Chapter 17
 Show Me the Money!

In This Chapter

• The value of money as a motivator
• Setting the compensation scales
• Incentive pay for the team
• Those “little extras” that make people happy

Everybody wants to get paid. Money buys us the necessities of life, and more money enables us to buy added comfort and enjoyment. But does money motivate people to stretch their efforts to accomplish more on the job?

The answer is “yes and no.” In this chapter we’ll look at the value of money as a motivator. We’ll examine plans to tie money more closely to productivity. We’ll also explore the many extras or perks companies offer to make employees happy campers.

Does Money Motivate?

A team of behavioral scientists led by Frederick Herzberg studied what people want from their jobs and classified the results into two categories:

• Satisfiers (also called maintenance factors): Factors people require from a job in order to expend even minimum effort in that job. These factors include working conditions, money, and benefits. After employees are satisfied, however, just giving them more of the same factors doesn’t motivate them to work harder. What most people consider motivators are really just satisfiers.
• Motivators: Factors that stimulate people to put out more energy, effort, and enthusiasm in their job.

To see how this concept works on the job, suppose that you work in a facility in which lighting is poor, ventilation is inadequate, and space is tight. The result: low productivity.

A few months later the company moves to a new site with excellent lighting and air-conditioning and lots of space—productivity shoots up.

The company interprets this as a solution to its productivity problems. Managers assume that by improving working conditions, workers will produce more. They decide to make the working conditions even better. They paint the walls a cheerful color; they place potted plants around the facility; they install Muzak. The employees are delighted. It’s a pleasure to work in these surroundings—but productivity doesn’t increase at all.

Why not? People seek a level of satisfaction in their job—in this case, reasonably good working conditions. When the working environment was made acceptable, employees were satisfied, and it showed up in their productivity. After the conditions met their level of satisfaction, however, adding enhancements didn’t motivate them.

Money: A Satisfier, Not a Motivator

Money, like working conditions, is a satisfier. It’s generally been assumed that offering more money generates higher productivity. And it works—for many people, but not for everyone. Incentive programs, in which people are given an opportunity to earn more money by producing more, are part of many company compensation plans. Why should they work for some people, but not for others?

Let’s look at one company’s sales department. Salespeople usually work on a commission, or incentive basis. If salespeople want to earn more money, all they have to do is work harder or smarter and make as much money as they want. Therefore, all salespeople are very rich. Right? Wrong!

How come? Sales managers wonder about this. They say, “We have an excellent incentive program, and the money is there for our sales staff. All they have to do is reach out—but many of them don’t. Why not?”

Psychologists note that most people set a personal salary level, consciously or subconsciously, at which they are satisfied. Until that point is reached, money does motivate them, but once reached, no more. This level varies significantly from person to person.

Some people set this point very high, and money is a major motivator to them. They “knock themselves out” to keep making more money.

Others are content at lower levels. It doesn’t mean that they don’t want an annual raise or bonus, but if obtaining the extra money requires special effort or inconvenience, you can forget it. Other things are more important to them than money.

By learning as much as you can about your associates, you learn about their interests, goals, and lifestyles, and the level of income at which they’re satisfied. It is futile to offer the opportunity to make more money as an incentive to people who don’t care about money. You have to find some other ways to motivate them.

Different Needs at Different Times

Team members vary in what motivates each of them, and what motivates a member may change from time to time.

For 20 years, Tony, a production worker in a plastics plant, did his job satisfactorily and met his quotas. Despite an excellent incentive plan for higher productivity, Tony never made an effort to earn those production bonuses. He was satisfied with his base pay and annual raises.

Two years ago, Tony’s productivity suddenly began to jump. He earned production bonuses every quarter and even asked for added training to enable him to earn even more. What happened? Tony was planning to retire in a few years. His company pension is based on the amount he earned in the last five years. By earning this extra money, not only could he save money for the travel he and his wife planned after he retired, but it would ensure a higher retirement income.

The opposite also occurs. Estelle looked for every opportunity to earn extra income. For years, she’d ask for overtime work; she’d fight to win every production bonus. Her goal was to send her son through college. After he graduated and was off on his own, Estelle no longer felt the incentive to earn more, and it was reflected in her work.

