The Often Ignored Importance of Getting Pay Right!

I had just finished building a great team of recruiters and sourcers, refined our branding and social marketing, and trained management on the new applicant tracking system. We were ready to shift into high gear for serious recruiting to add hundreds of needed R&D, marketing, and sales employees, when a recruiter walked into my office and said, “Two Stanford engineering grads are laughing at our offers!”

“Why are they laughing?”

“It is our pay levels. They are so low, it is laughable!”

All of the best recruiters, social media, and latest recruiting apps won’t amount to a hill of beans if your rewards strategy is stuck on cost control or outdated thinking about pay structures.

The theories about employee motivation, including Herzberg’s Motivation-Hygiene Theory, show us that compensation is a critically important hygiene factor— something connected with a job that may not make an ​employee feel satisfied, but will make them feel unhappy if it is not ​provided—but compensation is not a motivator. That is, employees expect compensation to be at market competitive levels for their industry and location. (More on motivators below). When compensation expectations are not met, the most talented employees leave the company, and the most talented recruits won’t join it. In addition to Herzberg’s theory, empirical research on employee satisfaction, engagement and turnover by companies such as Towers Watson reinforces that you need to get pay correct.[i]

Get base pay right

Start by matching employee base pay with market competitive wages, and your recruiting efforts will be able to attract and retain the best talent. Some CEOs and CFOs have told me that raising base pay is too expensive. So is turnover. Unfortunately, while most CEOs and CFOs know their working capital numbers, they don’t know what turnover is costing them. These leaders are in the dark. If they did know, they would empower human resources and managers to more effectively prevent it.

The cost of turnover can range from 16% of an annual salary for retail and entry level manufacturing positions to as high as 50% for college-degree-required professional and technical roles. For key executives, it can be 200%. Turnover costs include: recruiting costs, lost productivity, new hire training, and the novice errors of a new hire. Your return on investment for raising base pay to match market competitive wages can be easily tracked and monitored. If the gap is too big to make up in one year, raise base pay in stages over two years. Or, focus first on your most critical jobs or employees.

Some companies have a strategy to pay low and offer some other type of “equity.” This strategy can work in certain circumstances, but job candidates (and employees) need to have a high degree of faith that they will receive the equity you promise.  Some of these equity strategies include:

  • The Start-Up Model – Offering long-term incentives or equity with the promise of “making it rich” in several years with an IPO or buy out.
  • Brand Equity – Examples include being a professor at Harvard or a physician at the Mayo clinic.
  • Time Equity – This includes flexible work arrangements. Surveys show that some employees are willing to work for less base pay in exchange for work environment flexibility.

The caution is that using equity strategies may limit your candidate pool to those who are willing to trade pay for the equity you are offering.

Market competitive pay strategies will help you attract and retain the best, but they don’t motivate superior performance.

Market competitive pay attracts and retains employees. While surveys show that 62% of workers indicate that merit pay and other forms of monetary compensation are important[ii], compensation by itself does not motivate employees to provide superior performance, innovation or customer service[iii]. What does is motivators like a sense of achievement, recognition, perceptions of management fairness, more responsibility, career advancement, line-of-sight incentives, and working toward a commonly held purpose.

Recognition’s Role

Basic motivation research shows that employees will repeat high performance and positive behaviors when they are recognized for them in a timely and direct way. Timely recognition can be easily achieved by attentive managers. Top management’s role is to create the right recognition culture. Too many companies recognize the wrong things, such as longevity. Instead, they should recognize superior performance.

There are many digital systems that make recognition easy. Employees may earn points, for example, that they can spend shopping on-line, or exchange for cash. Points are awarded for reaching key milestones, achieving goals, or performing above expectations. Recognition does not have to be expensive. One of the biggest motivators a manager can offer is a specific, sincere, face-to-face thank you, along with a handshake.

Be sure to recognize employees – it reinforces desired performance and behaviors.

Engage with your workforce to motivate them!  

If you want to really motivate your employees to provide superior performance, innovation or customer service, engage with them. Get to know them. Ask them what excites them about work? What they like or don’t like about their jobs? What they want to be doing in five years? Praise their achievements. Work with them to jointly develop a career path in the company. Based on their skills, motivation and performance, provide them with greater responsibility and work that matches their strengths.

The greatest motivator is purpose. Work to align the company’s purpose to the intrinsic passion of your employees. Every business can have a purpose for the greater good, from sanitation companies to technology start-ups, from biotechnology to energy.

Compensation is a critical component of your integrated talent management strategy. When done poorly, it will not only create high turnover, it will also ruin your recruiting efforts, and sap your employees’ innovation and extra effort.

What has been your experience? Are you facing current issues with maintaining competitive pay? Providing meaningful recognition?  I would love to hear from you.

Victor Assad is a Managing Partner of InnovationOne.US and the CEO of Victor Assad Strategic Human Resources Consulting. He works with key decision makers and human resources leaders on talent management, innovation, accelerating change, leadership development, executive coaching, and other strategic initiatives.  Please e-mail Victor at victorassad6@gmail.com or visit Victor’s website at www.victorhrconsultant.com.

[i][i] “The 2014 Global Workforce Study: Driving Engagement Through a Consumer Like Experience” (August 2014), Towers Watson. Found at http://www.towerswatson.com/en-US/Insights/IC-Types/Survey-Research-Results/2014/08/the-2014-global-workforce-study.

[ii] “Employee Recognition Survey” (August, 2014) American Psychological Association for Organization Excellence.

[iii] “State of the Global Workforce Report 2103,” Gallup Inc.

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