Whether you’re a business owner hiring employees for your small business or an agency manager adding rock star employees to your team, you might think that the best motivator for the people you hire is more money. You’re not alone.

Many companies pay their employees based on performance. This can take the shape of bonuses when a milestone is hit, gain or profit sharing which offers cash when the company sees profits increase, or skills-based rewards when employees attend yearly trainings.

If your employees are compensated based on performance, their pay might be leading to higher levels of stress and decreased feelings of job satisfaction. New research suggests that certain types of incentive-based pay have a detrimental effect on workers.

Since 4 out of 10 U.S. employees will look for a new job this year, it’s in your best interest to retain great talent and keep everyone happy. You can start by reviewing your employees’ compensation packages.

• What is Performance-Based Pay?
• Is a Performance-based Pay System a Good Motivator for Employees?
• Is Performance-based Pay an Incentive for Employees?
• Why Performance-based Reward is Beneficial?
• Is a Pay Increase a Good Motivator?
• Why is Pay for Performance Such a Powerful Motivator?
• What is the Purpose of Performance-based Pay?
• Types of Performance Pay
• How to Incentivize your Employees Without Offering Them More Money
• Does Pay for Performance Affect Employee Behavior?
• Is Money the Most Effective Motivator for Employees?

What is Performance-Based Pay?

Performance-based pay plans involve compensating employees for a specific outcome or work that goes above and beyond the typical call of duty. When designing a performance-based compensation system, common criteria include:

• Job category
• Length of service
• Job classification
• The goal of the incentive
• What the payout will consist of (e.g., bonus, stock, or cash)

There is a lot to consider when deciding whether to implement a performance-based pay structure.

This pay structure ensures that only the top-performing employees survive. Many businesses say it’s a great way to improve employee performance.

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However, people in careers that use this payment structure don’t necessarily make more money. The U.S. Bureau of Labor Statistics shows that retail sales workers make only $24,340 per year on average. Real estate and advertising sales agents average twice that amount, which is less impressive when you consider that a house costs around $200,000 and a Super Bowl ad costs $5.6 million.

The commissions on these sales are few and far between, split up among a large sales force. In short, performance-based pay is great when both the company and employee are performing well, but it’s a double-edged sword.

Is a Performance-based Pay System a Good Motivator for Employees?

To help us better decide on whether the the performance based pay system is a good motivator, let’s consider some of the pros and cons.

Pros

There are many benefits of performance-based pay, recognizing those delivering the highest results to your company. Employees feel appreciated when their work is valued, but sometimes words of affirmation and encouragement only go so far. Instead, offering monetary recognition can result in higher rewards for your high-performing employees and the organization as a whole.

Identify Areas for Improvement

By implementing a performance-based pay system, your company can quickly identify top-performing employees. You can also hone in on workers who may not be contributing as much to the company. Putting a quantifiable amount on an employee’s contributions can help you determine the reasons for varying performance levels.

Low-performance factors can include an ineffective training process, lack of accountability, and miscommunication from superiors about job expectations. Companies that use performance-based pay can identify areas in which their businesses can improve. Offering pay increases based on performance allows you to focus on individuals that need more guidance and strategize on change.

Another way to identify areas of improvement is to incorporate performance appraisals into your merit-based compensation plan. Performance appraisals may be conducted yearly, semi-annually, or even quarterly. They provide a valuable opportunity to discuss individual performance with your employees and create a customized growth plan. As the individual achieves their performance goals, the program monetarily rewards the employee.

Increase Retention

Performance-based pay models help employers differentiate between top and low performing employees. When top performers are paid a higher compensation rate and recognized for their performance, they are more inclined to remain with their organization. Employees on a compensation plan based on performance are more driven to reach goals and earn the extra money.

A performance-based compensation plan encourages more valuable contributors to continue their best work because they are paid fairly for their efforts. These workers are also more likely to become your biggest brand ambassadors and attract other qualified employees to your organization.

Better Recruiting

When companies can identify those employees who perform better, they can improve their recruiting processes. Instead of vetting and hiring employees who might not contribute to the organization, they can use data on their top performers to hire candidates with similar attributes, goals, and personalities.

