Treat Your Employees as Consumers

Designing total rewards based on employee preferences can mean a more highly engaged
workforce … and a better return on total rewards investment.

In their 1998 book “Work & Rewards in the Virtual Workplace: A New Deal for Organizations and
Employees,” Dr. N. Fredric Crandall and the late Dr. Marc J. Wallace Jr. painted a 21st-century
vision that focused on a “new deal” to replace the traditional work and rewards arrangements
offered by most organizations.

Today, many of the predictions of the book — for example, the convergence of economic and
technological forces to create a new level of business competition — have come true, and a new
social contract has emerged between companies and their employees.

… modern organizations  have learned that highly skilled  contributors actually have
myriad  employment opportunities, even in the  most dire economic environments.

This new contract has become familiar: replacement of the promise of pay progression plus
lifetime employment and economic security with an agreement to provide competitive market
pay plus skill and experience development that enables future employability.

Now that organizations have more than a decade of experience operating in this millennium,
many have come to terms with the reality of this new social contract for those on both sides of
the table:

 The view of employers to their employees is: “We will employ you as long as you are
adding value commensurate with your costs.”

 In return, employees offer back: “We will work here as long as the value of our rewards
is commensurate with our contributions.”

This new social contract would appear to have transferred power to employers, but modern
organizations have learned that highly skilled contributors actually have myriad employment
opportunities, even in the most dire economic environments. And they are not burdened by the
constraints of loyalty or mutual long-term obligation.

We now know that those with the most valuable skills anticipate changing jobs even more
frequently than did their Baby Boomer parents. These valuable employees expect that, at some
point, their current companies may no longer need them (perhaps because the job or
organization will cease to exist in its current form). They learned long ago that they are
responsible for their own career development and their own long-term economic security. They
also have been taught that there is more to life than work, that they no longer necessarily need
to be tied to a corporation to earn a living and that they can shift to new geographies or even
different sectors to find opportunities when their current gigs go stale or go away.
These factors have transformed this population of marketable employees from informed job
seekers into astute consumers of total rewards and broader employee value propositions. The
most visionary organizations have realized this and have begun to treat employees not just as
workers, but rather as consumers … of their brand, mission, culture, leadership style,
organizational offering, career development opportunities, work environment, and, yes, their
total rewards programs.

Yet, many C-suite executives reject this perspective, believing that such notions lead only
to higher rewards costs, more entitlement and lower productivity. To the contrary, however,
research supports that organizations treating their employees as smart consumers actually
achieve lower rewards costs, higher engagement, higher retention, greater productivity and,
ultimately, better financial performance.

The recent “2012-2013 Global Talent Management & Rewards Study” by WorldatWork and
Towers Watson revealed that companies that have adopted an integrated approach to total
rewards strategy, design and delivery decisions — supported by an overarching employee value
proposition — are five times more likely than the average company to report their employees
are highly engaged and twice as likely to achieve financial performance significantly above their
peers.

How is this possible?

Segmenting Your Employee Market

A central tenet of marketing theory says that not all customers want the same things. The
corollary is that not all customers are created equal in their importance to the company. It turns
out that both concepts apply to the market for employees.

Today’s most effective organizations use consumer marketing principles to define and
understand employee groups along dimensions that reflect not only their needs and wants but
their contributions to the success of the business.

These organizations begin by defining the most important market segments within the
employee population. Effective segmentation criteria leave generous room for creativity in
exploring the values, attitudes and preferences of the employee population. Some begin with
standard demographic and generational categories. More specific segmentation variables might
include strategically critical roles or locations, performance or potential levels, engagement
levels, life stage segments and attitudinal categories.

Along these latter lines, a global life sciences company wanted to understand how different
parts of its employee population valued particular elements of the organization’s existing total
rewards portfolio. The analysis did not stop with conventional demographic segmentation. The
team learned that rewards preferences tended to vary surprisingly little across the generational
demographic clusters. More meaningful was a set of four employee groups defined by rewards
preferences rather than other traits. The four segments, with summaries of their rewards
preferences, are shown in Figure 1.

