Pay’s role as incentive: It’s not just how much

Employee engagement is in an abysmal state and global productivity is in a noticeable decline as a result, according to Gallup’s biennial 2017 State of the Global Workplace survey. Fully 85% of employees surveyed are not engaged with their jobs, costing companies across the globe productivity and competitive advantage, according to Gallup.

The benefits are well documented for companies with high levels of engagement, with Gallup reporting 17% more productivity and 21% higher profitability among business units with high employee engagement, along with reductions in absenteeism, quality defects, and internal theft.

However, understanding just what employee engagement is, how to improve it, and how a specific factor, such as pay policy, can affect it is not so simple.

“Employee engagement brings together several different things — does your job play to your strengths, do you feel supported in your environment, are you motivated by your work and aligned with organisational objectives?” said Jonny Gifford, senior adviser, organisational behaviour, at the Chartered Institute of Personnel and Development. “It’s not useful to try to capture that in a single metric. We also find that a single way of looking at reward doesn’t work. When you try to design reward structures in a behaviourally intelligent way, there are tensions and trade-offs; when you pull one lever, you may affect not only what you want, but other things as well.”

That said, there’s broad consensus that perceived fairness and transparency in pay policy are arguably more important than pay level in fostering trust and satisfaction, and that a well-crafted incentive programme can help drive employee engagement.

Fairness, transparency, and communication

The perception of fairness in pay is one of the most clear-cut drivers of engagement, with global HR and insurance consulting firm Willis Towers Watson reporting in a 2013 study of Central and Eastern European companies that employees who believe they are fairly paid are more than four times as likely to be highly engaged than those who don’t. But that perception can vary according to knowledge and perspective.

“Most employees don’t have the background to understand compensation,” said Suzanne Goulden, director, total rewards and analytics at the Society for Human Resource Management, based in Washington, DC. “I first realised this in a former job when I was talking to an employee who was very disappointed with a promotional increase that by most people’s standards was generous. She was looking at the maximum salary for her current position and assumed any promotion would be above that.”

The key is to create a compensation programme that delivers both internal equity and the competitiveness that the organisation needs, and then to communicate it effectively to employees. Working with a consultant to design the programme is a wise strategy. “Even if you have experienced people on staff, it’s good to bring in an outside expert, too,” said Goulden. “It ensures your programme will be well thought out and externally competitive, and it sends a message to your employees that you value getting it right.”

There are important decisions to be made around pay transparency, which while not in itself promoting engagement is foundational to it. “There’s a continuum of transparency, with pros and cons at each point,” Goulden explained. “Some companies share salary ranges for an employee’s grade and those below. Some reveal everyone’s salary, which may be going too far. Someone else in the same job as you may make a little more than you, and knowing that can easily be negative for your morale — but it may be based on factors you’re not aware of, such as performance and prior experience.”

Goulden described communications as ranging from simply publicising the pay policy, supported by basic FAQ documents, all the way to providing robust training that shows employees how the programme is arrived at. This openness empowers managers to have more compensation-related conversations with their reports. “A lot of managers aren’t comfortable with those conversations, even if they’re involved in making the decisions,” she said.

With most people focused largely on near-term gain, it’s important for organisations to educate employees on pensions, retirement savings plans, and other long-term benefits, especially for younger staff to whom they may appear quite abstract. Bringing in a financial adviser for either group or one-on-one sessions is a simple but effective way to reinforce motivation and loyalty.

Designing an incentive programme

Incentive pay is most commonly offered to individuals based on their performance or in the form of profit sharing. “Sometimes these incentives work as intended, but there are ways in which they can backfire,” said Kevin Daniels, professor of organisational behaviour, University of East Anglia in Norwich, UK.

As reported by Daniels and his co-authors in the Human Resource Management Journal, performance-related pay characteristically boosts job satisfaction, organisational commitment, and trust in management — benefits that add up to engagement and are associated with high productivity. On the other hand, it can encourage overwork, which has a detrimental effect on both engagement and productivity, so its effects need to be monitored carefully.

It’s also important that performance-related bonuses correlate well with the jobs they pertain to. In designing pay structure, finance executives should collaborate with HR and operations to optimise the employment relationship for maximum engagement. For highly individualised work, such as sales, individualised performance-related pay is appropriate, supported by training and decision-making authority that allows these employees to put their acquired knowledge to work.

“But if the work is more team-based,” said Daniels, “the incentives should be designed accordingly, backed up by training in negotiation and joint decision-making skills. The process requires thought and adaptation, but you get a much bigger return on your investment if you do several things well and integrate them.”

Profit sharing, Daniels’s study revealed, enhances engagement when implemented broadly across an organisation, but it has a detrimental effect at low to medium levels of employee participation. “It’s an equity issue,” he explained. “It’s better to have no profit sharing than to distribute the profits among a small number of people.”

Further thoughts

Do we value money for its utility or for its own sake as a symbol? “What we find from the research is that both are true,” said Gifford. “Given the choice, everyone will say, ‘Give me the cash,’ but having your boss take you out for dinner following a successful piece of work can do more to motivate you.”

Pay is a strong motivating force, but it’s not the only thing that makes people want to do a good job. They want respect, recognition, and the opportunity to do meaningful work. Employers, on the other hand, don’t only want employees to be productive; they want them to be collegial and innovative, and to serve as ambassadors for the organisation. “In establishing incentives,” explained Gifford, “employers should think through very carefully what the performance targets are, and whether in setting them they are unwittingly creating disincentives for other things the organisation places value on.”

— John Lehmann-Haupt is a freelance writer based in the US. To comment on this article or to suggest an idea for another article, contact Drew Adamek, an FM magazine senior editor, at Andrew.Adamek@aicpa-cima.com.