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Presentation for Business Uncovered at the Winona Chamber of Commerce on April 10, 2012.
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THE “ROLE” OF COMPENSATION IN EMPLOYEE ENGAGEMENT
Business Uncovered
Winona, MN
April 10, 2012
William Gould, CEBS, SPHR
Adm. Cloudesley Shovell(1650 – 1707)
SCILLY ISLES NAVAL DISASTER
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
2. “Workforce” measures must move from flow and profitability to ENGAGEMENT
3. 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 Engagement1. Do I know what is expected of me at work?2. Do I have the materials and equipment I
need to do my work right?3. At work, do I have the opportunity to do
what I do best every day?4. In the last 7 days, have I received
recognition or praise for doing good work?5. Does my supervisor, or someone at work,
seem to care about me as a person?6. Is there someone at work who encourages
my development?
DRIVING FACTORS OF ENGAGEMENT
7. At work, do my opinions seem to count?8. Does the mission/purpose of my company
make me feel my job is important?9. Are my co-workers committed to doing
quality work?10. Do I have a best friend at work?11. In the last six months, has someone at work
talked to me about my progress?12. 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