Often in our lives as consultants, we meet business and HR leadership teams who wax eloquence about the power of compensation in their firms. They strongly believe that booming India is different from other markets; money is more than a hygiene factor for employees. That is why, they join organizations, stick with them and even choose to leave due to money. I am sure all of us have heard of or even propagated stories of “that” employee who jumped ship for a small hike in pay. The stories have almost become urban legends in India and have though not universally but at a broad generalization shaped the way we think about employees and what it takes to get them to stick to organizations. In light of that, we at Aon started thinking if anyone can ever be truly satisfied with the amount of money that they make. We are sure if we asked any of you this question in public (or maybe in private as well) the answer would potentially be a sheepish grin. But, what if we were to ask you that for your employees, do you think your employees are as satisfied with the amount of money that they make. That’s where things turn a bit different, by and large our guess would be that you fundamentally believe that they are not, that as an organization you continuously need to invest in high single digit increases (alas going by our last Salary Increase Survey they aren’t double-digits anymore) to ensure employees continue to feel motivated to stay in your organization and more importantly perform to the desired expectations.
We found this to be an interesting proposition. Is money really a driving factor or is it the threat of not being paid more that is driving us to perform at work? More importantly, as consultants, we have for years come to you and showcased our “Four Box” of rewards frameworks. Do employees perceive that? Do they associate themselves with the model? Can you ever have a group of employees who are satisfied with the amount of money they make?
Wanting to be Proven Right
At Aon, we have built two large databases of employee information over the years. One is the compensation database which has employee compensation information of more than a thousand organizations. The other is our flagship study to understand employee perception and organization practice called the “Best Employers (BE) Study”. Fundamentally if you could look at how an employee’s satisfaction with pay changes as you increase their competitive positioning, you should be able to answer if money is what floats peoples’ boats.
To that extent, the BE study captures employee responses to a question which goes as follows: “I am paid fairly for the contributions I make to the organization’s success.” As you try to answer this question yourself, you will find that you tend to weigh your pay with the amount of work/responsibility you hold within your organization along with trying to figure out if you make more or less money than peers/friends who do similar jobs. So in effect it’s a good measure of both internal and external parity in an organization.
We took data from our BE and compensation database covering 48 organizations across industries and 69,225 respondents making this a statistically valid sample (assuming an organized private sector workforce of 10 million people). Using that data, we built a simple graph, where we plotted the percentile positioning of different employee groups across organizations along with their satisfaction with pay scores, and the graph looked like this:
What the graph above proves is that our urban legend is in fact not true. In India, satisfaction with pay is by and large only loosely correlated with their actual pay levels and more importantly, the increase in pay satisfaction you drive by moving ourselves from the 10th percentile of the market to the 90th percentile of the market trends between flat and negative.
While this adds credence to what we all know and believe is the gospel truth, what got us thinking was that we know from our databases there are organizations that do drive significantly higher satisfaction with pay than the industry average. What are they doing that the others aren’t?
Down the Rabbit Hole
Our engagement framework tends to measure employee perceptions on a host of enabling factors ranging from the physical infrastructure employees experience to their perception of their senior leadership team. We isolated the following factors to test if any of them have any bearing on an employee’s perception of whether they are being fairly paid for their contributions to the organizations success.
- Perception of the organization’s brand
- Perception of their career opportunities in the organization
- Perception of how collaborative the workplace is
- Perception of how much the organization values diversity and how inclusive a work environment it has
- Perception of the learning and development opportunities in the organization
- Perception on how fair the performance management system in the organization is
- Perception on the senior leadership of the organization
- Perception of how effective their supervisors are
- Perception of the kind of work they do
- Perception of the work-life balance they have
- Perception of the rewards and recognition programs that run in the organization
Isolating these factors, we ran a statistical tool called factor analysis to identify which of the above can impact an employee’s satisfaction with pay and how much influence does each of those parameters have. We built a multivariate regression model (the last technical term we use in this document, we promise!) to see if we can predict an employee’s satisfaction with pay. Here is what we found:
At an overall level, what impacts an employee’s perception of whether or not they are being paid
See something missing? The actual compensation did not impact the perception of whether employees were being fairly paid. What mattered more for them were the other 3 boxes of rewards rather than the cash box. For those of you who are statistically inclined, we achieved an adjusted R2 of 0.48 and a P value of <0.05. For those of you who aren’t, what we mean is that we achieved a model with low error rates and high predictability i.e. we were able to predict (by and large) how an employee’s perception of being fairly paid would move using the above 8 factors versus how it actually did.
Can’t Buy Me Love... Or Can You?
The absence of compensation as an attribute got us curious. The naysayers amongst us vehemently argued that as data was split into different management levels, we would see compensation playing a larger role at least at the bottom of the pyramid. Not ones to back off from a good argument, we decided to do just that. We ran the same set of tests on the data but now split it up into 3 groups, junior management (includes junior professionals as well), middle management and senior management and here is what we got.
