Employee motivation and retention is a key focus for companies nowadays. What policies and practices do you consider might improve motivation and retention? Is there any evidence as to what practices work?
Nowadays, Employee motivation and retention is a key focus for companies. The factors that mainly influence employee attitude, productivity and organisational competitiveness are rewards and recognition. Human Resources have become the most important asset for an organisation and people assets are now frequently viewed as vital to business success. It is critical for the company to identify their "star" performers, place them in the right positions in the organization and keep them in the business for long term to survive the surrounding competition. Therefore, employee motivation and retention strategies should be developed and implemented by the company to increase employee tenure and reduce the turnover rate.
"Employee retention is king" (Frank et al. 2004). This quote is often used to describe retention of employees as the fundamental factor in an organisation's future effectiveness. To understand what encourages commitment and the retention of employees, it is necessary first to understand motivational factors, since motivation is a fundamental field of human resource management (HRM).
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Different people are usually motivated by different things: some people may be encouraged by monetary rewards, while others are motivated by personal achievement or by the opportunity to advance in their career. Theories of motivation are significant in HRM as they help organisations to understand or identify individual needs, so that management is able to change the company's scheme to satisfy its employees.
While discussing the relationships among individual motivation factors and job satisfaction, Abraham Maslow and Frederick Hertzberg stated that the organisation must first understand what motivates employee. Thus, to increase retention rates, they should offer basic human needs in terms of physical and psychological needs. If an employer is not able to satisfy the needs of its employees, it may result in employees leaving the employer.
By the 1940s, Maslow had developed the 'hierarchy of needs' approach to motivation. This theory attempts to show how the healthy personality grows and develops over time and how that personality comes to manifest itself in motivated behaviour. In an organisational context, the first level is that of basic needs, such as physical comfort, pay and basic working conditions. After these needs are satisfied, the next level needs are more psychological: such as feeling safe in one's job. The third level concerns social needs, which relate to factors such as friendships, relationships between co-workers, and belongingness. The fourth level relates to esteem; fulfilling such needs may mean that employees are given the opportunity to achieve a certain level of status. Maslow's fifth level, the need for self-actualisation, is reached when the employee feels that the job itself has the chance for growth, which relates to the development and achievement of one's potential.
Frederick Hertzberg's two-factor theory, the 'dual structure theory', is in an organisational context used to identify what motivates employee to work hard and what makes employees satisfied or dissatisfied. The theory is structural because the attitudes of employees are directly related to their workplace environment. This is of great practical use for firms, because the firms can increase job fulfilment by influencing job characteristics that they usually have power over. Hertzberg provides a framework for understanding motivational factors, categorised into external and internal factors. The external factors are called hygiene factors, which are needed to ensure an employee is not dissatisfied. On the other hand, internal factors are known as motivational factors, which are needed in order to motivate an employee to greater performance.
There are similarities between Maslow's and Hertzberg's theories in terms of motivational and human needs. Maslow's first three levels in the hierarchy of needs show some similarities with Hertzberg's external factors, and the fourth and fifth levels show similarities with his internal factors. The diagram below displays Maslow's hierarchy of needs and also applies Hertzberg's two-factor theory, which is used when approaching analysis to clarify and discuss an employee's satisfaction within an organisation.
The combined hierarchy of needs and two-factor model (Wikipedia, 2009)
Employers should clarify the needs and demands of employees in order to meet employees' requirements. Each employee has specific needs, and the task for the organisation is to discover these needs in order to obtain and gather information on how to motivate an employee through satisfying his or her needs. Appraisal is a fundamental component of HRM in any organisation. Through appraisals, the information needed for systematic development of individuals - their careers, training, rewards and job design - is brought forward. Appraisal is a common method used by an organisation to identify employees' basic needs by giving them the opportunity to discuss future development and clarify individual needs. In this way, the firm will have the necessary information for retaining employees through satisfying their needs. This information is essential to formulate retention strategies, which are presented in the following section.
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Reward management for an organisation is the key issue in motivating employees and retaining staff. Lawler (1983) emphasises that organisations' reward systems significantly influence HR practices and processes by offering higher wages or better benefit packages that tend to retain more effective and efficient employees.
To develop an effective total reward system, companies need to encourage communication between employees and the management. In other words, the company can develop a more effective method to ensure employee royalty by considering individual preferences on reward and benefits. There are various retention strategies that use a variety of reward management systems.
