Does More Compensation Improve Productivity?

By: Catherine Conlan

As employers look for ways to keep employees engaged and motivated, they may consider using compensation as a tool. But while paying people fairly for their work is important, there’s a misperception that compensation will drive productivity and motivation in the workplace, says Kris Duggan, CEO of Palo Alto, California-based BetterWorks, an enterprise goal-setting software platform.

“A bonus or raise may give someone extra engagement for a couple days, but it’s not going to carry through the rest of the year or change motivation,” says Duggan. Productivity evaluation is essential to distribute salary increases or bonuses, and people development is necessary to get people to grow and improve, adds Duggan. “Conversations about these two things should remain separate.”

With fierce competition for top talent, it’s important to understand the role compensation and other motivations play in productivity. Here’s what you need to know.

Know Your Company Mission
Clarity of purpose can go a long way toward boosting employee productivity, Duggan says. “People do need to be paid a fair wage, and there should be a process inside the company to determine equitable compensation,” but he adds that compensation alone simply isn’t enough for maximizing engagement to boost productivity.

Understanding the company mission and empowering managers to help employees take risks and achieve their goals will help align and coordinate efforts to boost productivity more effectively.

Be Strategic as a Leader
Ken Abosch, a compensation practice leader with Linconshire, Illinois-based Aon Hewitt, says organizations should ask themselves what their strategic intent is when it comes to compensation. Leaders can ask themselves questions such as:

  • What behaviors are we looking for from employees?
  • What values do we want to measure and evaluate?
  • What do we want employees to focus on?

Too often, Abosch says, organizations don’t think about what it is that they want to accomplish. “If all a company thinks about is paying people to show up at work, then that’s what they’ll get — someone just showing up at work.”

Compensation can offer more leverage and potential to help employees focus on what the organization considers important, says Abosch. And leaders can use it to shape behaviors based on the company’s mission.

Abosch adds that for any compensation to be effective in shaping behavior, it must incorporate what he calls a “line of sight.” Employees need to know what they’re being measured on and whether the possibility of reward is within their control.

“The No. 1 thing is to identify measures and factors, and explain them to employees and how they have the ability to impact those things,” he says. “When that happens, you can achieve the productivity or higher revenues or reduced costs, or whatever you’re trying to achieve.”

Reward Employee Development
Compensation can be used as a tool to reward and encourage employee development. For example, when organizations think about compensation, it should be to reward people as they continuously learn, grow and gain in their skills, says Lindsay McGregor, co-founder of Vega Factor, based in New York and Boston, and co-author of Primed to Perform: How to Build the Highest Performing Cultures Through the Science of Total Motivation.

“It’s not going to be possible to use compensation to influence what each person is doing every hour and every minute of the day.”

Instead, people can be rewarded as they improve their skills and abilities, says McGregor. That way, it won’t distract people from why they come to work every day.

“If you’ve tapped into intrinsic motivation and the mission is clear and exciting, plus you offer a fair wage, why wouldn’t people want to work there?” Duggan says. “If you don’t have any of those things, then you’re resorting to bribery to get people to work there.”