The Basis of Base Pay

Most compensation programs determine how much an employee should be paid by considering the skill level of the job as determined by a job analysis and comparison with similar jobs in the industry and community. From these salary surveys a range is established. The amount paid to individuals performing the same job varies depending on experience, length of service in the company, and raises based on the performance review.

Pay for a Team Leader

When a person is promoted to a higher level position, pay is raised accordingly. Team leaders will get higher salaries than team members. Their bosses will get more pay, and the CEO will get the highest salary.

As teams become more and more collaborative, the leader becomes less of a manager and more the “first among equals.” Under these conditions, how should the team leader be compensated? Is it equitable to pay leaders more when their work is much the same as associates’? In the future, as teams become more and more a part of the corporate culture, the base pay of team leaders will be only slightly more than team members’ to accommodate the additional administrative details they perform. The real financial rewards will be based on team productivity.

Pay for a Team Member

As noted, base pay is determined by the skills of the jobs involved and the market value or going rate of a job. If there is a shortage of qualified personnel, salaries will be higher; if there is a surplus, base pay may be lower.

In most companies, employees are reviewed annually and, unless their performance is unsatisfactory, they will usually receive an increase. In many organizations every employee gets at least a cost-of-living increase or an annual raise just for still being on the payroll.

This is changing. New trends in compensation programs are developing. Here are some of these developments:

• Rank will not determine pay; contribution and performance are becoming the primary bases for compensation. The sales rep who brings in the most business may be paid more than his boss, the sales manager; the engineer who develops a viable patent may receive a higher bonus than the chief engineer.
• Increases in base salary will be reduced. With inflation more or less stabilized, cost-of-living increases have become minimal.
• Pay for performance plans are replacing fixed salary increments. Workers who contribute to the company’s productivity and bottom line will be rewarded. Marginal and average employees will be given minimal increases or none at all.
• Lump sum merit bonuses are gaining in popularity. Instead of raising salary, companies are paying production bonuses. Because bonuses are not part of salary, they do not become the basis on which benefits and future salary adjustments are based.

Because team members will be paid bonuses based on the team’s performance, more productive workers will be penalized because of their marginally productive associates. This can lead to discord in the team. Peer pressure from the high producers on the low producers often brings up productivity, but team leaders will have to work hard to keep the team working effectively to build and maintain high performance.

When compensation is performance-based, and some team members pull down the productivity of the team, the high priority of the team leader is to help marginal workers boost their productivity, and if that fails, remove them from the team.

Incentive Pay Plans

Since the earliest part of the Industrial Revolution, companies have used financial incentives as part of their compensation programs. In many companies all compensation was based on “piecework.” It was assumed that people would work harder and faster if they received a direct reward for production. This system was carried forward into the period of “scientific management.” Frederic Taylor, the founder of this new movement, and his followers believed that people could be motivated by wages based on productivity and developed variations of the “piecework” pay system to achieve their goals.

In an economy that is moving rapidly away from mass production and manufacturing-based businesses to custom-engineered production and service-type industries, pay per piece has little value. New types of incentive programs have had to be developed. This section looks at some old and new incentive pay plans.

Pay by the Amount Produced

Wages based solely on the number of units produced was the primary pay plan in some industries. The harder you worked, the more money you received. In the early days of scientific management, speed of production was the primary factor in determining wages, and this method worked well. Abuse in the piecework system, however, was rampant. Often, when workers mastered their work and produced more than quotas required, companies raised the quota or reduced the price paid per piece to keep their overall costs down. This practice led to demotivation, in which workers set their own top limits and would only do a fixed amount of work.

I saw how this system worked during the summers of my college years, when I worked in a factory that used this type of program. Because I was young and energetic and wanted to make money to pay my college expenses, I quickly mastered the work and soon exceeded my quota. One of my coworkers pulled me aside and said, “Hey, you’re working too fast. You’re making it bad for the rest of us.” His implication was that if I didn’t slow down, he would break my arm.

This, of course, defeated the purpose of the incentive program. As work became more complex, paying by the piece was no longer practical. Because of pressure from unions and, later, minimum wage laws, hourly rates replaced piecework rates in most industries.

In the age of “scientific management” (the 1920s and 1930s), a variation of piecework was introduced. Quotas were established based on time and motion studies, and people who exceeded quotas received extra pay. These types of programs still exist and, properly designed and administered, succeed in motivating some people.

