There are many ways that businesses can motivate their employees and this video
looks at the most common methods of financial motivation that a business can choose from.
At the end of the video there will be a featured question based on the methods
discussed and it would be great to hear your thoughts if you answer
the question in the comments section.
First of all, we are going to look at remuneration
Remuneration is the money that employees receive in exchange for working for the business.
However, the amount of money an employee receives is dependent on their role within the business,
typically the more senior the role, the more money an employee receives
in exchange for working for the business. For example, a customer service manager
is likely to receive a greater amount of money than a customer service assistant.
Remuneration can be a very effective method of motivation for employees as money is one
of the key reasons why many employees’ work. There are two main methods of remuneration,
the first is wages, which are a variable method of pay, within which the money employees receive
varies depending on how their pay is structure. The second is salary, which is when employees
receive a fixed amount of money in exchange for work.
First of all, let’s have a look at wages.
Now as I’ve just mentioned, wages are a variable method of remuneration,
within which the money employee receives varies depending on how their pay is structured.
Some employees are paid on a time rate basis Within which they are paid based on the amount
of hours they work, multiplied by a set amount per hour.
This is very common method which is widely used by many businesses such as McDonald’s who pay most of
their entry level employees on a time rate basis. The advantages of the time rate method include
the employer being able to accurately forecast how much the wage bill will be which enables planning,
whilst also provides employees with the security of knowing how much they will earn.
However, the time rate method also has potential drawbacks for the business as it doesn’t encourage
efficiency as employees receive the same pay per hour regardless of their performance.
Also, the time rate method may disgruntle workers if they are efficient and they consider their
colleagues to be less efficient or effective than themselves, but they still receive the same pay.
In manufacturing businesses, a piece rate method is commonly used to pay employees.
Within this method employees are motivated by the fact that they are paid based on
the amount of products they produce. Employees tend to work more efficiently
under the piece rate method as this will mean the wage they receive is higher which
increases productivity for the business. Whilst the most experienced, skilled,
and efficient employees earn more than less experience, skilled and efficient colleagues.
However, the piece rate method does make it more complex to forecast employee pay,
as it based on their performance which may vary from month to month for many employees.
Also, due to the incentive of being paid more for every item they produce, employees may rush,
which could result in sub-standard goods or excessive amounts being produced.
Therefore, effective quality control processes are essential when using the piece rate method of pay.
In addition to the time rate and piece work methods, some
businesses may also offer employees overtime pay. Overtime is when a business pays employees an
additional amount of money for working above their contracted hours at the request of the business.
This can be a very important method of remuneration to motivate employees
to work more than they are required to, especially during busy periods of trade
such as Christmas for the majority of retailers. Also, if employees know overtime may be available
in the near future and they want to do it to increase their wage, this can effectively
motivate them to increase their efficiency and productivity within their regular working hours
so they get chosen for the overtime hours if there is competition amongst employees for this.
However, if overtime is forced upon employees and they feel pressured to do it above and
beyond their contracted working hours, this can actually demotivate employees and may lead to
decreased productivity or even the employee leaving the business over the long term.
Moving onto salaries which are another form of remuneration for employees,
but in contrast to wages, salary payments are a fixed amount of pay
which employees receive in exchange for work. This is typically split into equal amounts and
paid monthly or four weekly depends on the business
Salaries are much more common for employees who hold senior roles within a business
such as managers and executives, or employees who are classed as working in a profession
such as doctors and teachers. Salaries offer employees a
guaranteed amount of pay regardless of their performance which provides employees with
safety and comfort in their role which often leads to more loyalty and longer service.
Often employees who are paid a salary are motivated by the incentive of a possible
yearly rise in their salary should they meet or exceed their targets.
However, salaries can also lead to decreased production and efficiency
because the employee is guaranteed a set level of pay regardless of their performance.
Also, employees who are paid a salary sometimes face pressure to work more than their contracted
hours without any additional payment due to the nature of their role which can cause
conflict in the workplace and demotivate the employee and decrease their efficiency.
We now move onto performance-related pay which is based on the performance of employees,
and as you can see from the look on this ladies face,
it can make employees very happy when they see their wage slip.
Simply put, the better an employee performs, the more they are paid.