This assessment process can save companies time and money by hiring top candidates from the start. Streamlining the recruiting process with more consistent hiring of people who are the right fit will also decrease turnover costs.

Cons

There are many benefits to performance-based compensation models once you identify potential areas for improvement. However, there are also potential disadvantages to consider when weighing performance-based pay pros and cons.

A Blurred Line

Unfortunately, it’s incredibly challenging to accurately and proportionally pay employees using this system. There is often a blurred line between job role expectations and levels of compensation. If you do not outline compensation and performance metrics precisely, there could be confusion and miscommunication about company expectations to reach compensation goals.

This confusion can lead to disgruntled and discouraged employees who are not receiving the pay they expected. Additionally, a blanket policy that encompasses your organization’s working departments is likely an inadequate one since work significantly differs company-wide.

Use tools that allow you to determine the appropriate compensation employees are entitled to based on experience, tenure, and education level. From there, you can decide what type of performance-based compensation structure might work for your employees.

Misalignment of Goals

For those employees who are top performers and receive additional compensation for their work, there is the possibility they could eventually reach a cap on their possible earnings. When employees are motivated solely by the incentive to receive a higher wage, this could become their only focus – forgetting about your organization’s goals.

In this situation, company missions, goals, and culture might be negatively affected by those whose contributions truly impact results. That’s why it’s essential to develop a performance-based compensation system that aligns with your organizations’ goals. This alignment ensures that everyone is working towards the same objectives and rewarded for meeting benchmarks.

The Threat of Dissolving Profits

Sometimes, companies use performance-based compensation to motivate employees without fully understanding the potential issues that could result. Weighing the pros and cons of performance-based compensation requires thorough research to evaluate fair pay for certain compensation levels.

Often, the allure of increased income incentivizes higher performance, which is all good and well. However, companies may lack a plan for when the cost begins to outweigh the benefits. If the promise of extra compensation causes your employees more stress and impacts their productivity, you may experience the law of diminishing returns.

That’s why it’s crucial to ensure a balance between the amount of work expected and the additional compensation. If the performance-based incentive is too small, it won’t motivate your staff to work harder. If it’s too large, the company’s profits could take a hit.

Is Performance-based Pay an Incentive for Employees?

Performance-based compensation rewards an investment manager or an employee for meeting certain performance targets or for high-quality work. For investment managers, it provides incentives to make smart and risk-appropriate investment choices that result in an appreciation of invested assets. This allows them a percentage of the returns in addition to the managerial fees they charge.

For employees, performance-based compensation is a reward for their hard work and acts as an acknowledgment of their contribution to the firm as well as functioning as an incentive to stay with the company. Most employee bonuses are performance-based compensation.

The Investment Company Act of 1940 governs the mutual fund industry and sets certain requirements that have helped to shape the compensation standards for portfolio managers. Investment companies must have a board of directors that approves the compensation schedule of managers.

Companies must also file a registration statement including a prospectus and statement of additional information, clearly and transparently outlining all the information on the fund including compensation.

Standards and documentation for publicly traded funds are generally expected to be consistent across the industry for easy comparison by investors. This consistency has also generally led to standardized fees charged by mutual fund managers as part of the fund’s total annual operating expenses.

Mutual fund portfolio management fees can range from 0.50% to 2.50% with active fund managers requiring higher compensation. Portfolio management fees typically comprise the majority of a mutual fund’s total annual operating expenses. Across the industry, mutual fund managers can also receive performance-based fees. These fees are detailed in their registration statement documentation and approved by the board of directors.

Hedge Fund Manager Performance-Based Compensation

Across the investment industry, hedge fund managers are more broadly known for their performance-based fees. Hedge funds are much less regulated than traditional mutual funds and therefore have greater latitude for fee schedule structuring.

They also typically employ more complex strategies that they develop, with the goal of offering higher returns than mutual funds, which they justify as a reason for higher performance-based compensation.

Hedge fund managers will typically charge a “two and twenty” fee schedule requiring higher management fees than mutual funds from their investors. The two and twenty hedge fund fee structure indicates a flat 2% fee as well as a 20% performance fee.

The 2% fee is based on the fund’s assets under management (AUM). The 20% fee is performance-based compensation that is typically triggered when performance outperforms a benchmark by a specified amount. The 20% fee is paid to the hedge fund manager from the fund’s profits.

