In Part 1, I discussed many of the misconceptions of compensation at a company level. While companies should address this, they often don't. Which leaves the manager in a difficult position. However, it doesn't leave the manager powerless.
The key thing for the manager is to understand how much control she has, communicate openly and honestly, and find what truly motivates employees.
Understand the Situation
Every company is different, so it is important for the manager to truly understand the level of control she has. In many cases, control over salary and bonuses is limited. This is usually controlled by HR or the Senior Team. In most cases, a manager simply gets communicated how much they pay a position and how much of a raise they can give. There may be some negotiation that can be done, but it tends to be little.
However, a manager usually has more control over other areas of the budget that allow for rewards. For example, a manager can build a budget with more money for development opportunities that can be used to reward employees. In one group I managed, I always built money into my budget for development and swag (in training, I would buy swag for participants). However, I made sure that I used some of that budget for my team. I had little latitude when it came to raises, but I had a lot of freedom in other areas of the budget that I used as a way to reward people.
Always be open and honest with the team when it comes to money, but don't confuse honesty with blame shifting. Tell the team the constraints that the company has put on compensation in terms of pay bands, raise limits, etc. Just don't say things like "I would pay you more, but upper management has limited raises to X". This shifts blame to someone else. You simply tell them the guidelines and be honest with them.
In many cases, your team will realize that there are guidelines that have to be followed. They may not like them and they may complain, but as long as they don't behave inappropriately, it is your job as manager simply to listen. You don't have to justify anything.
Find Individual Motivators
The biggest thing that a manager can do is find what the internal motivators are for an individual and focus on that. This is why relationship building is so important. For most people, a reward that reflects them as individuals is more authentic and more appreciated. Most likely, everyone will be motivated by something different. I had one team where one person was motivated by time off, another was motivated by increased autonomy, and a third was motivated by public recognition.
I can guarantee that each one would have been happy with a check, yet each one appreciated and valued the fact that I took the time to understand their needs and reward them based on that.
There is a lot a manager can do to motivate employees without directly changing compensation. It requires reframing the problem from compensation to motivation.