Motivation Is From Mars, Pay is from Venus: Limits of Compensation as Performance Driver
A Review by Martin Staubus, Beyster Institute Staff

We all like the feeling of mastery over a machine – being able to control a car, for example. Push the gas pedal half way down, and the car proceeds at half of its full speed. Press it the rest of the way to the floor and its speed increases to full. Turn the wheel left, the car goes left. To the right, it goes right. We act, and the car responds exactly and accordingly. We love it.

Wouldn’t it be nice if managing people worked that way? Hire the graduate from the fanciest college, and automatically get the best possible recruit. Increase work hours by 20 percent, and see productive output go up 20 percent. And the most popular pipedream of all: increase pay by 15 percent, and see performance rise accordingly. Wouldn’t it be nice?

Indeed, the concept is so attractive, so compelling in its way, that managers everywhere are drawn to operate this way, looking for the mechanical levers and inputs that will make the company stop and go, despite the volumes of expert research demonstrating that motivating employees and achieving high performance simply doesn’t work that way.

The latest expert research and analysis comes out of the Gallup Organization. If all you know about them is that they produce public opinion polls on political issues, you’re missing out on a whole lot. There is much more to them than the Gallup Poll.

Founded in Omaha, Nebraska by Dr. George Gallup, the organization has been studying the personal and social behaviors of human beings for more than 70 years. Today, Gallup employs thousands of people around the globe, with operations in more than twenty countries. It may well employ more PhDs in the behavioral sciences than any other organization in the world.

A primary research method that it has used since the start – and continues to use – is to sit down with people and simply interview them about their attitudes, preferences, likes and dislikes (it is this work that led, naturally enough, to the development of the Gallup Poll). In fact, the core focus of the Gallup folks has always been on the attitudes, feelings and behaviors of people in the workplace. Over the past several decades, Gallup has amassed a database of more than ten million interviews with employees, consisting of hundreds of questions asked about a wide range of factors that may influence business performance. In short, when it comes to the workplace, they have a pretty good handle on what makes people tick.

Recently, the Gallup folks shared their insights on this subject in the form of a book authored by two of the organization’s leading experts. Drawing on what they have learned from Gallup’s incredible reservoir of data, the book summarizes the essence of what they now know about what is and what isn’t effective when it comes to motivating people in the workplace to maximize performance. The Ph.D. brainpower at Gallup sliced, diced and otherwise intensively analyzed those 10 million entries in their data records and ultimately distilled their conclusions to produce exactly twelve elements of management practice that are essential to the maximization of workplace performance. These findings are published in their recent book, 12: Elements of Great Managing (Wagner and Harter 2006).¹

The 12 elements of excellent people management that Wagner and Harter have identified will not be surprising revelations to those who have followed the accumulating wisdom in the field of management practice. What they found from interviewing employees at the very best-performing companies – and the gist of what distinguished them from employees at other companies – was that employees at the best-performing companies were able to tell their interviewers, consistently, that:

1. I know what is expected of me at work.
2. I have the materials and equipment I need to do my work right.
3. At work, I have the opportunity to do what I do best every day.
4. In the last seven days, I have received recognition or praise for doing good work.
5. My supervisor, or someone at work, seems to care about me as a person.
6. There is someone at work who encourages my development.
7. At work, my opinions seem to count.
8. The mission or purpose of my company makes me feel my job is important.
9. My associates or fellow employees are committed to doing quality work.
10. I have a best friend at work.
11. In the last six months, someone at work has talked to me about my progress.
12. This last year, I have had the opportunity to learn and grow at work.

Clearly, this is a very thoughtful and insightful compendium. Certainly, this is a book worth buying and absorbing. But what struck some readers is that nowhere in these “12 Elements of Great Managing” is pay or any other element of standard compensation mentioned. Didn’t they miss something? What about all the consultant-speak in recent years about “paying for performance,” merit raises, variable comp, incentive pay, etcetera? Don’t we produce more performance by offering more incentives, mainly of the monetary variety? We managers like to think of organizational management as being like operating a car – and monetary incentives are the fuels that power the performance engine. Aren’t they?

