Total Rewards Compensation – A Winning Strategy In California’s Full-Employment Economy

How do you recruit, retain and motivate top-performing employees in California’s tight labor market?

Faced with stiffer competition for talent, a growing number of employers are adopting a “total rewards” approach to pay that manages compensation, benefits and retirement as a single, integrated program.

The holistic approach of a total rewards strategy breaks down the silos typical in many HR departments. With closer coordination between different HR disciplines, companies can create compelling pay strategies that differentiate themselves in the marketplace. At the same time, HR leaders can address the concerns of Chief Financial Officers, who increasingly want data to justify compensation.

Strong Headwinds

A total rewards strategy makes sense given the three challenges facing employers in the most competitive labor market in nearly a decade.

First, California, like other states, has adopted pay equity laws. Those laws should bring greater equity to the workplace over time, but most immediately, they will impact existing pay structures and go-to-market strategies.

California’s pay equity law prohibits an employer from asking candidates about their previous compensation. The law also requires employers to conduct pay equity audits for “substantially comparable work” performed by men and women. The audits are intended to assess the pay inequities between men and women who hold similar positions. The net effect is that organizations will now have to examine their entire pay structure.

Second, employee turnover remains stubbornly high. In the past decade, annual turnover was 14% to 18% across all industries in California. During the same period, the budget for pay increases was 3% to 3.5% — relatively flat when accounting for inflation. Skimpy merit pools have inadvertently lead to greater staff volatility and thus make it more difficult to develop and promote the next generation of leaders.

Third, many employers don’t know they are actually exacerbating the recruitment and retention challenge. Most employers have a piecemeal approach to pay-for-performance that has evolved over time. Internal politics and past practices dictate pay. As a result, many organizations have been unable to consistently identify and reward top performers.

A Better Approach

A total rewards compensation strategy can give an employer a meaningful edge. T

he total rewards approach includes cross-functional coordination among HR disciplines to better understand the value of current programs. The framework typically consists of competitive benchmarking, comprehensive program design, regulatory compliance and employee communication and education.

It often begins with a top-to-bottom assessment of all the elements of pay – compensation, health and other employee benefits, and retirement programs. Based on that analysis, HR teams can structure more thoughtful base salary, bonuses and long-term incentives, along with retirement and other benefits.

It can also help with one of the trickiest problems in retaining employees: Merit increases. With budgets for merit increases remaining in the 3.5% to 4% range for California employers, bonus payments can be a very effective supplement.

Likewise, Restricted Stock Units (RSUs), which are increasingly popular and effective, are another way to keep high-achieving employees satisfied and engaged. Many California companies are now offering a mix of stock options and RSUs on an annual basis to reward their team.

The Bottom Line

For HR directors leading their company’s compensation strategy, it’s important to note that CFOs are more focused than ever on a holistic approach.

In our work with small- to mid-tier employers across California, CFOs are routinely asking for proof that their company’s compensation strategy is having the intended effect.

Many want to see actual expense data. They are looking to HR leaders to provide insight about their compensation decisions to support the company’s growth. As much as anything, they expect HR directors to help them manage their biggest cost center – labor expenses.

By adopting a total rewards approach, HR executives can help their companies accomplish their business objectives and position themselves as strategic leaders within their organization.

Jeremy Anderson and Andy Welt are Compensation Consultants for MMA-West, the middle market agency subsidiary of Marsh. MMA offers commercial property, casualty, personal lines, employee benefits and compensation consulting services to midsize businesses and individuals across North America. To learn more, visit here.