Pension schemes are another way for the organisation to motivate and retain employees. According to Taylor (2008), the main objectives of occupational pension provisions are retention, attracting new staff, improving employee relations and managing the time and manner in which employees retire. Flexible benefits and harmonisation are also fundamental issues. There are many benefits that employees may value, such as sick pay, company car, holidays and health insurance. Harmonisation can be advantageous by removing status differentials between manual and non-manual workers.
Reward management is not just about money incentives. It can take the form of either financial (extrinsic) or non-financial (intrinsic) rewards. Intrinsic rewards relate to responsibility, achievement and the work itself, and are more important because they are very individual. On the other hand, extrinsic rewards may not last long but can have immediate and powerful results. Financial and non-financial rewards are discussed further below.
1) Financial Rewards
Pay is one method used by employers looking to influence the workforce and is a chief component of employment contracts, whether formal or informal. Pay is used to indicate the relative value of jobs and the level of fairness of a business's wage and salary policy. A suitable pay system helps the company to encourage high performance and retain good employees.
Incorporating a skill-based pay system allows the company to reward the employee when she obtains a new skill or further develops her current skills. This in turn can encourage career advancement and therefore develop a knowledgeable and adaptable workforce. This flexible workforce often results in lower staffing costs, reduced turnover rates, and a higher retention rate. From the employees' perspective, they enjoy the opportunity to develop their skills, to be recognized for their new skills, to achieve higher pay rate, to advance their career and therefore they stay loyal to the employer.
1.2 Bonus System and Performance-Related Pay
Performance-related pay (PRP) or a bonus system is a method used for retention and is frequently based on certain performance achievements. Objectives are set in advance and, if achieved, are often rewarded in monetary form. For example, objectives can be based on market shares, generated revenues or other things that can be transformed into value.
Recent efforts have been made to redesign jobs to pay more attention to improving cooperative working relationships among employees in order to obtain desired outcomes, for example improved quality, greater quantity, better communication and lower costs. Employee team building is required in today's workforce and rewards are based on team performance. Team-based performance appraisal method such as the 360 degree feedback strategy allows each employee to align individual performance goals with the organizational goals.
Many organisations believe that finance and non-financial benefits play an important role in gaining a competitive advantage in labour markets. Complementary financial benefits may help organisations to retain and attract employees, and non-financial benefits may assist organisations in meeting the particular needs of employees. Benefits can be offered in a variety of ways, but because there are also a variety of benefits to choose from, a so-called cafeteria plan offering a choice of benefits may be the cheapest and most straightforward way for an employer to meet an employee's needs.
Equity and fairness is also a key issue. It is always important to have competitive wages with the external labour market, in contrast to fairness within the internal market. Equity theory suggests that employees will be better motivated if they feel they are treated equally, and discouraged if they are treated unequally. Job evaluation can be applied by organisations to provide a basis for a fair and orderly grading structure. This is the relative position of jobs within a hierarchy, which is achieved by using criteria drawn from the job contents.
2) Non-Financial Rewards
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2.1 Challenging Work
The desire of many individuals to seek opportunities for personal growth through their work is very powerful. Some employees are motivated by their own inherent need to succeed at a challenging task. There are two common themes for this non-financial reward: a) recognition and feedback and b) involvement, autonomy and responsibility.
Promotion is not only a method of providing employees with more challenging work but is also a means to recognise them publicly, which often motives those who want to be differentiated and are driven by competition. Some people value the ability to influence their own work. If management can find ways to release and tap employees' creativity - for example via employee involvement - employees' commitment to organisational goals would follow. Developing employees as a retention strategy can seem contradictive in this sense, but at the same time firms must adapt to changes to relevant knowledge in the market.
2.2 Development and Careers Opportunities
Organisations should provide opportunities to employees who want to continue to grow and develop their skills. In fact, this opportunity to grow and develop through training is one of the most important factors in employee motivation. The practice of job redesign is a fundamental opportunity for the employee to advance in this way. Job redesign is concerned with the allocation of task functions among organisational roles and has been defined as "any attempt to alter jobs with the intent of increasing the quality of work experience and productivity" Wilson (1999). It can take a wide variety of forms in practice, such as job rotation, job enlargement, job enrichment, autonomous work groups and team working.
