Though companies around the world are cutting back on financial incentive programmes, few have used other ways of inspiring talent. We think they should. Numerous studies have concluded that for people with satisfactory salaries, some motivators other than money 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 unintended damaging consequences. Indeed, the economic crisis, with its imperative to reduce costs and to balance short- and long-term performance, 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 survey 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 than the three highest rated financial incentives: cash bonuses, increased base pay and stock or stock options. 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 motivating and engaging employees.
There could not be a better time to reinforce more cost-effective approaches. The traditional role of money 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 interviews with human resources (HR) directors suggest that many companies have cut remuneration costs by 15 per cent or more.
Further, employee motivation is sagging throughout the world: morale has fallen at almost half of all companies, another McKinsey survey says, at a time when businesses need engaged leaders and employees willing to go above and beyond expectations. Organisations face the challenge of retaining talented people amid morale-sapping layoffs that tend to increase voluntary turnover in the medium term. Often, top performers are the first to go. Strong talent management is critical to recruit new ones in, for example, the financial sector, who have been laid off by their employers or feel disenchanted with them.
Yet while 70 per cent of organisation have adjusted their reward-and-motivation programmes or plan to do so during the past 12 months, relatively few have gone beyond direct management of costs. Almost two thirds of the executives we surveyed cited cost reductions as one of the top three reasons for the changes, while 27 per cent made changes to increase employee motivation and only 9 per cent had the goal of attracting new talent.
The regional differences were striking: 45 per cent of the respondents in developing markets, where economies have proved more robust, cited employee motivation as a key reason for modifying incentives, compared with only 19 per cent in the US and Western Europe, where the crisis hit hardest. Even though overall reliance on financial incentives fell over the past 12 months, a number of companies curtailed their use of nonfinancial motivators as well. Thirteen per cent of the survey respondents reported that managers praised their subordinates less often, while 20 per cent said that opportunities to lead projects or task forces were scarcer and 26 per cent said leadership attention to motivate talent is less forthcoming.
Why have so few organisations made more use of cost-effective nonfinancial motivators at a time when cash is hard to find? One reason may be that many executives hesitate to challenge the traditional managerial wisdom that says money is what really counts. While executives themselves may be equally influenced by other things, they still think that bonuses are the dominant incentive. "Managers see motivation in terms of the size of the compensation," explained an HR director from the financial services industry. Another reason is probably that nonfinancial ways to motivate people require more time and commitment on the whole from senior managers.
One HR director we interviewed spoke of their tendency to hide in their offices. primarily reflecting uncertainty about the current situation and outlook. This lack of interaction between managers and their people creates a highly damaging void that saps employee engagement. Some far-thinking companies, though, are working hard to understand what motivates employees and to act on their findings. One global pharmaceutical company conducted a survey that showed that in some countries employees emphasised the role of senior leadership; in others, social responsibility. The company is now increasing the weight of engagement metrics in its management scorecard so that they are seen as core performance objectives.
One biotechnology company has reframed the incentives issue by putting the focus on recognition instead of reward to inspire a more thoughtful discussion about what motivates people. The top three nonfinancial motivators our survey respondents cited offer guidance on where management might focus. The HR directors we spoke with, for example, emphasised leadership attention as a way to signal the importance of retaining top talent. When the chief executive of a global pharma company was crafting corporate strategy this year, he convened several focus groups of talented managers to generate ideas about how to create more value for the business.
With the same aims, a leading beverage company asked every executive committee member to meet with the critical people in their own product groups. "One-on-one meetings between staff and leaders are hugely motivational," said a HR director from a mining and basic-materials company "They make people feel valued during these difficult times." By contrast, our survey's respondents rated large-scale communications events, such as the town hall meetings common during the economic crisis, as one of the least effective nonfinancial motivators, along with unpaid or partially paid leave, training programs and flexible work arrangements.
While communication is critical, attempts to convey messages about the state of the business often have some spin, one HR director said. A chance to lead projects is a motivator that only half of the companies in our survey use frequently, although this is a particularly powerful way of inspiring employees to make a strong contribution at a challenging time. Such opportunities also develop their leadership capabilities, with long-term benefits for the organisation.
A HR director in the basic-materials industry explained that involvement in special projects "makes people feel like they're part of the answer and part of the company's future". A leading company from the beverages industry, for example, selected 30 high-potential managers to participate in a leadership programme that created a series of projects designed and led by the participants. "Now is the time to swim upstream and invest more in our high potentials," said the HR director when launching the programme this year. With profitability returning to some regions and sectors, we see signs that bonuses will be making a comeback. For instance, 28 per cent of our survey respondents say that their companies plan to reintroduce financial incentives in the coming year.
While such rewards certainly play an important role, 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 emphasises the frequent use of the right nonfinancial motivators would benefit most companies in bleak times and fair. By acting now, they could exit the downturn stronger than they entered it.
Martin Dewhurst is a director in McKinsey's London office, where Matthew Guthridge is an associate principal and Elizabeth Mohr is a consultant.