In response to these reactions, authors Wagner and Harter have published an article entitled An Element Unto Itself: The Problem of Pay. ²  Daringly or fittingly, the article appears in the latest issue of the WorldatWork Journal, a periodical published by WorldatWork, formerly known as the American Compensation Association.

The authors begin by acknowledging the temptation to think of pay as being tied to performance in that linear, logical, machine-like way. “If any aspect of work should be logical and amenable to straightforward formulas … shouldn’t it be the most quantitative of the company’s rewards?” 

The reality, say Wagner and Harter, is very different. Rather than involving a rational relationship between the value of a person’s work and the amount of compensation, pay is hopelessly irrational. While straightforward and logical on the surface, they say, pay is surprisingly and exceptionally complex when processed through the human mind. Their bottom line: managers must view their compensation strategies through an emotional lens, not logical analysis, if they want to maximize how well they motivate workers.

The authors then lay out some specific aspects of the irrational attitudes that so strongly bear on the issue of pay, and of which managers should be aware. One is the widespread myth that if we get more money we will experience more happiness in life. In fact, studies of this question have been conducted repeatedly, with the leading experts (including the Rady’s School’s own Professor David Schkade) consistently coming up with the same findings: increases in our stocks of money and material goods – bigger houses, fancier cars – don’t make us happier. Thus, while so many people spend so much effort and energy in pursuit of higher incomes, the attainment doesn’t bring the hoped-for result.

Another behavioral factor that plays into the pay question bears significantly on the concept of merit-based pay systems. From their interviews with employees, the Gallup folks learned that most employees are not entirely satisfied with their level of pay, feeling that they really ought to receive more. Not really a shocker there. But what is of greater concern is the finding that this attitude was almost entirely unaffected by whether the person being interviewed was good performer or poor performer as rated by their employer. In fact, the worst performers were just as likely to say they are underpaid as the best performers. Surveying your employees for their views as to who deserves a pay raise, therefore, neither identifies who should really get a raise nor provides any useful information to management (indeed, the authors point out, its only likely effect will be to increase discontent, since, once employees have informed management of their view that they are underpaid, they develop some expectation that the company will then act to address that grievance).

Perhaps the most important pitfall to be mindful of in this area is the danger of overusing monetary incentives. Say Wagner and Harter, “when companies slice incentives into too many small pieces, they have the opposite of their intended effect.” Offering cash for a small act communicates to the worker, “you wouldn’t normally be expected to do this, so we’re offering to pay you for it.” Soon, employees become reluctant to do much of anything unless there is a special payment for it. Intended as a way to produce more performance in the short run, in the long run it instead decreases motivation. A separate study cited by the authors found that when people are rewarded for doing an interesting activity, they are likely to attribute their motivation to the reward and thus discount their interest in the activity. An example of this was shown in a study of children who were asked to collect money in their neighborhoods for a charity. Those who were offered a larger reward did, in fact, collect more donations than those who had been offered a smaller reward. But the children who had been offered no reward at all, other than the knowledge that they were doing something good for someone else, collected more than either of the monetarily incentivized groups. In scientific terminology, the monetary rewards “crowd out” the “intrinsic motivation” of the task itself. Notably, it is this idea of the intrinsic motivation that can be found in meaningful work, in its various manifestations, that is the subject of several of the “12 Elements” identified in the author’s book as being the keys to truly effective motivation.

