[MUSIC PLAYING]

Welcome to Mercer's podcast series on the new shape of work. Today we'll be chatting on total rewards and how AI and rising employee expectations are combining to demand that we embrace a more modern approach to how we reward and incentivize our people.

I'm Kate Bravery, Mercer Talent Advisor and Insight Leader. And today I'm joined by Gordon Frost, Mercer's Global Rewards Solution Leader. Gord, great to have you on the podcast today. Really excited to be tackling this topic, so thank you for joining us.

Hey. Thanks, Kate. I'm really, really happy to be here and looking forward to the discussion.

Excellent. All right, well, you know, I think the last few years for CMB professionals has, without a shadow of a doubt, been marred by the cost of living crisis and, of course, the associated pressure that that's had on labor costs. And that means that our thinking on total rewards-- and probably quite rightly-- has really been focused on the optimization agenda, and maybe less so on how we can modernize it.

But now as we start to see inflation steadying around the world and some of those gaps between hiring, internal pay reducing, I do think there's an opportunity to step back and think a bit differently. And I'm just curious, to kick off with, what are you seeing and hearing? How are reward professionals thoughts around the future of reward evolving?

Yeah, you know, I think that's a great question. And you're right, now that inflation isn't as big of an issue as it was a year or two ago, I think the focus of rewards professionals is now really turning towards pay fairness. And the importance of pay fairness, both to align with employee expectations, because we're seeing, especially the new generation of workers today, are much more open about sharing their information about their pay, researching pay before they join an organization.

But not just wanting to ensure that they're paid competitively, but wanting to ensure that the company's got a good track record around treating people fairly with respect to pay, because this idea of fairness and equity is really, really critical.

And then we're also seeing that reflected, of course, in pay transparency legislation that's being rolled out in jurisdictions around the world. So it's both a legislative imperative, but it's also an employee imperative in that employees are really demanding it. And so I think employers are really having to think more thoughtfully and strategically about how they address those issues of fairness and transparency in the workplace.

You know, one of the things I love doing on this podcast is actually busting some of that consultant speak that's out there. And I have been hearing the term human-centric total rewards for the last few months. Is that what people mean when they talk about being human-centric in their reward strategy? Maybe you can share a bit more on that.

Yeah, that's a great question. And it is one of those buzzwords that you hear a lot and that can mean different things to different people, or people scratch their heads and say, what is human-centric total rewards? And when I think of that, I think about the fact that our workforce has never been more diverse than it is today, whether we look at it from the perspective of age or ethnicity or gender or any of the other factors that you might think of from a diversity perspective.

And the challenge is that, I think, each of these distinct employee groups is looking for a total rewards program that meets their needs and their circumstances. And those will be different. And so from a human-centric perspective, I think you really need to think about how can you tailor your total rewards program, how can you be more flexible to really ensure that you're delivering a rewards program that meets the needs of different segments of your employee population to maximize the return on the investment you're making.

So that's what I think of when I think of human-centric total rewards. But I also think of it from the perspective of going back to fairness, and the challenge is that fairness will mean different things to different people. So it's not just paying people equally or the same, it's offering them something that meets their needs that might be different from what you might offer someone else, but reflecting their unique circumstances and their situation.

And you're so right that it does mean different things to different people around the world. And I do think that these last few years have all forced us all to say what is our net take home pay and how far does it go. So the question about wealth is just a lot more broader.

And as you know, because you've been a partner in global talent trends, this year we've been talking a lot about trust and equity. We did a principal component analysis of all the data. And how much you trust your manager, your organization to be doing the right thing by you has a huge impact on whether people are staying, where they have a sense of thriving.

If we get that wrong, then I think it really does impact people's engagement with the company and also whether they're staying or staying or wanting to go. And you mentioned there about employees are more curious about what they're paid and how they're paid compares to others, but also I think we've got more ways of finding out. I mean, that's what the pay transparency law does, but also our AI companions can tell us that.

So when I think about how we prepare for these changing expectations you've mentioned, how we get ready for this era of greater transparency, disclosure, reporting, what can people practically be doing today? Because it's not a short fix if we're really going to tackle this one.

Yeah, yeah. So I think that's a great question because I do think people need to think about, you know, where do I start? What do I do? And I think what's really important to start with is really to think about the importance of having a coherent compensation strategy or compensation philosophy to start with so that you've got a consistent approach to things like pay transparency and pay fairness.

Because I think especially for global organizations that have employees in many countries or many jurisdictions, if you're going to be transparent about how they're paid, you can't have one set of messaging in one country and then a different set of messaging in the adjacent country or the adjacent state or province or whatever the case may be.

You really need to have a consistent set of messages because people will talk to each other and people will share their information and people will look on the internet and see what their colleagues are paid across the border or down the road or whatever the case may be. And so you need to start with an overall compensation philosophy that makes sense and that aligns to your people practices and your people strategy.

