Salary versus performance
This isn’t a post about bonuses and other monetary incentives. (That’s already been done to death and we’re none the wiser.) This is a post about the psychology of salary.
Let’s start with an analogy.
Imagine you’re a rock star. You arrive at a nearby hotel with the rest of your band after headlining a concert. The hotel manager tells you there’s only one room left, and due to high demand from the concert, the last room is renting at a premium. You feel the manager is taking advantage of your fame and extorting you. But, you pay the price anyway because you have no other viable option.
So, how will you and your rock star friends treat the room, given that you feel ripped off?
Simple-minded business people think a transaction ends when the money changes hands. But, it doesn’t. If you’re paying money for a product or service, your perceived value of the transaction will shape and influence your subsequent actions. You may not trash a hotel like a rock star, but you may use the liquid soap in larger quantities, or drink from the mini-bar without paying, or take a little less care when checking out.
The same goes for employees. As an employer, it’s your choice whether you underpay, fairly pay or overpay your staff, but be aware of the consequences. Sure, they can leave if they’re not satisfied, but in private equity and many other industries, work is scarce. There are people out there that will work for a pittance for the chance to enter certain industries. And, they do. But, employers must be careful with this power.
Just as a ripped off rock star can cause calamity, a ripped off employee simply won’t provide value. For example, would you rather pay a CTO $90k to work at 20% of their capacity or $140k to work at 80% of their capacity? For some CTOs, the difference in output (from 20% versus 80% capacity) might be negligible. But for most great CTOs, the difference would reach orders of magnitude. This is the choice you’re making every time you pay a wage.
They may not even know they’re underperforming, you may not even know they’re underperforming, but it’s the risk you take. So, don’t be a manager that underestimates the influence of fair pay. Great people make great companies and great people don’t work at high capacity (or for long) on paltry pay grades. This sounds obvious, but one-dimensional managers continue not to understand the concept.
Image: The pill or the money? [source: Shutterstock]
Ah, but this assumes that salary is the only thing we work for
.
You yourself mention a powerful initiative – entry – which can be pretty strong motivating factor. In fact, by limiting the salary you provide a powerful incentive to work hard (since getting a good reference is then necessary to getting a good renumeration). From a game theory, it’s also a strong commitment signal – one commits to suffer financial pain now, which can be alleviated only by a good performance resulting in higher rewards in the future.
There’s also an interesting McKinsey study (in Nov McKinsey Quarterly), which says that three non-financial motivators are stronger than three best financial motivators (important note: for people with satisfactory salaries). Basically it boils down to companies taking employees seriously and making clear they are valued. IMO, bonuses and similar can have exactly opposite effect – especially if they are meant to be secret and then leak (as they inevitably will).
Personally, I prefered to work in places I felt appreciated and had fun to places I was just paid money and felt ignored doing dumb work.
vlade
24 Nov 09 at 14:50
@vlade, Totally agree re: non-financial motivators… from both personal experience and observations.
However, while I think it’s great to strive for a workplace in which everyone is challenged and inspired and appreciated, in practice it is difficult to achieve. Actually, I’d go as far as saying it’s impossible to achieve for all staff.
Even more, I think too many managers think they’re providing a “Utopian” workplace, when really they’re providing a workplace according to their own idea of Utopia.
I’ve thought about this quite a bit lately and my idea of Utopia, in which you could pay me $1 a day and I’d still be happy, is one that very few people would like. (I know this because I’ve tried to force it upon others.) And, my ideal workplace probably isn’t the most productive one, so I have to be careful.
Maybe my post is more consolation than anything else. Or, a product of defeat. But, I’m leaning towards your thoughts in thinking I need to expend more effort on creating non-financial harmony, than appeasing the vocal minority with pay rises.
The Private Equiteer
26 Nov 09 at 00:18
[...] is Take 2 of my last post, Salary versus performance. I’ve had a rethink about the topic, or more specifically, about workplace performance. [...]
Workplace performance | A Private Equity Blog
26 Nov 09 at 03:43
@vlade, Totally agree re: non-financial motivators… from both personal experience and observations.
However, while I think it's great to strive for a workplace in which everyone is challenged and inspired and appreciated, in practice it is difficult to achieve. Actually, I'd go as far as saying it's impossible to achieve for all staff.
Even more, I think too many managers think they're providing a “Utopian” workplace, when really they're providing a workplace according to their own idea of Utopia.
I've thought about this quite a bit lately and my idea of Utopia, in which you could pay me $1 a day and I'd still be happy, is one that very few people would like. (I know this because I've tried to force it upon others.) And, my ideal workplace probably isn't the most productive one, so I have to be careful.
Maybe my post is more consolation than anything else. Or, a product of defeat. But, I'm leaning towards your thoughts in thinking I need to expend more effort on creating non-financial harmony, than appeasing the vocal minority with pay rises.
The Private Equiteer
11 Jan 10 at 01:48
Strong argument raised Vlade, and a very comprehensive answer by the author. I shall always keep those points in mind and heart.
Salaries In Dubai
28 Jan 10 at 18:06
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Middle East Jobs
7 Apr 10 at 12:56