Employee Performance-Based Compensation

Employees earn a traditional salary but performance-based compensation seeks to reward them for their high performance above their job requirements. Performance-based compensation is most often awarded as a year-end bonus, though bonuses throughout the year are possible.

Another common performance-based compensation is the awarding of stock options. An employee is given the option to purchase a company’s stock at a discount when the price of the stock is above the exercise price. For example, shares of the company could be trading at $100 and the employee is given the option to buy at $90.

Performance-based compensation at companies is meant to motivate employees to work harder as they will reap the rewards of its success.

Why Performance-based Reward is Beneficial?

Performance pay offers a variety of benefits. One of the major advantages of performance-based pay is that it gives employees more reason to work hard and perform better. When an employee knows that he can be compensated more, he is willing to put more time and effort into his job.

When you are paid on salary, you can only be motivated by that amount of money for so long. With performance-based competition, employees work harder and it ultimately rewards the company as well. Potential employees may be more likely to choose a company that offers monetary incentives in exchange for their good work performance, and therefore potentially higher salaries.

Also, management enjoys better employee performance and employee engagement. As long as there is a fair and effective performance review system that is accurately aligned with local salary levels, employees will strive to work hard. Executives will enjoy increased revenue and working capital.

Management can use performance pay systems to transition model employees into supervisors. HR administrators can use performance pay to attract potential job applicants and improve employee retention. In the beginning, turnover rates may be slightly higher as low performers leave, but qualified and motivated employees will remain.

From compensation management point of view, performance management systems help in achieving following critical goals:

• It helps in recognizing the efforts and contributions of employees objectively and thereby facilitates in effective job pricing, both through cost optimization and rewarding of talented performers.
• It facilitates in suitable compensation design, rewarding employees based on the performance linkage.
• It supports employee motivation (which leads to increased performance), helping employees to receive their performance feedback, understanding their strengths and weaknesses. Employees can develop themselves through self-introspection and thereby feel intrinsically motivated.

Is a Pay Increase a Good Motivator?

Most people’s motivation to work is not driven solely by how much money they make. On the other hand, raises do often motivate employees; however, the way raises are issued often impacts their ability to motivate employees. Other factors, some of which do not relate to money, also have an impact on their effectiveness.

Raises can be an effective motivator for employees; however, employees must recognize that raises represent a reward for excellent work. There must be a direct connection between superior performance and higher pay. Employees must also have sufficient autonomy over their work so that their efforts can make a significant impact on their performance. The size of the raise may also have an impact. Awarding hourly employees a few more cents per hour is unlikely to generate significant motivation for increased effort.

The effectiveness of raises and bonuses to motivate employee performance is often short-lived, according to “Entrepreneur” magazine. After a few short months, the positive impact of a raise can fade, which also reduces the effect a raise has on employee motivation. On the other hand, more frequent rewards, such as paid time off or gifts, even if they are inexpensive, may be an effective means of motivating employee performance, especially when they are closely associated with positive behavior or good work by employees.

Merit raises may or may not be an effective means of motivating employees. On the one hand, employees who work diligently often resent the fact that workers who loaf on the job receive the same pay.

However, so-called merit raises are ineffective in motivating employees if they are actually automatically awarded to all employees or if employee salaries are barely enough to allow workers to make ends meet. In the latter case, workers are often resentful if they receive less than the maximum in merit raises, Cooperative Grocer states.

Employees who believe that they have opportunities for advancement within the company as well as the chance to develop their skills are often motivated to perform well. Posting internal job openings indicates to employees that there is an avenue for promotion from within the company.

Offering benefits such as tuition reimbursement and training programs, in addition to raises, can provide avenues to motivate their workers. During tough economic times, gestures that demonstrate to employees that their efforts are valued can boost morale, even in the absence of raises.

Why is Pay for Performance Such a Powerful Motivator?

Keeping a motivated workforce is key to the success of any small business owner, but figuring out how to do that is not always as easy as it seems at first glance. There are advantages of using money to motivate employees, but it needs to be executed properly and at the right time.

Many leaders use financial means to motivate employees who are already satisfied with their jobs. Happy employees often find that a welcome pay increase contributes to their overall sense of security and purpose within the company.

