Business leaders are perpetually in pursuit of an ever elusive employee engagement strategy that actually results in...well, more engaged employees. Compounding their frustration is the constant wonder whether their pay strategy is helping or hurting that quest. Analysis done of both these issues at the individual company level is typically based on instinct, anecdotal evidence and personal observation and experience. To the extent engagement surveys are employed, they don’t usually tell the story employers want to hear. So…the dilemma and disappointment deepen.
Each year, some new study emerges that supposedly sheds light on the connection between employee engagement and pay—but ends up raising more questions that it answers. As a result, although some additional insight is gained, the conclusions one should draw from the research are not always clear. A study reported on in a recent edition of the Harvard Business Review is a good example. (see Research: How Incentive Pay Affects Employee Engagement, Satisfaction, and Trust, by Chidiebere Ogbonnay, Kevin Daniels, Karina Nielsen March 15, 2017).
Let’s take a look at what the research sets forth and then discuss what you might want to consider doing as a result.
First, here is the premise of the study that was done:
Our study, published in Human Resource Management Journal, examined the extent to which each payment scheme was associated with employees’ experience of well-being, as measured by job satisfaction, organizational commitment, and trust in management. It also explored the relationship between the schemes and employees’ experiences of high work intensity and how this might explain any undesirable influence of incentive pay on well-being.
We used data from face-to-face structured interviews conducted in 1,293 private-sector workplaces across the United Kingdom. The interviewees were senior managers with responsibility for employment relations, personnel management, human resources, or financial management. The main issues covered in the interviews related to workplace characteristics, recruitment and training initiatives, pay determination, payment systems, and workplace performance. We also gathered employee data through questionnaires distributed to a random selection of five to 20 employees in each workplace where the management interviews were conducted. This amounted to 13,657 employees. The survey provided information on working arrangements, working hours, work intensity, and well-being. Data from the management interviews were then matched with employees’ reports about their subjective experiences of work.
The key finding of the study is summarized as follows:
Of the three incentive pay schemes examined, only performance-related pay was positively associated with the perception that work is more intense. In many ways this makes sense: People may feel individual pressure to work harder in order to obtain an individual reward. But, on a concerning note, we found that experiencing this kind of pressure partially, but not completely, offset some of the positive influences performance-related pay can have on job satisfaction, organizational commitment, and trust in management.
What should managers keep in mind? The positive relationship between performance-related pay and all three well-being outcomes indicates that employees may see increases in pay as a reasonable and even positive trade-off for contributing toward organizational success. Contrary to what many employers believe, organization-wide incentives such as profit-related pay and share-ownership may not generate such positive effects, as they were found to have negative relationships with employee well-being. The exception to this argument is the case of high employee participation in profit-related pay, where, if the mechanisms for distributing organizational profits are perceived to be equitable, more employees are likely to benefit and consequently experience job satisfaction, organizational commitment, and trust in management.
What You Should Do
While studies such as the one just quoted are helpful in shining a light on broad trends in employee thinking, they also reflect the attitudes of individuals working in companies whose approach to incentive plan design likely does not reflect best practices or may be poorly communicated. The research also isolates compensation from a look at an organization’s overall employer brand in which its pay strategy should be constructed. As a result, it is missing context.
With that in mind, here are three things I recommend you focus on as a result of the indeterminate conclusions all of these studies draw:
Know your workforce. Business leaders run into trouble if they take broad-based research too literally and try to apply it to all employees with their companies. Within each organization, there are career segments, each of which will have a distinct response to different parts of your pay strategy. In particular, the millennial part of your workforce “audience” should be looked at in at least three categories as you make compensation considerations:
Launchers. These are young professionals at the start of their careers. They have either just left the university or are within their first few years of graduating. Your company has provided their initial or perhaps second career-related job. Most of them are single.
Accelerators. These are Millennials who have had some experience with more than one company and are now trying to settle in with an organization where they can rise in ability, recognition, contribution and influence. Most in this group are probably still single but a growing number are married or have life partners and are starting families.
Catalysts. These are individuals who are either entering or are well into their 30s, have gained meaningful experience and possess unique abilities. They are able to affect significant (positive) change in an organization and companies are competing for their talents. They may not be Elon Musk from Tesla Motors or Jony Ive from Apple (yet), but they are still catalysts who could change the growth trajectory of your business. As a result, they have leverage and are in a position to negotiate. These Millennials either want to put their talent to work in a business that has resources they can leverage to accomplish their ambitions or start a business of their own. More in this group are married (than in the previous two segments) and many of them have children.
