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4 Ways Compensation Affects Employee Performance

Alicia Wilde

It’s no surprise that compensation is very important to employees. Here are four ways compensation affects employee performance:

1. Retention

In a tight job market, employers have to be proactive in their efforts to retain talented employees. Compensation is directly tied to retention because everyone is fiercely competing for top performers. According to a report from Willis Towers Watson, nearly half of all organizations have seen an increase in attrition rates in recent years. This may be due to the fact that 70 percent of high-retention-risk employees believe they must leave their current position in order to advance their careers.

Recently, annual raises have not kept pace with inflation, which amounts to a pay decrease for many employees. However, many younger workers have found that they can receive a much more substantial pay increase by switching jobs. Therefore, employers may need to increase wages to retain their most important workers.

2. Job Satisfaction

Compensation is the top contributor to job satisfaction, according to a report from the Society for Human Resource Management. In fact, 96 percent of surveyed employees say that compensation is important or very important to their overall happiness on the job.

Employers should regularly engage their workforce with surveys and feedback sessions to determine where everyone stands in terms of satisfaction. Low rates of employee happiness can lead to decreased productivity, absenteeism and attrition. If it’s not possible to increase wages, employers must look for other ways to compensate employees for their work. Non-monetary rewards such as group outings and flexible hours can bolster these efforts.

3. Productivity

In the U.S., there is a substantial gap between wage growth and worker productivity. According to research from the Economic Policy Institute, productivity has grown by 246.3 percent since 1940 but wages have only grown by 114.7 percent over the same period. Between 1940 and 1970, productivity and wage growth rose in tandem. Since the 1970s, wage growth diverged from productivity growth due to shifting economic policies.

Essentially, many large employers have the option to raise wages, but they have chosen not to. As the job market continues to tighten, they may have to exercise this option.

4. Motivation

Employees who feel they are under-compensated at work may not be motivated to work any harder. They may believe their time is better spent on personal projects or they may simply check out from the position mentally when they feel they have completed work in proportion to their salary. Increasing compensation rates through performance-based reviews or sales incentives could increase worker motivation substantially. Use analytics to track compensation and productivity rates in tandem to determine motivation levels.


To summarize, compensation directly impacts the following employee performance metrics:

  • Retention
  • Job Satisfaction
  • Productivity
  • Motivation

To learn more about how to optimize your workforce, check out our resource center today.

Alicia Wilde


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