Based on a true story…..
It is annual review time and my friend, an engineer, has received his time-slot with the boss. What will be his strategy this time? Last year, his first year in the company, he got a standard increase. But this year is different – now he has hit his stride. He’s just completed a high profile and highly praised project which completely redesigned a flagship product. The numbers are coming in and it’s a big success – much better customer acceptance and much lower costs.

The time arrives and he sits across from his manager, thinking this year I really deserve a big pay rise. I have helped the company make money and I have the data to prove it. I’m know one of the other engineers in my team earns more than me and he is not as good as me. So what shall I ask for – 15% pay rise or I ask for more…..?

Pay for performance is based on the theory that money will motivate people to increase effort, improve performance and shape behaviour. However, there are two problems with this theory, a theoretical one and an economic one. First, the theory of pay for performance is based on the mistaken idea that people make rational economic judgements about their effort and reward. Secondly, the economic issue, many companies just don’t have the money to pay what employees think they are worth.
As we all know, we are not very rational when it comes to our own salary expectations, even the most engineering minded amongst us. Our expectations are connected to our peer group; comparing our performance and ability to theirs. But this is where personal bias comes in. In the absence of any objective indicators about another employee’s performance, we make our own, often flawed, assessment. Typically we overestimate our own contribution to success, an over-confidence bias. Therefore we have the expectation of receiving more in comparison to others or just what we can imagine they earn.
Also it’s not just money that motivates us. We want autonomy, mastery and purpose (watch Dan Pink’s Ted Talk): We are motivated by the intrinsic aspects of the job not money. A McKinsey Quarterly survey of 1,047 executives found that the top three motivators are:

  1. Commendation or praise from immediate manager
  2. Attention from leaders
  3. Opportunities to lead projects or task forces

So money is not really the chief motivator. Consider the effort and expense your company has put into its pay for performance scheme. What could you do to increase intrinsic motivation in your organisation?
Back to my engineer friend. A demand for a 15% pay rise was met with a familiar response. His manager explained the tight budgets, lean times and the pay increase budget for the whole R&D team is a meagre 4%. Conclusion, there is no way that 15% is possible. No one else in the team will get more than 6%. More discussion and then comes the engineer’s ultimatum – “I want 10% more OR I WILL RESIGN !!. Now it’s no longer just about the money.  Pride and self-worth are in play. He immediately resigned, left the company and got another job quickly.

Could the company have:

  1. made the increase higher than others in the team and communicated this to him
  2. recognised the success of his project with some commendation or non-monetary award
  3. arranged meetings with the company leaders
  4. put another challenging project in front of him

Would one or a combination of these have worked? Very likely yes. Is it time to review your approach to recognizing your employees’ achievements before you are faced with such an ultimatum from one of your best people?
Jane Piper of Pipsy Consulting finds innovative HR approaches that will help your company engage your people in delivering your company strategy.