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Pay and Employee Motivation: What’s the Relationship?

June 13, 2017 • By Ken Gibson

For too many, that question remains unanswered.  Business leaders are still trying to determine the connection between what they pay people and how those employees perform.  Most profess a belief in tying rewards to results but remain unable to draw a parallel between the two.  When they turn to the research, there are studies supporting all sides of the issue.  Some researchers, academicians and authors continue to serve up evidence that, as a general rule, performance incentives don’t work…and can even be destructive.  However, a study referenced in a recent Harvard Business Review article says: “Our analysis showed that performance-related pay was positively associated with job satisfaction, organizational commitment, and trust in management.”  These conflicting research conclusions leave enterprise leaders scratching their heads and wondering how to make sense of it all in their day-to-day “how should I pay this person?” world.

So, let’s see if we can sort this out a bit.  The truth is that the research only tells part of the story and you can’t just take it at face value in making serious decisions about a rewards approach for your business.  There is some level of “truth” revealed in each of the studies but it would be a mistake to draw any extreme conclusions from the throngs of studies and articles written on the subject.

Much of the research in question argues the primary problem with financial awards is that they tend to inhibit creativity and innovation. Those writing on the subject point to studies where people performed worse when they were offered a reward for finishing a creative task sooner or “better.”  Those making this argument suggest you are better off just paying these people a “fair” salary because they aren’t going to work harder or smarter just because a performance incentive is part of their pay package.  It’s the intrinsic drive they have that makes them perform, not pay. 

The problem is that most of those commenting on motivation findings are examining awards in a vacuum. That isolated view doesn’t take into consideration the broader role pay should and can play in a value proposition for businesses that are trying to develop a performance culture. Compensation, when constructed properly, should encourage a stewardship mindset that has employees taking greater ownership of outcomesIt’s a tool for reinforcing roles and expectations not for trying to force desirable behavior.

In short, extrinsic motivation critics limit the purpose of compensation in general and employee rewards specifically within an organization. So let’s broaden our view of the role pay should have in a growth-oriented business. Here are seven issues that are not addressed when the intrinsic versus extrinsic motivation arguments are made regarding employee incentives:

1. It’s About Value Creation.  Shareholders deserve to know how much of the return their business investment is generating is attributable to the productivity of their workforce as opposed to their own capital at work. Identifying that threshold helps them determine the point at which real value creation—or value acceleration—is occurring.  If superior value is being created, the issue then becomes how that profit growth should be allocated.  How much should be invested back into the business, how much should be returned to shareholders and how much should be shared with the employees that are producing that growth—as an investment in the company’s human capital? Which leads us to the second issue…

2. It’s About a Rewards Philosophy.  Once a company has determined its value creation threshold and how much superior value should be shared, a logical next step is to develop a philosophy about how it should be shared.  What form of pay will best reflect the contribution made and reinforce the patterns of performance that made superior growth possible? What’s the right balance between guaranteed compensation (salaries) and value-sharing?  How much value-sharing should be tied to short-term outcomes (value creation occurring in 12 months or less) and how much should be long-term (sustained results)?  None of these factors inhibit intrinsic motivation.  Instead, addressing these kinds of questions removes a barrier to it. When employees know there’s a philosophy guiding how they are being compensated for their contribution to value creation, the issue of money is no longer a distraction. If they believe the philosophy is “fair” (see number 4), they can take their mind off pay and focus on their work.

3. It’s About Partnership. When organizations do away with incentives and instead define value creation and their philosophy and practices surrounding value sharing, they are simultaneously describing the nature of the financial partnership they want to have with their employees. With this approach, it’s no longer about rewarding specific conduct or trying to elicit performance based on a “carrot and stick” approach. Rather, it’s about using the construct of pay (the form compensation takes—especially “incentives”) as a strategic tool to reinforce the outcomes upon which business growth depends.  Pay then becomes a means business leaders use to communicate how all stakeholders participate in the wealth multiple growth-oriented results produce.

4. It’s About Alignment.  When an organization effectively defines the financial partnership it wants to have with its people, it creates a more unified financial vision for growing the business.  There is continuity between the vision of the company, its business model and strategy, employee roles and expectations and financial rewards.  When those things are linked in the minds of employees, you have line of sight.  As line of sight increases, so does accountability because there is operational integrity at play; people know their roles, what’s expected of them, why it matters and how they will be rewarded financially if the business model succeeds (not just if they perform their duties properly).