Pay for performance is one of the first things many small business owners think of when it comes to financial motivation. Under this model of financial motivation, employees are rewarded with higher salary or bonuses according to certain performance measures.

For instance, an appliance store might reward high-performing sales associates with a larger quarterly bonus. Or an engineer might receive a higher salary when a certain number of jobs are submitted in a timely fashion, with a low error rate.

Benefits of Paying for Performance

While utilizing a pay for performance model in health care or education can sometimes be controversial, it often makes good sense in a business environment. Some advantages of using money to motivate employees in this way include:

• Greater sense of employee empowerment
• Increased business revenue, leading to increased employee pay
• Higher productivity levels
• Decreased turnover, with greater job satisfaction
• Surging positive culture, based on achievement
• Better recruiting opportunities

If your workforce believes your success equals a bigger paycheck – and increased financial security for them and their families – they might be more likely to work efficiently and produce results.

What is the Purpose of Performance-based Pay?

A pay-for-performance plan, or performance-related pay plan, refers to company programs that pay employees based on how well they do at work. Often, companies that use this plan have clear guidelines for behaviours or performance evaluation results that increase pay. For example, employees must reach a sales goal or a particular score on a performance evaluation to receive an additional payment.

There are two standard performance-based compensation plans, merit pay increases and variable pay increases. Companies often use a combination of the two. If you’re thinking about implementing a performance compensation plan at your company, it’s best to consider these two options:

Merit pay increases

A merit pay increase plan is when an employee’s base pay increases due to their high work performance. With this pay plan, employees go through annual evaluations and may receive a base pay increase the following year. Merit pay increase rewards top employees for their contributions to the company.

Variable pay increases

A variable pay increase plan is when a company pays discretionary or non-discretionary bonuses to employees who meet or surpass company standards. Employees typically earn discretionary bonuses for excellent work performance.

Employees can gain non-discretionary bonuses to employees for reaching a predetermined goal, and teams, branches, or entire branches of the company may be eligible to receive them. Non-discretionary bonuses are either long-term incentives or short-term incentives, based on the evaluation period. Here are some examples of both bonus types:

Discretionary bonus types

Some examples of discretionary bonus types include:

• Project bonuses: reward employees for finishing a project. You can view this as a completion bonus.
• Retention bonuses: reward employees for staying with the company for an extended amount of time. Companies often award retention bonuses to avoid talented employees leaving the company.
• Spot bonuses: reward employees immediately or “on the spot.” These bonuses reward achievements even though they were not expecting a reward.

Non-discretionary bonus types

Some examples of non-discretionary bonus types include:

• Attendance bonuses: reward employees for not missing work due to illness for a determined amount of days. These bonuses encourage attendance at work.
• Hiring bonuses: reward new hires for signing a contract with the company. These bonuses entice desirable candidates to accept a job offer.
• Production bonuses: reward individuals or teams for reaching a set goal for production. Production bonuses motivate employees to work hard to achieve production goals.

Types of Performance Pay

There are two general categories of pay-for-performance compensation: merit pay increases and variable pay programs. As you look to implement a pay-for-performance program in your organization, you can use either of these two types of pay-for-performance plans – or both – to incentivize employee performance and drive your desired outcomes.

Merit Pay Increases 

A merit pay increase refers to an increase to an employee’s base pay due to high performance. These raises are typically delivered an annual basis, and are budgeted for as part of the annual salary increase budgeting process. Merit pay increases are the most commonly used pay-for-performance model for recognition of employee performance, as they deferentially reward top performers for their contributions with a bump to their base salary for the following year.

However, according to Chris Fusco, the Senior Vice President of Compensation at Salary.com, the external market is progressing in pay faster than merit pay increases alone can match. This makes top performers in your organization a flight risk, because they could potentially walk out the door just to take a job that offers more competitive pay.

Addressing Market Movement with Pay-for-Performance Programs 

In this competitive environment, many organizations are turning to variable pay programs to keep top recruits’ and top performers’ pay competitive with the market. Whereas salary increase budgets have remained flat at 3% for the last several years, data from Salary.com’s Pay Practices and Compensation Strategy Survey shows that many firms are adding budget to their variable pay programs.

