Let me stir up the pot a bit by saying salary is not a motivator. It took considerable time for me to convince my book editor of this, so I know how hard it is for some people to accept.
First lets review Herzberg’s Two-Factor Theory, one of the best management tools you will ever discover. Conclusions were based on extensive research in the field of job attitudes, first conducted with engineers and accountants, then substantiated by 16 more studies among a wide variety of populations.
Herzberg identified two distinctly different sets of factors in the workplace: one set (motivational factors) leads to employee satisfaction and motivation. The other set (hygiene factors) leads to dissatisfaction and unhappiness. The key to remember is that when hygiene problems are corrected, dissatisfaction goes away but motivation does NOT increase.
Factors leading to employee satisfaction and motivation relate exclusively to the job itself—the work a person performs. The most important factors here are job achievements, recognition for those achievements, interesting and challenging work, and job responsibility. When these factors are present in a job, the worker is likely to be satisfied and motivated.
Hygiene factors relate to the work environment, not to the job itself. Those most likely to cause problems are company policy and administration, interpersonal relationships (especially with a boss), salary and benefits. Correcting any of these problems will remove dissatisfaction, but will not motivate the employee.
Salary is the most interesting hygiene factor because it is often used in an attempt to motivate even though salary is not a motivator. Salary becomes a problem when perceived to be significantly lower than salaries of others doing similar jobs in similar organizations. Correct this problem and the dissatisfaction goes away- but motivation does not increase.
Except for a short period of time, people are never completely satisfied with their compensation and will always want more. The best thing you can do is to pay an equitable salary while providing great jobs with plenty of responsibility, purpose, autonomy, and opportunities to learn and achieve.
Some managers give raises for the wrong reasons: e.g. in the hope it will improve employee performance. This makes no sense when you consider salary is not a motivator. Compensation should be fair and equitable to avoid dissatisfaction, but going beyond the point perceived as equitable is a waste of money because it does not motivate.
Be careful with expectations regarding salary and bonuses. Research indicates that a salary bump increases happiness temporarily for up to six months. But that salary increase also creates future expectations that may not be realistic. If an employee receives a $1,000 salary increase one year, but only $500 the next year, he will be disappointed. Psychologically he is taking a $500 cut in his raise. After the first raise, the baseline expectation for the next raise becomes $1,000.
Annual bonuses can have a similar effect. A bonus smaller than the one received the previous year creates disappointment. And you can be sure that everyone looks back to see what they received the previous year.
The Bottom Line on Salary
Remember, employee motivation comes from the psychological benefits derived from the actual work a person does. This includes the feelings that come from achievement on the job, and recognition from others for those achievements. It does not come from workplace hygiene factors, like salary or other benefits unrelated to the job itself.