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2012 HR Summit Paper - Remuneration

The Total Rewards Approach to Support Business Goals and Increase Organizational Success ___________________________________________________________________

Sigit N. Hadiawan, MBA, GRP, CCP, GPHR Total Remuneration Specialist – Chevron IndoAsia Business Unit (IBU) Research & Development – Association of Indonesian Oil & Gas Remuneration Practitioners (APRIMI) The global economy has been affecting us all and demands HR professionals to align and balance local insight with global perspectives, strategies, and practices, including in remuneration areas. This paper introduce global rewards concept, models, and framework from WorldatWork – The Total Rewards Association, which consist of 5 (five) main components: (1) compensation – fixed and variable, (2) benefits, (3) work-life, (4) performance & recognition, and (5) development and career opportunities. With increasing awareness of total rewards elements importance, Indonesian HR or C&B professionals can play a champion in using the integral balanced approach of total rewards that lead to employee satisfaction and engagement to support desired business result. The effort to equip rewards professionals with global competency has been initiated by APRIMI using learning activities, total rewards courses, and recognized global remuneration certification.

The days when all of HR professionals need only to be concerned with local and domestic insight are decreasing. The signs of increasing globalization is everywhere. More and more goods and services are sourced, assembled, produced, or sold in various countries. There is also relatively free movement of talents, people, and investment flow across national borders. Todays technology allow us to immediate access to information around the world. Competition is no longer in country, but worldwide and fierce. To execute business strategy and win the global competition, enterprise needs 3 (three) important resources: capital, technology, and people or employees. People are the greatest company’s asset and giving

the energy for the organization to move on as determined by its vision, mission, and business goals. Historically, employers have been challenged with attracting, motivating, and retaining employees to deliver business result, that become key issues facing HR professionals. The organization premise has been the same: provide productivity and result to an enterprise, and the enterprise will provide its employees with something valuable. Company cannot achieve this goal unless employees know what is expected of them and how their behavior affects the rewards they can earn. Company ability to motivate and cause employees to behave in a way that achieves their highest performance levels becomes critical.


2012 HR Summit Paper - Remuneration

Nowadays, people do not work simply for pay but they also want get chances for individual development through which they are able to obtain new knowledge and apply their own talent and valuable skills. The compelling future and positive workplace may be other factors employees are pursuing. Why do employees choose to remain with a particular employer? Why do they leave? Losing critical employees can be painful to company with several damages: un-returned investment cost for recruitment and development, losing critical knowledge, and increasing competitors. For HR professional colleagues, rocognizing and understanding global rewards strategies and practices will add a competitive advantage to support business and act as strategic business partner. Effective delivery of total rewards will increase rentention and motivation factors to the employees resulting company ability to deliver its business objectives. We will begin our journey to explore the total rewards concept, model and framework, planning, and its implementation by understand employee’s attraction, retention, and motivation factors at first stage. Drivers of Attraction, Retention, and Motivation As the total rewards strategy means to effectively attract, retent, and motivate employees, its drivers are critical to be carefully understood. WordatWork (2007) defined the definitions those 3 (three) factors.

Attract – the ability an organization has to have in order to be able to draw the right kind of required talents to achieve its objectives. Motivate – the ability an organization has to have to cause employees to behave in a way that achieves the highest performance levels, consist of intrinsic and extrinsic motivation factors. Retain/retent/engage – the ability an organization has to have to keep employees who are critical and valued contributors to organizational success for as long as is mutually beneficial. Survey has demonstrated that the cash reward which was paid most attention to is still important but there are many emerging factors around compensation. From WorldatWork and Towers Watson – Global Talent Management and Rewards Study (2010) and Towers Watson – Global Workforce Study (2012), we can summarize the drivers of those 3 (three) factors.

Attraction

Retention

Motivation

Base pay/Salary

Base pay/Salary

Leadership

2

Job security

Career advancement opportunities

Stress, balance and workload

3

Career advancement opportunities

Relationship with supervisor/manager

Goals and objectives

4

Convenient work location

Trust/confidence in senior leadership

Supervision

5

Learning and development opportunities

Manage/limit work-related stress

Image

1

Table 1. Top Five Global Drivers from Towers Watson Global Rewards Survey


2012 HR Summit Paper - Remuneration

From those 15 identified factors, 13 factors (86%) are related to total rewards elements that we will explore in the next part of this paper.