Segmentation according to these factors gave the organization additional information and
insight beyond what it could have derived from conventional segmentation. The themes
sharpened the messages aimed at employee segments, enabling program designers to invest in
programs that met employee needs and divest from programs that did not. The findings also
enabled communicators to speak in terms that addressed what mattered to specific employee
groups.
Employees’ perceptions of value tend to increase when they receive clear messages that speak
directly to their interests, and segment definitions can take on an even more individualized and
creative feel through the creation of personas that personalize each segment.

Measuring How Employees Value Rewards Elements

After segmenting the employee population, companies must next measure preferences, in this
case testing rewards elements to determine which have the highest perceived value to
particular employee segments. The objective is to understand and define the value proposition
that carries the greatest appeal to each group. Consumer-products companies do the same
thing when they conduct sophisticated market research to understand how their target
segments will respond to the features and price of a proposed offering.

This research can take a number of forms, including focus groups, data mining, employee
surveys and trade-off analysis (which presents employees with scenarios to determine what
they view are the most and least valuable components of their rewards package).

As one example, in its segmentation and preference analysis research, the global life sciences
company used trade-off analysis to discover that increasing flexible work arrangements would
cost the organization nearly nothing financially but would increase employee engagement by 2.1
percentage points. Conversely, reducing the trend of growth in employees’ medical premiums
would produce a similar increase in engagement (2.1 points), but with a multimillion-dollar
incremental cost. This information proved invaluable to decision makers and made the choice
obvious.

A credit card customer service organization also employed the trade-off analysis approach,
focusing specifically on the high-turnover customer service population, a segment critical to the
company’s strategic success. By understanding what aspects of the rewards portfolio most
directly influence the decision to stay with the organization, the company hoped to tailor
rewards to reduce the cost of losing experienced, productive employees.

The company crafted a survey that asked employees to review an array of additions and
reductions to their current rewards portfolio and provide the opportunity to indicate how they
valued specific rewards elements.

The survey tool provided a broad spectrum of rewards elements within which employees could
make dynamic trade-offs that were based on previous responses. Their rewards choices
included foundational and performance-based compensation (base pay increases and bonus
opportunity) and benefits (retirement plan contributions and medical coverage costs, for
example) as well as career and environmental rewards, such as training and flexible work
arrangements.

Analyzing the Financial Implications of Rewards

Once employees told the company what they valued, these insights provided the information
required to translate that data into rewards the organization can deliver (market researchers
would call these utility preferences). The final program assessment hinged on the relationship
between what employees value (and their associated behaviors) and the cost to provide any
specific array of rewards.

To accomplish this, the credit card customer service organization supplemented the findings on
employees’ reward valuations with two other critical pieces of data: the cost to deliver each
reward component tested, and the financial implications of changes in employee behavior
associated with different rewards combinations. (See Figure 2.)
Each alternative tells a story of trade-offs. For example, in Alternative 1, the data suggest that
turnover would decrease if pay was raised, but the salary cost increase would exceed the
savings from greater retention by more than $900,000 annually.

The analysis ultimately enabled the company to look for ways to fund more desirable rewards
by shifting funding away from less desirable rewards areas (with lower perceived value for their
cost) — in this case, the investment in a relatively rich defined contribution retirement plan,
which the often-younger call center population did not value as much as other programs.

Conclusion

Organizations have come a long way during the past 15 years in understanding their workforces
and creating more meaningful and differentiated total rewards programs. The most astute
borrow methodologies from marketing and finance to design rewards programs that meet the
needs of key employee segments through prudent investment of the organization’s rewards
dollars. The next step for most is to follow the lead of other consumer-driven organizations to
optimize the stickiness and long-term engagement of their most valuable (or simply hard-to-find
or -retain) employee segments. The goal is to create a win-win-win among employee
preference, economic cost and company performance.
The Impact of Consumer-Driven HR
Over the past decade, there has been a growing trend among global organizations to treat their
employees as internal consumers. The most innovative of these companies have gone a step
further by embracing the concept of “consumer-driven HR” — that is, a mindset and an
operating philosophy that acknowledge and respond to the increasing variety of work-
related choices available to employees. This approach has significant potential to an impact on
the design and administration of total rewards programs, thus influencing the work and careers
of total rewards professionals around the world.

