This week’s blog takes a deeper look at employee compensation, motivation and the vital relationship between the two. It analyzes the importance of employee reward systems for the realization of organizational strategies and achievement of organizational success.
The History of Compensation
What is compensation? Simply put, it is pay in exchange for work. In early history, people bartered for what they could not obtain or create themselves. If one person labored for another, they would get a share of the reaping. Currency was later invented as a more liquid medium of exchange. With the Industrial Age came the need to be both systematic and scientific about compensation. How much should someone be paid for a given job? If someone was running a factory, how would they pay workers in similar or different roles? And thus, the field of compensation was born.
In the 1800’s and early 1900’s, labor conditions were appalling. Workplaces were dangerous, hours were long, wages were low and small children were frequently put to work. There were two primary reactions to these wretched conditions: 1) The birth of organized labor and unions where workers banded together to fight for improved conditions and 2) An outraged public that lobbied for protective laws. And so, The Wagner Act, passed in 1935, gave added legitimacy and legal protections to organized labor and the Fair Labor Standards Act (FLSA), still important today, minimum wage laws, child labor laws and overtime laws.
More recently, there have been laws covering workers compensation, equal pay, non-discriminatory practices and employee benefits. All of these impact modern compensation theory and practice. Yet the biggest present-day compensation issues stem from changes in the workforce and business world. The growth of pay for performance, increased diversity, greater use of contingency workers and globalization all play major roles.
The Importance of Reward Systems
Compensation can be expanded beyond salary to include any pecuniary or financial benefit provided by the employer to the employee. In the last twenty years, this has been referred to as Total Remuneration. It can include base pay, bonuses, long term incentives, welfare benefits and retirement benefits. It also includes rewards. Rewards can be economic or non-economic. They can be intrinsic (coming from inside the employee) or extrinsic (coming from the employer). Employee recognition programs for service, for special contributions, for achievement of objectives or for completing a project all fall under Rewards.
Motivational Theories Important to Compensation Practice
Employers are interested in rewards programs to attract, retain and motivate qualified employees. They want to influence individual behavior. With this in mind there are a few motivational theories that are important to compensation practice:
- Maslow’s Hierarchy of Needs Theory states that people have physiological, safety, belonging, self-esteem and self-actualization needs respectively. Their motivation is to satisfy each type of need hierarchally. First, people need food and shelter, then they need safety and, finally, they need to be creative and self-fulfilled.
- Herzber’s Motivation-Hygeine Theory characterizes a set of “somethings” as hygiene factors and not motivators. If we look through the semantics, Herzberg is saying there are some things whose absence creates dissatisfaction and others whose presence create satisfaction. This notion is very useful in understanding employee behavior and motivation.
- Alderfer’s Existence, Relatedness and Growth (ERG) Theory retains a progression of the aforementioned needs, but it is not strictly hierarchical. Various levels can coexist. In addition, an individual will substitute increased need for relatedness if attempts to satisfy self-actualization needs are continually frustrated.
- Goal Setting Theory says, “set the bar and people will live up to your expectations.” Goals must be well articulated, stretch objectives. They cannot be impossibly high, or frustration will ensue. As a manager or leader this is one of the most directly applicable motivation theories.
- Equity or Cognitive Evaluation Theory says that employees evaluate and compare their input-output ratio to those around them, and then ensure their ratio is the same as their neighbor’s. Watch out. An employee usually makes comparisons to other employees and there are more headaches than benefits from internally inequitable pay.
- Expectancy Theory indicates if an employee expects to get something they want, (praise, a big bonus, etc.), they’ll work hard to get it. If they don’t expect to get what they want, they won’t be so motivated to perform.
Successful reward systems are those that meet the needs of the employer and the employee. They are competitive in their ability to attract and recruit employees and they support the organization’s strategy or mission. They are generally results-oriented and motivate employees to increase productivity. Finally, they support high employee satisfaction and morale, lead to low turnover, few complaints and low grievances.
The Relationship of Compensation and Motivation Practices to Organizational Strategy
Alignment of rewards with the overall strategy of the organization requires integration of the performance management system with the organization’s objectives. The compensation function must ensure that the system(s) used for evaluating individual and/or team performance reinforce and support the organization’s strategy. This is done by connecting the criteria used to evaluate job performance to the organization’s mission and goals and matching employee rewards to achievement of the organization’s objectives. If aligning rewards systems with organizational strategy is done well, the organization will be successful and the employees will be happy.
Conversely, the consequences of misalignment between strategy and compensation/reward practices can easily result in reward system inefficiencies that waste money; loss of production and revenue; performance failure and strategic failure; and ultimately failure of the organization.