It's the end of rewards as we know it

Author

Kate Bravery

Global Advisory Solutions & Insights Leader, Mercer
Author

Heather M. Ryan

Compensation & Rewards Product Category Leader

Retaining talent requires flexible rewards, more frequent reviews, and creative compensation packages.

The pandemic upended many norms of work, and new geopolitical and economic shifts continue to push organisations to adapt their talent and rewards strategies. Before making decisions on new rewards, some leaders may want to wait for the dust to settle, but that’s not likely to happen anytime soon — if at all — in this rapidly changing world. To bake flexibility into reward programmes, leading organisations are replacing traditional approaches, such as annual base pay adjustments and hourly rate increases, with more frequent rewards reviews and creative compensation packages.

Five top talent and rewards challenges

It’s important to consider these new realities when assessing today’s rewards programmes:

Leaders don’t fully understand trends.

It’s important to know what’s new in rewards, including the dramatic changes we’re seeing in what employees want and what organisations can provide. But many leaders remain focused on a work landscape that no longer exists.
Skyrocketing inflation outpaces wage increases.

This creates cost-of-living and cost-of-labour concerns, putting pressure on organisations to keep up — but most don’t have the budget to do so, and nor is it a realistic expectation. Increasing base pay may satisfy some employees, but it can have the knock-on effect of increasing the prices of your products and services, which impacts the overall health of the business. The good news is that a pay increase is just one tool in the kit for addressing inflation.
Segmentation has separated high-tech roles from strategic roles.

Different employee groups call for different approaches to pay, but perceptions differ on which roles are crucial and deserve higher pay. One approach is to offer increases to those who deliver on the strategy, but this calls for identifying business-critical skills and the employees who possess them, which is not a straightforward process.
Leaving for another company can pay off, but at what price?

Workers can raise their income significantly — sometimes by 20% to 30% — just by moving to another organisation. But some who leave for higher salaries are ill-equipped for the position and burn out on the job. The real rub is that job hopping often creates problematic wage gaps between legacy employees and new joiners.
Employees increasingly want to work from anywhere.

Post-pandemic, there’s a new desire to stay home or travel the world while keeping a job. While some workers with critical skills are happy to return to the office, others have relocated (or plan to move) sometimes to cities where their company has no presence. To retain the talent necessary to execute on strategies, leaders are reviewing rewards plans to mitigate the risks and returns of talent that flexes.

More challenges are on the horizon. For example, emerging pay transparency laws are requiring disclosure around salary ranges when hiring — with equal treatment legislation firmly rooted in the Netherlands, the EU’s Pay Transparency Directive in motion, and new directives surfacing in the United States. Pay reviews can help organisations make pre-emptive parity adjustments, stemming the tide of employees who would otherwise say that their pay is low compared to newly posted salaries. Additionally, people have begun reconsidering what’s truly important to them, prompting organisations to tip the balance from base pay to flexible pay packages and other total rewards, including a menu of voluntary benefits that addresses employees’ changing priorities throughout their lives.

There’s a lot going on. Chaos and uncertainty can paralyse, but progressive organisations are finding opportunity. A new spirit of innovation has emerged for the first time in over a decade — moving from the concept of wages alone, as organisations think afresh about what constitutes the total rewards package.

Leaders are transforming their programmes to include flexibility, financial education, upskilling and reskilling. Other considerations include progress on environmental, social and governance and sustainability goals, relief bonuses and transparent communication. These organisations are devising tactical ways to retain employees today and shoring up funds for retaining top talent next year.

Six green shoots of innovation

A new work landscape calls for new approaches to rewards. Here are some thought starters for reframing rewards and retention for the future of work, based on a series of roundtables with total rewards leaders (Mercer European Rewards Conference, October 2022).

Engage and educate employees.

When workers understand the full range of rewards and the factors pressing upon them, they appreciate more than pay alone when they consider how employers compensate and otherwise look after them. Create a clear communication strategy that shines a light on factors such as benefits, the employee experience, organisational purpose, culture, brand reputation and take-home wealth. Use purchasing power to pass on relief to employees through benefits that deliver cash savings. And explain why inflation-indexed pay is not aligned to the company’s pay strategy, not now and not in periods of disinflation.
Pay for the future, not the past.

Share equity farther down the organisation to signal that people are part of the organisation’s long-term plan, even if pay cannot meet their expectations today. Show that you are investing in your employees’ futures in exchange for their agreement to ride the waves of inflation together. Cultivating such an ownership mentality has been shown to increase retention and promote understanding of shared challenges.
Focus on skills and projects, not jobs.

Adjusting rewards to fit the talent model calls for a radical, beneficial, and perhaps ultimately inevitable shift from rigid roles to agile work design. Using skills as the currency of work requires a clear inventory of your talent’s skills and an assessment of what skills might be most critical now and in the future. To focus on skills and project outcomes, HR and people managers need to be trained on how to apply skills thinking into the pay mix, so they can make smart decisions in today’s complex environment, including identifying, cultivating, and rewarding skills and competencies that will build a sustainable future.
Adapt rewards to varied needs.

