Business Uncovered
Winona, MN
April 10, 2012
William Gould, CEBS, SPHR
THE “ROLE” OF
COMPENSATION IN
EMPLOYEE ENGAGEMENT

SCILLY ISLES NAVAL DISASTER
Adm. Cloudesley Shovell
(1650 – 1707)
Images from Wikipedia

TECHNOLOGY…

EVOLUTION OF EMPLOYMENT

MANAGING WORK
 Management and measurement of work in most
organizations is built around the “science” of
FLOW
 Faster production/service
 Controlling costs (including labor)
 Increasing profitability

COMPENSATION IN LABOR
RELATIONSHIP
 Government regulation and organized labor have
profoundly influenced compensation systems
 Business management “science” was a foundation for
compensation designs
 Piece-Rate compensation
 Gain-Sharing arrangements
 Incentive compensation arrangements
 Key Business Assumption: employees are motivated
by extrinsic rewards to work harder and smarter;
risk of loss may also be a motivator toward desired
behaviors

AGENCY THEORY
Economic theory: A dilemma (tension) exists
where there is asymmetrical information held
between a principal (employer) and his/her
hired agent.
Assumption: Employees will not give any
more effort than that level which is equal to the
value of the pay that they are receiving.
Business Practice: Business should pay enough to get the
behaviors desired from employees, but never more than they
must – overpayment impacts profitability.

PERFORMANCE-BASED
COMPENSATION
 PBC systems are based (at least in part) on Agency theory.
 Extrinsic monetary awards “drive” employee behaviors,
according to designed incentives (Flow and Profitability):
 Merit-based pay programs (skills- or performance-based)
 Sales Commissions
 Annual executive incentive plans
 Long term incentive plans (cash, deferred, stock options)
 Gain-Sharing plans
 Profit Sharing plans

PROBLEM WITH PBC APPROACHES
We assume that performance based
compensation schemes work.

“It is easier to count the bottles
than describe the wine.”
-Thomas Stewart

BEHAVIORAL SCIENCE RESEARCH
 Our use of compensation systems is a result of
functional fixedness – our practice does not
follow the science.
 Contingent Motivators: Research shows that
in many cases they don’t work, and can even
cause harm
 These motivators do work when there are simple
rules and a clear direction – it causes a narrowing of
focus
 These are not effective when work requires
creativity, or any form of rudimentary cognitive skill
Source: Drive, Dan Pink

BEHAVIORAL SCIENCE RESEARCH
 Cognitive motivation studies have been
replicated many times, and in many cultures.
 London School of Economics: Some financial
incentives can result in a negative impact
on overall business performance.
Source: Drive, Dan Pink

BEHAVIORAL ECONOMICS
 Conventional economic theories assume that human beings
are rational at all times.
 Behavioral science research proves that human beings are
not rational, they are social.
 Organizations should be studied as social structures, not
management constructs.
 “Social norms build loyalty and make people want to
extend themselves to the degree that corporations
need today: to be flexible, concerned and willing to
pitch in.”
Source: Predictably Irrational, Dan Ariely

SOCIAL STRUCTURES
 For employees, the value of anything is relative.
 Fairness trumps opportunities in social
structures
 Peers define what is “normal” and what is
“possible” within your organization
Source: Predictably Irrational, Dan Ariely

THE ROLE OF COMPENSATION
TODAY?
“The future of profit is
purpose.”
- author unknown

3 PRINCIPLES OF 21ST CENTURY
COMPENSATION STRUCTURES:
1. Compensation is not the driving factor for
changing employee or cultural behaviors; stop
trying to drive change with money
 “Workforce” measures must move from flow and
profitability to ENGAGEMENT
5. Compensation strategies should be designed to
take compensation off the table.

EMPLOYEE ENGAGEMENT
 “Employees’ ability and willingness to contribute
to the company’s success” – IFEBP
 “People who work with passion and feel a
profound connection to their company” - Gallop

DRIVING FACTORS OF
ENGAGEMENT
Gallup: 12 Core Questions of EE Engagement
2. Do I know what is expected of me at work?
3. Do I have the materials and equipment I need
to do my work right?
4. At work, do I have the opportunity to do what I
do best every day?
5. In the last 7 days, have I received recognition or
praise for doing good work?
6. Does my supervisor, or someone at work, seem
to care about me as a person?
7. Is there someone at work who encourages my
development?

DRIVING FACTORS OF
ENGAGEMENT
1. At work, do my opinions seem to count?
2. Does the mission/purpose of my company make
me feel my job is important?
3. Are my co-workers committed to doing quality
work?
4. Do I have a best friend at work?
5. In the last six months, has someone at work
talked to me about my progress?
6. In the last year, have I had opportunities at
work to learn and grow?
Source: First, Break All the Rules, Buckingham & Coffman

EMPLOYEE ENGAGEMENT
 Numerous studies on engagement have repeatedly shown
that competitive salary levels, and other financial rewards
are not among the top drivers of employee engagement.
 Soft-dollar elements:
 Learning and development
 Autonomy (especially professional roles)
 Control
 Company reputation
 Authentic leadership
 However, salaries #1 consideration for selecting a new
employer
Source: International Foundation of Employee Benefit Plans

COMPENSATION IN EMPLOYEE
ENGAGEMENT
 Taking compensation off the table:
 Primary compensation consideration is for
recruitment of desired talent
 Ongoing compensation strategy is to maintain a
sense of fairness, and internal and external equity
 If compensation is perceived as fair and competitive,
it is largely a non-issue in retention and engagement
activities
 Engagement work is about organization
development. Compensation strategies should
support engagement, not drive it.

Questions & Discussion

REFERENCES & RESOURCES
 Buckingham & Coffman, First, Break All the
Rules: what the world’s greatest managers do
differently (1999).
 Dan Ariely, Predictably Irrational: the hidden
forces that shape our decisions (2010).
 Daniel Pink’s TED Talk:
http://www.youtube.com/watch?v=rrkrvAUbU9Y
 Daniel Pink, Drive: the surprising truth about
what motivates us (2011).
 International Foundation of Employee Benefit
Plans: www.ifebp.org