Nuala Walsh is CEO MindEquity, a behavioral scientist and TEDx speaker, with advisory boards in business, sports and nonprofits.
It is difficult to understand employees these days. Thanks to the modern gig-based economy and the Great Resignation movement, the traditional employer-employee relationship has radically changed. Activist workers are more likely to protest publicly. And picky candidates are more prone to spirit possible employers.
No wonder many companies are struggling. But in response, I find that too many people still rely on money to solve their retention problems. It is a fundamental flaw if the psychological contract between employer and employee has been completely redefined, and it is no longer just about money.
Incentives are a plaster
The traditional approach to motivating performance revolves around financial incentives. It’s understandable, especially with rising inflation and job pressures. Several signals point to money as a quick fix. Sara Rynes of the University of Iowa found incentives improved performance by 42% and productivity by 49%. A recent study found that: 73% of employees consider leaving their current job for a better offer.
Even larger consultancy and analysis firms seem to be advocating the power of monetary incentives. McKinsey notes that a one-time investment of $50 million can generate $1 billion in recurring value beyond its usual performance. And according to Gallup, money is now the critical factor when considering a new job, zooming in on first place at 64% since 2015. Work-life balance is in close second place with 61%.
During my career, I have noticed that most employees compete for bonuses with a disproportionate number of achievements at the end of the year. Yet many are dissatisfied with their compensation. High-paid executives tend to seek industry recognition and award more than a nominal raise. Spot bonuses are the second most common form of variable pay, according to PayScale.
Ultimately financial incentives can backfire. Money usually drives short-term compliance rather than sustained performance. High-paying investment banks like Société Générale and Barings learned too late how competitive money-oriented cultures reinforce trader misconduct and cause scandal.
While extrinsic incentives will always motivate a particular population, they cannot be used to drive retention, satisfaction, or performance, especially in the long run.
Moreover, four decades of research show that linking money to performance can hinder intrinsic motivation and job satisfaction. In an experimental game, Stanford’s Mark Lepper found that motivation diminished when achievement was rewarded financially. The participants stopped playing. Why? It became like work. The obligation to perform drowned out all pleasure. The reward was more attractive than the task.
Incentives can no longer be seen in isolation from culture, values and beliefs. Values have continued to evolve after the pandemic. Research suggests: UK consumers now rate financial success and material gains as less important than before.
It’s not just the socially conscious and eco-friendly millennial that has changed. Most modern workers demand more autonomy, freedom of expression, flexible working conditions and psychological safety.
People invest a lot in relationships in the workplace. A positive relationship increases satisfaction, performance, loyalty and identification. A break with a company or perceived disappointment can be more devastating than a romantic one.
Employees may feel betrayed when they perceive unfair recognition, inadequate terms, or tolerated misconduct. The result is conflict and mistrust, which affects productivity. For the employer, the solution after letting these feelings fester is expensive, time-consuming and reputational.
There are significant challenges. For example, the expectations of employees and employers about work-life balance are often disconnected. Many companies struggle to find the right balance.
Retention is a urgent leadership priority. Innovative companies call non-financial incentives in the war for talent, offering free time for volunteering, experience rewards, congratulation cards and peer recognition programs. Mediation is taking place in a new contract form.
A new psychological contract
The new psychological contract will vary by organization, but must include dimensions of well-being and social justice. Most employees expect targeted CEOs to speak out authentically against injustice.
Pressure from activists influenced Disney’s decision to support an open education bill. As a result, Governor Ron DeSantis revoked their self-governing status. Bee Coinbase and Netflix, workers rioted when they felt management did not support freedom of expression, equality and inclusion. Facebooks whistleblower made public about unethical behavior.
Well-being goes beyond profit sharing and salary increases. The best retention strategies focus on practical issues with retirement, savings, childcare, and debt. Take savings, which is a common cause of stress for employees. Simply automating savings can take some of the pain away. For example the opt-in 401k Save more tomorrow program increased participation from 3.5% to 13.6% by deducting an agreed allocation from the monthly salary. The result is better employee financial and mental health. It takes a more people-centric approach to reach this new type of employee – and it doesn’t cost much.
Five Behavioral Strategies for Drafting a New Contract
Managers can navigate this complex workplace by using a variety of behaviorally informed strategies:
1. Personalize. Understand employee aspirations, history and motivations. One employee may feel hurt by a 10% pay increase, while another is happy. Do not reject advice on modernization.
2. Empathize. Ensure interaction around career development, workload sharing and work-life balance. Understand the hidden causes of relational fractures and enable corrective action.
3. Optimize. Don’t assume that employees will hear your message. Communication can be biased and misinterpreted, making it challenging to spot dissatisfaction in time.
4. Determine strategy. Optimize long-term retention by recognizing conflicting agendas between employees and employers. Harness the power of people analytics to track sentiment shifts.
5. Inspire achievements. Excitement, recognition and enthusiasm are motivating forces. A Workforce Institute study indicates: 87% of employees feel included in a culture of recognition. So grow it.
Psychological contracts are the foundation of every relationship. It is not a tool for solving problems, but for mutual understanding. In world-class companies, employees and employers can work toward a common goal while recognizing divergent interests.
Money will always be a short-term band-aid. It won’t buy loyalty, but it can give managers time to gain a deeper understanding of employee expectations in a rapidly changing workplace. Be human. Ultimately, people remember what you do for them and how you make them feel — not what you give them.