Living Wage vs. Pay for Performance

Any readers unfamiliar with Maslow’s hierarchy of needs? At the bottom are the base, must-be-fulfilled-first needs of food, shelter, and safety. Then at the top are the higher order needs of belonging, esteem, and self-actualization. All are human needs, not wants. However, without the sense of security of knowing where your next meal is coming from and where you’ll lay your head at night, it’s much harder to achieve the higher-order needs.

Yet in some industries, especially those where labor is perceived as a cost and not an asset, more emphasis is put on incentives or bonus in a pay-for-performance model targeted to the higher order needs before fulfilling the base pay requirements for achieving the security of the foundational needs.

Walmart serves as an illuminating case in point. As this article illustrates, Walmart has moved away from its low-pay reputation to working to raise the minimum wage of its own workers (average for full-time employees now at $13.60 an hour), forcing rivals to improve minimum wage offerings, too.

Also, improving the lot of the worker has direct positive impact on the lot of the business. As the article points out:

“Paying workers more, and providing them with substantial benefits like healthcare and parental leave, attracts more applicants, and gives employers more choices when hiring. It also reduces turnover, which leads to more experienced employees with a greater investment in the health of the business. All of that pays off in a better customer experience, the critical component in whether shoppers return or seek out competitors…

“By raising wages, Walmart was able to start hiring — and, critically, retain — better employees. Longer-tenured staff bred more knowledgeable and helpful customer service. Meanwhile, training on new technology for inventory management sped the flow of merchandise from trucks to the sales floor. That led to fewer empty shelves, a better customer experience, and ultimately more sales at the registers.”

A living base-wage is foundational to any good compensation strategy. Once that’s accomplished, then layering on pay for performance approaches yields added benefit. To achieve the greatest benefit, however, these must be applied with careful consideration of human nature and psyche.

As Dan Ariely, the James B. Duke Professor of Psychology and Behavioral Economics at Duke University, points out in his extensive research (summarized in this TED book), poorly applied bonus schemes can result in demotivated employees and the consequent impacts on performance and results. He comments:

“There are many ways to kill trust and goodwill. The simplest is to pay people directly for their performance. … As the experiments on social norms show, my thanks, hug, and our family dinner would make all the difference in your feelings of current and future engagement. The bonus, however, would put a numerical value on something that wasn’t countable to begin with: your commitment. And while you might appreciate the cash, the next time I ask you to help me with a deadline, you will most likely ask ‘How much?’ ”

Does that mean we shouldn’t value the above-and-beyond contributions of others? Of course not. But we must be sure we strongly communicate how much we value the person delivering the contribution.

Sincere, personal, meaningful and appropriate praise, recognition, and, yes, rewards, are an important part of to express to employees their value and contributions. Perhaps it’s time we stop thinking in terms of “pay for performance” in favor of a more human approach of paying people appropriately so they feel secure and are able to contribute more with better effort, for which we then recognize and reward them above and beyond.

As Globoforce’s Vice President of Client Strategy and Consulting, Derek Irvine is an internationally minded management professional with over 20 years of experience helping global companies set a higher ambition for global strategic employee recognition, leading workshops, strategy meetings and industry sessions around the world.He is the co-author of “The Power of Thanks” and his articles on fostering and managing a culture of appreciation through strategic recognition have been published in Businessweek, Workspan and HR Management. Derek splits his time between Dublin and Boston. Follow Derek on Twitter at @DerekIrvine.

This post originally appeared on Compensation Cafe
Author: Derek Irvine