For employees who are motivated by money, performance related pay can be a very effective
motivator as they have the possibility of receiving a greater amount of pay if they perform
well, especially if they outperform set targets. Therefore, the most experience, skilled,
and efficient employees tend to earn more than less experience, skilled and efficient colleagues
but the performance levels of all employees tends to increase through performance related pay.
There are two common methods of performance related pay, these are bonus and commission.
A bonus is an additional payment made to employees on top of their standard pay typically as a reward
for their productivity and performance or to share some of the business’ profit to show recognition
and reward to the employees that have contributed to the overall performance of the business.
It is a very common method of financial motivation and is used in a wide range of industries
including manufacturing and retail, where bonus could be calculated on the productivity
of individual employees and is paid to employees who meet or exceed their production targets.
Alternatively, bonus may also be paid to all employees within a business based on
their collective contribution, a good example of this is Greggs, where employees each received a
one-off bonus up to £300 in 2020 following a successful year for the business. Within
which 25,000 employees received their share of £7 million due to a 13.5% increase in sales in 2019.
Whether bonus is based on either a team or an individual’s performance, it can be a very
effective motivator which provides employees with clear targets and the financial incentive
of additional pay if they achieve or exceed them alongside a sense of being valued by the business.
If a bonus is based on a team’s performance it can also have the added benefit of increased
team work and employee collaboration as they are working together towards a collective goal
which can increase productivity, efficiency, and morale of an entire department.
Alternatively, if bonus is calculated and paid based on individual performance
it can be a very effective motivator for every employee as they feel that they get rewarded
for their personal contribution which helps the business to retain and increase the performance
of the most experienced and skilled employees. However, once a bonus system is in place,
it can become an expectation and it is often hard to remove or reduce a
bonus system as this is likely to frustrate employees who may then become demotivated
and their performance may suffer as a result. Also, it is very important that the business
considers the financial implications of introducing a bonus system as it can be very
costly and reduces the overall profitability of the business, so they need to ensure
the additional benefits such as increased productivity outweigh the increased costs.
Another form of performance related pay is commission.
Which is an additional payment employees receive on top to their wage, commonly associated with
employees who sell products and services. It’s typically calculated as a percentage
of a sale or the profit within a sale, alternatively it maybe fixed amount per sale.
For example, a car salesperson sells a car for £10,000, which makes the business £1,000 profit
and they receive 5% commission based on the profit they make in every sale.
Therefore, in this scenario, the salesperson would receive £50 in commission.
Commission tends to be a very effective motivator as employees know the more items they sell and the
more profit they make for the business, the more money they receive in their wage.
Therefore, employees strive to make each sale as profitable as possible due to this incentive.
In a similar fashion to many other forms of financial motivators,
it typically benefits the most experienced, skilled, and efficient employees as they
tend to outperform and earn more than less experience, skilled and efficient colleagues.
However, using commission to motivate employees can also create a poor workplace culture,
one which could be described as dog eat dog, within which employees are highly competitive
with each other and don’t work together towards a collective goal which can cause conflict and
demotivate employees over the long term. Whilst at the same time, commission has
the potential to negatively impact the customer experience
as the salesperson may think more about the potential profit than the needs of the customer.
The next method of financial motivation we’re going to look at is employee promotion.
A promotion is when an employee progresses through the hierarchy within a business into a new role
with additional responsibilities and increased pay on the back of their performance in the workplace.
When employees get promoted it often makes them feel valued
and vastly increases their motivation to demonstrate their capabilities in the new role,
whilst at the same time increasing their loyalty to the business.
Also, by promoting existing employees within the business, costs will be reduced in comparison to
the fees associated with external recruitment. However, promotion isn’t just an effective
motivator for newly promoted employees, If employees are interested in career progression,
the opportunity for promotion itself often makes them very motivated and committed in
their current role which leads to increased productivity and efficiency as they aim to
impress their managers to increase their chances of getting promoted when the opportunity arises.
A drawback of using promotion as method of motivating employees is that it could
lead to friction between employees as they compete for the same promotion opportunity.
Even once a successful employee has been chosen, it may be demoralising for the
remaining employees who weren’t successful which could lead to them becoming demotivated and
their performance could suffer as a result. The final method of financial motivation we
are going to look at is Fringe Benefits. Many businesses use fringe benefits as a
form of financial motivation, and they are seen as additional employment perks awarded to employees
which are often ways of saving employees money rather than providing them with additional pay.
