This document discusses the role of compensation in employee engagement. It argues that traditional views of using compensation to directly drive performance are misguided based on behavioral research. Compensation alone does not motivate employees in complex work. Rather than trying to influence behaviors, compensation strategies should aim to maintain fairness and take pay "off the table" as a retention issue. True engagement depends more on factors like autonomy, learning opportunities, meaningful work, and quality leadership. The focus should be on organizational development rather than assuming money can change behaviors.

1. Business Uncovered
Winona, MN
April 10, 2012
William Gould, CEBS, SPHR
THE “ROLE” OF
COMPENSATION IN
EMPLOYEE ENGAGEMENT

2. SCILLY ISLES NAVAL DISASTER
Adm. Cloudesley Shovell
(1650 – 1707)
Images from Wikipedia

3. TECHNOLOGY…

4. EVOLUTION OF EMPLOYMENT

5. 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

6. 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

7. 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.

8. 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

9. PROBLEM WITH PBC APPROACHES
We assume that performance based
compensation schemes work.

10. “It is easier to count the bottles
than describe the wine.”
-Thomas Stewart

11. 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

12. 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

13. 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

14. 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

15. THE ROLE OF COMPENSATION
TODAY?
“The future of profit is
purpose.”
- author unknown

16. 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
 “Workforce” measures must move from flow and
profitability to ENGAGEMENT
5. Compensation strategies should be designed to
take compensation off the table.

17. 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

18. DRIVING FACTORS OF
ENGAGEMENT
Gallup: 12 Core Questions of EE Engagement
2. Do I know what is expected of me at work?
3. Do I have the materials and equipment I need
to do my work right?
4. At work, do I have the opportunity to do what I
do best every day?
5. In the last 7 days, have I received recognition or
praise for doing good work?
6. Does my supervisor, or someone at work, seem
to care about me as a person?
7. Is there someone at work who encourages my
development?

19. DRIVING FACTORS OF
ENGAGEMENT
1. At work, do my opinions seem to count?
2. Does the mission/purpose of my company make
me feel my job is important?
3. Are my co-workers committed to doing quality
work?
4. Do I have a best friend at work?
5. In the last six months, has someone at work
talked to me about my progress?
6. In the last year, have I had opportunities at
work to learn and grow?
Source: First, Break All the Rules, Buckingham & Coffman

20. 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

21. 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.

23. Questions & Discussion

24. 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