Years ago, former GE Chief Executive, Jack Welch, made this assertion:
"If you want people to live and breathe the vision, 'show them the money' when they do, be it with salary, bonus, or significant recognition. To quote a friend of mine, Chuck Ames, the former chairman and CEO of Reliance Electric, "Show me a company's various compensation plans, and I'll show you how its people behave.'" (Winning, HarperBusiness, 2005, Jack Welch and Suzy Welch)
So...is one right and the other wrong? Not exactly. In my view, there's room for both theories. Here's what I mean.
Compensation should never be viewed as a means of getting people to behave the way you want them to. That notion is antiquated and unproductive. As Daniel Pink asserts, motivation is intrinsic and you can't manipulate people by how you reward them. That said, how many people do you know who will work for no pay? (I don't see any hands raised.) And if how much you pay people isn't as relevant as how motivated they are, why do so many people ask for raises, or a bonus, or for shares of stock?
So, like it or not, pay has a role. If so, we better determine what that role is and how it can best be fulfilled.
This is where "real life" often needs to override the academic. Regardless of what "research" indicates, most people--especially premier talent--want to see a relationship between the contribution they make and how they are "rewarded." Similarly, CEOs want to pay people for the value they create--whether or not they're motivated by financial gain. Compensation is a large allocation of capital and business leaders expect to see a return on that investment.
The role of compensation, then, is to help the company achieve five things:
- Define the company's financial partnership with its people, particularly with key talent.
- Communicate "what's important."
- Reward exceptional performance.
- Build a sense of stewardship about key organizational intiatives.
- Create a link in the employees' minds between the company vision, its business model and strategy, roles and expectations and how individuals will be rewarded for meeting those expectations.
Growth-oriented companies devote a heavy dose of their compensation budget to variable pay. For the most successful organizations this can be as high as 50% of total compensation for key producers. This is not because that kind of formula makes an employee more motivated. Rather, it's because the CEO needs that person to experience full immersion in the financial outcomes for which they are responsible.
The long-term piece ensures the employees' sights are also fixed on the future and how the virtuous cycle of the business model can be leveraged. When variable pay is set up as true value-sharing, there is a careful balance between short-term and long-term pay outs. The short-term portion communicates the importance of maintaiing the revenue engine of the company.
When compensation is engineered within this kind of framework, both arguments about the influence of pay on performance can be reconciled. In organizations that clearly communicate their philosophy about value-creation and value-sharing, employees know what performance level the company expects them to reach and how they will be paid for achieving it. This removes ambiguity and allows intrinsic factors to have full sway--unincumbered by concerns about cash flow, standard of living, security and wealth creation.
Ultimately, what a business pays for communicates what it values. The more an employee understands about what's important to the company he works for, the more able he is to make it his focus. When focus improves so does execution. Consistent execution leads to sustained results. That consistency breeds a culture of confidence and success--one that becomes a magnet for the best talent. When an organization achieves this pinnacle, it has a competitive advantage because culture is not "copyable."
Does compensation impact motivation and therefore results? Well I've laid out the issues. Now you can decide.
To learn more about the business purposes pay should support, download our white paper entitled: "How to Effectively Link Compensation to Results."