The Impact of Pay on Employee Motivation

For years, business leaders have been trying to determine if they can positively impact the motivation of their employees through the pay strategy they adopt. Most of these leaders believe in tying rewards to results but have been unable to draw a verifiable connection between the two. They invest heavily in incentive plans every year, but don’t really know how to measure what they’re getting for it.

To compound the problem, when they turn to research on the subject, there are studies supporting every side of the issue. Some academicians and authors serve up evidence that, as a general rule, performance incentives don’t work…and can even have a destructive effect on employee motivation. Conversely, a study referenced in a 2017 Harvard Business Review article says: “Our analysis showed that performance-related pay was positively associated with job satisfaction, organizational commitment, and trust in management.” These conflicting conclusions leave enterprise leaders scratching their heads and wondering how to make sense of it all when it comes to answering a very basic question: “How should I pay my people?”

And so, the relationship between pay and employee motivation continues as an unresolved issue.

The aim of this report is to help you make better sense of all this and offer some principles that will help you determine the impact of your rewards approach. The truth is research only tells part of the story and you shouldn’t just take the results that are being served up at face value when trying to make serious decisions about a pay strategy for your business. While there is some “truth” revealed in each of the studies that have been conducted over the years, it would be a mistake to draw any firm conclusions from the throngs of studies and articles written on the subject.

Much of the research that has been conducted concludes that the primary problem with financial awards is they tend to inhibit creativity and innovation. Those writing on the subject point to studies of people performing worse when offered a reward for finishing a creative task sooner or “better.” Those making this argument suggest you are better off just paying these people a “fair” salary because they aren’t going to work harder or smarter simply because a performance incentive is part of their pay package. It is the intrinsic drive they have that makes them perform, not incentive rewards.

The problem is that most of those commenting on these findings are examining the issue in a vacuum. Their narrow approach doesn’t take into consideration the broader role pay can play for businesses that are trying to develop a high-performance culture and need an employee value proposition that will enable instead of inhibit that kind of environment. Compensation, when constructed properly, should encourage employees to take greater ownership of outcomes and adopt a stewardship mindset towards their roles. It should be a tool for reinforcing roles and expectations, not for trying to force a certain type of behavior.

In short, extrinsic motivation critics generally miss the point in the conclusions they draw from their research. This happens because their studies are based on the wrong premise. They try to determine if there is a direct correlation between incentives offered and the behavior employees exhibit in their work. By doing so, they ignore compensation’s broader role in an organization and the purpose incentive pay is intended to serve in that larger context. They isolate rewards from the context of the overall value proposition companies need to make to attract and retain top talent—and how those people evaluate the total economic relationship they have with their employer.

The research to date also doesn’t properly address the expectations shareholders should be able to have of compensation. They need to know that pay will “carry its own weight,” so to speak; that it will produce a return. In short, it needs to justify its existence. It has a job to perform and exists to produce specific outcomes. If it isn’t meeting those expectations, then it needs to be reconstructed so it does. Compensation should be helping owners reinforce their strategic priorities and communicating the results the company needs to achieve to meet its growth goals. The research and analysis that is currently done ignores this issue completely. As a result, it fails to address the whole reason business owners have for paying their people in the first place—which is to protect and represent the shareholders’ interests by helping to grow the company.

In summary, if employees are solely motivated by intrinsic factors, why pay them at all? Of course, no business leader would attempt to employ people without compensating them; but, researchers can’t have it both ways. If you have to pay people, then it stands to reason that the strategy you employ should help build a more unified financial vision for growing the company. It should help put employees and owners on the same page.

So, let’s extend our understanding of the role pay should have in a growth-oriented business, shall we? Ultimately, there are seven factors or “keys” that ought to be considered in any discussion about the relationship between pay and employee motivation—particularly when scrutinizing incentive compensation.

1. It’s About Defining Value Creation. Shareholders deserve to know how much of the profits their business is generating is attributable to the productivity and performance of their workforce, as opposed to their own capital at work. Identifying that threshold helps them determine the point at which real value creation—or value addition—is occurring. If superior value is being created, the issue then becomes how that profit growth should be used or allocated. How much should be invested back into the business, how much should be returned to shareholders and how much should be shared with the employees that are driving that growth—as an investment in the company’s human capital? Which leads to the second issue…

2. It’s About Articulating a Rewards Philosophy. Once company owners have a clear definition of what value creation means in their business, the next step is to articulate a philosophy about how and with whom that value should be shared. What form of pay will best reflect the contributions being made by employees and reinforce the patterns of performance that make superior growth possible? What’s the right balance between guaranteed compensation (salaries) and value-sharing (incentive plans)? How much value-sharing should be tied to short-term outcomes (results produced in 12 months or less) and how much should reward long-term performance (sustained results)? None of these factors inhibit intrinsic motivation. Instead, addressing these kinds of questions removes a barrier to it. When employees know there is a philosophy guiding how they are being compensated for their contribution to value creation, the issue of money is no longer a distraction. If they believe the philosophy is “fair” (see number 4), they can take their mind off pay and focus on their work.

