Compensation Focus

Using Compensation as a Springboard to Drive Employee Engagement
By Laurie Bienstock, Towers Watson

While compensation is necessary to attract and retain employees, it is not compensation alone that drives employee engagement. Rather, employers must build on a solid compensation foundation in order to influence the extent that employees will go the extra mile and put discretionary effort into their work — contributing more of their energy, creativity and passion on the job. This article presents a few key tips that will help with this effort.

Deliver the Basics
First and foremost, organizations must deliver the basics: internally equitable and externally competitive pay. Towers Watson research indicates employees who believe they are paid fairly compared with people in either their company or other companies are 4.5 times as likely to be highly engaged as people who do not believe they are paid fairly. This is especially important given that as the economy improves and job opportunities increase, a lack of competitive position can create disengagement among employees, which can lead to both unwanted turnover and trouble attracting critical-skill talent.

Note that although competitive compensation may mean different things to different businesses (or even different parts of the same company), it should be aligned with the organization’s compensation philosophy and labor trends within the industry. For example, an organization that competes for the majority of its talent in an industry where there is an adequate supply of labor may set its primary competitive compensation philosophy at the median of its defined competitive labor market. However, the same organization may have critical talent segments that are scarce in the market and difficult to retain. For this segment, it may set its compensation philosophy at the 75th percentile of its defined competitive labor market.

Tell Employees Where They Stand
Second, employers must ensure employees understand where they stand. How do employees know if they are paid competitively, either within or outside the organization? A strong performance management system and communication program are critical to creating alignment and understanding between employees and pay program outcomes. A well-developed performance management process can provide managers with the tools not only to deliver competitive base pay, but also to communicate one-on-one about how the pay (or pay increase) was determined, the relationship between employee pay and performance (either individual or organizational), and how the job fits within the organization overall.

Understanding where they stand and how pay decisions are made can increase employees’ line of sight, which is a key component of employee engagement. Towers Watson research shows that employees who indicate their company does a good job providing information on how pay is determined and that there is a clear link between pay and performance are 4.5 times as likely to be highly engaged as employees who do not.

Build On the Foundation
Once employers have built a strong foundation and established a positive relationship between pay and engagement, it is time to build on that foundation by providing intrinsic value and, if necessary, segmenting the workforce.

Providing Intrinsic Value
If employers add to the pay foundation elements that provide employees intrinsic value — activities that are rewarding in and of themselves and do not require compensation — employers have the opportunity to drive an engaged workforce. For example, many organizations have added programs that allow key employees to devote a portion of their time to research or innovation that is company-related. This empowers employees to follow their ideas and may also result in positive business results for the company. Other companies have created in-depth social responsibility programs that allow employees to give back to their communities as part of their work life.

Note that not all types of employees value the same types of intrinsic rewards. Organizations must understand the engagement drivers for their critical-skill employees and then design total rewards programs to ensure both the basic compensation as well as higher-order engagement factors are met for these employees. For example, employees in scientific fields often value the opportunity to conduct research or contribute to their profession through writing articles and presenting at conferences. It is important to ensure processes and workload allow the pursuit of these activities for those who wish to pursue them.

Segmenting the Workforce
In order to meet the needs of a range of employees, it may be necessary to segment the workforce or create different programs for different groups of employees. In fact, most U.S. companies have done this for years for their salesforces. Because of the direct relationship between business results and pay, it has been natural to segment this group.

Organizations should think about additional key talent groups as well, those that drive business success in other ways, perhaps through innovation or product development. Build a business case for these key talent segments and build a total rewards program that will drive engagement for these groups. It may mean increasing opportunities for pay growth for some career paths; developing specialized incentive or recognition plans for certain job categories; or developing specialized rotation, innovation, mentor or alternative work programs targeted at key populations. For example, increased opportunities for pay growth might entail higher competitive pay positioning and additional steps in a career path, resulting in faster promotional and pay progression opportunities for certain populations.

While compensation plays an important role in engagement, competitive and equitable base pay serve as a springboard to higher levels of engagement. As the job market picks up, it is the perfect time for employers to segment and align their total rewards packages with employee engagement drivers — the factors that drive intrinsic motivation for employees and those that will ultimately drive business success.

About the Author
Laurie Bienstock is the North America practice director, rewards, for Towers Watson in San Francisco. She can be reached at

Read the June 2011 edition of "Compensation Focus."

Contents © 2011 WorldatWork. No part of this article may be reproduced, excerpted or redistributed in any form without express written permission from WorldatWork.

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