June 23, 2022

Retain Your Employees: Financial Compensation vs. Emotional Compensation

Lauren Kemp

Compensation is integral to human resources management; it encourages employees and improves overall business efficacy. Compensation methods also inform others about the company’s values and culture.

Historically, society viewed employee retention strategy as monetary compensation alone; however, employees now place great value on emotional compensation: feeling appreciated, heard, and recognized. To halt the bleed of losing your employees, you need to implement monetary and emotional compensation.

How to retain your best employees 

What is traditional compensation? 

To understand the future of modern compensation, acknowledging traditional compensation is imperative. Workforce.com previously described compensation as:

  • Support for conventional job hierarchies.
  • Emphasis on duties, tasks, and deadlines.
  • Little room for variation.
  • Information was withheld unless necessary. 

Pros of traditional compensation

  • Financial security: Employees greatly value financial security, which salaried roles frequently provide. 
  • Work motive: Employees understand the tradeoff for being paid. You will be compensated if you perform the job description requirements well. Likewise, companies that recognize effort encourage employees to work more efficiently, contributing to job satisfaction. 

Cons of traditional compensation

  • Ambition plateau: Ambition and passion can take second place if an employee is focused on their paycheck alone. Without other areas of satisfaction, work can become redundant and lackluster. 
  • Work stress: If an employee is dragging themself to work each day solely for a paycheck, taking on new tasks and assignments can cause undue stress.

What is emotional compensation? 

A more modern approach to compensation highlights:

  • Base company structure on values and strategy.
  • Emphasis on employee contributions, empowerment, and motivation.
  • Fluid enough to accommodate changing company needs. 
  • Transparency is at the forefront of the company, and information is used to clarify expectations. 

Why is transparency important? Transparency is a value that seems to only increase in today’s business industries and increases overall job satisfaction. 

Pros of emotional compensation

  • Growth avenues: Each day is an opportunity to learn something new. As employees are encouraged to innovate on what they do, passion increases and work becomes more interesting.  
  • Fulfillment: Finding meaning in work is easier when you enjoy what you do. Job satisfaction helps people prioritize the work they do, not compensation alone. 

Cons of emotional compensation

  • It does not happen overnight: Mastering your role can take time, and finding a career that ignites your passion and funds your lifestyle can be challenging.
  • Feedback should be specific, measurable, achievable, realistic, and timely. Input alone may not suffice: A feedback deficit can reduce employees' job satisfaction. Employees also need to feel that they are appropriately compensated for their feedback to the company. 

Job Satisfaction: 

Job satisfaction measures an employee’s contentedness with their position at a company. How enjoyable is it? Is it fulfilling? It is best to measure behavioral, cognitive, and affective components when considering job satisfaction. High job satisfaction in the workplace is mutually beneficial as it decreases turnover, produces loyal employees, increases productivity, and increases profits. 

What contributes to job satisfaction?
  1. Compensation and working conditions: Some of the most significant considerations for improving employee job satisfaction include fair compensation and a healthy workplace environment. An employee with a reasonable salary, incentives, bonuses, and benefits is more satisfied with their job than an employee who is not fairly compensated. 
  1. Work-life balance: Spending time with family and other groups outside the work environment is essential. This idea describes how work performance is improved when other areas of an employee’s life are in balance. 
  1. Respect and recognition: Employees appreciate and are motivated by feeling respected and recognized by the company they work for. Awarding people for their efforts can take motivation even further. 
  1. Job security: If an employee feels confident that the company they work for will retain them despite a turbulent market, they have more confidence in themself and the company that employs them. 
  1. Challenges: Repetitive and lackluster work activities can lead to dissatisfied employees. Procedures such as job rotation and other job enrichment efforts can help employee job satisfaction remain high. J2T’s “10 Ways to Retain Your Top Employees” blog post describes how employees thrive on challenges. 
  1. Career growth: Employees often highly value career growth; hence, if a company helps further employees and gives them higher-ranking roles, it leads to greater job satisfaction. 

Blending financial and emotional compensation

After reviewing traditional compensation, emotional compensation, and leading toward job satisfaction, it is apparent that both forms of compensation are needed to maintain motivated employees. Historically, there has been a deficit in emotional compensation. Every company has different needs; however, many companies can benefit from shifting toward a modern approach to ensure their compensation plan supports desired outcomes. 

Eight tips for shifting toward a modern compensation approach:

