Editor's Note: This blog was going to be longer than usual, so I split it into three parts. The next two parts will be published over the next two days.
There are few people in the world who have the financial means to not have to work. Even those fortunate enough to love their job do it to get money for housing, food, clothing, etc. In terms of companies, payroll for employees is always a large expense. It isn't unusual to see companies with 30-50% of costs coming from payroll.
In short, this is a major topic for everyone.
Unfortunately, the role of compensation on employee engagement is horribly misunderstood. I would even argue dangerously misunderstood. Let's look at some key questions to determine see how this plays out.
Does salary impact employee engagement?
Yes and no. If employees believe they are not being paid fairly, it will cause lower engagement. The reverse is not true. Salary will not improve engagement.
What this means is that companies should ensure that the employees are paid fairly - based on role, performance, competition, etc. However, do not make compensation the foundation or cornerstone of engagement policies. You don't have to have the best pay in the industry, you just have to have pay that your employees deem fair.
Should I use bonuses as a way to increase engagement?
No. There are some limited instances where financial bonuses work to increase engagement and productivity, but these are more rare than you would like to believe. Most bonus programs are fraught with problems. Companies don't pay attention to this because they think money is a good enough motivator that it overcomes any issues. They couldn't be more wrong.
Why do companies get this so wrong?
I could spend days discussing this. I believe it comes from two key assumptions that are wrong, but many companies and leaders have acted upon.
First, they believe the company's main purpose is to make money (assuming it is a for profit; non-profits have their own issue that they think people should just expect less because they are non-profits). The thinking then becomes "if the company's goal is to make money, that is probably the employee's goal too". The conclusion is that money is the most important thing to employees so it will be the best motivator.
Second, employees communicate to the company a wrong impression about money. I've left companies because the people were horrible, but I always told HR I was leaving for a better opportunity, which they all assumed meant more money. Sometimes I got more money, but that wasn't why I left. I left because the manager was crappy. Also, when companies survey employees, they almost always say they want more money. Take this with a grain of salt. Many times employees say this not because they really think that is the most important thing, but because they are trying to play the system. Employees believe that if they don't say something about wanting more money, companies will either not give raises or cut pay. They aren't saying what they believe, they are saying what they think they have to in order to get the company to act a certain way.
Is this really so harmful?
Yes! In more ways than I can possibly describe. The biggest way is the fact that it creates a confirmation bias that hampers engagement and productivity. Companies believe money is the biggest factor in engagement so they create policies around compensation (with the idea that they want to pay no more than they have to because it is such an impact to the bottom line). Employees see this and think "this is where we have to pay attention because it is their main focus" and say money is important. Companies then hear this and think "we are right" and tweak what they've done so far. Then employees figure this is something they can impact, so they focus more on it.
See what happens - both parties become focused on the wrong thing because of a misconception of the other side. This then leads to an escalation of a no-win scenario.
The other problem is that pay and bonuses are an incredibly easy thing to measure. I can look at my taxes and tell you that I made more/less money than last year and exactly how much. I have no device to see if I was more happy than last year and by how much.
Conclusion
I have oversimplified this in many ways, but believe that at its core it is correct. Once you have a livable wage, for the majority of people, money is not the most effective way to engage employees. This leads to the inevitable question - how can we fix it.
In Part 2 , I'll offer the manager some ideas on how to fix things. In Part 3, I'll offer ideas to employees on what they can do to address the issue.