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COMPENSATION AND INCENTIVES What it Means Money is a highly motivating reward, and so, most people assume that a promotion, accompanied by higher pay, is the incentive that should be used to reward and retain your most talented employees. The reality is not so simple. Non-financial incentives, such as professional growth opportunities and access to top leadership, can be very motivating for high performers. HR professionals need to have a nuanced understanding of the way that incentives work, so that they can design incentive packages with an effective combination of financial and non-financial rewards.

Why it Matters

• To design effective incentive packages, HR needs a solid understanding of how rewards work

• Non-financial rewards, such as growth and leadership opportunities, are important incentives

• The best incentive packages offer a combination of financial and non-financial rewards

“People are happy when you give them what they ask for. People are delighted when you anticipate what they didn’t think to ask for.”

Laszlo Bock

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INCENTIVES THAT WORK

What is an incentive? Is it the same thing as a reward? According to the dictionary, a reward is anything that increases the probability of a future response. By that definition, money is a great and highly motivating reward. If you offer your people cash for doing something, you increase the chances that they will do it. By the same token, then, performance feedback is also a great reward. If you give your people incisive and productive guidance, you increase the chances that people will behave more productively in the future. A challenging new assignment is also a great reward, whether it is structured as a promotion or a simple transfer. For a top performer, the chance to learn and develop new skills is motivational and encourages the employee to work hard, so as to benefit from the opportunity. However, most organizations do not think about performance feedback and stretch assignments in the same way as money. They fail to recognize the role that all three can play in retaining talented employees. Many HR managers refer to their organization’s package of motivational tools as reward and recognition systems. In this approach, reward is shorthand for financial compensation, and recognition refers to plaques and awards. Rewards like performance feedback or stretch assignments are not mentioned at all.

THE ADVANTAGES OF FINANCIAL REWARDS

Money is among the most powerful of all rewards and therefore an almost universally effective way to motivate people. Money is uniquely attractive, in that no one refuses it, no one returns it, and even people who already have more money than they can possibly spend will go to great lengths to get more. Another distinctive aspect of money is that it does not saturate. What does this mean? Offering too much of something, even something people really like, will usually trigger negative results. Providing workers with more autonomy, for example, often improves morale and productivity, but at some point can lead to role ambiguity and confusion. Too much job responsibility and challenge can give an employee an ulcer. As for large quantities of critical, candid feedback, don’t offer that to anyone for more than an hour straight! More money, by contrast, is invariably received with considerable enthusiasm. The reason is that money satisfies people on many different levels. To understand this better, let’s step back and think more broadly about human motivation. The psychologist Abraham Maslow developed a classic Theory of Human Motivation, which states that lower level needs must be satisfied before people can focus on higher level needs. There are 5 levels in Maslow’s hierarchy of human needs:

• Level 1: basic physiological needs, such as food, water, and shelter • Level 2: the need for security, including personal safety, employment, and health care • Level 3: social needs, such as for friendship, family, and a sense of connection • Level 4: self-confidence, including respect, achievement, strength, and freedom • Level 5: self-actualization, the need to realize your full potential as a creative human being

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Financial rewards pack a punch because they have value to people on every level of the hierarchy. Money makes physiological and security needs evaporate. At the social and achievement levels, while money may seem less important, in American culture and many others, money goes a long way toward ensuring cultural acceptance and opportunities for achievement. Only at Level 5 does money become less powerful, but it is still the case that having more money frees people up to pursue self-actualization activities.

THE PROBLEMS WITH FINANCIAL REWARDS

What are some of the problems associated with using money to motivate people? The most obvious one is limited supply. Simply put, more money is not always available. Most organizations do not have enough money to attract, motivate, and retain everyone who is talented and deserving of a reward. They must choose where to use financial rewards and where other types of incentive may be beneficial. Another problem with financial rewards is that they are essentially commodities. The word commodity is used in business to describe an article that is interchangeable or can be traded. Financial rewards are commodities in the sense that they are not something distinctive, like the activities of a specific professional role. So, while another company may not be able to match a specific job opportunity you are advertising, it is relatively easy for another organization to match or exceed the financial rewards you are offering. If your team members are working with you just for the money, they will leave when someone offers them more of it. And eventually, someone is likely to offer more. Not to everyone on your team, of course – just to your best performers, the people you can least afford to lose.

THE ADVANTAGES OF NON-FINANCIAL REWARDS

Non-financial rewards fall into two categories. Prestige rewards are designed to increase people’s stature, be it inside the company or out. Examples are plentiful: job titles, direct access to top leadership, a business credit card, or the size and location of one’s office, to name just a few. Far more powerful and sustainable are job content rewards, which increase the satisfaction an employee derives from his work. Performance feedback is a job content reward. So are recognition, responsibility, and autonomy, as well as the opportunities to participate in decision-making and to work on important and interesting tasks. An especially important non-financial reward is the opportunity to develop managerial and leadership skills. Unfortunately, job content rewards are typically not thought of as motivational incentives. This represents a missed opportunity that leadership and HR would do well to consider. The best organizations use a combination of financial and non-financial incentives. Both types of reward have the potential to exert a powerful impact on employee performance. Used together, they can have a significant impact on retention of top talent, those employees with the potential to become future leaders for your company.

© Strayer University. All Rights Reserved. This document contains Strayer University confidential and proprietary information and may not be copied, further distributed, or otherwise disclosed, in whole or in part, without the expressed written permission of Strayer University. JWI 521 – Week 7 Lecture Notes (1192) Page 5 of 5

GETTING THE MOST OUT OF THIS WEEK’S CLASS

As you read the materials and participate in class activities, stay focused on the key learning outcomes for the week:

• Assess what type of rewards work best to motivate employees and why What incentives motivate the A players at your company? Are promotion and higher pay the keys to retaining them? Do non-financial incentives, such as growth opportunities and access to top leadership, have an impact, too? What about the B players, those solid performers that make up the largest percentage of your workforce? You will likely offer them more modest promotions and pay increases than the top talent. Can you use non-financial rewards to reinforce their sense of engagement with the company, while also developing their professional skills?

• Examine the relative importance of compensation versus other rewards Clearly, increases in compensation and promotion are important tools to retain employees. Financial rewards are highly motivating, providing employees with recognition for work well done, added security, and a sense of progress in their career. Does HR make sufficient use of other, less tangible rewards to incentivize employees at your company? Have they set up systems to ensure that employees receive frequent, productive feedback, as well as stretch assignments and professional development opportunities?

• Analyze your organization’s approach to rewarding top talent What are the reward and recognition systems in use at your company? Do you think the current systems are effective at motivating and retaining top talent? Are new professional challenges and leadership opportunities used as rewards for top talent, or are they only offered more traditional types of incentive, such as promotions and awards? How can HR work with the executive team to adjust the balance where needed, so as to use all available tools to retain the leaders of the future?