Compensation is the monetary reward people receive for performing expected tasks at their work place. It has been a hot topic in the past couple decades whether compensation influences employee behavior and motivation. Of course it does, many studies have linked higher compensation to increased motivation and performance (Newman, Gerhart, and Milkovich 2017). But first we have to classify the types of compensation and we also have to understand that people have different personalities, training, and job description, and require different types of compensation.
It is good to know that some people like challenges at work, others like monotonous tasks, some people love responsibility, while others would prefer do perform easy jobs that are not rocket science. Compensation varies according either to the knowledge and training of the employee, or to the type of job that needs to be done. It also varies either to seniority, or to the amount of value that employee brings to the company (Newman, Gerhart, and Milkovich 2017). For example, some people, such as brokers, love risk-taking – their compensation consists of a lower base pay, and a very high amount of commission or incentive pay. They are very much paid for good performance. Lower performers receive a smaller reward. Also, there are people who like security and a job that is kind of the same each day and pays the same, regardless of performance. These people would probably prefer a set base pay or salary, with little or no incentive. This way they know they have the security of always receiving the same amount of money.
The pros of compensation, if the compensation type matches the employee’s expectations and personality, are that it attracts and retains the talents the company needs. The right compensation will motivate people to come to our company and stay loyal to us. These employees will show up every day, they will perform the expected tasks and the company will be able to achieve its goals (Newman, Gerhart, and Milkovich 2017).
There are some cons to compensation as well if we are not careful. If we give fixed salary-based compensation to someone who would want commission – or a high-incentive compensation to a lower performer employee that would prefer the security of a fixed salary – it will probably lead to the employee not being motivated and ending up looking for a different job. This results in lower performance and higher turnover, which is not good for the company (Newman, Gerhart, and Milkovich 2017).
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So, what motivates employees to do a good job? Job satisfaction is very important, and many studies showed that a higher compensation leads to increased motivation, which in turn leads to better performance (Sudiardhita et al 2018; Yanuar 2017; Newman, Gerhart, and Milkovich 2017). But higher compensation needs to be coupled with the right type of compensation for the right type of personality. Employees need to feel that their compensation is fair – compared to others in the field, and colleagues at the company (Newman, Gerhart, and Milkovich 2017). Other perks that could help boost motivation are personalized benefits package, appreciation, good company culture, and the prospect of climbing the corporate ladder.
Compensation should always reinforce the behavior the company needs for it to be successful. If a company wants risk takers and people who work hard, then it should offer a high incentive package with pay for performance, and eventually the people who don’t like to work hard will sort themselves out. This will increase company performance (Newman, Gerhart, and Milkovich 2017).
As we can see, there is a lot of things we have to pay attention to when calculating the right amount of compensation for a new hire. It is important to analyse their personality, education, training, experience, what type of work they will be doing, how much responsibility they will have, how much value they will bring to our company, how this compensation aligns with our company structure and strategy, what are the external factors, and so on. If we get it right, the employee will want to stay with us and will be motivated every day, which in turn will make our company more successful.
References
Newman, J. M., Gerhart, B., & Milkovich, G. T. (2017). Compensation (12th ed.). New York, NY: McGrawHill/Irwin.
Sudiardhita, K. I. R., Mukhtar, S., Hartono, B., Herlitah, Sariwulan, T., & Nikensari, S. I. (2018). The effect of compensation, motivation of employee and work satisfaction to employee performance Pt. Bank XYZ (Persero) Tbk. Academy of Strategic Management Journal, 17(4), 1-14. https://www-proquest-com.libraryresources.columbiasouthern.edu/scholarly-journals/effect-compensation-motivation-employee-work/docview/2124080491/se-2?accountid=33337
Yanuar, Y. (2017). Compensation, motivation and performance of employees: Evidence from Indonesia. International Journal of Economic Perspectives, 11(4), 486–492.