3. It’s About Communicating a Partnership. When business owners transition away from paying “incentives” and instead adopt a value-sharing model that aligns rewards with value creation standards, they recast the nature of their relationship with their employees. Suddenly, they are treating them as growth partners, and the compensation employees are offered becomes the means of defining the financial partnership owners want to have with them. With this approach, it’s no longer about rewarding specific conduct or trying to elicit performance based on a “carrot and stick” approach. Rather, it’s about using the construct of pay (the form compensation takes—especially value-sharing) as a strategic tool to reinforce the outcomes upon which business growth depends. Pay then becomes a means business leaders use to communicate how all stakeholders participate in the wealth multiple they help produce.

4. It’s About Creating Alignment. When an organization effectively defines the financial partnership it wants to have with its people, it creates greater line of sight. There is continuity between the vision of the company, its business model and strategy, employee roles and expectations and financial rewards. When those things are linked in the minds of employees, you have alignment. As line of sight increases, so does accountability because there is operational integrity at play; people know their roles, what’s expected of them, why it matters and how they will be rewarded financially if the business model succeeds (not just if they perform their duties properly).

5. It’s About Fairness. Businesses that have operational integrity communicate a sense of fairness at all levels and in all dimensions of the enterprise. For example, they don’t promote growth goals and impose results expectations that are unachievable or pay employees in a way that is disconnected from the outcomes for which owners say they are accountable. Employees intuitively sense the lack of continuity those discrepancies represent and it creates distrust. This is how feelings of unfairness emerge among employees and intrinsic motivators are snuffed out. Organizations that subsequently try to address this negative effect by implementing “do this and we’ll pay you that” rewards programs will always fail—because they’re trying to remedy a systemic, chronic problem with a Band-Aid. A broader, more holistic “healing” process is needed. Employees will reject manipulative attempts at improving their performance by either gaming the system for their own gain or ignoring the effort entirely by just “doing their job” without vision, purpose, meaning or full engagement.

6. It’s About Creating a Total Rewards Experience. Ultimately, intrinsic versus extrinsic motivators is a false choice. In the context this report offers, it is not pay’s role or purpose to “motivate” anyone. Rather, compensation—including incentives (value-sharing)—is just one of four parts of a Total Rewards experience employees need to have to ensure their intrinsic drive is not stifled by factors that inhibit the autonomy, mastery and purpose elements authors like Daniel Pink point to as the primary forces motivating performance. In a Total Rewards construct, equal attention is paid to:

Offering a Compelling Future. This means the company paints a clear and persuasive picture of where the organization is headed and why it’s meaningful. More important, it communicates why a given employee (in the context of his or her role and unique abilities) is critical to the fulfillment of that vision. This addresses the purpose element upon which intrinsic motivation relies.

Having a Positive Work Environment. For intrinsic motivators to be unleashed, employees need to work within the realm of their unique abilities, be placed with team members who have complementary skills, have sufficient resources to produce the outcomes for which they are responsible and feel alignment with the values of the organization. This produces the autonomy component essential to motivation.

Providing Personal and Professional Development Opportunities. Motivation is fueled when employees feel as though they work in an environment that accelerates their ability to improve. This usually happens when the combination of resources to which an employee is exposed within the organization creates a unique learning experience—one that allows him or her to excel. This enables the mastery factor to take hold that intrinsic motivation feeds upon.

Offering Purposeful Financial Rewards (Tied to Value Creation). Value-sharing links an employee to the wealth multiplier opportunity an organization’s success produces. It creates continuity in the Total Rewards experience by financially codifying the relationship between owners and employees. A value-sharing philosophy and compensation model sends the following message to success-oriented employees: “We consider you to be an essential growth partner in this company and have confidence in your ability to help us achieve the future business we have envisioned. As a result, we want you to be clear about the financial nature of our partnership and what it can mean to you as we achieve sustained success.” This speaks to all three motivational areas—purpose, autonomy and mastery—and allows the employee to see how their role in the company will help them fulfill their contribution aspirations (see #7).

7. It’s About Enabling the Fulfillment of Contribution Aspirations. At its core, motivation is an aspirational issue. And most growth-oriented people aspire to be able to make certain contributions in their personal and professional lives. These are different for every individual. Some want to be able to contribute time and means to causes or charities. Others want the ability to contribute to their children’s future (education, talent development) or their family’s overall well-being. Many want to create an opportunity for themselves to have greater control over how they spend their time and where they devote their energies.

The ability to make a contribution in any of these realms has economic implications and requirements. The point that researchers and authors miss when arguing against performance incentives is that these “contribution” factors undergird the drive people have for greater economic well-being. As a result, while they are not specifically motivated by some kind of annual incentive that is tied to behavioral metrics, they do evaluate the overall rewards opportunity the company offers them. They then determine whether the financial commitment the organization is making will enable the economic means their contribution drive depends upon for fulfillment.

The ability to anticipate this kind of fulfillment in their lives is why economic rewards matter to employees. This element is largely ignored by those commenting on the potential destructive nature of incentives. It’s not about carrot and stick manipulation. It’s about the potential for wealth creation—however employees define that and for whatever purposes they hope to serve.

So, what should you conclude from all this?

Hopefully, you will determine that the controversy between intrinsic and extrinsic motivators is an unnecessary one—and that it kind of misses the point. Financial rewards are about creating a sense of partnership, not about manipulating behavior. The ability of compensation to achieve that is rooted in seven interdependent factors—keys if you will. It is not about an isolated issue or motivation tactic.

Pay and employee motivation will always be a complex issue, but it’s one worth trying to solve.