Compensation and Motivation

For many of us the mere thought about more money or other financial rewards, in return for the considerable amount of our precious waking hours that we spend at work, seem to spark our willingness to perform. Thus, in the attempt to enhance and maintain long-term staff motivation, modern leadership tends to cling to what seems to be the gold standard, that is performance-based compensation. But are additional financial rewards in the form of stock options, salary raise or bonuses useful measures to build highly motivated teams that perform above average at an above-average frequency over a long stretch of time? And if not, what alternative actions can leaders take in order to boost their employees’ incentive to work towards achieving strategic goals?

Let’s face it, no one is allergic to money. But when trying to generate a high level of staff motivation it might take more than the almighty dollar alone. I mean, why is it that there are employees who earn a fortune but don’t seem to be excessively ambitious? There is no doubt that a certain correlation between income and motivation exists. But there are several reasons explaining why money as the exclusive motivational device may not be particularly effective in the long term, or may indeed cause the opposite and actually demotivate.

As we all need to pay our bills, a fair monetary remuneration of course forms the basis for any kind of employment relationship. Obviously, the majority of people would not drag themselves to work every morning if they would not be compensated monetarily for the daily grind. However, leaving aside the possibly subjective understanding of a fair basic salary, for most employees this will merely be enough to show up at work every day and perform average. So, as money promises happiness, and happiness is essential for motivation, luring people with a little extra brass for a brilliant feat appears reasonable at first glance.

As a matter of fact, humans can only sense change but lack the ability to grasp absolute values. So, no matter how encouraging a salary raise may appear when initiated — finally there is enough money for a fancy new car, a bigger house, or the latest gadget — humans quickly return to a relative stable level of happiness and thus motivation. This mechanism is known as hedonic adaptation. And since an ever-increasing salary is simply not feasible the motivational boost will vanish soon. In fact, the net result may also be negative. Once one has adapted one’s life circumstances to the new income, a feeling of dependency comes creeping in. A step back to the old income is not possible with the current financial obligations, which may cause an enormous pressure to the individual. Eventually, what follows shortly after the promotion and its corresponding peak in the motivation level is a sharp decline that may even overshoot the base level. This is likelier to occur with greater vertical leaps up the corporate ladder.

While some incentives may elicit a powerful, positive, short-term response, but soon lose their lustre and do not prove useful in the long run, others may actually be directed opposite to strategic goals. Under the French colonial rule in Hanoi, Vietnam, in oder to get the plague of rats under control, the government offered a bounty for each rat killed. While initially large numbers of rats were killed for the reward eventually enterprising people began to breed rats. This is an example for a phenomenon referred to as the incentive super-response tendency, which holds that people tend to react on the incentive itself, instead of the intent it is predicated upon. Especially extrinsic reward systems are susceptible to evoking such a super-response.

In addition to the risks that every extrinsic reward by itself brings along, it also jeopardises peoples’ intrinsic motivation. Recent research by Cho and Perry in accordance with an often-cited study by Deci, Koestner and Ryan suggests that tangible as well as expected extrinsic rewards — from marshmallows to dollars — significantly diminish the leverage of intrinsic motives on engagement. When people identify with the task itself as opposed to focusing on its consequences they would perform substantially better.

Therefore, if money is not the ultimate motivator and on its own does not provoke outstanding, enduring performance, it apparently needs supplementary methods that enter a further dimension of reward management and incorporate human needs somewhat more than money alone does.

We humans all have various needs, which according to Maslow can be divided into five categories, or layers, constituting a pyramid. The individual needs, each of which belonging to one of the layers of the pyramid, respectively, have to be fulfilled one at a time in sequence from bottom to top. Unfulfilled needs lower in the hierarchy would inhibit the person from climbing to the next step.

The most fundamental physiological needs, such as food, water, and shelter, form the basis of the pyramid and should be a matter of course. They can be assumed to be fulfilled as soon as the employee is granted a minimum wage. It goes without saying that employers should not restrict access to physiological needs at work in any way. The next layer, termed Safety, with respect to leadership encompasses measures that offer a sense of security, such as appropriate wages and salaries, as well as medical and retirement benefits. Here, too, a safe work environment, in which employees do not have to fear for their lives and limbs, should be a self-conception.

Measures on these first two layers of the so called deficiency needs are all monetary in some wider sense. Increased financial resources will merely strengthen the foundation of the pyramid, but will not touch any of the remaining, higher layers, i.e. Belonging, Self-esteem, and Self-actualisation. In other words, a fair salary in combination with fringe benefits will enable human existence and give an employee a feeling of (financial) security, both of which is indeed essential for climbing the ladder, but in and of itself will not help satisfying higher needs.

Hence, when aiming at high staff motivation, the often untapped growth needs present the attack surface for intelligent leadership actions. As opposed to the concrete rewards that employees receive, also called extrinsic rewards, real leaders leverage intrinsic rewards, which tend to give personal satisfaction to individuals and thus make them inherently pleasurable. Monetary incentives, it turns out, are a fairly straightforward option for management, as it does not really need to go out of its way. I mean, clearly no manager will pay for anything personally, insofar as that paying a big bonus will not cripple his own monthly pay cheque. Leadership in contrast stems from social influence and that is why for a real leader’s deed it takes more than that.

