Every manager wants a happy, healthy, but highly productive staff. Ideally staff are motivated by the sheer joy of the job. But often, people want a little more compensation for their hard work. Often this is monetary, but compensation can take many other forms.

The most obvious extrinsic reward is money. And so we have the very simple-minded view that "if you pay people peanuts you will get monkeys". That is, that there is a simple relationship between reward, productivity and satisfaction. The idea is that better paid people are more productive and happy. Simple, casual, and entirely wrong.

Indeed there are at least four reasons why money is seen by business psychologists as much more likely to be a cause of dissatisfaction than satisfaction.

1. Pay for Performance

The relationship between pay and performance is often unclear, imprecise and unequal. The link between pay and performance is rarely straightforward, and this can be a considerable source of dissatisfaction. Perceived low pay can and does lead to considerable dissatisfaction and de-motivation. The reverse is not necessarily true. 

It is true that people often feel ‘happy’ after a pay rise but the effects wear off extraordinarily quickly. Any improvements in motivation are likely to be very temporary. Money can be a very effective motivator but you need a great deal of it to stop adaptation effects. Too much for most organisations to bear.

2. Relative Pay

Relative (or comparative) pay is more important than the absolute number. If one feels one is paid better than their comparison group, that may be satisfying. If one person’s salary increases they may feel that temporary increase in job satisfaction. If the entire team’s pay is increased it is unlikely anyone will feel (comparatively) better off. But satisfaction is always relatively with pay. No matter what people are paid if they believe, with or without evidence, that they are not equitably and fairly paid they become demotivated.

3. Work Values

Money is not everything to everyone. Many prefer other rewards, perks or benefits to pay. Some would prefer more time off, better job security or more flexibility in their work. If there is a trade off between a higher salary and other benefits, not everyone is prepared to make the sacrifice. And if it is seen as making a ‘sacrifice’ for increased pay (say, reduced time off) that pay rise is unlikely to be seen as motivating. 

4. Perceived Inequality

There are simple approaches to pay for performance. The Performance Management System seems logical and fair when productivity is easy to measure such as in sales jobs. Low base-rate, high commission. There is a clear logical and equitable relationship between personal effort, outcome and reward. It is essentially a piece-rate system. It works well. But we do know the attrition rate in sales staff is incredibly high (and can be over 90% in the insurance industry) and that the distribution of salaries is incredibly skewed.

But the logical consequence of paying everyone based on specific measures of performance quickly becomes apparent. Most people are paid less than their colleagues and so quite quickly become dissatisfied with their own pay. Whatever one does to keep salaries or bonuses secret, people get angered and frustrated by perceived inequity. It seems the clearer one make the relationship the more upset people get, particularly those in power who have lived under the old regime and they had "earnt" their right to power, influence and money. Hence the dissatisfaction with these systems and organisations abandoning them.

The real problem is that almost everyone values pay to a certain extent. Not everyone values pay equally, but most still value pay equity. It’s a constant difficulty in that pay is the most often employed tool for compensating and rewarding employees for their performance, but it’s more often a source of dissatisfaction than satisfaction.

The trick is understanding what people value, rewarding them appropriately, equitably and aligned with what they value.

Read more here about Work Values and how to measure them.