Characteristics of Consumer-Driven HR

Companies adopting the characteristics of consumer-driven HR recognize that employees today

have a broader level of information and choice in many areas, including a greater range of
career options, a wider array of employers from which to choose and more flexible programs
offered by specific employers (with more features selectable by employees). These expanded
choices have in turn made corporate life a more efficient marketplace for its increasingly
savvy employee-consumers.

As Figure 1 illustrates, the roots of this shift in program design actually go back to the 1980s,
when companies introduced choice-based programs, such as flexible-benefits and cafeteria
style plans. The trend continued with the migration from traditional defined benefit pension
plans to 401(k) plans that put employees in the driver’s seat in terms of savings amounts,
investment decisions and fund disbursement.

… leading companies have turned to  consumer marketing theory to gain  insights about — and
connect with —  their current and potential talent.

Today, change continues as private health insurance exchanges provide an alternative to

traditional single-carrier plans in the United States. Coupled with the evolving demographics
of today’s global workforces and the need for employees to become more accountable for their
role and decisions in career and benefit choices, these trends have motivated organizations to
tailor elements of the work experience to their increasingly diverse — and well-informed
— employee populations.

Today’s employees are more mobile, educated, technologically enabled and short-term-focused

than ever. They also have become informed consumers of their organizations’ brands,
culture, and compensation, benefits and career development programs. And with the first
Generation Z employees entering the workforce, companies can expect that the preferences
and expectations of their employee populations will continue to change, becoming
more personalized and more sophisticated along the way.

In response to this emerging consumer-employee, leading companies have turned to

consumer marketing theory to gain insights about — and connect with — their current and
potential talent. Just as companies are using technology and Big Data to direct products
and services to ever more carefully targeted segments of customers, organizations are starting
to understand the different segments of their varied workforces including what motivates them
and what elements of the employee value proposition (EVP) they value most.

Treating Employees as Consumers

The 2014 “Global Workforce Study,” conducted by the authors’ company, reports that 70

percent of employees believe their organization should understand them to the same degree
that they are expected to understand external customers. Yet only 43 percent of employees
report having an employer that understands them in this way. A central tenet of marketing
theory suggests that not all customers want the same things. The corollary is that not all
customers are equally important to the company. Both concepts also apply to the market for
employees. Companies that take a “consumer-driven HR” approach use consumer marketing
principles to define and understand employee groups by what they need and by their
contributions to the success of the business. For example, the most innovative companies:

 Segment the employee market. Innovative organizations begin by defining employee

segments in ways that extend beyond classic demographic groupings.
Effective segmentation criteria leave generous room for creativity in exploring the
values, attitudes, preferences and relative contributions of the employee population.
Most organizations begin by collecting information from standard demographic and
generational categories, but more relevant segmentation variables emerge, including
strategically critical roles or locations, actual and potential performance levels,
engagement levels, life stage segments and attitudinal categories. These data
 provide organizations with additional information and insight beyond what can be
derived from conventional segmentation approaches.

 Measure how employees value rewards elements. After segmenting the employee

population, companies can test rewards elements to determine which have the
highest perceived value to particular employee groups. The objective is to understand
and define the value proposition with the greatest appeal to each group. Consumer-
products companies do the same thing when they conduct sophisticated
market research to understand how their target segments will respond to the features
and price of a proposed offering. This research can take a number of forms, including
focus groups, data mining, employee surveys and tradeoff analysis (which presents
employees with scenarios to determine what they view are the most and least valuable
components of their rewards package).

 Analyze the financial and behavioral implications of rewards. Once companies

understand what employees value (market researchers call these utility preferences),
the information can be translated into guidance for determining rewards that the
organization can deliver. Program design hinges on the relationship between what
employees value (and the resulting behaviors, like commitment and engagement, that
these programs encourage) and the cost to provide a specific array of rewards. The
ultimate goal is for the company to identify ways to fund more desirable rewards by
shifting investment away from less desirable rewards areas (those with lower perceived
value relative to cost).

