What if you knew of a pay approach that would guarantee higher performance from your people? You would start using it right away, correct? I mean, who wouldn’t? Well, presumably, improved performance is, in fact, the goal of your company’s compensation strategy, is it not? You want to ensure that there is a link between how you pay your employees and how they perform—and that your compensation strategy is driving and not hindering better results, am I right? Which begs the question, is there such a thing as a magic potion when it comes to rewards? Is there a secret strategy that you can just plug in and then sit back and watch performance soar?
I’m sorry, but no there isn’t—and I suspect you know that. However, although there isn’t a magic means of improving performance through pay, there is, in fact, a secret to developing rewards strategies that unleash greater motivation on the part of your workforce. The secret lies in appealing to what I refer to as the employee “financial hierarchy of needs” when it comes to constructing your pay approach. Borrowing from Maslow’s concept, we can examine compensation in the context employees apply as they evaluate whether or not your value proposition “motivating.”
Fostering Trust Accelerates Performance
There are five levels to the pay “hierarchy” that your people evaluate in making a determination about the quality of the value proposition you offer them. While each level serves a different purpose, as a total unit they communicate whether or not your organization demonstrates integrity in the way it operates. Employees want to see continuity between the company’s vision, its business model and strategy, their roles and what’s expected of them in those roles and how they will be rewarded for achieving those expectations. If that kind of line of sight doesn’t exist, employee dissonance takes root. Left unaddressed, the incongruity individuals are experiencing breeds distrust, which is the enemy of engagement and performance.
In his book The Speed of Trust, author Stephen M. R. Covey asserts that the trust level in an organization affects two things: speed and cost. When trust goes down, speed goes down and costs go up. Conversely, when trust goes up, speed goes up and costs go down. We could probably also deduce from this that when trust and speed go up, sustained performance also goes up.
In short, trust has a huge economic impact. Accelerated results coupled with diminishing costs are the epitome of the performance most business leaders seek. Simply put, trust means confidence. The opposite of trust, mistrust, is suspicion. Covey makes the point that whether it's high or low, trust is the "hidden variable" in the formula for organizational success. The author explains it this way:
The low trust environment is a result of violating principles--not only individually, but organizationally. Leaders are missing the solution because they are not looking at the systems, structures, processes and policies that affect day-to-day behaviors. They are focused on the symptoms instead of the principles that promote trust.
This misalignment creates symbols that represent and communicate underlying values to everyone in the organization. A symbol can be either negative or positive; from a 500-page employee handbook, to a newly appointed CEO who refuses to accept a pay raise because it might send the wrong message to workers.
In summary, get compensation right and you will see trust increase in your organization. If you increase trust, you increase speed--and when you increase both, costs go down and sustained results go up.
Employee Financial Hierarchy of Needs
With that framework in mind, let’s examine the five levels within the employee financial hierarchy of needs and how, when they are effectively addressed, employee trust in the organization improves. This sequence is the secret to building a pay strategy that builds confidence and, therefore, higher performance and engagement.
- Cash Flow and Living Standard. Employees make decisions about where to live, where their kids can go to school, what kind of vacations they can take, how much they can invest, what kind of car they can afford to buy and a host of other financial decisions based on the compensation they anticipate receiving from their employer. This is one of the most basic evaluations your employees make. If they sense their level of skill and experience should allow them to maintain a standard of living above that which your pay offering is allowing them to enjoy, they will likely constantly be on the lookout for a better economic opportunity. Conversely, when you apply a pay philosophythat articulates an income opportunity (both short and long-term) that is tied to value creation, your employees feel in control of their earning capacity—and therefore are less likely to be thinking the “grass is greener” elsewhere. When push comes to shove, your people will typically pick a higher standard of living over intrinsic rewards every time.
Companies address this need by constructing an effective balance between salary and annual incentive compensation. Those are the two primary means your people look at to determine the kind of living standard they will have under your compensation offering. A company’s pay philosophy should articulate what kind of balance it will strike between guaranteed and incentive pay, including annual bonuses. It can then use pay data to decide where it wants to be relative to the market on both issues. Some may determine it’s best to be at a mid-range percentile of market pay for salaries but provide high or unlimited upside potential through value-sharing. Others may feel a better strategy is to be at the high end of the market for salaries and provide modest incentives. It’s all dependent upon the outcomes a given company wants to achieve and who it needs to attract to produce those outcomes.
- Risk Protection. Employees evaluate their financial vulnerability differently depending on where they are in their careers and in their family life. For example, a millennial employee who is single and in her first or second career position is not likely heavily focused on the quality of her employer’s health plan and the amount of life insurance her beneficiaries will receive if she dies. Conversely, a highly paid and high-performing executive with a family might insist on flexibility in how his benefit dollars are allocated. He may want to have access to a range of health plan options, a group legal benefit or disability income insurance that replaces his earnings if he is no longer able to work. He wants to have control over how to manage the financial risks to which he is vulnerable at this stage of his career.
