Why Do You Pay Your Employees?

September 01, 2016

You could be forgiven for thinking “That’s obvious, they wouldn’t show up otherwise?” but there’s more to this transaction than at first meets the eye that can add value to an organization.

  1. The Contract:
    • Employees set aside energy in the shape of time and/or deed either in the work place or elsewhere to create value for an organization. Time as a measure of value in this transaction is disappearing along with the daily need to appear at the same time at the same place and is being replaced with measures of contribution (i.e. performance deliverables). Extra pay in the form of overtime or incentive pay may be available if employees contribute more than expected.
  2. The Conditions:
    • Fair: Employees expect internal equity and their pay to be broadly in line with inflation. No one works well when pay is frozen for extended periods or when they feel discriminated against. Employees seek good employment brands; those employers who are fair-minded and deliver what they promise.
    • Competitive: In locations with little competition for skills less than the average for the region may work, where competition is fierce it may need to be more. Pay alone does not cause employees to engage in their work but they will in time become actively disengaged or quit if they feel taken advantage of. This fine balance with the environment needs to be clearly understood and will change over time with the fortunes of the company and supply of skills.
  3. The Terms:
    • Alignment: Shareholders expect strategic goals and key tasks be completed and management that they are done so in line with the organization’s values. Pay should motivate and reward those activities. However, even the largest companies fail or don’t refresh often enough alignment of tasks with pay. Employees will follow the money and if rewards are not directly linked to tasks pay will motivate unintended consequences. Aligned pay strengthens the credibility of management and employer reputation enabling recruitment and retention of the best.
    • Behavior: What gets rewarded is repeated in direct proportion to the pay available. Self motivation is not sustainable and while employees may be more productive in teams of like minded supportive colleagues they too need financial motivation. The how tasks or motivated and achieved is culturally as important as the “what”.

Employees are the essential sustainable component in any successful organization and effective pay should is an investment rather than a cost. Without a clear and transparent written pay policy employees will find it hard to commit to their work or their leadership; a precursor to lower productivity and higher turnover. With clarity on the fundamentals (pay policy) more sophisticated plans and targets such as long term goals, relative performance and specific project milestones can be introduced.

Pay is not the essence of employee engagement but how pay is managed will work to increase or diminish it. Fair compensation doesn’t distract employees from engaging with their work, deriving satisfaction from it, and giving more discretionary time to it.

Compensation philosophy and policy and alignment with business goals, culture, and values should be reexamined at least every five years. Compensation cannot be static when everything around it is changing and should evolve to reflect changing workplace values. Failure to refresh pay practice and even large companies are guilty, affects performance and talent management. 

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