This goes to show how the entire employment experience needs to consider the critical nature of some of the non-financial elements.

Traditional C&B Mindset vs. Total Rewards Approach

Total Rewards Framework

The traditional approach to compensation programs usually involve the process of offering basic wages or salary, and then add some benefits depending on what is appropriate for those situation. Total rewards is recognition of the fact that pay in itself is not the sole motivator to employees to performs. It acknowledges that it is both the tangible and intangible aspects of the work experience that contribute to the employees’ sense of engagement and choices in their careers. It goes beyond standard remuneration by embracing the company culture, and is aimed at giving all employees a voice in the operation, with the employer in return receiving an engaged employee performance. So, total rewards will involve the exchange relationship between employers and employee. Total rewards consist of several elements and no single element can be considered in isolation. Certain elements may rank higher in terms of priority, such as pay. However, there are other elements, which contribute to a sense of fulfillment for an employee and make the difference between whether an employee stays or goes. In fact, many of us have heard and read that oftentimes, people leave because of their manager.

WorldatWork, headquartered in Arizona, US (www.worldatwork.org) is a not-for-profit organization providing education, conferences and research focused on global human resources issues including compensation, benefits, work-life and integrated total rewards. Founded in 1955, the organization has nearly 30,000 active members in more than 100 countries, mostly are total rewards professionals. Worldatwork (2007) – The Total Rewards Association has introduced its total rewards model.

Picture 1. Total Rewards Model from WorldatWork

Rewards are the monetary and non-monetary return provided to employees in exchange for their time, talents, efforts, and results. Total rewards are all of the tools available to the employer that may be used to attract, motivate and retain employees. It is include everything the employee perceives valuable resulting from the employment relationship.


2012 HR Summit Paper - Remuneration

Total rewards strategy involve the art of integration and combination of 5 (five) key elements driving the workforce behaviors to achieve desired business result that ensure organizational success. Total rewards value is comprehensive, simply because of the wider variety of factors that comprised in. In addition to salaries and wages, total rewards may be broad structures of compensation and benefits package. On the other hand, total rewards may include many noncash incentives and recognition. Other substantial perks can include tuition reimbursement, related professional development activities, or opportunities for employees to design work schedules with arrangements such as telecommuting. All of these rewards are valuable. Some of them will cause a cost but many of them are cost-wise programs. The combination of all the elements is the important one, depend on specific company situation. Element of Total rewards There are 5 (five) elements of total rewards, each of which includes philosophy, objective, and practices. These elements are:  Compensation – satisfy financial needs  Benefits – satisfy protection needs  Work-Life – satisfy intrinsic needs  Performance and Recognition – satisfy acknowledgement needs  Development and Career Opportunities – satisfy personal challenge and growth

Compensation - Pay provided by an employer to an employee for services rendered (i.e. time, effort and skill). Includes both fixed and variable pay tied to levels of performance. Benefits - Programs an employer uses to supplement the cash compensation that employees receive, consist of health benefit, income protection, savings, and retirement programs that provide security for employees and their families. Work-life - A specific set of employer practices, policies and procedures, plus a philosophy, that actively supports efforts to help employees achieve success at both work and home. Performance and Recognition – Performance: The alignment of organizational, team and individual efforts toward the achievement of business goals. It includes establishing expectations, skill demonstration, assessment, feedback and continuous improvement. Recognition: Acknowledgment or gives special attention to employee actions, efforts, behavior, or performance. It meets an intrinsic psychological need for appreciation of one’s efforts and reinforcing certain behaviors. Whether formal or informal, recognition programs should be done immediately after the fact. Awards can be cash or noncash. Development & Career Opportunities – Development: A set of learning experiences designed both for employees and leaders to enhance applied skills and competencies.


2012 HR Summit Paper - Remuneration

Career Opportunities: Involve the plan for employees to advance their career goals. The company supports career opportunities internally so that talented employees are deployed in positions that enable them to deliver their greatest value to the organization. For example programs and more information, we can go to www.worldatwork.org/totalrewards or see the Appendix 2. The elements represent the "tool kit" from which an organization chooses to offer and align a value for both the organization and the employee, which are not mutually exclusive. It will and should involves the combination of all those 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. Advantages of Total Rewards Approach With enhanced effects of total rewards, company may experience positive results such as:  Higher profitability A direct link exists between employee motivation and product or service quality. Company highly rated by their employees often have higher profits. We can see the evidence clearly as those successful companies usually appears frequently in the global Employer of Choice survey or Fortune 500s, or Global 500s list.