According to our survey, the percentage of organizations committing at least 10% of their payroll budget towards non-discretionary bonuses and discretionary bonuses has more than doubled since 2017, while the percentage of organizations committing less than 3% of their total payroll budget to such programs has diminished over time.

Proportion of Payroll Budget Allocated to Variable Pay

Clearly, the organizations that offer variable pay programs have seen performance boosts because of these incentives, and are now beginning to allocate a larger proportion of their budget to them each year.

Variable Pay Programs

Variable pay programs encompass a variety of discretionary and non-discretionary bonuses that can vary according to the payout period, the employees who are eligible, and the metrics that employees are measured against. Unlike merit pay increases, variable pay programs are increasingly administered not just annually but multiple times a year (e.g., once a quarter) and a mix of different variable pay programs are often used in combination to achieve the desired results.

Discretionary bonuses are awarded on an ad-hoc basis to employees who demonstrate exceptional performance, often without consideration of pre-defined goals and objectives. Some common discretionary bonus types are:

• Spot bonuses – Reward employees “on the spot” for achievements that deserve special recognition.
   
• Project bonuses – Reward employees for completion or superior completion of a specific project.
   
• Retention bonuses – Typically awarded to long-tenured employees, or employees in hot jobs, to decrease their flight risk.

Nondiscretionary bonuses are awarded when employees, teams, or the entire organization meets specific, pre-defined goals and objectives. Based on the duration of the assessment period (the amount of time over which performance is measured), they are considered either short-term incentives (STI) or long-term incentives (LTI). Some common nondiscretionary bonus types include:

• Company-wide bonuses – these focus around specific improvement goals for the organization, and reward employees based on how much improvement is made on these goals within a certain period of time.
   
• Team-incentive bonuses – these focus around specific improvement goals for one team (e.g., marketing or sales) and are rewarded based on performance for that team.
   
• Individual incentive bonuses – these plans are often based on predetermined, measurable business objectives (MBOs) that are evaluated periodically (e.g., each quarter) based on one person’s performance

Of all the variable performance bonus types, individual incentive pay plans were the most popular, used by 53% of participants in a survey. An organization’s pay-for-performance compensation strategy will likely include a combination of merit increases and short-term incentive plans.

Hiring bonuses and referral bonuses, while not tied pay for performance, were the most widely used form of bonus compensation in our survey. These bonuses are designed to attract and hire strong candidates, and are especially popular in today’s tight recruiting market.

How to Incentivize your Employees Without Offering Them More Money

Increased Vacation Days or Sabbaticals

Everyone loves vacation and a time to unplug and recharge, yet most companies only offer two weeks of paid vacation a year. If your employees are motivated by time-off with their families and travel (because who isn’t, really), then offer the opportunity for them to earn an extra week or two of vacation a year based on their performance.

Offer Internal Recognition and Rewards

Create a system that publicly rewards your top-performing employees. When someone feels recognized for their hard work, this can go a long way in motivating them to work hard and perform their best. It can also motivate others to achieve those top rewards in the future.

Schedule Workplace Retreats

Even if you can’t offer additional PTO, planning a short workplace retreat for your employees can feel like a vacation; plus it works double to create team building and bonding among your team. Even something simple like renting a cabin in the woods for everyone to spend the weekend, and creating group meals or playing games can be a great incentive that will have employees saying, “Man, I work at a great company.”

Increased Workplace Perks

If your employees are incentivized to work hard by great perks, this can work wonders for employee morale. Offer company lunches, game time, motivational speakers, movie days or anything that makes it feel like you’re a “cool” place to work rather than a place that will work them to the bone.

When employees feel happy about their workplace and want to come in every day into a well-designed office with places to hang out and relax during their work day, they’ll likely be more motivated to perform well so they don’t have to leave and find another job somewhere with fewer perks.

Remember, offering other incentives like this doesn’t mean you can underpay your employees. But if you offer competitive financial compensation packages plus these incentives, then your employees might feel like they have a great workplace to walk into, a work-life balance and a recognition program that makes them feel like an important part of the team. All of these will go a long way in keeping employees motivated to work hard for you, rather than feeling like you’re overworking them for more cash.

