Positive Psychology, Employee Engagement and Rewards (Part II)
By James T. Stodd, MS, SPHR, SHRM-SCP
January 11, 2017
Part I of this series dealt with “positive psychology” within the workplace as summarized by Daniel Pink in his New York Times best seller…Drive(1). I have high regard for what positive psychology can teach us about how employers can best design their organizations, work environments, work processes and the very jobs people perform. However, I expressed serious disagreement with the conclusions proponents of positive psychology offer regarding the importance of “extrinsic rewards” and the use of “contingency pay” in particular. Here’s why…
Contingency Pay Reflects Business Reality
The academic researchers that inspired much of Mr. Pink’s conclusions treat the use of “if-then” contingency pay practices as if they are merely a method devised by business owners and managers to corral, shape and control the behavior of workers (e.g., “carrot and stick”). I don’t agree. Rather, I would argue that the “if-then” circumstance is a fundamental reality for every business organization that must be identified and sagely dealt with by founders, investors, governors, and business leaders.
Well designed contingency-based pay plans align rewards with that reality. As such, it only makes sense to extend that reality to folks working within the organization who can make a difference, and to do so via programs that effectively communicate those challenges and reward people for successfully embracing those circumstances.
Real Life Data Leads to Different Conclusions
Much of the research behind the argument that contingency-based extrinsic rewards undermine the potency of intrinsic rewards is actually based upon laboratory research with children, college students, as well as some working adults such as artists. Naturally we might question the degree to which the conclusions derived from those studies can be properly generalized to a broader population of working adults.
In addition, use of “if-then” contingency-based incentive programs has been and continues to be common place when it comes to the compensation of CEO’s and other senior executives. This enduring practice begs the question of “why” experienced business leaders and responsible corporate directors continue to believe in the power of contingency-based financial incentives, particularly if they diminish naturally occurring intrinsic rewards associated with the work? My answer…because their collective experience tells them that these pay programs work…for both parties! So, if experience tells us that contingency-based pay programs are suitable for senior executives who perform some of the most complex “heuristic” jobs available, why would they not be suitable for other employees?
Making a Living is Still the Primary Reason People Work
Positive psychology tells us that a growing number of people are seeking jobs and work environments that render significant intrinsic rewards, perhaps to the extent of accepting lower paying jobs for their intrinsic reward value while leaving other more lucrative options for others. This is one reason Pink suggests that it might be better not to introduce extrinsic rewards that could diminish the intrinsic rewards associated with the work. Rather, the focus should be placed upon maximizing a) autonomy/empowerment, b) mastery and c) purpose in the workplace. OK…seems like a good argument…but does real world data support that supposed shift in values?
A recent survey conducted by the Society of Human Resource Management (SHRM)(2) does show the dimensions of autonomy, mastery and purpose to be important factors associated with job satisfaction and employee engagement. However, amongst a field of 32 factors studied, Mastery (i.e., the work itself) ranked 11th in importance amongst the survey participants, followed by Autonomy (i.e., autonomy and independence) and Purpose (i.e., the meaningfulness of the job), each with a ranking of 13th and 14th respectively. On the other hand, pay, benefits and job security all ranked amongst the top five factors deemed to be “very important” by the workers surveyed. In fact, the only factors that rated higher in importance than these extrinsic rewards were “respectful treatment” and “trust between employees and senior management.”
While the SHRM survey is just one such survey, there are other surveys conducted by other organizations that convey a very similar picture with respect to the importance of extrinsic rewards. Moreover, repeated SHRM surveys convey the enduring importance of pay, benefits and job security to job satisfaction and employee engagement over the past decade. These data clearly establish that extrinsic rewards, and the prospects of future extrinsic rewards, continue to be paramount in the minds of employees regardless of industry, occupational group or level within the organization.
Making the Most of Competitive Opportunities
As competition for top talent increases, it only makes sense that employers will seize every viable opportunity to strengthen their position. When it comes to determining where those opportunities lie, extrinsic reward programs again loom large and perhaps offer the best opportunity. Let me explain…
The SHRM survey noted above collected and reported data on both “importance” and “satisfaction” levels for each of 32 factors associated with job satisfaction and employee engagement. Much can be learned by looking at the “gap” between those rating a factor as “very important” and those also saying they are “very satisfied.” This “gap” essentially equates to a measure of the opportunity employers have available to increase job satisfaction and engagement by improving their standing on that factor.