 Lower labor cost Many programs in the work-life area are low-cost solutions and company may not put the focus on compensation items only. However, compensation savings should not be the driving force behind work-life offerings.  Increase flexibility Each company, based on its specific challenges and needs, can customized its total rewards programs in unique proportion. This is called the total rewards mix.

Picture 2. Sample of TR Mix by Levels

 Improve recruitment and retention Organizations are facing key shortages of best-in-class workers (top performers). The classic initial solution to a recruitment and retention dilemma is to throw money at the problem. But because this solution is so reactive, it does not offer a competitive advantage. Furthermore, it immediately raises costs and compensation budget. A total rewards strategy is critical to addressing the issues created by recruitment and retention. It can help create a work experience that meets the needs of employees and encourages them to contribute extra effort.


2012 HR Summit Paper - Remuneration

Today’s workers are looking beyond the “big picture” in deciding where they want to work. Work and personal life should be seen as complementary priorities, not to be competed each other. When a company helps its employees effectively run both their personal and work lives, the employees feel a stronger commitment to the organization and its truly motivate them to deliver the highest performance levels.  Reduce employee turnover cost The cost of turnover is sometimes invisible. In reality, it is far from cheap. According to Bliss (2012) estimated of the total cost of losing employee due to turnover, range from 30 percent of the yearly salary of the position for hourly employees, easily reach 150 percent for professionals, will be significantly higher (200% to 250% of annual compensation) for managerial and sales positions. In addition, the cost of turnover includes indirect costs such as losses from customers and sales, as well as decreased efficiencies as productive employees leave and the remaining workers are distracted. Total Rewards Strategy Research from over the years and across many disciplines tells us that the combination of rewards offered by an employer represents a system of inducements, where different reward elements drive different behaviors and outcomes as expected by employers.

Some rewards are strong attractors, while others play a more important role in motivating or engaging employees. The process of development will identifies:

strategy

 The desired company competitive position in the market for each employee group because rewards programs are vary between market segments  The appropriate labor market segments according to industry, company size, geographic location, and employee movement  The optimal mix of total rewards elements for each employee group and business life-cycle The other way to look at the elements compared to personal needs, is through Maslow’s Hierarchy framework. In the 1950s, psychologist Abraham Maslow first published Motivation and Personality, which introduced his theory about how people satisfy various personal needs in the context of their work. He theorized that a person could not recognize or pursue the next higher need in the hierarchy until her or his currently recognized need was substantially or completely satisfied. There is a pattern of needs recognition and satisfaction people follow in generally the same sequence. That is the reason that total rewards also following the sequence scheme. We cannot expect employees to be satisfied if the basic need, which is financial, not enough covered.


2012 HR Summit Paper - Remuneration

Maslow’s hierarchy of needs is often illustrated as a pyramid with the survival need at the broad-based bottom and the self-actualization need at the narrow top. is In the recent rewards survey, AON Hewitt Consulting (2012), try to depict the hierarchy, alongside the main components of total rewards, which have listed in a parallel structure to illustrate the connection.

Picture 3. Alignment of Personal Motivation alongside Total Rewards Elements – AON Hewitt

There are several parties should be involved in the total rewards strategy development process:  Senior Management – typically approve the programs and budget. Involvement is important for buy-in and ownership  HR Leadership – they articulate HR strategy in which rewards strategy are aligned with  Employees – will be affected party. Internal, external, or exit survey may provide guidance in identifying the relative importance of each total rewards elements to various employee groups.  Outside consultants – they can work closely with HR to facilitate the process

The challenge of total rewards design is to find the proper mix of elements that satisfy the balance of employee financial and personal needs, given existing business conditions and cost constraints. Implementing and Communicating Total Rewards According to SHRM (2006), total rewards, as a valuable HR tool, will be the most motivating to employees when the following characteristics are present:  Clarity – the rewards is well defined and tangible. The relationship between performance and rewards is unambiguous.  Timing – the time between the performance appraisal and rewards is short enough to be meaningful.  Relevance – the reward directly relates to something valued by employees.  Line of sight – the employee must be able to see the connection between his/her own performance and the rewards.  Achievability – the goal must be perceived as realistic ones with reasonable expectation to be obtained. To implement total rewards strategies successfully, organizations must follow a disciplined process, which is based on either classic PDCA (Plan-Do-Check-Action) philosophy or Assessment – Analyzes – Execute Evaluate process. AON Hewitt Consulting (2012) define the more sophisticated implementation process by viewing the


