How to Motivate Your Employees While Cutting Their Pay

(MoneyWatch)  Layoffs. Pay cuts. Longer hours. No wonder employees are down in the dumps, as the U.S. economic recession drags on. Yet smart corporate managers can boost workers' morale and heighten their motivation with two simple words: Well done.

A recent McKinsey Quarterly study (free registration required) shows that praise from direct supervisors, attention from company leaders, and opportunities to lead projects or task forces do as much or more to lift employee spirits as extra cash (assuming folks are satisfied with their pay, of course).

At a time when many companies are hurting, it's an obvious, but neglected, insight -- to recognize employees is different than to reward them. And to be valued within an organization isn't only, or even chiefly, about the paycheck (click on chart to expand).

Says McKinsey in its poll of HR executives:

The survey's top three nonfinancial motivators play critical roles in making employees feel that their companies value them, take their well-being seriously, and strive to create opportunities for career growth. These themes recur constantly in most studies on ways to motivate and engage employees.

There couldn't be a better time to reinforce more cost-effective approaches. Money's traditional role as the dominant motivator is under pressure from declining corporate revenues, sagging stock markets, and increasing scrutiny by regulators, activist shareholders, and the general public. Our in-depth interviews with HR directors suggest that many companies have cut remuneration costs by 15 percent or more.

Even as companies are tightening the screws on base pay and bonuses, few are adjusting their incentives programs to develop new ways of keeping employees fired up. For instance, only nine percent of the companies McKinsey surveyed changed these programs specifically to attract new talent.

And during the recession, when managers might benefit from giving employees more moral support, a fair number of companies are actually offering less -- 13 percent of survey respondents said their managers praise staff less often than before the financial crisis. Meanwhile, 20 percent report that employees have fewer opportunities to lead projects or task forces, and 26 percent say leaders are less focused on motivating top workers.

Several factors deter companies from turning to nonfinancial means to keep employees happy and productive. For one, many managers view financial compensation as the dominant motivator for subordinates, to the exclusion of anything else. Another is that keeping folks engaged, especially in this era of corporate austerity, is hard work:

One HR director we interviewed spoke of their tendency to "hide" in their offices -- primarily reflecting uncertainty about the current situation and outlook. This lack of interaction between managers and their people creates a highly damaging void that saps employee engagement.

What works for motivating employees? One successful approach -- personal face time with top managers. But only if such meetings are on an individual basis, with one HR director remarking that "they make people feel valued during these difficult times."

By contrast, mass meetings between managers and staff, such as the dreaded "town hall" or "state of the company" address, are a dud. Nothing like hearing an organization's mission statement for the umpteenth time, as the pink slips fly, to turn employees off.

So, how am I doing boss?