Total Rewards: Strategy, Benefits and Best Practices

Most organizations offer total rewards, but that doesn’t mean it’s a straightforward area of HR. In fact, an entire discipline of HR focuses on the design, implementation and management of total rewards programs.

Effective programs help businesses attract, hire, retain and motivate employees. Poorly managed programs, however, de-incentivize and disengage workforces to the detriment of the companies that designed them.

Let’s examine how total rewards programs work, the components that make them and why every business should offer its own program.

What are total rewards?

Total rewards refers to the combination of compensation, benefits and other incentives that employees receive from their employer for the work they perform.

A total rewards program should consider what employees expect as well as a company’s:

• vision
• values
• brand
• culture
• environment it seeks to foster

Total rewards programs include company-paid health insurance, paid time off (PTO), retirement benefits, equity, cash bonuses and perquisites.

Human resources and total rewards

Total rewards is a specialization within the HR field. HR professionals study the topics of total compensation and total rewards as part of their undergraduate and graduate degree programs. Total rewards is even covered on Human Resource Standards Institute’s PHR and SPHR certification exams.

Large and some medium-sized organizations hire directors, vice presidents and other executives to oversee a company’s entire total rewards strategy.

What are the components of a total rewards strategy?

A company’s total rewards strategy helps sustain long- and short-term goals by identifying ways to promote employee:

• compensation packages
• benefits
• other incentives

When considering their compensation and benefits programs, employers should take a holistic view of everything employees earn. Companies should account for everything from base pay to retirement benefits, on-site accommodations and even intrinsic rewards like a greater sense of purpose.

Compensation packages

Compensation packages refer to the financial upside that the company is providing employees in exchange for work.

Base pay

Base pay is the amount of money that will be given to an employee as a foundation to their compensation package. Base pay may be represented in the form of an annual salary for certain team members or hourly for employees who track their time and are paid based on how long they work.

Base pay represents the least a person can expect to receive in a given period. Other forms of pay may be added to build out a compensation structure.

Supplemental pay

Supplemental pay is financial incentives beyond base salaries and hourly wages, like:

• bonuses
• commissions
• shift differentials
• recognition awards
• on-call pay

Supplemental pay may be used to encourage desired behaviors within a team. For example, offering employees shift differentials (higher pay) to work on nights and weekends may encourage people to sign up to work at times they typically wouldn’t.

Bonus payments

Bonus payments allow organizations to compensate employees based on their contributions. Employees who perform at a higher level receive money commensurate with their levels of productivity.

This has the dual benefit of incentivizing high-performing teams while also allowing the overhead of employee pay to adapt to company earnings. Additionally, bonuses can be discretionary or nondiscretionary.

Discretionary bonuses, such as spot bonuses, are not guaranteed or promised and are issued when the company decides to issue them (i.e., at the company’s discretion).

Nondiscretionary bonuses are guaranteed additional payments that are tied to specific outcomes (signing 100 new clients in a year) or tasks (making 100 phone calls per day for a month).

Whatever the arrangement, bonus programs should be well communicated so employees know exactly what is required to earn the financial incentive.

Commission

Commission is pay tied to the revenue generated by a person or a team. Incentives are typically designed to give workers a part of the money they take into the business. For example, a retail clothing employee could receive 10% of the revenue for every sweater they sell.

Commissions are different from bonuses because they represent a direct correlation between money brought into the business and money given to employees. Bonuses are more often tied to targets, quotas, tasks or behaviors.

Total compensation

Total compensation refers to the total amount of money given to employees in exchange for the work they contribute to the team. In HR circles, total compensation and total rewards are often used interchangeably, although “total rewards” is more in vogue for referring to all forms of monetary and nonmonetary compensation.

Equity

Equity is a type of compensation that gives employees the opportunity to share in the growth, progress and profits of the organization they work for. Equity lets employees own a part of the company, so when the company does well, the employee reaps a benefit.

This is a highly effective strategy to motivate employees and encourage people to make decisions that benefit the organization. For example, employees may be less likely to spend company money unnecessarily if they know that they will receive a piece of profits. Equity is non-cash pay that employees can convert to cash by selling their shares.

Some employers choose to give employees stocks that must vest to be optioned and will design a vesting period that could take years to pay out. This strategy encourages retention because employees are rewarded for staying longer to receive their full benefit.

Benefits

Benefits are generally nonmonetary forms of compensation that help maintain employee health and enhance their overall well-being. From tuition reimbursement to health insurance and PTO, the benefits that an organization offers can directly fuel employee trust, satisfaction and commitment.

For these reasons and more, it is important that benefits packages support a diverse array of employee needs and attract a talented workforce while working within the company’s budget.

Health insurance

Health insurance is a vital component of a benefits package. Health insurance is designed to provide financial protection and access to medical care for employees and their families. Plans may cover preventative care, such as regular doctor’s appointments and vaccinations, or issues that require extended treatment and even hospital stays.

While many companies offer health insurance, that doesn’t mean every employee opts for the same package. For example, young employees just entering the workforce making entry-level pay may prefer low-cost plans that have high deductibles. Others who have some existing health issues and require frequent doctor visits may desire richer plans that will cover more types of consultations, procedures and medications.

Organizations should survey their teams to understand their needs and preferences. In turn, this will ensure employers find plans that best support the most workers. Enterprises may even offer multiple types of plans to cater to their diverse workforce.

U.S. employers are required to cover at least 50% of the cost of group health insurance benefits under the Affordable Care Act, provided they have enough employees. Plus, most health insurance carriers require employers to provide a census that includes the age, gender and ZIP code of all eligible employees and their dependents to provide a proper quote. Depending on the overall premium cost and the percentage covered by the employer, employees may have their pay deducted to cover their portion of the benefit.