Although in some compensation systems, team members are rewarded on the basis of their individual production, additional bonuses may be given if the team as a whole exceeds production quotas. This gives each member incentive to produce more and at the same time help the team meet its goals.

It doesn’t always work. One of my clients, the Sweet Sixteen Cosmetics Company, used this combined incentive system for its packers. Some sharp operators figured out that their personal production bonus would be higher if, instead of helping the slower members improve, they concentrated their efforts on personal productivity. The team bonus would be less or even nonexistent, but they would earn incentives.

To correct this, I redesigned the program so that time spent in helping other team members was factored into the incentive plan. The result was a significant increase in total team productivity and even higher bonuses for the better workers.

Profit Sharing

Many companies have instituted profit sharing plans as an incentive to their employees. These are plans in which a portion of the profits the company earns is distributed to its employees. Many of these plans are informal. The executive committee or board of directors sets aside at the end of the fiscal year a certain portion of profits to be distributed among employees. Other, more formal plans follow a formula established for that purpose.

In many organizations, only managerial employees are included in a profit sharing plan; in others, all employees who have been with a the company for at least a certain number of years are also included; in still others, the entire work force gets a piece of the profits. Some profit-sharing plans are mandated by union contracts.

A number of profit sharing programs are based on employee stock ownership. In addition to the stock options discussed in the next section, various types of stock-ownership plans are used. Some companies give shares of stock as bonuses or encourage employees to purchase shares.

A growing variation is the employee stock ownership plan or ESOP, whereby employees own so much of the stock that they virtually own the company. Having an ownership stake in the company should be a great incentive. As stockholders, they share in profits by receiving dividends. The higher the profits, the higher their dividends. Alas, it doesn’t always work that way. Factors outside the control of employees often affect stock prices and dividends, and as the share of the company owned by each employee is very small, they have no real input in running the organization. ESOPs work well when things are going well, but are of little value when stocks are down.

Stock Options

In an economy where more and more teams work in jobs in which performance cannot be measured by production figures, other types of incentive plans must be developed.

Stock option programs provide opportunity for employees to benefit from an increase in the value of the company’s stock. Employees are given “rights” to purchase the stock at a price that is lower than the market price. Let’s say the stock is currently selling for $25 per share.

Options are issued enabling employees to buy the stock at $22 per share. If they exercise the options immediately, they make a $3 per share profit. However, the incentive is to keep the options until the stock rises in value. A year later, the stock is selling at $40 per share. They can still purchase it at $22 and sell it immediately for a profit of $18. In the exploding Internet business, exercising stock options has made millionaires of many employees.

The incentive is to help the company grow through its efforts, and this will result in higher stock prices. The downside is that stock price doesn’t necessarily reflect the company’s profitability. Other market factors may influence it. If the stock falls below the option price, the rights are worthless.

Until recently, stock options were not offered to lower-level employees. They were chiefly a major part of executives’ compensation packages. Over the past few years, particularly in start-up firms, stock options have been a force in attracting and retaining needed technical personnel.

Management by Objective (MBO)

Management by objective is used in many companies as both a management tool and an incentive program. Although there are many variations, the basic idea is that managers and associates determine together the objectives and results expected for a specific period. After a time period is agreed upon, associates work with minimum supervision to achieve the specified goals. At the end of the period, the manager and the associates compare what has been accomplished with the objectives that have been set. In some organizations, bonuses are awarded for meeting or exceeding expectations.

When a company is organized on a team basis, MBO is extended to the team. Rather than individual objectives, team objectives are set by the team leader and the entire team, and the team works collaboratively to meet these objectives. Results are measured against expectations at the end of the period, and the entire team shares the rewards or bonuses.

Special Awards for Special Achievements

Another type of incentive compensation is recognition and extra pay for special achievements of teams and individual members. One example is that of the Footloose Shoe Store chain, which instituted campaigns periodically to emphasize various aspects of its work. One campaign, for example, centered on increasing sales of “add-ons” (accessories for customers who have just purchased shoes at a store). The campaign, which lasted four weeks, began with rallies at a banquet hall in each region in which the chain operated. Staff members from all the stores in the region assembled in a party atmosphere, where food, balloons, door prizes, and music set the mood as the program was kicked off.