When you've got the coherent compensation strategy or compensation philosophy articulated, then I think the really important thing that you also need to do is take some time to understand your current situation and where you might have outliers or where you might have individuals who are not paid in a way that's consistent with your compensation philosophy, right.

So, for instance, if you say that you've got a pay for performance culture, do you have high performers that have a consistently high performance rating who are paid below your compensation ranges or at the bottom of your compensation ranges? Or do you have other elements that would be inconsistent with the philosophy that you've established?

And then how do you address those over time? Because I think the importance there, as you said, is if you really want to establish trust with people, the words on the page or the word-- the words on your company website or in the employee communications that you send out need to be consistent with the experiences that people have. And so if they feel that their experience as an employee from a pay perspective is inconsistent with the philosophy that you've been communicating, then that's where the trust gets eroded.

So it's both establishing that philosophy and then ensuring that your actual pay practices are consistent with that, and in areas where you've got gaps, putting in place a strategy to actually address and close those gaps over time.

Who would you get to see loads of reward strategies? Doesn't everybody have a comprehensive compensation strategy in place? I mean, what are gaps that you typically see? I mean, how would I know whether mine's comprehensive or not?

Yeah, that's a great point. And I think a lot of people will say that they do have one, but they may not have looked at it in a while, they may not have ensured that it's comprehensive. And what I mean by comprehensive is it's not just around base salary, or it's not just around saying, you know, we pay competitively or something like that.

It should also touch on how does pay align to performance, what drives pay increases over time. Is it increases in skill and capability? Is it high performers? Is it based on tenure, potentially? What are the elements that can drive pay, progression, or promotion with an organization? And that latter point about promotion I think is also really important because it's not just about the salary elements of pay. I think it should also tie to career progression, opportunities for advancement, opportunities for skill development.

All of that is also part of the overall journey that an individual takes with an employer and part of the reason that they stay with that employer. So giving people real transparency about what does it take to advance and have a more compelling career and how will they be treated relative to others, I think, ties into that issue of fairness so that they don't look around and say, well, why is that person advancing and I'm not? Or what would I need to do to advance? When you're really transparent about it, then that helps to foster trust.

Yeah. And if you're saying that the key point of fostering that trust is that it's authentic to what-- the way they experience it is what you do. Having career transparency to support pay transparency or even skills transparency, I think, would be part of the equation. You mentioned there about pay for performance. I've been hearing a lot about pay for skills. Do these sit together or are they different approaches?

I think they're related topics, right. And so all of them tie back to the pay philosophy and what do you pay for. I think a lot of organizations have thought about pay for skills as an alternative to, for instance, paying for a job. And I think instead of that, people should start thinking of it as complementary, as a way to go deeper into how we pay for different jobs and for justifying different rates of pay for people within a similar job.

So if you can start to quantify what a specific skill might be worth or how much you might pay for certain relevant skills within certain job families, that can help to give you a more robust story around why you may have differences in pay within a certain job in an organization. And I think pay for performance ties into that too.

So I think pay fairness doesn't mean that everybody is paid the exact same amount, but I think it means that have clarity around what do we pay for and how can you get differentiation in pay within your organization based on performance, based on the skills that you have, based on experience, but not based on unfair reasons like favoritism or other things like that, which is what people will start to assume if you don't have clarity.

OK. And I think AI can actually perpetuate some of that. And maybe we can come on to that in a moment. But I think what you're talking about here is we often use external data, external benchmarking on different types of jobs or on the rising cost of skills in order to inform that. Is that alone sufficient in the current world? Because the world of work is changing pretty rapidly.

People are looking to get rewarded for their contribution, I think quicker, more frequently than they were before. And we've got lots of different people in the workforce maybe wanting different things. And we saw that in global talent trends this year. Many people said, I would forego a 10% pay rise for a whole range of benefits. I've never seen so many people speaking about the total proposition. And that could be exciting, but, surely, that means we need to take a look at other data points to get it right.

Yeah. And so I've got a colleague who I think has a great saying that he often uses, which is that you can't benchmark your way to a reward strategy. And I just love that because it's true. I think if you only use market benchmark data to determine your rewards programs or to determine your reward strategy, you're going to end up with something that is average or market median.

And so you'll get an average compensation program from benchmarking or a 60th percentile or something like that, but that won't be a strategic program and it won't be a program that necessarily meets the unique needs of your employee population. So it's an important element, using market data, I think is an important element of your total rewards program design, but it certainly should not be the only one.

And I think the two other elements that are really important to add to that is, first of all, developing a deeper understanding of what really matters most to the employees that either you've got today or the employees that you're targeting to have in the future.

And so you can do that through a variety of different employee listening programs like conjoint analysis or like digital survey tools or digital focus groups or other types of preference analysis. There's a lot of great tools that exist today that allow organizations to gather information about their employees preferences-- to the point you made earlier-- what would you be willing to trade off some of your base salary for.

