Motivating Employees When Merit Increases Are Cut

In this economy, many companies are trying anything to cut costs before turning to layoffs. We’re seeing variable pay and incentives components put under increasing budget pressure. Indeed, for many companies it may be a no-bonus year. And for other companies, even merit increases are under pressure with plans for small merit increases, no merit increases, pay freezes, and even reductions in pay.

Jeffrey Pfeffer, Organizational Behavior Professor at Stanford’s Graduate School of Business, was recently quoted in Workforce Management saying:

“Typical pay increases are not enough to motivate employees, but they are enough to irritate them. … Even when companies create seemingly significant pay differentiation between low and high performers, the actual cash increase is insufficient to sustain performance – or it drives the wrong behaviors. … Effective management is a system, not a pay plan. The mistake is that companies try to solve all their problems with pay.”

In this recession, HR and company leaders need to urgently rescue employee morale and productivity. This rescue is necessary due to the cutting of awards, incentives and bonuses that leaves a gap with nothing meeting the higher-tier needs (not nice to haves) in Maslow’s Hierarchy. In a recession, this gap is filled with Fear, Uncertainty, Panic, and Mental Paralysis. This is precisely where a recognition program can help you come to the rescue of employees’ psychic income needs among all of the pressures on core compensation.

And the returns for such an investment in recognition are proven. McKinsey published a study last year showing a $1,000 payment had a 10 times higher return on investment when it was given as recognition than when it was given as an increase in base pay. So that’s a 10 times higher return on investment through a recognition program. There was also another study by a UK firm, White Water Strategies, who found the impact of a 1% pay increase could be gained simply as the result of frequent appreciation.

Moreover, a meritocracy-based performance and reward culture is enhanced through such strategic recognition. Our client Biogen Idec, for example, sees recognition as a vital part of the company’s culture of meritocracy. Company leadership wanted a recognition program that would allow anyone to show colleagues appreciation for their contribution and hard work, believing such an effort would motivate employees to deliver the same kind of desired results on an ongoing basis for the benefit of colleagues, patients and shareholders. Globoforce delivered this with the Applause program.

One thing that should be clarified (and resolves many of the problems of linking reward to performance) is the “currency” used for reward. By their very nature, cash recognition (or bonuses) are a problem as cash quickly becomes an entitlement and is easily confused with (or subsumed by) compensation. If the goal is to recognize above and beyond efforts of employees then recognition with a different “currency” than the cash used in compensation must be applied. That’s where strategic recognition comes in — giving a different currency for recognition with clearly defined and oft-repeated reasons deserving of recognition — to ensure employees know when they are being PAID vs. being REWARDED.

Strategic recognition accomplishes these additional critical goals not fully possible through compensation:
• Telling employees how their efforts matter – how they are not just working for the company, but with it.
• Encouraging cooperation and teamwork
• Encouraging people to notice and acknowledge stellar efforts of their peers
• Offering a “360° review” performance mechanism
• Offering a means for constant feedback throughout the year
• Making the rate of reward equivalent to rate of effort, employee by employee

What’s the status of merit increases in your organization? Are you going forward? Limiting them? Eliminating them? What’s the reaction of employees? How are you counteracting any potential negative effects? Share your thoughts in comments.

Derek Irvine

About Derek Irvine

The VP of Client Strategy and Consulting at Globoforce, Derek Irvine is one of the world’s foremost experts on employee recognition and engagement, helping business leaders set a higher vision and ambition for their organizations. As a renowned speaker and co-author of "The Power of Thanks" and "Winning with a Culture of Recognition," he teaches companies how to use recognition to proactively manage company culture. Derek holds a B.Comm and Masters of Business Studies from the Smurfit Graduate Business School at University College Dublin.

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  1. […] But what about Levels  3, 4 & 5? Well, these are the engagement levels—the levels Maslow highlighted that make our lives worth living. They are also the levels that make our jobs worth having. (The “psychic income” that Derek Irvine talks about so often,). […]

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