Sunday, 28 April 2013

Does pay really matter in employee engagement?

I learnt a valuable lesson on the role that pay and rewards play in an employee’s life very early in my career when I was managing a fleet of trucks with unionised drivers. We instituted a number of measures to develop morale that included giving out a written letter of commendation to a driver that garnered positive compliments from customers. One such letter was handed by me to a driver but I noticed that he took the letter with no smile on his face. I asked him the reason and he took me over to his locker and pulled out six commendations that he had received over one year and said something that changed my perspective forever as a people manager -- “How do I feed this paper to my children?”

Organisation’s spend a considerable time and money on benchmarking their products/services and reverse engineer their competitor’s product/service. Similar to benchmarking of products/services the same technique is well-entrenched in the form of salary benchmarking. The general consensus is that if an organisation underpays for a particular role then the person is likely to be negatively impacted BUT if an organisation ends up overpaying for a particular role then the organisation’s competitive cost basis will be negatively impacted. This is driven by the logic that an organisation has to keep its costs in check in relation to its peers or it will be out-priced and lose market-share (besides having a sub-optimal profit basis vs. the competition).

The dilution of rigour when benchmarking occurs due to the fairly imprecise nature of the characteristics of an organisation that create organisation specific differences. Think about geography; revenue mix; profitability mix; product mix; level of investment in internal tools/processes; on-going investments in Information Technology; extent of labour arbitrage through outsourcing; culture; maturity of the organisation (start-up vs. established organisational structures) etc. Not only are organisations different but then most organisations use their vision, mission and annual reports to argue vociferously that they are 'the benchmark' are 'world-class' or 'set-the-standard' or are 'best-in-class' or even talk about why their cultures are 'innovative' or 'caring' or 'in a class of its own'. So if every organisation wants to cast itself as unique or 'the one' then surely the roles that their people do are also unique and organisation specific?

Many organisations recognise this and therefore generally place a role (or type of role) on a
pay band/range that is broad enough to ensure that the employee’s pay-point on the band/range can reflect any unique nuances that cannot be captured in the benchmarking exercise.

As I try to build a career for people particularly those who are performing well and have shown an interest in building a career I find that organisations tend to look at pay as one of the elements of rewards and other ancillary activities such as training, development, career planning, perquisites (perks), social activities etc. With this also are on-going HR findings where
pay is usually placed in the list of things a company must do for its employees (pay does not always feature at the top of these lists); HOWEVER, pay always appears on the list of reasons for why people remain disengaged from work or contemplate leaving. Research shows that if basic needs (such as pay) are perceived to be unfair then employees are disengaged and only when we have parity on the basic needs then other things can drive higher levels of employee engagement. “An engaged employee is one who is fully involved in, and enthusiastic about their work, and thus will act in a way that furthers their organisation's interests.” It consistently affects key performance outcomes, regardless of organisation, industry or country (Gallup 2012).

Today organisations are challenged by economic swings; fierce competition; the need to ‘cannibalise’ themselves otherwise someone else will ‘cannibalise’ them; cost alignment etc. Every time an organisation undertakes lay-offs or pay and/or promotion freezes as well as undertake structural changes to maintain relevance (causing more uncertainty) then employees start losing 'stickiness' with the organisation. Along the way I think we lost the element of trust that needs to exist to some degree with our employees and frankly, the employees of today know that!

Many organisations drive various supporting (but ancillary) programmes to improve employee engagement and make the work-place better. However, making the work-place better is a different matter than making the pay process better. This came about because pay was treated as one of the elements that employees wanted for better engagement at an organisation and not weighted in the right manner in the mix. However, remember that ALL THINGS ARE NOT EQUAL. In fact, a survey by
Mercer consulting (2012) found that “top reward elements that organisations expect to have the biggest impact on employee engagement and retention in 2012 are base pay increases (reported by 50 percent of participating organizations), followed by vertical career progression (47 percent) and leadership development (46 percent). Other reward elements that are viewed as having a moderate impact on employee engagement and retention include variable pay, health care benefits, work life programs, performance management, time off programs and training.” In summary, pay is still the biggest driver of employee engagement with vertical career progression and leadership development following very closely.

