Pay-for-Performance and the Science Behind What Motivates Us

When setting employee compensation, companies usually turn to the benchmarking data in their respective industries and set a salary based on fair market value. Talent professionals sometimes think that potential new hires will simply follow the money, and therefore a dollar amount is everything. But what if this model for compensation is misaligned with what employees really value? Spoiler alert: it’s no longer just about the money.

Today’s pay-for-performance model is based on the belief that people who perform should get paid more, which then motivates them to perform better to earn even more. But, research shows that the relationship between pay and performance isn’t so simple. As leaders, we know that employees have diverse needs, that many different motivators can affect performance, and that optionality is key.

When thinking about a rewards package and building a pay-for-performance model, we must consider both extrinsic and intrinsic employee motivation to ensure an engaged and productive workforce.

Extrinsic motivation in the workplace commonly takes the form of tangible rewards (such as salary, bonuses, and vacation time); however, it can also be psychological in the form of benefits and perks. A manager or workmate giving praise or writing a thank-you note are examples of extrinsic motivation.

Having a well-rounded rewards strategy is important, especially when you consider that the majority of employees weigh heavily the importance of great benefits and perks over a pay raise, but not necessarily in the same way. A Glassdoor survey found that the millennial age group, which is 18-34, preferred additional benefits to a pay raise by more than 30 percent as compared to those aged 35-64. The same study also found that women prefer benefits to a pay raise more than men, by 82 percent to 76 percent.

Of course, these conclusions aren’t entirely new. One study suggests that using money as a motivator inhibits creativity and actually results in poorer performance than those rewarded with pride alone. In order to determine the right rewards strategy, we have to consider all potential motivators and leverage the data at our disposal to tailor these extrinsic rewards to best give meaningful value to employees.

There are many types of intrinsic motivation that you can foster in your employees. Pro-social motivation is the feeling you get when you help someone else. Another type of intrinsic motivation is the natural desire to do a job well—it’s the satisfaction of doing challenging work that forces an employee to stretch beyond what’s easy to provide value to other employees and managers. And a third is centered on positive emotions that make people feel good, such as those experienced when receiving positive body language like smiling during an interview or looking at cute pictures of puppies or babies.

A study demonstrating the power of intrinsic motivation used origami creation by participants. In the first trial, participants were broken into two groups, observers and builders, with the builders tasked with constructing origami. Both groups were asked to put a value estimate on each piece of origami. Researchers found that people in the builders group would nearly pay five times as much for the origami than people in the observers group.

The study concluded that when you put that extra effort into making something, you value it that much more. It’s not hard to see how this might translate into the workplace. By allowing employees to work hard and achieve their true potential through ambitious goals and stretch assignments, they become much more invested in and motivated by their work.

So how do these two types of motivations factor into how companies should approach performance and compensation? It’s important to make sure you have the proper internal communication strategy to make all of your company’s benefits known and easily accessible. This means more than an email announcing free massage sign-ups. You must choose the perks that fit your organization culturally, and effectively communicate their value.

Another element is recognizing performance and empowering managers to get into the habit of showing appreciation to their teams. This builds a culture of positivity and support, and in turn drives feelings of impact and accomplishment.

Determining the best pay-for-performance model is a complicated task, but when we break down the science behind what motivates employees, we can get a clearer picture of how to think about compensation. By considering how salary and other non-cash rewards play into extrinsic and intrinsic motivation, we can identify ways in which we can improve our rewards strategy, benefits, and the overall employee experience.