Sure, the satisfaction of doing a good job can sometimes be enough to push employees to work hard. But often it is the lure of that next good job—a promotion, and the raise and bigger office that come with it—that drives staff to excel.
The opportunity for advancement, as any employee or manager knows, is a great way to motivate employees. Firms do not simply hand out promotions to any employees doing good, or even outstanding, work, however: they are constrained by their organizational structure, the makeup of their existing employees, and company policies limiting the number or timing of promotions.
“A firm’s organizational chart is going to impact workers’ career paths through the personnel policies it enables the firm to put in place,” says Jin Li, an assistant professor of strategy at the Kellogg School. And while the chance of promotion is a boon for employees and an incentive to keep them loyal to an employer, he says, a lack of opportunity will drive talented workers elsewhere.
How can companies keep employees motivated even when there are not plentiful promotions to hand out? Li teamed up with Michael Powell, also an assistant professor of strategy at the Kellogg School, and Rongzhu Ke, at the Chinese University of Hong Kong, and built a mathematical model to investigate how companies can best use promotion policies, given their organizational constraints.
The model was based on previous research that emphasized that workers may be motivated by the fear of losing high-paying jobs. But the researchers observed that firms’ personnel policies are richer than their wage policies alone. So, they asked, how can firms work around their promotion constraints by manipulating salaries or other perks, like stock options, to keep workers motivated if opportunities for promotions are scarce?
Opportunities Worth Working For
Promotion really is the most effective way to motivate workers, their model confirmed. When employees are striving to move up the career ladder, Li says, “the firm can get the workers to do well while paying the lowest amount of money.”
Their model shows that it can be cheaper to motivate workers with career advancement rather than with cash. This is surprising, because one of the main reasons why workers value promotions is that they come with a pay bump. A key insight of Li, Powell, and Ke’s model is that the higher pay in higher positions serves two purposes: it motivates the higher-level employee to work hard to keep that job, and it motivates lower-level workers to work hard to eventually get that job.
But promotions do not happen in the same way, or with the same frequency, at every company. Firm-level differences, like its size and organization, can impact individual workers’ careers, Powell says. “A worker will have a different career experience at a different employer, even though at the beginning of her career, she might not care which firm she works for,” he says.
The size of a company, the model suggested, matters quite a bit—especially because larger companies tend to have what Li and Powell call larger spans, meaning more employees at one rung of the ladder for each employee at the rung above. Take law firms as an example: small firms generally have fewer associates under each partner than larger firms.
That means that in smaller companies, with smaller spans, each associate has a fairly good shot at making partner—or, in non–law firm terms, each entry employee has a sizable chance to become a manager. Because of that, wages can stay relatively low: associates can reasonably assume they will become partners, and get the benefits that come with that, later in their careers.
In larger firms, however, with more entry-level employees per manager, it is more difficult to get one of the few top spots. What can companies do, then, to keep workers motivated? Put simply: pay them more.
For one thing, the salaries of the entry-level employees will be higher. “When the job offer itself is already pretty good,” Li explains, “the promotion is less important.” And the salary for the managers goes up, too. Since workers are not as likely to get promoted, the firm has to dangle a more appealing carrot—in this case, a much larger salary—to keep them working hard and hoping to move up.
Another way to make sure that the opportunity for advancement keeps motivating workers is for big companies to force turnover higher up the ladder. Investment banks, for instance, often buy out a portion of their partners each year—even if those partners are still doing productive and profitable work—to make room for younger employees to advance. The fact that top jobs will open up more frequently helps motivate more junior workers—but it has a downside too. Knowing that the top job has a limited tenure can make it less valuable (and less enticing) to younger workers, so firms have to compensate for that, too, with higher wages after a promotion.
Keeping Employees Motivated with a Clear Path
Promotions are the most motivating when the next step upward is never too far out of reach. How can flat organizations—with very few opportunities for promotions between a team’s entry-level and top jobs—keep employees engaged and working hard?
Li and Powell’s model has a few implications for such companies. The first is that growth can provide new opportunities—think of early employees at a start-up, who start out in junior roles and are soon running their own teams. “Firms that are expanding are going to find it easier to use career-based incentives,” Powell says. “When the firm’s growth starts to level off, you have to adjust expectations, because you have significantly less flexibility.”
Firms that are not growing may have to compensate for the lack of advancement opportunities in other ways. “In order to motivate workers, you might want to give stock options or award bonuses more,” Li says. Checks and balances within a flat organization, and long-term incentives like stock options, can help ensure that employees are making choices to benefit the company in the long run—and not simply creating a short-term improvement to earn a bonus.
It is also important for every company to remember that promotions do not happen in isolation: they are tied in with a firm’s policies, salaries, and org chart. Additionally, it is important to keep opportunities for individual workers in mind when making offers and structuring teams.
“If you’re going to promise people that if they work for you for three years they’re going to get promoted, you need to make sure that you need people at higher-level positions three years from now,” Powell says. “When you’re managing your workforce, you need to manage the careers of the workers themselves.”
This post originally appeared at Kellogg Insight and is featured on STADA's resource centre with permission from the researcher.