Understanding the connection between productivity and pay

So you think more money is usually the best motivator for employees? Not necessarily.

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In the 1950s, ׳60s, and for part of the ׳70s, a great deal of work was done to understand the impact of compensation and productivity on the workplace. (Given the unionization and labor problems Apple, Google, and Amazon now face, it seems clear that those lessons might not have been part of executive training.) I spent a great deal of time on this subject in undergraduate and graduate school, and when running a compensation program at IBM. I also learned it is inadvisable to call the head of your division an idiot — even if he was fired a few months later when our revenues went from $750 million to $250 million while holding costs constant. I’ve learned to be more circumspect when talking to bosses. 

What follows are the rules I’ve learned about how compensation and productivity affect each other. 

Money doesn’t always motivate

Regardless of which expert you study, one constant is that money is a poor motivator. Overpayment, as often happens with CEOs, doesn’t result in more work, but taking money away from an employee can almost shut them down. So don’t muck with compensation unless people feel they are being underpaid.

Notice I said “feel” — because one way to really hit productivity is to let an employee believe they are being unfairly underpaid. This played out in a recent effort by Google to reduce salaries for employees who moved to lower cost regions. Workers feel they have a contract with the company to pay them for what they do. Their location doesn’t change the work they do, so why should their pay change? From the corporate perspective, there’s a false argument that any such cut is tied to lower need. Employers like Google often alter salaries by region, but they don’t explain their calculations when hiring. As a result, an employee believes their salary is connected to what they do, not where they do it.

This becomes a problem because at no time after hiring does a company look at living costs (they should) and adjust salaries dynamically for changes in employees’ financial situations. Once common, cost-of-living raises are increasingly rare. And changes in marital status and the birth of children, which can add significant costs to a household, don’t generally result in salary adjustments. So, a company that cuts pay when an employee reduces living costs — but doesn’t increase pay as costs rise — appears to be acting unfairly, because it is. 

Status can motivate, but be careful

At one place I worked we had a “President’s Club.” Top producers (and their spouses) would be rewarded with an all-expenses-paid trip at the end of the year, and the most status-driven would work incredible hours for that reward. One year after getting into the President’s Club, I worked hard to win again — only to find I was ineligible because I’d won the prior year. I was so upset I went from being a loyal employee to an ex-employee within weeks. 

I once saw a PR firm announce an “award” program that gave no guarantee any employee would win something if the company wasn’t doing well — pretty much eliminating any value the program might have offered. Awards can drive higher performance, but they create an informal contract between a company and its workers; any change to reduce the program later can undercut its positive effect. 

It’s better to do layoffs than pay cuts

One thing I’ve seen CEOs do over the years is trade off layoffs with salary cuts. The problem is that a lot of employees match their expenses to their income, so if you reduce income, they can rapidly fall into financial distress. Cuts spread the adverse impact across all employees, making it harder to reverse sliding revenue trends. Layoffs, on the other hand, affect only a set number of employees. Both, however, can damage trust between an employee and the company — especially if it seems that senior managers, and particularly the CEO, get a bonus, financial incentives or a reward for their actions. 

Layoffs cause other problems that can be exacerbated by awards to CEOs. At Gateway, one person who had been laid off became the buyer for Best Buy — and cut Gateway as a supplier to the retail chain. HP’s Carly Fiorina was famous for being well compensated for executing layoffs. When she ran for the US Senate in California, she lost — and the number of votes by which she lost almost exactly matched our estimate of the number of employees and families of voting age that had been laid off. The bottom line: the people you lay off can become a buyer, an analyst, a reporter, or a politician with an agenda to strike back. So, while layoffs might have fewer immediate effects on productivity than salary cuts, they come with other risks that are harder to measure and could lead to bigger problems later. 

The role of unions

When employees feel abused or mistreated, one way to seek recourse is unions. I’m not a fan of unions. I was trained in union busting, and one lesson that stuck with me over the years was from the great Borax strike in 1974. That strike showcased how far out of hand things can get when management and a union go to war. Both sides carried things too far, but this can happen when workers feel they’re being abused at scale.

Having worked with unions in the past, I’m aware they can lead to secondary problems. I’ve seen union reps require side payments and “gifts” in exchange for not filing unnecessary and necessary actions. (When I was in a union, my rep sold us out.) I do recognize that when management abuses employees, unions are the only way for them to restore balance though in some cases they have destroyed companies and industries. If they are too successful, a company can fail. At the moment, both Apple and Amazon are facing unionization pushes due to seemingly abusive behavior and a focus on the compensation of top executives.  (This week while I was writing this, a story broke that Amazon had a union organizer arrested for bringing food to employees; I expect that won’t end well for Amazon.) Apple employees are reported to be using Android phones to keep their unionization efforts secret, which will likely create concerns about the security of iPhones while highlighting extreme distrust for Apple management. 

The greatest resource?

Companies often say, “Employees are our greatest resource.” But too often companies fail to fully understand that statement and treat employees like easily replaced pieces of equipment. They aren’t. They’re people, and what motivates and demotivates them to work hard has a great deal to do with how they perceive their compensation and how their companies maintain trust.

If employees really are the greatest asset, then learning about the impact of compensation on their productivity, maintaining their trust, and not treating them as if they’re equipment will mean they have your back. This is something that leaders at Apple, Google, and especially Amazon, need to learn.

Oh, and a reminder for Facebook: happy employees are far less likely to become whistleblowers

Copyright © 2022 IDG Communications, Inc.

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