Another aspect of pay that managers should be aware of is the reality that, once employees are earning comfortably above a subsistence level (and especially in light of the above-noted revelation that more money doesn’t produce a happier life), pay is more about status than about addressing real needs. The data collected by Gallup only confirms what other researchers have found: that a person’s satisfaction with his pay is affected more by how much he out-earns those around him than by his objective pay level. In essence, a person who is paid $60,000 per year while his colleagues are earning $45,000 will be happier than if he were being paid $80,000 while colleagues were getting $100,000. (A notable sub-plot to this revelation can be found in its implications for executive pay at our major corporations. While some reformers have sought to reign in the sky-high levels of compensation at major corporations by pushing for complete disclosure of what such executives receive, the authors here caution that such disclosure could have the opposite effect. After all, both the corporate boards doing the hiring and the individuals being hired want to believe that the hiree is an above-average candidate and, as such should be paid above the average rate for such leadership positions. Disclosure, then, can be expected to spur action from those CEOs and boards who learn, based on the information newly revealed by other companies, that the CEO pay at their organization is not above average, thus exacerbating the inflationary cycle).

For these reasons, and more, monetary compensation simply can’t be treated as the fuel that powers your “performance machine.”  Instead, it is the company’s success in engaging an employee in meaningful work with the opportunity to succeed and be appreciated for his contributions that drives satisfaction and the desire to contribute and excel. In fact, a key finding of the research in this field is this truth (and you can quote this reviewer here): a good pay level does not lead an employee to be satisfied with his company; rather, a good company leads an employee to be satisfied with his pay. As Wagner and Harter found, “paid the same amount, an engaged employee is happier with her pay than a disengaged worker.”   Says Stanford business professor Jeffry Pfeffer, “Any organization believing that it can solve its attraction, retention, and motivation problems solely through its compensation system is probably not spending as much time and effort as it should on the work environment – on creating its culture, and on making work meaningful.”  This, in short, is the authors’ answer to why issues of pay do not appear anywhere in their 12 key elements of managing for great performance.

On a more encouraging note, Wagner and Harter do offer a specific prescription for managing compensation, and some good news about pay as well. The prescription? Keep individual levels of compensation private, but establish clearly delineated criteria for determining pay and get that out there as common knowledge. The primary focus of a company as it seeks to engage and motivate its employees should be on the mission and goals of the organization, and the valuable contributions that each employee makes to those ends. Still, the subject of pay will come up, and having a reasonable and well-understood set of criteria to point to as the way that pay is determined in the organization will minimize the potential of pay issues to act as a source of conflict and distraction. Make no mistake, there isn’t any pay system on Earth that employees will love, but a reasonable and well-established system based on objective and known criteria will at least be accepted as adequately close to perceived fairness and justice.

The authors do end their litany of myth-busting points with a positive point. The traditional management view, they note, is that a company should pay as little as possible to secure the services of the employees it needs, whether that is defined as just enough to outbid a competing employer or simply the lowest amount that the worker will settle for in salary negotiations. The flip side of this approach, whether recognized or not, is that the employee, taking the same attitude, will do the minimum amount of work required to keep his paycheck coming.

But research has shown something that might not be expected from the cynics who embrace such attitudes. In fact, if the employer offers a salary that is perceived as generous and above-market, the employee generally matches that above-minimum pay with more effort on the job, even though he could get away with less. While money itself does not buy engagement, conclude the authors, it seems that an employee’s perception that an employer is taking generous and caring action to improve the employee’s welfare leads to the desire to reciprocate. This is actually a demonstration of the authors’ item number five in the list of 12 elements above. Note that it is not actually the money itself that is significant; rather, it is the thought that counts. A company that embraces its people as partners and stakeholders, rather than resources to be exploited, will have that approach repaid with loyalty, commitment and performance.

¹ Rod Wagner, MBA is a principal with The Gallup Organization, focusing on employee engagement and business performance. James K. Harter, Ph.D. is chief scientist for The Gallup Organization’s international workplace management practice.

² “An Element Unto Itself: The Problem of Pay.” WorldatWork Journal Volume 15 Number 4, 2006.

©2007 The Beyster Institute and its authors and their entities. All rights reserved.

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