Despite what you might hear, compensation is not the primary motivator for most people. Sure, as I have written about before, some people are what I call "coin-operated." These are the folks that make great salespeople because they are motivated by making more money.

But many people aren't like this. You can think of their motivation as a thermostat. They don't want it too hot or too cold--most people want to be paid at a level that seems fair to them. There are other intrinsic factors that are more important to high performers, like the company mission.

This is a dynamic that's known as "felt fair compensation," and the more you understand it as a leader, the better you'll be able to understand what your people want to be paid when you put together your compensation and incentive programs.

Comparative Reasoning

So where do people get a sense of what is fair pay? The primary source people look to is their referent groups--people inside the organization who do jobs like theirs.

If people learn that other people in similar jobs inside the company who have similar experience and proficiency levels are making about the same compensation, that feels fair to them.

Another kind of referent group people look to when evaluating their compensation is how people are paid outside the organization. It is easy to jump on Glassdoor or LinkedIn and find out what people with the same title are making.

One element of feeling fairly compensated is when the external and internal compensation for a similar job is close to current compensation. As a leader, since you know that is how people will analyze their pay, you should do that analysis ahead of time and know what kind of a salary they'll be comparing against.  

Mistaken Identity

One of the mistakes people make, though, is forgetting to factor in experience and competency levels when they look at their referent groups. This can lead to dissatisfaction.

It's then your job as a leader to explain that while someone might have the exact same title that they do, that person has been working in that job for several years and developed some significant proficiency in doing it and therefore they should make more than a junior employee. This can also happen when a low-performing employee doesn't understand why they make less than a top-performing employee, which can lead to difficult conversations.

Setting a Baseline

One strategy to overcome these mismatches in perception is to use data such as salary surveys to help reset the baseline for what the market is actually paying for a particular position. That can sometimes move the needle in opening an employee's eyes to how they are being paid fairly. It is desirable to then show the employee how to make more money, through experience and education.

But this move can have limited success, and also even backfire, especially if an employee has their mind set on the idea that you are deliberately underpaying them. They can then think you're just trying to push your point on them by using the wrong data as opposed to giving them a raise.

In these cases, you may have no choice but to let the disgruntled employee make the decision to leave the company rather than try to pay them more than what the market rate might be.

The War for Top Talent

This is a challenge many businesses will be facing in the coming years as the war for talent heats up again post-pandemic. As the economic recovery continues to heat up, more and more companies will be hunting for people--and that might shift the dynamics of what employees actually believe "feels fair."

So, be warned: If you're trying to get away with paying below-rate compensation, you might actually be putting your future growth at serious risk.