How to Motivate—With and Without Pay Raises

How much is a decent pay raise? How large does a pay raise have to be to actually motivate employees to work harder?

A series of studies by a research team led by University of Northern Iowa management professor, Atul Mitra, has looked at this question. The researchers investigated pay raises using the psychological construct of “just noticeable differences,” the idea that a change in a stimulus (such as the sound of a tone or the brightness of a light) has to reach a certain threshold in order to be noticed and seen as “making a difference.” The results suggest that a merit raise needs to be about 7 to 8 percent in order for workers to feel pleased about the raise and motivated to work a little harder.  According to this research, most of the raises we receive, or those that we are able to offer employees (typically, 3-5% or less), are well below that motivational threshold.

So what is a manager to do?

It is important to remember that there are other sorts of non-monetary incentives–recognition, praise, time off. The advantage of combining monetary and non-monetary incentives, is an increase in both employees’ motivation and morale.

Based on research on motivation, with and without compensation, here are some guidelines for managers:

• Understand that simply giving a raise will likely have little impact on motivation unless it is substantial (7% or higher).
• Couple the raise, regardless of its size, with recognition and the “social reinforcement” of praising the employee for a job well done.
• Be transparent. Let employees know exactly why economic circumstances won’t allow larger pay raises.
• An important key is to be straight with employees and fully explain the rationale behind raises (or the reason there is no pay increase).