Examples

Earlier this year, a top global employer was considering a move to private health-care

exchanges, primarily to reduce costs. It discovered that only about one-third of its U.S.
workforce preferred to have a choice of health plan or carrier, and the executive team was
concerned that many employees would perceive exchanges as a take-away. The total rewards
team recommended that the company conduct a detailed conjoint analysis to determine
whether, and to what extent, specific key employee groups in the organization valued health-
care choice more than others. The output of the analysis was powerful, showing that several key
groups actually favored choice and attached positive perceived value to health-care programs
that offered choices over those that did not. These groups included difficult to retain Generation
Y employees (73 percent preferring choice), high performers (61 percent), mid-career managers
(60 percent) and those in certain key-skill roles (53 percent). For these critical employee
segments, a move to exchanges could actually enhance the employee value
proposition, increase engagement and save the company millions of dollars in health-care costs.

In another example, a global life sciences company’s tradeoff survey reported that increasing

flexible work arrangements would cost the organization nearly nothing financially (and could
even save real-estate costs), but would increase employee engagement by 2.1 percentage
points. Conversely, reducing the trend of growth in employees’ medical premiums would
produce a similar increase in engagement (2.1 points), but with a multimillion-dollar incremental
cost.

The Chief Employee Experience Officer

Last year, Scott Sherman, head of human resources of Allergan, observed, “Just as the chief
marketing officer has become the chief consumer experience officer, I aspire to become the
‘chief employee experience officer.’ That’s a long way from being a personnel
manager.” Sherman is not alone in this view. The evolution of the chief HR officer (CHRO) role
from a backroom personnel director to C-suite continues, as does the value these executives
contribute to their organizations. (See Figure 2)

While today’s CHRO may have come a long way from the tactical, operationally oriented
personnel manager of previous generations, leading heads of human resources are taking
another step beyond the strategic, business-focused nature of the modern CHRO role. This new
incarnation, the “chief employee experience officer,” acts as a board adviser and
futurist focused on differentiating talent (that is, identifying key roles and the employees who
excel — or have the potential to excel — in those roles), and helping organizations
redefine “employee” as an active value creator rather than simply an asset. Chief employee
experience officers envision well-designed programs as a necessary-but-not-sufficient
condition for creating a high-performance organization. Their ultimate objective is to weave
together a company’s brand, programs, culture, vision, values and environment to create a
differentiated experience for its employees.

A great CHRO will say, “I direct programs to balance the needs of employees, the company and
shareholders.” But a great chief employee experience officer will say, “I create an employee
experience that unleashes the potential of our talent to create incremental value for
our customers and shareholders. And I do this in a way that pulls the highest possible value out
of every dollar my organization invests in employees and their work environment.”

Impact on Total Rewards

There is considerable good news here for total rewards professionals. First, most have been
working in organizations that long ago stopped looking at specific rewards programs in a
vacuum. The siloes separating compensation, benefits, learning and development, and work-life
are far less pronounced today than they were in the past. Progressive organizations routinely
look at the entire total rewards picture when designing programs — regardless of what part of
the HR organization has responsibility for each component. They share the total value of
programs (the “total deal”) with employees through comprehensive rewards statements and
other communications designed to emphasize that “rewards” means much more than just
pay. Second, most organizations have a history of offering programs that involve employee
choice. Whether it is a flexible benefit program, a 401(k) or 403(b) plan, a PTO program, a
spectrum of alternative work arrangements, or a private health-care exchange, virtually
every employer today has at least some experience with employees making selections,
exhibiting choice and acting as informed consumers. The next step for total rewards
becomes moving past program design to create a truly integrated and differentiated experience
for employees.

The siloes separating  compensation, benefits,  learning and development,  and work-life are far
less  pronounced today than  they were in the past.

