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A number of studies have concluded that money is not a chief motivator for workers. According to Abraham Maslowââ‚¬â„¢s and Frederic Herzbergââ‚¬â„¢s theories on compensation, salary, instead of motivating an employee, tends to dissatisfy them. In a hierarchy of needs, Maslow observed that people want to actualize their potential and a reward system that provides the means to do so. There are other forms of recognition that motivate workers better than profit sharing, cash bonuses and stock options, among them the most important being the work itself. In a corporate environment what motivates employees is a compensation package that satisfies a higher level of needs than salary. After basic needs are fulfilled compensation is not a strong motivation but what form of compensation motivates people?
A key to a successful organization is a motivated workforce. It sounds simplistic but many companies get it wrong when using a pay back, an effective method to retain and reward talents. For many companies recruitment goals are more easily satisfied than retention goals, which are challenging and requires providing a rewarding incentive plan to employees. A survey conducted in 2007 by the Charter Institute of Personal and Development indicates that 78% of employers had difficulties in retaining employees. Todayââ‚¬â„¢s generation, often called generation Y, with better educational backgrounds and usually fulfilled basic needs, has desires higher levels of motivation and expect more from employers. These expectations may cause a high level of employee turnover, where the value exchange is only one way. In this environment, the business organizations should be aware of the employee de-motivation mix when training programs cease in the organization and employee learning levels off, making the career of the employees with the organization unclear and often resulting in a salary freeze for the affected employees.
In todayââ‚¬â„¢s highly competitive business environment, it is important to develop an incentive plan within the organization that accurately captures the level of employee overall understanding of the organizationââ‚¬â„¢s goal and objectives, their expectations, and yet increases their motivation. Obtaining this data may be done by either an employee survey or a company customized ââ‚¬Å“partner profileââ‚¬Â. In the partner profile, the employee behaves like a business partner and addresses the following criteria: critical attitudes, behaviors, skills, and understanding of employee needs and expectations. While developing an incentive program, management needs to be aware of employeesââ‚¬â„¢ understanding of the business strategy and, most importantly, their own role in achieving goals for the organization. In planning incentives, management needs to know whether the employees understand how a profit is generated and more specifically their role in contributing to the organizationââ‚¬â„¢s revenue and profit.
A cornerstone of company success is to have employees closely connected to the companyââ‚¬â„¢s strategy and motivate them to achieve the company desired goals. Ideally, the employees will do this by performing assigned jobs. While it may appear obvious that employees look for motivation in order to meet the company goals, employees work performance ultimately reflects whether the work and incentive rewards fulfill their needs.
Motivation can have a financial or non-financial nature, as well as be positive or negative. It may be assumed that the financial motivation is what really influences employee performance, i.e., the higher the financial reward the higher employee performance. Surprising, this assumption is not true because financial motivation usually stops working when motivation reaches certain amount, after which it stops influencing employees. In order to deliver a required performance, successful companies have a strong compensation system that motivates employees. As mentioned above, non-financial motivation aspects may be provided by an employer and employees value these types of motivation too. A top non-financial motivator is the corporate culture of the company. The corporate culture of the company, aside from money and benefits, can be attractive to employees. An attractive corporate culture may include an organizationââ‚¬â„¢s diverse workforce, opportunities for professional development, growth and ongoing learning.
The Human Resources (JR) department of a company is usually responsible for introducing and promoting a performance management system that delivers ideas and instruments to motivate employees. One of HRââ‚¬â„¢s objectives in creating an incentive plan is managing the financial compensation system and delivering input for company strategic decisions.
Senior management, along with line management, is oftentimes responsible for setting up company non-financial motivation incentives.
Financial Compensation System
A performance management system for successful organizations is integrated with employee compensation that corresponds with fulfilling the goals of the company, as well as the goals of the team and the individual. Employeeââ‚¬â„¢s compensation should reflect an individualââ‚¬â„¢s skills, expertise, and knowledge, as well as their long and short-term performance.
Graph 1, reproduced from depicts a relationship between an employee and the wage received by the employee. The wage compensation is based on the type of job and jobââ‚¬â„¢s description; whereas the individualââ‚¬â„¢s goals depend on his or her position in the company hierarchy. If the employeeââ‚¬â„¢s position in the organizational structure is higher, then there are corresponding higher strategic goals and the employeeââ‚¬â„¢s total reward is greater.
