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12/19/2014

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Hi Jacque,
Thanks for the post, it is an interesting topic. I always go back to the question “What’s the workforce strategy?”. Have you designed your reward practices and programs to align with that workforce strategy? If so, would offering choice undermine that strategy? If you wanted a strong pay for results culture would you want employees opting for more base pay and less incentives? Would you want your leadership team choosing less equity?

As you get into larger organizations it may also be harder to keep everyone’s selections straight without the right tools. If someone chooses less base pay do you adjust the pay range lower so managers don’t forget during an annual pay increase process and think they are further behind the market?

Anything is possible with the right tools but it has to align with the company’s workforce strategy.

A number of us have advocated (and predicted) the expansion of increasingly sophisticated cafeteria compensation plans for many years. Personalized total rewards are indeed the trend of the future.

Trevor nicely identifies two of the biggest issues to such customization of comp beyond base rates.

Strategy might not be an obstacle, because this is about tactics (how to reach the goals) rather than strategy (goals like retention and motivation). The strategic objective of happy, engaged and productive ees should be best achieved by Total Rewards packages tailored to their personal preferences.

The effect of such personalization on other administrative systems like pay ranges is more problematic and will require more care and special attention. Perhaps an approach comparing total employee investment cost (total $TR) rather than total cash only) would work. But companies already have issues adjusting for the effects of contingent comp already when they fiddle with pay ranges, so it won't be simple or easy. That probably means it is a very good idea to look at total employee investment numbers rather than only current personal pay.

Yes, reading Jacque's column motivated me to conduct an information scavenger hunt. And as close as I could tell, I think I hinted publicly at the fully customized total rewards approach, as a very early "thought experiment", somewhere back in 2008 (which means I was probably thinking about it back in 2007 . . . but I was too frightened about being derided professionally to speak up any sooner). Well-founded caution apparently, since even broaching this publicly in 2010 elicited feedback from two sources suggesting that I was crazy . . .

Exclusive of those interested in conducting a professional "witch hunt", I fully endorse this customized approach as one of the "next things". The increased capability of technology is the key that makes this approach possible. And I agree that "nudging" employees to some sort of minimum, mandatory safety net of insurance coverage will be a necessary program provision.

I considered something related to this as a Master's thesis topic back in the mid -90s and ultimately rejected it as impractical (as a thesis topic).

With that said, I cannot imagine any sensible employer trying this in the present-day US. The legal and regulatory risks and hurdles are simply too high.

You may not be able to use this with nonexempt employees because they are more heavily regulated --- but you can use it with exempts. Don't dismiss it so lightly.

Implementation requires sophisticated systems, but HR systems currently available are 100 times more powerful than those in the 1990s.

We may require minimum benefits and base salary (maybe 80%ile). Employees will become more involved and astute about how to structure their package to give them more of what they want with minimal risk.

CEO's are less interested in what the market does anymore than what they need to pay for critical skills. (PwC survey). And the number of hybrid jobs is increasing such that job matches in surveys will become more and more difficult. So this Comp 101/201/301 taught by W@W for years may not be so relevant now.

Nothing is sacred. Business has had to change its "sacred" models ---- all functions. To cling to our old models as absolutes is not being very responsive to the environment.

I would strongly encourage Compensation pros to think like buainess-people. It's quite different than the traditional way Comp pros think. We need to be flexible, open and looking at new options now instead of being blind-sided by top management in the future.

Trevor --- you bring up a good point. Remove choice for bonuses and let those be used to reward performance. Stock options are awarded based on performance. Award merit % by whatever you want but let employees decide how to split it.

The TR strategy to me would be flexibility and employee empowerment. Employees have responsibility and choice.

Frankly I'm not much worried about executive compensation. They always seem to take care of themselves.


I do enjoy these sorts of posts. I'm from the UK, but have spent a fair amount of time over the last few years working with South Africa. Why am I telling you this? Well, at least as far as this topic is concerned, in South Africa, the future is already here.