A quick scan of the public websites of leading organizations provides a vision for the future in
terms of differentiated experience. At the Procter & Gamble career site, for example, potential
candidates learn that P&G “hires the person rather than the position.” The site is video
intense — viewers can see vignettes of employees in Asia, Europe and the Americas talking
informally about their jobs. And they also can watch a humorous four-minute clip of a potential
hiree being interviewed by a bottle of liquid Tide. It feels more like a consumer product
experience than a classic job search moment, which is the whole point.

Google expands its “Do cool things that matter” brand slogan to include three categories (“Build
cool stuff; sell cool stuff; do cool stuff”) that explain various teams and roles to current and
potential talent. This is how the company appeals to employees and recruits in a
more interesting way — and in a manner more aligned with the Google culture — than simply
using such conventional department names as engineering, sales, customer support, finance
and administration.

Kellogg’s applies its “Grow with us” brand to its employee experience. IBM says, “Help us build a
smarter planet.” JPMorgan Chase says, “Let’s build our legacy together.” Each of these
organizations then connects its programs to the intended (and promised) employee
experience. Well-designed, market-competitive, financially sound programs remain at the core
in each case, but leading total rewards teams take the next step to connect them in an
integrated and comprehensive manner, just as their counterparts in marketing do for
the external consumer experience.

Impact on the Total Rewards Professional

Given these trends, today’s total rewards professionals are well positioned to refocus on
optimizing the value of the employee experience produced by their organizations’ investment in
a total rewards portfolio. They may ask their CEO: “How often do you spend $3 billion
to develop a product offering without first finding out whether it will sell?” The response is most
likely, “You know darn well that if I did that too often, I wouldn’t stay in this chair long.” Yet
every year the typical global organization with 20,000 employees invests approximately $3
billion in employee programs that include salaries and bonuses, stock grants, health-care and
retirement benefits, training and paid time off. Total rewards professionals with a focus on their
employee-consumers can help extract the highest possible value from this investment.

… virtually every  employer today  has at least some  experience with  employees
making  selections,  exhibiting choice  and acting  as informed  consumers.

A New Way to Go

Organizations that embrace consumer-driven HR have learned that by understanding and

acting on employee needs and preferences, they are more likely to have motivated and
committed workforces, even with total rewards budgets that are no greater in aggregate than
the investments of their peers. Their employees will be more engaged, serve customers better,
innovate more frequently and consistently, and protect company assets more conscientiously.
Experience with organizations that have performed the return on investment
analysis demonstrates that superior financial results become part of the equation as well.
Human Resources and the Emerging Employee-Consumer
By Thomas O. Davenport and John M. Bremen, Willis Towers Watson

What is the best way to describe the relationship between employers and employees? Since the
early 1990s, employees have evolved from costs to assets, from hired hands to associates, from
workers to thinkers, from cogs in the industrial machine to consumers in the customer service
machine.

This next step in the evolution of employee identity is to envision employees as an internal
marketplace of consumers. The offering they seek (the employee value proposition, or EVP) is a
portfolio of elements (including purpose and culture, the work they do, the people they work
with, and formal rewards such as compensation and benefits, which they receive in their
exchange with the company). To this exchange they bring their human capital — the intangible
assets (skills, talent, knowledge and behaviors) they possess; these, combined with other
organizational assets, create value for the enterprise.

Where does this leave the role of human resources? Thinking of employees as a market of
consumers requires HR to redefine itself not only as the organization’s human capital function,
but also as its internal marketing and branding function. To play this role, HR must take a page
from the marketing department’s playbook and apply traditional marketing approaches to
employees. Marketing’s core concept is that a firm’s marketplace goals can be best achieved
through identification and satisfaction of consumers’ stated and unstated preferences. HR’s
focus in this environment would be to identify the needs and wants of internal consumers and
prudently invest the organization’s people resources to deliver the highest value to employees
at optimal cost to the enterprise.

Many organizations have a long way to go to make their employment offering truly consumer-
focused and deliver it with anything like the sophistication required of their external marketing
group. As Exhibit 1 indicates, less than one quarter of employees surveyed in Towers Watson’s
2014 Global Workforce Study say that their organizations effectively communicate, deliver and
competitively differentiate their employment offerings. More than half of surveyed employees
say their companies either have no articulated EVP or haven’t communicated it clearly.