The fringe benefits offered to employees vary vastly from business to business, however some are
more commonly used than others. Let’s take a look at 6 of the most commonly used fringe benefits.
Profit sharing schemes reward employees for their contribution
to the business’ overall profitability. A famous example of a profit-sharing scheme
is John Lewis, which rewards its employees with a percentage of
their overall profitability each year. This can be a very effective motivator
for employees and they typically become much more focused on how they personally impact the
business’ profitability as it impacts the amount they get paid personally each year.
Which in turn encourages employees to become more knowledgeable in their role
and committed to the business and its customers to ensure they positively impact the bottom line.
However, profit sharing schemes can be very costly and they aren’t as common as they once were,
slowly being replaced by share schemes where employees have the choice to purchase shares
in the business, typically at a reduced rate through monthly wage deductions if they want to.
This approach still motivates employees in the same way as a profit-sharing scheme as they are
still personally benefitting when the business does well, but it reduces the costs associated
as employees have to purchase shares themselves. Another type of fringe benefit is a workplace
pension scheme and in October 2012 the government emphasised the importance of this type of
fringe benefit by announcing an automatic enrolment pension scheme for all employees.
Now that a workplace pension scheme is a legal requirement
and businesses are required by law to contribute at least 3% from April 2019,
many businesses now need to offer and invest heavily into a pension scheme which is better
than the minimum requirements if they want to attract the top talent.
However, a competitive pension scheme can effectively motivate employees whilst increasing
loyalty and morale across the workforce as employees often feel valued by the business.
Offering employees private healthcare or health insurance allows them to have medical treatment
in private hospitals and facilities. It has many similar benefits to offering
a company pension scheme in the sense that employees will feel valued by the business
which in turn increases their loyalty, morale and motivation in the workplace.
Alongside these factors, it helps the business to reduce the amount of employee absences
as it increases the chances of having a healthier workforce who can receive treatment quicker than
they would by going through the NHS in most cases. Put simply, providing employees with additional
support with their physical and mental health is costly, however it should be looked at as
an investment as it typically leads to improved productivity by a happier and healthier workforce.
Some businesses choose to offer their employees free or discounted meals whilst at work,
a famous example of this is McDonald’s who offer employees a free meal whilst on shift,
it is more common for businesses which operate in the hospitality industry but
is also used in other industries where staff get a free or subsidised meal in the canteen.
If employees don’t eat, it is likely to negatively impact their performance
and levels of motivation, which links to Maslow’s Hierarchy of needs.
By offering food to employees, the business is able to ensure some of their employees
phycological needs are met to ensure they are able to perform in the workplace.
Another fringe benefit is additional sick and holiday pay,
which have similar effects on employees as a pension scheme and private healthcare insurance
would, due to phycological effects of feeling looked after and cared for by an employer.
Whilst paying employees additional sick and holiday pay above the legal requirement
can increase the costs substantially for the business, it can lead to a more motivated
and happy workforce as it provides employees with time to relax whilst on annual leave
so they return refreshed and refocused.
Alternatively, employees who are sick don’t come back to work before they fully recover
which is more likely to happen when they are faced with the pressure of running out of sick pay.
For example, if employees only receive statutory sick pay, they may return before
they are fully recovered, which can lead to low levels of motivation and poor performance,
whilst potentially spreading across the workforce if the sickness is related to a virus etc.
which would further impact the business. The final fringe benefit we are going to look at
is staff discount, which some may argue does not directly increase motivation levels of employees.
However, offering employees discount on the business’ or affiliated business’ products and
services can make employees feel valued, which in turn naturally increases motivation and commitment
to the business, which in turn could be one of the key reasons they are loyal to the business.
So, there you have it, the most common methods of financial motivation which businesses use.
Now you’ve watched the video, why not have a go at our featured question by commenting below.
The question is: which method of financial motivation would be the most effective method
to motivate you personally and which methods would you choose to motivate
your employees if you owned a business? We’ve also got a free activity worksheet
if you’d like to test your knowledge of financial motivators even further,
just click the link to our website in the video description.
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