Each store was designated as a team. Footloose announced that prizes would be awarded, including $2,000 to be divided among all the team members (both sales and support people) of the winning team. The salesclerk who made the most personal add-on sales in the region would receive $500, and the sales clerk who made the most add-on sales in each store would receive $100. The campaign was reinforced by weekly reports on the standings of each team and each salesclerk.

The result was not only a significant increase in accessory sales for that period, but an increase in regular shoe sales, attributed to the excitement and enthusiasm generated by the campaign. Another party was held to present awards and recognize winners. Footloose runs three or four campaigns every year.

Xerox is another company that adds financial reward to recognition. To encourage team participation, special bonuses are given to teams that contribute ideas that lead to gains in production, quality, cost savings, or profits.

Other examples of team incentives come from companies that have instituted total quality management (TQM) programs. Special emphasis is placed on providing high quality products or services to customers. The objective is reinforced by offering financial rewards based on reducing the number of product rejects, gaining measurable improvements in quality, and increasing customer satisfaction.

Perks

In many companies, employees have been given perks—those little extras that may not seem like much, but they often are significant additions to the traditional compensation package.

The Perk Buffet

Company perks vary. Here are some of the more commonly provided perks:

• Company cars. Cars are leased for executives, salespeople, and sometimes other staff members.
• Memberships in professional associations. To encourage technical and specialized personnel to keep up with the state of the art in their fields, the company will pay their dues for appropriate associations.
• Subscriptions to professional and technical journals. Offered for the same reason as memberships in associations.
• Membership in social clubs. Because much business is conducted on the golf course or over a meal, for years many companies have paid the enrollment fees and annual dues for country clubs and dining clubs for executives and sales representatives. In recent years such memberships have been extended to other employees as an added incentive.
• Subsidized lunchrooms. I recently had lunch in the cafeteria of a large insurance company. My bill for a salad, entree, coffee, and dessert was less than half of what I normally pay at a restaurant. This is a great savings for employees.
• Coffee and snacks. Many companies provide a never-empty coffeepot for employees. Often the company offers free doughnuts, bagels, or sweet rolls at break time.
• Child care. With the great number of families where both parents are working, child care is a major problem. Some companies have child care facilities right on the premises or arrange for child care at nearby facilities and subsidize the cost.
• Transportation. Vans or buses are made available to employees to bring them to and from work. It’s cheaper for the employees to use the company’s transportation than to take public transportation or drive one’s own car. Some companies will take employees to and from the nearest railroad station or bus depot at no cost to them.
• Tuition. Companies often pick up the entire bill for courses taken by employees—even if not specific to their job training. If the company doesn’t pay in full, it may pay a portion of the cost of education.
• Scholarships. Some companies provide funds for college scholarships for children of employees.
• Flextime. A very effective perk is giving team members control over their own time. Some companies have company-wide flexible hours, but others allow team leaders to set the hours for their teams. For example, if the team is facing a lot of pressure to complete a project, don’t insist that all members be on the job from 9 to 5. Some team members may be more productive if they can work at home for a few hours before reporting to the office. Others may want to complete work away from the office during the day. Others may do their best work in the evening. Letting each member set time schedules for the project gives that person control over his or her hours and usually pays off in higher productivity.

Now let’s look at some of the less common perks that companies give:

• Birthday celebrations. There are a few companies that give employees a day off on their birthday. That’s a nice gesture, but it can disrupt team production. Many more companies celebrate the birthday on the job—at a break, lunch, or after work—with a mini-party: cake (no candles, age is confidential), soft drinks, and a little fun. When teams are relatively small, the whole team may go out together after work for a little party.
• Pets at work. Bringing pets to the office can be very distracting, especially if they get restless. However, some companies permit employees to bring the dog or cat to work if they are kept under control. One company sets aside one day each week as “pet day” for employees who wish to take advantage of it.
• Casual dress days. Offices have always been formal places. Men wore suits and ties; women wore conservative outfits. Today many companies—particularly in the high-tech fields—have no dress code. Employees can wear whatever they feel comfortable in—except perhaps beachwear or “indelicate” attire. However, most offices still have traditional dress codes, modified somewhat. Sports jackets and slacks are okay for men and blouse-skirt outfits or slacks for women. To appease and attract the younger generation, companies have instituted casual dress days, usually Fridays, in which men can replace business suits with open-necked sports shirts and slacks and women can wear sporty outfits.
• Exercise rooms. With so many people engaging in regular exercise routines, many large firms have built complete gymnasiums for use of employees. Smaller organizations, of course, have neither the space nor funds for a gym, but an exercise room with a stationary bike, a treadmill, or other equipment for use by employees is feasible.
• Recreation rooms. To give employees a chance to relax after work, during breaks, or at lunch, some organizations have recreation rooms. In an article in the Wall Street Journal, one firm reported that it provided a billiard table and ping pong table; another beanbag chairs; another a Velcro wall at which employees throw sticky toys.

