C O M P E N S A T I O NC
ompensation strategy
plays a critical role in
motivating workers and
attracting high-performing
employees, and "pay-for-
performance" has always been a central
element of compensation plans. It has
its limits, however, in fully engaging
those employees and maximizing
their productivity. Hard compensation
(involving money) misses a number of
psychological compensations that need
just as much attention if an organization
wants to maximize employee contribution
and talent retention.
TRADITIONAL COMPENSATION
ASSUMPTIONS IGNORE
EMOTIONAL INFLUENCERS
A recent working paper called "The Psy-
chological Costs of Pay-for-Performance"
by three business school professors (Ian
Larkin, Lamar Pierce of Harvard and
Francesca Gino of Washington University)
has brought together a lot of the thinking
on the limits of pay-for-performance as
a motivator, and can serve as a useful
guide to HR compensation managers on
where to look to improve compensation
plan effectiveness:
"(The authors) argue that while (an
economic model called) agency theory
provides a useful framework to analyze
strategic compensation, it fails to consider
a host of psychological factors that affect
employee motivation and attraction. This
paper examines how psychological costs
from social comparison, overconfi dence,
and loss aversion reduce the viability
of individual performance-based
compensation systems..."
Some quick descriptions:
Social Comparison: People compare
their pay/effort ratio to their peers, and
expect perceived compensation to be "fair,"
based on these assumed ratios.
Overconfidence: People overestimate
their own skill set, which leads to accepting
tasks above their ability, and an infl ated
sense of what their work is worth.
Loss Aversion: People have "income
targets." They are deeply concerned about
staying afl oat fi nancially, and will work hard
to earn enough to cover their obligations.
Once those obligations are met, however,
their positive reaction to monetary
incentives diminishes dramatically.The study focuses on this question: If
Pay-for-Performance is so effective as a
motivator, why don't more companies use
it as their primary compensation plan?
Experience must be teaching companies
that it fails to fulfi ll its promise.THE SIMPLEST SOLUTION
IS NOT THE BEST ONE FOR
COMPENSATION PLANS
Pay for Performance has a nice simple
charm to it: People are motivated by
money, so structure the compensation
correctly, and corporate goals will be met
by people anxious to maximize their pay
packets. Salespeople have been paid this
way since money was invented.
Most HR professionals will tell you that
it isn't that simple, of course. Not every em-
ployee responds to such a compensation
plan positively, and a company cannot sur-
vive with just one type of personality. Aside
from unique examples among salespeople
and serial entrepreneurs, most people need
a more complex suite of compensation ele-
ments to motivate them. Among the factors
that research has identifi ed as infl uential,
as noted in the Larkin working paper:
Q Fairness in wages
Q Shame
Q Social preferences
Q Teamwork
Q Emotional responses resulting from
social comparisonsBACK TO BASICS: ENGAGE YOUR
WORKFORCE IN THE PROCESS
OF DEVELOPING BETTER NON-
MONETARY COMPENSATION.
Compensation comes from more than just
pay packets. It fl ows out of the whole work
environment. Engage your employees in
fi guring out how to ma[imi]e the non-mon-
etary compensation that comes from beingvalued and being able to actively contribute
to meeting shared goals. You will then fi nd
that monetary compensation is easier to
fi gure out, because it loses some of its
primacy and urgency among employees.
HR cannot justify the manpower and
resources one would need to customize
rewards for hundreds of employees, but
full engagement of employees can ad-
dress that need more universally by giving
individual employees a say in shaping their
work environment, and giving each one the
interpersonal skills they need to manage
their own corporate relationships.REDUCE YOUR RELIANCE ON
MONEY TO MOTIVATE PEOPLE
BY BETTER ADDRESSING THE
THREE KEY PSYCHOLOGICAL
INFLUENCES OUTLINED ABOVE.
We have used this approach effectively
with our clients for twenty years (even
before it was fashionable), so I know it
can work for you. Who knows better than
your employees what will work best in
keeping them motivated to perform at a
high level and maximize their contribution
to achieving corporate goals?SO FAR SO GOOD, BUT HOW DO
YOU GET THE EXECUTIVE TEAM
TO BUY IN?
Senior Executives look in the mirror,
and see "Pay-for-Performance" working.
They forget that at their level, all the
psychological factors are also covered:
They call the shots, they control decisions,
etc. Your job as an HR professional is to
convince them that people below them also
need to control some of their environment,
and be valued as a contributor.
Q Bring in this "Psychological Costs..."
research to back up your point. It is a
comprehensive summary of the fact that
people are motivated to perform by many
psychological factors aside from money.
Q Remind them that non-monetary
motivation usually costs less per "unit of
increased productivity."Pay-for-Performance issues are a great
place to start conversations about what
compensation plans are supposed to
accomplish, which allows "pay" to take
its proper place alongside, but not above,
the social and personality factors that also
shape an employee's desire to perform at a
high level.By David TigheI N D E P T HWHY DOESN'T PAY-
FOR-PERFORMANCE
COMPENSATION
WORK?