The thorny issue of how best to reward and incentivise staff has always been near the top of the corporate agenda. Get it right and it can help you attract and keep hold of the best people and improve performance. Get it wrong and it can soon lead to demotivation, dissatisfaction, and in the worst case scenario, even dispute.
The economic climate may be improving but budgets are still under pressure and the days of big pay rises (or even any pay rises in some sectors) have not returned.
A recent report from the CIPD on how the latest thinking from behavioural science affects the way employees perceive their pay and benefits is therefore timely – and also makes for fascinating reading.
‘Show me the money! The Behavioural Science of Reward’ suggests the time is ripe for a new look at how we design reward strategies and make them more effective. So what are the key factors employers need to be aware of if they want to make sure their pay strategies hit the right note?
How people value reward
The research tells us that people’s view of their own worth goes up and down over time and is affected by a variety of factors. These include the state of the economic climate at any given time or how they compare their own skills and competence with those of the people they are working with.
What this suggests is that pay systems need to be more dynamic and flexible to keep in line with employees’ changing expectations. Flexibility does of course bring its own challenges, but it can also help to overcome a number of issues, such as how to keep people motivated when they have reached the top of their ‘official’ pay scale or how to reward people whose job may have significantly changed in response to organisational need and who no longer fit into traditional pay and grading structures.
The desire for fairness
The evidence from behavioural science research suggests that people’s need for fairness is deeply ingrained and when it comes to pay, we want transparency about how compensation and career progression is decided. In some organisations, reward and progression is open and highly structured; often it’s attached to a grading system with a set pay band so people know where they stand in relation to their peers, and what their next step up will be. In other organisations, or in certain sectors, it’s the exact opposite. Pay is highly secretive, if you asked your colleagues what salary they were on they probably wouldn’t tell you and managers can pay whatever it takes in order to keep hold of their best people. Finding the right balance can be a challenge – and obviously transparency becomes more difficult if, as suggested above, reward systems become more flexible and managers have more room for manoeuvre when it comes to making decisions about pay.
The debate about whether financial incentives are effective in motivating people at work has been running for years – and will no doubt continue to. What the latest research does show us, however, is that money has a powerful effect on behaviour. People perceive money as a ‘tool’ – something they can use in the future to get the things they want. It also acts a bit like a drug in terms of the effect it has on our brains, stimulating those areas of the brain that are associated with immediate gratification. The CIPD report suggests that the problem with financial incentives is that they risk “crowding out” the other reasons employees have for performing well – the desire to do a good job for example. The impact of a financial incentive is also likely to wear off over time – by which time people have ‘forgotten’ the other things that motivated them in the first place.
Team and individual reward
The CIPD research points out that team rewards can lead to dissatisfaction because people tend to compare their contributions more favourably than that of others. It’s easy to see how this plays out in the workplace. How often have you felt, for example, that other team members aren’t pulling their weight or that the whole project would collapse if it wasn’t for you? This doesn’t mean that team reward doesn’t have a place as part of a reward strategy. What it does suggest, however, is that reward systems which also include an individual element may be more effective because they will satisfy people’s need for personal recognition.
At a time when budgets are tight and big pay rises are not on the agenda, employers often make benefits a key part of their strategy for attracting and rewarding people. Flexible benefits schemes, which include everything from pensions and healthcare to gym membership and discount vouchers are now common in most sectors. The research highlighted some interesting findings about these kind of benefits, which employers might want to take into account when planning to introduce or refresh schemes. The first is that offering pension contributions over and above the standard is generally under-valued by employees, with the exception of those in their late careers. The same goes for deferred incentives, such as shares, which are not valued because they are ‘in the future’.
More work needs to be done to regularly communicate the value of these kind of benefits if employees are to truly appreciate their worth. The research also suggests that although flexible benefits schemes, where employees can choose from a wide range of benefits, are great for meeting the needs of a diverse workforce, there is also a downside in offering too much choice. People can regard having to make the choice as a ‘cost’. They may hang on to a benefit that is no longer of value to them, for example, because they can’t be bothered to make a choice. Or if a benefit is taken away, they may suddenly value it higher than they would have done when it was there. The implication for employers is that they need to simplify the range of benefits on offer, refresh the offering regularly, and avoid offering benefits that may later have to be taken away.
One action to take this week:
Ask yourself these key questions from the CIPD report…
- Are you dealing with jobs that rely on high levels of autonomy, mastery, and purpose? If so, it may be less appropriate to link pay directly with individual performance.
- How important is collaborative behaviour in your organisation and department? This can be encouraged by team-based reward and backed up by individual reward and/or recognition.
- How much choice do you offer employees in their benefits packages? Too much can be treated as a cost, so restrict the number of options to a few meaningful ones if possible.
- When did you last refresh your organisation’s benefit offering? The value placed on a benefit by an employee can reduce over time.
- How aware are your employees of the value of their pension contributions? Raising understanding through financial education and communication increases the value people place on pensions.