Research has shown that more money doesn’t necessarily make employees happier. Money does seem to influence motivation – but is that impact positive or negative? The short answer is: we aren’t quite sure. The disclaimer? Yet!

“Money doesn’t make you happy. I now have $50 million but I was just as happy when I had $48 million.” – Arnold Schwarzenegger

Compensation is a topic that is often at the top when people discuss job satisfaction. Intuitively one might assume that as the pay increases, job satisfaction would increase. Surely the man driving an Audi has more fun than the one hanging off the suburban train compartment. Some companies have blindly adopted this strategy – let’s throw more money and hope to keep the person motivated to continue working for us.

Research (yeah those pesky guys who look at data) has determined that the relationship between compensation, performance and motivation is far more complex than what intuition would have you believe.

Research has also shown that beyond a threshold, further increase in compensation has no impact on motivation levels. A meta-analysis by Tim Judge et. al. reviewed findings from over 90 quantitative studies covering over 120 years of data to establish that the association between pay and job satisfaction is weak (r=.14). And this is not just restricted to a particular culture. A cross cultural comparison seems to indicate that this relationship holds good everywhere.

There is one aspect that is often overlooked however. Job satisfaction while deeply affected by conditions at the workplace – culture, job-competence matching, supervisor etc, it also dependent on the employee’s personality. The core self-evaluation has a big impact on how the employee perceives money and its impact.

Those with positive core self-evaluations tend to be happier at their work even with less salaries. It would seem that compensation (external motivation) does not crowd out the core drive in these employees (intrinsic motivation).

In the classic set of experiments conducted by Edward Deci and colleagues, it was evident that incentives can actually have a negative effect on motivation – especially in tasks that the subjects found interesting or enjoyable.

Subsequent research has also established that when employees are focused on external rewards, the effects of intrinsic motivation on engagement are reduced. So if you are working for money, chances are you won’t enjoy the job so much as compared to if you were doing the job because you liked the work – money be damned!

Yo, I thought I told you that we won’t stop
Now what you gonna do when it’s cool
Bag a money much longer than yours
And a team much stronger than yours, violate me

I don’t know what, they want from me
It’s like the more money we come across
The more problems we see

(Mo Money, Mo Problems: Notorious B.I.G)


But is that really true – all the time?

There is an undeniable impact of the cultural background, the influence of others (deciding what constitutes a threshold), situation in one’s life etc. on deciding the extent of motivation money has.

For a fresh graduate who might have education loans or is supporting elderly parents, money will play an important role to a much larger extent than say a middle-aged manager who has a fairly settled income and spend trajectory or a CEO who is now in pursuit of respect and big goals rather than financial security.

Compensation is largely a psychological symbol. The value individuals place on money is subjective. To some a bigger car, a bigger house than peers is important. To some the role and team size matters and a lower compensation is acceptable as long as they have an ‘important’ designation.

But even this has a contextual time line. At a particular point in time, one or more of these might hold true, but it doesn’t hold true once the threshold (however it might be defined) is crossed.

So what does the organization do to motivate?

 To truly motivate the employees, organizations will need to identify what motivates the individual at that point in time.  As I mentioned before this is subjective and very individualistic – depending on a multitude of variables and personality types. You can have a motivated CEO who doesn’t care about compensation but cares about designations and titles and team members who don’t care what their visiting cards say but want higher compensation. A broad stroke engagement strategy cannot hope to bridge the gap between these two. And also a static strategy will fail in the long run as motivations will change over the years.

Research has established that income goals based on pursuit of power, narcissism, or overcoming self-doubt are less rewarding than those based on pursuit of financial security, family and leisure.

A micro-rewards strategy?

 Technology is now increasingly making it possible to have a better understanding of how rewards are influencing (or not as the case might be) employee performance and motivation. Platforms that enable companies to observe the impact of their rewards programs on employee performance over a period of time can serve as a very useful tool in fine-tuning rewards strategy to a more granular level where they are better aligned to the motivators of the individuals receiving the incentives.

Maybe the day is close when each employee would have a personalized rewards program completely in synch with their core self-evaluation and motivators. But till then, a better statistical analysis to establish correlations and causations might go a long way – much better than the current one size fits all approach most companies follow.

References and Acknowledgements: 

Does Money Really Influence Motivation? … (Harvard Business Review)

The relationship between pay and job satisfaction: A meta-analysis of the literature, Timothy A. Judge et. al, Journal of Vocational Behaviour. 



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