The fourth level – what we call Segmented and Differentiated – represents the minimum
expectation of an effective external marketing unit. This is the standard to which HR will need to
rise to compete effectively for the next generation of talent.

How should HR go about achieving this goal? Adopting an internal consumer-focused approach
involves six specific process steps.

Step 1 – Idea Generation

No matter how successful you perceive the company’s current employee value proposition to
be, you will need to evaluate it periodically. Is it attracting the talent the company needs to
succeed? Are recruiters and managers closing the deal with more than a fair share of candidates
for critical jobs? Does key talent stay with the company once they become fully productive? If
you can answer “yes” to all these questions, congratulations! But even in an organization that is
winning the talent battle today (and especially if its competitors believe it is winning), HR should
be thinking about how to stay ahead by expanding, upgrading, focusing, and enhancing the
value proposition.

Ideas for improving the value proposition fall into four basic categories:

 Improvements to the current elements of the EVP: Much as auto companies have
continuously improved their products over time, HR should look for ways to make
incremental improvements to existing elements of the value proposition. Adding
additional health care providers to the current program would be an example, much like
adding wireless capability to an existing minivan model.

 Additions or extensions to the current value proposition: Consumer products companies

frequently build on the success of existing products by extending product lines – mini
Reese’s Peanut Butter cups, for instance. A value proposition analogy might be the
addition of new forms of equity (restricted stock, for example) to an existing stock
option offering.

 Repositioning of specific value proposition components: Procter & Gamble repositioned

Febreze from an occasional-use odor remover to a fabric freshener with everyday
application. A company could do the same by repositioning its subsidized gym
membership not just as a nice perk, but also as a way for employees to improve their
health and wellness and reduce their (and the organization’s) health care expenses.

 New value proposition elements: Some products are revolutionary enough that they
create whole new markets. Disposable diapers did that, as did smartphones. Who knows
what value proposition analogs your organization might come up with – perhaps
providing every employee with a puppy or a new Lamborghini…or more realistically,
child care, elder care, pet care or financial wellness counseling. Some companies
(especially those that serve consumers directly) have unique opportunities to provide
discounts or different levels of access to the company’s own products.

The goal of the idea generation phase is to develop a roster of new or modified EVP elements.
Where does the list come from? Brainstorming among HR experts; focus groups with
employees; interviews with new hires from competitor organizations; discussions with the
external recruiters; competitor information from Websites and other public sources;
presentations competitors make in public forums (such as meetings for HR professionals).

Step 2 – Screening
In this second step, test the feasibility of the EVP concepts generated in Step 1. The goal is to
weed out ideas with limited appeal or large practical barriers to implementation. Here are some
questions to use:

 How will this idea benefit employees? Which segment of the internal market will care
the most? How important to competitive success are those employee segments? How
large is the internal demand likely to be? You’ll answer these questions more rigorously
later; for now, just estimate. On-site daycare, for example, is an attractive concept.
Many organizations have found, however, that it has high value to some employee
segments (those with young children) but limited appeal across the breadth of the
employee population.

 Where will the idea place the EVP and rewards array competitively? Will it move the
company from a lagging position to parity or provide an opportunity for differentiation?
If the latter, is it an advantage the organization can sustain (because, for instance, the
company has more available cash than the competition, a stock with a higher beta or
the ability to give employees bigger discounts on a product)?

 How administratively feasible is the idea? As every consumer products company knows,
the total cost of actually taking an offering to market includes distribution. In reward
terms, this includes the cost of systems, people and external service providers to deliver
the reward to employees. Are those costs and administrative burdens manageable or
prohibitive?

 How well does the idea align with the organization’s reward philosophy? If your culture
is inherently intolerant of flexibility, is it realistic to try to introduce flexible hours or
work athome arrangements? If pay-for-performance is part of your stated reward
strategy, would it be inconsistent to shift funds away from bonuses or stock options and
into base pay or other forms of rewards?

