Motivation is one of the foundations of effective leadership. Compensation is certainly part of the motivation equation. Trouble is, most leaders focus far too much on things that matter less and far too little on things that matter most. First you must recognize that no amount of money will ever create high productivity from bad relationships. Research is clear. When employees are asked what motivates them to come to work and do their job every day, compensation rarely tops the list. Typically, it falls in the 4-7 range after such notions as “feeling part of a team” or “feeling valued.” Compensation is an extrinsic motivator. Used improperly, it harms intrinsic motivation – the main source of creativity and invention in organizations.

There are three major ways organizations use compensation in a manner that hurts long-term morale, productivity and creativity: the overall level of compensation is too high, compensation decisions are not transparent and just, the process of determining compensation is too complex. First, yes, companies, on average pay too much! The availability of data (valid or not) from HR organizations and the internet has companies and employees incessantly focused on whether or not everyone is compensated “enough.” This is a horribly unproductive focus. Companies that successfully create cultures based on positivity and performance do not have to pay industry leading wages to attract and retain the best talent. Second, compensation decisions based on things other than merit kill the positive motivational potential of money. This includes compensating low performers like good performers, high performers like good performers, allowing the executive/employee pay gap to become too wide, not providing clear explanations for decisions made, etc. Finally, many compensation and incentive systems are simply too complex (think of excessive paperwork, long mathematical formulas). More complexity means more ambiguity experienced by the employees. More complexity means more “gaming” the system. In short, more complexity means more employee hours spent trying to comprehend the system that governs them – hours spent not working.

Good news! Compensation has the potential to make a meaningful contribution to the motivation equation. However, you have to avoid the all too common pitfalls and you have to realize that compensation takes a back seat to positive and productive work environments any day in terms of morale, productivity and retention. It is a fun topic - I hope to see you on May 13!

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