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Restructuring a total rewards portfolio

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HR business people Periods of change and uncertainty require active management and a fresh look of total rewards program investments to ensure the arrangements meet the future needs and goals of the organization and its workforce. Base salaries, annual bonuses, health and retirement savings benefits, life, disability and leave programs, paid time off and other total rewards components may not align with new operating models, workforce strategies or the competitive environment.

In a June 2019 survey of over 250 business owners and C-level executives, Grant Thornton found that 62% of the respondents expected to have a recession materially change the course of their business within 18 months. At that time, these employers were more concerned about the impact of interest rate hikes, changing regulations and trade and tariff issues on their 2021 plans. Their risk mitigation preparations for this expectation included developing crisis management plans for unexpected events, stress-testing performance expectations, reviewing supply chain resiliency and performing cash flow modeling to challenge recession scenarios. Few, if any, of these business leaders could have ever imagined the rapidly changing economic environment that occurred during 2020 because of COVID-19.

Rapidly shifting demands and operating environments have pressed many employers to take a critical look at labor costs and the allocation of total rewards dollars across employee compensation, benefits and reward programs. Rapidly shifting demands and operating environments have pressed many employers to take a critical look at labor costs and the allocation of total rewards dollars across employee compensation, benefits and reward programs. When doing so, the urge to identify short-term cost reductions can be strong, but this impulse also can complicate the goal of ensuring a rewards portfolio that reinforces desired outcomes, ways of working and changing workforce preferences.

In addition to forecasting the overall spend, employers who conduct periodic reviews of their total rewards portfolios should also consider the impacts of changing labor markets, productivity and the use of contingent labor. By conducting periodic reviews of an organization’s total reward offerings, employers can gain additional insights to:

  • Clarify workforce strategies and identify future needs
  • Re-allocate current reward investments to new programs, or modify existing arrangements
  • Identify aspects of pay and benefit programs that are valued by critical workforce segments
  • Understand emerging trends that impact reward and recognition engagement
  • Create decision frameworks that can be used for making changes in the mix of base salary, incentive compensation and employee benefits

Set the frame Resetting an organization’s total rewards portfolio during periods of uncertainty and rapid change can be a complex and sensitive undertaking. As an example, though many organizations instituted salary reductions, staff furloughs or headcount reductions to help make payroll because of COVID-19, some are currently exploring ways to reinstate market-competitive salaries as their businesses become more confident in their cash flow position. In these same organizations, rising costs associated with health care renewals, additional safety and design investments to meet new workplace expectations, as well as the acceleration of technology investments may now compete with the limited dollars potentially allocated to salary increases needed for the desire to reinstate base salaries.

Given the fast-moving nature of COVID-19, these workforce investments require leaders to consider several perspectives before they can be implemented. To help guide the work, organizations should consider applying a decision framework that incorporates several considerations when restructuring their employee total reward portfolios. By doing so, the quality of these types of decisions will improve management’s ability to address changes in business conditions and cash flow concerns.

Apply investment strategy to accelerate performance Organizations invest in a variety of workforce programs to attract, retain, and motivate employees with the right skills and experiences, at the right cost, to deliver on its business strategies. Just like any investment portfolio, the investments required to fund these workforce programs require periodic rebalancing to ensure they are delivering the types of results expected during a period of significant change. Periodic total reward portfolio reviews enable more active management of these investments than a more passive approach that focuses on making small adjustments to individual components of the portfolio.

Many, if not all, Dec. 31 tax year-end companies will need to determine whether modifications made to cash compensation in 2020 will be retained for 2021. Before an organization simply reinstates compensation programs that were used under very different market conditions, business leaders should determine if their total cash compensation is properly leveraged, or whether the use of incentive compensation can be applied differently to accelerate performance. Other elements of the reward portfolio can be reviewed from a similar perspective — what elements are delivered in a manner that is not consistent with accelerating business performance and the emerging trends that impact employee engagement?

Incorporate new operating principles The actions taken to manage productivity, trust and engagement during COVID-19 were critical to the sustainability of many organizations and have positioned new capabilities for the future. These actions created much more than a remote workforce. Leaders now have a blueprint for the workforce of the future and opportunities to apply the different operating principles that were deployed to manage an organization’s ongoing talent strategy. For example, companies may have uncovered opportunities to reskill and upskill the workforce to deliver new business models or adaptability and resilience.

In addition, the elevated conversations that have developed around stakeholder capitalism and value creation in organizations has disrupted legacy business priorities and established new strategic imperatives.

These shifts are expected to be increasingly discussed at the board or the compensation-committee level as organizations continue to plan for their new business realities. As a result, these new operating principles also need to be incorporated into the total rewards portfolio review. This will better ensure rewards investments are better positioned to reinforce strategic business drivers for both anticipated and unanticipated business priorities.

Redefine market benchmarks and internal metrics As the new world of work shapes a new world of total rewards, employers should consider how their program redesign choices impacts how their total rewards program compares against trends in the marketplace. Benchmarking total reward programs can guide and validate decisions and identify ways to differentiate. In some instances, the standard metrics that have been adopted as part of a legacy measurement strategy may also need to be modified. For example, the way we interpret cost of turnover, compensation ratios, usage by benefit plan, and career growth are likely to be recalibrated during periods of change.

For compensation comparisons, prioritizing internal pay equity and fairness metrics may need additional focus, as it is expected that these areas will be a higher priority for boards and C-suite executives for their talent management discussions and required disclosures. Finally, the combination of rapidly changing organizations and associated business transformation initiatives has had a profound impact on the structure of jobs and the architecture that can be used to define market benchmarks.

Incorporate workforce segments and employee preferences As organizations continue to emerge from the immediate actions required in response to COVID-19, many have explored how the near-term solutions that were adopted in response to it may continue to help promote positive employee experiences. As restrictions began to lift, some segments of the workforce returned to work, while other parts continued to work remotely. Employers were faced with establishing different solutions for different workers and making trade-offs between the impacts that segmentation had on the overall workforce, including attracting and retaining key talent, and the sustainability of the business operations.

By including the voice of the workforce — an organization’s “internal customer” — employers can refine the total rewards review and test the impact of making trade-offs to the allocation of rewards. Similarly, organizations can engage the workforce in these types of trade-off decisions when reviewing a total rewards portfolio. By applying consumer and market research methods such as surveys, focus groups and conjoint studies, an organization can incorporate many approaches and tools to help discover what aspects of the reward offerings are important to their employees. By including the voice of the workforce — an organization’s “internal customer” — employers can refine the total rewards review and test the impact of making trade-offs to the allocation of rewards. Finally, careful communications planning for this type of employee research can further reinforce new operating principles and position the initiative for success.

Next steps It is crucial that organizations examine their total rewards portfolio on a recurring basis and from a variety of perspectives for the foreseeable future. Looking long-term, companies will need to continue to consider how COVID-19’s impact on financials will be reflected in evaluating performance expectations and the trade-offs that may be required to accomplish broader stakeholder interests.

Regardless of the step taken to complete the review, business leaders should regularly explore opportunities to rebalance the organization’s total rewards investments to make their rewards portfolio responsive to periods of uncertainty and rapid change.

Contacts:
Bob Lemke
Director
Human Capital Services
T +1 312 602 8969

Andy Mechavich
Director
Human Capital Services
T +1 312 602 8167

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