If questions such as the ones above make your leaders uncomfortable, should you consider
revising your reward philosophy? If many of HR’s ideas appear to have merit, given business
strategy and competitive position, but seem at odds with the principles that guide reward
design, it may be time to change the core principles. Perhaps they were established by a
different leadership team or under a set of no-longer-relevant business and workforce
assumptions.

Step 3 – Concept Development and Testing

Having narrowed the list of ideas to those most likely to be both important to employees and
feasible to support, HR’s next step is to involve internal consumers in the testing process. The
goal is to understand better which specific groups in the organization find offerings appealing,
and to evaluate the best way to help employees understand the benefits of those offerings.
Start by defining the most critical segments within the employee population. Pinpoint segment
definitions you can consistently identify and reach. Tap into meaningful behavioral differences
within the target population — differences that provide guidance on real actions you can take.
For instance, a segmentation approach based on levels of risk-seeking behavior might be useful.
Financial risk-seekers would likely value incentive opportunities, and would probably respond
well to a leveraged annual bonus plan. Conversely, risk-avoiders typically want stable base pay
but generous health and retirement benefits.

Segmentation criteria should leave room for creativity in exploring the values and attitudes of
the employee population. HR can begin with such standard demographics as generational
categories. However, more inventive (and perhaps meaningful) segmentation variables could
include strategically critical jobs, performance levels, or attitudes toward particular rewards
(career advancement, for instance).

Once HR has segmented the employee population, the next step is to test reward ideas to
determine which have the highest perceived value across the employee segments. The key is to
involve employees as partners in defining the value proposition that carries the greatest appeal
to them. Consumer product companies do this when they conduct market research to
understand how their target segments will respond to features and pricing of proposed
offerings. Such research can take a number of forms: focus groups; data mining; employee
surveys; or tradeoff analysis (a market research approach that calls for people to indicate which
rewards they would willing exchange for others).

At one fast-growing social-media company, HR used a tradeoff survey to better understand

reward preferences. The survey revealed that employees placed high value on adding a
matching provision to the retirement savings plan. This finding surprised management: Why
would a population of millennials value something as chronologically far off (and, frankly, old-
school) as a boost to their retirement savings? To test the result, management conducted a
series of focus groups. What they found surprised them at first but then made sense. As one
employee said, “Saving for retirement is the one thing my parents tell me that I actually listen
to.” Further, employees said they believe they will ultimately need to take full responsibility for
funding their own retirement. Armed with this information, the organization was able to add a
simple but powerful reward.

Step 4 – Product Development and Financial Analysis

With the knowledge gained from screening and testing a set of value proposition components,
HR is now ready to “spec” the design of elements to be preserved, modified or eliminated.
Knowing what employees value most and least, HR must translate value information (market
researchers would call these utility scores) into rewards the organization can actually afford and
deliver.

To complete the design process, HR and Finance should conduct an optimization analysis. The
analysis must take into account the cost to upgrade certain reward elements, balanced by
opportunities to reduce investment in lower-value elements. The objective is to achieve the best
possible net effect on employee perceptions of the resulting reward portfolios. In the financial
analysis, HR should consider the year-one costs and savings of reward changes, downstream
investments in subsequent years and the administrative costs associated with supporting new
and possibly innovative reward elements.

In a well-known example, Google has taken this kind of reward research and analysis to heights
reached by few, if any, other organizations. A few years ago, Google surveyed its employees to
learn about the rewards they valued most. Using the findings, the company famously decided in
2010 to raise all employee salaries by 10 percent, funding the increase in part with money
moved from the annual bonus plan. As Google CEO Eric Schmidt said at the time, “We’ve heard
from your feedback on Googlegeist and other surveys that salary is more important to you than
any other component of pay (i.e., bonus and equity). To address that, we’re moving a portion of
your bonus into your base salary, so now it’s income you can count on every time you get your
paycheck.”1 Google also ran the numbers on the billions the company would spend on
increased pay, plus the US$1,000 end-of-year bonus provided to all employees in 2010, offset
against potential savings in bonuses and stock. Company analysis no doubt indicated that the
net investment would yield a positive return in terms of reduced turnover cost and higher
productivity from employee engagement and motivation.