And it'll be different for different segments of your employee population. So understanding what their preferences are is really important because you can't give them everything. You can't afford to give them everything in most cases. And so understanding where the priorities are is really important.

And then I think the other piece of data that I would look at is actual usage data. So lots of organizations either internally or through either the insurers or the other financial institutions that they may work with or the benefit providers that they have can get much more robust data around which benefits are used most, who's typically using them, what are they using them for.

And gathering that information in combination with the preference analysis and with the market benchmark data, I think that's how you really develop a total reward strategy that maximizes the return on your investment and gets you an optimal outcome.

So I'm sitting here thinking about my own team around the world. And I am quite inundated around data on some of these topics. And you covered loads of topics here. Kind of, you know, what does it look from a pay equity perspective, what does it look like from a baseline, from a variable, can I do it more quicker?

There's a lot of data to take in. And I agree with you, you can't just benchmark your way to a reward strategy, but I do think sometimes you get inspired by what other people are doing. Is there anything that you've seen lately that you think, I like that thinking or it's a bit more progressive than maybe you've seen in the past?

Yeah, those are-- there's a lot of things that come to mind with that, and we probably don't have time for them all today because I think a lot of companies are doing some really innovative stuff around total rewards. And I think the two that I would pick are-- going back to the point of transparency, I did have one client who said to me-- who said something to me that I thought really resonated. Was they said, we don't want to be transparent about anything externally that we haven't already been transparent about internally with our own employees.

Meaning that we don't want them to find out what our pay philosophy is on the internet or from LinkedIn or Glassdoor or something like that. We want them to hear it from us first. So I think that reflected the importance of having a communication strategy around pay transparency that puts your own employees and their managers front and center before you think about external candidates or the external market or something like that.

So I thought that that just really resonated with me. And then the second thing that I think is really cool is all of the experimentation around AI. And we could have a whole other podcast around that and I'm sure you've had other speakers on that topic, but I think there's so much innovation in the use of AI in total rewards to both do a better job of optimizing the rewards programs that are offered to people.

And then-- again, as I said a minute ago-- communicating those programs so that people really develop a better understanding, get a better user experience, get a really consumer grade experience at the end of the day which drives better employee engagement and all of that kind of other stuff. I've seen a lot of great innovations around that that I think are really exciting. And I look forward to seeing more of those in the future.

Well, my head is boggling on that because I think everyone's been saying AI can be a great assistant for getting that personalization right. And I know that I think with AI pay, we've also been doing a bit around identifying where we might make off-cycle decisions that can lead to exacerbating some of those gaps. So I'm excited to see when a lot more of that becomes mainstream.

I know on the AI topic we could probably talk-- in fact, you know what, Gord, why don't we actually have another session on that? Because I have heard you at some conferences speak to some of your clients, and I do think the seeds of what the reward function will look like next is in those conversations.

And if I can cajole you on the phone to agree to maybe lead a session with some of those clients, I think it would be great to bring it to a broader audience. I'd love to get you on speaking specifically on AI and rewards because particularly when you get to generative AI, there's definitely some do's and don'ts that are emerging.

Yeah. And you know what, I would love to.

Is that a yes?

I think that'd be a fantastic topic, and let's do that. Let's get some examples that people can really respond to and give them some really tactical and tangible examples of where different organizations are innovating because, again, I think there's so much that's moving so quickly.

But I do find that when you give some people some examples of where those innovations are and how they're being implemented in the comp event function in different organizations, it really sparks their thinking about what they could be doing in their organizations as well. So I'd be thrilled to talk about that some more.

That's good because I've heard you in some workshops and I think it certainly sparked my mind around the art of the possible so let's broaden it out. I will commit to organizing that in the next couple of months. But Gord, I know it's been fast and furious and you are up against another client meeting, but thank you so much for dropping in and sharing with us today.

I do think the focus of the discussion being around pay fairness is one that everyone needs to be prepared for and employees are looking for. And I love that comment there, that we've got to be more fair internally than we are externally around transparency.

I think you're right on that point around personalization, and I hope AI is going to solve that for me. And that last point there I think around it does come down to pay conversations, and it's pretty hard for leaders to have good pay conversations when there isn't a coherent compensation strategy to actually anchor back to. So thank you for sharing your wisdom on the call.

And I will get that set up. So, listeners, if you're interested to hear more on AI in rewards, we'll do a follow up episode on that in the coming months. And if you're inspired to dive deeper onto any of the topics we've discussed on the new Shape of Work Podcast series, please do visit our interview series on mercer.com or have a look around Mercer's, our thinking page. And Gord, it's been wonderful to have a chat with you on this topic today, one that is absolutely moving. And I'm loving all the innovations in this space.

Great. Thank you so much. It's wonderful to be here, and I look forward to joining you again soon.

Yeah, absolutely. I think you're just committed to it. Good bye, Gordon. Have a good rest of the day. Thank you, everyone, for joining. Have a good onward journey. Bye bye.

[MUSIC PLAYING]