Retirement plans

Retirement plans are programs that assist employees in saving for their future. Most retirement plans can be set up so deductions are taken from an employee’s pay to cover their contributions.

Accounts’ terms may vary, with some taking out taxes before submitting payment (post-tax or Roth). Others submit payment that employees may have to pay taxes on upon withdrawal (pre-tax or traditional).

Companies may choose to match contributions up to a certain percentage of their employees’ pay, effectively increasing an employee’s total compensation (potentially on a tax-advantaged basis to the employer sponsoring the retirement plan).

Employer-sponsored retirement plans not only help employees build long-term savings, but also contribute to their overall financial well-being and stability. By offering retirement plans, employers can attract and retain talent while demonstrating their commitment to supporting employees’ long-term financial goals.

Paid time off

Some may overlook PTO as part of a total rewards package because a salaried employee’s pay is not noticeably changed by this offering. But it is an integral part of a total rewards package that can impact employee satisfaction overall.

PTO plans reflect employer values and can cover:

• sick leave
• vacation
• personal days
• mental health days
• parental leave
• bereavement
• and more

It is important to note that, as with many types of compensation, there are compliance considerations when forming a PTO policy. Employers should take great care to learn the laws in each state where they operate.

Work-life balance

The right work-life balance to foster at an organization is just that: a balance. Providing both personal and professional benefits is essential for retaining employees and fostering a positive organizational culture.

By acknowledging the importance of personal time, family needs and mental health, employers can:

• reduce burnout
• increase job satisfaction
• boost overall productivity

Flexible working hours

One way employers can improve their workers’ work-life balance is to allow flexible working hours. People may structure their lives differently and have familial obligations that require their attention during the typical workday.

Hybrid work flexibility

Similar to flexible working hours, employees who are able to work remotely — even for a portion of their workweek — may be able to design a life for themselves that isn’t bound by a location. Remote workers may be able to live in or travel to different destinations and make the most of their lives without needing to be geographically stationed in one place.

However, employers who allow remote work must take certain precautions with their tech and digital security. Employees who have access to sensitive data must be given digital protection to ensure they do not compromise the company’s systems. Similarly, remote or hybrid work may not be feasible for every business and could even be detrimental to certain industries.

Four-day workweek

In some cases, teams that work four days per week (as opposed to the traditional five) can be more effective. Ideally, this approach compels employees to make the most of their more limited hours, with more focus and better time management.

Recognition awards

Recognition awards are one way to celebrate and encourage desired behaviors or work attitudes. Recognizing employees’ efforts keeps them motivated and engaged, such as through:

• awards
• celebratory lunches
• performance-based bonuses

Recognition programs may include a variety of components, including ceremonies, financial rewards and publications on social media. There are also group or team recognition awards, like a group of sales reps who earn their spot in the president’s club.

Career growth

Growth trajectories or career maps are another nonmonetary way to attract, motivate and retain employees. Employees may be given a road map to their career if performance is maintained and continues to improve. This lets them clearly see a line between their current efforts and their future.

Career growth charts may show the additional training or education that employees must receive to reach a certain level. Detailed maps can include salary data such as pay bands and tiers of benefits that will become available if the an employee advances enough.

What are the benefits of total rewards?

Total rewards are a powerful tool to attract, hire, retain and motivate highly skilled teams. To achieve each of those four goals, packages must be competitive and compelling. Employers may offer eye-catching benefits, such as pet insurance or minimum PTO days off requirements, to attract hires.

Employers may also need to scale up their programs annually in order to stay competitive in quickly evolving industries. Whatever the case may be, highly effective HR leaders must understand what’s at stake in constructing tailor-made benefits packages for their organizations.

Improved hiring capabilities

Candidates in tight labor markets may have multiple choices and job offers to consider when selecting a new company to join. Candidates may not even apply to companies that don’t offer high enough salaries or ample benefits. In recruitment, benefits may make the difference between a signed offer and another “one who got away.” For these reasons, employers should consider industry benchmarks and record the types of benefits or compensation candidates are asking for to stay competitive and adjust offerings as needed.

Increased employee retention

Reliable benefits plans, effective retirement savings accounts, healthy monetary compensation and equity plans can all promote employee retention. Employees who enjoy the financial security that comes with a higher base wage may be more likely to stay with an organization for longer periods of time. Once a team member’s basic needs are met, perks and fringe benefits become more impactful retention tools.

It’s also important for HR to stay within their budget and make sure they are receiving enough input from employees to afford the financial output it costs to keep people employed.

Increased productivity

Effective compensation strategies will motivate teams to do their best work. By incentivizing desired behaviors, employers can encourage employees to drive output and increase their contributions to team success. Employers should be very careful to ensure they incentivize the right role-based behaviors to avoid negative consequences. For example, a call center that incentivizes the number of calls per day must also make sure they incentivize the quality of the calls so reps don’t just dial without consideration for the outcome.

Higher morale

Employees who are supported through their pay and benefits may experience higher levels of morale than underpaid workers. And employees who feel valued by their company through its compensation strategies may be more likely to stay long term and perform at a higher level while employed.

Like many things in life and in business, total rewards programs are complex and highly variable. There is no magic button or template that will work for all teams. Demographics, values, industry, geography and types of work are all factors that must be considered when constructing effective programs.

Compensation communicates values to both current and future employees. These packages must be considered holistically, considering industry standards, individual requirements and future designs of the business.

Ultimately, companies can use total rewards strategies to show employees that there is a future for them and what they give and what they get are proportional.

Explore Paycom’s resources to learn more about compensation, HR strategy and more.