An engaged employee is like the star student in an elementary or high school class. When a teacher recognizes a standout pupil’s work ethic and commitment, she naturally wants her other students to be “just like that one.” So she sets up a system of rewards and punishments designed to promote the model behavior she’s trying to encourage and inhibit the kind she’s trying to suppress. The hope is that this “ying and yang” approach will prompt a loyalty to learning—and instill the conduct the teacher prefers. The report card becomes the means of measuring whether it’s all working. More often than not, the grade report indicates it’s not.
Historically, this same scenario has played itself out in business. Enterprise leaders have sought various means of “encouraging” the commitment, loyalty and engagement they seek. This has led some to employ pay programs as their own version of a “reward and punishment” system designed to elicit the desired performance. Annual appraisals have served as the report card—with mixed results at best.
We have entered a new age in the evolution of the employer-employee relationship. A Deloitte Review article and study from January 2015 describes the shift this way:
After decades of corporate discourse about the war for talent, it appears that the battle is over, and talent has won. Employees today have increased bargaining power, the job market is highly transparent, and attracting top-skilled workers is a highly competitive activity. Companies are now investing in analytics tools to figure out why people leave, and the topics of purpose, engagement, and culture weigh on the minds of business leaders everywhere.
Our research suggests that the issues of “retention and engagement” have risen to No. 2 in the minds of business leaders, second only to the challenge of building global leadership.
…The employee-work contract has changed: People are operating more like free agents than in the past. In short, the balance of power has shifted from employer to employee, forcing business leaders to learn how to build an organization that engages employees as sensitive, passionate, creative contributors. We call this a shift from improving employee engagement to a focus on building an irresistible organization.
The Deloitte report goes on to identify five elements that drive engagement in irresistible organizations (see Figure 1 below).
So where does compensation and pay fit in this new engagement environment? Does it play any role? The Deloitte analysis suggests its impact is minimal. Other studies indicate it is a larger factor. Payscale’s 2015 Compensation Best Practices Report, for example, indicated that inadequate pay is the number one reason people leave an organization. To the extent attrition can be considered the antithesis of engagement, one might be confused by what seems to be conflicting data analyses among researchers regarding the influence compensation has on this much sought after quality in employees. The Deloitte report explains the discrepancy this way:
Most studies show that compensation is an important factor in employee satisfaction. Research by Aon Hewitt, for example, shows that it ranks among the top five drivers (but is not number one). In this article, we do not discuss compensation because much research shows that pay is a “hygiene factor,” not an “engagement factor.” In other words, in most cases if compensation is not high enough, people will leave—but increasing compensation does not directly increase engagement (with certain exceptions).
One organization we studied told us that among the highest-potential employees, the organization could directly correlate pay increases with retention—but among the remaining 90 percent of the workforce, compensation simply had to be competitive and fair within job families. Our discussions with clients confirmed that once pay is competitive and fair, the 20 issues we discuss in this paper have a much greater effect.
So…people will leave if compensation is not high enough, but pay doesn’t increase engagement, with certain exceptions. Well, it’s hard to engage employees who have left your organization—and it would be nice to know the exceptions under which pay does matter. So let’s consider how compensation should be viewed and constructed in this new age of employee empowerment and where it fits in the “irresistible organization.”
The conclusions being reached regarding the impact of compensation on engagement, while not exactly inaccurate, are at least incomplete. As a result, at the risk of being presumptuous, let’s add a sixth element to Deloitte’s list: A Sense of Partnership. The pay strategy of an organization performs an essential role in defining and communicating the financial relationship an organization desires to have with its employees—particularly its key talent. When the pay component isn’t well engineered and effectively promoted, compensation quickly moves from being merely a “hygiene factor” to an engagement hindrance.
In our work with clients at VisionLink we find that when businesses are able to make their employees feel like essential partners in the company’s growth plans, they secure greater commitment and focus from those people. This occurs when business leaders view and treat their organizations as “wealth multipliers,” where all stakeholders benefit from the value creation they help drive. When compensation is approached in that framework, the issue no longer becomes how high someone’s pay is and whether it is “fair” or “adequate.” Rather, the focus becomes how people should be paid (what forms of compensation they should receive) and what the rewards philosophy and overall strategy communicate about the partnership the company wants to forge with its employees.
