Pay Matters – But Does it Pay Off?

Subtleties matter

Asking “What matters about pay?” is quite different than asking “Does pay matter?”

The former question makes you think. The answer is hard, and is not the same for every culture, company or individual. The latter question is simply answered “Yes.” And if you stop there, you may have successfully answered the question, but the question itself was the wrong thing to ask.

Asking “What matters about pay?” starts from the foundation that pay is not monolithic.

Pay up is made of many components, each with different characteristics that play out differently for different people and in different environments. Pay in the form of wages or salary for example makes up just under 70% of the total compensation costs of the average U.S. employee; and, that doesn’t even count the wide range of immeasurable ways we feel rewarded for working where and how we do, like the reputation our organization may have for “doing good,” or the flexibility to bring a dog to work. These kinds of components of our total compensation might be things we are willing to trade-off some traditional wage or salary pay for.

What does the research say?

Because it is complicated, personal and context-dependent, there is still a lot we don’t know about getting pay right in a specific organization. But, there are many things we do know. Research has shown that pay for performance:

  • Works better for extroverts than introverts.
  • Is less effective if it’s newly implemented immediately following a significant downsizing.
  • Needs to be underpinned by a well-functioning performance review process.

Research has also shown that the motivational impact of money:

  • Is weaker the more money one already has (diminishing returns)
  • Is stronger in recruitment than retention
  • Can be negative if it’s “known” in advance the same superstar gets the big bonus every year
  • Creates a selection mechanism whereby employees who like monetary rewards sort into jobs with a larger variable pay component

Separating Fad from Function

Some fascinating case study research by founder and faculty director of the Institute for Compensation Studies, Kevin F. Hallock, has shown that individual factors, including gender, correlate which components of compensation employees prefer. If your goal is to have your compensation program function similarly across all employees, then adopting the latest “everyone is doing it” component into your pay plan may not give you the desired result. Deeper digging into your unique employee pool, empirical assessment of the form and result of pay incentives, and thoughtful review of how your strategic goals align with your pay practices takes effort. In the end, however, it will pay off.