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Do pay for performance plans boost employee productivity?

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The nature of pay for performance has come under fire many times, yet this compensation strategy is based on sound business principles that have been around for ages. Traditional theories of positive reinforcement have been shown to have a direct link to performance in the workplace. It is common sense -- when employees are provided with a reward system that is tied to their job performance, this tends to motivate and inspire them. In a nutshell, when employees clearly understand what they stand to gain financially from good performance, they have a more focused effort on meeting these performance goals in order to be compensated.

A June 2013 Kelly Global Workforce Index, indicated that 40 percent of nearly 12,000 American workers said they would be “more productive if they had their earnings linked to performance and productivity outcomes.” In our own employer surveys, PayScale has found that 56 percent of all companies used pay for performance strategies in 2012, and this trend is expected to continue.

However, the question is whether or not pay for performance plans alone actually boost employee productivity, or if they are just a piece of the puzzle. To dig deeper into this topic, it’s important to understand what employees believe about the work they do.

  • Employees need to be valued by employers. When employees understand their importance in the success of your company, they develop a better attitude about work in general. An American Psychological Association survey advised that,” Employees who feel valued are more likely to be engaged in their work and feel satisfied and motivated.” This overall satisfaction at work comes from being regularly recognized for hard work, having a stress free work environment, and being offered fair compensation.
  • Employees like a variety of benefits and rewards. In addition to salaries, many employees like to have several choices when it comes to compensation and benefits. Offering generous incentive programs based on performance, supplemental benefit programs that fill gaps in existing benefit offerings, and other perks like flexible scheduling can enhance productivity levels. Having benefits and compensation that honor a cross-generational workforce also supports productivity.
  • Employees enjoy challenging work opportunities. It’s one thing to have a job; it’s another to have a job that’s rewarding. Employees who produce well are those who are actively engaged because they enjoy what they do every day. A compensation strategy ties closely into this – when employees work in jobs that require them to think outside the box, they tend to be compensated highly as adverse to their counterparts who work menial jobs for menial pay.
  • Employees like to see their total compensation. Having a successful compensation plan that motivates employees can include tangible proof of the connection between pay and performance. Outside of a salary and benefit program, when employees can see how much you are investing in their success and happiness at work, they are more often loyal and hard-working in return. Total compensation statements provided each year can be an insightful way to show your employees how much you appreciate their efforts.

Generally, it’s important to do some research into what drives motivation in your workplace. Asking employees what inspires them can be part of a compensation plan, as can understanding what current compensation data says about how close you are to industry standards.

Want to learn how to match compensation to perfomance?

Read the PayScale guide: Strengthen the Link Between Pay and Performance.

1 Comment

  1. 1 Morten Løgstrup 02 Dec
    Very good article, I must say that in a country like Denmark, where the ground salary is very high (stated by labour law) is is very difficult to motivate the employees the same way as in the states or so.

    But as stated, is is very important that the employee understand the "pay per performance" program..

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