I suspect that the results would have been more skewed in the favour of pay and rewards if not for the simple fact that that many employees are not keen on identifying pay or the need for more pay as a reason for leaving or impacting their employee engagement as that would make them appear 'mercenary' or 'opportunistic'. Nor can employees articulate how higher pay will allow an organisation to retain them hence organisations end up looking at pay as one component in a larger list or reasons on why employees remain engaged. My concern is that the assumptions that drive an organisation’s view point on pay are forgetting one simple thing – since all else is never equal, therefore, pay does matter in employee engagement.

The issue is not the presence of a pay system based on a benchmark but the challenge that invariably a benchmark based system can only work if a majority of the individuals in a particular role change a role and do not end up staying in a role that they have outgrown due to experience. The assumption underlying this logic is that all employees are ambitious and want to grow. This assumption therefore creates a differentiation between a role and a career. A career then would be a series of roles that move a person up the pay ladder! And yes capability is relevant but also relevant is the notion of built in turnover for those who are not capable.

My goal is not to discredit the pay process at organisations as I am aware of the difficult choices that an organisation has to make and the difficulties of people managers in implementing the same. The truth of the matter is that whenever we make a difficult choice, some employees will win and some will lose.

I am trying to make ensure that people managers do not succumb to the on-going notion that pay is not one of the top reasons for people leaving or that employee engagement is driven by other factors and not only pay. This type of thinking has created more dissatisfaction amongst employees as managers have stopped thinking about the impact of their actions with regards to pay and how they must continuously grow their employees out of their roles to ensure that employees benefit from the reality that there are role specific salary benchmarks and the ability to sign blank cheques to employees i.e. delinking pay from a role does not exist.

Building in a virtuous cycle of employee churn so that a series of roles can create a career is critical otherwise a people manager will end up with employees who are doing the same role but demanding more pay for the same, which by now we all realise is challenging given pay and role benchmarking.

A majority of employees do not understand the process to determine their pay and most employees only associate satisfaction with the size (i.e. amount) of their compensation than with the process used to determine it. Employees invariably look at the pay process with suspicion and hence my advice to managers is to spend time in explaining how the pay process works in their organisations.

I have always felt that longevity with an organisation is a better metric for employees than focusing on longevity in a role. Longevity in role means stagnation for the individual from both a skills and pay point of view BUT a huge challenge for a people manager who has to build this into his or her strategy for developing their people and managing careers of their talent.

To employees who are looking at pay as an important variable please look at your role and force yourself to focus on longevity with your organisation vs. longevity in a role. Ask yourself whether you have made the same mistake when talking to your manager i.e. kept asking for more pay (not inflation linked increments but promotion driven change) for the same role and in its absence started questioning your commitment to the organisation as the organisation appeared to be acting 'unfairly'. 


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  1. Interesting though "focus on longevity with your organisation vs. longevity in a role". Having spent 10 years in current org, I can tell and usually tell my team benefits of working in same org but rightly said focus should be on longevity in org rather than in role.

    Coming to main topic of pay being motivating factor for employee engagement, my limited experience has been that employee engagement is only possible when pay is able to take care of basics of living. With a below par salary, one is bound to be dissatisfied and none of he side kicks keep him motivated.

    But is it also not true that taking advantage of market conditions employees are also behaving 'mercenary' or 'opportunistic'. How many truly evaluate their worth in the role and then weight the pay package.

    Rahul Arora

    1. Rahul...there are many jobs that don't pay sub-par but pay what the market believes is the value of the job/role. Paying to care of basics of living is a function of many things. For e.g. the same salary will work very well for one person but may not be enough for salary of four. This is why it is always difficult to understand what is basics of living.

    2. If that is the case, how do you define the value/contribution of an individual to the operations/business activity of an organization? Airline pilots were the heaviest paid people at one point of time, has their job role changed? no, the technology skillset became redundant/lots more pilots and easier aircrafts to fly, while airlines have not become more profitable.. have they?

    3. The value/contribution of any role is a function of what the organisational priorities are. If an organisation is in the manufacturing and sales of computers then clearly those are the two priorities and the rest are support functions. Planes may be easier to fly but the issue is not ease of flying but ease of surviving! Given the meandering nature of your comments here is an obtuse reference for you...the best place to survive an aircraft crash is to be seated in the back...