In South Africa, the total cost of employment (TCoE) concept is already widely used (about 70% of organizations). It goes by a few names (Guaranteed Package, Cost to Company, Total Cost of Employment etc.), but the concept is essentially the same: base salary, fixed allowances, and benefits (bonuses, incentives etc. are excluded) get consolidated into one amount and the employee then determines how to structure the package. Think flex benefits taken to their logical/extreme conclusion.

As far as benchmarking and ensuring equity goes, this does indeed require a change in thinking. As Jim noted, rather than looking at base salary which can vary significantly depending on how the employee chooses to structure their package, the point of reference is the TCoE.

And, as regards ensuring a minimum standard, there is certainly scope to build this in to the framework. Whether that's setting a minimum level of contribution to a pension or insisting that medical coverage is mandatory unless an employee can demonstrate they are covered under a different plan (e.g. parent or spouse). The minimum standard can be varied according to strategy, culture, or regulatory context. The point is, there is scope to do it.

As for whether it's the future, why not? It's already up and running in some places. And it certainly seems to be consistent with the general trends as far as demands for choice, flexibility, transparency etc are concerned.

From a comp practitioner's perspective, there can't be many better ways of getting employees to engage with and understand the value of their reward than by giving them responsibility for how it's structured.

For more information on the South African model, here's a link to a pretty decent (brief) explainer:

(http://web.vdw.co.za/Portals/12/Documents/events/2012/SAPA%20Conference%202012/Total%20guaranteed%20package%20-%20Jerry%20Botha.pdf)

Thank you James. Other than South Africa can you tell us what other countries have adopted this method?

And I know Africa is booming. It's the next frontier.

James the link you provided does not work. Sure it's correct? I'd love to read the article.

There is some history here that may be helpful. The idea of flexible compensation is older than we may think and the systems to support these plans have existed since the 1990s, when the company that I worked for adopted a sophisticated cafeteria plan, with salary trade-offs, for its 100,000 employees.

See Wiki quote below:

The Cafeteria Benefits Plan was a result of the revelation that "one universal benefit program can no longer do the job," said Thomas E. Wood of Hewitt Associates and chairman of the Corporate Board for the International Foundation of Employee Benefit Plans. Wood was the originator of flexible compensation due to the fact American corporations and households were becoming increasingly dynamic and globalized. As quoted in his chapter of the business publication, Business, Work, and Benefits: Adjusting to Change produced by the Employee Benefit Research Institute, "Wood's framework creates a specific detailed picture. The concepts include the establishment of a basic "safety net" of benefits to cover financial hazards associated with old age, death and disability, and catastrophic medical expenses, with supplementary benefits offered on a defined contribution basis"

http://en.wikipedia.org/wiki/Cafeteria_plan

Like Chris, I looked up my last dated prediction about TCoE becoming the biggest future trend (published in February 2011 @ http://www.compensationforce.com/2011/02/thought-leader-interview-five-questions-for-jim-brennan.html).

"The personalization of total reward packages, until each worker (employee or …increasingly… contractor) has an individualized customized self-selected set of goodies for which they toil. Senior executives have Total Remuneration package contracts; hourly workers have personalized payroll deductions already: I see that trend continuing to converge to overlap the center. Rank and file workers will have deals like (but lesser than) the NEOs. From an organizational standpoint, this will further divide the leaders from the followers."

Wonder which company in the U.S. will do it first.

Exactly my point Jacque; the fact that nobody is doing it is prima facia evidence that it can't be done under the current legal / regulatory regime.

In the US, you are always one protected class disgruntled former employee away from a world of hurt.

Tony --- just because few companies have tried this in the U.S. that does not mean it is prima facia evidence that it can't be done.

South Africa is apparently doing it and there may be other countries where it is being done.

I'm not saying "take a flying leap" but like I said I don't think we can continue to cling to our 50 year old methods. Look at companies like Netflix, Adobe, Lear, Kelly Services who have changed their whole performance appraisal system. These companies did it and it makes sense for them. Who's to say it won't make sense for other companies? If we never did anything forward-looking what does that say about us? Rigid? In denial?