2012 HR Summit Paper - Remuneration

total rewards process as a Six Sigma closed-loop system, rather than a project based which usually done by most of companies. Interestingly, the survey findings suggested that highperforming companies are managing their total rewards using this kind of process-loop or Six Sigma thinking.

objectives and based on a defined communication strategy. Regardless the value that total rewards package holds, if employees don’t understand it, they won’t perceive the value. Total rewards communication has the potential to influence employee behaviors so employee’s actions align with and support the organization’s mission, goals, and values. Every good communication should have a call to action. In order to achieve the action as a result from effective communication, employees must experience all the following process of communication foundation, strategic, and behavioral: Awareness  Understanding  Acceptance  Commitment  Action

Picture 3. Six Sigma Methodology Applied to Total Rewards – AON Hewitt

Strategic communication is a critical element in the success of total reward programs. Oftenly and unfortunately, communication still viewed as part of implementation, utilizing the remaining budget and resources left. The purpose of communication is to obtain a shared understanding between the sender and the receiver of information, means that sending or receiving a memo does not really reflects communication occured if the receiver did not understand it. Communications must go beyond tactical plans, to include initiatives that are tied to business

Good communication will not repair a flawled rewards program, but ineffective communication will cause a well-designed program to fall short of expectations. Business Result – Related Metrics The organizational culture, along with business and HR strategies will drive the direction for the total rewards strategy. At the end of all process, it should come back to company’s original vision/mission to ensure that the deliverable of total rewards strategy really support business objectives that leads to organizational success. Company’s investment on total rewards program should be optimized to ensure they are allocated among the specific programs that deliver the targeted ROI.


2012 HR Summit Paper - Remuneration

Over the years, susccessful organizations have tested different combinations of total rewards portofolios, with the relative costs and level of risk associated with each program, using quantitative models. Depend on the company’s specific challenge, the quantitative models enable to see the optimal point at which employee preferences and the organization’s investment or financial requirements are balanced. Using metrics also make it easier to explain the investment returns when communicating the programs to senior management and employees. John M. Bremen and Laura Sejen from Towers Watson (2012) – see Appendix 1 - explained the sample of linkage model between rewards and returns. The linkage model allows us to identify specific variables that affect customer behavior and related financial outcomes, also determine what employees need to do or focus on to help achieve them. Conclusion Among all kinds of budgets in an organization, compensation and benefit cost remains a part of great importance. While these programs remain critical, it has become clear that the battle for talent involves much more than effective compensation and benefits programs. The most successful companies have realized that they must take a total rewards approach and deploy all the elements to their strategic advantages.

Total rewards program has influenced the business strategy in several ways. If employees are satisfied with their rewards level and coverage, they are more likely become productive contributors to the company. If HR can provide the certain “naturally high-cost” benefits such as health care and retitement programs to be more effective, there will be more resources can be applied to other prioritized rewards components. Last, rewards program always can be tied to achievement of business objectives. Numerous studies show that employees look at the total rewards package when deciding whether to join or to stay with an organization. An actual summary of total rewards statement can be prepared for potential employees, enabling them to see the whole value of being employed by a company. As such, as highly desirable job candidates explore their options with various companies, companies with total rewards have a competitive advantage because they are able to show the “total value” of their employment packages. The value of total rewards lies in its comprehensiveness and flexibility. It adapts to the unique circumstances of diverse workforces, and the increasing alternative work arrangements. It lets employers to channel their expenditures in optimal ways for their needs, deciding when and where to reduce investments with a clear understanding of how those decisions will affect attraction, retention, motivation, and productivity.


2012 HR Summit Paper - Remuneration

APRIMI – The Effort to Increase Indonesian HR and Total Rewards Professionals Competencies Started in 1983 with former name of IICS, the Association of Indonesian Oil & Gas Remuneration Practitioners (APRIMI) was officially founded in 2011. It has three main objectives:  Education and Development – competency development of members in the area of remuneration to cope with market demand, especially in oil & gas industry.  Research – annual salary survey activities which administered by appointed outside consultant and discussion/study of market trends, best practices, and new concept.  Others activities – cooperation with other professionals association, sharing session, and seminars. APRIMI has almost 70 active members, consist of HR or C&B professional representatives from upstream oil and gas companies operated in Indonesia under Production Sharing Contract (PSCs) of BPMIGAS. Due to most of them came from multinational companies, the total rewards concept already familiar in its daily application. The organization also aims to have more varied programs. APRIMI has started to collaborate with WorldatWork – The Total Rewards Association, to deliver the preparation courses and examinations programs for its members who plan to obtain Global Remuneration Professional (GRP) certification.

