Why it Takes More Than Money to Improve Employer Performance
Authors often describe writing a book as going on a journey. You set out with a clear direction, visit some specific resting places on the way, and finally arrive at the final destination.
But the finished book is rarely what you set out to write. You learn so much on the journey and visit so many unexpected places that your views change. It was John Maynard Keynes, the economist, who once said:
"When my information changes, I alter my conclusions."
So it was for me when writing and researching about organizational reward and recognition. Some of the accepted concepts and practices that I have seen in the last 30 years came under very close scrutiny. So much so, that I began to collect a number of so-called ‘facts’ about how to manage reward and recognition. These eventually revealed themselves to be shady imposters. Here are some of them...
'Employees work harder if you give them more money'
It may be counter-intuitive to CEOs and finance directors to suggest that more money produces a marginal effect on performance - and often actually impairs good performance - but it’s true.
In 1990, a study by Jensen and Murphy looked at the relationship between executive pay and corporate performance, analysing over 2,000 executives across 1,200 organizations in the USA. The study found that there was no correlate between PRP (performance related pay) and quoted company performance as measured by the share price. They even found that "executives tended to be overpaid for bad performance and underpaid for good performance".
Similarly, the Mazda Motor Corporation of America ran an incentive for their B-Series trucks within 900 dealers to ‘move the metal’. A heated debate ensued amongst the management team about whether the incentive should be cash or merchandise. As neither faction would give way they decide to reward half the dealers with cash at $75 per unit sold and half the dealers with an awards catalogue using the same reward value for each sale. The cash dealers improved their sales performance by 2.28%. The non-cash dealers went well beyond their targets to a 15.65% increase.
In 2004 Scott Jeffrey, a junior professor at the University of Waterloo, Ontario, tested some volunteer students with a word game. One group had the reward of money as an incentive, while the second had no incentive. The third group's reward was a therapeutic massage, the length determined by their prowess at the word game. The results? The cash group performed 14.6% better than the group with no reward, as you might expect. But the massage group outstripped the cash group with an improvement of 38.6%.
What conclusions would you now draw about the effectiveness of cash vs. non-cash as an efficient reward mechanism for above average performance?
'If we are paying 30% of our remuneration budget on benefits, why would we need recognition as well?'
This is one of those issues where the senior team has forgotten to ask themselves what benefits are actually for. This reminded me of the original two-factor theory of Herzberg. In this study of 200 employees in Pittsburgh, USA, Herzberg was attempting to isolate what factors made people more satisfied/motivated at work and thus perform better for the business (and create more profit).
He discovered, in broad terms, that achievement opportunities and recognition can increase job satisfaction by 40% or more. But he also learned that factors such as salary/perks, work conditions and status only push satisfaction levels by just 5% at most, and are often neutral in performance improvement.
It is clear from other studies that benefits are a loyalty device which may prevent an employee leaving earlier than they otherwise would. It is the recognition of achievements in the workplace which actually foster higher performance, promote loyalty and ultimately make the organization more profitable or effective.
'Is employee engagement just another word for internal communications? And does it make a difference anyway?'
LV, the car insurance company, introduced a new employee engagement scheme based on values research with staff, and an extensive internal comms campaign that went on for six years. Employee engagement was benchmarked at the outset at 64%. However, by the end of the six years, engagement levels rose to 83% and profits rose over the same period by 327%.
In 2005, Towers Watson, the global outsourcing provider, produced a study of 85,000 employees across 16 countries measuring the correlation between highly-engaged staff and Stock Market performance. It concluded that those with highly-engaged employees had improved their EPS (earnings-per-share) growth rate by 28%, compared with just 11.2% for organizations with averagely-engaged employees.
Sears, the department store group, began an extensive employee engagement initiative in the early 1990s when many retailers were cutting costs and staff. They discovered that for every 5% of improved ‘engagement’ from employees, they could add a predictable 0.5% in sales revenue growth. Between 1990 and 1993, Sears went from a $3billion loss to a net profit of $752million.
On my writer's journey, I discovered many unexpected things:
There are now more mobile phones than people in the World
Travel and leisure concepts are the most effective reward
Better engagement needs to come from the CEO, not HR
Most millennials use up to five social media channels a day, in addition to those provided by their employer
Very few people go to work setting out to perform badly
The last word goes to William James, the 19th-century philosopher, writer and wit, talking about human motivation:
"The deepest craving in human nature is the desire to be appreciated."
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