Step 5 – Product Delivery and Promotion

Products are not real until they reach the hands of the target consumer. This means deciding
how employees will learn about and gain access to components of the reward portfolio. How
will you inform them about the innovative elements of your employment deal? How do they
sign up for the new alternatives? Who will explain how new compensation, retirement or equity
plans work? How will they access their accounts, find out how well plans are performing and
make changes?

Once HR has ensured that delivery and administration processes are in place and functioning,
it’s time to communicate the value proposition and give it a brand identity. In the consumer
products world, a brand is the cluster of beliefs, experiences and impressions that consumers
attach to a product or service. In essence, a brand is a condensed packet of information that
helps people make purchase decisions with minimal repeated analysis. Having a wellknown
brand with rich positive associations means people know immediately what a product
represents and how it will perform. Buy an iPad and you know you will get innovative
technology and a cool user experience. Buy a Mercedes Benz and you will feel confident you
own a fine a luxury car with plenty of caché. In each case, buyers can make their choices without
going through a lengthy purchase assessment – consumers already know what to expect from
these well-known brands.

The same factors apply to the brand that companies attach to their employee value
propositions. An internal brand tells employees and candidates what the organization stands for
and how they can expect to be rewarded for contributing to their jobs and to the enterprise. As
with a consumer product, organizations build their internal brands by making and keeping
performance promises. The company started the process of building a brand by setting out to
understand employee needs and preferences. Leadership had in mind the positive associations
the company wanted to incorporate into the value proposition. HR designed a portfolio of
rewards to meet employee needs through prudent organizational investment (Steps 1 through
4). Those offering elements were made accessible in Step 5. Reinforcing the value provided and
embedding the notion of that value is now the goal of the branding and communication process.

Fulfilling and communicating an EVP’s promises requires more than just internal public relations.
Many organizations will have work ahead of them to convince skeptical employees that reward
communication is anything more than just hype or superficial banter. As Exhibit 2 shows,
employees often perceive that the value propositions of their organizations are no different
from what they could get at any other company.

Moreover, employees experience much of the EVP communication they receive as basic
explaining and convincing. Often, they observe much less effort focused on connecting reward
program elements with actual employee needs. A consumer products company whose messages
were believed to be this tilted toward selling rather than linking offering features with needs
would find itself out of business quickly.

The strongest internal brands reflect values that are consistent with the organization’s external
market position. Few things frustrate employees more than having to project a positive image to
the market through their innovative ideas and strong customer service, only to have a vastly
different experience inside the organization. Conversely, companies that ensure consistency
between their internal and external brands receive the boost of extra leverage as satisfied
employees reflect their positive attitudes through their interactions with the external market.

Step 6 – Measurement and Possible Modification

Successful consumer products companies know that their product designs will rarely remain
static, and that their brands will need periodic (or even frequent) refreshing. Successful
companies take the same perspective with their reward portfolios. They continue to survey,
conduct focus groups and monitor employee engagement, and turnover. As their business
strategy and human capital needs evolve and the competitive environment changes, they go
back through all six steps of the product development process, in varying levels of depth, and
ask themselves a few critical questions:

 Are we getting the hiring, performance, and retention results we expect from our value
proposition?

 Are there new ideas we should consider, perhaps because the competition is innovating
or our employee needs and preferences are evolving?
  Are we still investing our reward dollars in the optimal way? Does our return on that
investment remain at the level we need?

HR may choose to repeat a few or even all of the steps, some in abbreviated form and others in
more depth. Only by constantly re-evaluating and possibly reconfiguring reward offerings can an
organization expect to preserve and improve its competitive position. A human resource
department that sees itself as the organization’s internal marketing function must take the lead
in advocating, defining, and executing those changes.

Endnotes

1 H. Blodgett, “Google Gives All Employees Surprise $1,000 Cash Bonus And 10% Raise,”
http://www.businessinsider.com/google-bonus-and-raise-2010-11, Nov. 9, 2010.