Understand the realities of different people within the organisation. Address low-income workers’ cost-of-living concerns by making energy payments for bills and spot payments for food needs, or by offering meals during work hours. People appreciate the ability to use lump sums for immediate needs versus waiting for base pay increases over a longer term. Reward digital nomads with the flexibility they seek. And those approaching retirement age may value higher pension contributions more than a base pay increase.
Know your data.

Set a benchmark with annual data, then age the baseline throughout the year. Learn what’s working for other organisations in terms of off-cycle offerings and how pay is adjusted. Watch the external market for movement in labour market costs and make internal adjustments when necessary to stay competitive — for example, some companies in Latin America track labour costs, correcting course on a quarterly basis as required. Monitor talent attrition to understand who is going and who is staying — the picture is never homogenous, and typically it is more than pay that makes people walk away.
Face your gremlins.

Pay transparency legislation is coming, and the cold hard fact is that employees and candidates can already access compensation data aligned with their role with a few clicks online. Check that your organisation actively and regularly addresses gender pay gaps and any other rewards discrepancies that won’t pass public scrutiny. It’s better to adjust incrementally than build up a deficit that, if left unchecked, can impact both your budget and your brand.

Today’s work environment calls for dynamic and creative pay approaches — annual pay and bonuses no longer suffice. Deliver incentives tailored to different levels of the organisation and persona groups.

Insights into what global organisations are saying

77% of companies are adjusting their rewards approach in of inflation

29% Implementing a bonus/pay adjustment across the entire workforce
29% Providing a cost-of-living adjustment or other wage increases in the most impacted markets
27% Using bonuses instead of base salary to increase total compensation without long-term commitments
19% Adjusting pay or offering cost-of-living adjustments only to those paid below the market median

Source: 2022-2023 Mercer Global Talent Trends Study

61% of companies anticipate increased salary demands across all roles/skills

39% Expecting significantly increased salary demands only for talent and skills that are in demand for their industry/sector
16% Believing there will be a shift to sourcing talent outside their country/region

In response to heightened inflation:

79% Placing greater focus on communicating total rewards
78% Using benchmarks to determine increased compensation eligibility
71% Placing greater emphasis on non-financial elements of compensation

Source: Mercer September 2022 Real-time Insights Pulse Survey: Inflation and Impact on Pay and Rewards

Success Stories

Here’s what some organisations are doing to adapt rewards to new challenges:

An organisation in Europe

Is expanding equity to lower levels of the organisation for the first time and changing incentive targets to include greater earning potential. Establishing a sense of ownership has increased loyalty and retention, as employees stay for the potential larger payout.
A fast-moving consumer goods company

Is offering fixed-amount appreciation bonuses to help hourly and lower-level employees cope with the increased cost of living. As a result, workers are staying with the company rather than seeking a small increase in base pay at a new organisation.
A multinational retail company

Is adopting a market movement approach, instead of an inflation-based reaction, beginning in 2023 — using spot and appreciation bonuses, equity, and rewards offered for projects and contributions. By avoiding running up base pay, the organisation can adapt if inflation gives way to recession.
A financial technology organisation

Allows talent to flow to opportunities more readily via a pay-for-skills model based on two organisational structures — one for capability and one for accountability, which is aligned to the employee’s present role and responsibility. This model shored up and freed up sufficient skills to keep the organisation’s innovation engine firing.

In turbulent times, it’s critical to be anchored by a stable rewards programme supported by peer-aligned compensation — and to have the budgetary flexibility to make market-sensitive adjustments to internal and external market shifts. Educating leaders to make strategic forward-thinking rewards decisions that don’t have a sting in the tail for anyone is just as important as educating employees on the value of their total rewards packages. What is clear is that organisations with a defensible and well-communicated strategy that is applied with empathy will succeed in the years to come.

About the author(s)

Kate Bravery

is a Partner and the Global Advisory Solutions & Insights Leader at Mercer. Her role involves strategising growth opportunities for Human Capital Consulting, bringing new products to market and supporting the business’ professional practices: Talent Strategy, Mobility, Workforce Rewards, Executive Rewards, HR Transformation and Communication. She has over 20 years’ experience in the Human Capital consulting helping organisations achieve a talent advantage through people. Kate has expertise in people strategy, talent management, assessment/leadership development and HR process design. She has held office and market leadership positions in multiple countries. She is a UK Chartered Occupational Psychologist with an MSc. in Organisational Psychology. and an MBA.

Heather M. Ryan

is the Compensation & Rewards Product Category Leader of Mercer’s Career Products business. Her speciality is in building and delivering data and technology solutions to ensure companies are rewarding key skills and talent for the future of work. During her 12 years at Mercer, Heather has led product innovation and renovations, negotiated strategic partnerships with leading tech firms, and introduced new data solutions. Prior to joining Mercer, Heather worked for startups and HP/Agilent in software development, product management, sales, and sales consulting.

Heather holds an MBA from Massachusetts Institute of Technology Sloan School of Management, a master’s in computer science from the University of Colorado, and a bachelor’s in computer engineering from the University of Michigan.