If you read some of the literature these days about pay incentives and other rewards strategies, you could easily conclude that what and how you pay your employees doesn’t really matter. “Experts” suggest people aren’t motivated by pay “schemes” and that performance is driven solely by intrinsic factors that have nothing to do with compensation. However, if you lead a business, I doubt you have ever seriously considered not paying your people (“Hey, just enjoy the intrinsic rewards!”) or paying everyone the same (although one CEO did actually attempt that). What researchers and authors that downplay the importance of your compensation approach have overlooked are the fundamental, common-sense reasons people care about both how and how much 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.
So, in that context, let’s examine why pay matters to your employees and the clues they are taking from how you reward them. Here are the seven reasons your employees care about their compensation:
1. 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.
2. 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. If an employee’s variable compensation is only tied to his performance for a 12-month period, then he is going to assume that the company’s priorities are tied to short-term results. Conversely, if he also has a long-term component to his value-based pay, he knows he needs to focus not only on this year’s outcomes but on sustained performance. Your employees will quickly determine whether there is consistency between the priorities you articulate and the way they are paid.
3. 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. Therefore, they find it easier to apply greater commitment and focus to their roles. This occurs when business leaders ensure 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.
4. It frames where they are in their career. With the click of a mouse, your employees can find a broad range of information about the kind of pay arrangements people at their career level are receiving. They can easily determine what the salary ranges are for people with their work experience and what kind perks, benefits and incentives they are receiving. This becomes a comparative exercise for them to weigh whether they are progressing economically in their career the way they think they should. An evaluation like this becomes particularly important to them as they think about their contribution ambitions (see #5 below). If one of your employees looks at the information available and determines her pay offering is inferior to others at her career level, she will do one of two things: 1) She will determine she has not yet developed the skills she needs to attain the career level of her peers, or; 2) She will determine you do not fully recognize what a person of her talent and ability should be paid at this stage of her professional development. In either case, the pay level and programs in which an employee participates become a measuring stick to determine where they are and where they need to go next.
5. 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. Conversely, when you apply a pay philosophy that 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. Wouldn’t you? Again, this is common sense.
6. 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. 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.
7. It conveys whether you are consistent and fair. Your employees look at your company’s approach to compensation and decide whether you are encouraging or diminishing trust in the way you deal with pay. Think about it. If I work in your organization, and hear you talk about the company's vision and mission, and what the growth strategy is for the next two or three years, but I participate in a rewards program that either has no bearing on those outcomes or is at odds with them, what level of confidence do I have in your leadership? How would I evaluate the significance of my contribution to the company's future?
Organizational trust exists when employees experience operational integrity between mission, vision, strategy, roles, expectations, results and rewards. If that trust is to be sustained, a company's pay philosophy and associated strategies must enable continuity between each of those elements, not diminish it. That consistency between professed belief and organizational execution offers your employees evidence that they can have confidence in where the company is headed, how it's going to get there, what their contribution should be to that future and how they will be rewarded if those results are obtained.
Well there you have it—six fundamental, common sense reasons your people care about compensation. Why pay matters is not really a difficult thing to define if you take the time to think about the economic considerations your employees need to make as they navigate their lives. Being in tune with these six issues should help you construct your pay strategies in a way that enhances your ability attract, retain and develop the kind of talent you want.