Employee Compensation is More Than Salary

Employee compensation is the reason you can attract people to work for you, so let’s get that out of the way at the start of this post. Your quality as an employer and as a company is determined in your employee’s eyes — in a large part in most business and organizations — by compensation for the work that they do. They spend a good part of their lives providing you with labor – they get up for you, they drive to work for you, the eat lunch at their desks for you, work on breaks for you, and they worry about you. The worker literally gives their lives to the employer, and most of the time this is not an even exchange. Many employers do not appreciate the sacrifice made by each employee. Labor is routinely short changed in this relationship, and we have been taught that this situation is good for business. Maybe it is, but it’s not good for society. If you think otherwise then you probably don’t want to bother reading further.

Most people in today’s economy work to support themselves and their families. While conventional wisdom states you should work in a field doing something you like, usually it’s only the luckiest among us who work purely for personal satisfaction, are employed because they wish to perform a service, or work for reasons unrelated to monetary compensation. For those who work to support themselves and their families, compensation is a primary concern.

Changing employee salaries can have very real consequences for the employer. Monetary compensation represents a feeling of self worth and can motivate or de-motivate employees, so it’s important for businesses to examine rate of pay on a regular basis wether or not the company is profitable.

If a company is not being profitable, then the workforce is one of the areas that often gets selected for an adjustment. The employees may see it coming if they notice a lack of sales or a slow down. If they have not noticed or can’t see it because of the type of business or industry, then the owner or department manager should make an announcement concerning the economic viability of the company well before any changes are made. When employees know there is an issue then they are less likely to be resentful over a reduction of the workforce or salary adjustments. Honesty is appreciated. On the other hand, surprising your workforce with layoff notices or sudden pay cuts will almost surely engender negative feelings. One problem, lack of profit, can be compounded all too easily by lack of motivation, resulting in a downward spiral.

When a company is profitable and does not increase compensation for the workforce the result can be resentment, high turnover rate, low production, poor quality, and industry-specific issues. While companies can tell employees that current conditions do not support raises for the workforce, if this continues for long (consecutive years, for example) then your employees might suspect they will never get a raise. If the company is expanding or showing noticeable growth, employees may begin to wonder what they have done that makes them unworthy of a raise. Resentment begins. While an employer may say “The benchmark wages for the industry are just what you are earning,” or make similar statements, the truth is that the company has made it policy to not share profits with employees, but will be more than happy to share misery when it comes around. Employees know this because it has been done in the traditional pattern of business for many years.

Fairly to provide bonus compensation during the “fat times” has a de-motivational effect on your labor force. Highly trained individuals and high performers may start looking for work elsewhere. Some employees may stop trying, or may decide minimal effort is required to stay employed. After all, the employer is providing less than optimal pay in the current condition of the company – it’s very easy to rationalize. Failure of the company to invest in raises — or provide bonuses — will be seen as lack of appreciation, and it’s hard to gauge exactly how this will effect your labor force. It’s probably safe to say it won’t enhance sustainability in the long run, unless you think it’s desirable to treat people like disposable parts. If that’s the case your employees will pick up on it and treat your company with somewhat less than full loyalty.

Every business has to create a policy that works for the employer and the employee. There is evidence that small annual raises don’t do much for employee motivation, but a small raise might be seen as better than no raise at all during hard economic times. Small annual raises (1-4%, for example) may or may not help you retain the workforce, and will probably do little to motivate employees. If your company can afford to do more then it will probably pay off in the long run. Raises at 7% and higher can make a visible difference in a person’s life, resulting in positive feelings of appreciation and motivation. While their next raise may be smaller, 3% for example, for the employee who appreciates last years raise it may not be a de-motivating factor.

Most employees know the relationship between company profits and salaries. Regardless of company edicts or traditions that are designed to prevent this information from becoming public knowledge, many employees discuss compensation and raises with each other. Satisfied employees help to sustain positive growth and profits. De-motivated employees are more concerned with finding a path to better compensation that does not include their current employer. By understanding the psychology behind salary increases and employee compensation, you can prevent unnecessarily high turnover rate and help create a self-sustaining workplace environment.

References:
http://www.psychologytoday.com/blog/cutting-edge-leadership/201012/do-small-pay-raises-spur-motivation-or-resentment
http://www.inc.com/kimberly-weisul/four-strategies-to-raise-profits-by-paying-employees-more.html
http://www.businessweek.com/articles/2013-06-06/costco-ceo-craig-jelinek-leads-the-cheapest-happiest-company-in-the-world