How organizations use rewards to attract and retain employees, and drive performance:
Decades ago, the answer to the question, “What motivates an employee to go to work every day?” was fairly simple a need to put food on the table. Jobs that offered a high fixed pay were in demand because they allowed people to have a higher standard of living, plan for their retirement and for the education and life-events of their children. As the focus shifted to driving performance, organizations introduced Short Term Incentives that linked an individual’s performance to their bonus. When coupled with a robust performance management system, this helps employees understand what the organization expects from them, and how much money they can earn should they do well on pre-defined goals. The motivational premise of short-term incentives is pretty straightforward. The better you perform, the more money you make.
At some point, organizations realized the pressing need to retain their senior-most employees, the ones who control the fortunes of the entire firm. Long Term Incentives were thus designed as a tool to retain such employees, promising a huge pay-out should an employee stay invested with the company for a number of years. But, the times are changing. Increasingly, organizations are (rightly) attaching performance metrics to LTI plans to ensure that the hefty payouts typically associated with LTI plans are only made if the organization’s performance is on track with the expectations of the shareholders. Thus LTI plans not only drive retention, but also push performance of key employees in the right direction.
Start-ups and early stage companies have also begun to utilize LTI to attract talent. Fixed pay is marginally higher than what the rest of the market pays, but the true differentiation that such organizations offer is the potential to multiply that money through ESOPs. Similarly, Fixed pay is no longer the first metric that many employees consider when weighing an offer. We now want more than cash to join (or stay with) an organization.
What employees want from their rewards?
Once an employee joins an organization, what motivates them to perform their best? The most widely accepted contemporary answer to that question is the somewhat vague concept of “meaningful work”. The current generation is no longer content to work for financial stability, because most of them are accustomed to the feeling of financial security, having grown up in that environment. What our generation (and perhaps the one before us) has realized is that work takes up more of our time than anything else (and that includes family, personal hobbies, etc.). And therefore, we want to work not only for money, but for the satisfaction of knowing that the work we do matters, if not to the universe, than to ourselves personally. I’ve had conversations with bright young graduates, three months into their first ever job, about how they feel their current role doesn’t truly extract the best of their abilities, and they feel they can contribute so much more to the organization if they were given a different responsibility. Of course, this is just an anecdote, but it’s also a good example that highlights the changing perception of what our work and our jobs mean to us.
So, what role does Compensation now play in motivating employees?
In 2014, Aon Hewitt conducted a study that saw participation from over 7000 respondents. It was simply called the “Employee Preference Survey”, and its aim was to find out what employees want from their total rewards package. The data was analysed for various demographic groups across generations and gender. When asked which component of total rewards would employees like their organizations to invest additional funds into, the highest ranked answers were “increased fixed pay” and “increased variable pay”. This clearly indicates that the most important component of rewards continues, unsurprisingly, to be cash. However, beyond cash, different demographics showed different priorities. Baby Boomers (those born in the 1950s-1960s) placed the highest emphasis on retirals, while Gen X (1960s-1980s) and Gen Y (1980s-1990s) favoured Flexible Work Arrangements. In fact, for Gen Y, “professional support” and “transport assistance” were both much higher on the list than retirement benefits. This is intuitive, because as the Baby Boomers reach the age of retirement, it’s natural to expect them to be concerned about how they will manage their finances going forward.
As far as satisfaction with current components of rewards is concerned, all generations highlighted that they were unhappy with their incentives. This is slightly alarming because the primary role of incentives is to motivate employees to perform better. Lower levels of satisfaction with one’s incentives don’t bode well for the intended effect. As a result, organizations are therefore consciously differentiating themselves on other aspects of total rewards to attract the best talent. Where once companies would simply throw cash at potential employees, they are now communicating their excellent benefits, outstanding work culture, flexibility of work timings and work arrangements, etc.. All of the above is offered in addition to the promise of “meaningful work”.
Meaningful work is the bedrock of the effective rewards package.
In India, the war for talent rages on. Over the last decade, the average salary increase for India Inc has been above 10%, which is unmatched by any medium or large economy worldwide. Despite having amongst the world’s largest population of eligible working age, companies struggle to find skilled high-performers. Once an organization does hire them, they are obviously keen to retain them. Meaningful work, therefore, is customized to satisfy the aspirations of this “key talent”. Key talent is defined as employees who are either identified as having high potential or possessing niche skills which are difficult to find in the market. High performance is either already evident or expected in the future. In most organizations, this cream of the talent typically constitutes ~10% of the total employee base.
In the Salary Increase Survey that Aon Hewitt conducts every year, we ask employers how they differentiate rewards for key talent. Surprisingly, most organizations respond with non-monetary rewards. These include accelerated careers (arguably, this does lead to higher pay, of course), coveted roles / international assignments, mentorship by leaders, etc.. All of these components fall within the “Development” box of the Total Rewards framework. One could make a case that this is the component under which “meaningful work” also gets filed.
So, in a nutshell, perhaps the best way to summarize all of this is to say that pay (read: “cash”) no longer drives our primary motivation to work, but it remains exceedingly important for someone to choose to join or stay with a particular organization. Note that this has begun to apply not only to fixed pay, but also short term incentives. Ergo, cash has become more of a hygiene factor rather than a motivating factor. It’s difficult to imagine a young professional saying “I work my hardest because I want to get the best bonus at the end of the year”. It’s much more likely for one to hear, “I work my hardest because I want to be identified and acknowledged as the best, thus improving my future opportunities”, or, “I work my hardest because I really like my job”. But other components of total rewards differentiate organizations and provide incentive to targeted employees to work. It is then fair to conclude that pay is no longer the primary motivator for driving performance. Rather, it plays a supporting role to other aspects such as organization culture, professional development, and role/career progression.
Author Information:
Gurdit Singh Sachdeva “Gurdit Singh Sachdeva is an alumnus of XLRI (PM&IR 2009-11). He currently works at Aon Hewitt as Senior Consultant – Total Rewards and specializes in the Consumer and Life-Sciences sector. In his spare time, he blogs about life, the universe and everything else at Gurdit.com”
