Companies want to improve performance. Employees want to increase their wages. So, should compensation be used as the main motivator? Many companies already do utilise compensation in such a way, but are they doing it effectively?

Creating a pay-for-performance culture is one promising option for organisations hoping to effectively motivate employees.

“Pay-for-performance is a very good thing if structured appropriately, as it incentivises behavior and underscores results the organisation wants to see,” according to Bonnie Crater, CEO of San Francisco-based Full Circle Insights, a marketing and sales performance management company. “However, compensation is more complicated than just that,” she says. “It’s an intersection of many factors, including an employee’s personal goals, personal expectations, personal satisfaction and the company culture.”

When companies implement a compensation plan with a guaranteed base pay and a portion that is based on performance, Crater believes there are two results: “it allows for high achievers to gain more and low achievers to gain less.”

Ben Eubanks, a Huntsville, AL-based human resources professional, speaker and blogger at Upstart HR, believes it’s hard to prove that pay is a performance driver in the modern workplace.

“In the past, it worked if I was paid more to build one more widget on an assembly line, but most knowledge workers are not motivated to perform by money, and this has been proven in science and in practice for a long time,” he explains.

“The absence of compensation can demotivate, but compensation does not directly drive people to perform and be engaged for a sustained length of time,” Eubanks continues. “That being said, variable compensation is an option for encouraging performance and specific behaviours and tying compensation to those behaviours.”

 

Effective strategies for building a pay-for-performance culture

Companies that want to create a pay-for-performance system will need more than a compensation carrot to achieve the desired result.

“The research is clear that pay itself is merely a ‘satisficer,’ as employees look for equity and fairness in pay to avoid dissatisfaction, but it is not enough alone to truly motivate and engage employees,” according to Jonathan Westover, an associate professor of organisational leadership and ethics at Utah Valley University, and an HR/leadership consultant.

He agrees with Crater and Eubanks that compensation is merely one piece of the engagement puzzle.

“Therefore, it is important for organisations to take a strategic approach to their total compensation proposition (all types of pay and benefits) and provide a range of incentives—both monetary and non-monetary—that employees actually value, that also connect with the organisation’s mission and other key initiatives, in order to help build true employee engagement,” Westover says.

Westover believes other elements must be present for this type of culture to succeed.

“There needs to be a fair and equitable system in place—including clear expectations, effective performance management and evaluation processes—coupled with clear and consistent messaging and modeling of behavior from top leadership all the way down to the front-line supervisors.”

In addition, Westover says the company needs to get buy-in from the employees, and it must commit the type of resources (time, money, etc.) needed to truly establish a pay-for-performance culture.

It’s also important to ensure that compensation is truly a motivator.

“For instance, don’t make my bonus dependent on everyone else, because that doesn’t motivate me,” Eubanks explains. “Make it based on my level of performance or whether I accomplish task X, Y or Z.” When employees don’t have a lot of control over the outcome, Eubanks says they are less likely to be motivated.

 

Communicating pay decisions to employees

Equitable pay (or the perception of equitable pay) is a serious concern for most companies.

Payscale report reveals that employees tend to believe they’re worth more than they’re paid. While 73% of companies thought workers were paid fairly, only 37% of employees agreed.

According to a report by economists at University of California, Berkeley and Princeton University, when University of California (UC) employees were able to access a website that listed the salaries of each employee in the UC system, not only were those employees who were paid below the median not motivated to improve their performance, but they actually started looking for employment elsewhere. These are the types of concerns that companies have to wrestle with when they decide to release compensation data.

Regardless, Westover says organisations have to be transparent in pay decisions.

“Such transparency may include publishing a formal pay schedule and related policies for all to see, but it also must include consistent discussions between organisational leaders and their teams regarding a range of complex pay equity issues, both internal and external. Companies have to be committed to treating all employees fairly, and with dignity and respect,” Westover says.

Eubanks agrees. He says, “companies that can overcome this ‘off-limits’ topic by making it part of regular discussions and interactions can take away some of the weird feelings associated with discussing pay practices privately or publicly.”

 

Written by Terri Williams, originally posted on The Economist blog.