And Jim ---- the biggest divider between the leaders (haves) and followers (have nots) is not because of this. Look at the reaction to executive compensation today. It's a very volatile subject that is divisive.

Fine if we disagree but I can't help but look forward. Anything that gives employees the ability to tailor their package, gives them a better understanding of compensation and creates transparency looks good to me. Simple? No. But better than automatically saying it will fail.

Harold --- thanks for your comment. Indeed cafeteria benefits has been around a long time. What we are talking about here includes cash compensation --- at least salary and allowances and other things excluding bonuses/incentives and stock.

Corrected South Africa link (sorry ... rogue parenthesis):

http://web.vdw.co.za/Portals/12/Documents/events/2012/SAPA%20Conference%202012/Total%20guaranteed%20package%20-%20Jerry%20Botha.pdf

As for where else uses this sort of approach, I've just started some work in Namibia where it seems to be similar. Perhaps not such a surprise given it was part of South Africa until the early 1990s.

The point about flexible benefits or cafeteria plans is a good one. From my perspective, the TCoE model is just taking that concept one step further. Seen in this context, it’s really more a case of evolution not revolution.

In fact, I think you can make a pretty compelling case for flexible benefits and TCoE being more consistent with W@W teaching on Total Rewards than the traditional base + benefits approach. Paraphrasing from my W@W course book: Total Rewards is about finding the appropriate mix of elements that will not only attract, motivate and retain employees, but lead to employee satisfaction and engagement. That being so, isn’t TCoE just eliminating the guesswork on the part of the employer about the appropriate mix of elements? And isn't that a good thing?

Corrected South Africa link (sorry ... rogue parenthesis):

http://web.vdw.co.za/Portals/12/Documents/events/2012/SAPA%20Conference%202012/Total%20guaranteed%20package%20-%20Jerry%20Botha.pdf

As for where else uses this sort of approach, I've just started some work in Namibia where it seems to be similar. Perhaps not such a surprise given it was part of South Africa until the early 1990s.

The point about flexible benefits or cafeteria plans is a good one. From my perspective, the TCoE model is just taking that concept one step further. Seen in this context, it’s really more a case of evolution not revolution.

In fact, think you can make a pretty compelling case for flexible benefits and TCoE being more consistent with W@W teaching on Total Rewards than the traditional base + benefits approach. Paraphrasing from my W@W course book: Total Rewards is about finding the appropriate mix of elements that will not only attract, motivate and retain employees, but lead to employee satisfaction and engagement. That being so, isn’t TCoE just eliminating the guesswork on the part of the employer about the appropriate mix of elements?

Thanks for your comment James. Do you think that the UK or other countries in Europe will ever adopt this approach?

Difficult to say. Certainly the take-up of flexible benefits is becoming more widespread. In the UK, around 50% of organizations now offer a formal flexible benefits scheme. The trend in mainland Europe lags the UK, I think. However, considering the concept has been around since the 1990s, that's pretty glacial progress. But, over the last decade or so, as the workforce has become more diverse, there has been a realization that there needs to be a suitable benefit offering at each stage of an employee's life. So perhaps, for now, offering a comprehensive flexible benefits scheme will be sufficient to satisfy the need for choice and flexibility while ensuring a relevant offering.

As for whether we ever get to the TCoE model, I’m not sure. If the take-up of flex benefits is anything to go by, it probably won’t be soon. Certainly, I don’t think there is any pressing desire or imperative to get there. But I maintain it’s only an extension of the flex benefits concept.

Perhaps if anything were to act as a catalyst it might be pay transparency. Once we get there, it would probably be incumbent upon employers to demonstrate that equity exists not just at a base salary level but also at a TCoE level, too.

And thinking back to a post of Jim’s earlier this month about the taxation of perqs and benefits, if we get to the point where these elements are taxed as cash, presumably it will be far easier to give cash in lieu of benefits and we get to the TCoE model by the backdoor.

Looking into the future is hard! Fun … but hard!

