TOTAL REWARDS:
Direct and Indirect Pay

By Terri Herren

Total rewards include direct pay - base salary, variable pay, promotional increases, and indirect pay – benefits, training and recognition.  Because it is typically a company’s most significant investment, the management of total rewards should be part of the overall strategic business plan.  A first step in assessing total reward offerings begins by analyzing a company’s ability to attract and retain top talent. 

There are three basic segments of direct pay – base salary, variable pay and promotional increases.  

Base salary is predicated on:

• The competencies the company requires and team members use to produce results;
• The team member’s consistent performance;
• The team member’s value in the job market

Variable pay is most effective in rewarding team members for achieving specific business objectives.  The most successful model includes 3 to 5 team member goals aligned with company goals and rewards based on defined contribution levels.

Variable pay is awarded only when the business achieves economic success and team members add measurable value.  Variable pay serves to manage total pay costs because base salaries are not adjusted.  Each performance period focuses on different or expanded business objectives to qualify for rewards.  Variable pay goals should not be a regular part of a team member’s job.

Promotional increases reward and recognize team members for developing required competencies and advancing their contribution levels.  Promotional recognition and accompanying rewards are playing more crucial roles in retention of key talent, particularly Generation Y.  Criteria for promotion should be defined and communicated for each level so team members can focus on specifics needed to advance their careers. 

Direct pay will vary for each company but the common success factor is having a process that defines and communicates performance expectations and measurements.  The process allows team members to understand the importance of adding value by accomplishing objectives that benefit the company and themselves.

Indirect pay, particularly benefits and training, also must take a strategic approach.  A company must assess its best return-on-investment and allocate its resources appropriately.  There are normal training costs associated with upgrading skills and knowledge.  However, the greatest training investment should be directed at increasing the company’s competitive advantage by developing and retaining top talent.  Benefit costs continue to rise with no end in sight.  Offering competitive benefits and allocating costs must be planned within the framework of total rewards.

TOTAL REWARD COMPONENTS

DIRECT PAY

INDIRECT PAY

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