Team leaders can create their own perks for team members. They need not be time consuming or expensive. All it takes is a little creativity. You may not be able to set up an exercise room or recreation room, but I bet you could incorporate some form of exercise or recreation into your team activity. Why don’t you and your team have a brainstorming session to generate ideas for special “team perks” to make your team environment even better than it is now? See the following guide to team perks:

Perks vs. Cash

Why do perks work as motivators? Why not give the employees cash bonuses and let them purchase or lease their own car, pay their own dues to the country club, or buy what they wish?

Companies have found that most employees like receiving perks. If they did get a cash equivalent, they would probably use it to pay bills or fritter it away. Perks keep reminding them that the company is giving them something. Every time they step into the company car, it reinforces their loyalty to the company. Every time they pass the day care bill to the accounting department, they thank the company for taking that burden off them. The company can benefit as well because it can save money by taking advantage of group rates in leasing cars and purchasing merchandise.

In addition, many perks attract hard-to-find personnel to the company. Marilyn, a skilled operating room nurse, chose to work for South Shore Hospital because it provided a day care facility for her three-year-old son. Ken accepted a slightly lower salary at his new company because he was allowed to bring his dog to work. Sean isn’t looking to change jobs because he loves the golf club for which his organization pays his dues.

Do perks give incentive for higher productivity? There are no studies showing that perks motivate productivity, but companies believe that the loyalty and stability perks engender contribute in the long run to the bottom line.

Perks should not be confused with benefits. Benefits such as pensions, health care, and life insurance are part of the compensation package. Today almost all large companies provide these standard benefits. Perks usually are add-ons to make life more pleasant for employees.

Teams That Play Together Stay Together

One way to develop team spirit is to engage in recreational activities as a team. Bowling leagues, softball teams, and other sports activities are frequently sponsored by companies. If team members enter these programs as a team, it could add a little fun to the job and cement the relationship among team members.

Carrie was not much of an athlete, and when her team entered the relay race at the company picnic, she was afraid she would do badly, embarrass herself, and lose the respect of her teammates. She confided her worries to her colleague, Beverly, the informal leader, who reassured her that her teammates would help her. Before the picnic, the team practiced running and gave Carrie some tips on improving her techniques. When her turn came to run, the team cheered her on, and she did fine.

Recreational programs need not be formal. It’s not necessary or even advisable for team members to spend all of their free time together. But, occasional parties or attendance at a sports event or concert helps the members know each other as total humans, not just coworkers.

Sandy, a team leader, invited his team each year to a Christmas party and a summer barbecue. The team members looked forward to these events, and Sandy attributed the very low turnover in his team to the personal rapport that was built and reinforced by these parties and other recreational activities in which the team as a group participated.

The Least You Need to Know

• Satisfiers are factors people must have from the job in order to produce at least minimum work. Motivators are factors that stimulate people to perform over and above the call of duty.
• Money is a satisfier. It’s generally been assumed that offering more money generates higher productivity. And it works—for most people, but not for everyone.
• Learn as much as you can about your associates’ personal life style. Offering the opportunity to make more money as an incentive to people who don’t care about it is futile.
• Most compensation programs determine how much an employee should be paid by considering the skill level of the job as determined by a job analysis and comparison with similar jobs in the industry and community.
• As teams become more and more a part of the corporate culture, the base pay of team leaders will be only slightly more than that of team members. The real financial rewards will be based on team productivity.
• Although in some compensation systems team members are rewarded on the basis of their individual production, additional bonuses may be given if the team as a whole exceeds production quotas.
• Profit-sharing (ESOPs) and stock option programs are effective incentives that are growing in popularity.
• Companies have found that most employees like receiving perks. Perks keep reminding them that the company is giving them something.