What Is Total Reward? (With Benefits and Components)

Updated December 14, 2022

Implementing a total rewards strategy can help an organization build an excellent team to facilitate long-term growth and success. It's beneficial to develop a plan that offers multiple forms of compensation and other attractive features to make the organization a desirable place to work. If you work in human resources, understanding why developing a compensation plan is important can help the organization compete for top talent. In this article, we answer the question, “What is total reward?”, discuss its benefits, list the components of total reward, and explain what to look for when evaluating it.

What is total reward?

Those who work in human resources and are looking to retain an organization's top talent might wonder, “What is total reward?” Total rewards are the tools available to employers who look to attract, motivate, and retain employees. This includes salaries, perks, bonuses, and other intangible employee benefits. These rewards aim to appeal to employees to keep them in the organization. Creating a total rewards strategy conveys that the organization is a premier employer.

Related: How to Create Incentive Programs (With Examples and Tips)

Benefits of a total rewards strategy

The benefits of implementing a total rewards strategy include:

Improved recruitment capabilities

When an organization quantifies the value of a total rewards strategy, they use it to show how valuable their benefits package is when speaking with potential candidates. Having an overview of a compensation package allows an organization to show employees which benefits they may not be using. They can use resources such as access to a benefits provider site or a rewards statement to show employees what's available to them.

Higher employee retention

When employees see how much a company is investing in them, this can lead to improved morale, a healthy work environment, and higher employee engagement. If an employee engages more in the workplace, they become more loyal to the company. This means that competing companies may require more than a salary increase to entice employees.

Increase in employee productivity

It's important for compensation to reflect the true value of an employee's work. This can help employees become more efficient and productive. It also rewards motivated, intelligent, and hard-working team members. For example, a company that provides benefits such as wellness programs, monetary rewards, or flexible work schedules can motivate employees to focus on reaching important goals.

Related: Complete Guide to Employee Incentives (With Examples)

Components of a total rewards strategy

A total rewards strategy combines compensation, benefits, and personal growth opportunities. These help to create a motivating work environment for employees. The components of a total rewards strategy include the following:

Employee compensation

Compensation is what an employee receives in exchange for their time, talent, and services. It comprises a base salary and extra monetary benefits. The following describes what a company can include in their compensation:

  • Basic pay: You can calculate this by dividing an employee's annual salary, minus any benefits, by the number of hours they work annually. Basic pay can be annual, monthly, or hourly, and it doesn't include raises, bonuses, or benefits.

  • Fixed pay: This is the fixed amount an employee receives at the end of the month, minus any taxable deductions. Employers calculate fixed pay by combining basic monthly salary with fixed monthly allowances, such as leave travel allowance, conveyance allowance, or medical allowance.

  • Variable pay: This pay changes according to an employee's performance or the results they achieve for a company. It's a one-time payment, such as a bonus, which an employee re-establishes and re-earns during each performance period.

  • Short-term incentive pay: This is a form of variable pay. Companies use it to reward employee performance during a period of one year or less.

  • Long-term incentive pay: This is a form of variable pay that focuses on rewarding employee performance for periods longer than a year. Common forms of long-term incentive pay include restricted stock, stock options, performance units, performance shares, and cash.

Employee benefits

For many organizations, offering employees benefits is an affordable and easy investment. An excellent package incorporates comprehensive benefits that are usually more than the minimum federal government requirement. Employee benefits can include the following:

  • Supplementary pay: Supplementary pay can differ between organizations and may include stock options, RRSP contributions, tips, or bonuses. It refers to any addition to a salary that improves an employee's well-being.

  • Workplace flexibility: A healthy work-life balance can directly impact an employee's performance. Many companies use a flexible work schedule to increase employee morale, improve work-life balance, and reduce work stress.

  • Paid leave: An organization can calculate compensatory time off, such as maternity leave and sick leave, by dividing an employee's annual leave balance by the number of pay periods they have within a year. Paid vacations and sick leave differ between companies, while the law governs some paid leaves, such as maternity leave.

  • Retirement benefits: A pension plan is an excellent way to raise employee retention and increase an employee's dedication and loyalty. Typically, a retirement plan provides employees with regular income after retiring, but many companies offer their teams a one-time payment.

  • Employee discounts: These may include discounts at various retail and food stores, spas, or gyms or employee cashback. Companies can also provide food vouchers or free food in the office.

  • Learning and development: This can increase employees' productivity and engagement in the workplace. Many companies provide opportunities for employees to strengthen their skills through various initiatives.

Related: What Is a Benefits Package? (With Components and Tips)

Performance recognition

Rewards for performance are more tangible than other total rewards. It's beneficial to encourage employees by setting goals and rewarding accomplishments and providing a platform for them to communicate with their colleagues. The most common reward programs include the following:

  • Annual bonus: It's common for a company to reward employees in the form of an annual performance bonus. The bonus amount may differ between companies, but an organization typically calculates it as a small percentage of an employee's annual salary.

  • Employee experiences: Companies use employee experience rewards to provide their teams with custom experiences and increase their work satisfaction. If employees feel enthusiastic and motivated, they can be more productive.

  • Performance awards: This is an excellent way to show commitment to employees and reinforce productive behaviour. Giving long-term awards can help everyone feel a sense of accomplishment for their efforts.

  • Work anniversaries: Giving employees real-time awards for work service anniversaries instead of traditional mementoes to mark long-term tenure is the new norm. If an employee works for a company for five or more years, a company may award them something worth more than a gift certificate or plaque.

  • Social media shout-outs: A shout-out on social media can be more valuable than a private e-mail message. Organizations that experience an increase in their success can show appreciation to employees by giving them a shout-out.

Related: What Are Reward Systems? (Including Benefits and Examples)

Evaluating the success of a total rewards strategy

Organizations create highly customized, effective total rewards strategies to engage employees. These strategies rely on how well an organization addresses specific factors that can influence its employees, such as their wants, needs, and expectations. The following are important indicators that can help a company measure the success of a total rewards strategy:

Employee retention rate

It's important for a company to provide its teams with the motivation to feel loyal, engaged, and inspired. A company can analyze its employee retention rate to measure its total rewards strategy's effectiveness. Retention measures how many employees stay with a company over a specific amount of time. It's an important indicator because the happier employees are, the longer they typically stay with a company.

Related: 13 Effective Strategies for Employee Retention (With Tips)

Employee productivity

A successful company depends on employee performance and productivity. A successful total rewards strategy can increase employee happiness. Employees who are happy are often more productive, which can make a company more successful. It's also important for a company to promote a workplace culture that can help it retain top employees while improving productivity.

Related: 14 Best Productivity Tools to Boost Workplace Productivity

Employee absenteeism

An excellent total rewards strategy can positively impact employee absenteeism. Increasing the amount that a company spends on a total rewards strategy can significantly decrease absenteeism. It's beneficial for a company to build a workplace culture that helps employees feel good about coming to work.

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