As business consultants, we’re often asked about compensation. But in addition to the various types of benefits, ownership, and bonus programs, there’s a bigger question about the relationship between pay and motivation. What does the way money is spent do to how people work?
To begin the conversation, let’s review the four different ways to pay people. Chances are, you haven’t thought about any of these lately except the one that is used for you. In fact, you may not even be aware of all four approaches.
Paying for Time
Most people in most jobs throughout most of human history have been paid for their time. They get paid a wage by the hour, by the week, or by the month. Some people are even paid by the year, such as those who serve on corporate boards.
Advantages: The main upside to an hourly wage is that it’s easy to measure. You can watch any clock and know how much money you will get. This also makes it easy for managers to budget, since they can easily predict what costs they will incur.
Disadvantages: If it’s easy to measure time spent, it’s also easy to waste time watching the clock. There’s not much incentive to work harder or faster. You get paid the same amount either way. In fact, the best short-term strategy for an hourly worker is to figure out how to do as little real work as possible.
Paying for Commitment
Once you move into the “professional” world you are no longer paid by the hour but instead become a “salaried employee.” This means that you are expected to work full-time, which in theory means about forty hours a week.
Advantages: It’s even easier to pay salaried employees than hourly ones, because you don’t have to keep track of timesheets. Salaried employees also feel more respected.
Paying for Events
Salespeople often feel they have found a way out of the trap of hourly or salaried employees. That’s because many people in business development are paid “on commission.” This means that some or all of their earnings come out of a purchase made by a customer.
But in reality, a commission is paid out when a customer makes a payment, so it’s really just compensation tied to an event. Of course, salespeople have some control over the event, which makes this one of the most lucrative payment models.
Advantages: An event-based payment model means you can make lots of money, because you can generate lots of events. It also minimizes the financial exposure for the company, since they don’t have to pay you until they get paid.
Paying for Outcomes
The most progressive way to pay employees is to focus on results rather than on time. This is hard to do because results are difficult to identify and evaluate. It’s not as easy as targeting an event, such as a closed sale.
Advantages: Team members can focus on getting things done, not on looking busy. They control their own schedule and feel respected. People are motivated not by money, but by making meaningful contributions.
Disadvantages: Employees must be self-starters. Those that require extensive supervision will fail.