Total Rewards Quarterly

Innovations in Rewards Through Segmentation

Q. Could you briefly walk us through changes and innovations taking place in the HR space in the US currently? What are the challenges and trends you are noticing with firms right now?

A.While the technology sector in America is extremely innovative in a lot of areas of business, the same does not hold true when it comes to people management. For example, first, while we have been progressive in performance management by getting rid of the rating scales, we are still archaic in rewarding our employees wherein we use the method of benchmarking. And this benchmarking is not only on base pay but for all kinds of rewards leaving very little space for customization. While one can decide to pay employees a differential for certain kind of work, but there is very little innovation.

Second, when we start looking into different employee groups, there has been some effort over the past years to understand the employee lifecycle. Even this is a slightly simplistic approach because the output of such an exercise is identifying age groups and age cohorts. Once these age cohorts are identified, it is easier to customize rewards a lot more than before.

The innovative piece would be to think about this problem a little broader. Not only to look at employee lifecycle but also look into employee lifestyle. The next question to address would be how we can learn something about the employee’s lifestyle especially since data for this is not easily available.

At this point you do not want to boil the ocean but rather use the existing data to understand these trends. Some of the innovate organizations that I have worked with work with the marketing teams to understand the employees lifestyle through factors like age, income, hesitation or acceptance to move from one organization to the next, employee tenure, family background, where they stay, etc. The methodology used on such data is variations of cluster analysis. This methodology groups together people that are similar in their patterns. This is something that has become prevalent over the past couple of years and I have directly worked with two of these organizations. While it may not be a trend yet, it is the only viable alternative that I am seeing in the labour market out there right now.

Q. Older generation would want rewards to focus more on retrials, the younger groups wanted their TRO packages to focus on flexibility. In a developed market like the US, are there firms that are making this investment? Could you give us an example of how an organization has differentiated rewards on the basis of lifestyle?

A.We do not base it purely on demographics, since classifying the entire workforce into old and young could potentially be harmful and this could also be part of the problem that is faced. There is so much talk of Gen X, Y, Z and the millennials that we forget that lifestyles could cut across generations and they typically do.

One client I have worked with, segmented their workforce into different groups – we went into existing data to see for each segment what rewards elements that drive retention.

If you study the linkage between rewards and retention, it would give you quite a fair picture of what employees want. With this information we created seven different personas that represent employee lifestyles.

An example of one such persona could be ‘hiring stars’ – new hires, at high compensation and steep career trajectory. They live in wealthy urban neighbourhoods and they wanted to have recognition and did not want work-life balance.

If you step back and think about rewards, there are two things to keep in mind – how people perceive the rewards and how they take advantage of what is available and the other is the reality of the kinds of rewards that are offered. Aon helped the client in changing how we communicated the rewards in terms of an idea like a Total Rewards Statement. On their website the employees could go and select one of the seven personas they believe they fit into and the website had a brief on how the organization rewards each persona.

The next step was to identify areas where employees did not really look for customization in these aspects. An example of this is base pay where the employees did not want any variability, but for paid time off there is a lot. This firm used to historically provide leaves to those employees who had been a part of the organization for longer but this seemed counter-productive because our studies showed that the segment of employees that desired vacations most were those who had just joined. This also provided an opportunity to give the employees the ability to buy additional paid leaves.

Q. While updating the rewards proposition might not be a top priority for businesses, how does a CHRO go to a CEO and show him the value proposition of innovation in rewards and how would an organization track return on investment?

A.Typically, we see such change taking place when the CEO has a realization that HR needs to be a bigger business proposition than before. And therefore, the best approach for a CHRO to bring this up is to identify a business issue around rewards where they believe that customization would be the solution. When HR takes such a story and business case to the leadership, it automatically presents a goal to be able to measure returns on investment. The biggest problem in HR in the US, especially in the tech industry, is the lack of understanding of the importance of well-directed approaches. And often in HR, the problem is that we approach the problem not because there is a business problem, but because we still have a very ‘benchmarking’ mindset, we do it because the others are doing it. Everyone wants to take the initiative, but only if the others have.

HR business partners need to act as linchpins between people and business and really utilize their ability to strategically marry how people and business would affect each other. And what is missing today is having more people in HR who have a business mindset. The best method of tackling this problem would probably be to split HR into parts – strategic partners.

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