In today’s guest blog, Daniel Hibbert, author of “Thunder Cloud: Managing Reward in a Digital Age” reveals how to make the psychology of reward work for you. Few things are more emotive than someone’s pay package – its critical to get it right, or you risk losing top talent.
Three keys to the human mind and how it evaluates reward
Every business has to make difficult decisions on how much employees should be paid. Salaries and bonuses must be affordable, be legally compliant and enable the recruitment, retention and motivation of a high-quality workforce. The decision is complicated because every business has its own objectives and culture and a different workforce. But there are three universal principles that should be applied in making decisions about pay:
Define what you mean by fairness
Most businesses try to pay their employees fairly. This can go wrong when they do not define what they mean by fairness and explain this to their employees. Pay decisions are based on external market data, the value of job an employee is doing and on performance. Inevitably employees will not always accept that the decisions coming out of this process are fair to them as individuals.
This happens when employees are left to define what fairness means for themselves. When they do they often develop unrealistic expectations and are disappointed with their pay. If the business defines what fairness means and explains this as part of the reward policy employees are more likely to understand and accept your pay decisions.
Always pay what employees are expecting
The human brain evolved to be averse to losses, and anything that is below what employees are expecting is felt as a loss. There is just one golden rule in reward management: NEVER PAY EMPLOYEES LESS THAN THEY ARE EXPECTING. If I am expecting a bonus of £3,000 and I only get £2,000, I will feel as if I have lost £1,000 and it will be as if my employer has taken money away from me. We all react badly to losing things.
This will not happen if you invest time in making sure employees know what to expect and that they are not expecting more than the business can afford. If there is a lot of uncertainty about what you can afford it is best to keep employee expectations as low as possible.
It is a waste of money to pay a lot more than employees are expecting. There would no point in paying me a bonus of £6,000 if I am only expecting £3,000. I would be glad to have the money but I would probably soon forget about it. And I might also expect a higher bonus or £6,000 for the next year and feel a loss if I did not get it.
It’s not just about money
Pay is something that happens to an employee, it comes from outside and is an “extrinsic” reward. Extrinsic rewards are visible, short-term and unreliable. They contrast with intrinsic rewards, which come from fulfilling the psychological needs of employees. We all have a need to be respected, to have control over how we do our work, to feel part of a social team and to be treated fairly. Intrinsic rewards are hidden, long-lasting and dependable.
High salaries and bonuses do not lead to a high-performing workforce unless they complement the more powerful intrinsic rewards. If employees believe they are being treated unfairly the intrinsic reward is compromised. Employees will see this as a threat and will quickly become disengaged and unproductive.
Intrinsic rewards are the most valuable part of reward and are the best way to make sure employees stay committed to the organisation. Pay is well managed when extrinsic and intrinsic rewards work in harmony together.