I met with a friend for coffee the other day. She had just received her annual pay raise and was quite disappointed.

Last year she had “exceeded expectations” on her annual performance review and received an 8% pay raise because of it. This year, she had also “exceeded expectations” and received a 2% raise.

Unaware of the process or how decisions are made, my friend was confused and disheartened. She had worked just as hard, if not harder this year. She had happily worked extra hours, taken on additional projects, and answered calls at all hours of the day and night.

While she is a hard worker and would likely have tackled the same projects and put in similar hours, she was visibly disappointed by what felt like an arbitrary compensation decision.

I can understand why.

Surprisingly, this is not an uncommon experience.

In the book Bringing up the Boss, Rachel Pacheco, discusses the common complications of compensation, and how many organizations often get it wrong.

The biggest issue when it comes to compensation is that the process is not shared, just the outcome.

It can be frustrating and demotivating when no one knows why or how much compensation is given out.  

By contrast, when the process is shared, even if the process is light with limited data, it makes a big difference in employee morale. And the more transparent and data-driven the process is, the better it will be embraced.

For example, to make compensation transparent, a company could base it on clear project outcomes combined with project manager and team reviews. Ratings could be calculated on a detailed 5-point scale, and compensation is aligned with the result.

Of course there are infinite ways compensation can be calculated, and this is only one idea. Yet, no matter which method is chosen, it should be data-driven, transparent, and consistent across the organization. Otherwise, it will feel like favouritism or randomness drives the decisions.

Another challenge with giving out compensation is the number attached to it.

If an expectation is set that an individual gets a certain amount as bonus and then doesn’t, it can destroy an individual’s motivation. On the other hand, if a small bonus is awarded after a lot of effort was given, it can feel insulting.

Getting the number right is a challenge, but a process and transparency will limit disappointment.

Lastly, it is important to recognize that intrinsic motivation matters.

I work in an industry where there are no bonuses. Our wage is uniform and only increases with years of experience and additional education obtained in our free time, paid out-of-pocket. In turn, the work, volunteering, and additional effort people put forth stems from intrinsic motivation, not extrinsic rewards.

In industries where this is not the case, it is important to not kill the enjoyment people get out of certain activities by attaching money to it. For example, if someone loves to plan the annual retreat, attaching a monetary value to it may decrease motivation to plan it. Or if people love a challenge, make that the focus. Attaching a higher value to a more challenging project, makes it then less about the challenge and more about the money.

Getting compensation right can be difficult and doing it wrong may have the opposite result than you anticipate. But if the process is data-driven and transparent, and everyone clearly understands how rewards are given, you are much more likely to have a happier, motivated workforce.  

Best wishes, Lauren