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.

About the Authors

Thomas O. Davenport is a senior consultant with Willis Towers Watson, a global human resources consulting firm. He provides consulting services on manager effectiveness, employee and organization research, and reward strategy to clients across a broad range of industries. He is the author of two books: Manager Redefined: The Competitive Advantage in the Middle of Your Organization and Human Capital: What It Is and Why People Invest It. He can be reached at [email protected].

John M. Bremen leads Willis Towers Watson’s Human Capital and Benefits business in North America. He also actively consults with senior executives and boards around the world in a number of practice areas related to talent and rewards,and leads the firm’s global total rewards team. He is based in Chicago. He can be reached at [email protected].