Pay and engagement: a totally rewarding relationship

Since the Hawthorne experiments – some of the earliest into how to improve people’s performance at work, carried out by Elton Mayo at General Electric’s Hawthorne electric plant in the 1920s – the role of pay in motivating staff has been controversial and a frequent source of disagreement between HR and line management.

HR professionals have been strongly influenced by psychologists such as Herzberg and Maslow. Herzberg’s two-factor theory propounded that, while inadequate financial rewards could strongly demotivate employees, non-financial factors such as interesting work, recognition and development were more important in motivating high performance.

Today’s terminology may have moved on to ’employee engagement’ – which research from the Corporate Leadership Council, Gallup and others suggest is critical to high organisational performance – but there is a similar emphasis on non-monetary rewards.

The importance of pay

A 2008 Employee Benefits/YouGov study found bonuses and benefits packages rank in 16th and 17th place respectively in a list of factors driving employee engagement. The most important were interesting work, work-life balance and the working environment.

Our City colleagues often seem wedded to a more materialistic view. A senior executive in a major bank once told me: “Pay people well and you get good performance, pay them doubly well and you get double the performance.”

A major UK company successfully operates aggressive bonuses to incentivise executives and is one of the best performers in the FTSE. Yet, an attitude study suggests staff engagement levels are low compared to other UK firms.

A complex reality

The true picture, inevitably, lies somewhere in between. In our increasingly consumerist society, money is key to fulfilling a wide range of needs, signalling achievement, status and recognition. As the head of reward for a utility told me: “Money is not the most important motivator in life, but it is a powerful lever for change, a symbol.”

A recent WorldatWork study shows performance pay has a powerful impact on the engagement of high-performing employees, while the Corporate Leadership Council demonstrated it has a significant influence on employees’ discretionary effort. And the Institute for Employment Studies’ (IES) work in the NHS showed that pay and benefits contributed to staff engagement.

So money motivates and can help to engage. But, as ecomonics professor Simon Burgess’s meta-analysis of performance pay concludes, “employees do respond to cash incentives, often in sophisticated ways that may or may not benefit the organisation”. Engagement is not just about the motivation to achieve performance goals but also a genuine sense of mutuality with the long-term interests of the employer.

While a lack of emphasis on pay and its links to performance can damage staff motivation, an over or sole emphasis on financial incentives can be detrimental to employers.

Last month, the Oxford Union debated the motion that City pay levels are indefensible. The motion was defeated. But whether paying your chief executive 1,000 times the average pay of a firm’s employees is conducive to widespread staff engagement must be highly questionable.

Total rewards and engagement

The resolution to the debate lies in total rewards, defined by Michael Armstrong, managing partner of e-reward, as “all types of reward, financial and non-financial a value proposition which embraces everything that people value in the employment relationship implemented as a coherent whole.”

Employers need to develop and operate such a strategy, giving due weight to the pay and incentive elements, but also delivering a broader work experience that is conducive to the engagement of their staff and differentiates them from their competitors. As the IES research shows, that blend has to be tailored to the needs and character of each organisation and its workforce, as well as being flexible to suit each employee.

Pay is vital for motivation and incentive, but a total rewards approach is essential for employee engagement.

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