The role of Compensation and benefits in Employees Motivation

What is Compensation and Benefits?

Compensation, sometimes referred to as remuneration, is a frequently used term in HR to refer the monetary rewards given to employees in return for their services. These rewards can be in salaries, wages, bonuses, allowances etc. Compensation is mostly described in combination with benefits, but both terms need not to be confused where Compensation includes ‘direct’ rewards of the employee. On the other hand, benefits consist of the ‘indirect’ rewards like health insurance, stock awards, pension, retirement benefits, and flexible working hours etc.

What is Motivation?

Before explaining the link between Compensation and employee motivation, let us briefly describe types of motivation. Motivation, as we know, is the driving force that encourages a person to engage in certain behavior. This force can either come from within an individual, or it can come from the external surroundings. Hence, we have two types of motivation; intrinsic and extrinsic.

  • Intrinsic motivation is motivation to do a task because it is internally rewarding to you. For example, you spend hours painting because you like it.
  • Extrinsic motivation is motivation to do a task to get external rewards or avoid external punishment. For example, you make your university assignment to get grades.

Wide research is available to support the fact that the motivation to work among employees is key contributor to any organization’s productivity and good performance because motivated employees are more satisfied, engaged, and loyal to their institutes. Compensation and benefits are tools to induce extrinsic motivation among the workforce.

How do you feel when your manager tells you that you are getting a 5k bonus in your salary for the month? A general perception is that the answer to this question will be ‘yes.’ But in reality, there is no fixed answer; rather, it is relative to a number of factors that will be discussed further. For now, let us look upon the general beliefs about Compensation and motivation.

Receiving a fair salary every month and an additional reward whenever an extra effort is put in motivates the employees and makes them feel valued at the company. According to the US-based Society for Human Resource Management’s 2016 Employee Job Satisfaction and Engagement report, 85% of the respondents rated Compensation as ‘important’ or ‘very important to keep them satisfied at work. Job satisfaction and engagements are products of employee motivation.

 Maslow’s Need Hierarchy

Maslow’s Need Hierarchy also supports this perspective. According to Abraham Maslow, there are five levels of human needs; Physiological needs, Safety needs, Social needs, Esteem needs, and on top Self Actualization needs. The second level of the hierarchy i.e., Safety needs includes the need to have financial security fulfilled by receiving stable compensations and fair benefits. Hence, for an employee to be internally motivated to work, he/she must feel secure and stress-free about the fulfillment of basic financial needs. So, according to this theory, Compensation and benefits have a strong link with an individual’s motivation.

Research and Statistics

Looking at the other side of the picture, statistics show that the results of a national survey of 1200 randomly selected US employees showed that 54% of the respondents considered direct financial pay as ‘important’ or ‘very important to their motivation, 46% of the respondents did not consider Compensation as important to their motivation. Another study showed that monetary rewards increased extrinsic motivation, especially for carrying out uninteresting tasks. But, at the same time, these rewards reduced intrinsic motivation by 25% to 36%. There are a number of other factors that moderate the relation between Compensation and motivation, which will be discussed further.

The main idea here is that; Compensation is an expense at the company’s end thus, the management should develop suitable compensation and benefits plan so that this expense can prove to be a source of generating profitable cash flows in the long run.

Role of Financial vs. Non-financial Rewards in Employee’s Motivation

Employees expect financial and non-financial rewards for their work. Financial rewards include Compensation and benefits, whereas non-financial rewards are a means of individual growth, including training, appreciation, recognition, task opportunities, and feedback. While monetary rewards are related to an employee’s extrinsic motivation, the non-financial rewards boost their esteem and confidence and are intrinsic motivation tools. A company must balance both types of motivation to keep the employee satisfied regarding their job and self-growth.

It is highly debated whether an employee valued intrinsic or extrinsic motivation more. Surely, people do require decent pay for their work and love the occasional bonuses but it’s not the only thing that keeps them going at their job. Studies have shown that intrinsic motivation is also a strong predictor of job performance than extrinsic motivation. Moreover, in organizations where higher financial rewards are valued over personal growth, the quality of performance is reduced. When people focus on their salaries and ways to attain increments, they lose focus on their actual purpose of work. In this way, the pursuit of more money actually demotivates people in the long run. Now, this doesn’t mean that people should work for free. But once the basic needs, such as stable earning, are covered, salary is no longer the priority.  

To sum up, intrinsic motivation is necessary to maintain employee contentment, consistency in their work and, in the process, create an innovative environment.

Also read, qualities of good manager

Moderating Factors between Compensation and Motivation

Understanding compensation requires that we question what actually drives people and the answer to that depends on their specific circumstances. We need to assess factors that influence each person’s motivation regarding their financial well-being and professional career development.

Employers who recognize that workers have different preferences for various types of rewards, from cash to acknowledgment to autonomy, will have a better chance of getting an employee’s initial commitment for the job and retaining them for longer periods. In order to make employees strive for betterment, the management should make efforts to satisfy their drive for achievement and curiosity and not only their materialistic needs. If an organization wants its employees to exhibit their high levels of capabilities, then it should ensure that employees aren’t distracted by lower-level needs such as decent pay.

However, an employee’s financial position greatly influences the above argument. Let’s take an example of factory workers. For them, wages are a strong indicator of their performance. There is a significant lift or drop in employee satisfaction with a change in pay rates. Therefore, their financial position dictates their type of motivation. Most workers would have no objection to working long hours for a pay increase.

On the contrary, if employees of top corporations are unsatisfied with their working conditions, then they wouldn’t care if their salary were to be increased. Such employees have a stable financial position and can easily transfer to better organizations without worrying about their livelihood. For them, a cooperative manager, good workspace, recognition, and feedback matters more than the paycheck.

The bottom line is that managers must develop policies and compensation packages that suit their employees’ values and needs.

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