3 Compensation Mistakes that Kill Employee Motivation

You have hired good people.  You believe your business model is sound.  Your strategy is solid.  You think you pay a “fair” wage.  You allow people flexible hours and they can work from home when necessary.  They can take as many vacation days as they want as long as their work gets done and they participate in an above average benefits package, including some things your competitors don’t offer. But your employees don’t seem motivated.  They are not as engaged as they should be and you can’t figure out why.  “What’s holding them back?” you wonder, with some frustration. 

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To the extent it makes you feel better, it’s a common problem.  It also has a common denominator.  Pay.  Often without recognizing it, you are paying people in a way that kills their motivation.  And all the while, you think you are treating your people well.  You may even think you are going above and beyond what you need to do.  If so, it’s doubly frustrating.

So, let’s unpack this problem, shall we?

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How Employees View Compensation

Before we identify the things you might be doing (compensation-wise) that are undermining your efforts at employee motivation, it’s important to understand how talent evaluates the value propositions made by employers in today’s environment.  Often, business leaders are doing great things for their people but they don’t have a good understanding of the way their people are viewing their compensation.  It’s no longer simply about how much they are paid.  Nowadays, it’s about how they are being paid.   

Certainly, qualified employees want to be receive a salary that is at least commensurate with market standards.  That’s a given. However, they are concerned about the total financial opportunity available to them, not just the amount of salary you are offering. 

Each of the people in your employ has contribution ambitions.  For some, it’s to support a cause or charity they believe in at some point. Others want to start their own business one day.  For many, the contribution they want to be able to make is to their children’s education.  All these ambitions have economic underpinnings.  They require money to be fulfilled.  So, employees evaluate their overall compensation package in that context and then ask themselves: “Will this pay approach get me there?”  They don’t think in terms of whether a given incentive plan motivates them to behave a certain way (an issue most research on the subject misses). They are thinking broader and more holistically when they assess the pay plan in which they participate.

In addition, employees juxtaposition the compensation package they are offered with expectations they have for lifestyle opportunities, security issues, career advancement and their role within the organization.  On the latter issue, they want their pay plan to give them a clear view of the outcomes associated with their role in the company and how they will be rewarded if they meet those expectations.  They look at compensation for clues about what priorities they should focus on and whether leadership views them as an important player in the company’s future.

So, if you approach compensation design without respecting this view, there’s a good chance you will make some fatal mistakes and kill the motivation of your people.  Here are just three of the most common errors I see businesses make. 

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The Three Motivation Killers

Well-intentioned company leaders end up with the scenario described in the opening paragraph when they make the following mistakes.

No Pay Philosophy

If you find yourself consistently having uncomfortable conversations with employees about their compensation, there’s a good chance you fall prey to this mistake.  When your people raise questions about their pay it’s because they don’t understand the belief system upon which their compensation is based.  And telling them that their salary is within market standards for their position is not going to cut it.  Market data is not a philosophy.

Every company needs a written compensation philosophy statement that articulates what guides leadership’s decisions about the value proposition they offer their employees.  It should start by stating how the business defines value creation (the threshold at which the organization considers value to have been created by employees as opposed to owner assets at work).  It should then state how and with whom value will be shared—and what form it will take.   Beyond that, a philosophy statement can include any number of things that help define the company’s belief’s about pay: what balance the company will maintain between salaries and value-sharing; where the company wants to be vis-à-vis market pay standards for salaries; how much value-sharing will reward short versus long-term performance; under what circumstances equity will be shared; and so forth.

When a company has a clear pay philosophy, employees understand why they earn what they earn and what they need to do to earn more.  Absent a philosophy, employees don’t know the basis for their compensation and are more prone to question it and be distrustful of explanations they are given.  That becomes demoralizing and stifles the commitment level of people who might otherwise be prone to more fully engage. 

No Long-Term Value Sharing Plan

In today’s business environment, companies are competing for people who can be catalysts.  These are strategy leaders who can significantly impact the growth trajectory of a business.  Their talents are somewhat entrepreneurial in nature—and they are joining organizations that have deep resources as an alternative to starting their own businesses.  Their interest is in having their financial rewards mirror those of owners. 

Company owners realize the benefit of their investment by driving up business value over extended period.  They must produce “good” profits every year in order to have excess capital to invest in enterprise growth.  As a result, they have to focus on two things at once: keeping the business model working well enough to drive consistent revenue while simultaneously anticipating where increased owner value can to be realized in the future.  Unfortunately, these same leaders often pay top talent in a way that is at odds with that dual focus.  They offer a generous salary and maybe an annual bonus, but their key producers have no financial incentive to build long-term business value.

In today’s environment, this won’t work.  Catalysts expect to participate in the long-term wealth multiple they help create.  And if the company doesn’t provide a mechanism for sharing that value, they will be less motivated to produce it.  Not only will they be less committed, they will leave—because in a scarce talent market, they have options.

Poor Communication

Most business leaders assume their people understand how well they are being treated from a compensation standpoint.  They may have a solid philosophy, provide a long-term value-sharing plan and offer a salary, perks and benefits that would rival any competitor.  But they make the mistake of thinking their employees will recognize, on their own, how good they have it.  You should never assume this.

Instead, you need to market a future to your people, especially the catalysts in your company.  You must have a means of communicating with your employees in a way that gives them clarity about the vision of the organization, its business model and strategy, their role in that model and strategy, what’s expected of them in that role and how they will be rewarded for meeting those expectations.  That’s called creating line of sight. 

Organizations that have highly motivated employees consistently engage in this kind of conversation with their people:

  • Here is where the company is headed.
  • This is the business model and strategy that is going to get us there.
  • This is where you fit in that vision.
  • These are the outcomes for which you will be responsible.
  • These are the compensation plans in which you will participate.
  • If the company meets its targets, and you produce the outcomes your role exists to achieve, this is the kind of earnings those pay plans will provide you.
  • We pay you this way because we consider you to be a significant partner in our growth.
  • So, what I want you to understand is that this is not a $160,000 salaried position we’d like you to fill. If you perform your role well, this is a $1.7 million dollar opportunity over the next five years.
  • Here is a report you will receive each year showing you where both the company and you stand relative to those wealth multiple opportunities.

That kind of conversation is motivating to growth-oriented individuals.  But you kill that motivation when you assume your people will figure those things out on their own. 

Certainly, there are other mistakes company leaders can make that will negatively impact the engagement of their employees.  But the organization that avoids the three errors we just discussed will be light years ahead of its competition.

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