutory requirements, coordination with government programs, collective bargaining agreements and other influences may shape or define the final program, limiting employer flexibility in plan design.

In addition, offer wellness programs to employees are very useful to increase the satisfaction and healthy life.

• Retirement and Investment Plans

Qualified retirement plans include both the traditional defined benefit (DB) pension plans and defined contribution (DC) plans

• DB; is based on a formula that considers pay and service (i.e. one percent of compensation for each year of continuing service). Provide better benefits to employees with long service.
• DC; characterized by employee and employer contributions made to individual participant accounts
• Hybrid plans; combine elements of defined benefits and defined contribution plans.

• Other benefits
  • Housing Allowance
  • Transportation Allowance
  • Meal Allowance
  • Phone Allowance
  • Training Allowance

WORK-LIFE BALANCE

Work – life is composed of offerings in the Total rewards package that address the unique individual needs of the employee. These offerings are important to the employee but may be less tangible than compensation and benefits.

Categories which support work – life could be:

• Caring for depends
• Supporting health and wellness
• Creating a workplace flexibility
• Flexible Work Hours
• Financial support programs

After we have our Global Total Compensation model successfully implemented in our company it´s time to think about “Performance & Recognition” and “Development & Career Opportunities” thus completing the corporative Total Rewards Model required to get business goals.

Borja Burguillos & María López

Global Mobility: What talent is moving around the world?

Below you can see a interesting infographic made by Mercer Think about who is taking an international assignments and why.

Global Mobility is gonna be the main important challenge for HR during the rest of the century, so I would like to highlight the words of Anne Rossier-Renaud -Principal in Mercer’s global mobility business- whom said “Many companies do not have a clear selection process that would include assessing an employee’s suitability for an international assignment, whether at initial recruitment or upon assignment opportunity. Then, when qualified candidates are found, employers need to address potential obstacles to mobility, such as dual career and family issues, which may prevent candidates from accepting an international assignment”.

We have a long way to learn.

Borja Burguillos