Updated: 5 days ago
Salary is the most important motivator for employees to work hard every day to achieve results for the company's goals. After all, we are all responsible for bringing home the bread-and-butter and paying the bills!
Business owners and managers typically underestimate the impact of compensation on employee motivation, and so do many researchers. As a result, this aspect of human resource management has not attracted enough attention to be the subject of HRM research, like other more popular areas such as employee retention, engagement, or talent acquisition.
In fact, an organization's compensation structure is the most influential factor that can fundamentally determine all talent management functions as well as the quality and effectiveness of human capital, ultimately leading to the achievement of overall organizational goals. In addition, compensation systems can be used to reinforce the company's core values, culture, and goals.
Human resource managers should focus more on their company's compensation systems to create a productive workforce that enforces what is important to the company and to improve the other functions of human capital, such as attracting the best talent, employee engagement, retention, training, and expected attitudes to shape the company's culture.
Issues around compensation
Although some academic researchers, consultants, and media influencers claim that extrinsic motivators, especially salary, are not effective in eliciting desired employee behaviors, there is clear empirical evidence to the contrary.
Compensation is too effective at motivating employees, and this can sometimes have dysfunctional consequences.
For example, the scandal at Wells Fargo in 2016 revealed that some salespeople at Wells Fargo opened many fictitious credit card accounts for random people with random names in order to receive the bonuses the company offered for each new account opened. While this is a dysfunctional consequence of compensation, it clearly demonstrates the motivational effect of the bonus.
The problem is not the tremendous impact of compensation on employees, but how the company implements the plan to exert that power on employees to achieve the desired results.
Compensation packages also have a huge impact on the company's strategy to attract new employees. If the compensation for a certain position in the company is below the market value, there will not be many good applicants and the company will end up hiring mediocre talent.
In fact, high pay is the main motivator for the best talent to be interested in your company, as they usually have no idea what exactly working in this new company entails or what the culture is like.
Compensation systems should be designed to support a company's talent management strategy.
According to the Global Workforce Study, career advancement is one of the most important factors in retaining the highest performing employees. So, if a company is aiming for high retention of top performers, it is important that there is a career plan for employees and that compensation systems are linked to this strategy in some way.
For a company to motivate its employees to achieve the company's goals, compensation and benefits should help create the expected value in employees who exhibit the expected behaviors and reward them accordingly.
For example, it is important that teachers are motivated to improve student learning by achieving desired results on challenging state tests. Therefore, school salary systems should be linked to student performance on state tests, which translates into salary increases or bonuses.
It is of utmost importance for companies to offer competitive compensation packages for their talent. However, compensation has a major impact on a company's budget, and payroll costs can be the largest line item on a company's balance sheet.
Therefore, the financial impact of compensation systems should be well planned to preserve the company's solvency and cash position.
In times of recession or economic downturn, companies take various precautionary measures. Many companies either freeze salaries, make minor cuts, or simply lay off a small number of positions to get through these difficult times. Thus, when companies structure their pay systems based on either the performance of their employees, the results they achieve, or other factors such as education level, seniority, years of experience, etc., they must have the following characteristics:
Employer’s affordability of the salaries.
Employees’ accountability to achieve the company goals.
Companies tend to create more affordable base pay systems and incorporate performance evaluation systems to pay bonuses when an employee achieves (even partially) the goals set by the supervisor.
Structuring compensation systems.
Since HR is responsible for developing compensation systems for the company, certain aspects should be considered when involving all stakeholders in the decision-making process.
To begin with, corporate values should be considered when creating a compensation philosophy or statement that establishes the basic principles of the system that support the corporate values and are linked to the corporate objectives.
In addition, the compensation strategy should address the following:
How is salary distributed between hierarchical levels and even within a level?
Is the salary system egalitarian or elitist?
How are the differences determined?
Do nuances such as a college degree, certifications earned, years of experience, seniority, internal and external experience, related and less related experience, etc. play a role in determining base salary?
Will there be a variable compensation system based on the results achieved or the attitude and performance evaluation of managers?
If so, how will this play out and to what extent or proportion?
Will there be a grievance procedure that employees can turn to if they have a complaint?
In conclusion, how will other rewards such as retirement, health care, or other employee benefits be structured and embedded in compensation systems?
Human Resource department should determine the answers to all of these and other questions around compensation systems by talking to managers, executives, board members, and a select group of employees, reviewing job descriptions, examining the market values of existing positions, work groups, working conditions, etc. to create the most favorable yet effective compensation systems that motivate all employees to do their best and achieve results.
There is no magic formula or simple answer to the question of how compensation systems should be designed to get the best out of employees for the company.
Each company should develop its own systems to turn this powerful extrinsic motivator into a tool to achieve the best results for the company. In addition to extrinsic motivators, today's employees place a high value on intrinsic motivators such as meaningful tasks, autonomy and flexible work schedules, and working toward sacred or important goals for humanity and career advancement.