How much does increased pay drive increased performance?

6 min read

A person has been headhunted to a very prestigious executive position. Upon handing in notice the manager asks, “How much will it take for you to stay?” The response? “It's not about the money. It's about growth and career opportunities. Where do you see me in five years if I stay?”

This is an increasingly common scenario: the importance of pay is often over-emphasised compared to other crucial sources of motivation, such as job satisfaction, personal development, opportunities for growth and sense of purpose.

Obviously, there is a minimum threshold of pay that represents a fair compensation and will allow a person to fulfil basic human needs and to fund lifestyle choices. However, the relationship between pay and motivation is far from linear. Self-employed people often work longer hours than employees for lower wages but value their freedom over higher pay. We've all heard about people who didn't hesitate to take a cut in salary to move to a more fulfilling role, and in the corporate and showbiz worlds, examples abound of very highly paid, but unfulfilled and unhappy people.

According to a research paper: The relationship between pay and job satisfaction: A meta-analysis of the literature, “Although U. S. Gross National Product (GNP) has increased threefold over the past 50 years, levels of life satisfaction have remained constant… a finding which has been replicated in Japan”. The same study examined the pay level to job satisfaction correlation in several countries, including Great Britain, India, Australia, and Taiwan, and found results that weren’t significantly different.

The Harvard Business Review notes that “employees who are intrinsically motivated are three times more engaged than employees who are extrinsically motivated (such as by money). Quite simply, you’re more likely to like your job if you focus on the work itself, and less likely to enjoy it if you’re focused on money.”

So what does this mean for remuneration policies today? Firstly, it depends on the type of work. Do you want “heads” or “hands”? According to research commissioned by the Boston Federal Reserve Bank, performance-related pay (incentives) works for purely mechanical tasks, but as soon as cognitive skills are required, even at a rudimentary level, incentives lead to poorer performance. The majority of highly paid work in the Western world falls under this latter description. 

Deirdre Lyons, strategist at Davy, Ireland says the answer lies in a very simple Venn diagram between what’s important for the business and what’s important to the person. “If you can find a narrow, deep overlap and operate within that circle, there can be truly powerful results”, she says.

If pay is not the only, or even the main, motivator for employee performance, what is?

Businesses should have an open conversation with employees from the beginning of the working relationship: invite them to share what’s important to them and the values they hold dear, so that you can both work together for your mutual benefit.

Offer a better quality of life

Encourage employees to know themselves and what helps their productivity. Knowledge work often doesn't require the physical presence of employees, thanks to improvements in technology. If the nature of the task allows it, the ability to work from home or on a flexible schedule can represent a precious advantage. Some people value being able to spend time with their children, but will gladly log back on or have a conference call with a different time zone after the kids have gone to bed. Insisting that all employees do their work in the same place, on the same schedule can actually hamper productivity; employees who are early morning larks or night owls often perform better if work rhythms are aligned to their own biorhythms.

Offer control and ownership

Set employees’ goals together and engage them in taking ownership of the solution. If they want to try a different approach to achieve a specific outcome, give them the space to make it happen. Ask employees what they need for optimal performance: let them take ownership of outcomes and hold them accountable. Schedule accountability reviews to see how the proposed changes actually affect their performance and if it hasn’t worked out, then ask what happened and how did this differ from their expectations. As an employee takes on more responsibility and a feeling of achievement when it works out, the more performance is likely to grow.

Offer opportunities for growth and learning

One of the key reasons that employees want to stay at a company and give their all is that the work is exciting, challenging and delivers personal development. More companies are adopting learning as a key tenet of their culture. Newsweaver’s motto sums it up: “Don't just work. Learn”.

However, implementing a culture of learning needs to be translated into practical behaviours:

  • Add a step to HR reviews to ask staff members about areas or skills they are curious about and would like to incorporate into their role: digital marketing, project managements, sales, etc.
  • Strategic answers are not the exclusive province of senior managers: have an open-door policy for ideas and make sure trials, suggestions and brainstorms are positively received, to encourage contributions from staff. This will tap into the collective knowledge and experience of the company, accelerates the sharing of tacit knowledge and delivers greater collective performance.
  • A more fluid, less rigidly hierarchical environment where contributions are valued will allow upcoming talent to shine. Delve into the collective intellect of your staff: share the problems of the company and invite feedback. Two-way communication and reverse mentoring will foster an atmosphere in which lifelong learning is the norm, not the exception.

Offer a sense of purpose

One of the most powerful drivers of employee performance is a sense of purpose. In the bestselling book Drive, Dan Pink quotes “a fundamental aspect of all employee motivation is transcendence and having a purpose which is greater than ourselves. More and more organisations are coming to realise this.” 

Companies that satisfy their employees' thirst for purpose will be rewarded richly with their motivation. The Cone Communications Millennial CSR study shows that more than 9 in 10 US millennials would switch brands in order to choose one associated with a cause (91%, vs. 85% US average). This proportion is greater than in previous generations, and is reflected in behaviours such as buying local, shopping sustainably, being concerned with the environment, etc. This translates into recruitment trends. 

If you can demonstrate to staff that their work makes a difference, they will have a tangible incentive to increase performance:

  • Is your organisation engaged in CSR activities?
  • How do your team's efforts make a concrete, positive difference in the life of customers, suppliers and all the stakeholders of your company?
  • How does the work of your company help global innovation, the environment, disadvantaged communities?
  • How does the work of your company positively impact the regional economy and local communities?

An employee in a big organisation can lose sight of the ultimate aim of their work and get the feeling that they are only “a cog in the machine”. More money will do little to alleviate such a negative feeling, but tangibly showing employees that their contribution is part of a greater mission will reinforce their will to succeed.

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