Plugging the Leaks: Optimizing Your Total Rewards Strategy

Companies are under pressure to attract top talent and manage costs, but leaving your total rewards program on autopilot can make it both more expensive and less effective, says Mercer.

Why it matters: Without regular reviews, total reward strategies can develop what Mercer calls “leakage,” inefficiencies that emerge from cumulative decisions around pay, structure, and incentives that no longer align with business needs.

Salaries: Over time, pay decisions made outside the formal review process, to retain top talent, and outside the formal pay band structure, can distort your pay design: 

• Unanticipated changes: Off-cycle job changes or role expansions; discretionary adjustments that create inequity; and merit increases to employees at pay band maximum.
• Lack of ROI: Market adjustments without ROI assessment.

Structure: Job roles naturally evolve, but unchecked changes—like title inflation or excessive layers of management—can add cost without improving outcomes:

• Unchecked changes: Too many promotions, too many people paid as people managers despite low levels of direct reports, and too many roles in higher level jobs relative to the market.
• Turnover traps: Above average turnover in high value roles; delay in removing poor performers; and automatically re-filling existing roles rather than considering whether a lower level would be enough.

Bonus: Bonus programs intended to reward performance can drift into becoming expected salary supplements:

• Cost management: Failure to tie bonuses to the company’s financial performance; having company and individual performance payouts that compound when individual ratings are high; and not separately funding individual incentive plan components.
•  Lack of rigor: Using subjective goals to determine bonuses and paying out above 100% target on a consistent basis.

Equity: Unless they are valued by recipients and influence behavior and retention, equity programs become an expensive tool with little return:

• Expansive use: Granting equity to lower levels of the organization without demonstrated ROI; granting equity in countries or talent segments where it is not valued; and using equity vehicles that are not understood by recipients.
• Ignoring data: Not using data to assess whether equity is achieving desired results.

Benefits: Benefits must be aligned with employee priorities and clearly understood to deliver value:

• Non-review: Retaining benefit programs that are underutilized by employees and sticking with long-standing contracts without revaluating cost.
• Overlooking key costs: Lack of focus on wellness and management of chronic conditions

The bottom line: Mercer provides a nice framework to review your total rewards package and make sure small inefficiencies aren't quietly compounding into major costs. Check out their free total rewards optimization guide here.