A detail integration of fulfilled goals into the individual total reward system incorporates a portion of the individualââ‚¬â„¢s income, the competitive environment, and also the companyââ‚¬â„¢s and HRââ‚¬â„¢s strategy.
Graph 2 below shows the interrelations between fulfilled goals and total reward, which varies from moderate to aggressive and can have an impact on an individualââ‚¬â„¢s behavior in reaching the goals of the individual employee.
As we can observe, both horizontal and vertical axes picture percentage in fulfilling goals and total of the reward. Rewards are paid when goals are fulfilled and criteria met. In other words, when the company achieves its financial goals, than employee rewards can be acknowledged.
Graph 2 also shows that after goals are reached at certain level, there are no higher rewards that will drive goal fulfillment. This level of reward leveling is called a reward or compensation cap. The reward cap applies against qualitative goals that are always above the fulfillment level and not covered by financial funds. In successful companies where goals and objectives are thoroughly planned, the maximum employees can exceed their goals is usually about ten percent.
Another form of motivation is referred to as non-financial motivation Non-financial motivations are less tangible than financial motivations and are typically determined by both corporate culture and other values. Evaluating corporate culture begins with evaluating the communication channels and relationships among employees in all levels of the company.
Basic company values such as, for example, ethical approach, loyalty, empathy, courage, leadership and team spirit are the characteristics of non-financial motivation. Non-financial motivation plays an integral role in the entire process of company goal setting and employee evaluations, including establishing the employeesââ‚¬â„¢ own goals. There are other non-financial motivation tools that company management can use such as, for example, giving employees more responsibility and power through decision making opportunities, self-fulfillment opportunities, relationships in the group, recognition price, respect in terms of authority and more, if desired. Engaging employees in the success of the company business by acting like business partner rather than hired-for-labor may make them a highly motivated and valuable company asset. It is a managerââ‚¬â„¢s responsibility to determine and address the specific strategy of individuals under their supervision and select the main motivator category of their subordinates, in order to achieve a motivated workforce that also maximize s the companyââ‚¬â„¢s goals.
It is important to point out that a key to non-financial motivation is to have attractive and diverse work. However, there are other non-financial motivation incentives that make company attractive, such as opportunities of ongoing learning, career and professional growth while being part of corporate development. These incentives are attractive to todayââ‚¬â„¢s generation of workers that are mostly focused on developing their own professional skills and career.
From a psychological stand point view, Mihaly Csikszentmihalyi in his book ââ‚¬Å“Flow-The Psychology of Optimal Experienceââ‚¬Â explained that people are entirely involved when the following four elements takes place, people have to (1) face rules that require learning, (2) have set up challenging and clear goals, (3) receive timely feedback, and (4) possess appropriate skills to perform assign tasks well. Any system or organization that maintains these four elements is likely to make every participantââ‚¬â„¢s experience highly enjoyable. If the workplace is missing highly engaged employees it means that management has to design a strong reward system.
There is another form of non-financial motivation called empowerment that is addressed to all levels of management through allocating responsibilities and releasing control by management. It is necessary to increase peopleââ‚¬â„¢s capacity to request more responsibility and make them more motivated. That means that a successful company has to invest in management by offering education programs and trainings to develop skills such as critical thinking, goal setting, problem solving, risk analysis, and coaching relationship and influencing skills. Empowerment motivates people even more if they can compete on actions and responsibilities with others in the organization. The best result is achieved when people have a broad understanding of the company goals and objectives and their role in the effort of achieving them. Empowerment goes along with accountability to avoid chaos in the aspect of responsibility. Trust and trusting employees are the forms of accountability which generally motivates them. To have employees feel more empowered, the organization often encourages them to be more confident, self-reliant, self-directed and responsible individuals.
Empowerment is a form of compensation that is part of the culture of partnership, where each employee is a business partner. Employees will be highly involved in a high-performance environment when the appropriate compensation is provided to them.
Compensation strategy is use as a tool to motivate people. The intention of compensation strategy is to give the right award to the right employee. Compensation in terms of increases in salary is an important motivator but often only until the next pay increase is due. Compensation strategy can stimulate organizational culture through the clearly defined objective of performance pay. An Organization compensation strategy offers non-cash benefits can also motivate people. If we use a compensation strategy to retain valuable employee, then its main objective is to offer higher salary. It is important to avoid pay secrecy that can indicate a weak compensation system, cause mistrust and yet reduce motivation and organization effectiveness.
