As described in the article “How to find the right bonus schemes to boost innovation”, the age of traditional compensation models is over in companies whose success rests on their ability to innovate. Rather than effectively serving its purpose of increasing employee motivation, performance-based remuneration actually restricts employee creativity in some cases, as shown by studies and experiments. Nevertheless, many companies are finding it hard to break with Gaussian employee classifications, performance-based bonus parameters or complex bonus-malus systems. Compensation models that back employee development, team spirit and motivation would contribute considerably more to a company’s long-term success and innovation than promised bonuses.  

For years, companies have managed their compensation models based on the “pay for performance” principle. These still widespread extrinsic models try to motivate employees using monetary incentives. At worst, they produce egotistical, go-it-alone individuals, or, as illustrated by examples from large banks, they entice employees to operate in legal grey areas in order to achieve their performance targets and pocket higher bonuses in return. 

In contrast to this, there are studies that examine the intrinsic motivation of employees who gain satisfaction from their working life because they are doing work that they consider meaningful and interesting, that furthers them in their development and that they can perform autonomously. They are motivated by the work itself and not by external, material or non-material incentives. The term intrinsic motivation may well cause some to shake their heads in amusement as they contend that not everyone works because they get a great sense of fulfillment from it, or people still need to earn a living. But when you look at what really motivates employees, there is no escaping the topics of personal development, self-improvement, autonomy, and doing something worthwhile. And the generations that are entering the labour market now give more and more importance to these topics.

This does not mean that money is not important. While money may not be a motivator, it does however prove to be a demotivating factor if the total remuneration is ultimately not right or people have the feeling that they are getting a smaller piece of the pie than others.

To summarize:

• Money does not motivate and at worst leads to poorer performance.
• Money can demotivate; the total remuneration must be right, fair and consistent.
• Motivation stems from the opportunity for self-development, the urge to direct our lives autonomously and the yearning to do something in the service of something larger than ourselves (see Dan Pink – The puzzle of motivation).

No magic formula for non-traditional compensation models

There is no golden formula for compensation models – every company should define for itself which values form the basis of its models and which parameters help most to strengthen motivation, team spirit and corporate values. One option is to consistently align variable compensation with the company’s success. The amount of the variable wage component is based solely on the result the company achieves at the end of the year. This uncompromising option should strengthen team spirit, curb egotism and the silo mentality, and keep employees focused on the company’s success as a common goal. However, there is also the danger here that particularly hard-working employees have the impression they go unnoticed.

The “Avaloq compensation model”

At Avaloq, we have moved away from our “pay for performance” compensation model in the past year and developed a new model that is based on three components. We have made a conscious decision to continue paying variable monetary compensation but to no longer base it on individual performances. Instead, the focus of the new model is on the company’s success that we achieve together.

The new model is based on three cornerstones: the base salary, Success Share Units and an Extraordinary Achievement Award.

1. Base salary: As before, every employee receives a base salary every month in line with market standards. The pay band in this respect is determined by the position. A position has up to four proficiency levels and the pay band increases with each level. The focus here is on the employee’s development in the position. Our managers receive detailed information about where the employee is positioned on the pay band and also in comparison with the external market so that conscious, informed decisions can be taken at the annual salary review.
2.  Success Share Units: If we achieve success, then we want to share that success with our employees. Every position is therefore assigned a number of Success Share Units. The number of units increases with each proficiency level, but this number is always the same for the same position and proficiency level. No difference is made on an individual basis. The Success Share Units are paid out once a year, and their amount depends on the success that we achieve together. In this way, we concentrate on putting the emphasis on the success of the company as a whole: we achieve success only when we all pull in the same direction and work together for our company.
3.  Extraordinary Achievement Award: As there will always be special situations or outstanding contributions, we have also made a budget available for “special achievements”. The Extraordinary Achievement Award is paid whenever a team or individual employees should be rewarded for their extraordinary performance. Anyone can be nominated for this award. The criterion for the award is strong dedication to the company’s values by teams and employees, which thus strengthens the networking component. This budget also makes it possible to treat interdisciplinary teams equally, thus blurring the lines between organisational units.

However, our compensation model does not work “on its own”. The wider context and our adapted management tools must be considered in order to get a complete picture of what we want to achieve. For instance, we have also changed the processes for target setting, feedback and employee development and added them to the overall topic of development and networking.

We are convinced that with our compensation model and new leadership tools, we have found a fair and transparent way of compensating our employees, moving away from performance-driven incentive schemes towards a model that backs intrinsic motivation. Perhaps you are interested in a similar model for your company, too?

Get in touch if you would like to exchange experiences.