Contrary to popular belief, employee incentives have limited positive effect on performance of employees or executives. According to Jeffrey Pfeffer and Robert Sutton in their must-read book, Hard Facts, Half-Truths and Total Nonsense: Profiting from Evidence-Based Management, “individual incentives and highly differentiated reward and recognition distributions make more sense when performance can be objectively assessed and when performance is mostly the result of individual effort rather than the product of interdependent activity.”

Pfeffer and Sutton make a strong case, based on solid research, that many executive management practices are based more on anecdotal evidence than on hard facts. They investigated management practices, compensation systems and strategic planning to answer the question: Are great leaders in control of their companies?

Does money motivate employees?

Based on a 2017 survey by the Society of Human Resource Management, 65% of employees indicated that respectful treatment (at all levels) was a very important contributor to their job satisfaction. This is in stark contrast to what most executives assume motivates their employees – incentive pay (bonuses, commissions, etc.).

In a meta-analysis published in 2012 by Harvard Business review, 15,000 individual reports and 92 studies were evaluated to answer the question: Does pay motivate employees? The answer: there is only 2% overlap between pay and job satisfaction levels. In another HBR study published in 2017, it was found that performance-based pay could actually decrease job satisfaction, organizational commitment, and trust in management in the long run.

Instead, employees are motivated by:

• More opportunities (27%)
• More career training (20%)
• Flexible job conditions (15%)

So, if incentive pay or performance-based pay isn’t the motivator that leaders thought it was… what should leaders be doing to increase motivation, productivity and employee retention?

What really motivates employees?

A highly regarded executive compensation consultant recently told me:

“With the exception of most sales people and a few executives with a focused mercenary mentality, you won’t get much, if any, ‘lift’ out of compensation — no matter how you structure it. Lift comes from great work to do, liking your boss, being treated with respect, knowing who you can trust, having pride in the company, having the ability to see a future for yourself, and other less traditionally ‘important’ things. It is through these that the 2-3x multiple pulls through (where the high performer delivers 2-3 times the results of an average performer). If the compensation system is faulty, it interferes (sometimes completely) with all the things that give lift (‘soft stuff’ in the minds of many CEOs and CFOs). Financial incentives do not drive company performance. They are necessary for a variety of reasons, but they are not the drivers.”

Other factors that drive performance, according to the consultant, include cost control and risk management. I would add enthusiastic, self-aware and self-confident (without being arrogant) leaders who are worth following, as well as innovation and quality products and services.

Pfeffer and Sutton, in their book, suggest that, “to obtain great employee motivation, instead of signaling people through lavish and contingent financial rewards that they are working mostly for the money, let them see and experience other benefits from their work, such as being part of a supportive community (people derive satisfaction from their social relationships in the workplace), doing work that helps benefit others and that their work enhances their reputation (e.g., working for Google has great career cache, or that they are working on life saving or enhancing technologies – not just selling sugar water). ”

An executive at Philips Medical Systems (client company of mine) put it succinctly: “You need to humanize corporate goals and objectives. Most employees aren’t motivated a bit by the goal of enhancing shareholder value.”

How corporations motivate their employees

Companies like Southwest Airlines, who talk about bringing people together, are good examples according to Pfeffer and Sutton. “Southwest’s low fares, which are possible only because of the low costs that come from a productive workforce, becomes not just some competitive strategy but something that enables customers to see their family and friends more often… DaVita, which runs kidney dialysis centers, shows pictures of its patients and has a video segment in which dialysis patients, their families, and work colleagues say, ‘Thank you DaVita,’ for keeping the person alive.”

The bottom line – Pfeffer and Sutton recommend that you focus on the celebration of the achievements and the spirit of camaraderie, rather than the money. Or as Alfie Kahn (noted compensation researcher) said, “Pay people well, pay them fairly and then do everything you can to make them forget about money.”