Re-examining the concept of employee reward to achieve optimal value

Published in The Business Times on 26 June 2024

How employees are rewarded has evolved from a simple salary to comprehensive total reward offerings.

With today’s evolving workforce, these offerings take on fresh importance as employees embrace more flexible ways of work and expect an employment experience that is aligned with their personal and professional priorities.

Amid this transformation, a fundamental question that is increasingly being asked is whether current approaches to reward deliver optimal value for all.

Employers use reward as a lever to attract and retain talent and steer performance and culture. However, reward is also a significant cost for organisations. At the same time, employee expectations are changing, cost pressures impact both businesses and individuals, while the world at large expects reward arrangements to be defensible, well-governed, and sustainable. Amid this complexity, getting reward “right” to balance all priorities is key.

How then, could reward strategies evolve to ensure value for all?

The high cost of getting it wrong

Pay, benefits, and workforce costs are one of the most significant outflows for organisations. There is therefore a clear business imperative to ensure that this investment delivers value.

Reward is also top of mind for employees. A 2023 LinkedIn study found that Singapore employees ranked “excellent compensation and benefits” as their top priority when considering what they wanted from work. With employees increasingly ready to vote with their feet, the balance of power between employers and employees has shifted.

The stakes are higher for publicly listed companies. News headlines regularly feature stories of indefensible or misaligned pay for senior leaders, often resulting in shareholder activism or scrutiny by regulators.

In Singapore, new regulations that require the disclosure of actual pay for chief executive officers and directors of SGX-listed companies come into force in end-December 2024. This is a clear signal to ensure defensibility in pay arrangements through greater transparency.

Back to basics: Defining the ‘right’ value

Most modern reward frameworks are designed to achieve multiple objectives, whether to attract or retain employees, drive business outcomes, align stakeholder interests, manage risk, or to hold senior leaders accountable for environmental, social and governance initiatives. In turn, there’s the challenge of complicated formulas and metrics to determine variable pay, elaborate approaches for performance management, and a wide ranges of benefits.

Many organisations also fail to clearly articulate the intended purpose of each reward element and how they interact with one another. Combined, this complexity and ambiguity erodes value. Where employees cannot clearly see how to derive value from or impact their reward outcomes, the “perceived value” of the reward and the subsequent impact on employee behaviour is limited.

What reward looks like, and needs to support, can also differ depending on where the organisation is in its lifecycle. It can be an essential tool to make a company merger or acquisition sticky, or be designed in a way to support high growth if it is scaling up. It requires modification when a company transitions from private to public and becomes subject to open scrutiny from new stakeholders, or where retention of talent is required for stability.

Regardless, organisations that can better articulate the purpose of each reward element – how it works and drives value – will have a better chance of achieving its intended purpose.

The human-centric era: Tailoring reward offerings

Reward governance has traditionally excluded the human aspect from the decision-making process. Employers have generally made assumptions about what their employees want and based decisions on what others in the market do. Their reward structures have been contingent on objective factors like an employee’s position within the organisation, level of performance, or based on one-size-fits-all approaches to ensure equity and fairness.

While this approach removes bias and ensures defensibility and equality, Deloitte’s research into total reward suggests it also misses an integral part of the picture – what employees actually value.

With employees, particularly the younger cohorts, seeking different outcomes from work, companies must develop workforce value propositions that represent a two-way value exchange between employers and employees. The starting point for organisations is simple – ask their people what they value. This would indicate how they assign value to what they are offered.

By ignoring the realities of what their employees seek from work, organisations are missing an opportunity to optimise and to differentiate their workplace offerings. In Deloitte’s 2024 Gen Z and Millennial survey, good work/life balance, learning and development opportunities, alongside pay and other benefits, were the top reasons respondents joined new organisations. Therefore, considering these elements when designing a holistic reward package would bring organisations significant benefits when it comes to talent attraction and retention.

Deloitte’s 2024 Global Human Capital Trends report shows that when organisations focus on human sustainability – which includes creating value for employees, leaving them with better well-being and a heightened sense of belonging and purpose – there are more positive outcomes for both employees and employers.

What then, might human-focused reward look like? Perhaps lesser focus on salaries and bonuses and a stronger emphasis on long-term human sustainability would be the way forward. This can be achieved by redistributing investment into employees’ overall well-being and future employability.

Progressive companies already place employees at the centre of the decision-making process with flexible compensation models, where employees determine how much of their pay is delivered as cash vis-a-vis company shares, enabling employees to choose a cash flow profile that works best for them.

While these models may be more radical, other organisations are experimenting with flexibility on a smaller scale, such as by giving employees freedom to determine their own benefits from a suite of options, up to a maximum value.

Focus on best fit, not best practice

The next evolution of reward should not be a rush to hop onto trends, but be guided by a set of principles. In comparison to many other markets, where reward structures, particularly for senior leaders, have become homogeneous in response to regulatory and shareholder input as well as market norms, organisations in South-east Asia are relatively diverse in this regard, which puts them in good stead to experiment and refine their approach.

Three principles that organisations can adopt:

Firstly, start with a clear purpose. Define, articulate, and measure against the objective of what each reward element is specifically designed to achieve. Keep it simple and clear.

Secondly, work within your own context. Understand the expectations of your different stakeholders, including the preferences of your talent, and what they value. Design arrangements that work for you, and for them, not just because they align to the market.

Finally, provide human value. Consider reward in a broad sense – as an experience across all aspects of work, the workforce, and the workplace – and seek to create a holistic value exchange that leaves your talent better off because of their employment with you.

It is also imperative for organisations to understand the individual and business income tax implications of implementing or changing reward arrangements to ensure they are discharging their tax reporting obligations accurately. The taxation and corporate tax deductibility of non-cash benefits – particularly those delivered as part of equity schemes or salary-sacrifice-type arrangements – can be complex. Employers should do their due diligence to ensure they are compliant with their tax reporting and not end up on the wrong side of the tax authorities.

The future of work, and reward, will only become more complex. Following these principles provides the best opportunity for organisations to truly understand the purpose of their approach to reward, which will in turn help to differentiate themselves and deliver optimal value for employers, employees, and stakeholders in the wider community.