Hi Jacque,
I think it can be done. My concern is that it is done for the right reasons and it fits the company’s strategy. It is easy to say it will inspire more employees to get engaged in their rewards but isn’t that what everyone said about the changes in benefit plans? In the same way granting equity has not inspired all employees to understand how it works. Don’t do it because you think it will be engaging for most employees.

I think it would also make “transparency” more difficult as employees are not going to know what “mix” of rewards someone else selected to be able to compare. It would also be difficult to compare TCoE if employees are selecting different risk levels (higher or lower incentive opportunity or equity) because that would impact the overall earnings opportunity.

But again, it goes back to workforce strategy. What would be the minimum and maximum level of choice? Would VP’s have to have a minimum incentive opportunity of 25% but no more than 50% (enough to have skin in the game but not enough to be the “bull in the china closet”)?

It may be prudent to start with limited flexibility and grow over time. If it ends up that only 10% of the employee base changes from the default is it worth the effort?

Can we give employees credit for making rational compensation choices, when you have to establish mandatory, minimum health care and life insurance coverages in a flex plan, as Jacque describes above?

Companies are using automatic 401K plan enrollment to get employees to start saving sooner. That sounds a bit heavy handed and doesn't give employees much credit for prudent thinking when it comes to their compensation. Many have their hands full, as money managers, making savings choices in their 401k that are in their long term interests.

Not sure a lot of employees are ready for flexible compensation.

What do others think? Are they ready? If they have total flex will they screw things up, even though they like the idea of choice?

Hi Trevor and Harold. I don't see this as dumping responsibility on employees. I see it as employees doing the pulling -- not employers doing the pushing.

I think the real motivation for this would come from employees asking for it --- the desire to have the opportunity to customize their package.

Yes I think companies may start slowly --- gradually adding more components to the "choice" category.

I'm not sure if transparency necessarily means knowing what everyone else is making --- maybe a part of it.

Personally I think that this opportunity would lead a lot of employees to talk to each other examining the pros/cons and giving opinion/options of what their fellow employees might consider. I think that would be a beautiful thing ---- employee beginning to understand why packages have been designed the way they have been. Getting rid of the "black box".

And HR/Comp people would be doing a lot of training, etc. But again I don't see this as dumping packages on employees. I wouldn't suggest that companies do it if they don't hear any requests.

I may be wrong but the demographics with younger employees is what has brought on the whole issue of transparency. Wouldn't it be better to have employees get involved in the process rather than sending out all employee emails with some canned response of how comp packages are designed to be competitive and fair, etc. yada, yada?

I think we need to think about this method as well as other new ones because I see the necessity to do something in future.

No need to jump off the cliff yet --- but let's be open to change. We may not have a choice.


On motivating Employees, not all employees can be motivated. In fact, many employees don't wanted to get tired of just working and working and working...

Most of the employees usually wants to have a regular outings or team building just to get motivated. Even the activity doesn't have a connection to their JOB!

If companies starts to check out their employees (Depends on the country and work industry). It will still be depending on what tasks are they doing.

Errata: my bad, in accidentally appending an improper ending "close paranthesis" on my referenced link http://www.compensationforce.com/2011/02/thought-leader-interview-five-questions-for-jim-brennan.html above where I opined some years ago that personalized TRs would become another popular practice.

Clarification: my referenced prediction was that TCoE would be first awarded to the same elite groups who currently get the first/most best stuff. That earlier access entitlement would simply parallel status quo dividers that already exist.

And "on motivation", it is something internally generated by the individual rather than some universal generic fuel you can inject into a person. We can offer inducements and hope they tap into existing motivations that will drive desired behaviors by individuals, but you can't create from outside an interest that doesn't already exist in the target subject.

James ---- finally read the corrected link on South Africa. Good stuff. I wonder if that method was in existence pre globalization --- in other words before Western companies began setting up shop there. Was this method there when your company arrived? Or was it something that you and other Western companies developed?

Thanks all for the discussion!!

Oops! Thanks Jim for your corrected link as well.

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