Motivation and performance are very complex issues affected by many factors. No one factor can guarantee motivation or performance in the absence of other critical factors (see my article on Managing for Peak Performance at http://personnelsystems.com). Money cannot be effectively substituted for good management. Some people think that money can't be used to motivate employees and that is true for some employees, but for a large percentage of the workforce it does not have to be that way. Studies show almost everyone is motivated by money to some degree, many to a moderate degree, and most to a great degree when compensation is properly designed. Some psychologists would argue that money doesn't change behavior because they do not consider it properly termed a "motivator", but rather they call it a "director" of behavior. This is a semantic argument. The idea is whether money can be used as a tool to change employee behavior in a desirable direction. It is unfortunate that in most companies and for most jobs, pay is a small factor in managing and changing employee behavior. However, inadequate use of incentive plans and problems with compensation design and strategy are usually to blame.
What the Research Shows
Behavioral scientists, employee and management surveys, and my client experiences show compensation can be a strong driver of employee behavior under the right circumstances when properly designed.
In a survey of over 1500 compensation and productivity professionals by the American Compensation Association and the American Productivity Center various types of compensation or rewards systems that they utilized were rated as having a "Positive" or "Very Positive" impact on performance in 66% to 89% of the companies where the companies used specific techniques such as gain sharing, small group incentives, profit sharing, individual incentives, and lump sum bonuses (source: "People, Performance, and Pay").
In a national survey of 1200 randomly selected U.S. employees across many different types and sizes of companies 54% of employees rated direct financial compensation as "very important" or "extremely important" to motivation. When stratified by age group there was statistically insignificant difference by age group. Gen X and Gen Y were no different than Baby Boomers in this respect (source: "The Rewards of Work - What Employees Value")
In a national survey of 2500 employees, 84% of those who understood their organization's reward/performance link believe they can help make a difference. If they also believe that the company will share its success when the strategy is achieved, 91% say they are motivated to help the company succeed (source: Workplace Index)
In a study of 663 companies with performance reward compensation plans covering 1.3 million employees and a broad section of the workforce of each company (not just managers and salespeople) by the American Compensation Association, they found that at the median, organizations earned $2.34 for every dollar they spent on payouts; thus a close approximation of the net return on plan investment is 134% (source: "Organizational Performance and Rewards").
How to Motivate with Pay
In jobs where significant variability in pay occurs in compensation and where it is closely related to key performance factors, then pay can be a big motivator. Some of my clients have gotten tremendous increases (over 20%, and often continued growth at a similar rate compounded year after year) in productivity in production jobs (white collar and blue collar), in sales jobs, and significant improved results in executive jobs. Many companies that put in company-wide incentive plans have gotten great productivity results with well-designed plans.
Clients of mine that have gotten a big change in behavior following the implementation of the incentive plan include PacifiCare Health Systems (about 100 claims processors), the sales force for a wholesale steel distributor, the sales force for an air conditioning manufacturer, and the Juanita's Foods executive team. These clients have told me that they attribute much of the change in behavior to the incentive plan. The head of claims processing at PacifiCare said that some of their slowest processors quickly became among the fastest processors because of the incentive plan.
The good performers prior to new compensation plan implementation remain good performers and may not improve much because they are already giving close to 100% effort, but the middle and the bottom performers are where there is significant opportunity for change. Most (though admittedly not all) are money motivated when they perceive the target is achievable and within their reach and where the rewards are also significant for target achievement. If a company is able to get significant differences in behavior from 50% to 70% of people because they are motivated by money, then the payoff for the compensation plan can be great. It is a shame for an employer to ignore the motivational effect that can be achieved with payroll dollars since it is such a large expense item for most businesses.
Failure in Compensation Design Leads to Failure to Motivate (behavioral change)
Typical compensation design problems include
Failure to tie pay closely to achievement of objective and realistic performance measures
Failure to regularly measure and provide feedback on performance
Failure to design variances in pay related to performance that are large enough to be perceived by the employee as worth the effort
Over-reliance on salary as the only significant method of financial rewards
In my experience, one of the biggest single impediments to the use of money as motivator is the manager's inability or insufficient effort to measure employee performance accurately and regularly, give performance feedback to the employee regularly, and set goals/standards that are challenging, realistic, and have strong relationship to business success. Since it is easier to measure performance and set performance standards/objectives in some jobs than others, money as motivator is more effectively used in some jobs than others. Nevertheless, company wide incentive plans can be powerful in the right circumstances.
Another major impediment is when employee motivation and effort, is overwhelmed by the impact of poor business strategy or poor business environment (i.e. the economy).
Compensation design (which goes far beyond the issue of labor market competitiveness) is not a panacea for performance problems nor is it the silver bullet for business success. However a well-designed incentive plan has the potential to be a powerful tool (not just a "hygiene factor") that businesses should not ignore.
"The Rewards of Work - What Employees Value" (2000, WorldatWork and Sibson & Company) A survey of over 1200 randomly selected U.S. employees determining the value of financial and nonfinancial rewards on attraction, retention and motivation by employment size, employee age, and industry.
"Workplace Index" (1997, Towers Perrin). National survey of 2500 employees attitudes about work and pay.
"Rewards, Interest and Performance - An Evaluation of Experimental Findings" by Judy Cameron and W. David Pierce (ACA Journal, Winter 1997). An excellent article that summarizes a large body of research on the impact of rewards on employee behavior.
"Organizational Performance & Rewards: 663 Experiences in Making the Link" by the Consortium for Alternative Rewards Strategies Research, 1994. Reviewed effectiveness of variable pay plans in 663 companies over a 3 year period.
"High Value HR Practices" by Shari Caudron (Workforce, December 2001)
"People, Performance, and Pay", by Carla O'Dell and Jerry McAdams (American Productivity Center and the American Compensation Association, 1987) - a survey of 1598 members of the American Productivity Center and of the American Compensation Association.
For additional information about this topic, contact
Mae Lon Ding, CCP, MBA
Personnel Systems Associates
7551 E. Moonridge Lane
Anaheim, CA. 92808