As you look at each of those descriptions, it should become obvious that a "one size fits all" pay approach is not going to succeed when it comes to building a value proposition for millennials. This does not necessarily mean you need to construct a different compensation strategy for each group, however. It simply suggests that the components of pay you offer, and the emphasis you give to each, will differ based on the life history and career trajectory of each group.
Know What “Job” You Want Your Pay Strategy to Do. Clayton Christensen is widely considered one of the world’s prominent thought leaders on the subject of innovation. Christensen’s latest writings focus on a concept called the “theory of jobs to be done” in which he posits: “When we buy a product, we essentially ‘hire’ something to get a job done. If it does the job well, when we are confronted with the same job, we hire that same product again. And if the product does a crummy job, we ‘fire’ it and look around for something else we might hire to solve the problem.” (Clayton Christensen: The Theory of Jobs To Be Done, Harvard Business School, Working Knowledge, Dina Gerdeman, October 3, 2016)
Christensen’s premise doesn’t just apply to the products we deliver to the marketplace. It applies to all of the systems and strategies we employ in our business including those related to compensation. His question is a good place to start when developing a comprehensive pay strategy that can serve the needs of both shareholders and employees in creating a unified financial vision for growing the business. Think about it. What if all CEOs carefully answered these questions as they considered their approach to compensation: What job are you hiring your rewards strategy to do? What is it intended to achieve? What problem is it intended to solve? And how will you know if it is performing its job?
Know why your people care about the way they are paid. Everything you do in your organization gives your employees clues about two things: 1) what you value, and; 2) where they fit in your plans. However, they don’t usually articulate their observations and thoughts in those terms because it’s an intuitive issue. Individuals within your workforce know at a visceral level whether they are involved in a company that wants its people to succeed as much as it wants shareholders to succeed—and if you value their contribution. If they sense you aren’t (invested in their success) or don’t (appreciate their impact), they will leave—or at least not fully engage.
So, in that context, here are a few of the reasons pay matters to your employees and the clues they are taking from how you reward them:
- It helps them understand their role. Your employees look at the elements of compensation you bring together in your pay offering and draw conclusions about what is expected of them. For example, an employee who is paid a salary at the 45th percentile of market pay but also participates in an annual value-sharing plan (where she can earn up to 100 % of her salary in additional payouts) and a long-term incentive plan (that is tied to the value increase in the business) understands that she must assume a stewardship role for certain outcomes the business needs to achieve. She is not just there to perform certain duties. She is there to drive value creation. She has not been hired to fill a position. She has been recruited to fulfill a role—one that has strategic significance to the organization.
- It clarifies priorities. Pay strategies should help employees better understand what’s important to company owners and leadership. For example, the metrics and measures of a company’s value sharing plan help participants understand the most critical factors affecting the business right now: growth in profitability, improved margins, increased revenue, greater customer retention and so forth. Employees also take cues from the type of pay they receive to know how to balance their focus on short-term versus long-term results.
- It communicates their value. 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 businesses treat their employees like essential partners in the company’s growth plans, those people feel like their contribution matters to the organization.
- It dictates their standard of living. 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.
- It helps them fulfill their contribution ambitions. 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. The contribution aims of employees are tied to the achievement of certain financial objectives. 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.
Ultimately, the most valuable thing a company can do to ensure its pay strategy enables instead of diminishes employee engagement is to spend time crafting a clear compensation philosophy statement. This means putting down in writing how business owners believe value creation is defined for their company and with whom they think it should be shared. It should go on to explain what form the organization believes value sharing should take and how guaranteed and variable pay should be balanced.
When companies take time to articulate their pay philosophy, it makes every conversation with employees about rewards easier. If business leaders can tell their people not just what and how they are paid but why they are compensated that way, they create credibility with employees—which leads to greater engagement. When employees understand the philosophy behind the way they are paid, they may agree or disagree with it but they cannot claim it’s unfair—because it is based on the business model and performance framework the company needs to succeed. And when it does (succeed), everyone benefits. Employees that observe that kind of wealth multiplier philosophy at work put their best effort into their roles and seldom leave.