Financial Rewards: Attracting and Retaining Talent
- Imagine you're a manager at a fast-growing tech company.
- Your team is talented, but competitors are offering attractive packages to lure them away.
- How do you ensure your employees stay motivated and loyal?
Recall how theories like Taylor’s Scientific Management, Maslow’s Hierarchy of Needs, and Herzberg’s Two-Factor Theory provide insights into how pay influences employee behavior.
What Are Financial Rewards?
Financial rewards
Financial rewards are monetary incentives provided to employees in exchange for their work. These rewards can be direct, like salaries and bonuses, or indirect, such as benefits and profit-sharing schemes.
Why Are Financial Rewards Important?
- Attracting Talent: Competitive pay packages help businesses stand out in the job market.
- Retaining Employees: Financial incentives reduce turnover by rewarding loyalty and performance.
- Aligning Goals: Linking pay to performance encourages employees to work toward business objectives.
- Boosting Productivity: Well-designed rewards can motivate employees to increase efficiency and output.
Connection to Motivation Theories:
- Taylor’s Scientific Management: Argued that money is the primary motivator, promoting piece-rate pay for efficiency.
- Maslow’s Hierarchy of Needs: Pay satisfies physiological (basic needs) but has limited impact on motivation beyond security.
- Herzberg’s Two-Factor Theory: Identifies pay as a hygiene factor, necessary to prevent dissatisfaction, but not enough to drive motivation alone.
While financial rewards are powerful, they are most effective when combined with non-financial motivators like career development and a positive work environment.
Types of Financial Rewards
1. Salary
Salary
A salary is a fixed annual payment, typically divided into monthly installments. It provides stability and predictability for employees.
A marketing manager earning $60,000 per year receives $5,000 monthly, regardless of hours worked.
- Advantages:
- Predictable income for employees.
- Simplifies budgeting for businesses.
- Disadvantages:
- May not directly incentivize higher performance.
- Can lead to complacency if not paired with performance metrics.
2. Wages
Wages
Wages are payments based on hours worked or units produced. They are often used for hourly or piece-rate workers.
A factory worker earning $15 per hour receives $600 for a 40-hour workweek.
- Advantages:
- Directly ties pay to effort or output.
- Encourages productivity.
- Disadvantages:
- Can lead to "clock-watching", or rushed work.
- Less predictable income for employees.
- Taylor favored piece-rate wages to drive output.
- Herzberg argued that wages alone don’t truly motivate—growth opportunities matter.
- When choosing between salary and wages, consider the nature of the job.
- Salaries suit roles requiring consistent output, while wages work well for task-based jobs.
3. Commission
Commission
Commission is a payment based on sales performance, often used in sales roles.
A salesperson earning a 5% commission on $10,000 in sales receives $500.
- Advantages:
- Strongly incentivizes sales and revenue growth.
- Aligns employee goals with business objectives.
- Disadvantages:
- Income variability can cause stress.
- May encourage unethical sales practices.
- Car dealerships use commission-based pay to drive high performance.
- However, excessive reliance on commissions has led to pushy sales tactics and poor customer experiences in some industries.
When evaluating commission structures, consider fairness and employee well-being, not just sales outcomes.
4. Performance-Related Pay (PRP)
Performance-related pay (PRP)
PRP rewards employees for meeting or exceeding specific targets. It can take the form of bonuses or salary increases.
A project manager receives a $2,000 bonus for completing a project ahead of schedule.
- Advantages:
- Directly links pay to performance.
- Encourages goal achievement.
- Disadvantages:
- Can be perceived as unfair if targets are unclear.
- May demotivate employees who miss targets.
Ensure PRP systems are transparent and based on measurable criteria to avoid perceptions of bias.
- Google uses PRP-based innovation incentives to reward creative problem-solving.
- Wells Fargo’s aggressive PRP system led to unethical banking practices, as employees created fake accounts to meet unrealistic sales quotas.
5. Profit-Related Pay
Profit-related pay
Profit-related pay involves sharing a portion of the company's profits with employees.
A company distributes 10% of its annual profits among employees as a year-end bonus.
- Advantages:
- Fosters a sense of ownership and teamwork.
- Aligns employee interests with business success.
- Disadvantages:
- Payments may be small if profits are low.
- Can create dissatisfaction if profits fluctuate.
- Ford shares annual profits with employees.
- In 2019, payouts averaged $6,600 per worker, but in 2021, this dropped 45% due to declining profits, causing dissatisfaction.
Profit-sharing can be unpredictable, great in strong years, frustrating in downturns.
6. Employee Share Ownership Schemes
Employee share ownership
These schemes offer employees shares in the company, aligning their interests with long-term business success.
A tech startup grants stock options to employees, allowing them to purchase shares at a discounted price.
- Advantages:
- Encourages long-term commitment.
- Provides potential for significant financial gains.
- Disadvantages:
- Share value can be unpredictable.
- Not all employees may value equity-based rewards.
These schemes work best in high-growth companies where stock values appreciate over time.
7. Fringe Payments (Perks & Benefits)
Fringe payments
Fringe payments (or benefits) are non-cash rewards that enhance an employee's compensation package.
A company offers health insurance, a company car, and gym memberships to its employees.
- Advantages:
- Improves employee well-being and job satisfaction.
- Can be tax-efficient for both employers and employees.
- Disadvantages:
- Costs can escalate quickly.
- Not all benefits are equally valued by employees.
Fringe benefits improve employee well-being but should be customized to employee needs.
Aligning Pay With Motivation
- Financial rewards are most effective when they align with the company's goals.
- Here's how different rewards can support specific objectives:
| Type of Financial Reward | Best for | Linked Theory/Motivator |
|---|---|---|
| Salary | Stability-focused roles | Maslow (Safety Needs) |
| Wages | Task-based jobs | Taylor (Efficiency) |
| Commission | Sales & revenue-driven roles | Taylor (Performance-Based Pay) |
| PRP | High-performance cultures | Herzberg (Recognition) |
| Profit-Related Pay | Team-oriented businesses | Maslow (Esteem) |
| Stock Options | Long-term growth | Herzberg (Commitment) |
| Fringe Benefits | Employee well-being | Herzberg (Hygiene Factors) |
A retail chain uses a combination of hourly wages, sales commissions, and profit-sharing to motivate employees. This approach drives sales while fostering a sense of ownership and teamwork.
- Which financial reward system would be most effective for a sales team? Why?
- Which of these financial reward systems can you identify in your life now?
