Does Compensation Really Motivate Employee Performance?

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does compensation motivate employee behavior

Making sure that employees are properly motivated is one of the most common problems that a lot of companies face. Without a dedicated and motivated workforce, you will have problems reaching your goals. In effect, this will have a toll on your bottom line and that is the last thing that you would want as a business owner.

This is why it is very important you understand how your employees are motivated. You need to understand that you will not be able to motivate every employee you have in the same way. One common method of motivating employees is to compensate them properly or more than adequately. Proper compensation should be done in the first place regardless of any other fact but if you go a bit deeper you will understand compensation is a really important and complex topic. It requires due diligence on your behalf and that is the purpose of this article.

Let us take a look at how compensation can motivate employees in more detail. Read on to learn more.

How Compensation Motivates Employee Behavior

Ask yourself this question first, if you were an employee yourself, would you like to work for yourself without proper pay and compensation packages? The answer will be a resounding no! However, while research has been able to prove that compensation does have an effect on employee motivation and behavior, it is not the only variable in the equation.

First of all, you need to understand that top talent is in high demand right now. Therefore, the competition to get these people is really intense at the moment. Another challenge is, provided you do get to hire a model employee, retaining these top talents.

Proper compensation packages can go a long way when it comes to motivating employees. You need to understand what the demands of your specific employees are. After you understand the demand they have, you will be in a much better position to judge whether they deserved that amount of compensation or not. If they do deserve it, give it to them. If you think, after thorough consideration, that they don’t deserve the compensation they expect, you need to properly communicate the reasons to them.

Before we move on, it has to be mentioned that compensation is not the only thing that motivates employees. A lot of other factors will come into play. These include things like your work environment, the culture in action at your company, how much flexibility you provide, etc. So, while proper compensation is going to motivate employees, it is not the only factor that will determine their motivation levels.

How are Compensation & Benefits Related to Motivation

All great employers are aware of the fact that proper compensation packages will get you top talent. However, in order to retain them properly, you will also need to have attractive benefits packages.

When we talk about compensation, what we are referring to are wages, salaries, all kinds of bonuses, and a proper commission structure. Whether you like it or not, top talent knows their worth. In almost 100 percent of cases, they will not be happy to settle for anything less than they think they deserve. This will become even more true if there are other companies vying for their services.

Regardless of any other thing, do not try to take advantage of your employees. That will be the literal worst thing to do. If they somehow get to understand that they are being taken advantage of, things will not go well. Therefore, make sure that your employees are happy with their compensation packages. This will also make sure that they understand you are valuing them as your employees. This will have a very positive effect on both the morale of the workplace as a whole and it will also improve productivity.

Effects of Compensation on Employees

As we have previously mentioned, all types of compensation packages really have a very big impact on how well your employees are engaged. Proper compensation will give your employees the job satisfaction they want and need. It will also incentivize your employees to do better and get better results for the company.

If we take a look at the opposite of this, we will quickly see that improper compensation or low compensation packages have a really negative impact on those same employees. With all things being said and done, proper compensation packages will have very positive effects on your employees’ motivation levels. Let us take a look at how this happens. 

Job Satisfaction

When employees know and feel that they are being valued properly by their employers, they will have a true sense of satisfaction from their jobs. People appreciate it when their efforts are recognized and appreciated. A proper compensation package is one of the best ways to accomplish this.


As we have talked about earlier, top talent is in high demand. There will be other employers and other companies who may try to pry away your top talent with better compensation packages. So, in order to improve worker retention and to make sure you do not lose your best employees to your competitors, make sure that all your employees are under the compensation packages they deserve.

Prospective Recruitment 

Word of mouth is very powerful. When your existing employees will be properly satisfied with their individual compensation packages, they will be more than willing to express that gratitude publicly. They will tell their friends and family about how well your company is run and how well your employees are treated and compensated.

This will, in turn, entice other top talents to at least get curious about your company. This is one of the best ways to hire top talent.

Work Productivity

Finally, and most importantly, when your employees will feel like they are properly compensated, their overall performance and productivity will go up. This is the main point and the one that you need to pay the most attention to.

When productivity is up, you will notice several positives for your company. You will have a much more engaged workforce and this will ultimately, positively affect your bottom line. 

How to Maximize the Potential Benefits of Compensation

In order to make a compensation package both effective and attractive, you will first need to plan everything properly. Compensation planning used to be done on spreadsheets but this is really not the most effective way to do things. What they should do instead, is to make sure that they are utilizing compensation management software. This software should be integrated properly within your HR department. When done properly, managers will be able to:

  • Simplify all calculations
  • There won’t be any need for any kind of spreadsheets
  • Increased visibility and also better compliance from employees
  • You will be able to get much better support for decisions
  • It will minimize the expensive errors that can sometimes occur with spreadsheets

Is Money Enough to Motivate Employees?

As we have discussed before, motivating employees is a complicated matter. Of course, money will be able to motivate your employees but bear in mind that this is not the only variable that will account for their motivation levels.

There are certainly other factors that will also determine how motivated your employees are. This includes things like the culture of the company, the interpersonal relationships built with other colleagues, how much flexibility is on offer, etc. These factors are also important when it comes to motivating employees.

Final Words

Motivation is a complicated thing to understand properly. Not everyone functions in the same way and therefore, how each individual is motivated will depend completely on them. However, money is probably the most important thing when it comes to the motivation and productivity levels of your employees. Other factors matter but nowhere near as much.

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