Are your compensation policies contributing to employee engagement? Perhaps, but it is probably more likely that your compensation policies are actually acting as a drag on engagement, even if your compensation plan is competitive in the marketplace. To understand the role that compensation plays in employee engagement, we need to understand that there are many different things going on within the compensation discussion, and that whether your compensation policies are contributing to engagement depends on how compensation “deconstructs” in your organization.
To begin, we need to understand to what degree compensation “drives” engagement; that is, do employees’ perceptions of compensation contribute to a higher degree of employee engagement, and vice versa? The answer in most organization is: partially.
Compensation is the Engagement Survey “Whipping Boy”.
In the large majority of the employee engagement surveys conducted by TalentMap, compensation receives one of the least favourable ratings among all of the dimensions of employee engagement. As a 30 year veteran of the survey business, I’ll be the first to admit that a lot of this can be simply attributed to “survey psychology”, i.e. employees (falsely) reason that rating compensation favourably will preclude the organization from increasing compensation in the future. Of course, we know this is false, but in survey debrief after debriefing with employees, they continue to answer in this way. Therefore, bottom line: employees aren’t as dissatisfied with compensation as survey results suggest.
If compensation rates poorly in most organizations, and we can’t build on other drivers until compensation is perceived to be “in line”, then doesn’t that mean we need to use compensation to drive engagement?
No. When we understand how compensation breaks down into its component parts, we see that while money still matters, it is often not the heart of the matter and that perceptions around compensation are actually gaps in social and emotional employee needs that can be addressed without money. Let me repeat that: you can address compensation as a driver of engagement without money.
But first, we need to “deconstruct” compensation into its different component parts and look at what each contributes. Compensation meets three very different types of employee needs:
Compensation is a Hygiene Driver: Poor perceptions drive engagement down, but good perceptions don’t drive engagement up.
In other words, if our employees aren’t happy with their compensation, that can, and will have a drag effect on engagement; however the reverse is not true: engagement does not increase when employees have favourable attitudes towards compensation. This is because when employees are dissatisfied with compensation, it takes on over-riding importance, and nothing else matters. Once compensation is “in line”, then you can build the more emotive engagement drivers on top, like a foundation.
So how do we meet these emotional needs? Can we meet these needs without money?
Absolutely. But for now, let’s begin with the assumption that your organization’s compensation policy is truly fair and competitive in the marketplace, so an employee would not get compensated more or less for taking an equivalent position in a similar organization.
Compensation addresses three types of emotional needs, each of which can be addressed in ways other than money:
However, recent research in behavioural economics(1) proves that human beings are not rational, they are social, which means:
Just to illustrate the importance of fairness, the same research indicates that employees who believe they are paid “fairly” compared with people in either their company or other companies are 4.5 times as likely to be highly engaged as people who do not believe they are being paid fairly. In other words, it’s not really about the money – which is functional – it’s about being (and feeling) treated fairly.
Compensation as Motivation. Does compensation, in and of itself, motivate? Can it be used to motivate? Most importantly, should you use it to motivate? It is already well-documented that base pay does little to motivate long-term, so we will concentrate the discussion on variable or performance pay. Variable compensation is a double-edged sword. It can be a very effective tool to motivate performance under some circumstances. But other times, it actually works as a demotivator and barrier to engagement. Why? Because it violates the fairness test discussed earlier. Simply put, there are many situations where employees don’t feel variable compensation is distributed fairly and equitably; in these instances, variable compensation motivates a few, but have the opposite effect on many more. Yet variable compensation and pay for performance schemes continue to be used because management believes that they work.
When does variable compensation work to motivate (and engage)?
There are a number of clear conditions which need to be met:
Conversely, research shows that pay for performance/variable compensation actually serves to disengage when it’s:
The Bottom Line: How do we Engage through Compensation?
Remember, compensation is multi-layered and you need to deconstruct it in your organization to understand how it can be a help (or hindrance) to employee engagement. Then, you can use compensation to engage your employees, without money.
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