Compensation and Employee Motivation



A majority of human resources professionals appear to believe that employees are likely to over-report the importance of pay in employee surveys. However, research suggests the opposite is actually true. We review evidence showing the discrepancies between what people say and do with respect to pay. We then discuss why pay is likely to be such an important general motivator, as well as a variety of reasons why managers might underestimate its importance. We note that pay is not equally important in all situations or to all individuals, and identify circumstances under which pay is likely to be more (or less) important to employees.

Some employees are motivated by money. In fact, most are motivated by money; at least for their basic needs. Employee motivation through compensation can come in the form of raises, performance bonuses, commissions, profit sharing, or any number of "extra benefits" like, automobiles, vacations, or other tangible items purchased and used as rewards.

I noticed an interesting program in a hotel where I recently stayed. They have a sophisticated system for rewarding employees based on customer feedback. Throughout the hotel, they have placed customer feedback forms and boxes for depositing the forms. When customers comment on the performance of a hotel employee, the employee accumulates points that can be used to purchase rewards like trips, gifts, and other incentives.

What the Research Shows

Behavioral scientists, employee and management surveys, and my client experiences show compensation can be a strong driver of employee behavior under the right circumstances when properly designed.

  • In a survey of over 1500 compensation and productivity professionals by the American Compensation Association and the American Productivity Center various types of compensation or rewards systems that they utilized were rated as having a "Positive" or "Very Positive" impact on performance in 66% to 89% of the companies where the companies used specific techniques such as gain sharing, small group incentives, profit sharing, individual incentives, and lump sum bonuses (source: "People, Performance, and Pay").
  • In a national survey of 1200 randomly selected U.S. employees across many different types and sizes of companies 54% of employees rated direct financial compensation as "very important" or "extremely important" to motivation. When stratified by age group there was statistically insignificant difference by age group. Gen X and Gen Y were no different than Baby Boomers in this respect (source: "The Rewards of Work - What Employees Value")
  • In a national survey of 2500 employees, 84% of those who understood their organization's reward/performance link believe they can help make a difference. If they also believe that the company will share its success when the strategy is achieved, 91% say they are motivated to help the company succeed (source: Workplace Index)
  • In a study of 663 companies with performance reward compensation plans covering 1.3 million employees and a broad section of the workforce of each company (not just managers and salespeople) by the American Compensation Association, they found that at the median, organizations earned $2.34 for every dollar they spent on payouts; thus a close approximation of the net return on plan investment is 134% (source: "Organizational Performance and Rewards").

How to Motivate with Pay

In jobs where significant variability in pay occurs in compensation and where it is closely related to key performance factors, then pay can be a big motivator. Some of my clients have gotten tremendous increases (over 20%, and often continued growth at a similar rate compounded year after year) in productivity in production jobs (white collar and blue collar), in sales jobs, and significant improved results in executive jobs. Many companies that put in company-wide incentive plans have gotten great productivity results with well-designed plans.

Clients of mine that have gotten a big change in behavior following the implementation of the incentive plan include PacifiCare Health Systems (about 100 claims processors), the sales force for a wholesale steel distributor, the sales force for an air conditioning manufacturer, and the Juanita's Foods executive team. These clients have told me that they attribute much of the change in behavior to the incentive plan. The head of claims processing at PacifiCare said that some of their slowest processors quickly became among the fastest processors because of the incentive plan.

The good performers prior to new compensation plan implementation remain good performers and may not improve much because they are already giving close to 100% effort, but the middle and the bottom performers are where there is significant opportunity for change. Most (though admittedly not all) are money motivated when they perceive the target is achievable and within their reach and where the rewards are also significant for target achievement. If a company is able to get significant differences in behavior from 50% to 70% of people because they are motivated by money, then the payoff for the compensation plan can be great. It is a shame for an employer to ignore the motivational effect that can be achieved with payroll dollars since it is such a large expense item for most businesses.

Theory of motivation

Under theories of motivation, Vroom's expectancy theory  clearly defines strong relationship between moderation and compensation. According to this theory, satisfying one's expectations and giving value (rewarding) for his efforts will result in motivation. generally employee in any organisation first expect monetary reward from his/her employer in respect of his/her work done in the job. More Detailed >>


EXPECTANCY THEORY FORMULA  {Motivation = valence x Expectancy (instrumentality) }



Failure in Compensation Design Leads to Failure to Motivate (behavioral change)

INDIA: Defence Minister A K Antony in a report to Parliament upper house disclosed that 637 scientists have resigned from the Defence Research and Development Organisation (DRDO) during the period of 2007-2011, most of them were younger scientists who resigned.  Better incentives, better increments and promotions  are few  main reasons behind the resignation of scientists from DRDO.

Source: TOI, 6-12-2012

Facts [+]
In the year 2012, Kingfisher airlines pilots rejected to attend the work due to the non-payment of the salaries by the airlines management for few months. But the fact was Kingfisher airlines went into losses due to various reasons like heavy competition from other airlines in India. 

Every employee working in the companies concerns about regular payment of salaries by the management and it is fact that regularly payment of salaries shows positive impact on motivation of employee. Hence there is direct linkage between compensation and motivation of employee.


Typical compensation design problems include
  • Failure to tie pay closely to achievement of objective and realistic performance measures
  • Failure to regularly measure and provide feedback on performance
  • Failure to design variances in pay related to performance that are large enough to be perceived by the employee as worth the effort
  • Over-reliance on salary as the only significant method of financial rewards