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How to develop a reward strategy
A reward strategy describes how an organisation will use reward policies,
practices and processes to support the delivery of its business strategy.
Within it, every reward issue or initiative should be viewed through the prism
of how it helps the business.
While the reward strategy should support the overall business strategy,
it is likely to be explicitly linked to the HR strategy. It is integral to HR
strategy because it is mutually supportive of other strands such as talent
management, performance management, and learning and organisation
development, which themselves support business strategy.
This XpertHR“how to”guide looks at the steps that an employer should
follow to develop a reward strategy.
The guide covers:
What is a reward strategy?
The purpose of the reward strategy
Total reward
Global reward strategy
Developing the reward strategy
Using reward to achieve business objectives
Key stakeholders
How to address reward priorities
Formulating and implementing the strategy
Planning implementation
Communication plan
Ongoing review
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How to develop a reward strategy
What is a reward strategy?
A reward strategy describes how an organisation will use reward policies, practices and
processes to support the delivery of its business strategy. Within it, every reward issue or
initiative should be viewed through the prism of how it helps the business. The reward
strategy should include: some guiding principles, what needs to be done in reward to reflect
how the organisation is developing, details of the mix of financial and non-financial rewards
to be offered, and a plan for implementation.
The purpose of the reward strategy
The aim of the reward strategy is to support the business strategy. It does this by:
n being integrated with HR strategy;
n enabling and incentivising achievement of corporate business objectives;
n rewarding the behaviours associated with business success;
n supporting and making real the values of the organisation; and
n helping to attract the skills the organisation requires to meet current and future business
needs.
The reward strategy should support the overall business strategy, but is likely to be explicitly
linked to the HR strategy. It is integral to HR strategy because it is mutually supportive of other
strands of HR strategy such as talent management, performance management, and learning
and organisation development, which themselves support business strategy.
Total reward
Successful reward strategies include a compelling offer to come and work for the organisation
and stay with it. That offer is not necessarily just about pay and benefits but also about
alignment of aspirations and values. Total reward is about the whole package comprising
both tangible reward, such as pay and benefits, and intangible items such as opportunity and
development. It is important to balance two key drivers - value and employee engagement.
Value is about managing costs but also about ensuring value to the business and a return on
investment in reward. Employee engagement is key to attracting and retaining motivated
employees.
Total reward strategy supports HR strategy by:
n combining the tangible aspects of the employment package, such as pay and benefits, with
the intangible ones, such as career and development opportunities and being associated
with excellence, to articulate the employer value proposition; and
n supporting the engagement, resourcing and talent and organisational development
strategies by providing a platform for structuring and sizing roles, recognising relative
positions, motivating employees and recognising development.
For more information on total reward see How to follow a total reward approach.
Global reward strategy
In global or multinational organisations it is important to establish what elements of
the reward strategy will be globally determined and what will be determined locally. For
example, it would be typical to establish globally determined principles such as paying
for performance and guidelines for bonus or long-term incentives because they support
corporate business objectives; whereas salary ranges, benefits programmes and specific
merit awards would be locally determined because of the need to be competitive in the local
market.

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Developing the reward strategy
In determining reward strategy the organisation will need to consider internal influences
such as:
n current reward practice and how it should change to align with business strategy;
n the views of key stakeholders (leaders, managers and employees); and
n organisation structure (for example the relative importance of the group and/or autonomy
of individual business units).
The organisation will also need to take into account external influences such as:
n market practice and trends; and
n the global/regional/sectoral context as appropriate (legislative, fiscal, economic, regulatory
and tax environments).
It is critical for the employer to keep checking with the business to ensure that the reward
strategy is still relevant, up to date and effective.
Using reward to achieve business objectives
The first step in developing a reward strategy will be to review the business strategy (if this
is not clearly articulated in a discrete document it may be derived from materials such as
annual reviews or CEO’s statements). The employer should identify the key factors that can be
influenced by people in the organisation and the reward actions that could make a difference.
The table below shows some example goals for organisations and how they are supported by
reward solutions and the business rationale.
Strategy/objective Reward solutions Rationale
Recognise and
reward excellent
performance
Use incentive and bonus schemes;
merit-related salary reviews; and/
or non-financial recognition (for
example awards or professional
recognition, depending on the
organisation context).
Promotes, encourages and/or
incentivises the delivery of business
objectives and desired behaviours.
Market related
Conduct a benchmarking exercise
against similar jobs, and use to
determine a market position that
fits with the business strategy -
individuals’reward may be related to
contribution, job size and/or market.
Employee perception is that
they are paid competitively
compared with the external market
considering the role and their level
of performance.
