Why Your Pay Raise May Not Motivate You

I was having lunch with a colleague and the conversation turned to the question of when we were going to retire. He stated, “If I get another 5 percent pay cut, it’s going to be very soon!” “What are you talking about? We all got a raise, right?” I replied.

“Well, inflation is almost 8 percent, and we got a 3 percent raise," he said. "I can’t afford this!”

That shifted my perspective and brought to mind research on motivation and pay. I’ve researched the question of how big a pay raise needs to be as an incentive for employees to continue to work, or even 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 pay raise needs to be about 7 to 8 percent in order for workers to feel pleased about it and motivated to work a little harder, and relatively few workers get that size of a raise on an annual basis. (Interestingly, this size of pay raise would currently only keep up with inflation.)

Worker productivity has risen while wages have not

This is particularly important, especially in light of the fact that worker productivity has steadily increased over the years, while the rate of pay has remained relatively the same. For example, a report by the Economic Policy Institute shows that productivity for the typical U.S. worker has grown nearly 60 percent during the past 40 years, while wages have only increased about 16 percent. Of course, technology and other factors are partly responsible for the huge increase in worker productivity, but the psychological issue of pay and motivation is still important.

Motivational factors aside from pay

Pay is one incentive to work hard, and to keep working, but when it comes to worker motivation, a variety of other factors are also important:

• Social recognition/reward. If an employer expresses recognition of a worker’s performance, the social reinforcement—praise for a job well done—can mean a lot.
• Autonomy. Many workers are motivated by having the ability to have control over how they perform their jobs, and where. The pandemic-related shift to remote work offers an opportunity to allow hybrid work, which can be motivating to some workers who are allowed to partly work from home. Interestingly, productivity, in many instances, did not decline (or increase) during the mandatory shift to online work.
• Benefits. A good health care or retirement plan may be a much better incentive for some employees than a small pay raise.
• Opportunities for advancement. Showing workers that they legitimately have a chance to advance in an organization can be a good incentive. Even when this isn’t a possibility, demonstrating to employees that you care about their career advancement by providing resources for development (e.g., career- or skill-building seminars/workshops) or subsidized higher education programs can be motivating and increase organizational commitment.

In any case, when pay raises are used to try to motivate employees, it is important to make a strong connection between their performance and the raises they receive. To be motivating, employees need to see that when they reach or exceed goals, they are recognized for it, financially and otherwise.