The workplace environment may change but human nature doesn’t. Here is a brief excerpt from an article that appeared a few years ago in The McKinsey Quarterly, published by McKinsey & Company, but one whose key insights remain even more relevant today. As Martin Dewhurst, Matthew Guthridge, and Elizabeth Mohr point out, an economic slump offers business leaders a chance to more effectively reward talented employees by emphasizing nonfinancial motivators rather than bonuses.
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Companies around the world are cutting back their financial-incentive programs, but few have used other ways of inspiring talent. We think they should. Numerous studies1 have concluded that for people with satisfactory salaries, some nonfinancial motivators are more effective than extra cash in building long-term employee engagement in most sectors, job functions, and business contexts. Many financial rewards mainly generate short-term boosts of energy, which can have damaging unintended consequences. Indeed, the economic crisis, with its imperative to reduce costs and to balance short- and long-term performance effectively, gives business leaders a great opportunity to reassess the combination of financial and nonfinancial incentives that will serve their companies best through and beyond the downturn.
A recent McKinsey Quarterly survey2 underscores the opportunity. The respondents view three noncash motivators—praise from immediate managers, leadership attention (for example, 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 base pay, and stock or stock options (exhibit). The survey’s top three nonfinancial motivators play critical roles in making employees feel that their companies value them, take their well-being seriously, and strive to create opportunities for career growth. These themes recur constantly in most studies on ways to motivate and engage employees.
It’s not about the money
Three nonfinancial incentives are even more effective motivators than the three highest-rated financial incentives.
There couldn’t be a better time to reinforce more cost-effective approaches. Money’s traditional role as the dominant motivator is under pressure from declining corporate revenues, sagging stock markets, and increasing scrutiny by regulators, activist shareholders, and the general public. Our in-depth interviews with HR directors suggest that many companies have cut remuneration costs by 15 percent or more.
What’s more, employee motivation is sagging throughout the world—morale has fallen
at almost half of all companies, according to another McKinsey survey3 —at a time when businesses need engaged leaders and other employees willing to go above and beyond expectations. Organizations face the challenge of retaining talented people amid morale-sapping layoffs that tend to increase voluntary turnover over the medium term. Often, top performers are the first to go. Strong talent management is critical to recruit new ones from, for example, the financial sector, who have been laid off from their employers or feel disenchanted with them.
Notes
1. John Gibbons, Employee Engagement: A Review of Current Research and Its Implications, Conference Board, 2006.
2. McKinsey Quarterly conducted the survey in June 2009 and received responses from 1,047 executives, managers, and employees around the world. More than a quarter of the respondents were corporate directors or CEOs or other C-level executives. The sample represents all regions and most sectors.
3. “Economic Conditions Snapshot, June 2009: McKinsey Global Survey Results,” mckinseyquarterly.com, June 2009.
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Martin Dewhurst is a director in McKinsey’s London office, where Matthew Guthridge is an associate principal and Elizabeth Mohr is a consultant.