THE “ROLE” OF COMPENSATION IN EMPLOYEE ENGAGEMENT

Business Uncovered

Winona, MN

April 10, 2012

William Gould, CEBS, SPHR

Adm. Cloudesley Shovell(1650 – 1707)

SCILLY ISLES NAVAL DISASTER

Images from Wikipedia

TECHNOLOGY…

EVOLUTION OF EMPLOYMENT

MANAGING WORK

Management and measurement of work in most organizations is built around the “science” of FLOW

Faster production/service Controlling costs (including labor) Increasing profitability

COMPENSATION IN LABOR RELATIONSHIP Government regulation and organized labor have

profoundly influenced compensation systems Business management “science” was a foundation for

compensation designs

Piece-Rate compensation Gain-Sharing arrangements Incentive compensation arrangements

Key Business Assumption: employees are motivated by extrinsic rewards to work harder and smarter; risk of loss may also be a motivator toward desired behaviors

AGENCY THEORY

Economic theory: A dilemma (tension) exists where there is asymmetrical information held between a principal (employer) and his/her hired agent.

Assumption: Employees will not give any more effort than that level which is equal to the value of the pay that they are receiving.

Business Practice: Business should pay enough to get the behaviors desired from employees, but never more than they must – overpayment impacts profitability.

PERFORMANCE-BASED COMPENSATION PBC systems are based (at least in part) on Agency

theory.

Extrinsic monetary awards “drive” employee behaviors, according to designed incentives (Flow and Profitability):

Merit-based pay programs (skills- or performance-based) Sales Commissions Annual executive incentive plans Long term incentive plans (cash, deferred, stock options) Gain-Sharing plans Profit Sharing plans

PROBLEM WITH PBC APPROACHES

We assume that performance based compensation schemes

work.

“It is easier to count the bottles than describe the

wine.” -Thomas Stewart

BEHAVIORAL SCIENCE RESEARCH

Our use of compensation systems is a result of functional fixedness – our practice does not follow the science.

Contingent Motivators: Research shows that in many cases they don’t work, and can even cause harm These motivators do work when there are simple

rules and a clear direction – it causes a narrowing of focus

These are not effective when work requires creativity, or any form of rudimentary cognitive skill

Source: Drive, Dan Pink

BEHAVIORAL SCIENCE RESEARCH

Cognitive motivation studies have been replicated many times, and in many cultures.

London School of Economics: Some financial incentives can result in a negative impact on overall business performance.

Source: Drive, Dan Pink

BEHAVIORAL ECONOMICS Conventional economic theories assume that human

beings are rational at all times.

Behavioral science research proves that human beings are not rational, they are social.

Organizations should be studied as social structures, not management constructs.

“Social norms build loyalty and make people want to extend themselves to the degree that corporations need today: to be flexible, concerned and willing to pitch in.”

Source: Predictably Irrational, Dan Ariely

SOCIAL STRUCTURES

For employees, the value of anything is relative.

Fairness trumps opportunities in social structures

Peers define what is “normal” and what is “possible” within your organization

Source: Predictably Irrational, Dan Ariely

THE ROLE OF COMPENSATION TODAY?

“The future of profit is purpose.”

- author unknown

3 PRINCIPLES OF 21ST CENTURY COMPENSATION STRUCTURES:

1. Compensation is not the driving factor for changing employee or cultural behaviors; stop trying to drive change with money

2. “Workforce” measures must move from flow and profitability to ENGAGEMENT

3. Compensation strategies should be designed to take compensation off the table.

EMPLOYEE ENGAGEMENT

“Employees’ ability and willingness to contribute to the company’s success” – IFEBP

“People who work with passion and feel a profound connection to their company” - Gallop

DRIVING FACTORS OF ENGAGEMENT

Gallup: 12 Core Questions of EE Engagement1. Do I know what is expected of me at work?2. Do I have the materials and equipment I

need to do my work right?3. At work, do I have the opportunity to do

what I do best every day?4. In the last 7 days, have I received

recognition or praise for doing good work?5. Does my supervisor, or someone at work,

seem to care about me as a person?6. Is there someone at work who encourages

my development?

DRIVING FACTORS OF ENGAGEMENT

7. At work, do my opinions seem to count?8. Does the mission/purpose of my company

make me feel my job is important?9. Are my co-workers committed to doing

quality work?10. Do I have a best friend at work?11. In the last six months, has someone at work

talked to me about my progress?12. In the last year, have I had opportunities at

work to learn and grow?Source: First, Break All the Rules, Buckingham &

Coffman

EMPLOYEE ENGAGEMENT Numerous studies on engagement have repeatedly

shown that competitive salary levels, and other financial rewards are not among the top drivers of employee engagement.

Soft-dollar elements: Learning and development Autonomy (especially professional roles) Control Company reputation Authentic leadership

However, salaries #1 consideration for selecting a new employer

Source: International Foundation of Employee Benefit Plans

COMPENSATION IN EMPLOYEE ENGAGEMENT

Taking compensation off the table: Primary compensation consideration is for

recruitment of desired talent Ongoing compensation strategy is to maintain a

sense of fairness, and internal and external equity

If compensation is perceived as fair and competitive, it is largely a non-issue in retention and engagement activities

Engagement work is about organization development. Compensation strategies should support engagement, not drive it.

Questions & Discussion

REFERENCES & RESOURCES

Buckingham & Coffman, First, Break All the Rules: what the world’s greatest managers do differently (1999).

Dan Ariely, Predictably Irrational: the hidden forces that shape our decisions (2010).

Daniel Pink’s TED Talk: http://www.youtube.com/watch?v=rrkrvAUbU9Y

Daniel Pink, Drive: the surprising truth about what motivates us (2011).

International Foundation of Employee Benefit Plans: www.ifebp.org