  1. A shift toward transparency: empower employees to connect to the company’s overall mission and help them react to a changing business environment; transparency should be at the forefront. To feel committed to the company, employees need to know what is happening within the organization and how their performance fits into this plan.
  1. Shift to employee-powered: Micromanaging can disrupt employee motivation and decrease productivity. Instead, managers and others within the organization should provide employees with the tools, information, and knowledge needed for productive autonomy for the company. This aspect ties in with transparency because when employees are aware of company strategy and given the freedom to perform tasks, they will contribute far more than without these critical aspects. 
  1. Focus on future capabilities: Performance reviews can be helpful tools; however, they reflect on things that already occurred. This is important for any organization, but it is also essential to consider the future. Having discussions with employees about their past performance and using it as a foundation for the next steps in the organization helps build motivation and emphasize the importance of future performance. 
  1. Customization: The corporate default tends to be a one-size-fits-all method concerning management processes and policies. By implementing a more customized strategy, there is a mindset shift toward helping improve performance and connecting to a company’s vision and career growth. This should be reframed to consider different locations, focuses, backgrounds, skill sets, career stages, and role needs of employees.
  1. Diverse input and rich dialogue: Building a culture where employees receive consistent feedback and training, not from managers alone but peers and colleagues, will diversify the information employees receive. Assigning one person to provide input can give an individual perspective, but employers may achieve a more accurate representation of performance by including others in this activity. Globoforce’s survey on employee recognition discovered that 90% of respondents agreed that feedback from peers is more accurate than feedback given by an employee supervisor or manager. 
  1. Manage by exception: It is no secret that problems arise in every organization. It is crucial to address these issues as they arise; however, employing complicated documentation or other necessary procedures before taking action can deter employees from taking action. Managing problems as exceptions can lead to a more productive solution that is simple, factual, and direct. 
  1. Shared commitments: Collaboration is suitable for both the organization as it drives better products, ideas, and services and for an organization’s employees as it provides them with more avenues to scale their ideas, influence company actions, and find greater meaning in their work. To best support collaboration and shared commitment, the team must be recognized and evaluated as a whole. Emphasizing individual accountability to support the team’s goals is a productive way to consider the group but not distract from personal achievement. 
  1. Pay for capabilities, and reward for contributions: Research shows that employees are more motivated by intrinsic rewards than by linking pay to performance. This is represented in the industry through employees enjoying their work, feeling valued, and being motivated by the company’s mission. Linking pay to the market value of employees’ capabilities and competencies rather than overusing small incremental performance raises will help your organization confidently make compensation decisions. 

What goes into fair financial compensation? 

When considering fair compensation, several factors come into play, primarily focusing on job satisfaction. 

  • Internal equity refers to employees’ perception of their pay and if they believe they are being compensated fairly compared to others in the organization.
  • External equity: This area refers to employees’ perception of their company’s pay compared to similar positions at other companies. 
  • Accurate job description: Accurately defining and implementing the responsibilities, requirements, conditions, environment, and other employment aspects is an essential compensation element. Job descriptions that are well-written to match what is expected of an employee in the position help establish a fair salary range and shorten the recruiting process and ensure compliance with the Americans with Disabilities Act. 
  • Job evaluations: Areas such as safety risks, scheduling, autonomy, and stress associated with the position are all factors that help determine proper compensation. 
  • Pay structures: Upon determining the desired positions for a company, it is essential to decide on pricing and salary structures for each. A minimum and maximum should be selected for each position available for hire and associated with market trends and company policy. 

Employee compensation statistics:

  • 92% of organizations are giving base pay increases in 2022.
  • 44% of organizations are planning to give pay increases more significant than three percent
  • 86% of organizations have a compensation strategy or are working to make one.
  • Benefits that have increased most between 2021-2022:
  • Remote work: 25% increase
  • Work from home stipend: 8.3% increase
  • Flextime: 7.7% increase
  • Four-day work week: 3.2% increase
  • A survey of 1,000 full-time employees ranked health benefits as a top job incentive. 
  • Nearly 25% of employees do not receive health benefits from their employers, despite 92% saying that benefits are essential to their overall job satisfaction.

How do I decide which benefits to offer? 

Benefits are categorized into two separate pools: mandatory and voluntary benefits. 

Mandatory benefits 

  • Social security
  • Worker’s compensation
  • Unemployment
  • Family Medical Leave Act (FMLA)
  • Access to health insurance (only for companies with 50 or more full-time employees)

Voluntary benefits

Voluntary benefits primarily focus on health, wellness, welfare, and retirement. Many of these benefits can be costly; luckily, there are options for employees to pay a portion of the cost, and by banding customers together, high-quality benefits are accessible at a lower price. 

Most desirable benefits, according to employees, include health insurance, some disability and life insurance, and a retirement plan (401k). Offering these perks can help a company remain competitive. To assess which benefits your company should provide, look at other businesses of the same size in your industry and observe their offerings. This is crucial as 4 out of 5 employees prefer benefits to increased pay. 

As a guideline, the typical employee benefits package is valued between 25-40% of the employee’s base salary.

Supporting your company’s outcomes:

Every company’s needs are unique; however, many companies can benefit from moving toward a modern approach to compensation that considers employees’ emotional compensation needs and financial compensation. 

Taking into consideration employee job satisfaction is an integral concept industrywide. Employee mindsets have shifted from prioritizing financial compensation alone to prioritizing emotional compensation. This should be carefully considered when deciding what benefits, perks, and salaries to offer to employees at your company. 

Written by Lauren Kemp

Lauren Kemp, Communications and Marketing Specialist at J2T, earned a Bachelor of Science in Business Management with a minor in Latin American studies and a Master of Science in Innovation and Management from Montana State University. Lauren hails from Montana and enjoys reading about the history of her home state. Her bucket-list items include touring the Biltmore Estate in Asheville, North Carolina, and taking an immersion trip to Chile to experience Latin American culture first-hand.

J2T is a recruiting and staffing firm that solely focuses on accounting and finance roles. J2T Flex facilitates all operational accounting needs including and all contract or contract to hire needs. On the direct hire side, J2T Recruiting specializes in Sr. Accountants/Analysts through CFO and touches everything in the corporate accounting and finance organizational chart. J2T is a women-owned business exclusively serving the Colorado and Montana markets with the overarching goal to serve you in all areas of the hiring experience.