Equitable
Use reward structures that ensure
similar treatment to internal
comparators and appropriate
relativities between roles and
different levels of performance.
Employee perception is that pay
decisions are made fairly and that
the organisation lives by its values.
Be as good at
everything as core
business
Develop the reward policy and
process to define or match the best
practice in each of the organisation’s
markets/sectors.
Positions the employer as best in
class, promotes pride in employees
and reinforces satisfaction with
reward.
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Strategy/objective Reward solutions Rationale
Be innovative
Encourage/reward innovation and
achievement through recognition
schemes, appraisal criteria and
competency frameworks.
Encouraging innovation and
original thinking enables the
organisation to gain maximum
leverage from the intellectual
capital of its people, to differentiate
itself from competitors and to
establish a distinctive brand or
identity that will help attract
high-performing individuals in the
labour market.
Focus on the
customer
Incentivise delivery, quality and
service through reward and
recognition programmes that
promote customer service practices.
For example, total reward promotes
pride and affiliation in the company
so employees offer a consistent
message to clients.
Ensuring a high level of customer
service increases the likelihood
of repeat business, develops
and maintains a reputation for
excellence, supports the value
chain by ensuring employees are
satisfied and engaged and gives a
positive image to customers.
Reduce the cost base
Define the measures of the return
on investment in reward and
monitor the impact of reward
initiatives. Build reward capability
of HR and the line managers by
knowledge and communication
training to obtain the best impact
from reward programmes. Leverage
benefits purchase by commercial
procurement strategies to gain
advantages of economies of scale.
Such actions enable effective
short-term budgetary control and
safeguard the longer-term financial
wellbeing of the organisation.
They also promote a sustainable
future business for all stakeholders
including shareholders and
employees, and ensure that
decision-making in reward is
consistent with business strategy
and generates value.
Be a good corporate
citizen
Adopt a total reward approach which
includes social responsibility to
promote pride and affiliation in the
employer.
Building an attractive corporate
reputation and brand will aid the
business strategy by promoting
positive perceptions of the
organisation in its markets and as
an employer.
Key stakeholders
When developing the reward strategy, it is important to engage in consultation and obtain
buy-in across the whole organisation. The reward strategy will be more relevant to the
business and offer a much better chance of buy-in and successful implementation if what
people think is taken into account. It may be necessary to invest in building understanding
to facilitate debate at the right level: senior executives should be consulted on key objectives
and relevance to the business; and management on the skills and support they need to make
reward decisions and communicate reward effectively.
Employee consultation may be effected by reference to specific reward questions in
employee attitude surveys but organisations may also consider feedback from sources such
as exit interviews and annual performance and pay reviews, together with any existing
employee consultative structure.
How to address reward priorities
The organisation will need to review the whole current reward offering, looking at each
element such as salary, bonus, benefits and intangibles to identify how each element
supports the business strategy by delivering value in terms of employee outcomes such as
attraction, retention and motivation.

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The idea is to cover all the relevant aspects of business and people strategies, so that there are
no gaps and no overlaps. An organisation should not be paying for the same thing twice, for
example by confusing the roles of salary and bonus.
The organisation should review everything in its reward offering, considering the following:
n What is its purpose?
n How does it support the business?
n How does it support the broader HR strategy?
n How do we measure its effectiveness; and what can we do to make it more effective?
By conducting this type of gap analysis the organisation can start to establish the direction of
travel that the reward strategy should take and establish some pointers for priorities. These
can be refined further through consultation.
The reward structure should comprise elements that each have a purpose. For example:
n basic salary reflects ongoing contribution, performance and size of job;
n bonus rewards individual achievement and enables employees to share in success;
n executive reward recognises the roles of executives in achieving business targets; and
n benefits are market competitive, may support the organisation’s values (for example caring
for the environment or being family-oriented), and may offer choice and flexibility to
employees.
In devising the strategy, organisations should consider the relative cost of reward items and
their perceived value by employees and where possible focus spend on items that give best
return in terms of perceived value. They should bear in mind that the more expensive benefits
might be less widely appreciated. Organisations may also think about targeting different
groups of employee within the workforce and offering flexibility or choice within the reward
programme.
Formulating and implementing the strategy
The table below summarises the key steps that organisations need to follow when developing
a reward strategy.
Phase Actions
Collect
and review
information
Collect and review corporate information such as mission statement, values and
business strategy; and basic reward data such as headcount, reward structures (for
examples grades and job evaluation), pay review frequency and processes, reward
cost and existing reward elements (such as salary, bonus, incentives and benefits),
linkage between reward and performance management and trade unions, different
types of pay for different categories of employee and how executive reward relates
to the rest of the organisation.
