Setting the right levels of compensation: A balancing act

Compensation and motivation are two of the most thoroughly discussed topics in business literature. Years of study have focused on questions that seem obvious: does more money mean employees are more satisfied with their work or — counter-intuitive as it may be to ask — with their pay? According to Harvard Business Review and a meta-study in the Journal for Vocational Behavior that reviewed 120 years of research and synthesized findings from 92 quantitative studies, the answer is…not really.

If higher compensation alone is not what motivates staff (and de-motivates if handled improperly), what can leaders do to keep a firm’s workforce performing at high levels?

Before firm leaders rejoice at the idea of shrinking payroll, they must understand the role that compensation plays in attracting, retaining and motivating talent. Offering competitive compensation is essential for retention and financial incentives play an important role in motivation programs that include both extrinsic (external) and intrinsic (internal) rewards. The key is balancing the two.

Setting the right level of compensation is itself about balancing the needs of individuals and the firm. Dr. Tomas Chamorro-Premuzic of University College London, writing for Harvard Business Review, articulates the danger in sub-par compensation: “The more people focus on their salaries, the less they will focus on satisfying their intellectual curiosity, learning new skills, or having fun, and those are the very things that make people perform best.”

In order to be sustainable, the cost of base pay should stay within a preferred  budgetary range. Dave Zimmerman, a Principal at Greenway Group who was a partner at NBBJ and chief financial officer at Perkins+Will, recommends a rule-of-thumb guideline of 45-48 percent of net service revenue, and for all payroll benefits, a range of 15-17 percent (for a total of 60-65 percent when payroll benefits are included).

Once they have set a competitive level of compensation, firm leaders must work on the much more complex and subjective task of fostering intrinsic motivation in their staff. In a recent HBR blog post, Harvard professor Rosabeth Moss Kanter summarized the keys to strong work motivation in three Ms:

1. Mastery: helping people develop deep skills

2. Membership: creating community by honoring individuality

3. Meaning: repeating and reinforcing a larger purpose

Clearly, the challenge of using Kanter’s “3Ms” model comes in implementation. The 3Ms demand that a firm invests in developing its people (Mastery), maintains a healthy and supportive culture (Membership), and lives a strong and well-defined mission (Meaning).

Unfortunately, there are no shortcuts. But leaders who care about building stronger firms will invest the time and resources to create the programs, culture, and direction that will ensure they attract and retain the best talent in the profession.

Bob Fisher is a contributing editor to DesignIntelligence.