By Steven D. Handler, CPA, CMC, GGMA – Partner
Compensation is defined in two basic ways:
- Making up for someone’s loss or damage by giving the injured party an appropriate benefit. Examples include: payment of a workman’s compensation claim, or giving a raise to an employee to offset the negative feelings from being passed over for promotion.
- Rewarding someone for services such as wages and benefits paid to an employee.
This article primarily addresses the second meaning.
Enterprises want to motivate their employees to accomplish the goals of the business. Compensation is a part of the motivation. Employers compensate their employees in various ways including salary, bonus, commission, and fringe benefits: insurance (health, life, disability), retirement plan contributions, stock options, expense allowances, use of a company automobile, discounts, ego satisfiers such as title or a corner office, and numerous other ways.
To learn how compensation fits into the process of motivation, it helps to hear what the most influential experts of the modern business era presented on the subject.
Frederick Irving Herzberg was an American psychologist who became one of the most influential names in business. Herzberg believed that lack of money is demotivating, but money on its own cannot motivate people.
Douglas Murray McGregor was an American management professor at the MIT Sloan School of Management who was famous for his Theory X and Theory Y. Theory X stresses the importance of heightened supervision, external rewards, and penalties. Whereas Theory Y stresses the importance of job satisfaction and working without direct supervision.
Abraham Harold Maslow was an American psychologist best known for creating the famous 5 Tier Hierarchy of Needs listed below.
- Physiological are basic such as food, water, and air.
- Security and Safety include financial security, health and wellness, and safety against accidents and injury.
- Social deals with emotional needs like love, acceptance, and belonging. Family, friends, lovers, and group memberships (religious, sports, clubs, etc.) are important.
- Esteem examples are feelings of appreciation, respect, accomplishment, prestige, self-esteem, and personal worth.
- Self-Actualization to achieve one’s full potential as a human being.
We can learn from these scholars in many ways. I have been advising clients on compensation planning issues for employees, executives, and sales personnel for many years. My use of Maslow’s Hierarchy has helped me to understand the needs of the parties being compensated. If we cannot understand their needs, how can we determine the best way to motivate them?
My clients all have unique management styles. When dealing with someone who tends to micromanage, I discuss McGregor’s Theory Y about the importance of job satisfaction and working without direct supervision.
Capital One cash rewards card used to have a television ad starring Jimmy Fallon with the theme “Who doesn’t want more cash?” Although the ad was amusing, somewhere in the process of designing compensation programs, I always must remind my clients about Herzberg’s theory that money on its own cannot motivate people.
This brief article barely covers this important topic of how best to use compensation in accomplishing your business goals. We can help you evaluate the right compensation structures for your business. For additional information, please contact Steven D. Handler, CPA, CMC, CGMA – Partner, at [email protected] or 847 213-2107 to discuss how we can help.