Let’s look at an example to make this point clear. Suppose an executive has a salary that is at the 90th percentile of market pay and participates in an annual incentive plan that pays him an additional 50% of his salary if certain performance standards are met. One could say such an arrangement is very “fair” in terms how much that executive is being compensated. After all, the person in question is being paid at the high end of what market data say he should be paid. However, let’s further assume that same executive is sitting in meetings where the chief executive is talking about the company’s goal of doubling revenues over the next three—and how important it is that the executive team get behind that target. What part of that key performer’s compensation plan communicates to him the importance of that long-term goal? (Answer, none.) Is it possible the executive could perceive there is a disconnect between the priority he’s hearing about in strategy meetings and how he is being paid? More specifically, might the executive be left wondering what part of his pay arrangement will compensate him for the long-term value he’s being asked to help create? When he discovers there is no such mechanism, is it likely disillusionment will set it? And if he becomes disillusioned, what happens to his engagement level?
This issue is remedied when leadership takes the time to articulate a clear pay philosophy and then implements a rewards strategy that is consistent with that philosophy. The compensation philosophy should be written and referenced any time a decision about pay is being considered. Among other things, it defines what value creation means in the business and how it will be shared with those who help create it. The rewards philosophy should also address what the company believes the balance should be between guaranteed and variable compensation and between short and long-term value sharing (incentives).
When a business adopts this approach to framing the financial partnership it wants to have with its people there is greater clarity and line of sight. This is because the pay system acts as a strategic tool in helping reinforce what is important to company leadership, what role each employee (or employee group) has in the company’s priorities, what’s expected in that role and how that person will be rewarded if those expectations are met. If there is a lack of continuity through all the elements of the partnership relationship, the confidence of employees will waver and wane. This is when pay starts adversely affecting engagement. It’s not because pay is “inadequate,” per se. This issue is that employees sense there are inconsistencies in the partnership. That incongruity breeds distrust—the enemy of engagement.
Many business leaders conclude pay is not a factor in engagement because they read that pay is not a “motivator” when it comes to employee performance. It’s an age-old conflict in search of a resolution. However, the question of whether compensation does or doesn’t impact motivation really misses the point. In the context addressed here, we’re not talking about pay being used to “motivate” anyone. Rather, compensation—including value sharing—should be part of a larger Total Rewards framework an organization adopts of which financial rewards are just one component. Growth-oriented companies use a Total Rewards approach to ensure their employees’ 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:
Because engagement and motivation are performance companions, it is important to recognize that motivation is an aspirational issue. Most growth-centered people aspire to be in a position to make certain contributions in their personal and professional lives. The ability to achieve their contribution goals is the source of their motivation. Those goals 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, etc.) or their family’s overall well-being. Many want to contribute to their ability 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 an economic component to it—even a requirement. The point that researchers and authors miss when arguing that pay is not a motivation factor is that these “contribution” ambitions undergird the drive people have for greater economic well-being. As a result, while employees may not be especially “motivated” by a given incentive that is tied to behavioral metrics, they do evaluate the overall rewards philosophy and approach the company’s value proposition encompasses. They then determine whether the financial commitment the organization is making will enable the economic means their contribution drive depends upon for fulfillment. If it does, they feel “motivated” to achieve the outcomes that maximize their earnings.
The ability to foresee this kind of fulfillment in their lives is why economic rewards in business matter. This element is largely ignored by those commenting on pay’s role in motivation and engagement. It’s not about carrot and stick manipulation. It’s about the potential for wealth creation—however employees define that and for whatever contribution purposes they hope to serve. That kind of motivation strikes at the very roots of employee engagement.
Certainly, the five elements Deloitte has identified are essential in building an “irresistible organization.” However, any organization seeking greater employee engagement must also place a high priority on framing an effective financial partnership. While pay alone won’t secure the engagement a company seeks, an ineffective approach to compensation will just as surely kill it.
Need Help with Your Pay Strategy?
If you lead a business and are struggling with developing an effective compensation approach, it might be the right time to have a conversation with a VisionLink consultant. To speak with one of our experts about the rewards issues you are facing, call us at 1-888-703-0080.
About the Author
Senior Vice President, The VisionLink Advisory Group
Ken has been consulting with middle-market private and public companies on executive compensation and benefits issues for over 30 years. In addition, he has authored numerous articles and white papers addressing compensation and rewards topics that modern businesses face. Ken also conducts a monthly webinar series on compensation best practices for business leaders throughout North America. His client work centers on the development of overall compensation strategies designed to enhance and improve shareholder value and workplace productivity. He is one of VisionLink’s six principals.
Does Pay Impact Employee Engagement? If you’re like most business leaders, you would sure like to know the answer to that question. In this report, we analyze Deloitte’s landmark 2015 study on engagement and offer insights about the critical role compensation plays in securing committed, passionate employees. Among other things, it will help you determine how to prioritize your pay strategy efforts—especially related to incentives.
Find the role of compensation in employee engagement!