Whatever you do, have an open conversation with your employees on how their compensation packages are working for them, and if it’s motivating them to bring their best every day. It’s very difficult to find and retain great employees, so don’t be afraid to shift your perks and benefits to avoid losing great people.

Does Pay for Performance Affect Employee Behavior?

A worker is more likely to perform to his potential if he’s happy with the salary he is earning. A person earning a high salary feels motivated to do a good job, because he wants to please his employer to retain his position. His salary brings him a feeling of security, allows him to feel accomplished and gives him a high status ranking that he enjoys. A person is much more willing to put in extra hours at the office if he feels his financial rewards are a fair trade-off.

According to Zeynep Ton, a professor at the MIT Sloan School of Management, interviewed by the Atlantic, research has shown that an employee satisfied with his pay is more productive and motivated, although pay is not the only factor.

The advantages of a high salary can often be eclipsed by performance-based pay. Using a performance-based pay strategy can provide a worker with extra motivation to do his job to the very best of his ability. This can be an effective way to align a worker’s incentive to earn additional monetary bonuses with the goals of the company.

If he knows he will receive extra money when achieving a target set by his supervisor, it’s likely he’ll do everything in his power to exceed expectations. Writing for Inc., CEO Michael Alter notes that an incentive program can increase employee productivity and create a sense of shared responsibility among the team.

While the pay-for-performance model can create advantages for your employees and the overall company, it may come with some disadvantages. Understanding these potential outcomes can help you determine if such a compensation method is a good fit for your business. Some possible criticisms of pay-for-performance policies include the following:

Affects teamwork

If employees strive to meet objectives based on their performances as individuals, they may focus less on being a teammate to fellow employees. For example, they might concentrate solely on improving their own skills or productivity rather than assisting a struggling colleague.

In some situations, the ability of one employee to fulfill their tasks may rely on the performance of another employee. Conflicts may arise if employees feel that not everyone contributes equal effort. However, they may feel better knowing that those who contribute more receive additional payment.

When setting objectives, you may want to include team-based measures into your performance evaluations to highlight their importance. This tactic can help maintain a high level of collaboration and ensure that employees see the value in helping one another achieve goals. While you want to establish cooperation among your employees, remember that healthy competition can still be a great motivator for them.

Puts focus on the quantity of work

When determining the objectives to tie pay raises to, it may be easier to use quantifiable measures. For example, you might tell employees that they need to make a certain number of sales during the quarter to receive the bonus. However, this may lead employees to focus more on the quantity of work they contribute rather than the quality of that work.

To help avoid this, you can explain to employees that you also expect a high level of quality along with meeting the goals. Set these quality standards at the same time as your quantity goals to ensure they work toward all your expectations.

Leaves possibility of subjectivity

In a pay-for-performance model, the compensation relies on the performance reviews received by employees. As a manager, you can objectively rate whether employees met quantifiable measures or goals. However, less quantifiable skills or values such as communication, creativity or teamwork may be more subjective.

Let employees know that there may be some subjectivity in their performance reviews, so they know what to expect from their reviewers. You can also determine how to weigh these measures with the more objective ones to ensure more balanced evaluations.

Makes changes more difficult

Once you implement this program, employees who enjoy the benefits will get used to having them. As a result, making changes to or ending the program can become more complicated. If you need to make such decisions, carefully consider the impacts that potential changes could have on employees, and clearly explain your reasoning to them. Even if they feel disappointed, establishing open and honest communication can help maintain trust in your relationship.

If you decide to start a pay-for-performance program, consider having trial periods to test what payment amounts or goals work best for productivity. By testing out the program first, you potentially avoid having to make changes later.

Highlights potential deficiencies

While evaluating the performance of your employees, you may notice that some do not meet certain expectations because they do not have sufficient training, knowledge or experience. Therefore, you may need to implement additional training or resources to provide everyone with the same set of skills or abilities.

While that may add costs, it can also further improve the productivity of your team by ensuring everyone has the qualifications needed to achieve your goals. Before using the pay-for-performance model, you may want to assess the abilities of your employees to make sure you can use a fair evaluation system.

Is Money the Most Effective Motivator for Employees?

Managers have dangled merit increases, bonuses and other financial incentives in front of their employees in the belief that the pursuit of money would result in greater productivity, reduced turnover, improved product quality, better customer service and even lower rates of absenteeism.

