1.3 Introduction to the Total Rewards Framework

Overview of Dimensions

The total rewards framework shows us that there are three primary categories of rewards that influence our decisions to join, perform in, and stay with an organization. These three categories are Pay, Benefits, and Intangible Rewards.

Pay or Compensation

Pay is a broad category that refers to the monetary compensation that is provided to an employee in exchange for their work. The terms "pay" or "compensation" generally refer to several different forms of pay.  Cash Compensation is monetary pay that employees receive in exchange for their work. As we will see in this text, however, Cash Compensation can be provided in many different forms. Base Pay includes salary or hourly wages. This category is the most common and readily understood and observable form of rewards, and represents the simplest answer to the question of "how much does this job pay?"  Variable Pay can include performance-based rewards such as bonuses and commissions, as well as longer-term equity rewards such as stock options. The important thing to remember is that Cash Compensation refers to the direct monetary pay given to an employee in exchange for their contributions to the organization.

Employee Benefits

In addition to cash, Total Rewards systems in organizations have evolved to offer additional benefits and services to their employees. While these portions of the compensation package are known as "fringe benefits" or perks, as firms compete in the labor market, many of them have become quite central to compensation plans. In addition, some of these benefits have become mandated by federal, state, and local governments. Employee benefits include company health benefits and retirement plans.

Intangible Rewards

Are there other factors beyond cash and benefits that cause employees to join and perform in organizations? The answer is a resounding "Yes!" While a tangible, monetary compensation (like a salary or hourly wage) is one reward that motivates employees, decades of research have also revealed that there are many other non-monetary rewards that shape employee choices. These intangible rewards such as meaningful work, positive working relationships, or working location will be discussed in depth in a later topic.

Holistic View of Dimensions' Interdependencies

While each of the categories of total rewards is important, it is also important to consider how they are related. That is, the level of cash compensation has monetary value, but it also can have an influence on the employee's perception of how much they are valued at the firm. Similarly, when an employer offers a generous benefits package it can also shape employee perceptions of the extent to which the organization cares about their needs and values them as a person. Thus, in establishing a total rewards system, each of the elements of the system should be designed with a knowledge of and a connection to the other elements. A useful exercise is to list out the various elements of a total rewards system, and draw lines representing the connections among them. Draw a solid line if the two elements are consistent and draw a dotted line if they contradict each other. These lines then can be the basis for investigation and refinement of the rewards system.

A Strategic View of Total Rewards

So what is the best way to design a total rewards strategy? That question is at the core of this course, but the short answer is that the choice of reward elements should be made in light of the organization's strategy. That is, one set of awards that may work well in one firm may not fit very well with another firm. Therefore, you will find that both understanding your organization's rewards and designing an effective rewards system will require you to have a clear understanding of how your business competes in the market, meets customer needs, and remains profitable. This Strategy/Total Rewards link will be visited in depth in topic two.