No debate on employee engagement would be complete without considering what role reward, and more specifically pay, has on the relationship. Is how much you are paid a key engagement driver that motivates you to strive for organisational success, or simply a hygiene factor?
Reward as a hygiene factor
Hertzberg’s two factor theory of job motivation (Hertzberg 1959) has shaped the historical debate on workplace behaviour and the impact of pay in employee engagement. Pay has usually been regarded as an extrinsic factor (or hygiene factor) that was more a job dissatisfier than an intrinsic motivator leading to increased job satisfaction.
Employees are not necessarily demotivated by hygiene factors but, if these requirements are not met, they may feel dissatisfied. The theory indicates that money is not a motivational factor in job satisfaction but rather it’s a hygiene factor or deficiency need. When it’s not met then employees will leave and the company’s ability to attract and retain key talent is diminished.
This theory was supported 50 years later in a report by World at Work in 2012 entitled “Retention of Key Talent and the Role of Rewards – WAW Survey on Reward and Engagement.” This study found the primary reason why key talent left organisations was an “opportunity to earn more pay elsewhere” showing pay to be the principal hygiene factor. The next most-cited reason was “lack of promotional opportunities”, followed closely by “feelings that pay levels are unfair relative to others outside the organisation”. Tied for fourth place were “dissatisfaction with job or work responsibilities” and “feelings that pay levels are unfair relative to employee’s performance and contribution”.
It’s important to note here that “feelings that pay levels are unfair relative to others outside the organisation” was a key factor. When considering employee engagement and pay, fairness is critical. Research supports the theory that when employees leave an employer it is not due to the absolute pay, but rather their perception of whether they are paid fairly relative to their peers and the market. This shows the importance of fair pay
Can reward drive higher performance?
We know that fair pay, and the perception of fair pay, is critical for attracting and retaining employees. But can pay motivate employees to go the extra mile, apply more discretionary effort and drive higher performance?
Bonuses, or short-term incentives, are usually viewed as having the most impact on performance; ahead of base salary, salary increases, long-term incentives and financial recognition programmes. Short-term incentives typically score highly because of their often direct and immediate relationship to employee contributions and performance. However they are dependent on:
- Employees understanding what effort is required and what measures are being used to determine success
- Employees believing they can impact the measures that drive success
- Managers who are able to explain, motivate and communicate the desired outcomes
More recently it has been argued that the use of bonuses and monetary rewards can lead to counterproductive results. Dan Pink, in his book ‘Drive’, argues a new model is required for the 21st century; and particularly for working environments that do not rely on pure productivity to succeed but rather knowledge work, creativity and problem-solving. Therefore, work is less based on carrot-and-stick motivators. He argues not only that this approach doesn’t work but often does more harm. His new approach to workplace motivation is centred on three essential elements:
- Autonomy – the desire to direct our own lives
- Mastery – the urge to get better and better at something that matters
- Purpose – the yearning to do what we do in the service of something larger than ourselves
How to get reward right – back to basics!
However you still need to get the employees in the door and retain them. It is worth noting that the some of the key reasons employee engagement nose-dived during the recession years were due to pay (including pay freezes, restricted bonuses) and other hygiene factors together with lack of job security, the need to work hard and downsizing. However, in the current, post-recession, environment where there is significant competition for talent, pay is critical to attracting key employees and keeping your high performers loyal and motivated.
There is a real need to get the basics right with regard to reward and address the key concerns of employees and their hygiene factors. Put yourself in their shoes and consider are they and do they perceive themselves to be:
- Paid enough relative to market? Could they get paid more elsewhere?
- Paid fairly compared to their peers?
- Rewarded enough for their contribution, effort and performance?
Employers need to ensure managers and employees understand how pay decisions are made, that managers have the tools they need to deliver competitive pay and, crucially, that they are equipped to communicate how pay is determined and how it relates to both individual and organisational performance.
Pay is central to the relationship between and employer and employee, it allows you to build a foundation from which to drive employee engagement and those activities that deliver intrinsic value to employees. Ultimately, if pay is not managed well and aligned it undermines all other engagement efforts.
Ruth Thomas is a founder and Senior Consultant with Curo. With over 25 years of global HR and reward management experience in the financial services sector she also has international expertise in the management of compensation processes and the design of pay and benefit structures, salary progression systems and management incentive plans. Her corporate experience includes Lloyds TSB Group, Price Waterhouse Coopers, Dow Jones Group and Credit Suisse.