Struggling to compose an all-encompassing, tangible definition of leadership, in the leadership class at Münster University of Applied Sciences we instead identified the three active ingredients of leadership. That is to say the traits all instances across the entire leadership domain have in common, whether it is a youth football coach, an army officer or a CEO. In addition to the leader’s intent — of course he needs to know what he wants to achieve — and having the technical know-how for achieving his goal, which we touched upon above, the arguably most important one of these shared traits among real leaders is that he has the will to do what is necessary. Sometimes, this ‘doing what is necessary’ may also imply stooping down to the staff and catering to their needs. Although this can be unpleasant at times, and might not quite align with our innate understanding of a real leader, after all employees are human beings and therefore exciting their human side can trigger a strong motivational response. Marketing consultant and motivational speaker Simon Sinek once wrapped this up in an aphorism during a TED Talk, which really resonated with me. Relating to leaders in the military and the fact that soldiers pull together in a remarkable manner, he said, “In the military, they give metals to people who are willing to sacrifice themselves, so that others may gain. In business, we give bonuses to people who are willing to sacrifice others, so that we may gain”.

In order to give employees a sense of belonging to the organisation, to make them feel like they are part of the tribe, a leader creates team spirit and a corporate culture that ensures that everyone respects each other in the team. Every member is factored into what the team aims to accomplish. No one is excluded. In order to encourage social interaction and boost team morale, he could facilitate outside social activities, weekly pizza-and-beer meetings after work, or establish a football team. Integrating potential misfits into the group comes more easily beyond the tense day-to-day work routine when everyone has their nose to the grindstone. Once everyone feels integrated and accepted in the team, a leader gives his team members a feeling of superiority over non-team members, and emphasises the power of the group. Another important ingredient that contributes to a feeling of belonging is trust. To earn his employees’ trust, a leader acts rational and comprehensible. He avoids random walks, communicates goals clearly and does not switch between tasks or shuffle priorities on a daily basis. He takes accountability for his decisions. If market changes arise, he clarifies why his priorities have changed. As a leader, he goes first and has his herd follow him. This includes authority only when necessary. When employees come under fire, he offers help and listens to them. All this will draw staffers into a circle of trust.

Praising and expressing appreciation verbally will boost an employee’s self-esteem and confidence. Though, only a stable level of confidence inside a narrow band will induce an equally stable level of motivation and consequently high performance. Whereas overconfidence may cause incorrect prognoses and inhibits predictability of projects, so that other employees may have to make up for the damage. Conflicts among team members are virtually preprogrammed and eventually motivation will plummet. Obviously, the other extreme, a downbeat, pessimistic employee inherently lacking of confidence is unlikely to experience a burst of motivation either. Therefore, to avoid heavy oscillation and outliers on the confidence spectrum, that is equally overconfidence as well as a lack of it, a true leader dispenses all sorts of appreciation and recognition in a counter-cyclical manner. When the employee feels down he needs some ’patting on the back’, praise for and a reminder of previous accomplishments. On the other hand, right after a success, a leader provides honest, critical feedback and then, after some slack to recover from a stressful period, assignes another challenging task.

The uppermost layer of Maslow’s pyramid, i.e. the self-actualisation needs, represent the variable in the motivation equation with the most influential weighting coefficient. Thus, a leader delegates responsibilities and involves people in deciding how to achieve strategic objectives relevant to them, giving them flexibility and autonomy in their jobs. He tries to articulate his intent as precisely as possible but leaves the implementation to his employees, as long as they stick to existing corporate design guidelines. Instead of the typical nine-to-five, he offers flexible working arrangements. He lets his employees choose their own core working hours and, if feasible, lets telecommuters occasionally work from home. This will give them a sense of control and self-determination, which forms the bedrock for ideas. While assembly-line work or the like — jobs where you just execute a task repeatedly but which do not require creativity — can be delegated to solely extrinsically motivated employees, you cannot command them to be innovative. Innovation relies on creative people who are given room and freedom to be original and unfold their skills. Leaders encourage creativity and allow time out of normal work commitments for innovative ventures, without expecting a great result, or sometimes even without expecting any result at all. Grand ideas are simply not as easily obtainable as a Google search result. To foster innovation, leaders also give their staff the opportunity for periodic training. Catering to people’s need to grow and progress professionally is like nurturing the breeding ground for innovation. Completing accredited courses — both in house and offsite — gives their skill set and way of thinking the chance evolve. All the measures above will entail a complete and fulfilled human being that is not only fun to work with, but who will bubble with motivation.

As often in life, also when aiming at high staff motivation there is certainly no right or wrong decision, no black or white, but there are actions that are not as promising as others. I have argued above that high pay alone is not the motivational super power and why the overly simplistic arithmetic — you improve motivation by adding a few dollars — will not suffice to maintain staff’s motivation to consistently excel, but instead may even demotivate.

Missing the full spectrum of human needs can have disastrous consequences on staff motivation. Therefore, I proposed adding a further dimension to the extrinsic reward continuum, namely intrinsic rewards. Then, the motivational landscape spanned by the two reward axes will have peaks, corresponding to highly energised behaviour, and valleys, corresponding to disappointment and demotivation. Finding the right balance between intrinsic and extrinsic motives that lead to global maxima on the motivational surface forms a multi-dimensional optimisation problem and is certainly no easy endeavour. That is to say, I believe that more so than taking them separately, the mixture does the trick and only a sophisticated combination of both financial and non-financial rewards, whilst taking into account the natural tension between both, will ensure and uphold maximum staff motivation.

Since the motivational landscape varies from employee to employee and might even morph over time there is no one-size-fits-all approach. So it is the leader’s job to seek out actions that align with global maxima on the motivational surface and continuously adjust them over time when necessary. This is not rocket science, but takes a bit of talent and definitely a strong will. First and foremost it takes the will to sacrifice oneself so that others may gain.

This essay was originally written for the class 'Leadership and the Role of Leaders in Management' at the Münster University of Applied Sciences. My point of view is certainly inspired to some extent by the typical engineering work routine. However, most of the concepts are not only applicable when developing cutting-edge technology, but in any kind of corporate setting.