Fewer Dollars = Unhappy Employees? Not Necessarily!

Last year well over 50% of employers cut their merit budgets or worse (eliminated them or cut base pay).  In a recent webinar I did for Salary.com, about 80% of the 200 or so attendees said they had cut or eliminated their salary increase budgets for the 2009. After the dust settled, 2009 pay increases were the lowest on record, under 2%.

While 2010 will see an increase in pay increase budgets (most studies are projecting 2.5% to 2.9% merit increases for 2010), these budgets remain at historically low levels, and the preliminary numbers for 2011 aren't much higher. Due to the extremely weak economic recovery, it's likely that even these low projected numbers will drop somewhat.

It's hard to imagine that the workforce will be too thrilled with these pay increases, especially when comparing them to what most employees typically received prior to 2009, but since nearly everyone will have modest budgets, it's not like they would do dramatically better elsewhere.  Of course, this assumes that your base pay and cash compensation programs are already competitive, that base pay growth and variable pay are tied to performance, and that you're taking care of your best employees. If not, these tasks should move to the head of your priority lists.

Countless studies in the past few years have shown that employee morale is dropping (and has been for two decades) and half or more or the workforce today is ready to seek out the proverbial "greener pastures" of a new employer.  But is pay the main issue driving  the discontent?  "No," say most of these studies. 

While competitive cash compensation is a critical element of any rewards program, once these basic needs are met, what's keeping the best performers with your company?  Assuming you've already taken care of these basic needs, it's your culture and how you manage and treat your people that can really make the difference (see my recent post on "Can't Buy Me (Workplace) Love" for more on this topic).  With employee loyalty and engagement at an all-time low, quality leadership and management are at a premium (see my colleague Laura Schroeder's excellent post on "...We Must Increase Our Trust") for additional supporting information.

But don't take our word for it. Check out the recent WorldatWork study on the linkage between various reward program elements and engagement. Bottom line: how your workforce is lead and managed is far more important than pay per se in determining workforce engagement and commitment.  The global recession has had a particularly negative impact on employee engagement according to a Hewitt study, but pay isn't the reason.

Both the WorldatWork and Hewitt studies make it clear that visible, trusted and communicative leadership are critical to maintaining high levels of engagement. While the focus of each study were somewhat different, neither study posits pay as a driving factor in employee commitment and engagement.

While pay is, and remains, a critical element in the attraction, retention and satisfaction of the workforce, it is far from the most critical factors in determining overall happiness, commitment and engagement of the workforce. If you've even worked in a "toxic" work environment for an employer that paid well, you'll easily relate.

Pay competitively and treat your workforce well. It's cheaper and more effective than trying to overcome poor people management with extra pay dollars.

Doug Sayed, SPHR, CCP, is principal with Applied HR Strategies, a Seattle-area compensation consultancy, and an instructor, periodic author and publications reviewer for WorldatWork. 

Comments

[Alanah Throop]

Hey Doug,
I agree that cash is not the best incentive! Working at Rypple: http://rypple.com I have learned that feedback and public recognition is appreciated more than money. If people are recognized for what they do and achieve, and they feel like their work is paying off, then they happiness level will increase. If you don't show any recognition for what an employee does, they won't feel needed or recognized and that created a negative workplace.
Try something like kudos to show your public recognition of an employee or fellow co worker. http://bit.ly/clCJxL

Thanks for the great post! Something all employers need to be reminded of sometimes.