5. It’s About Fairness.  Businesses that have operational integrity communicate a sense of fairness at all levels. In other words, they don’t promote growth goals and results expectations in meetings but then apply expectations to roles that are unachievable or pay people in a way that tugs them in a strategic direction at odds with the future plans of the company.  Employees intuitively sense the lack of continuity those disconnections represent and it translates to distrust. That’s when feelings of unfairness emerge and intrinsic motivators shut down. Organizations that subsequently try to address this negative effect by implementing “do this and we’ll pay you that” rewards programs will always fail—because they’re trying remedy a systemic, chronic problem that needs a holistic “healing” process with a Band-Aid.  Employees will reject those attempts by either gaming the system for their own gain or ignoring the effort entirely by just “doing their job” without vision, purpose, meaning or full engagement.

6. It’s About Total Rewards.Ultimately, intrinsic versus extrinsic motivators is really a false choice.  In the context laid out here, we’re not talking about pay being used to “motivate” anyone. Rather, compensation—including incentives—is part of a Total Rewards framework that ensures employees’ intrinsic drive is not stifled by factors that inhibit the autonomy, mastery and purpose elements authors like Daniel Pink point to as the primary forces motivating performance. In a Total Rewards construct, equal attention is paid to:

Compelling Future. This means the company paints a clear and persuasive picture of where the organization is headed and why it’s meaningful. More importantly, it communicates why a given employee (in the context of his or her role and unique abilities) is critical to the fulfillment of that vision. This addresses the purpose element upon which intrinsic motivation relies.

Positive Work Environment. For intrinsic motivators to be unleashed, employees need to feel as though they are working within the realm of their unique abilities, that other team members have complimentary capacities, that they are sufficiently empowered to produce the outcomes for which they have responsibility and that they share the values of the organization.  This produces the autonomy component essential to motivation.

Personal and Professional Development. Motivation is fueled when employees feel as though they work in an environment that accelerates their ability to improve. This usually happens when the combination of resources to which an employee is exposed within the organization creates a unique learning experience—one that allows him or her to excel. This enables the mastery factor to take hold that intrinsic motivation feeds upon.

Financial Rewards. Value-sharing gives shape and definition to the wealth multiplier opportunity that is the natural outgrowth of organizational success. It performs a kind of continuity role in the Total Rewards make up by putting a financially codifying exclamation point on the relationship. As previously indicated, in essence a value-sharing philosophy sends the following message to success-oriented employees: “We consider you to be an essential growth partner in this company and have confidence in your ability to help us achieve the future business we’ve envisioned. As a result, we want you to be clear about the financial nature of our partnership and what it can mean to you as we achieve sustained success.” This speaks to all three motivational areas—purpose, autonomy and mastery—and allows the employee to see how their role in the company will help them fulfill their contribution aspirations (see #7).

7. It’s About Contribution. At its core, motivation is an aspirational issue. And most growth-centered peopleaspire to be in a position to make certain contributions in their personal and professional lives. These take unique forms and shapes for every individual. Some want to be able to contribute time and means to causes or charities.  Others want the ability to contribute to their children’s future (education, etc.) or their family’s overall well-being.  Many want to contribute to their ability to have greater control over how they spend their time and where they devote their energies. The ability to make a contribution in any of these realms has an economic component to it—even a requirement. The point that researchers and authors miss when arguing against performance incentives is that these greater “contribution” factors undergird the drive people have for greater economic well-being.  As a result, while they aren’t specifically motivated by some kind of annual incentive that is tied to behavioral metrics, they do evaluate the overall rewards philosophy and approach the company’s value proposition encompasses. They will then determine whether the financial commitment the organization is making will enable the economic means their contribution drive depends upon for fulfillment. The ability to foresee this kind of fulfillment in their lives is why economic rewards in business matter. This element is largely ignored by those commenting on the potential destructive nature of incentives. It’s not about carrot and stick manipulation. It’s about the potential for wealth creation—however employees define that and for whatever purposes they hope to serve.

So what should you conclude from all this?  Hopefully, you’ll determine that the controversy between intrinsic and extrinsic motivators is an unnecessary one—and that it kind of misses the point.  Financial rewards are about creating a sense of partnership, not about manipulating behavior. It’s about seven different but interdependent factors, not about a single issue or motivator.  Pay and employee motivation will always be a complex issue but it’s one worth trying to solve. 


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Ken Gibson

Ken is Senior Vice-President of The VisionLink Advisory Group. He is a frequent speaker and author on rewards strategies and has advised companies for over 30 years regarding executive compensation and benefit issues.