It’s the end of the year and like in most companies it’s probably time to start calculating and reassessing your employee’s compensation. But can you actually use money to motivate and retain your employees? A study by Willis Towers Watson found that only 20% of employers in North America actually believe merit pay is effective in driving high performance.
Traditionally money was seen as the main incentive used to motivate employees. Higher productivity results in higher salaries and bonuses. For companies, it’s been used as the main tool to attract, retain and engage their people. Today we’ve learned that the key to motivation is much more complex than that.
Employee engagement is not about the financial rewards you provide, it’s about the intrinsic motivators that drive people at your company. Say your business hits hard times and you can’t provide pay raises that meet the standards you had set in the past. Employees who are there for the financial rewards will be the first to start looking for new jobs. Interestingly, Gallup found that 64% of millennials who are engaged at work stated they would not leave their job, even if the job market improves.
What’s more rewarding than money?
In his TEDTalk “What makes us feel good about our work”, behavioral economist Dan Ariely discusses an experiment in which he had participants put together lego figures for a diminishing amount of money. However, in one group, each time someone finished a figure it would be placed under the table. In the second group, each time someone finished a figure an experimenter would immediately disassemble it.
While being offered the same amount of money, the second group stopped making figures at a much faster rate. Even if nothing was being done with the first group’s lego figures, the act of disassembling them was an extreme demotivator for the second group. The reason being that aside from money, people need to feel a sense of purpose in what they’re doing to actually feel motivated. Furthermore, having the number of figures add up could also give the first group a sense of progress.
Similarly, PWC conducted a survey of employees asking them how much extra time they would work if:
a) They received a bonus for every 15 minutes more they worked, with a cap of 90 minutes
b) Customer satisfaction would increase when working 150 more minutes
Interestingly, they found that about 30% would work up to 150 minutes, even if they stopped receiving a bonus after 90 minutes. In both cases we see that people are largely impacted by: the purpose behind their work and their ability to see progress or improvement.
The 3 keys to motivation
In the 1980s, psychology professors Edward Deci and Richard Ryan came up with six main reasons that drive people to work. Building on their theory, authors Lindsay McGregor and Neel Doshi recently adapted these to the modern workplace.
They include positive motives:
And negatives motives:
When people are working solely based on necessity (to receive a paycheck for instance) they will be thinking more about the reward than the work itself. However, in their study they found that companies which emphasize the first three factors experienced a boost, not only in productivity, but also in factors like creativity and customer satisfaction.
How managers can use intrinsic motivators
Douglas McGregor’s XY Theory was one of the first to make the distinction between the use of extrinsic vs intrinsic motivators. In his 1960 book “The Human Side of Enterprise” he outlined two management styles that require different types of motivators. Theory X managers take a carrot and stick approach to motivation believing that humans have an inherent tendency to avoid work. Monetary rewards are thus the main tool used to retain and push employees to achieve more.
Theory Y managers, on the other hand, believe that a sense of ownership and autonomy in reaching company objectives can drive an inherent form of motivation. Humans receive a natural satisfaction from personal growth and improvement. Taking McGregor’s Y Theory into account, it becomes clear that to motivate employees, managers must provide an environment which can fuse their desire for constant development and achievement with a strong sense of purpose and room for self-direction.
These factors have encouraged managers to break the connection between performance and pay, instead placing emphasis on an environment that encourages Y Theory management objectives. This has created a paradigm shift away from annual performance reviews based on X Theory incentives and towards a mission driven environment that fosters creativity, ownership and self-direction.
Creating a strong culture of continuous learning and feedback will win you a motivated and agile workforce. To create these conditions, more managers are prioritizing coaching, recognition and openness by using real-time 360-degree feedback tools. However, compensation decisions still need to be made. Check out our research on the 5 latest trends in delinking pay from performance feedback.