Incenting People Beyond the Money > Software Consortium

Data from McKinsey sheds light for business leaders to reconsider the combination of financial and nonfinancial incentives that will serve their companies best through and beyond the downturn. During times of uncertainty and stress, many senior leaders forget the importance of connecting with their staff. As the recovery starts, this is a well-timed reminder of how we can positively adapt to the fiscal constraints of the “new normal.”

 

In 2009, many companies responded to declining corporate revenues, sagging stock markets, and increasing scrutiny by regulators and shareholders with remuneration cuts of 15 percent or more. Most report that the information technology industry weathered the storm better than many industries when it came to job loss and salary cuts.

IT starting salaries dropped on average from 2 to 2.8% in 2010 compared to an increase of 3.7% in 2009 and 5.3% in 2008.

-- 2010 IT Salary Guide, published by Robert Haft Technology

Companies continue to struggle to reduce costs and balance short- and long-term performance while retaining and keeping staff motivated despite sagging morale, which is reported to be down as much as 50% in a recent McKinsey Quarterly survey.

The survey of over a thousand executives, managers and employees has some insights or reminders into what is important to people as a motivation and reward for their performance. The McKinsey survey finds three nonfinancial motivators—praise from immediate managers, leadership attention (i.e. one-on-one conversations), and a chance to lead projects or task forces—as no less or even more effective motivators than the three highest-rated financial incentives: cash bonuses, increased pay base, and stock or stock options. 

The top three nonfinancial motivators play crucial roles in making employees feel that their companies value them, take their well-being seriously, and strive to create opportunities for career growth. And these themes constantly recur in other studies on how to motivate and engage employees.

The study finds even though reliance on financial incentives fell over the past 12 months, many companies also curtailed their use of nonfinancial incentives too.

Why haven’t many organizations made more use of cost effective nonfinancial motivations at a time when cash is hard to find? McKinsey suggests that one reason may be that executives hesitate to challenge the traditional management wisdom: money is what really counts, even though they themselves may be equally influenced by other things.

Another reason is likely that nonfinancial motivators may require more time and commitment from senior managers. One interviewed HR director spoke of a tendency for leaders to “hide” in their offices—primarily reflecting uncertainty about the current situation and outlook. The lack of interaction between managers and their people, says McKinsey, creates a highly damaging void that saps employee engagement.

Some far-thinking companies are working to understand what motivates their employees and act on their findings. One global pharmaceutical company surveyed its employees and found in some countries employees valued the role of senior leadership, while in others social responsibility. The company is now increasing the weight of engagement metrics in its management scorecard so these are seen as core performance objectives. A biotech firm has reframed incentives by putting the focus on “recognition” rather than “reward” to inspire a more thoughtful discussion about what motivates people.

When another global company’s CEO was crafting strategy this year, he convened several focus groups of talented managers to generate ideas about how to create more value for the business.

One-on-one meetings are found to be hugely motivational and make people feel valued during difficult times. By contrast respondents rated large-scale communication events, such as the town hall meeting, as one of the least effective nonfinancial motivators, along with unpaid or partially paid leave, training programs, and flexible work arrangements.

The McKinsey survey found the chance to lead projects was only used by half of the companies with frequency, although it is an especially powerful way to inspire employees to make a strong contribution as they develop their leadership capabilities, which provides long term benefit to the organization.

With profitability returning to some business sectors, 28 percent of those surveyed say their companies plan to reinstitute financial incentives in the coming year. While these rewards have an important role to play, McKinsey suggests business leaders would do well to consider the lessons of the crisis and think broadly about the best ways to engage and inspire employees. A talent strategy that emphasizes the frequent use of right nonfinancial motivators would benefit most companies in bleak times and fair and, by acting now, companies and IT departments could exit the downturn stronger than they entered it.

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