Job rotation involves employee moving from one job to another job in an attempt to alleviate boredom doing the same job day after day. Job enlargement involves expanding a job so that one or more related tasks are added to existing tasks at a similar level of responsibility. This may add to employees' motivation if they can see their contribution to the final product or service. Job enrichment is more radical; new responsibilities are added, so that employees have the opportunity to get involved in the tasks in order to gain and develop their skills. Autonomous work groups and team working involves a group of multi-capable workers for certain tasks so as to form high-performance teams.
The following section presents several case studies which provide evidences on how different practices impact employee motivation and retention in an organization.
Edinburgh's IKEA store
Based on the results of IKEA's employee opinion survey, the need to provide more computer training is identified. With many locations world-wide, e-learning is more cost-effective to IKEA than the traditional classroom training. IKEA Edinburgh has introduced its first ever IT training programme using NETg's e-Learning in Microsoft desktop skills and the (ECDL) course.
"While many of our employees do not use computers directly in their roles, we recognise the importance of allowing our staff to develop in all areas in the belief that this will help us to create a more motivated, committed and happy workforce." (Neil Crowson, Training Manager, IKEA Edinburgh)
Staff from the Edinburg store can access the NETg e-learning via a PC in the Learning Resource Centre or they can review the training modules on CD-ROMs at home. For managerial or supervisory level employees, Excel and PowerPoint skills are in most demands to perform bookkeeping or carry out presentations effectively. For those employees on the shop floor, acquiring basic IT skills and increasing confidence in using computers are essential. IKEA's training policy is targeted to encourage the individuals to take their responsibilities and pursue their own development based on one-on-one discussions with their line managers. Their policy states that employees do not have to prove the need to develop any particular IT skills, but rather they are committed to self-development of their IT literacy. This is a perfect example of empowering the employee by giving them the opportunity and flexibility to develop their skill. Therefore, an environment to foster a more motivated and committed workforce is created.
Source: Training Press Release, May 2002: "IKEA Edinburgh Signs One Year Contract with NETg for Quality e-Learning in IT Skills"
Senior management at Claridge's hotel implemented some HR initiatives to highlight the necessity of valuing and involving employees. Two employee recognition schemes were also introduced: 'Employee of the Month' and 'Going for Gold'. In the Employee of the Month scheme, staffs nominate colleagues for recognition for outstanding effort or achievements each month. Nominations are reviewed by the Executive Committee, which makes the final decision. The winner receives vouchers, and their photograph is displayed on a wall. Each year, the 12 monthly winners have a chance of becoming 'employee of the year', with prizes such as a Caribbean cruise worth over £5,000. The Going for Gold scheme offers employees the chance to take a 'lucky dip' in a pot of gold prize envelopes kept in the HR director's office. According to management, these schemes have been very successful and are highly valued by the hotel staff.
Source: IRS Employment Review 792f (2004) "Thank you goes a long way", 23 January, pp. 32-6
Some employee retention strategies could have adverse effects for an organization if the strategies are not implemented right. For example, by providing learning and development opportunities, companies allow employees to obtain portable knowledge and skills, which the employee can use to increase their attractiveness in the labour market. In many cases, companies should focus their resources in developing trainings on non-portable learning content, which refers to knowledge and skills only apply to their unique products, services, and business cultures.
Overall, successful schemes seem to be a mixture of both extrinsic as well as intrinsic rewards. Since monetary extrinsic rewards are easy for a competitor to match, it appears to be in the company's interest to secure its employees by not just focusing on money. Monetary rewards can deliver immediate and effective motivation results as we have seen, but intrinsic rewards such as varied tasks and other extrinsic issues such as development are also highly regarded.
Retention management might be hard for companies to handle if they do not implement succession planning for the long run. Companies should research labour market and predict the future job trends as they could have difficulties to recruit and hire the right people in an economic upswing. Irreplaceable resources and organizational knowledge will be lost when key employees leave the company. Recruitment and hiring for new employees could be costly. Retention management will cost significantly less compared to loosing key employees. People resource is the most important assets in an organization. By implementing the right retention strategies at the right time, companies can maintain employee royalty, motivate high performance, and succeed in a competitive business environment. A well developed retention management system can offer companies the key to success.