Where companies run into trouble and lose the confidence of their workforce is when they take a “one size fits all” approach to constructing benefits. At a minimum, organizations should consider having an executive benefit arrangement that supplements its general plans so the needs of both key contributors and entry level employees are properly addressed. This again breeds confidence and trust in company leadership because it reflects an awareness of who their people are and where those employees place this need in their financial hierarchy.
- Retirement Planning. Most employees look to the company for whom they work as the channel through which they can accumulate funds for retirement. However, as with the benefits category, this area needs to reflect the distinct needs employees have depending on their career and life circumstance.
The most common deficit that exists in this regard is in providing for highly compensated employees. Qualified retirement programs such as 401(k) create a kind of reverse discrimination for high income earners. The amount of contribution they can make to a qualified plan is dictated by what non-highly compensated people contribute. As a result, they are not able to accumulate as high a retirement value relative to their incomes as people with more modest incomes. In addition, employees with high incomes look to their retirement plans as a means of sheltering income from current taxation. This becomes almost as important to them as the amount they can accumulate towards retirement.
Smart companies solve this issue by offering their executive and other management level employees some kind of supplemental 401(k) or deferred compensation plan. Often, they will include a match that is tied to performance so key people are incented to drive better results—knowing that the increased value they are creating is going to inure to their long-term financial benefit.
- Long-Term Value-Sharing. Of paramount importance to “catalysts”and other top performers in your organization is participation in the value they help create. Those of superior talent are attracted to the value-sharing concept because they want and expect to participate financially in the growth they help create. Here we are talking about those possessed of abilities that can dramatically change the growth of the business. Catalysts represent the kind of talent most businesses should be trying to attract. There is competition for them because there is such a shortage of these kinds of highly-skilled individuals in today’s talent marketplace. And businesses are not just competing against other companies for them. Most catalysts will start their own business if the opportunity with a given organization doesn’t mirror the entrepreneurial experience they’re looking for—including and especially financially.
In an interview with TV talk show host Charlie Rose not long before Facebook went public, Mark Zuckerberg said this:
I actually think the biggest thing for us is that a big part of being a technology company is getting the best engineers and designers and talented people around the world. And one of the ways that you can do that is you compensate people with equity or options. Right?
So you get people who want to join the company both for the mission because they believe that Facebook is doing this awesome thing and they want to be a part of connecting everyone in the world. But also if the company does well then they get financially rewarded and can be set.
… we`ve made this implicit promise to our investors and to our employees that by compensating them with equity and by giving them equity that at some point we`re going to make that equity worth something publicly and liquidly -- in a liquid way. Now, the promise isn`t that we`re going to do it on any kind of short-term time horizon. The promise is that we`re going to build this company so that it`s great over the long term. And that we`re always making these decisions for the long term. (From a transcript of an interview on Charlie Rose, PBS, on November 12, 2011. Emphasis added.)
The point Zuckerberg was making had little to do with whether or not a company should share equity or go public. There is a larger principle he is defining. When companies can attract and retain the kind of people that think and perform as he describes, they are in a unique position to sustain results. This is because a distinct and lasting interdependency emerges between the employees’ skills and the company’s resources that extend those skills (capital, co-workers, suppliers, products, technology, etc.). Talented contributors soon learn that their skills are not as unique and applicable outside the company as they are within the enterprise. That’s a mindset a company should want its talent to have because of the mutual dependency it creates. Long-term value-sharing reinforces that sense of shared dependence and therefore leads to higher performance.
- Wealth Accumulation. In the employees’ minds, all that has been discussed so far adds up to the total wealth accumulation opportunity their company’s value proposition represents to them. Each person has a different contribution ambition in mind for their future—referenced previously—which requires a certain wealth standard to be achieved. As a result, your key people in particular take a composite view of the pay programs you offer and evaluate whether they will grant them the accumulation opportunity they seek. If they do not, they will search for an organization that will provide it. On the other hand, when your offering is consistent with their personal growth ambitions, they feel motivated to realize the full benefit of what their compensation provides. It’s not that any specific program is a motivator for them, per se. It is the comprehensive realization of their value proposition that aligns them with the financial goals of the company and leads them to higher levels of performance.
Building pay strategies that motivate employees to perform on a higher level requires a different mindset about compensation than most company leaders are used to adopting. No longer can organizations deal with their pay plans as necessary “evils” they have to just “deal with.” Business leaders must embrace pay as an engine of performance which, when constructed properly, can help a culture of confidence to take root and success to be sustained.