At the junior management levels, what mattered was surprisingly, fixed pay still didn’t show up to be a relevant factor affecting pay satisfaction at the junior management levels.
But honestly, we can’t expect an organization to focus on all 8 things simultaneously to improve. Based on the data, if an organization were to try to increase pay satisfaction at the bottom of the pyramid using this model, it needs to focus on the 3 factors mentioned above. Buoyed on by this and always in search of a good debate, we looked at the middle managers, and what we saw mattered the most for them were as follows:
What makes the most difference to employees in middle management, top 3 areas where organizations should focus on are:
- Managing performance
- Having a capable line of managers above them
- Actual compensation
Similarly for senior management, what impacted satisfaction with pay were as follows.
But Wait... I’m Different, My People are Special...
There is no denying that every organization has a context and a circumstance in which it operates and the key drivers that will impact an employee’s satisfaction with pay could be different. In reality, they should change with time as you shore up some of the points that are made above. Fundamentally, business strategies should also impact how much importance employees put on compensation i.e. tribal knowledge will have you believe that in organizations that do R&D, innovation, etc. like the Googles of the world, employees don’t work for money because money is taken out of the equation, whereas if you were running a highly cost sensitive business and focusing on executing at a low cost, employees would inherently believe they are underpaid and would shift easily for money. If you have gotten this far in the article, one thing you will realize we love to do is to prove tribal knowledge wrong.
We classified each of the 48 odd organizations into one of three operating styles i.e. product innovation, customer centricity and operational excellence and ran the same tests that you saw above. Here is what we got:
1. Product innovation (Adjusted R2 of 0.52 and P value of <0.05) For organizations that focus on product innovation as a business strategy, what comes out as factors that drive pay satisfaction are as follows:
Interestingly fixed pay positioning had a negative weight in this model, suggesting that money in itself in the absence of the other parameters would drive an employee’s satisfaction with compensation down.
2. Customer centricity (Adjusted R2 of 0.65 and P value of <0.05): For organizations that build their competitive differentiation on customer centricity, the factors that affected an employee’s perception of being paid fairly for their contribution were as follows:
In environments where you are putting an employee’s compensation under large variation linking it to the success of the customer, compensation starts playing a key role, but interestingly, along with that the allied environment becomes critical in their perception of being fairly paid. In terms of what the top 3 levers are which can be pulled to impact satisfaction with pay, they were employer brand, collaboration and performance management.
3. Operational excellence (Adjusted R2 of 0.53 and P value of <0.05): In this case, we assumed compensation had to matter, but what came out as factors that impact satisfaction with pay were as follows:
This may appear counter intuitive but consider this, in an environment where budgets are constrained, performance management outcomes significantly determines the budgetary allocations. In terms of the factors that had the highest impact on employee’s satisfaction with pay were performance management, senior leadership and supervisors.
I Get Your Fancy Math But What Are You Really Trying to Say
One thing is clear, across the Board, across management levels, the things that have the highest impact on an employees perception of being fairly paid are less qualitative parameters like the quality of work employees get, the collaborative environment they work in and how much they value their interactions with their managers and leaders. There are many common themes that emerge from the data which forces us to rethink how we deliver “rewards to employees”. There may not be a magic bullet, but there are at least some probable answers.
It is uncomfortable for consultants not to have the correct answer. We are brought up to always have an answer and our clients expect that of us. But here we have a few questions instead.
1. What portion of your operating costs do you spend on things like building a compelling employee value proposition, manager capability, robust performance management systems, fulfilling talent internally? A fair guess would be that it is less than the spend on salary increases. It is important to get a sense of what your employees want, not in terms of the tactical elements like car allowance and insurance but what they really want.
2. Once you know that, how do you increase your spending on the other lever of rewards outside cash to improve their efficacy?
3. What will give you a better return on investment, investing in cash or investing in the experience? Our sense is the experience.
4. Will this journey of moving away from investing all budgets into compensation increase towards a more holistic budget allocation model across different facets of an employee lifecycle be easy? Our sense unfortunately on this is no, it requires tremendous change management not with the employees but with managers, leaders and more importantly, with ourselves. Throwing money at the problem is so much simpler.
We are all too used to pumping money into the system because we believe that it will drive talent outcomes. Our employees in a sense, we think have matured more than we have in HR. While they are looking for a holistic experience with the organization, we tend to solution their problems with silos. The learning teams, OD teams, HR business partners will have to come together with the rewards teams to ensure you are not just delivering compensation to an employee but truly rewarding them. That is when you will see your employee’s satisfaction with pay start to move up. Throwing money at the problem just won't help anymore.
Aon Hewitt Consulting
Aon Hewitt Consulting
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