The size of the “gap” associated with each of the mentioned intrinsic reward dimensions (autonomy, mastery and purpose) was 19, and 11 respectively, meaning there is some opportunity for employers to improve on each. By comparison, however, the size of the gaps related to pay, benefits, and job security were found to be 37, 36 and 27 respectively. This analysis tells us that pay, benefits and job security are not only “very important” to a significantly larger number of workers than the dimensions autonomy, mastery and purpose, but that current levels of satisfaction with those extrinsic rewards are significantly lower than the levels of satisfaction with the intrinsic reward dimensions. As such, efforts to improve satisfaction with pay, benefits or job security would often be a better investment than spending comparable amounts to further improve satisfaction with the intrinsic reward dimensions associated with the job or the workplace. If you can do both…wonderful!
Variable Pay is Where the Action Is
Salary budgeting surveys conducted by both WorldatWork (3) and the Economic Research Institute (4) are again projecting pay increases to average around 3 during 2017 (including those for most managers and executives). This follows a long trend of slow growth in wages and salaries that has extended well over the last decade. Meanwhile variable pay programs (frequently conditioned upon “if-then” terms) were forecasted to average 12.7 or more of base pay during 2015/2016, with almost 90 of business organizations offering some form of variable pay program to a broad range of employees.(5) This is a monumental trend showing variable pay programs now disseminate approximately four times the amount of rewards than salary increases.
This trend also indicates that employers seeking to remain “in the game” talent-wise need to think in terms well beyond just base salaries. Moreover, while presenting the positive psychology position, Pink concluded that employers seeking to reap the full benefits of intrinsic rewards need to ensure that “baseline rewards” are adequate and fair. Of course he was thinking of salaries, benefits and some perks at that time. But with variable pay now assuming such a prominent position in the total rewards scheme, employers need to ensure their variable pay practices are also considered adequate and fair, in addition to other baseline rewards.
Contingency Pay Practices are Practical and More Affordable
The data summarized above indicates that today’s employers are clearly favoring investments in variable pay programs over investments in fixed pay. The rationale behind this makes perfect sense. After all, contingency pay is a means for employers to provide mutually advantageous pay at a level they might not otherwise be able to afford without putting their cost structure at risk. So, without the “if-then” contingency there may be no opportunity for delivering a true win/win, or an economical means for employers to provide the higher levels of pay they’d like to distribute to deserving associates.
As far as employee engagement is concerned, a recent study conducted by Aon-Hewitt(6) indicates that employees not only want to participate in variable pay programs, they actually feel they have more influence over the size of their bonus/incentive payments than they do the size of their salary increases. Why? Well, first of all there is not much negotiating room around a 3 salary increase. Secondly, well designed variable pay programs tend to be more concrete and specific about what gets measured and how that will be rewarded.
Positive psychology can teach us a lot about the importance of meaningful work in our lives, the value of intrinsic rewards associated with that work, and how employers can better shape business models, structures, processes, systems, and job components to maximize the intrinsic rewards associated with work. These scientific contributions are very noteworthy and important, including the notion that we should strive to maximize “purpose” in the workplace in addition to maximizing “profits.” On the other hand, where rewards are concerned we need to open up a broader lens, that extends well beyond the confines of the university setting, to capture experiential learning that occurs within business organizations themselves, as well as relevant incumbent-provided data, just as the above analysis illustrates. Doing so will help us have a much richer view of the importance of both intrinsic and extrinsic rewards, and how business leaders can best recognize those in shaping competitive and rewarding work environments.
1 Pink, Daniel, Drive: The Surprising Truth about What Motivates Us, New York: Riverhead Books, 2009.
2 Society for Human Resource Management, Employee Job Satisfaction and Engagement: Optimizing Organizational Culture for Success, 2015
3 Stephen Miller, Salary Budgets Expected to Rise 3 in 2017; SHRM Online, initially published July 27, 2016 and updated on September 28, 2016
4 Economic Research Institute, National Compensation Forecast, July 2016
5 Stephen Miller, Compensation Budgets Favor Variable Over Fixed Pay; SHRM Online, September 2, 2015
6 Stephen Miller, Short-term Incentives Are Playing Larger Retention Role, SHRM Online, August 11, 2015