WorldatWork has an affiliate organization, WorldatWork Society of Certified Professionals®, whom is the certifying body for the prestigious Certified Compensation Professional (CCP®), Certified Benefits Professional (CBP®), Work-Life Certified Professional (WLCP®), Certified Sales Compensation Professional (CSCP™), and Certified Executive Compensation Professional (CECP™). This GRP certification program contains of a series of 8 (eight) modules of courses and examinations. The course was started in December 2011 by conducted GR 6 module (Variable Pay), followed by GR 1 module (Total Rewards Management) and GR 2 module (Quantitative Methods) in April and July 2012. The venue has been selected in various different cities (Bali, Bogor, Bandung, etc.) to introduce the richer culture of Indonesia to WorldatWork faculty member. The next plan will be a GR 3 module (Job Evaluation) to held in Yogyakarta at mid of December 2012. The association expects most of its members will complete the program by end of 2013, graduating more than 25 C&B and HR professionals. As a developing organization, APRIMI plans to widen the scope of its programs into other areas of human resources, through cooperation with other global HR association. APRIMI are welcoming other professionals association from various industries to collaborate with and work together to accelerate National Capacity Building in facing the fierce global competition.


2012 HR Summit Paper - Remuneration

REFERENCES WorldatWork. (2007). Total Rewards Management. Arizona: WorldatWork – The Total Rewards Association WorldatWork. (2009). Strategic Communication in Total Rewards. Arizona: WorldatWork – The Total Rewards Association Kaplan, Stacey L. (2007). Business Strategy, People Strategy and Total Rewards – Connecting the Dots. Benefits & Compensation Digest Vol. 44, No. 9 – September http://staceykaplan.com/pdf/Stacey_Kapla n_Total_Rewards_And_Business_Strateg y.pdf Hill CCP, Brad & Tande, CCP, Christine. (2006). The Employment Value Proposition. Arizona: WorkSpan 10/06. http://www.tandehill.com/pdfs/TotalRewards.pdf Dessler, Gary. (2008). Human Resources Management. New Jersey: Pearson Education Inc. WorldatWork and Towers Wattson (2010). Creating A Sustainable Rewards and Talent Management Model - Results of the 2010 Global Talent Management and Rewards Study. http://www.worldatwork.org/waw/adimLink ?id=42295 http://www.towerswatson.com/canadaenglish/research/3322

Towers Watson (2012). Global Workforce Study – At a Glance. New York: Towers Watson website. http://www.towerswatson.com/research/71 77/ AON Hewitt (2012). 2012 Total Rewards Survey – Transforming Potential Into Value. Chicago: AON Hewitt website. http://www.aon.com/human-capitalconsulting/thoughtleadership/talent_mgmt/2012_total_rewar ds_survey.jsp Society of Human Resources Management – SHRM (2006). Global Compensation and Benefits. Virginia: The SHRM Global Learning System. M. Bremen, John and Sejen, Laura – Towers Watson (2012). Advancing Total Rewards and The Employee Value Porposition. Arizona: Workspan - Issue No. 1, 2012. http://www.towerswatson.com/assets/pdf/ 6835/Workspan-Total-Rewards-Article2012.pdf Bliss, William G. The Cost of Employee Turnover. New Jersey: The Advisor. http://www.isquare.com/turnover.cfm


2012 HR Summit Paper - Remuneration

APPENDIX Appendix 1. The Linkage Model – Towers Watson

Appendix 2. The Total Rewards Inventory from Work


2012 HR Summit Paper - Remuneration

Appendix 3. 2011 Fortune 500 (US) and Global 500 List Fortune 500

Global 500

Source: http://money.cnn.com/magazines/fortune/fortune500/2011/full_list/index.html http://money.cnn.com/magazines/fortune/global500/2011/full_list/index.html

Appendix 4. Sample - Total Rewards Statement at GE Focusing on Benefits

Source: http://www.ge.com/careers/life_at_ge/index.html


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