Executive Compensation and Employee Motivation

Posted by SRA Admin on Nov 23 2015


Executive compensation can be an integral part of employee motivation. Since the financial crisis in 2008, it seems as though more and more CEOs are taking pay cuts, whether they are voluntary or not. During the recession, many researchers found that such pay cuts could help prevent some high-risk decisions. This finding led many companies in the U.S. to cut salaries for their executives; 373 companies to be exact.

Since then, these cuts in executive compensation packages have been used as motivation for employees. For example, many companies have chosen to incorporate these involuntary pay cuts when the companies are failing thrive at their optimum levels. These salary decreases are used to motivate the CEOs. They are intended to light a fire under them and boost their productivity. If they are successful in doing this after a pay cut, then they can earn back their higher pay. Since many CEOs in America have inflated salaries as it is, it is important to see what effects this kind of action can have on these individuals, and more specifically, their psyches.

Voluntary and Involuntary Pay Cuts

The two kinds of pay cuts can create very different outcomes. If there is a voluntary pay cut, it can result in positive results across the board. The CEO is happy because they did it on their own. The employees that work under the CEO are also happy because it levels the playing field and makes the CEO more relatable. Often, the reason why the CEO voluntarily takes a pay cut is because they want to be able to pay their workers more or show them more respect. It happens more often than you think and in April of this year, Dan Price of Gravity Payments did just that. He isn't the only one who volunteered a pay cut this year for his workers. GE chief, Jeff Immelt, denied a performance bonus because he wanted to show loyalty and support to his employees during a time of reconstruction. These kinds of pay cuts can have very positive outcomes but when you create an involuntary pay cut, you can create a world of hurt for your company. 

When a CEO is made to take a pay cut, it could cause trouble in the company. Not only will the CEO be upset if there is not a viable reason, but the employees may think that since a pay cut was given to the executive, it may be coming for them next. In fact, a new tactic that companies are using to keep employees is to cut pay instead of cutting jobs. While in theory this seems like a better alternative to getting rid of employees, over time, it can have a negative impact. Motivation is tough to rebuild when the reason for a pay cut is because there is not enough money. Unfortunately, several companies have been forced to enact this practice, including FedEx, The New York Times, and Hewlett-Packard.

Psychology Behind Motivation

As far as psychology is concerned, there are certain tactics that can be used to encourage or discourage behaviors. This is called operant conditioning. Basically, it consists of enticing people to act a certain way by either giving them something or taking it away. However, when a company chooses negative reinforcement through pay cuts, it could be doing more harm than good. For example, these pay cuts can be seen as punishment which causes a negative reaction in the brain, leading to overstimulation of the anxiety region of the brain. Ultimately, this can have an impact on a person's risk assessment, innovation, and even decision-making. When looking at it this way, these kinds of pay cuts can result in the opposite of the desired effect. If your executives are scared of a pay cut coming, it could actually cause their brain to work against your risk averse goals.

How To Approach Employee Compensation and Motivation

Since there is a negative part of the psychology of this method, it is important to take a look at other options to reach your goals. You can still adjust the pay of your executives but there are some things you will need to consider.

  1. No person is the same. You can't assume that this tactic will have a negative impact so be sure to look at all of these people individually before taking any action.
  2. Take a look at how it will affect others. These kinds of pay cuts can potentially impact the entire company so before making a decision, determine how it will affect others in the company. 
  3. Consider if you would be ok with using the same tactic on the entry-level employees. If not, then you should likely not use it on your executives either. 
  4. If you do decide to cut the pay of an executive, you should always continue to give them motivation and support through the process. You should find other ways to be rewarding since you took away the monetary component. 

Although it is impossible to determine whether or not cutting executive pay is a good decision and will lead to positive results for every company, there are psychological components that are important to consider. Take these components into account and do not make these decisions lightly. In any case, you should do everything you can possibly do to limit the amount of fear the executives fear so you can maintain motivation to get the desired results.

Topics: executive compensation

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