Analyse the
data and
formulate
an initial
strategy
Review what this information tells the organisation about the relationship of reward
to business and HR strategies and whether or not reward supports the direction of
the organisation. Consider any apparent issues such as:
n under/overpayment comparative to market or internal comparators;
n inconsistencies by employee group, business unit or location;
n fairness, equal pay and discrimination;
n feedback from employee surveys and exit interviews;
n where leavers go and where joiners come from and if reward is a factor in these
decisions; and
n what the skills of today and tomorrow are and whether or not pipeline is sufficient.
Use this analysis to develop an initial strategy and identify associated reward
interventions.
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Phase Actions
Develop and
refine
Consult and discuss initial findings with stakeholders such as senior executives,
HR, line managers and possibly employees. Discuss and explore the practical
implications:
n Test potential actions against emerging principles.
n Model costs and the impact of change.
n Identify the cost and the benefits of a new strategy.
n Determine what success would look like and how to measure return on
investment in reward.
When you have a robust proposition, develop an associated implementation
plan and communication strategy in order to cover questions on detail and
implementation as well as on strategy.
Consultation
Identify key people from the organisation to contribute or be consulted such as
senior executives and subject-matter experts. Think about their expectations and
how to meet them, as well as how to keep them informed and involved. Talking
with stakeholders will make the strategy better and develop a broader sense of
ownership.
Approval
The reward strategy should be agreed at the highest level in the organisation
because it is about how to support the strategic direction and is likely to involve
a programme of action over an extended period. It is therefore essential to obtain
senior buy-in to give impetus and credibility to planning implementation.
Planning implementation
As part of the process of developing a reward strategy, employers should develop an action
plan to turn the reward strategy into reality by identifying actions associated with each
reward element such as salary, bonus, benefits and intangibles.
The employer should develop a project plan that includes resources, outputs and timescales.
It should define deliverables, contingencies and individuals’roles including responsibility for
approval and implementation. Oversight for the reward strategy should be at the top level of
the organisation and an individual should be appointed to report to this level on progress.
Organisations should define the roles of stakeholders such as HR and reward professionals,
and regional and national HR, as well as other specialist areas such as communications,
systems and finance, as appropriate. The organisation will need to consider potential risks
and issues and how to manage them. Finally, the organisation will need to agree who has final
sign-off for the reward strategy and is responsible for implementation.
Communication plan
The project team should develop a communication plan to support roll-out throughout the
organisation. Employers need to remember that the principles are global but how they are
applied locally is determined by local factors so there may be a need for local communication
in addition to corporate messages, but the two must be consistent.
Reward communication should be:
n simple, to promote understanding among employees and managers and facilitate better
management of reward decisions;
n consistent with the reward strategy to ensure continuing credibility;
n aligned with business and HR strategy to support policies on engagement and individual
performance and be directly relevant to organisation success; and
n clear about objectives and transparent about process so that people feel fairly treated.
Methods of communication may include online, paper or in person (depending on the culture
and type of workforce) but communication will be most effective when integrated with other
corporate messages and targeted to specific employee groups.

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The role of line managers should not be underestimated. The most effective reward
communication comes from line managers so it is essential to ensure that they understand
the strategy and have the skills and knowledge to communicate about reward.
Communication can also play a key role in ensuring return on investment, as effective
communication of the reward offering promotes better employee understanding of the
overall package, its components and its value. It can also improve employees’perception of
their pay because of the sense of fair treatment with respect to others in the organisation,
competiveness with the external market and integration of reward with business strategy.
Ongoing review
Persistent effort will be required to embed the changes with HR, managers and employees
until they become familiar with the strategy. This should include regular reporting on
progress and monitoring of the impact of interventions to assess if adjustments are needed
or respond to any unexpected effects. Organisations should define the responsibility for
implementation up to the point when strategy becomes part of business as usual.
There is no given lifespan of a reward strategy - it is a case of a continuous feedback loop.
Organisations should build in a regular way to check with the business that the reward
strategy is still relevant, current and effective. It should be possible to integrate this with
reviewing HR strategy and its relationship to business strategy. In this way reward maintains
its position as an integrated part of the HR strategy, linking with resourcing, learning, talent
and engagement to contribute to business success.

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More guidance from XpertHR
“How to”guides on:
n benchmarking your pay and benefits against those of
other employers
n deciding the pay and benefits for a new position
n choosing a salary survey
n using a salary survey
Good practice guides on:
n performance management
n retaining staff
Salary Surveys to benchmark the pay and benefits of
your staff against market rates
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practice, compliance and benchmarking for HR professionals.
Let us show you how XpertHR can immediately benefit your
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