If money is such a great motivator, why are so many companies still plagued by low productivity, high turnover, plummeting quality, disappointing customer service and high absenteeism despite the monetary carrots they have dangled before their employees?

The answer is simple: money is not the best motivator for most employees.

In an ideal world, managers would know all employees well enough to accurately predict what they need. In companies with more than one or two employees, however, it is highly unlikely that the level of mutual trust and openness will be sufficient for this to occur.

This does not mean that it is impossible to find the right motivations, however. For all of their differences, humans share many common needs and desires.

1. People want to feel that their work is appreciated

Behavioral economist Dan Ariely has conducted numerous studies on motivation. In one study:

• He gave participants a piece of paper containing random letters and instructed them to find letter pairs.
• The amount of money decreased with every round.
• The first group had to sign their sheets and give them to the experiment leader, who would look over the sheet before placing it in a pile.
• The second group did not sign their sheets, and the experimenter did not look over their sheets before placing them in a pile.
• The third group’s work was immediately shredded.
• The third group wanted twice as much money to continue as the first group, and the second group wanted almost as much as the third group.

The SHL study also found that having their work appreciated was a great motivator. Approximately 17 percent of the respondents stated that having the company acknowledge their work inspired them to work harder.

Recognizing an employee’s performance can be a powerful motivator. A sincere compliment would work best, but even an acknowledgment of the employee’s efforts is better than silence.

2. People want to see the fruits of their labor

In another study, Ariely had participants build Lego characters.

• The pay declined for every character built after the first one.
• In the first group, the creations were placed under the table to await disassembly when the experiment ended.
• In the second group, the creations were disassembled immediately and in front of the participants.
• On average, the first group completed an average of 11 creations before quitting, but the second group only averaged seven.

Although the participants knew that their creations would be disassembled eventually, seeing the fruits of their labor for a short time substantially improved their productivity. It gave them tangible proof that their work had meaning.

3. People want autonomy

A study led by Greg A. Chung-Yan of the University of Windsor found that the amount of freedom that employees have to handle a job their way can significantly impact their performance. Although there are some jobs that require strict compliance with a particular method or approvals at every stage, many tasks can be completed in a variety of ways. Allowing employees to choose the method that is most efficient for them can be an effective motivator.

Read Also: Gender Impact on Business Strategies for Top Performance

Employees who can use their own skill sets and creativity to succeed are being motivated from within. Their success is directly tied to their own initiative and talent, allowing them to have greater pride in the results.

4. People want to be challenged

In the SHL study, 22 percent of the respondents stated that wanted to take on more responsibility. In another study conducted by Dan Ariely:

• He provided participants the materials to build their first origami product.
• The first group received instructions, making their work easier and their products prettier.
• At the end, the builders were asked how much they would pay for the product, and the same question was posed to a group who had only observed.
• The builders in the first group stated they would pay five times as much as the amount stated by the observers.
• However, the second group valued their products even more highly than the first group even though the observers considered them less valuable.

The more difficult it is to perform a task, the more pride people feel when they accomplish the task. Employees tend to tie the value of their work to the effort they expended. Limiting employees to simple, easily mastered tasks can rob them of their motivation to contribute to the company and make them feel unappreciated.

5. People want to feel a sense of belonging.

A sense of belonging can come from being a member of a team, contributing to the well-being of others or being a good fit for the company culture.

In the SHL study, the motivation cited by most respondents — 26 percent — was the support of colleagues and workplace culture.

Adam Grant, a researcher, author and professor at Wharton College, found that the sense of belonging can extend to a desire to help others. In a study he conducted:

• He placed signs at a hospital’s hand-washing stations.
• Half of the signs reminded nurses and doctors that hand hygiene protected them from catching diseases,
• and the other half reminded them that hand hygiene protected their patients from catching diseases.
• After measuring the amount of hand sanitizer and soap used at each station, he found that 45 percent more was used at the stations referring to patients.

In the Gallup study, employees who did not feel connected to the company’s mission or its leadership were more likely to quit than those who felt connected.

Relationships in the workplace can be powerful motivators. Whether the actions manifest as not wanting to let others down or a desire to do their part for the greater good, a sense of belonging increases the employee’s happiness.