A main role in compensation strategy includes rates of pay that are based on the following factors. First, a pay increase based on an employeeââ‚¬â„¢s length on the job, which is good in retaining the employee is not considered as a reward for performance. Second, we recognize a performanceââ‚¬"based pay that motivates employees to perform better. This way of recognition is the most reasonable and achieves the highest results by encouraging managers and employees to communicate organization goals and performance criteria. A third factor is pay increases based on job-related skills and knowledge, also called competency-based pay, that motivates employees to obtain new skills and to broaden their knowledge.
A salary increase is a part of an overall compensation strategy and reflects employeesââ‚¬â„¢ achievement of the company goals and objectives. It is important to review salaries periodically (e.g., annually) including times when the firm cannot afford the increase salaries to avoid de-motivating employees. It is absolutely unacceptable to increase salary for under-performing employees. For example, some organizations maintain a policy that includes letting go of employees who are in the performance bracket below the bottom five percent. On the other hand, the reward for the best employees has to be big enough to motivate in order to be truly effective.
It is not recommended to give across-the-board increases because employees will trust in the compensation system and be less motivated to increase their productivity or contributions to the company. Thatââ‚¬â„¢s why it is necessary to distinguish outstanding, average and non-performers among employees in performance evaluations and pay increases.
Another form of salary increases, referred to as automatic salary progression, is typical in the public sector. This type of salary increase does not influence performance improvement and is given in respect of increase of the cost of living.
There are two anomalous salaries, one where the employeeââ‚¬â„¢s salary is below the minimum and an adjustment has to be made and the second when the employee is overpaid and freeze of future salaries is necessary to reach an appropriate pay level. In both situations, management has to communicate the decision with the employee in order to effectively manage expectations of the employee.
In difficult economic times where many firms face financial difficulties and struggle to merely survive, management has to pay close attention not to lose talented, committed and focused employees by implementing an effective compensation strategy. The strategy should differentiate between top, non-performance and average, reward only top performance, check the market(s) to determine whether the offered compensation system is competitive, explain the value of the compensation package, make plans to motivate employee in the short-term and, finally, terminate nonperformers in order to better cope with the financial difficult times.
Organizations in the private sector are free in defining their compensation packages but could be forced by national and/or state governments to change their compensation practices during times such as a recession to avoid negative public opinion in sensitive matters such compensation. Private organizations oftentimes have no choice but agree to proposed legislation and adjust the compensation policy to either impose a minimum wage or increase salary when the cost of living is getting too high.
There are also unwritten rules in compensation systems that are guided by the market that reflects salary systems and the common law that shapes compensation decisions.
Organizations may use different compensation systems for specific groups of employees because they are more important than others and contribute more to the organizationââ‚¬â„¢s competitiveness. These types of employees are hard to be replaced and thatââ‚¬â„¢s why the compensation package has to be tailored to their needs and expectations. This is common for Research and Development (R&D) employees in high-technology firms. In these organizations, the strategic employee compensation is based on three dimensions: (1) pay structure when the pay level for R&D employee is different than other employees, (2) compensation time horizon, and (3) pay design in terms of stock options and vesting periodââ‚¬â„¢s lengths.
Employees are the most valuable asset of the company so the key to retaining and motivating the most valuable employees is to motivate them properly by offering an attractive incentive plan that appeals and fulfills their desires. The successful company needs to have management that knows employeesââ‚¬â„¢ level of understanding of the companyââ‚¬â„¢s goal and objectives and their own expectations. Human Resources managers need to understand how to coordinate compensation plans with corporate strategy because compensation plans are essential components of a strategic human resources management plan.
The Provision of Incentives in Firms
Journal of Economic Literature, Vol. 37, No. 1. (Mar., 1999), pp. 7-63.
COMPENSATION STRATEGY: DOES BUSINESS
STRATEGY INFLUENCE COMPENSATION IN
YOSHIO YANADORI1* and JANET H. MARLER2
1 Sauder School of Business, University of British Columbia, Vancouver, British
2 School of Business, University at Albanyââ‚¬"SUNY, Albany, New York, U.S.A.
Strategic Management Journal
Strat. Mgmt. J., 27: 559ââ‚¬"570 (2006)
Published online in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.521